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    Northern ARC

    NORTHARCGood
    Financial Services·31 Oct 2025
    Management Summary

    Northern Arc Capital Limited reported a strong Q2 FY26, marked by robust AUM growth, significant NIM expansion, and improved profitability. The company's Direct-to-Customer segment, particularly MSME and Consumer Finance, drove growth. Asset quality remained stable with declining credit costs, and management expressed confidence in achieving its full-year and long-term targets, supported by a diversified funding base and strategic focus on a comprehensive credit solution ecosystem.

    Highlights

    8

    • Assets Under Management (AUM) grew 15% YoY and 6% QoQ to Rs. 14,166 crores.

    • Direct-to-Customer AUM increased 17% YoY to Rs. 7,628 crores, with MSME growing 42% YoY.

    • Net Interest Income (NII) for Q2 FY'26 was Rs. 322 crores, up 12% YoY.

    • Net Interest Margin (NIM) expanded 40 bps QoQ to 9.3%, driven by a 40 bps QoQ improvement in cost of funds to 8.5%.

    • Profit After Tax (PAT) for Q2 FY'26 rose 13% QoQ to Rs. 92 crores.

    • Return on Assets (RoA) improved 22 bps QoQ to 2.6%, and Return on Equity (RoE) improved 78 bps QoQ to 10.1%.

    • Credit cost for the quarter improved to 2.7% from 3% in Q1, with H1 credit cost at 2.8%.

    • Asset quality remained stable with GNPA at 1.15% and NNPA at 0.56%.

    Key financials

    Single quarter

    06 metrics
    1. 01AUM₹14,166 Cr+15%YoY
    2. 02Net Interest Income₹322 Cr+12%YoY
    3. 03NIM9.3%+0.4%QoQ
    4. 04PAT₹92 Cr+13%QoQ
    5. 05RoA2.6%+0.2%QoQ

    Segment breakdown

    Direct-to-Customer
    ₹7,628 Cr AUM17% AUM Growth
    MSME (within D2C)
    42% AUM Growth
    Consumer Finance (within D2C)
    24% AUM Growth
    Intermediate Retail
    13% Growth
    Microfinance/Rural Finance
    6% AUM
    List

    Guidance & targets

    15
    CategoryTargetPriority
    AUM Growth
    Overall AUM Growth
    20%-22%
    		High
    AUM Growth
    Long-term AUM Growth
    25% to 28%
    		High
    Profitability
    RoA
    around 2.8%
    		High
    Profitability
    RoE
    late teens
    		Medium
    Profitability
    RoA Improvement
    100 basis point improvement
    		Medium
    Credit Cost
    Overall Credit Cost
    2.6% to 2.8%
    		High
    Credit Cost
    Overall Credit Cost
    2.6% to 2.8%
    		High
    Credit Cost
    Overall Credit Cost
    2.3% to 2.5%
    		High
    Credit Cost
    Rural Business Credit Cost (MFI)
    close to 5%
    		High
    Margin
    Opex Ratio
    3.7% to 3.8%
    		High
    Margin
    Opex Ratio
    3.7% to 3.8%
    		High
    Cost of Funds
    Overall Cost of Funds
    8.5% to 8.6%
    		Medium
    Cost of Funds
    Overall Cost of Funds
    8.5% to 8.7%
    		Medium
    Fee Income
    Fee and Other Income (ROE tree)
    80-90 basis points
    		Medium
    Fee Income
    Fee and Other Income (ROE tree)
    upward of 90-110 basis points
    		Medium

    Risks & concerns

    5
    RiskSeverity

    Macroeconomic Headwinds

    India has faced multiple headwinds including tariff-related pressures, geopolitical tension, slowdown in urban consumption, and supply chain disruptions over the last 15 months. — Management acknowledged

    medium

    Residual Stress in MFI Portfolio

    There might be some residual stress in the MFI portfolio that needs to pass through, despite new book quality improving. — Management acknowledged

    low

    HFC Exposure Legal Process

    The HFC exposure is under subjudice, preventing management from disclosing further details. — Management not addressed

    low

    Areas of Evasion(2)

    • HFC exposure details (due to subjudice)
    • 1+ DPD numbers (offered to share offline)

    Q&A highlights

    3

    “Hopefully we will see an improvement in credit cost. Like I said, the quality of the new book is both in case of Rural Finance or MFI is actually performing better than what we saw in April '24, pre stress level. We are seeing sequential improvement across the portfolio. But if there is a residual stuff which needs to pass through, that will pass through. And that is one of the reasons why we are holding on to it.”

    This question sought clarity on whether credit costs would further reduce in the coming quarters, providing insight into management's cautious but optimistic outlook on asset quality, especially for new originations.

    asked by Digant Haria

    3 min read6 chapters

    Detailed Narrative

    01

    Macroeconomic Environment and Outlook

    India continues to demonstrate remarkable resilience despite global uncertainties and headwinds over the last 15 months, including tariff-related pressures and supply chain disruptions. Recent policy measures, notably in income tax, GST, RBI liquidity, and regulatory easing initiatives, are expected to stimulate consumption and support broader economic revival. Management noted early signs of credit growth revival in late Q2 FY'26, which has strengthened into October 2025, positioning the country for stronger growth momentum in the coming quarters.

    02

    Assets Under Management (AUM) Growth Drivers

    Northern Arc's Assets Under Management (AUM) grew by 15% year-on-year and 6% quarter-on-quarter, reaching Rs. 14,166 crores. Excluding the consciously calibrated Rural Finance book, AUM growth would have been 22%. The Direct-to-Customer (D2C) segment was the primary growth driver, accounting for 54% of total AUM and growing 17% YoY to Rs. 7,628 crores. Within D2C, the MSME segment grew robustly by 42% YoY, and Consumer Finance AUM increased by 24% YoY.

    03

    Net Interest Margin (NIM) Expansion and Funding Strategy

    Net Interest Income (NII) for Q2 FY'26 stood at Rs. 322 crores, an increase of 12% YoY. The company achieved a significant NIM expansion of 40 bps quarter-on-quarter, reaching 9.3%. This was primarily driven by a 40 bps QoQ improvement in the cost of funds, which declined to 8.5%. Management highlighted that 70% of borrowings are linked to variable interest rates, positioning the company well to benefit from declining interest rates, with expectations to settle cost of funds in the 8.5%-8.6% range in the coming quarters.

    04

    Asset Quality and Credit Cost Performance

    Asset quality remained stable with a Gross Non-Performing Asset (GNPA) ratio of 1.15% and a Net Non-Performing Asset (NNPA) ratio of 0.56%. Provisions improved sequentially to Rs. 92 crores in Q2 FY'26, down from Rs. 102 crores in Q1 FY'26. The overall credit cost for the quarter improved to 2.7% (from 3% in Q1), resulting in a H1 credit cost of 2.8%, which is well within the guidance of around 3%. Management guided for H2 FY'26 credit cost to remain in the 2.6%-2.8% range and projected FY'27 credit cost at 2.3%-2.5%.

    05

    Fee-Based Business and Comprehensive Credit Solutions

    Northern Arc's fee-based business continues to complement its lending operations, with performing credit funds growing 14% YoY to Rs. 13,198 crores. The company is strategically focused on building a comprehensive credit solution ecosystem, rather than solely relying on a balance sheet-led model. This includes leveraging its proprietary tech platform, Altifi.ai bonds platform, and performing credit funds to cater to institutional and retail investors across seven sectors of retail credit.

    06

    Long-Term Growth Vision and Profitability Targets

    Management articulated a long-term vision for sustainable AUM growth of 25%-28% year-on-year, building on its unique capabilities in diversified retail financial services. For FY'26, the company maintains its guidance for AUM growth of 20%-22% and RoA around 2.8%. Furthermore, Northern Arc aims for a 100 basis point improvement in RoA over the next 4-6 quarters and targets late teens RoE over the next 2-3 years, driven by its chosen focus segments like MSME, consumer, and rural finance.

    This is an AI-generated summary of a publicly available earnings call transcript. It is for informational purposes only and does not constitute investment advice, a recommendation, or an endorsement. inve.money is not a SEBI-registered investment advisor. Please consult a qualified financial advisor before making any investment decisions.