Arman Financial Services Ltd

Arman Financial Services Ltd (Arman) is an Ahmedabad based non-banking financial company (NBFC) promoted by Mr. Jayendra Patel. The companyâs operations are spread across Gujarat. It has recently entered Madhya Pradesh. The company has two lines of businesses:

1 Two-wheeler and three-wheeler Financing: The company commenced its operations with this activity and has since become one of the top-five players in two-wheeler and three-wheeler financing in Ahmedabad region. The average loan size is around Rs.20,000 to Rs.50,000 and tenure is around 12 â 36 months. The company claims that âa customer can literally walk into a dealer early afternoon and walk out with a new motor cycle in the eveningâ. In the mean time, the company does the background checks and investigations.

2. Joint liability group (JLG) microfinance: The company entered the business in 2009 and has become one of the few microfinance companies to have a presence in the Gujarat state. The company follows the JLG model of lending for microfinance business where the borrowers are organized in group of eight to ten women living in an area of around 500 â 600 meters, each jointly liable for other members. So in case one member defaults, other members can press her to repay (social pressure). The loan ticket size are small of around Rs.12,000 â 15,000 and is given for income generating activity of the borrower (for eg buying a cow/buffalo/goat, sewing machines etc). The tenure of the loans is for less than one year. Arman usually lends to members who own their house and collects residential proofs from them. Arman also takes life insurance for the borrower and male members (although the women borrow the money, around 50% of the time the money is used by the male member of the family for income generating activity) to the extent of loan amount. The company doesnât follow agent based model and has its own disbursal and collection agents. During FY14, the microfinance segment has overtaken vehicle financing in terms of asset under management. As per Reserve Bank of Indiaâs requirement, during FY13, Arman incorporated Namra Finance Limited (Namra) as its wholly owned subsidiary to carry on micro finance business which has got MFI license from RBI (first company in India to be awarded the license). During FY14, the microfinance business of Arman was fully transferred to Namra. Around 45 companies in India have MFI license.

The company has 35 branches spread all over Gujarat as on June 30, 2014. During FY12, Arman raised Rs.15 crore of equity (equity raised at Rs.56.95/share) by raising funds from private equity company, Incofin Investment Management, which specialises in lending to micro finance institutions all over the world. Incofin has portfolio of investments in more than 100 MFIs in over 100 countries. Incofinâs experience is expected to benefit the company in the medium term.

Key Financials (on consolidated level)

Growth in loan portfolio

(Rs. Crore)


As on March 31, 2010 2011 2012 2013 2014
2 Wheeler & 3 Wheeler Loan 13.62 21.15 27.96 36.88 42.79
Growth (%) 55 32 32 16
Microfinance 8.82 20.99 21.25 32.23 45.56
Growth (%) 138 1 52 41
Others 0.23 2.41 2.83 3.17 2.72
Total 22.67 44.55 52.04 72.28 91.07
Growth (%) 97 17 39 26
2 Wheeler & 3 Wheeler Loan 24.63 30.30 32.76 44.96 53.39
Growth (%) 23 8 37 18
Microfinance 9.38 38.86 43.27 59.96 85.00
Growth (%) 314 11 39 41
Total 34.01 69.16 76.03 104.92 138.08
Growth (%) 103 10 38 32

Over the years, the management seems to have focussed more on microfinance business and in FY14 microfinance business has overtaken vehicle finance business in terms of AUM.

Growth in AUM leading to healthy growth in interest income along with high NIMs

(Rs. Crore)

For year ended Mar 31, 2010 2011 2012 2013 2014
Net Interest Income 3.57 6.75 9.50 10.67 14.46
Growth (%) 89 41 12 36
NIMs 17.91 17.28 16.48 14.46 14.91

On account of presence in high margin vehicle finance and microfinance business, company has high NIMs.

Low Delinquencies

As on Mar 31, 2010 2011 2012 2013 2014
GNPA (%) 1.98 0.68 0.55 0.56 0.72
NNPA (%) 0.59 0.50 0.51 0.64

Companyâs delinquencies have remained under control and with shifting focus towards microfinance has led to GNPA coming down to less than 1% over the past four years from around 3.30% in FY09. However, the companyâs microfinance business is less seasoned.

High Return on Assets

For the year ended Mar 31, 2010 2011 2012 2013 2014
ROA (%) 4.63 5.31 4.53 4.64

*High NIMs and low NPAs have led to high and improving Return on Assets for the company

Adequate capitalisation

* Post Incofinâs investment in the company, companyâs capital adequacy ratio has remained high at 41.12% as on March 31, 2014 on standalone basis and 25.92% at Namra level. Company is adequately capitalised for at least two years and hence can grow at high rate.

Key Triggers for growth

Prior to FY10, although Arman was doing well it was still a small company and had high delinquencies (GNPAs in FY08: 2.9%, FY09: 3.30% and FY10:1.98%) and low RoAs. Also, the management didnât seem that much interested in the business (investments in equity shares as on March 31, 2009 and March 31, 2010). However, following events changed the approach of management as well as triggered growth for the company:

*Induction of Mr. Aalok Patel (son of MD) in the management team of the company: During FY10, Mr. Aalok Patel joined the company as executive director. Mr Patelâs educational background and experience in pretty interesting. He is MS in Accounting & Finance and is also a licensed CPA (equivalent to CA in India). He has worked with KPMG as sell. Induction of Mr. Patel bought about lot of positive changes in the company. He seems to have streamlined processes (no auditor qualification in FY13 and FY14 AR), focussed management (selling of equity shares in FY11) on microfinance business (leading to lower NPAs) and has also bought in private equity in the company. Since his induction there has been steady rise in companyâs AUM and disbursements.

*Entry into microfinance business: Company entered microfinance business in FY09 and has steadily grown it and is now concentrating more on this segment compared to vehicle finance. Prior to Andhra Pradesh crisis, microfinance was considered to be a high growth and low risk business. Post the Andhra Pradesh crisis lot of positive steps have been taken by RBI in terms of regulating the microfinance industry like cap on interest rates to be charged by the company, giving licenses to microfinance companies, provisioning, etc which has led to improvement in liquidity for the industry as well as equity funding. Granting banking license to Bandhan Microfinance by RBI was a big positive step for the microfinance industry.

Infusion of PE funding by Incofin: Incofin invested Rs.15 crore of equity in the company in FY12. Incofin is a specialized fund management company with more than 12 years of experience in microfinance. It has portfolio of over 100 MFIs. The shares were allotted to Incofin at Rs.56.25/share. Incofinâs experience and expertise hasbenefitedthe company.


* Highly underpenetrated MFI sector: MFI is a highly underpenetrated sector and if the sector is regulated properly, it can have above average rate of growth. In my opinion, because of high underpenetration, most of the companies will have high rates of growth. The sector has high NIMs and decent ROAs (comparable to even few of the HFCs). There are very few listed companies in the sector and those listed can have high scarcity premium.

* High NIMs and healthy growth in NIIs

* Adequate capitalisation

* On account of social pressure delinquencies are low


* High Competition and regulatory issues:MFI is a highly competitive sector and Arman is among the lowest quartile in terms of size. It becomes very important for the company to grow conservatively and learn from the lessons of Andhra Pradesh (unprecedented growth, charging high interest rates, ghost loans, employees siphoning off money etc). However, post the regulations by RBI (Malegaon committee report) and regular circulars (available on RBI website), the regulatory issues seems to have been sorted out.

* Presence only in Gujarat: The company has presence only in Gujarat any political issue in the region can adversely affect the company. Although, the company is trying to enter Madhya Pradesh, it will take time for them to establish.

*Low promoter holding: The promoters have low holding in the company (29.95%). Further, fund raising can happen at Namra level since its 100% subsidiary of Arman. Its a highly illiquid stock and valuations dont seem cheap as they were earlier.

Views invited

(Disc: I am positively biased towards the stock and hold it from much lower levels)


It becomes very important to know about the regulations in the MFI business. Please find below few of the relevant Q&As for MFIs from the RBI website:

What is an NBFC-MFI?

An NBFC-MFI is defined as a non-deposit taking NBFC (other than a company licensed under Section 25 of the Indian Companies Act, 1956) with Minimum Net Owned Funds of Rs.5 crore (for NBFC-MFIs registered in the North Eastern Region of the country, it will be Rs. 2 crore) and having not less than 85% of its net assets as âqualifying assetsâ.

What are âNet Assetsâ and âQualifying Assetsâ?

**Net Assets:**âNet assetsâ are defined as total assets other than cash and bank balances and money market instruments.
Qualifying Assets:Loan disbursed without collateral by an NBFC-MFI to a borrower with a household annual income not exceeding Rs. 60,000 (rural) or Rs. 1,20,000 (urban and semi-urban) and total indebtedness not exceeding Rs. 50,000 will be a qualifying asset provided:

  1. loan amount does not exceed Rs. 35,000 in the first cycle and Rs. 50,000 in subsequent cycles;
  2. tenure of the loan not to be less than 24 months for loan amount in excess of Rs. 15,000 with prepayment without penalty;
  3. aggregate amount of loans, given for income generation, is not less than 70 per cent of the total loans given by the MFIs and
  4. loan is repayable on weekly, fortnightly or monthly installments at the choice of the borrower.

What are the limitations imposed on an NBFC which does not qualify as NBFC-MFI?

An NBFC which does not qualify as an NBFC-MFI shall not extend loans to micro finance sector, which in aggregate exceed 10% of its total assets.

Are there any restrictions on the remaining 15% of the assets that an NBFC-MFI holds?

No there are no restrictions.

Can NBFC-MFIs lend funds for personal use/emergencies?

A part (i.e. maximum of 30%) of the aggregate amount of loans may be extended for other purposes such as housing repairs, education, medical and other emergencies. However aggregate amount of loans given for income generation should constitute at least 70 per cent of the total loans of the NBFC-MFI.

What happens to the existing NBFCs who intend to convert to NBFC-MFI but do not fulfill the minimum net owned funds criteria of Rs. 5 crore at present?

Existing NBFCs seeking conversion to NBFC-MFI category, were required to maintain Net Owned Funds (NOF) at Rs.3 crore by March 31, 2013 and at Rs 5 crore by March 31, 2014, failing which they must ensure that lending to the Microfinance sector i.e. individuals, SHGs or JLGs which qualify for loans from MFIs, is restricted to 10 per cent of the total assets. For NBFCs operating in North Eastern Region, the minimum NOF to be maintained is Rs. 2 Crore

Is there any restriction on pricing of the loan/interest recoverable on such loans?

The interest rates charged by an NBFC-MFI to its borrowers will be the lower of the following:

i. Cost of funds, plus margin

Cost of funds means interest cost and margin is a mark up of a maximum of 10 per cent for large NBFCs-MFI and 12 per cent for others. Large NBFCs-MFI are those with asset sizes above`100 crore

ii. The average base rate of the five largest commercial banks by assets multiplied by 2.75

The average of the base rates of the five largest commercial banks shall be advised by the Reserve Bank on the last working day of the previous quarter, which shall determine interest rates for the ensuing quarter. The Bank will announce the applicable average base rate on March 31, 2014 and every quarter end thereafter.

What procedure is to be adopted for calculation of interest cost (cost of funds) and interest income by NBFC-MFIs?

The interest cost will be calculated on average fortnightly balances of outstanding borrowings and interest income is to be calculated on average fortnightly balances of outstanding loan portfolio of qualifying assets.

What are the processing charges that a NBFC-MFI can levy on its customers?

Processing charges by NBFC-MFIs shall not be more than 1 % of gross loan amount. Processing charges need not be included in the margin cap. Further, NBFC-MFIs shall recover only the actual cost of insurance for group, or livestock, life, health for borrower and spouse. Administrative charges where recovered, shall be as per IRDA guidelines.

Can an NBFC-MFI charge a differential rate of interest to its customers? If yes, is there any limit imposed by RBI on it?

Yes, an NBFC-MFI can charge a differential rate of interest to its customers but the variance for individual loans between the minimum and maximum interest rate cannot exceed 4 per cent.

What are the charges that a customer is supposed to pay for the loan that he takes from an NBFC-MFI?

A customer needs to know that there are only three components in the pricing of a loan viz. the interest charge, the processing charge and the insurance premium (which includes the administrative charges in respect thereof). An NBFC-MFI cannot levy any more charges apart from the three mentioned above.

What should a customer keep in mind when he/she takes a loan from an NBFC-MFI?

The customer must keep in mind the following

a. The NBFC-MFI is fair and transparent in its dealings with the borrower.

b. No security deposit/ margin/collateral is required to be kept by the borrower with the NBFC-MFI.

c. The borrower should ensure that he gets a loan card from the NBFC-MFI reflecting:

(i) the effective rate of interest charged;
(ii) all other terms and conditions attached to the loan;
(iii) information which adequately identifies the borrower;
(iv) acknowledgement by the NBFC-MFI of all repayments including installments received and the final discharge;

d. All entries in the Loan Card should be in the vernacular language.

e. The interest charged to customer is calculated on a reducing balance basis.

f. NBFC-MFI does not levy penalty on delayed payment

How can a borrower find about the current interest rate being charged by the NBFC-MFI?

RBI has made it mandatory for the NBFC-MFIs to prominently display in all its offices and in the literature issued by it and on its website, the effective rate of interest being charged by it.

Is there any prepayment penalty that can be levied by an NBFC-MFI?

For loan amounts above Rs. 15,000, an NBFC-MFI cannot levy any prepayment penalty.

Is there any cap on an individual membership with SHG/JLG and/or number of MFIs from whom a SHG/JLG/an individual can borrow?

A borrower can be a member of only one SHG/JLG or borrow as an individual. He can borrow from NBFC-MFIs as a member of a SHG or a member of a JLG or borrow in his individual capacity. Further, a SHG or JLG or individual cannot borrow from more than 2 MFIs.

Is it essential for NBFC-MFI to become a member of a Credit Information Company?

Every NBFC-MFI has to be a member of at least one Credit Information Company (CIC) established under the CIC Regulation Act 2005, provide timely and accurate data to the CICs and use the data available with them to ensure compliance with the conditions regarding membership of SHG / JLG, level of indebtedness and sources of borrowing. While the quality and coverage of data with CICs will take some time to become robust, the NBFC-MFIs may rely on self certification from the borrowers and their own local enquiries on these aspects as well as the annual household income.

What is the minimum moratorium period applicable in case of NBFC-MFIs?

There must be a minimum period of moratorium between the grant of the loan and the due date of the repayment of the first installment. The moratorium shall not be less than the frequency of repayment. For example, in the case of weekly repayment, the moratorium shall not be less than one week.

There have been a lot of issues related to methods of recovery used by the MFIs. How has RBI addressed this problem?

Taking into cognizance, the alleged coercive methods of recovery adopted by MFIs, RBI has mandated that NBFC-MFIS shall ensure that a Code of Conduct and systems are in place for recruitment, training and supervision of field staff, incorporating the Guidelines on Fair Practices Code issued for NBFCs vide circular CC No.266 dated March 26, 2012 as amended from time to time. Also, Recovery should normally be made only at a central designated place. Field staff shall be allowed to make recovery at the place of residence or work of the borrower only if borrower fails to appear at central designated place on 2 or more successive occasions.

Is there a difference in the asset classification and provisioning norms that are applicable to the NBFC- MFIs and other NBFCs?

Yes, there is a difference in the norms applicable to the NBFC-MFIs. For NBFC-MFIs non-standard asset would mean an asset for which, interest / principal payment has remained overdue for a period of 90 days or more, and for which provisions of 50 percent of the aggregate loan instalments which are overdue for more than 90 days and less than 180 days or 100 percent of the aggregate of loan instalments which are overdue for a period of over 180 days is to be made.

What are the capital adequacy requirement for NBFCs-MFI?

All NBFC-MFIs shall maintain a capital adequacy ratio consisting of Tier I and Tier II Capital which shall not be less than 15 percent of its aggregate risk weighted assets. The total of Tier II Capital at any point of time shall not exceed 100 percent of Tier I Capital.

What is the dispensation given to AP based NBFCs which are not able to comply with the CRAR requirements?

To be able to facilitate the registration for those AP based NBFCs which are not able to comply with the capital adequacy requirement, for the purpose of calculation of the CRAR, the provisioning made towards AP portfolio can be notionally reckoned as part of NOF and there shall be progressive reduction in such recognition of the provisions for AP portfolio equally over a period of 5 years. Accordingly 100 per cent of the provision made for the AP portfolio as on March 31, 2013 would be added back notionally to NOF for CRAR purposes as on that date. This add-back would be progressively reduced by 20 per cent each year i.e. up to March 2017. No write-back or phased provisioning is permissible.

However, capital adequacy on non-AP portfolio and the notional AP portfolio (outstanding as on the balance sheet date less the provision on this portfolio not notionally added back) will have to be maintained at 15 per cent of the risk weighted assets

Are there any additional dispensations on provisioning and risk weights provided for NBFC-MFIs other than those related to AP âbased portfolios provided earlier?

Yes, for loans extended on the lines of credit facilities guaranteed by Credit Guarantee Fund Trust for Micro and Small Enterprises, it has been decided that zero risk weights and no provisioning is to be made towards the guaranteed portion.


Great post - very forward looking. I’m always impressed when an idea has the following combination: (a) Big picture macro view; (b) Scarcity premium in a high growth sector; combined with © Low growth in the recent past.

I’ve never dared to touch companies with ©, but I know a lot of successful people do just that.

Can you elaborate more on ©, and how you see that changing? Why is it showing such strong de-growth in bottom-line beginning Dec '13?


Very well written post. Beautifully structured and well explained.

A few questions from my side

1). Screener shows an ROE of 15% whereas you mention ROA of 4%+ and NIM of almost 15% - numbers not adding up in combination (apply the Du-pont formula) (please guide if I am missing something)

2). Cash flow from Operations is sporadic and doesnt tally up nicely with EBITDA on a y-o-y basis

3.Company is not making enough provisions to P/L. See the difference between Gross and Net NPA

Otherwise you have explained pretty nicely the whole industry structure. Very impressed by your writing skills.

@Prasanna and Ashwini: Look at the consolidated numbers. MFI business was earlier part of standalone entity. However, due to RBI regulations, it was transferred to Namra (100% subsidiary) during FY14. I think it will be better to directly look at results from BSE website for consolidated figures. For GNPA, I agree with you. Will have to check.

Two other things, I would like to point out:

  • As per RBI guidelines, MFI with AUMs below 100 crore, need to have an interest cap of 12% above their borrowings. For eg, if their cost of borrowing is 14.5%, they cannot lend above 26.50%. However, once the AUM crosses 100 crore, the interest cap reduces to 10%, since the RBI believes that costs for larger MFIs will come down. This might bring down the NIMs. However, reduction in Op. Exp/Avg Assets might not affect the overall profitability.
  • Although, I am more excited about the MFI business, the revival in two-wheeler sales can be an additional kicker for 2-wheeler financing.

@Ankit - impressed with your post. Very nicely written.


Great post - can you compare SKS and armaan’s MFI portfolio (non AP) and see how they stack up on NIM, GNPA, ROA etc.

Thanks - just trying to figure out if it’s justfied at the right price - based on PEG, it looks fairly valued to me.

@Manish Bhai: Thanks a lot.

I think SKS is much bigger compared to Arman and it wouldn't be proper to compared them. Also, SKS has a cap of 3% on its ROA as mentioned in their FY14 AR. Anyways, the comparison are given below for FY14 financials are given below:

SKS Arman
NIM (%) 10.7 14.91
GNPA 0.1 (non AP) 0.72
Net NPA 0.1(non AP) 0.64
ROA 3.5% 4.64

Arman's results were out today and there were not as per my expectations.

Consolidated Financials:

(Rs. crore)

Q2FY15 Q1FY15 Q2FY14
Net Interest Income 4.55 4.44 3.74
Growth (y-o-y) 22%
Employee Expenses 1.20 1.07 0.97
Growth (y-o-y) 23%

Other Expenses 1.10 0.75 0.76
Growth (y-o-y) 45%
PAT 1.47 1.71 1.36

With increasing branches, employee cost and other expenses have increased.Loan book growth for H1FY15 has been 6.71% (as compared to loan book on March 31, 2014).

1 Like

Ankit - Thanks for the updates. I’m looking at the results here:

Can you tell me where you got the NII figures from? I don’t see it there.

I would also like to know how to figure out the loan book looking at the balance sheet? Do you take long term loans + short term loans in your calculations?

If we figure out how much the MFI grew by, that’d also be helpful.


Yes. One can add them to get the loan book. However, it would give you the consolidated picture (2 wheeler and MFI) and not the picture for MFI alone.

Thoughts on the NII picture? How does one get it?

Please go through a very good presentation on how to analyse Banking and NBFC stocks - Link:


NII - Income on earning assets minus finance cost.

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Namra seems to have 20% NIM!! Do you think its ethical to charge such high a rates to underprivileged persons ??

Sorry for above post. Did a blunder. Its around 6.8%

What about this? CRISIL suspended its rating last year. Has it been resolved?

arman-problem.pdf (31.8 KB)

Hi Utkarash,

Arman now has a rating with CARE. The link - Link: .

Arman has come up with its Q3FY15 results. Please find below the link for the press release:

Although, the results might seem muted, the press release does explain the reason for the same. However, what is encouraging is the increase in the number of branches with expansion in Madhya Pradesh and increase in disbursements in the microfinance segment with disbursements increasing by 50% on a y-o-y basis.

Arman has come up with good set of numbers for Q4FY15 -

The press release of the company which should be out in few days will give us more details about the performance of the company.