Event Participants
Executives
5 Ashish Mehrotra (Managing Director & CEO), Atul Tibrewal (CFO), Chetan Parmar (Head, Investor Relations), Jigar (unnamed), Pardhasaradhi Rallabandi (Group Risk Officer & Governance Head)
Analysts
5 Abhijit Tibrewal (Motilal Oswal Financial Services), Chintan Shah (ICICI Securities Ltd), Digant Haria (GreenEdge Wealth Services), Kaushik Agarwal (Haitong Securities India Pvt Ltd), Raghav Garg (Ambit Capital)
Financials & KPIs
| Metric | Reported | Commentary |
|---|---|---|
| Total AUM | ₹16,855 crores | 26% YoY growth, outpacing industry; D2C now 64% of AUM |
| D2C Portfolio | ₹10,000+ crores | Crossed ₹10,000 crore milestone; >50% YoY growth |
| MSME Finance AUM | ₹3,761 crores | 40% YoY growth; secured LAP predominantly |
| Rural Finance (MFI) AUM | ₹1,200 crores | 26% YoY growth (first growth in several quarters); highest-ever quarterly disbursement of ₹328 crores |
| Net Interest Income (NII) | ₹394 crores | 32% YoY growth |
| NIM | 9.3% | Improved 44 bps YoY; slight QoQ decline due to late-quarter disbursements |
| Total Revenue (incl. fees) | ₹416 crores | 28% YoY growth |
| Operating Expense Ratio | 3.6% | Stable; well controlled |
| Pre-Provisioning Operating Profit | ₹263 crores | 27% YoY growth |
| Profit After Tax (PAT) | ₹114 crores | 41% YoY growth |
| GNPA | 1.0% | Improved ~1% as of June 2026 |
| NNPA | 0.5% | Improved |
| Credit Cost | 2.6% | Moderated; within guided range of 2.6%-2.7% |
| Cost of Funds | 8.46% | Stable; lower than 8.5% FY26 and ~50 bps lower YoY |
| Incremental Cost of Funds | 8.69% | Stable |
| ROA | 2.7% | Improved; targeting ~3% for FY27 |
| ROE | 11.5% | Improved |
| Total Borrowings | ₹12,440 crores | 62% linked to variable interest rates; well positioned for declining rate environment |
| Liquidity Surplus | ~₹1,300 crores | LCR well above 150% |
| Tangible Net Worth | ₹4,063 crores | 15% YoY growth |
| Debt-Equity Ratio | 3.1x | Improved; comfortable (comfort level 4-4.5x) |
| Capital Adequacy (CRAR) | 22.7% | Well above regulatory requirement; Tier-1 ~21% |
Geographic & Segment Commentary
D2C (Direct-to-Customer) Business: Crossed ₹10,000 crores milestone, growing >50% YoY, now contributing 64% of total AUM. Segment mix: MSME finance 23%, consumer 34%, MFI 7%. Growth was calibrated across sectors—consumer grew ~15% QoQ, MFI ~19% QoQ (first growth after 6-7 quarters of moderation), MSME retail ~8% QoQ.
MSME Finance: Portfolio expanded 40% YoY to ₹3,761 crores; LAP business (50% of portfolio) average ticket size ₹12-15 lakhs. Collection efficiency improved significantly; credit performance indicators (leading and lagging) reasonably strong. Merchant business (~₹1,000 crores) also improved.
Rural Finance (MFI): Record quarterly disbursement of ₹328 crores; AUM grew 26% YoY to ~₹1,200 crores. Collection efficiency robust at ~99.6% in June 2026; Tamil Nadu and Karnataka showing strong momentum. ~94% of MFI book covered under CGFMU. All loans individually underwritten using proprietary Nu Score.
Credit Solutions (Intermediary/Wholesale): Network of 373+ originating partners, ~90% rated BBB and above, ~95% maintain capital adequacy above 20%. Q1 volumes subdued due to seasonal factors and broader credit moderation; pipeline improving across MFI, MSME, and consumer finance. Expected to grow 8-10% YoY. No incremental Stage 3 assets moved in the quarter.
Company-Specific & Strategic Commentary
Direct Lending Strategy: Achieved significant milestone of ₹10,000+ crores D2C AUM; strategy focused on granular, diversified retail lending franchise building on NIM expansion from 5.5% to ~9.5% over five years.
ESG Recognition: Received outstanding ESG rating of 81 from ICRA—first ESG rating, placing Northern Arc among highest-rated financial institutions.
Fund Management Expansion: Received approval to launch two new funds—diversified debt fund (₹2,000 crores with ₹500 crore green shoe) and Northern Arc Saving Plus Fund. Performing credit fund AUM stands at ~₹3,000 crores; provides ~110 bps fee income.
Altifi Retail Platform: Crossed 1 lakh subscribers; volumes more than doubled YoY from ₹146 crores to over ₹315 crores, enhancing capital efficiency and diversifying revenue streams.
AI-Enabled Lending: Developed suite of in-house AI tools across lending, risk, operations, and markets. Key initiative: end-to-end AI-enabled journey for retail LAP branches, targeting 90% turnaround within 3 days. All material credit decisions remain with credit officers.
Branch Expansion: Added ~20 branches in Q1 (total 430+); plan to add 50-60 branches in FY27. Added 230 sales personnel in Q1 to improve productivity per branch.
Guidance & Outlook
| Metric | Guidance / Outlook | Commentary |
|---|---|---|
| Credit Cost | 2.6%-2.7% (FY27) | Maintaining guidance; Q1 at 2.6% within range |
| ROA | ~3% (FY27 target) | Q1 at 2.7%; improvement driven by NIM expansion, fee income growth, stable OpEx |
| NIM | ~9.7%-10% by end of FY27 | CFO guided to ~10%; driven by yield expansion, D2C mix improvement, and fee income growth |
| Fee Income Contribution | 75-100 bps on revenue | Loaded NIM expansion from ~50 bps current fee contribution |
| Credit Solutions Growth | 8-10% YoY | Seasonal Q1 softness; pipeline strong for Q2/Q3 (securitization, assignments) |
| Branch Network | 50-60 new branches (FY27) | ~20 added in Q1; focus on sales per store productivity |
| Equity Raise | Not needed for next 2 years | CRAR comfortable at 22.7%; debt-equity at 3.1x; internal accruals sufficient for 22-23% growth target |
| Cost of Funds | Rangebound at 8.5%-8.6% | Some repricing of 5-10 bps expected on maturing debt; hedges and liquidity strong |
Risks & Constraints
| Risk | Context |
|---|---|
| Geopolitical/Economic Uncertainty | West Asia crisis creating volatility in energy prices, supply chain disruptions, and increased risk awareness; evolving trade relationships creating near-term headwinds for global growth and complexity to inflation/interest rate outlook in India |
| Liquidity Tightening | Benchmark rates up 50 bps in last 6 months; hedge costs up 75 bps; MCLR up 10-15 bps. Management maintains comfortable position with ₹1,300 crores surplus liquidity and undrawn sanctions; LCR above 150% |
| Weather/Monsoon Risk | El Nino concerns with potential impact on monsoon and rural economic activity; mitigated by healthy reservoir levels and government infrastructure spending |
| Cost of Funds Repricing | ~5-10 bps increase expected on debt repricing in next couple of quarters; benchmark rate movements could pressure spreads if yields don't keep pace |
| Competitive/Concentration Risk | Consumer finance growth questioned by analysts given sector-wide stress; management cites diversification across 30+ partners and 50+ direct-site partners with rigorous guardrails and cohort-level tracking |
| Sector Recovery Risk | MFI sector showing early recovery signs but still in consolidation phase; micro LAP and unsecured business loan segments showing early signs of improvement but not fully stabilized |
Q&A Highlights
Provisions and Credit Solutions Segment
- Question: Did the ₹110 crore provisions include prudential overlay? Why did credit solutions provisions spike to 1.5% despite improving outlook? (Digant Haria)
- Answer: Overlay remains ~₹66 crores (unchanged from March); provisions included conservative good-book provisions in credit solutions segment. No incremental Stage 3 assets moved in the quarter; AUM volatility is normal seasonal Q1 pattern—denominator degrowth drove higher provision ratio. No single account deterioration. (Ashish Mehrotra)
MSME Portfolio Improvement
- Question: How much of MSME improvement is from LAP vs. digital merchant portfolio? (Digant Haria)
- Answer: ~50% of MSME book is LAP with average ticket ₹12-15 lakhs; balance ~₹1,000 crores is merchant. Both segments show significant improvement in collection efficiency; X-bucket movements present but overall portfolio quality stronger. Focus on high-quality balance sheet growth. (Ashish Mehrotra)
ROA Target and NIM Decline Drivers
- Question: What will drive ROA from 2.7% to ~3%? What caused 50 bps sequential NIM decline? (Kaushik Agarwal)
- Answer: NIM decline due to late-quarter credit solutions disbursements during June (yield not yet realized). ROA improvement driven by: D2C business growth expanding NIMs, funds management income (~110 bps on AUM, two new funds approved), placement business pipeline for Q2/Q3, fee contribution to expand from ~50 bps to 75-100 bps. OpEx stable at 3.6% while investing in capacity. (Ashish Mehrotra)
Consumer Finance Growth and Concentration
- Question: What gives confidence in aggressive consumer finance growth? Any channel concentration risk? (Kaushik Agarwal; Abhijit Tibrewal)
- Answer: Work with 30+ partners and 50+ direct-site partners—well diversified. Growth is calibrated: consumer +15% QoQ, MFI +19% QoQ, MSME +8% QoQ. Cohort-level performance tracked loan-by-loan and partner-by-partner, tracking better than anticipated. Guardrails on diversification (sector, product, geography, district, partner levels) are non-negotiable. Consumer looks bigger because base is larger and easier to execute. (Ashish Mehrotra)
Cost of Funds and NIM Trajectory
- Question: Will cost of funds converge to 8.7%? Does this pressure spreads further? (Raghav Garg)
- Answer: Benchmark rates up 50 bps, hedge costs up 75 bps, MCLR up 10-15 bps in last 6 months. Despite this, maintained cost of funds at ~8.5% for three consecutive quarters. Incremental cost remains 8.6-8.7%; possible 5-10 bps repricing impact on maturing debt. Yields have been increasing consistently except Q1 (late disbursement impact). NIM should reach ~9.5% next quarter and ~10% by end of FY27. (Atul Tibrewal)
Capital Raise Timing
- Question: When will the company raise equity capital? (Raghav Garg)
- Answer: No equity raise needed for next 2 years. CRAR at 22.7%, debt-equity at 3.1x vs. comfort level of 4-4.5x. Internal accruals sufficient for 22-23% growth target; Tier-1 should remain in current range. (Atul Tibrewal)
Fintech Partnership Model Sustainability
- Question: Can the fintech partnership business scale sustainably without credit cost deterioration like peers? (Chintan Shah)
- Answer: Deep commitment model goes back to Northern Arc's genesis—comprehensive credit solutions. Model: small initial exposure, test performance, support liability needs, introduce other lenders, offer funds/securitization services. Underwriting done by Northern Arc; repayment instructions, sanctions, and disbursals directly from Northern Arc. Many partners have 5-15 year relationships; some reaching capital markets. Management demonstrated willingness to dial down quickly when cohorts underperform. (Ashish Mehrotra)
Provision Reversals Expected
- Question: Are any provision reversals expected from AVM Housing or Kinara Capital this year? (Chintan Shah)
- Answer: AVM more than adequately provided (~75% provided); retains two-pronged approach—retail book aggressively provided, other part fully provided. Kinara fully done—securitized and taken over completely. Some upside possible as settlements happen but declined to comment on individual accounts. Overlay of ~₹66 crores retained given uncertainty; not released on DLG changes. (Ashish Mehrotra)
Key Takeaway
Northern Arc Capital delivered a strong Q1 FY27 with PAT of ₹114 crores (41% YoY growth), driven by 26% YoY AUM growth to ₹16,855 crores and NII of ₹394 crores (32% YoY). The D2C portfolio crossed ₹10,000 crores (64% of AUM) growing >50% YoY, with MSME finance expanding 40% YoY and MFI achieving its first growth in several quarters at 26% YoY with highest-ever quarterly disbursements of ₹328 crores. Asset quality continued improving—GNPA at 1%, NNPA at 0.5%, credit cost at 2.6% within guidance. The strategy centers on expanding the granular retail franchise while building a differentiated fee-based credit solutions ecosystem (fund management with two new fund approvals, placement business, and Altifi retail platform crossing 1 lakh subscribers with volumes doubled to ₹315 crores). Management guided to ~3% ROA, ~10% NIM, and credit cost of 2.6-2.7% for FY27, driven by yield expansion and fee income growth from 50 to 75-100 bps. Key watch points include geopolitical volatility (West Asia crisis), potential El Nino impact on rural recovery, and liquidity tightening, though management maintains comfortable capital (22.7% CRAR) and liquidity (₹1,300 crores surplus) positions to navigate uncertainty.