El Niño may pressure agri credit growth

El Niño may pressure agricultural lending, but strong corporate, retail and MSME loan demand is expected to keep overall credit growth healthy

El Niño-related weather risks could affect agricultural loans, though overall banking sector credit growth is expected to remain healthy in FY27, according to a report by Yes Securities.

The brokerage said it does not expect any material rise in credit costs in FY27 compared with FY26, while the implementation of Expected Credit Loss (ECL) norms in FY28 is also unlikely to trigger any major one-time impact on banks’ balance sheets.

Agricultural lending remains a key segment under watch as weather conditions evolve. The report noted that while El Niño may impact some farm-linked loans, historical trends suggest the effect is unlikely to be severely disruptive unless a stronger or “Super El Niño” event develops.

El Niño has emerged as one of three major monitorables for lenders, alongside the West Asia conflict and the delayed impact of global trade tariffs. These factors could influence credit quality across sectors, particularly in rural and small business lending.

The report said stress in unsecured lending has started easing after earlier pressure caused by economic slowdown and overheating in the segment. However, risks may persist due to slower nominal GDP growth and potential pressure on microfinance borrowers if adverse weather affects rural incomes. MSME loans also remain under scrutiny because of geopolitical and trade-related uncertainties. 

Even so, Yes Securities does not expect significant stress build-up, adding that the Emergency Credit Line Guarantee Scheme could offer support if required. On lending growth, the outlook remains positive. 

Bank credit growth, currently around 17%, is being driven by improving corporate demand and strong MSME and retail loan expansion. Though growth may moderate later in the financial year, it is expected to remain in the low-to-mid teens range.