Arman aims to cut operating costs by a third as it exits credit cycle
The micro-lender targets a 7% cost-to-AUM ratio, down from ~9%, with a return-on-assets goal of 3.5-4% as it shifts away from group lending.
What's new
- Management has set a target to lower operating expenses to 7% of AUM in FY27, from ~9% in FY26.
- The shift to individual credit assessments has raised rejection rates and costs, but improved asset quality.
- About 90% of the microfinance book is now covered by the CGFMU guarantee scheme; digital collections are at 35% of total.
Why this matters
The cost-cut target signals Arman believes the worst of the credit cycle is behind it and that the higher-cost, higher-accuracy lending model can now scale. The 90% CGFMU coverage is a direct limit on future downside risk. The open question is how quickly the cost savings materialise versus how much the elevated rejection rate constrains book growth.
What we're watching
- FY27 cost-to-AUM ratio versus the 7% target.
- Trends in rejection rates and disbursement growth.
- ROA progression toward the 3.5-4% aspiration.
The full read
Arman Financial is trying to cut its cost-to-AUM ratio from ~9% to 7% in FY27, a target that implies the micro-lender believes the post-credit-cycle recovery is now its to manage. The shift to individual credit assessments from traditional joint-liability groups has improved asset quality but come with a cost: higher operating expenses and elevated rejection rates. Management is betting the model can deliver a return on assets between 3.5% and 4% on the back of lower credit costs and steady book growth. The portfolio now carries 90% CGFMU guarantee coverage, a major buffer against future MFI losses. Digital collections reaching 35% of the total is another incremental sign of operational maturation. The cost-cut is the story, but the rejection rate is the tension.
Questions answered
- Why is Arman targeting a lower operating cost ratio?
- The company is emerging from a credit cycle trough and believes it can reduce costs as the portfolio stabilises. The target is 7% of AUM for the current financial year, down from ~9% in FY26.
- How has the shift to individual lending affected the business so far?
- It has improved asset quality but increased operating costs and kept rejection rates elevated. Management is confident the model can achieve a 3.5-4% ROA with lower credit costs and book growth.
- What role does the CGFMU guarantee play?
- The scheme now covers about 90% of the microfinance portfolio, providing a government-backed guarantee against defaults. This significantly reduces the risk of large-scale losses in the MFI segment.
- What is the current digital collection capability?
- Digital collections have risen to 35% of total collections, indicating a shift in operational efficiency and a move away from cash-heavy models.