Arman Financial Services Limited — Q1 FY26 earnings call

Call held 14 Aug 2025

Management summary

Arman Financial Services reported a mixed Q1 FY26, with strong performance from its non-MFI segments (29% YoY AUM growth) offsetting continued challenges in the MFI portfolio, which saw a decline in AUM and led to a consolidated loss of INR 15 crores. The company is implementing structural reforms in MFI, including credit underwriting separation and CGFMU coverage, which are showing early positive indicators in asset quality and collection efficiency. Management anticipates MFI recovery in H2 FY26 and aims for overall loan book growth by Q4 FY26.

Highlights

  • Non-MFI AUM grew 29% year-on-year to INR 602 crores, demonstrating resilience.

  • Non-MFI disbursements increased by 10% to INR 117 crores, contributing to growth.

  • MFI impairment cost was INR 59 crores, the lowest in the last three quarters (Q4 FY25: INR 82 crores, Q3 FY25: INR 68 crores).

  • MFI collection efficiency reached 95.3% in June, with 0-bucket flow forwards improving to 98.8%.

  • Almost 50% of MFI AUM is now covered under the CGFMU guarantee scheme, providing a cushion against credit losses.

  • Strong capital adequacy: 38.24% for standalone entity and ~50% for Namra Finance, both well above regulatory requirements.

Concerns

  • Consolidated AUM declined to INR 2,156 crores as of June 30, 2025, from INR 2,594 crores a year ago.

  • The company reported a consolidated loss of INR 15 crores, primarily due to elevated credit costs in the MFI subsidiary.

  • MFI AUM (Namra Finance) closed at INR 1,554 crores, down from INR 2,129 crores last year.

  • Consolidated disbursements for the quarter were INR 387 crores, down from INR 459 crores in the same period last year.

  • Cost-to-income ratio increased significantly to 44% from 32-33%, partly due to declining AUM and increased operational expenses.

  • Employee attrition was approximately 45% last quarter, reflecting the challenging operating environment.

Key financials

  1. Consolidated AUM ₹2,156 Cr -16.9%YoY
  2. Consolidated Loss ₹-15 Cr
  3. MFI Impairment Cost ₹59 Cr -28%QoQ
  4. Non-MFI AUM ₹602 Cr +29%YoY
  5. Consolidated GNPA 3.5%
  6. Cost-to-Income Ratio 44%

What they filed

Q1 FY27: revenue up 33.8%, net profit up 400.0% against the same quarter last year.

₹ Cr · quarterly
Line itemQ2 FY25Q3 FY25Q4 FY25Q1 FY26Q2 FY26Q3 FY26Q4 FY26Q1 FY27
Revenue181 165 199 151 159 −12%160 −3%176 −12%202 +34%
Net profit15 -7 13 -15 8 −47%22 +414%41 +215%45 +400%
How to read this

₹ crore, as filed. The percentage beside a figure is the change against the same quarter a year earlier — never the quarter before, which would make every seasonal business look like it collapses and booms each year.

Segment breakdown

Share of AUM
₹2,156 Cr Total
  • MFI (Namra Finance) ₹1,554 Cr 72.1%
  • Non-MFI (MSME, 2-wheeler, Micro LAP) ₹602 Cr 27.9%

Capital allocation

high confidence
  • Liquidity Cash ₹216 Cr · Undrawn ₹256 Cr INR 216 crores in cash, liquid investments and undrawn limits, in addition to INR 256 crores in sanctioned but undrawn facilities from the lenders.
    Our balance sheet strength remains a key differentiator. As of June 30, capital adequacy was 38.24% for the standalone entity and almost 50% for Namra Finance, both well above regulatory requirements. We closed the quarter with INR 216 crores in cash, liquid investments and undrawn limits, in addition to INR 256 crores in sanctioned but undrawn facilities from the lenders.

Guidance & targets

Profitability

  • Return on Assets (ROA) Profitability · normal state · Medium confidence 3.5%
    Well I mean once we get back to normal, it's easily a 3.5% ROA business. Historically, in the good days, we have reported even 4.5%, 5%.

    — Aalok Patel

Debt

  • Debt-to-Equity Ratio Debt · before next capital raise · High confidence 4-4.5x
    Well, my answer remains kind of the same that we start looking at about 4, 4.5x debt equity ratio. 5 is something that although we have gone that far in the past, but that's something that I start getting slightly uncomfortable. But yes, between 4, 4.5x.

    — Aalok Patel

MFI Portfolio Mix

  • Individual vs. Group Loans MFI Portfolio Mix · next 3-4 quarters · Medium confidence 50-50
    And my hope is that group loans versus non-group loans, whatever you call them, individual loans or whatever it may be, hopefully, that should be 50-50 even like over the next 3 to 4 quarters, and that's where my efforts will be.

    — Aalok Patel

Operating Expenses

  • Employee Benefit Expenses Operating Expenses · next 2-3 quarters · High confidence not increase substantially
    Yes. So for the last 2 quarters, specifically employee benefit expenses has been steady. And even if you consider the third quarter that they have not increased substantially. So I don't expect those expenses to increase substantially over the next 2 to 3 quarters.

    — Aalok Patel

MFI Credit Reforms

  • Rollout across all branches MFI Credit Reforms · second half of FY '26 · High confidence complete
    We are on track to complete the rollout across all branches by the second half of FY '26.

    — Aalok Patel

Loan Book Growth

  • Consolidated Loan Book Growth Loan Book Growth · by September · Medium confidence decline will stop
    So I am hoping at least by September, at least the decline will stop. As far as growth, I don't really expect it at least until Q4.

    — Aalok Patel

  • Consolidated Loan Book Growth Loan Book Growth · Q4 · Low confidence growth
    As far as growth, I don't really expect it at least until Q4.

    — Aalok Patel

What to watch in Q2 FY26

MFI Credit Cost Trajectory

next quarter
Current INR 59 crores (Q1 FY26), lowest in 3 quarters
Target Further decline or stabilization

Why it matters

A key indicator for MFI segment recovery and overall profitability.

I was saying that there were good indicators in March, and then I turned out to be wrong. So like ask me next quarter, I promise I will give a better answer.

Risks & concerns

  • Challenging MFI operating environment

    high

    The microfinance sector continues to operate in a challenging environment with uneven recovery and local stress, impacting repayment behavior.

    Management acknowledged

  • Elevated credit cost in MFI subsidiary

    high

    The consolidated loss of INR 15 crores was largely due to the elevated credit cost in the MFI subsidiary.

    Management acknowledged

  • Uncertainty on MFI credit cost bottom

    high

    Management could not confirm if the bottom for MFI credit costs has been reached, indicating ongoing pain in the industry.

    Management not addressed

  • Stress in non-MFI segments (MSME)

    medium

    While performing better than MFI, the MSME segment is not immune to macro-economic stress, with impairment costs slowly edging up.

    Management acknowledged

  • High rejection rates in MFI

    medium

    Rejection rates are 'ridiculously high' (19 disbursements for 100 inquiries), which is not a sustainable business model long-term.

    Management acknowledged

  • High employee attrition

    medium

    Attrition was approximately 45% last quarter, driven by the challenging environment and the demanding nature of collection roles.

    Management acknowledged

Q&A highlights

5 direct, 1 evasive
Stress in non-MFI portfolio (MSME/2-wheeler) Partial
MSME has been behaving a lot better than expected. But that said, yes, there are challenges in that book as well as it's clearly shown also in the impairment cost, if you compare it previous quarters versus what it is this quarter, it's slowly been edging up.

Analyst inquired about potential stress in non-MFI segments, and management acknowledged some challenges while noting better performance compared to MFI.

Asked by Girish Shetty

Normalized Return on Assets (ROA) Direct
Well I mean once we get back to normal, it's easily a 3.5% ROA business. Historically, in the good days, we have reported even 4.5%, 5%.

Analyst sought clarity on the company's long-term profitability potential under normal market conditions.

Asked by Girish Shetty

Increase in Cost-to-Income Ratio Direct
So that has been increasing significantly. And it's no big surprise. I think overall, as the denominator decreases, as the AUMs decline or in your case, as the AUM declines and as a result, the income declines, the operating cost as a percent of a declining denominator obviously will show it increasing, right?

Analyst questioned the significant rise in cost-to-income, and management provided a detailed explanation linking it to AUM decline and increased operational investments.

Asked by Karthik Srinivas

MFI industry vacuum and growth opportunity Partial
So definitely, once the situation improves, I am just ready to bounce. But until I get a clear indication, this is over and this is behind us, it will be very difficult to do that. And the rejection rates are also ridiculously high. So it's not a problem of inquiries. I mean last month, in the month of July, for every 100 inquiries, we made 19 disbursements.

Analyst asked if the current market conditions create an opportunistic lending environment, but management indicated continued caution due to high rejection rates and ongoing rural credit stress.

Asked by Ronak Chheda

Bottoming out of MFI credit costs Evasive
I think I wish there was an answer which could be done as a yes or no, but then that's not the case. I think the industry is still going through a bit of pain.

Analyst pressed on a critical metric for MFI recovery, and management was unable to provide a definitive answer, indicating ongoing uncertainty.

Asked by Ronak Chheda

Effectiveness of MFI end-use monitoring and operational changes Direct
See, what I kind of learned over the last 10, 15 years of doing this is once the loan goes out of your account and into the hands of the customer, doing any kind of monitoring after that is pretty useless, because it doesn't really bring a lot of value to making sure that the customer pays back.

Analyst questioned the impact of new operational changes on end-use monitoring and ROA, and management clarified their focus is on underwriting rather than post-disbursement monitoring.

Asked by Shreepal Doshi

MFI ticket size increase and model change Direct
Because we have changed our model, right? So we are basically assessed. So again, we are kind of getting away from this one-size-fits-all model. What was the model earlier in JLG? What we were saying is if you are a first cycle customer, you are good for INR 40,000. And for second cycle, you might be good for INR 60,000.

Analyst sought to understand how MFI ticket sizes are increasing despite the shift away from the traditional JLG model, and management explained the move to individual, cash-flow based assessments.

Asked by Umang Shah

Employee attrition and its causes Direct
Nobody likes collecting overdues. It may sound hard to believe since I am in the business of that. But including myself, nobody really likes collecting money or recovering money. And so when that becomes a big portion of FO's job, obviously, that's going to lead to high attrition.

Analyst asked about high employee attrition, and management linked it to the challenging environment and the demanding nature of collection-focused roles.

Asked by Umang Shah

3 min read 6 chapters

Detailed narrative

MFI Segment Performance and Challenges

The microfinance (MFI) segment, housed under Namra Finance, continued to face a challenging environment in Q1 FY26. AUM declined to INR 1,554 crores from INR 2,129 crores year-on-year, and disbursements were INR 270 crores. Despite these headwinds, operational metrics showed improvement, with collection efficiency reaching 95.3% in June and 0-bucket flow forwards at 98.8%. Impairment cost for Namra was the lowest in three quarters at INR 59 crores, down from INR 82 crores in Q4 FY25. The company is consciously trading near-term growth for long-term stability, focusing on improving portfolio quality and collections.

Non-MFI Segment Resilience and Growth

In contrast to MFI, the non-MFI businesses (MSME, 2-wheeler, and Micro LAP) demonstrated strong resilience and growth. AUM for this segment grew 29% year-on-year to INR 602 crores, with disbursements rising 10% to INR 117 crores. Net interest income for the standalone entity (non-MFI) rose 17% year-on-year, and profit after tax remained stable at INR 12 crores. While acknowledging some stress, management noted that the non-MFI portfolio is performing better than expected, with MSME GNPA at 3.8% and 2-wheeler GNPA at 4.7%.

Asset Quality and Collection Efforts

Consolidated GNPA stood at 3.45% and NNPA at 0.5%. The company has intensified collection efforts, with group collection efficiency at 95.5% in June. Early bucket trends in MFI branches are encouraging. Management highlighted that 0 DPD collection efficiency is improving month-on-month, currently at 98.8%. They also noted that accelerated write-offs are being done in the Namra book for accounts over 90 days past due, with almost 90% provisioned, to ensure compliance and manage GNPA aspects.

Strategic Reforms and Risk Management

Arman Financial is implementing key structural reforms, including the separation of credit underwriting and recovery functions at the MFI branch level, which is operational across approximately 180 branches and expected to be rolled out across all branches by H2 FY26. Since November 2024, all new MFI disbursements have been covered under the CGFMU guarantee scheme, with almost 50% of MFI AUM now covered, providing a significant cushion against potential credit losses. The company is also focusing on diversifying its product offerings beyond traditional group loans, aiming for a 50-50 mix of individual and group loans in the next 3-4 quarters.

Capital Position and Liquidity

The company maintains a strong balance sheet. Capital adequacy was 38.24% for the standalone entity and approximately 50% for Namra Finance, both well above regulatory requirements. The quarter closed with INR 216 crores in cash, liquid investments, and undrawn limits, in addition to INR 256 crores in sanctioned but undrawn facilities from lenders. Management aims to maintain a debt-to-equity ratio of 4-4.5x before considering any future capital raises, emphasizing funding stability and flexibility for growth opportunities.

Outlook and Future Strategy

Management anticipates that as the rural economy strengthens with favorable monsoons and better agriculture output, the pace of recovery in the MFI business will accelerate in H2 FY26. They expect the consolidated loan book decline to stop by September and foresee overall growth returning by Q4 FY26. The strategy involves balancing collection focus with increasing AUM safely, evolving from a single-product to a multi-product entity, and leveraging improved risk management and diversified growth drivers for the anticipated upturn.

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