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Arman Financial Services Ltd
| Q2 FY26 Earnings Conference Call
Summary : Arman Financial Services shows signs of recovery in Q2 FY'26, driven by stabilizing asset quality and non-MFI growth, while maintaining a calibrated approach amidst evolving market conditions.
Management Perspective positive : Management expressed confidence in recovery, stating 'early signs of recovery,' 'firmly positive underlying trends,' and 'confident of continuing this momentum.' They also noted 'steady progress' and 'rebuilding momentum.'
Concall Report Analysis & Insights
Business Overview
- Consolidated AUM reached INR 2,130 crores in September 2025, showing stabilization and gradual growth.
- Impairment costs decreased for three consecutive quarters, from INR 89 crores to INR 38 crores in Q2 FY'26.
- Q2 FY'26 disbursements increased 26% year-on-year to INR 475 crores, with 21% sequential growth.
- Consolidated GNPA stood at 3.69% and NNPA at 0.53%, indicating asset quality normalization.
- Non-MFI segments (MSME, Two-Wheeler, LAP) delivered consistent growth, with AUM up 29% year-on-year.
Future Growth Prospects
- Expect strengthening momentum and broad-based improvements in H2 FY'26 across all businesses.
- Anticipate continued stabilization in microfinance asset quality and moderation in credit costs.
- Well-positioned to benefit from improving rural sentiment and a supportive policy environment.
- Structural reforms and disciplined execution are translating into tangible results.
- Expanding geographical footprint, including new branches in Uttar Pradesh, to boost MSME growth.
Management Insights
- Microfinance industry is showing early signs of recovery after a challenging period.
- Prioritizing portfolio quality and risk discipline over headline growth is a conscious strategy.
- Implemented governance and process reforms, including separating credit underwriting from recovery functions.
- Believe the worst of the credit cycle is behind us, positioning for stable, sustainable footing.
- Adopting a calibrated approach to growth, learning from past credit cycles.
Signs of Skepticism
- Management acknowledged the recovery process is 'two steps forward and one step back,' indicating potential volatility.
- Difficulty in controlling operating costs was highlighted, suggesting ongoing efficiency challenges.
- The MSME portfolio is still under 'some level of stress,' despite overall improvements.
- Management admitted to being 'scared to pick one side or another' regarding the JLG model's future.
- Past attempts to use ML-based algorithms for customer evaluation were 'unsuccessful' due to human behavior complexity.
Risk Factors
- External environment continues to evolve, posing potential for setbacks in recovery.
- Difficulty in controlling operating costs due to AUM decline and increased collection efforts.
- MSME portfolio, particularly small-ticket rural unsecured loans, is not immune to MFI sector stress.
- Pricing sensitivity and competition in the LAP segment could impact yields.
- Uncertainty regarding the long-term growth pattern and sustainability of high growth rates.
Good To Know
- Capital adequacy is strong: 38.73% for stand-alone, 57.78% for Namra Finance.
- Healthy liquidity position with INR 238 crores in cash, liquid investments, and undrawn CC limits.
- 67% of microfinance portfolio is covered under CGFMU guarantee scheme, providing risk protection.
- Credit officer model (BCM) shows 40% lower delinquencies in originated cases.
- Company operates across 11 states with a network of 509 branches, serving over 6 lakh customers.
Key Drivers
- Microfinance asset quality is stabilizing.
- Non-MFI segments show consistent growth.
- Improved collection efficiency supports recovery.
- CGFMU cover reduces provisioning needs.
Key Analyst Discussions
Competitive Environment
- LAP segment is competitive, leading to price sensitivity and negotiation on rates.
- MSME yields are higher than MFI, not due to higher risk but supply/demand and customer tolerance.
- Company aims to grab market share from peers still struggling with liquidity and attrition issues.
- Management avoids raising pricing due to sensitivity from regulators and stakeholders.
Market Trends & Consumer Behavior
- Borrower discipline and field-level monitoring have improved collection efficiency to 95.6%.
- Rural sentiment is improving, which is expected to support business momentum.
- Festive season (September, October) saw high disbursement growth and demand.
- Micro-level customers can afford high interest rates due to high daily returns on small businesses.
Financial Highlights
- Capital adequacy appears better due to portfolio decline; expected to normalize with growth.
- Overall cost of borrowing is approximately 12.5%, with incremental borrowing at 12%.
- PAR 1-30 book for microfinance is around 1.1% to 1.5%.
- Consolidated H1 write-offs were INR 134 crores, with credit loss reversals of INR 29.62 crores.
- Target ROA is 3% to 4%, with 3.5% to 4.5% being a realistic and acceptable range.
Product Composition
- Diversifying the book with LAP, MSME, and Two-Wheeler to create a healthier balance sheet.
- LAP portfolio's average ticket size increased from INR 3.5-4 lakhs to INR 5-7 lakhs.
- Unsecured MSME growth is moderated due to stress in the segment and focus on quality.
- Experimenting with individual loans (IL) to retain good JLG customers and expand product offerings.
- BCM structure allows for venturing into other products like IL and higher ticket loans.
Strategic Considerations
- CGFMU cover is applicable to NBFCs for unsecured loans under INR 2 lakhs; registration approved.
- Separation of credit underwriting from recovery functions is operational in 50% of branches.
- Not ready to 'floor it' on MFI disbursements, maintaining a cautious approach.
- AI is seen as a tool for evaluations, back-end processes, IT, and tracking, but not for ground-level operations.
- Management is committed to using AI where it is proven effective and right for the business.