Micro lenders in India urged to integrate climate risks into rural credit decisions

Microfinance institutions must integrate climate risk modeling into their traditional credit assessment frameworks to mitigate the growing threat of extreme weather to rural livelihoods, according to the Bharat Microfinance Report 2026. Released on Thursday, the report highlights that as erratic monsoons, unseasonal heatwaves, and extreme weather events increasingly disrupt rural economies, geographical vulnerability has become directly tied to credit risk.

The report recommends that micro-lenders combine credit-bureau leverage data with spatially disaggregated climate-vulnerability indices. This integration will help identify early-warning signals within specific origination cohorts and over-leveraged borrower segments, enabling institutions to navigate the next phase of growth with a materially lower risk of repeating the FY 2024-25 stress cycle. This prescription comes as India grapples with a rain-deficient monsoon season, which ended with a 13 per cent rainfall deficiency—the second-lowest since 2001, according to India Meteorological Department (IMD) records.

Addressing microfinance stakeholders at the Sa-Dhan National Conference on Inclusive Growth, Shaji Krishnan, Chairman of the National Bank for Agriculture and Rural Development (NABARD), warned of emerging risks to the rabi (winter) crop following the deficient monsoon, even though agricultural states report no major shortfalls yet. Krishnan cautioned that if temperatures rise over the next one to two weeks, reservoir evaporation will become a severe concern, directly impacting the upcoming rabi season.

Pointing out that traditional credit bureaus do not yet factor weather shocks into credit scores, Krishnan urged lenders to incorporate these datasets into their underwriting and decision-making processes. He also noted upcoming regulatory interventions by the Reserve Bank of India (RBI). Stating that climate risk is now credit risk rather than a standalone metric, he mentioned that the RBI is formulating draft guidelines for risk categorization, while NABARD is finalizing a comprehensive database for climate-resilient agriculture involving partnering states.

The push for climate-smart lending follows a challenging year for the microfinance sector. According to the report, the sector contracted in FY26 as credit information companies (CICs) reported a 13 per cent year-on-year drop in active clients and an 11 per cent decline in total outstanding loans, bringing them down to ₹3.34 trillion. Total loan accounts also declined by 21 per cent during FY26. While short-to-medium-term delinquencies and asset quality improved, the portfolio-at-risk ratio for loans more than 180 days past due remained stubbornly high at 4.73 per cent in FY26, down slightly from 4.83 per cent in FY25 despite full provisioning and write-offs. The report categorized FY26 as a period of consolidation and recalibration as the portfolio finally turned positive sequentially in the final quarter after eight quarters of contraction.