In conversation with Aalok Patil, Joint MD of Arman Financial Services

The NBFC sector in India is witnessing a growing trend towards retail lending, particularly in the areas of microfinance consumer finance and housing finance, enunciates Aalok Patil, Joint MD of Arman Financial Services

In FY23, Arman Financial Services’ net profit zoomed more than 195 per cent on a YoY basis, while in Q4FY23, the net profit jumped 122 per cent on YoY basis. Can you highlight the factors that are responsible for your exceptional outperformance? 

At Arman, it is our constant endeavour to outperform ourselves every single quarter. So, the profit has come on the back of multiple reasons. 

We witnessed a higher disbursement growth, particularly supported by high demand in the micro-finance and (Micro-Enterprise) MSME segments. To add, we have been gaining some efficiencies as far as employees and other costs are concerned thanks to our technology-related initiatives and investments. We had higher provisions on account of COVID-19 in the previous quarters, however as things are back to normalcy, these provisions have reduced significantly. So, all of those things have added to the overall margins.

 If you would have noticed, we continued to do better in terms of asset quality than our counterparts in the microfinance industry, even during COVID. Due to our very conservative risk culture, we tend to recover quicker than our competition in terms of asset quality. Therefore, while the industry continues to devote significate bandwidth to deal with macro disruptive events like Covid and Demonetisation related asset quality issues, we were in a position to take advantage of the supply vacuum in the market and were in a position to grow quickly post-these disruptive events.

Further, this growth is supported by our entry into the newer states of Bihar and Haryana. Much to our delight, Bihar is doing amazingly well; we are banking on it to continue doing well in the future too. We are focusing on extending our presence in newer districts in existing states while exploring opportunities in new states as well.

In this financial year, the company has recorded the highest-ever profit after tax. This was mainly on account of improved interest income, optimization of operational cost, lower provisioning requirements and improved asset quality.

What is your outlook on the Indian NBFC sector? What are the emerging trends and opportunities you are witnessing?

With the rise of technology and the increasing adoption of digital platforms, NBFCs are increasingly leveraging technology to streamline their operations, reduce costs, and enhance customer experience. The NBFC sector in India is witnessing a growing trend towards retail lending, particularly in the areas of microfinance consumer finance and housing finance. Many NBFCs are partnering with banks and fintech companies to leverage their strengths and expand their reach. This has led to increased competition in the sector but also presents new opportunities for innovation and growth.

Now coming to microfinance, there is a slew of measures taken by the RBI which has ensured higher growth and has opened up a lot of other opportunities for the Microfinance Sector. These include the removal of the interest rate ceiling on loans offered by NBFC-MFIs, allowing lenders to go for risk-based pricing and an increased annual household limit from Rs 1.25 Lakh to Rs 3 Lakh, which will widen the scope of opportunity for the business.

Overall, the sector is still largely underserved and is expected to continue growing, driven by the increasing demand for credit, the rise of digital platforms, and the focus on financial inclusion. However, we will need to navigate the evolving regulatory environment and manage risks effectively to maintain their profitability and sustainability.

Can you highlight the key growth triggers for the company over the next 3-5 years?

Arman is focusing on expanding its loan book by diversifying its product offerings and expanding its customer base. We’re exploring opportunities in the areas of secured MSME and consumer durable finance, among others.

Another trend that we are witnessing is the transition to an individual lending model from the previous joint liability model. Following this, Arman has also started a pilot on individual business loan portfolios. In this, the company offers individual business loans (IBL) towards graduating micro-finance customers without any group guarantees and on an individual basis. The Individual Lending portfolio in Arman’s Micro-Enterprise vertical and the pilot IBL segment has grown to over Rs 295 crore as of FY23, an impressive 79% growth YOY.

Additionally, Arman is exploring opportunities to expand its operations to new geographies within India. This is helping the company to tap into new customer segments and diversify its revenue streams. 

We are also leveraging technology with the implementation of company’s new LOS and LMS system. This has helped automate processes, enhance customer experience, and reduce costs. At this point, I would like to reiterate that the entire microfinance process is completely paperless, including the loan documentation by using digital signatures.

We have achieved another major milestone in the month of January, where our micro-finance business has been assigned the highest-ever grading of MFI-1 by CARE Ratings. This is the highest possible grading of an MFI, helping us improve our cost of borrowings as well as relationships with the lender community.

Arman maintains a strong focus on asset quality and risk management practices. We work towards consistently improving our credit, underwriting and collection mechanisms.

The company’s AUM rose by about 58 per cent on YoY basis to Rs 1,943 crore. What is the AUM growth that you are targeting for coming years? 

In September, Arman concluded a fund raise of Rs 115 crore of capital via CCDs and OCRPS. This will not only help us remain adequately capitalized but also fund our growth plans. In addition to this, Arman has grown at a CAGR of 35-40 per cent over the past decade and we aspire to achieve this kind of growth annually.

Consequently, this coupled with technological advancements and cost efficiencies is providing a significant tailwind to our operations. These continuous and sustained efforts will optimize our operations and bring in the next leg of growth.

At the moment, what are your top 3 strategic priorities? 

Microfinance is the largest portion of our portfolio, and we continue to remain focused on growing the same. A large part of the MFI business is concentrating on collections, so we are placing special emphasis on collection efficiency and revamping our collection mechanisms. We are also seeing a lot of traction in the individual business loan segment, and we aim to increase its share of the revenue pie further.

Second, we are moving towards a more technology-driven organization where we have systems like facial recognition and OCR technology in place. We are also graduating MFI customers to cashless e-NACH collections in the IBL segment. 

Third, we see a lot of scope and opportunity in the individual loan segment in rural areas. 

Our Micro-Enterprise and IBL segments are poised to take advantage of this market demand in the long run and offers a long-term potential to scale up our business in other rural loan products. There is a higher operating cost involved with individual loans, but the higher margins more than offset it currently. In the long run, the goal is to reduce the operating costs with technology and cash-less strategies.