MUMBAI: Non-bank financier Northern Arc Capital is targeting a 70-75% share for its direct-to-customer lending business as it makes deeper inroads into rural, small business and retail loans, managing director and chief executive officer Ashish Mehrotra said.
At present, the business accounts for 59% of the total lending assets under management of ₹16,594 crore as of 31 March, up from 19% in FY21. Its overall assets under management have expanded at a compounded annual growth rate of 26% over the past five years. The change in the mix has led to a 380-basis point improvement in margins to 9.4% in FY26 from 5.6% in FY21.
“As we continue to execute our strategy, the direct-to-customer business will continue to grow at about 30%… that means we will eventually go to 70-75%,” Mehrotra said in an interview.
Northern Arc’s shift towards direct lending is a natural evolution of the business after spending over a decade building expertise through its credit-enabling platform.
“We’ve been in the retail credit business for almost 15-16 years. We’ve built underwriting capability, we’ve built data, we’ve built risk management. The natural progression was to build a direct-to-customer franchise,” he said.
Founded as a credit-enabling platform, Northern Arc connects lenders and investors with borrowers across credit segments. Apart from lending directly, it helps financial institutions raise capital through securitization, debt placement, fund management and bond distribution.
“From 19% to 70%, Northern Arc Capital is midway through one of most value-accretive portfolio transitions,” analysts at Haitong International said in a note on 26 June.
While the balance sheet will increasingly be driven by direct lending, Mehrotra said the credit solution business will remain a key pillar.
“The credit solution business will continue to grow. It will continue to grow in volume… Last year alone, we would have enabled almost ₹30,000-35,000 crore of credit volume,” he said.
Improved profitability
The strategy has improved profitability. Along with a net interest margin (NIM) of 9.4% in FY26, Mehrotra said the company’s loaded NIM, after including fee income from placement, fund management and technology businesses, stood at 10.1%, supporting return on assets.
In the March quarter, Northern Arc reported NIM of ₹387 crore and profit after tax of ₹133 crore. Return on assets stood at 3.3% and return on equity at 14%.
Despite macroeconomic uncertainties, Mehrotra said the company remains confident of maintaining strong growth in the current financial year, driven by the expanding direct lending franchise and improving operating leverage.
“We should be able to grow our business by about 24-26% this year. You should see an equivalent amount or correspondingly higher growth in the overall margins and profits,” he said, adding that the company expects profitability to improve as the retail lending mix increases.
Analysts said the company delivered a strong Q4 performance, supported by healthy growth across all key operating parameters.
“Management remains confident of sustaining this momentum in FY27, aided by the recovery in the microfinance segment and continued strong growth in the MSME (micro, small and medium enterprise) and consumer finance businesses,” analysts at Motilal Oswal Financial Services wrote in a note to clients on 10 May.
They said the credit solution business, which provides a steady fee income stream, along with a continued focus on asset quality and prudent risk management, places Northern Arc on a strong footing to deliver sustainable long-term growth.
On asset quality, Mehrotra said the worst of the stress in the microfinance sector appears to be behind, although the company will remain cautious. Rural finance, which includes its microfinance portfolio, accounts for ₹1,009 crore, or about 6% of Northern Arc’s total AUM.
“We are seeing the collection efficiencies coming back,” Mehrotra said, adding that the company will continue to monitor external risks such as the monsoon and geopolitical developments. He also said growth will be calibrated with a focus on portfolio quality and collections.
Diversification plan
Mehrotra said the company is looking to diversify into segments where it has a limited presence. Affordable housing finance is among the most attractive opportunities.
“I think affordable housing is a very interesting space for us… that’s an interesting area of opportunity,” he said, adding that the company’s board has approved entry into the business.
Wealth management could become an extension of Northern Arc’s fixed-income franchise over the longer term.
“Given that we are a large fixed-income player, wealth management could be a very interesting area of opportunity,” Mehrotra said.
There is a boom in wealth management in India, with banks and non-banks competing for a piece of this business. Consulting firm BCG estimates that emerging markets will add $12 trillion of financial wealth, accounting for about 10% of global wealth growth, between now and the end of the decade. India, it said, will add more than $2 trillion in total wealth by 2030.