Fusion Finance Q4 FY26: Profitability returns, but the real story is credit normalisation

Fusion Finance Limited closed Q4 FY26 with a visible shift in narrative. After a difficult FY25, the company reported Q4 FY26 PAT of INR 114.19 crore and full-year FY26 PAT of INR 13.85 crore. The quarter’s headline profit, however, included a deferred tax asset recognition of INR 76.8 crore. Management clarified on the earnings call that core profitability excluding this one-time impact was about INR 37.5 crore, implying an annualised ROA of roughly 2.1% for the quarter.

Behind the accounting uplift, the more durable improvements showed up in credit costs and portfolio quality. Q4 FY26 credit cost fell to INR 56 crore, continuing a multi-quarter decline. Gross NPA improved to 3.21% from 4.38% in Q3 FY26, while net NPA improved to 0.51% from 0.63%. The company also highlighted that net forward flow from the current bucket was extremely low in Q4 FY26, supporting its claim that collections discipline is stabilising.

AUM ended the quarter at INR 7,407 crore, up about 8% sequentially from INR 6,876 crore. Disbursements rose to INR 2,140 crore in Q4 FY26 from INR 1,594 crore in Q3 FY26, reflecting a calibrated return to growth.

Q4 FY26 performance: growth returns, but average book and liquidity weighed on NII

The quarterly P&L showed total income at INR 430.14 crore, up marginally from INR 424.10 crore in Q3 FY26. Net interest income declined 6% QoQ to INR 222.34 crore, even as end-of-period AUM increased. Management attributed this to two deliberate factors: maintaining higher liquidity buffers and lower income recognition from direct assignment during the quarter.

On the call, the CFO said the company held liquidity of INR 1,913 crore as of March 31, 2026, including an additional buffer of roughly INR 500 crore due to the geopolitical situation. This extra liquidity, according to management, increased finance cost by about INR 7 to 8 crore in Q4. The CEO also referenced lower direct assignment income recognition during the quarter, contributing to flatter NII.

Operating expenses were stable at INR 205 crore in Q4 FY26 versus INR 207 crore in Q3 FY26. As a result, PPOP remained broadly flat at INR 93.05 crore.

Credit costs and collections: the core of the turnaround

Fusion’s credit trajectory improved meaningfully through FY26. The investor presentation showed FY26 impairment of financial instruments at INR 425.17 crore, down sharply from INR 1,869.49 crore in FY25. In Q4 FY26, impairment was INR 55.64 crore compared with INR 79.52 crore in Q3 FY26.

The credit cost disclosure provided more detail on provisioning and recoveries. For Q4 FY26, provisions as per ECL were INR 53 crore, write-offs were INR 136 crore, and closing ECL stood at INR 270 crore. Stage III (GNPA) loans were INR 201 crore with ECL of INR 170 crore, implying provision coverage of 84.4% on Stage III. Stage II coverage was shown at 71.5%.

Recoveries also supported reported performance. Bad-debt recovery was INR 21 crore in Q4 FY26 versus INR 14 crore in Q3 FY26. Management framed this as evidence of improving effectiveness in in-house collections, including hard-bucket recoveries.

Operationally, the company leaned heavily into technology-enabled collections. The presentation highlighted an AI-led engagement model that executed more than 5.3 million customer interactions and engaged over 1 million customers across collections and onboarding, along with AI-assisted monitoring. Management positioned this as a foundation for tighter monitoring and better productivity.

The collection efficiency metrics in the presentation were strong. Average CE (MFI) improved to 99.66% in Q4 FY26 from 99.14% in Q3 FY26. The company also highlighted net forward flow rate below 0.1% in Q4 FY26.

Operating guardrails: borrower deleveraging, branch discipline, and MSME mix

A notable theme in the presentation was borrower deleveraging and stricter customer selection. The company shared lender association trends, showing that customers with Fusion plus more than 3 lenders declined to 7.73% in Mar 2026 from 9.9% in Dec 2025 and 13.9% in Sep 2025. It also stated that 80% of disbursements were to customers with two or fewer lenders.

Management added an operational tightening effective April 2026: onboarding of new-to-Fusion customers is restricted to the Fusion plus 1 category only. In the Q&A, management also mentioned that acquisition of Fusion plus 2 lender customers for new onboarding was stopped in the prior two months.

The company also described a branch-level operating framework as a structural change. Since November 2025, branches have been classified A to D based on credit metrics, operating quality and growth behaviour. Management said nearly 90% of disbursements are now coming from A and B branches, and that this framework is being used to allocate growth while calibrating risk.

On MSME, the company disclosed an AUM of INR 772 crore with Q4 disbursement of INR 122 crore. It positioned MSME as largely secured with 98% secured book and portfolio LTV of 42.5%. Management said it is strengthening its position in the loan against property segment, particularly in the INR 8 lakh to INR 15 lakh ticket size range.

Technology investments are expected to continue. Management said the company is migrating to a more advanced loan management system, with UAT starting in May 2026 and migration expected to complete by end-August 2026. The stated objective is improved branch productivity, onboarding quality, monitoring capability and customer service, and lower process friction.

Guidance and what to watch in FY27

Management reiterated its aspiration of reaching INR 10,000 crore AUM by March 2027. It also discussed credit costs in two layers: a longer-term through-cycle MFI credit cost guidance of 3.25% to 3.75%, and an internal modelling expectation closer to 2.5%. With MSME scaling, management said the overall weighted credit cost could be closer to 2.5%.

On costs, the CFO indicated FY27 opex could rise around 4% to 5% over FY26’s INR 832 crore, while also referencing ongoing opex rationalisation initiatives including branch rationalisation.

Liquidity and capital appear supportive for growth. CRAR was 36.46% at March-end, and liquidity was INR 1,913 crore. Management also noted sanctions in hand of INR 1,245 crore and a pipeline of about INR 2,500 crore. Borrowings of INR 2,040 crore were drawn in Q4 FY26.

The near-term question is whether growth-led operating leverage shows up in NII and PPOP as average AUM rises. Management repeatedly emphasised that while end-of-period AUM has started improving, the benefit of average book growth will start reflecting in Q1 and accelerate from Q2.

Fusion Finance exits FY26 with improving asset quality, declining credit costs, and strong capital buffers. At the same time, investors need to separate the DTA-driven accounting profit from operating profitability, and track whether the combination of tighter borrower guardrails, tech-enabled collections, and branch-level discipline converts into sustained returns through FY27.