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Northern ARC
Our verdict on Northern ARC isn’t the consensus take — see where we landed, and the one risk the bull case glosses over.
See the verdict — free →Does management do what it says?
The RoA for Q3FY26 stood at 2.7%, slightly below the 2.8% target, while the 9MFY26 average is 2.6%. (2 in progress, 2 met across 4 tracked commitments)
“And I think from where we ended on a full-year basis, my objective is to get to 3 plus return on assets”
The incremental cost of funds for 9MFY26 was 8.7%, hitting the upper bound of the guided range. (3 met, 1 missed across 4 tracked commitments)
“I think 8.5% to 8.6% is something we'll be able to hold and with the expansion in the D2C mix should see improvement in yields”
As of Q1FY27, 94% of the MFI (Rural Finance) AUM is covered under the CGFMU scheme. (1 in progress across 1 tracked commitment)
“Pertinent to highlight as the mix continues to improve from 59% to targeted 65%, you will see some bit of expansion in NIMs.”
The D2C mix reached 64% in Q1FY27, an improvement of 1,038 bps YoY, bringing it very close to the 65% target. (1 in progress across 1 tracked commitment)
“Expand NuScore Offering to not just MFIs, but also to NBFCs, SFBs, Consumer Durables, etc.”
Management delivered FY26 credit costs of 2.8%, meeting their previously stated guidance. — target: 2.8%
“Sector wise asset quality – FY26 Credit cost in line with guidance of 2.8%”
See the full cited Management analysis of Northern ARC
How durable is the business?
Net Interest Income (NII) grew 12% YoY to Rs. 322 crores, supported by a 40 bps expansion in Net Interest Margin (NIM) to 9.3% due to lower borrowing costs. (5 expanding across 1 engine)
“Net Interest Income: 394 (INR crore). YoY %: 32%. Net Interest Income (as % of Assets): 9.3%”
The business model is shifting heavily toward direct-to-customer (D2C) lending, which now accounts for 54% of the total AUM, up from 19% in March 2021. (4 expanding)
“nPOS – Digital Lending proprietary platform. Connecting Banks & Fintechs through APIs... 29.0Mn+ Loans Disbursed. 438Bn+ Cumulative Disbursements.”
Fee income remains a strategic focus to build a 'credit solution ecosystem' rather than just a balance sheet model; management expects fee income to improve to 90-110 bps on a forward-looking basis. (3 expanding across 1 engine)
“Fee & Other Income: 22 (INR crore). YoY %: -20%. Fee and Other Income (as % of Assets): 0.5%”
The company significantly strengthened its balance sheet, reducing its debt-to-equity ratio from 3.9x to 2.8x and maintaining a high Capital Adequacy Ratio of 24.6%. (2 expanding, 2 stable)
“Our debt-equity ratio also improved from 3.9x in March 2024 to 2.8x as of September 2025. Capital adequacy remains quite strong at 24.6%.”
The D2C segment is becoming the dominant growth engine, now accounting for 54% of total AUM, with MSME lending within this segment growing at 42% YoY. (4 expanding, 1 contracting)
“Growth was predominantly driven by our Direct-to-Customer segment, which accounted for 54% of our total assets under management... MSME space, which grew by about 42% on a year-on-year basis.”
See the full cited Business Model analysis of Northern ARC
Where does growth come from?
The company has entered a strategic partnership with Yes Bank to accelerate lending to underserved markets, which acts as a future growth catalyst.
“Entered MOU with Yes Bank to accelerate Inclusive Credit for Viksit Bharat 2047”
The company is aggressively shifting its mix toward direct-to-customer (D2C) lending, targeting a 70% mix by FY28 to drive higher yields and ROA. (2 steady, 2 accelerating, 1 decelerating across 5 signals)
“Credit Cost 2.6% -44 bps”
Credit costs are showing a downward trend (improving) from Q1FY26 to Q2FY26, particularly in the Consumer and Rural segments. (1 accelerating, 2 reversing, 2 steady across 5 signals)
“Net NPA 0.5% -6 bps”
AUM growth is steady at 22% YoY, slightly lower than the 5-year CAGR of 26%, but management has committed to future growth of 22-25% (3x GDP). (1 steady across 1 signal)
“Our assets under management has grown over the last five years at a CAGR of about 26%... Our AUM has grown by about 22% on a year-on-year basis and about 10% over the previous quarter to reach INR 16,594 Cr”
Net NPA remains exceptionally low and stable at 0.56%, well within the management's target range of 0.5%-0.7%. (2 steady, 1 accelerating across 3 signals)
“NNPA Mar'24 0.08%... Sep'25 0.56%”
See the full cited Future Growth analysis of Northern ARC
What could break the thesis?
INTENSIFYING. While PAT grew YoY, the ROE of 11.5% in Q1FY27 is a decline from 14.0% in Q4FY26, though it is an improvement over the 9.3% seen in Q1FY26. (1 intensifying, 4 easing)
“Return on Equity... Q4FY26 14.0% Q1FY27 11.5%”
Risk is stable but monitored; management noted a slight increase in Stage-2 assets within the unsecured business loan side of this book, but maintains 'prudent provisioning' as an overlay. (1 stable, 4 easing)
“Rural... Credit Cost Q1FY27 3.5%”
The risk is easing as the incremental cost of funds has dropped to 8.7% in H1FY26 from a peak of 9.3% in FY25, following the absorption of previous risk weight hikes. (5 easing)
“Increase in Risk Weights for NBFC Exposure in FY24... 9.3% [FY25]”
A significant portion of the company's loan book is concentrated in the MSME and Consumer Finance sectors, making it vulnerable to economic downturns affecting small businesses or individual spending power. [CONCENTRATION] (+2 more risks)
“Building diversified Sector mix... MSME 37% Consumer Finance 24%”
Risk is easing as dependency on bank borrowings has reduced from 65% in March '25 to 52% in March '26. (2 easing, 3 stable)
“Borrowing Mix %... Bank 56% [Jun-26]”
See the full cited Risk analysis of Northern ARC
Northern ARC analysis by filing period
Read the full thesis on Northern ARC
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