Fusion Finance Limited: Navigating Growth with Discipline and Digital Prowess in Q2 FY26

Fusion Finance Limited, a prominent player in India's microfinance and MSME lending sector, has reported a quarter marked by disciplined growth, significant improvements in asset quality, and strategic technological advancements for Q2 FY26 and the first half of FY26. The company's management highlighted a period of sustained operational efficiency and a robust financial position, signaling a confident outlook for the coming quarters. Despite a challenging macroeconomic environment, Fusion Finance has demonstrated resilience, with key financial metrics reflecting a strong focus on portfolio hygiene and customer-centric strategies.

For Q2 FY26, Fusion Finance reported a total income of INR 433 crore, a modest sequential decline of 3% from Q1 FY26, but a 39% decrease year-on-year from Q2 FY25. Net Interest Income (NII) stood at INR 243 crore, down 9% QoQ and 39% YoY. Pre-Provision Operating Profit (PPOP) was INR 89 crore, showing a 3% sequential increase but a 69% YoY decline. The company reported a Profit After Tax (PAT) loss of INR 22 crore, a significant improvement from a loss of INR 92 crore in Q1 FY26 and INR 305 crore in Q2 FY25. This positive trend in PAT reflects the company's efforts in managing credit costs and operational efficiencies. The Asset Under Management (AUM) for Q2 FY26 was INR 7,038 crore, experiencing an 8% sequential decline and a 39% year-on-year decrease. However, disbursements saw a healthy 37% sequential growth, reaching INR 1,298 crore in Q2 FY26.

Strengthening Asset Quality and Collections

Fusion Finance has made significant strides in strengthening its asset quality. The Gross Non-Performing Assets (GNPA) ratio further declined to 4.61% in Q2 FY26 from 5.43% in Q1 FY26, with Net Non-Performing Assets (NNPA) at a healthy 0.38%. Credit costs continued their downward trend, reaching INR 111 crore in Q2 FY26, a substantial reduction from INR 693 crore in Q2 FY25. This improvement is attributed to robust collection efficiencies, which stood at 98.47% across All India for Q2 FY26, and proactive risk management strategies.

The company's collection vertical has been fully stabilized, driving consistent reductions in PAR (Portfolio at Risk) flow across buckets. Digital enablement and expanded coverage have significantly reduced PAR 30-60 and PAR 0-30 flows. Early engagement and targeted strategies have been crucial in improving bucket health, while digital collections and conciliation efforts have accelerated rollbacks, lowering PAR 60-90. The MSME portfolio, a key growth engine, boasts a 93% secured book and 95% digital collections, further underscoring the company's commitment to asset quality.

Strategic Initiatives and Digital Transformation

Fusion Finance is actively pursuing several strategic initiatives to drive sustainable growth and enhance operational efficiency. The company recently received approval for its corporate agency license from IRDAI in October, which will enable it to offer more diverse and customized products to its customers. This move is expected to broaden its product portfolio and cater to a wider customer base.

Technological interventions are at the core of Fusion Finance's transformation. The company has implemented a paperless customer onboarding system, significantly reducing processing time and manual errors. AI/ML-driven credit operations, including intelligent KYC validation and automated credit decisioning, are minimizing human bias and enhancing underwriting consistency. Furthermore, geo-fencing and location intelligence are being utilized for smarter resource deployment and monitored route planning. The omni-channel collections enablement, using AI/ML to identify high-risk customers and guide outreach, is improving recovery rates and customer engagement.

Governance has also been a key focus, with the induction of Rajeev Sardana as an independent director and the appointment of a dedicated Chief Compliance Officer and Head of Internal Audit. These measures aim to strengthen the governance framework, ensuring transparency, integrity, and accountability across all operations.

Outlook and Management Commentary

Management expressed confidence in the company's trajectory, anticipating that disbursements will continue to climb in Q3 and Q4 FY26, with the overall book degrowth expected to cease by December or January. The strategic focus remains on expanding presence in branches and districts, driven by products that attract less leveraged customers. The company aims for a customer mix of 60-65% existing Fusion customers and 35% new-to-Fusion/new-to-credit customers, with this tempering from Q4 onwards.

Fusion Finance is building its portfolios with a credit cost guardrail of sub 2.5%, though a more realistic ongoing future credit cost is estimated at about 3.5%. The marginal cost of borrowing is expected to decrease by 20-30 basis points next quarter, with efforts to maintain the Net Interest Margin (NIM) or keep it within a plus/minus 10 basis points range. The company also anticipates a 30% growth next year without a significant increase in headcount, leveraging productivity gains from digital initiatives.

In conclusion, Fusion Finance Limited's Q2 FY26 performance reflects a company that is derisked, disciplined, and digitally enabled. With a strong capital position, robust lender confidence, and a clear strategic roadmap, the company is well-positioned for sustainable and profitable growth in the quarters ahead, shifting its focus from balance sheet protection to safe and sustainable expansion.