Summary
Northern Arc Capital Limited - Q3 FY2026 Earnings Call Summary Friday, January 30, 2026 5:00 PM
Event Participants
Executives 5 Ashish Mehrotra (MD & CEO), Atul Tibrewal (CFO), Chetan Parmar (Head IR), Jigar Seta (Head of Strategy), Pardhasaradhi Rallabandi (Group Risk Officer)
Analysts 8 Aditya Singhania, Anand Mundra, Aravind R, Darshil Jhaveri, Digant Haria, Divyansh Agarwal, Pavan Kumar, Sameer Bhise
Financials & KPIs
| Metric | Reported | Commentary |
|---|---|---|
| AUM | ₹15,121 crores | +23% YoY, +7% QoQ; driven by D2C business which now forms 56% of total book. |
| Disbursements (Rural) | ₹260 crores | Sequential recovery to pre-stress levels; December alone saw ₹100 crores. |
| Net Interest Income | ₹371 crores | +39% YoY; supported by loan book expansion and stable risk-adjusted yields. |
| Fee & Other Income | ₹32 crores | +49% YoY, +50% QoQ; driven by 73% YoY growth in placement volumes. |
| NIM | 9.9% | +60 bps QoQ; benefit of improved product mix and reduced cost of funds. |
| GNPA | 1.36% | Marginal movement; management notes stress in small-ticket unsecured segments. |
| NNPA | 0.69% | Maintained through prudent provisioning and 90 DPD write-off policy for unsecured. |
| Credit Cost | 3.0% | Includes one-time ₹23.4 crore provision for digital business; normalized cost at 2.9%. |
| Cost of Funds | 8.5% | -90 bps YoY; reduction from 9.4% in Q3FY25 due to gradual MCLR transmission. |
| PAT | ₹101 crores | +33% YoY; highest ever quarterly profit for the company. |
| ROA | 2.7% | Sequential uptick; trending towards long-term target of 3.2%. |
| CRAR | 23.1% | Strong capital position; Debt-to-Equity improved to 3.0x from 3.9x in Mar-24. |
Geographic & Segment Commentary
- Consumer Finance: AUM grew 45% YoY to ₹4,226 crores, representing 28% of total AUM. Performance was bolstered by festive demand and GST rate cuts, though it carried higher compensatory credit costs aimed at optimizing risk-adjusted yields.
- MSME Finance: Segment AUM increased 41% YoY to ₹3,292 crores (22% of total AUM) supported by 17 new branch additions. Management noted industry-wide stress in small-ticket LAP but emphasized that their average ticket size is higher (₹12-14 lakhs) with 100% registered mortgages.
- Rural Finance (MFI): Consciously calibrated to 6% of AUM following industry stress. Incremental PAR 0+ accretion turned negative this quarter, signaling a revival; over 55% of the portfolio is now covered under CGFMU.
Company-Specific & Strategic Commentary
- D2C Transition: Direct-to-customer business now accounts for 56% of AUM, up from prior years, as the company shifts toward a direct-retail model to capture higher margins.
- Credit Solution Ecosystem: Fee income is becoming a key differentiator, with the “Nimbus” platform enabling over ₹1 trillion in credit flow and “nPOS” underwriting 20k-25k loans daily.
- Digital Provisioning: A one-time credit cost of ₹23.4 crore (60 bps annualized) was recognized following an internal ECL assessment of digital partnerships over a 2.5-year look-back period.
- Liquidity Management: Maintained ₹1,400 crores in surplus liquidity with 65% of borrowings linked to variable rates, positioned to benefit from future rate cuts.
Guidance & Outlook
| Metric | Guidance / Outlook | Commentary |
|---|---|---|
| AUM Growth | 20% - 25% (FY26/27) | Sustained momentum in MSME and Consumer segments; calibrated MFI scaling. |
| Credit Cost | 2.7% - 3.0% (FY26) | Expectation of stability as MFI improves and MSME stress plateaus. |
| ROA | 3.2% (FY27) | Driven by loaded NIMs (10.7%) and scaling of the capital-light fee franchise. |
| ROE | 15% - 16% (FY27) | Expected over the next 6-7 quarters as leverage and margins optimize. |
Risks & Constraints
| Risk | Context |
|---|---|
| Unsecured Segment Stress | Continued pressure in small-ticket unsecured business loans and LAP segments; management is mitigating this through higher ticket sizes and registered mortgages. |
| Asset Quality Lag | While repo rates fell 125 bps, bank MCLR only dropped 25-30 bps, delaying cost of fund benefits and pressuring borrower repayment capacity in sensitive segments. |
| MFI Overleveraging | Industry-wide concerns regarding rural borrower debt levels; Northern Arc has responded by shrinking the book 30% and adopting strict MFIN guardrails. |
Q&A Highlights
Asset Quality & Provisions
- Question: Why did provisions jump significantly this quarter despite record PAT? (Digant Haria)
- Answer: Growth in digital lending yields was offset by compensatory higher credit costs. A one-time ₹23.4 Cr charge was also taken for digital business reconciliations over 2.5 years. Risk-adjusted yields remain stable at 13.7% (Ashish Mehrotra).
MSME Stress
- Question: Is the credit cost cycle just starting for MSME segments? (Digant Haria)
- Answer: Small-ticket stress is industry-wide, but Northern Arc’s bounce rates improved to 27%. The portfolio consists of registered mortgages with 100% perfect titles, unlike quasi-secured peers (Ashish Mehrotra).
Yield Expansion
- Question: What caused the 80 bps jump in yields this quarter? (Shalin Kapadia)
- Answer: Primarily a shift in cohort selection within the consumer finance space and a higher mix of D2C business. The objective remains optimizing risk-adjusted returns rather than just lowering costs (Ashish Mehrotra).
Capital & Liquidity
- Question: Are there plans for more equity or debt raising? (Darshil Jhaveri)
- Answer: Current 3x leverage provides 8-12 quarters of growth headroom. No immediate equity need; ₹3,000 Cr debt was raised this quarter including significant DFI participation (Ashish Mehrotra).
Key Takeaway
Northern Arc Capital delivered a milestone quarter, crossing ₹15,000 crores in AUM and achieving its highest quarterly PAT of ₹101 crores. Performance was characterized by a strategic shift toward direct-to-customer lending (56% of mix) and a robust 49% growth in fee-based income from its credit platforms. While headline credit costs reached 3.0%, this included a one-time digital portfolio adjustment; normalized credit costs remain stable at 2.9% with NIMs expanding to 9.9%. Management highlighted a clear recovery in the MFI segment and resilient MSME growth despite micro-LAP headwinds. Looking ahead, the company is targeting a 3.2% ROA and 15-16% ROE by FY27, backed by a strong 23.1% CRAR and a diversified funding base. The primary watch point remains the stabilization of unsecured business loan delinquencies in the coming months.
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