Northern Arc Capital Limited — Q3 FY26 earnings call

Call held 30 Jan 2026

Management summary

Northern Arc Capital delivered a strong Q3 FY26, achieving record-high quarterly profit and surpassing INR15,000 crores in AUM. This growth was primarily fueled by the Direct-to-Customer (D2C) segment, particularly in consumer and MSME finance, while the microfinance portfolio showed signs of stabilization. The company maintained healthy margins and capital adequacy, despite acknowledging industry-wide stress in certain unsecured loan segments, and provided clear forward-looking targets for AUM growth, profitability, and credit costs.

Highlights

  • Assets Under Management (AUM) crossed INR15,000 crores, reaching INR15,121 crores, up 23% YoY and 7% QoQ.

  • Reported highest ever quarterly Profit After Tax (PAT) of INR101 crores, up 33% YoY and 10% QoQ.

  • Net Interest Income (NII) stood at INR 371 crores, reflecting a 39% YoY growth.

  • Net Interest Margin (NIM) improved by 60 basis points QoQ to 9.9%.

  • Direct-to-Customer (D2C) business AUM grew 29% YoY to INR8,492 crores, comprising 56% of total AUM.

  • Consumer finance AUM surged 45% YoY to INR4,226 crores, and MSME AUM grew 41% YoY to INR3,292 crores.

  • Fee and other income increased 49% YoY and 50% QoQ to INR 32 crores, driven by strong placement volumes.

  • Return on Assets (ROA) reached 2.7% and Return on Equity (ROE) increased by 60 basis points QoQ to 10.7%.

Key financials

2 periods

Headline

  • AUM
    ₹15,121 Cr
    YoY +23% QoQ +7%
  • PAT
    ₹101 Cr
    YoY +33% QoQ +10%
  • NII
    ₹371 Cr
    YoY +39%
  • NIM
    9.9%
    QoQ +6.5%
  • ROA
    2.7%
  • ROE
    10.7%
    QoQ +5.9%
  • GNPA
    1.4%
  • NNPA
    0.69%
  • Fee and Other Income
    ₹32 Cr
    YoY +49% QoQ +50%
  • Incremental Cost of Funds
    8.6%

Q3 FY26

  • Credit Cost
    2.9%

What they filed

Q1 FY27: revenue up 29.9%, net profit up 17.3% against the same quarter last year.

₹ Cr · quarterly
Line itemQ2 FY25Q3 FY25Q4 FY25Q1 FY26Q2 FY26Q3 FY26Q4 FY26Q1 FY27
Revenue573 560 590 591 606 +6%712 +27%731 +24%768 +30%
EBITDA341 309 236 323 333 −2%— — —
Net profit112 102 47 104 95 −15%92 −10%139 +196%122 +17%
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

SegmentYoY GrowthShare of Total AUMAUM
Direct-to-Customer (D2C)29%56%₹8,492 Cr
Consumer Finance45%28%₹4,226 Cr
MSME Finance41%22%₹3,292 Cr
Microfinance (MFI)—6%—
Intermediate Retail Business17%——

Guidance & targets

AUM Growth

  • AUM Growth AUM Growth · this year · High confidence upward of 20%
    Overall, these developments give us confidence that we are well positioned to achieve a guided AUM growth upward of 20% for this year.

    — Ashish Mehrotra

  • Long-term AUM Growth AUM Growth · next three years · High confidence 25% plus
    And sir, our long-term AUM growth target of 25% plus that, that's what continues, right, over the next three years.

    — Ashish Mehrotra

Credit Cost

  • Credit Cost Credit Cost · final quarter · High confidence within 2.7% to 3% range
    As we enter the final quarter, we expect the credit cost to remain stable within 2.7% to 3% range.

    — Ashish Mehrotra

  • Credit Cost Credit Cost · end this year · High confidence below 3%... anywhere between 2.8% to 3%
    I think as we see improvement we should end this year with below 3% credit costs anywhere between 2.8% to 3%.

    — Ashish Mehrotra

  • Credit Cost Credit Cost · FY'27 · High confidence around 2.7% to 3.0%
    I think as we go forward, when we aligned our model and deliver on targeted D2C mix, we should be around 2.7% to 3.0%.

    — Ashish Mehrotra

Profitability

  • ROE Profitability · by 6 to 7 quarters · High confidence 15 to 16
    I think if you look at the leverage and you adjust for it, our endeavor is to get to 15 to 16 ROE by 6 to 7 quarters.

    — Ashish Mehrotra

  • ROA Profitability · FY'27 · High confidence 3.2%
    For FY'27, we are targeting a ROA of 3.2%.

    — Atul Tibrewal

  • ROA Profitability · quarter four · High confidence crossing 2.8%
    And generally, if you see March is the best quarter for any NBFC. So, we are very confident of crossing 2.8% in quarter four.

    — Atul Tibrewal

  • Return on Assets Profitability · next 4 to 6 quarters · Medium confidence 3.0%- 3.2%
    So, this will give us visibility of 3.0%- 3.2% return on assets over the next 4 to 6 quarters.

    — Ashish Mehrotra

Margin

  • NIM Margin · forward-looking view · Medium confidence 10% to 10.25%
    My forward-looking view would be if we our fee contribution of 90 basis points scales up to about 110-120 basis points, and net interest margin improves to10% to 10.25%.

    — Ashish Mehrotra

Fee Income

  • Fee Contribution Fee Income · forward-looking view · Medium confidence 110-120 basis points
    My forward-looking view would be if we our fee contribution of 90 basis points scales up to about 110-120 basis points...

    — Ashish Mehrotra

AUM Mix

  • D2C Composition AUM Mix · forward-looking view · Medium confidence 65% and 70%
    So, this is very good for us to play as a mix goes from 56% to 65% and 70%.

    — Ashish Mehrotra

Branch Expansion

  • New Branches Branch Expansion · coming quarters · Medium confidence about 50 plus
    We plan to add about 50 plus branches in the coming quarters.

    — Ashish Mehrotra

Risks & concerns

  • Stress in unsecured business loan and small-ticket LAP segments

    medium

    Stress continues to build in these segments, impacting NBFCs across the spectrum.

    Management acknowledged

  • Muted offshore funding participation and challenging liquidity

    medium

    Repo rate cuts have not fully translated into MCLR reduction from broader capital flows, making liquidity challenging.

    Management acknowledged

  • Higher PAR accretion in small-ticket MSME

    medium

    The small-ticket MSME segment is experiencing a higher degree of PAR accretion, though Northern Arc's average ticket size is higher (INR12-13 lakhs).

    Management acknowledged

Areas of evasion (1)

  • Granular breakdown of MSME asset quality performance for branch-led vs. digital segments.

Q&A highlights

2 direct
Digital lending business profitability and risk-adjusted yields Direct
the way we look at the digital business is saying how do we optimize the risk-adjusted yields? I think that is the best way to look at it because in a high consumption-led demand where you provide convenient financing solution, you look at various cohorts at various points in time and try and see how you get better risk-adjusted return by providing superior product to customers.

Clarifies management's core strategy for the digital lending segment, focusing on optimizing risk-adjusted returns rather than just top-line growth or isolated provisions.

Asked by Digant Haria

MFI industry behavioral change and on-ground problems Direct
The borrowers do appreciate that the credit history will be impacted and their ability to raise further loans will be impacted. What we have seen really is some amount of overleveraging at the borrower level playing out... The current crisis in that sector is predominantly led by over leveraging or over lending. With the new, with the MFIN guardrail being followed... I think we are seeing a significantly better behavior.

Addresses concerns about MFI asset quality and borrower behavior, explaining the root cause (overleveraging) and the positive impact of new MFIN guardrails on industry behavior.

Asked by Darshil Jhaveri

MSME asset quality breakdown and NCLT resolution for housing finance company Partial
Yes. Aditya, we will separately get back to you on that with a specific breakup. That is not as part of this disclosure that we have made. Chetan would reach out to you... I think the way to, hi, this is Ashish, the way it stands, I think company is going to be file the final resolution bid with NCLT which they are targeting to do in the next two weeks... Our current provision is more than the hair cut reflected in the highest bidder value.

Highlights a lack of granular disclosure for MSME asset quality but provides a clear update on a specific NCLT resolution, indicating proactive provisioning and a timeline for resolution.

Asked by Aditya Singhania

3 min read 7 chapters

Detailed narrative

Record-Breaking Performance & AUM Growth

Northern Arc Capital achieved its highest ever quarterly profit after tax of INR101 crores in Q3 FY26, marking a 33% YoY and 10% QoQ increase. The company also surpassed the INR15,000 crore AUM milestone, reaching INR15,121 crores, reflecting a robust 23% YoY and 7% QoQ growth. Net Interest Income (NII) grew by 39% YoY to INR 371 crores, with Net Interest Margin (NIM) improving by 60 basis points QoQ to 9.9%.

Strategic Focus on D2C & MSME Segments

The Direct-to-Customer (D2C) business was a primary growth driver, accounting for 56% of total AUM and growing 29% YoY to INR8,492 crores. Within D2C, consumer finance demonstrated strong momentum with AUM growth of 45% YoY to INR4,226 crores, while MSME finance grew 41% YoY to INR3,292 crores. The company plans to add over 50 branches in the coming quarters to further penetrate the under-served MSME credit market, which is a key growth engine.

Asset Quality & Credit Cost Management

The company reported healthy asset quality with GNPA of 1.36% and NNPA of 0.69%. Credit costs for Q3 FY26 stood at 2.9%, excluding a one-time recognition of INR23 crores for internal ECL assessment in digital business. Management expects credit costs to remain stable within the 2.7% to 3% range for Q4 FY26 and targets 2.7% to 3.0% for FY27, emphasizing a prudent risk management framework and optimizing risk-adjusted returns.

Microfinance Portfolio Calibration & Recovery

Northern Arc has consciously calibrated its microfinance portfolio over the past six quarters, starting from June 2024, leading to incremental PAR 0+ accretion reverting to pre-stress levels. Over two-thirds of the MFI book now comprises loans originated under new MFIN guardrails, and nearly 55% is covered under CGFMU. Rural disbursements in Q3 stood at INR260 crores, with December alone seeing INR100 crores, indicating a return to pre-stress levels and confidence to scale this business back in a calibrated manner.

Fee-Based Business & Digital Platforms

The fee and other income segment witnessed significant growth, up 49% YoY and 50% QoQ to INR 32 crores, primarily driven by a 73% YoY increase in placement volumes to INR3,669 crores. The company leverages its proprietary technology platforms such as Nimbus (B2B credit flow), nPOS (API-based co-lending), Altifi (bonds platform), and NuScore (ML-based underwriting) to build a comprehensive credit solution ecosystem and drive fee accretion, with early signs of monetization.

Funding & Capital Adequacy

Northern Arc's cost of funds improved meaningfully, declining to 8.5% in Q3 FY26 from 9.4% in Q3 FY25, a reduction of 90 basis points. The debt-to-equity ratio improved from 3.9x in March 2024 to 3x as of December 2025. Capital adequacy remains strong at 23.1%, well above regulatory requirements, providing ample headroom for growth over the next three years, with 25% of funding sourced from offshore and DFI partners.

Outlook & Long-Term Targets

Management is confident in achieving an AUM growth upward of 20% for FY26 and a long-term AUM growth of 25% plus over the next three years. They target an ROA of 3.2% for FY27 and aim to reach 15-16% ROE within 6-7 quarters. The company expects NIM to improve to 10-10.25% as the D2C mix increases from 56% to 65-70%, projecting a 3.0%-3.2% return on assets over the next 4 to 6 quarters.

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