Arman Financial

The microfinance sector has been grappling with significant challenges, including over-leveraging, weakening meeting discipline, deterioration of the Joint Liability Group (JLG) model, and rising employment attrition. These factors have led to increased household indebtedness and strain on borrowers' repayment ability, resulting in higher delinquencies and impairment costs across the industry. In response, Arman Financial has adopted a cautious approach, prioritizing portfolio quality and collections over aggressive growth, which has led to lower disbursements and AUM contraction, but is expected to strengthen financial resilience long-term.

For Q3 FY25, Arman Financial's consolidated assets under management (AUM) stood at Rs. 2,280 crores, marking a 6.5% year-on-year decline. Disbursements for the quarter amounted to Rs. 338 crores, a 28% decrease compared to the previous year. Gross total income for the quarter was Rs. 164 crores, down 2.4% YoY, while pre-provisioning operating profit (PPOP) was Rs. 69 crores, a 4.7% YoY decrease. For the nine-month period, gross total income grew 10.9% to Rs. 530 crores, and PPOP grew 13% to Rs. 231.6 crores.

The wholly-owned microfinance subsidiary, Namra Finance, reported an AUM of Rs. 1,768 crores as of December 31, 2024, a 13.6% year-on-year decline. Disbursements for Q3 FY25 were Rs. 214 crores, significantly lower than Rs. 459 crores in the same quarter last year. The segment recorded a loss of Rs. 17.2 crores in Q3 FY25, primarily due to increased impairment costs of Rs. 67 crores. Despite these challenges, Namra maintained a strong capital adequacy ratio of 45.7%, with a gross NPA of 4.4% and net NPA of 0.56%.

The MSME, two-wheeler, and Loan Against Property (LAP) segment, part of the standalone Arman entity, demonstrated encouraging growth. AUM for this segment grew by 30.9% year-on-year to Rs. 512 crores. Gross total income for Q3 FY25 stood at Rs. 44.9 crores, growing 32.4% year-on-year, and PAT increased to Rs. 9.9 crores. The standalone Arman entity maintained a healthy capital adequacy ratio of 39.45%. Asset quality for MSME stood at 3.43% GNPA, and for Two-Wheeler, it was 4.03% GNPA, indicating resilience despite industry challenges^🌐.

Arman's liquidity position remains strong, with cash and bank balances, liquid investments, and undrawn CC limits totaling Rs. 262 crores. Additionally, the company has Rs. 120 crores in undrawn sanctions from existing lenders, ensuring continued financial flexibility. Total borrowing stood at Rs. 1,765 crores, with a diversified funding mix: 34% from banks, 11% from NBFCs and financial institutions, 20% from NCDs, and approximately 30% from direct assignments or off-balance sheet liabilities, with the remainder from DFIs like NABARD and SIDBI.

In response to current challenges, Arman has reinforced underwriting standards and expanded its collection team, now with about 350 recovery officers. A dedicated credit department has been introduced at the branch level to separate credit from sales in microfinance, covering about 120 branches by March. Early indicators from December and January show improving trends in the credit cycle, with zero DPD flow forward rates stabilizing at 98% plus. The company has also started using the Credit Guarantee Fund for Micro Units (CGFMU) scheme, which covers about 72% of the principal in default for a premium of 1% (plus GST) per year.

The new Micro LAP segment, introduced last year, is currently in a pilot stage and has gained encouraging traction, representing about 1% of the total AUM. The product is offered in Gujarat and piloted in Telangana and MP, focusing on tier three and four and rural locations. The average ticket size for LAP loans is about Rs. 4.5 lakhs. The company is currently dispersing from 15 branches and plans to expand to at least 25 branches soon, with a current disbursement run rate of around Rs. 3 crores per month, not expected to cross Rs. 5-7 crores in the coming 3-4 quarters.