brother, sometimes its about patience. They are being cautious - which is very good - keeping into mind its a lending business. You have already waited for 1.5 years - just keep on hanging - once the growth starts - returns will automatically come .
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As mentioned in management commentary, the worst of the asset quality cycle seems to be behind. Collection efficiencies have picked up, credit costs have eased off, and AUMs have again started growing after going through a difficult phase for the entire industry. Additionally, management has been diversifying into MSMEs, LAP, and two-wheelers, lessening reliance on microfinance.
However, the most important risk factor in today’s case is not competition or regulation, but rather inflation.
Inflation is likely to result in higher fuel prices, which will adversely affect the rural economy through several ways:
- Higher cost of transportation
- Increase in food prices and other necessities
- Squeeze on household disposable income Decrease in repayment ability of lower income group customers.
Especially since the borrower pool includes individuals such as small shop owners, dairy farmers, vegetable sellers, and other people with volatile income and high inflation sensitivity.
Having said all that, Arman looks more resilient compared to many of its competitors as:
- Lending diversification to MSME & Secured lending will help cushion any shocks to the MFI book.
- Capital buffer levels remain adequate.
- Underwriting criteria has already tightened by the Management.
The firm has survived through what would be considered the toughest credit cycle over the past few years.
From my standpoint, a temporary rise in fuel prices should not have an adverse effect on the business. That said, a longer period of higher rural inflation due to increasing fuel prices over the month could effect in the future.
Interested to hear your take on the microfinance space, particularly with respect to underestimation of inflation risks for microfinance institutions, and the sufficiency of the diversification strategy as seen in Arman’s case.
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Due to super el nino we are expecting lesser rains as well, in past it has led to draughts. Maybe one of the many reasons Indus water treaties is being held in abeyance
60% chance of deficient monsoon as IMD downgrades rain forecast | India News - The Times of India
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My Assessment of Q4 Performance of Arman (with the help of Notebook LM):
- The industry-wide transition to tighter underwriting mandating independent credit managers and rigorous field investigations has shifted operating costs upward across the MFI sector. While this is an industrywide headwind asset scale determines who survives it.
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Sector leader CreditAccess leverages its massive scale (₹29,590 Cr AUM) to maintain a highly efficient C/I ratio of 30.4%. Muthoot Microfin saw its Q4 C/I ratio run high at 53.2%, but their ₹14,005 Cr balance sheet provides the runway required to absorb this structural hit over time.
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Arman’s C/I ratio exploded to 51.7% in Q4, with management conceding that these elevated Branch Credit Manager costs represent the new normal. Given Arman’s small AUM of just ₹2,728 Cr, the company mathematically lacks the scale to absorb these fixed costs.
According to me Arman is caught in a dangerous loop. They are mathematically forced to chase aggressive loan growth simply to inflate their AUM denominator and make their operating margins appear acceptable.
- Q4 Disbursement Dynamics
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Peers:
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Fusion Finance instituted a hard “Fusion+2” lender cap and refused to onboard borrowers who weren’t perfectly current on all liabilities. This deliberate risk-off stance caused their active client base to shrink from 38.6 lakh to 32.1 lakh.
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CreditAccess Grameen actively purged its portfolio of over-leveraged borrowers, driving its >3 lender exposure down from 25.3% to just 3.3%, while successfully positioning themselves as the sole lender for 46.1% of their book.
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On the other hand, Arman hit the accelerator. After a cautious 9M, they suddenly disbursed ₹951 crore in Q4 alone representing nearly 40% of their entire year’s volume in just 90 days. Aggressive volume chasing under current macroeconomic conditions represents a severe credit risk red flag.
3.While the broader MFI sector is attempting to de-risk by moving away from unsecured JLG loans, Arman is using structural labels to mask high-risk lending.
Arman's Actual AUM Composition Breakdown
|---------------------------------------------------------|
| [Unsecured JLG & Unsecured Individual Business] 92.6% |
| [Actual Secured Assets: LAP & 2-Wheeler] 7.4% |
|---------------------------------------------------------|
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Muthoot Microfin expanded its non-JLG portfolio to 17.5% of AUM by pivoting toward higher-ticket, secured lending and cash-flow-backed MSME products. Meanwhile, peer leaders openly acknowledge that their portfolios remain 80%+ unsecured JLG micro-loans for lack of scalable alternatives. When Fusion Finance recognized the dangers of individual unsecured lending, they explicitly pivoted recent non-MFI disbursements to “100% collateral-based” Loan Against Property (LAP).
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Arman boasts that its “Non-JLG” portfolio accounts for over 50% of its AUM to justify its growth narrative. However a little deep dive reveals the true picture:
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Hard-collateral secured assets (LAP and 2-Wheeler) comprise just 7.4% of the total book.
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Management admitted that LAP is too competitive for them to scale easily.
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Consequently, the bulk of Q4 growth was dumped into uncollateralized Individual Business Loans, which ballooned to ₹712 Cr. This is my conclusion based on Q4 Concall and Investor Presentation Analysis and this is where my thesis on Arman Broke. According to me Arman is not de-risking its balance sheet with hard collateral. They are simply swapping unsecured group risk for unsecured individual risk and labeling it “diversification.”
- Arman’s reported financials present a stark divergence from peers who are actively absorbing credit stress.
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Peer companies facing credit stress are letting it reflect on their financial statements. Spandana Sphoorty barely scratched a ₹5.27 Cr profit in Q4 (reversing a ₹95 Cr loss) because they chose to actively recognize legacy write-offs and collection stress.
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Arman reported an optically strong Q4 GNPA of 3.43% and a headline PAT of ₹41 Cr. However, this print is heavily distorted according to me by two factors and I might be wrong:
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The PAT was heavily supported by a deferred tax credit, resulting in an abnormally low effective tax rate of just ~2.5%.
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The reported Gross Non-Performing Asset (GNPA) ratio is artificially suppressed. Management heavily inflated the denominator by aggressively dispersing ₹951 crore in fresh loans during Q4. However, the substantial gap between the 3.43% GNPA and the 0.93% Net NPA (NNPA) highlights a deeper story: management was forced to front-load provisions and execute accelerated write-offs to artificially clean the balance sheet. This rescue act came at a severe cost a massive ₹148 crore hit in provisions and write-offs for FY26, which severely eroded profitability, leaving FY26 PAT at a meager ₹57 crore. Management sacrificed their P&L to artificially clean the NNPA, and pumped AUM volume to dilute the GNPA. But now that their Cost-to-Income ratio is permanently stuck at 51.7%, they no longer have an earnings buffer. If the ₹951 crore of unseasoned Q4 loans start defaulting 12 months from now, how will a company with 51%+ operating costs absorb another ₹148 crore provisioning hit without destroying shareholder equity?
Disclaimer: Not Invested.
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See Arman is down again on the second day. Total down 12.8%
Credit access is up 2.86% in the same 2 days.
Even the microcap index is only down 1.75%.
Market for sure knows something that we retailers don’t.
Also niveshark and Divyank Patel made good points. The business model is not as solid as it used to pre crisis.
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Pls refrain from posting so much of AI slop. Secondly, Muthoot shouldnt even be considered a Microfinance, we all saw their 400cr loss in just one quarter at peak stress levels. Muthoot’s management is inexperienced and consequently, they reverted back to gold loans. In microfinance, where majority of loans are unsecured and borrower quality is inferior, you need experienced and a prudent management to navigate the cycles, which arman’s management very well is. Only company superior to Arman in Microfinance is CA grameen, but it also has a higher D/E which pushes its ROE up, but CA grameen also trades at a higher P/B which is justified.
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Hey everyone
I came across an interview of Vivek Modi on YouTube. He is the group CFO and the #2 guy at Arman.
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@Divyank_Patel Fusion Finance reported a 12.58% GNPA in Q3 FY25. Arman’s highest GNPA was 4.1%, also in Q3 FY25.
Arman has intentionally separated its lending and collection teams to improve underwriting discipline and recovery. Yes, that has temporarily increased the cost-to-income ratio but that’s the cost of building a stronger loan book, not masking weak asset quality. As disbursements recover and scale improves, those costs should become more efficient especially with management targeting an AUM of around 5,000 crore.
edit: invested
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