Arman Financial Services: Navigating Challenges with Strategic Resilience in H1 FY26

Arman Financial Services Limited, a diversified non-banking financial company (NBFC) with a strong focus on under-served rural and semi-urban retail markets, has demonstrated strategic resilience and early signs of recovery in its H1 FY26 performance. The company, which operates across 11 states with 509 branches and serves approximately 6.4 lakh active customers, reported a consolidated Assets Under Management (AUM) of INR 2,130 crore as of September 2025. While this figure reflects a year-on-year decline, it aligns with management's conscious strategy of prioritizing portfolio quality and risk discipline over headline growth in a challenging microfinance environment.

The microfinance industry has faced significant headwinds over the past 5-6 quarters, marked by elevated credit stress, regulatory reforms, and substantial write-offs. Despite these challenges, Arman Financial Services is witnessing a moderation in bad loan ratios and an improvement in collection efficiencies, signaling the early stages of recovery. The company's disciplined execution, sharper risk controls, and structural reforms implemented over the past year are now beginning to yield tangible results, positioning it well to capitalize on the ongoing market recovery.

Segmental Performance and Diversification Strategy

Arman Financial Services' diversified portfolio is a cornerstone of its resilience. The company's AUM split in Q2 FY26 highlights its multi-product approach:

The non-MFI segments, including MSME, Two-Wheeler, and LAP, have continued to perform in line with expectations, serving as crucial growth engines during these testing times. The standalone AUM for these segments grew by 29% year-on-year to INR 623 crore. Disbursements for H1 FY26 stood at INR 865 crore, largely flat year-on-year, but Q2 FY26 disbursements increased by 26% year-on-year and 21% sequentially to INR 475 crore. This growth in non-MFI segments is a testament to the company's successful diversification strategy.

Financial Highlights and Asset Quality Improvement

For H1 FY26, the company reported a consolidated gross total income of INR 310 crore, a 15% year-on-year decrease, and a net total income of INR 208 crore, an 11% year-on-year degrowth. Pre-Provisioning Operating Profit (PPOP) for H1 FY26 stood at INR 112 crore, a 31% year-on-year degrowth. However, the company registered a profit of INR 8 crore in Q2 FY26, a significant improvement from the INR 14.6 crore loss in Q1 FY26, narrowing down the losses sequentially.

Asset quality metrics have shown visible improvement, reflecting the effectiveness of disciplined measures. The overall collection efficiency improved to 95.6% in September 2025, driven by stronger borrower discipline and enhanced field-level monitoring. Consolidated Gross Non-Performing Assets (GNPA) stood at 3.69%, and Net Non-Performing Assets (NNPA) at 0.53%, indicating signs of normalization. In microfinance, GNPA improved by 96 basis points to 3.77%, and NNPA improved by 39 basis points to 0.26% compared to H1 FY25.

Strategic Initiatives and Future Outlook

Arman Financial Services has undertaken several strategic initiatives to strengthen its operations and ensure sustainable growth. A key reform is the separation of credit underwriting from recovery functions, now operational across 196 (50%) of its branches. This structural change has enhanced accountability, risk oversight, and collection consistency, with early results being encouraging.

The company maintains a strong capital adequacy, with the standalone entity at 38.73% and its MFI subsidiary, Namra Finance, at 57.78%, both well above regulatory requirements. A healthy liquidity position of INR 238 crore in cash, bank balances, liquid investments, and undrawn credit limits further underpins its financial stability. Arman is also actively exploring the application of AI in evaluations, back-end processes, IT, and tracking to enhance efficiency, while acknowledging the complexities of modeling human behavior in lending.

Looking ahead, management expects the momentum to strengthen in the second half of FY26, with improvements becoming more visible and broad-based. They anticipate continued stabilization in microfinance asset quality, sustained strength in collections, and further moderation in credit costs. The company aims to increase the SME book's share to 35% and reduce the MFI book's share to approximately 60% over time, with an aspirational Return on Average AUM (ROAA) of 3-4% and a Post Tax ROA of 4-5%. This calibrated approach, coupled with improving rural sentiment and a supportive policy environment, positions Arman Financial Services for durable, profitable, and sustainable growth.