ETMarkets Management Talk | Northern Arc sees D2C lending contributing over 75% of its loan book in the next few years

Northern Arc Capital is sharpening its focus on direct-to-customer (D2C) lending as it looks to build a larger, more profitable and diversified lending franchise. The company’s D2C lending AUM has already crossed Rs 12,500 crore and accounts for 66% of its overall lending book, with secured MSME lending emerging as the anchor business alongside consumer and rural finance.

The company now expects D2C to contribute more than 75% of its lending balance sheet over the next few years. The strategy is aimed not just at growing the loan book, but at improving the quality and productivity of capital while building direct customer relationships and durable franchises.

In this edition of ETMarkets Management Talk, Ashish Mehrotra, Managing Director and CEO of Northern Arc Capital, discusses the company's next phase of growth, its plans to expand the D2C business, and how a higher share of direct lending could support margins and return ratios.


He also explains Northern Arc's broader strategy of combining a growing balance-sheet-led lending business with a capital-light, fee-based Credit Solutions platform to drive sustainable long-term returns. Edited Excerpts -

Q) NII grew 32% YoY, while PAT rose at a faster pace of 41%. What were the key factors behind the improvement in profitability, and can this operating leverage continue?

A) I often say that one data point is an observation, two establish a trend, but three reveal a trajectory. I would encourage investors to look at Northern Arc through that lens. Over the years, we have built our business around a fundamental capability, i.e, understanding the credit needs of underserved and underbanked customers and creating efficient, scalable mechanisms to make credit available to them. Today, what one sees is a lending balance sheet of approximately INR 19,000 crore. But that is only one part of our franchise.

Through our Credit Solutions business, we also facilitate significant credit flows through fund management, placements and capital-market transactions. In essence, our ability to intermediate credit extends well beyond the size of our own balance sheet. Our profitability growth reflects two factors, the increasing scale of our businesses and the benefits of the capabilities we have built over time.

As we scale, we are able to derive operating leverage from our existing investments in technology, distribution, underwriting and people. At the same time, we continue to reinvest in building the capabilities required for our next phase of growth. This has been a consistent feature of our journey.

Since FY21, our AUM has grown at a CAGR of ~26%, while profitability has grown at ~40%. Over the same period, we have transformed our balance-sheet mix, increasing D2C's contribution from 21% to 66% as of September 2026. We believe this trajectory has room to continue. However, our approach is not to maximise near-term operating leverage by cutting investment. It is to continuously build new capabilities, scale them and progressively realise their earnings potential. We would rather reinvest today's operating leverage to create tomorrow's growth engines than optimise for a single period's profitability.

Q) Lending AUM grew 34% YoY and 13% sequentially to ₹19,003 crore. What were the key growth drivers during the quarter, and how sustainable is this momentum in the second half of FY27?

A) Our growth is being driven by a deliberate capital-allocation strategy rather than a uniform expansion across businesses. We look at our balance sheet through two distinct lenses. Our Credit Solutions balance sheet, which we refer to as Intermediate Retail, is intended to grow at a measured, single-digit pace.

The strategic objective is to use this balance sheet to support and strengthen our broader Credit Solutions franchise, which is increasingly focused on generating fee income through fund management, placements and secondary-market transactions, including through Altifi.ai. Our aspiration is to evolve Credit Solutions into a more flow-oriented business.

For every INR 1 of credit deployed through our balance sheet, we would like to facilitate approximately INR 2–3 of additional credit through these capital-light channels. The principal driver of balance-sheet growth, therefore, is our D2C franchise. We have deliberately identified three segments; MSME, Consumer Finance and Rural Finance where we see a large addressable market, attractive profit pools and the ability to build differentiated capabilities. Within D2C, secured MSME lending is our anchor business, complemented by Consumer Finance and Rural Finance. Each of these businesses has a distinct operating model and plays a different role in our portfolio.

Looking ahead, we expect D2C to contribute more than 75% of our lending balance sheet over the next couple of years. We remain confident in the growth opportunity, while remaining mindful that the pace of expansion will be guided by risk-adjusted returns and the quality of the underlying portfolio. Our objective is not simply to grow AUM; it is to improve the quality and productivity of every rupee of capital deployed.

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Q) D2C lending AUM has crossed ₹12,500 crore and now accounts for 66% of overall AUM. How do you see the D2C mix evolving, and what does a larger share of direct lending mean for margins and return ratios?

A) The expansion of D2C is fundamentally a strategic capital-allocation choice. We see attractive long-term opportunities in these segments, but each business has a different maturity curve, investment requirement and return profile. Within D2C, our primary anchor is secured MSME lending.

We are building a durable, granular and secured lending franchise in Tier 2 and beyond markets. This is not a business that can be built overnight. It requires investments in distribution, technology, people, processes, and local market understanding.

Over the last five years, we have added 102 new branches to our existing network, brick by brick, taking our total network to 432 branches. Our focus is to make each branch economically viable early, ideally achieving breakeven within the first year, and progressively improving its contribution to profitability.

Going forward, we intend to expand this network by approximately 15-20% annually, with an increasing proportion of the existing network contributing to the next phase of growth. Consumer Finance follows a different model. We leverage our longstanding fintech partnerships and existing technology rails to access customers efficiently.

This makes the business relatively asset-light from a distribution perspective and enables incremental growth to be bottom-line accretive from the outset. Rural Finance, meanwhile, has navigated some sectoral headwinds during FY25 and H1FY26.

Over the last 12 months, we have seen encouraging improvement, supported by stronger on-ground execution and tighter underwriting. The business remains profitable, and we are focused on sustaining this recovery while maintaining appropriate risk discipline.

As the D2C franchise scales, we expect its higher-spread profile to support an improvement in overall returns. Based on our current business mix and growth plans, we see the potential for a further 70–80 basis-point improvement in return ratios over the next 24–30 months, driven primarily by the changing portfolio mix.

Importantly, we are not pursuing a higher D2C mix for its own sake. We are pursuing it because we believe these businesses offer attractive long-term risk-adjusted returns and allow us to build direct customer relationships and durable franchises.

Q) Northern Arc has a capital adequacy ratio of 20.8%. How are you thinking about capital deployment as growth accelerates, and is there enough headroom to support the current growth trajectory?

A) One of Northern Arc's strengths is that we have built a consistently profitable franchise, which allows us to fund a meaningful part of our growth through internal accruals.

Our current capital adequacy ratio of 20.8% is comfortably above the regulatory requirement and provides adequate headroom to support our stated growth ambitions.

For our planned balance-sheet growth of approximately 20–25%, we believe we are well capitalised. Our philosophy has always been to plan capital ahead of growth rather than react to capital requirements once they arise.

We typically evaluate our capital needs over a three-year horizon, considering the expected growth trajectory, portfolio mix and regulatory requirements.

Our last capital raise was in FY25 and based on our current business plan and capital projections, we are comfortably placed to support our growth ambitions at least until FY28-29. We will, of course, remain opportunistic and evaluate capital-raising opportunities ahead of time if our growth trajectory or strategic priorities warrant it.

For us, capital is not just a regulatory requirement; it is a strategic resource. Our focus is on deploying it towards businesses that generate sustainable, risk-adjusted returns while preserving sufficient headroom to support the institution's next phase of growth.

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Q) Management has flagged a cautiously optimistic approach to lending in selected geographies impacted by drought conditions. Which segments or regions are you watching most closely, and what steps are being taken to protect asset quality?

A)We have been closely monitoring the impact of drought conditions, particularly in parts of Maharashtra and Northern Karnataka, as well as the potential implications of El Niño on rural incomes and repayment behaviour.

Our primary area of caution is the microfinance segment, given its direct sensitivity to agricultural income and local economic conditions. However, our direct exposure to the most vulnerable geographies is limited.

We do not have any microfinance exposure in Maharashtra, while our exposure in Karnataka is less than 1% of our overall book. Accordingly, we do not anticipate any material impact on our portfolio from these specific geographies at this stage.

That said, our philosophy has always been to recognise risks before they manifest in portfolio performance.

Following the industry-wide overleveraging challenges in microfinance, we have tightened our underwriting scorecards and strengthened borrower-level assessment where each customer is individually underwritten using our proprietary scorecard, NuScore.

Further, we have incorporated additional credit protection through CGFMU cover. Our portfolio continues to demonstrate resilience, with rural collection efficiency at 99.7% as of September 2026.

In addition, we have taken prudent provisioning overlays in both MSME and Rural Finance to account for potential uncertainties, even though we have not witnessed material deterioration in the underlying portfolio.

Our approach is to remain growth-oriented, but never at the cost of risk discipline. We would rather moderate disbursements in a market where we see emerging vulnerabilities than compromise the quality of the portfolio we are building.

Q) Northern Arc is simultaneously scaling its balance-sheet-led D2C business and building a capital-light, fee-based Credit Solutions platform. How do you see this mix evolving over the next few years, and what could be the biggest driver of return on equity going forward?

A) This is really the essence of our long-term strategy. We are building two complementary engines of growth, each with a distinct role in driving the Company's returns. Over the next three years, we expect our overall lending balance sheet to grow at upwards of 25%, with D2C accounting for more than 75% of the portfolio.

Within D2C, secured MSME will remain our anchor, supported by Consumer Finance and Rural Finance. At the same time, we expect our Credit Solutions platform to grow at upwards of 20%. However, the balance sheet deployed within this business, which we refer to as Intermediate Retail, will grow at a measured single-digit pace.

Our focus is to increasingly leverage our relationships, distribution capabilities and underwriting expertise to facilitate credit through fund management, placements and secondary-market transactions, including through retail bond platform, Altifi.ai.

This distinction is important. We want to grow the amount of credit we facilitate much faster than the capital we need to deploy on our own balance sheet. This will allow us to expand our franchise, generate fee-based income and improve capital efficiency.

We see the next phase of return improvement coming from three levers – a higher contribution from D2C businesses with attractive spreads, increasing fee income from the Credit Solutions franchise, and operating leverage as the capabilities we have built over the years scale up.

Our objective is to deliver sustainable return on equity more than the mid-teens for our investors, while maintaining the balance-sheet strength and risk discipline required to navigate different credit cycles.

If you look at Northern Arc's journey over the past five years, we have consistently invested ahead of growth, built new capabilities and expanded our addressable markets. We believe those investments have created the launchpad for our next phase.

We are not building a business for the next quarter or even for the next three years. We are building a diversified financial institution that can compound sustainably, remain resilient through cycles and create enduring value over the long term.

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