Northern Arc Capital: Steering Towards Sustainable Growth in Q2 FY26

Northern Arc Capital Limited has delivered a robust performance in the second quarter of Fiscal Year 2026, showcasing resilience and strategic execution amidst a dynamic economic landscape. The company's assets under management (AUM) witnessed a healthy 15% year-on-year growth, reaching an impressive ₹14,166 crore. This growth was predominantly fueled by its Direct-to-Customer (D2C) segment, which now constitutes 54% of the total AUM. The management's focus on prudent risk management and a diversified credit solution ecosystem appears to be yielding positive results, positioning Northern Arc for sustained profitability.

The D2C business, particularly MSME finance, has been a significant growth driver, expanding by approximately 42% year-on-year. Consumer finance also demonstrated healthy momentum with a 24% year-on-year growth in AUM, with management anticipating further pick-up in demand during the second half of the year. While the rural finance portfolio saw conscious calibration, the company maintained a strong operational base and observed steady improvement in portfolio quality, with 80% of the MFI book adhering to MFIN guardrails and 40% covered under CGFMU. The intermediate retail credit solution business also recorded a healthy 13% year-on-year growth, further diversifying the company's revenue streams.

Northern Arc's financial health is underscored by expanding margins and stable asset quality. The Net Interest Margin (NIM) improved by 40 basis points quarter-on-quarter to 9.3%, driven by a 40 basis points sequential decline in the cost of funds to 8.5%. This improvement reflects the treasury team's effective negotiation and the transmission of repo rate benefits. The Gross Non-Performing Assets (GNPA) stood at a stable 1.15%, with Net Non-Performing Assets (NNPA) at 0.56%. The credit cost for the quarter improved to 2.7%, down from 3% in Q1 FY26, aligning with the management's guidance of 2.6% to 2.8% for the second half of the fiscal year.

Strategic Pillars and Future Outlook

The company's strategy revolves around several key pillars: deepening its presence in the MSME sector, leveraging digital and partnership channels for consumer growth, and enhancing rural finance through individual underwriting and secured products. These efforts are expected to drive AUM mix towards more than two-thirds from D2C segments in the coming years. Northern Arc's robust technology stack, including NuScore for underwriting and nPOS for connecting financial institutions, provides a competitive edge in credit assessment and straight-through processing of loans. The company's diversified funding base, with 70% linked to variable interest rates, positions it favorably in a declining interest rate environment.

Profitability and Risk Management

Northern Arc is committed to maintaining consistent and sustainable quarterly profitability. The management aims to improve interest yield through changes in AUM mix and build a lean, efficient branch network to maximize productivity. The long-term target includes achieving an RoA of 3.7%-4% and an RoE of 16%-18% within the next three years. Proactive risk management, including strong in-house collections infrastructure and granular portfolio monitoring, is crucial to maintaining asset quality across business cycles. The company's ability to navigate various economic stresses, from demonetization to the COVID-19 pandemic, demonstrates its robust operational framework.

Northern Arc Capital's Q2 FY26 performance reflects a company with strategic clarity, disciplined execution, and a strong foundation for future growth. The focus on underserved households and businesses, coupled with a comprehensive credit solution ecosystem and robust risk management, positions it well to capitalize on India's economic revival and achieve its ambitious profitability targets.