January 14, 2025

Arohan Financial Services Limited: Rating reaffirmed; removed from Rating Watch and
Stable outlook assigned
Summary of rating action

Previous Rated Amount Current Rated Amount

Instrument* Rating Action
(Rs. crore) (Rs. crore)
[ICRA]A (Stable); reaffirmed, removed from
Long-term bank facilities
5,603.07 5,603.07 Rating Watch with negative implications and
– Fund based
Stable outlook assigned
[ICRA]A (Stable); reaffirmed, removed from
Non-convertible
325.00 325.00 Rating Watch with negative implications and
debentures
Stable outlook assigned
[ICRA]A (Stable); reaffirmed, removed from
Subordinated debt 75.00 75.00 Rating Watch with negative implications and
Stable outlook assigned
Total 6,003.07 6,003.07
*Instrument details are provided in Annexure I

Rationale
The rating action factors in the removal of the supervisory restrictions imposed by the Reserve Bank of India (RBI) on Arohan
Financial Services Limited (Arohan) vide its press release dated January 03, 2025. On October 17, 2024, the RBI had directed
Arohan to stop sanctioning or disbursing loans with effect from October 21, 2024. This move came after the RBI’s material
supervisory concerns about the company, wherein certain observations were made regarding usurious pricing, evergreening
of loans and other compliance matters. Subsequently, the company initiated remedial actions and submitted its various
compliances to the RBI. After being satisfied on the basis of the company’s submissions and in view of its adoption of revamped
processes and systems as well as its commitment to ensure adherence to the regulatory guidelines on an ongoing basis,
especially for ensuring fairness in loan pricing, the RBI decided to lift the aforementioned restrictions placed on Arohan.

The rating continues to factor in Arohan’s established track record of operations, comfortable capitalisation profile and
adequate liquidity. It has an established track record of around 18 years in the microfinance space with assets under
management (AUM) of Rs. 7,000 crore and a presence in 17 states, catering to more than 23 lakh borrowers as on September
30, 2024. ICRA takes note of the decline in the AUM in Q3 FY2025 owing to the restrictions on the sanctioning and
disbursement of loans. Nonetheless, disbursements are expected to pick up from hereon. The company continues to be well
capitalised with a capital adequacy ratio (CAR) of 30.2% as on September 30, 2024 while the gearing (managed) remains low
at 3.0 times (3.3 times as on March 31, 2024). It plans to raise fresh equity capital in the near term, which shall further
strengthen its capital profile.

The rating is, however, constrained by the deterioration in Arohan’s asset quality and earnings profile in H1 FY2025. The 0+
days past due (dpd) increased to 4.9% of AUM as of September 2024 from 2.8% as of March 2024 on account of various factors
including, but not limited to, adverse climatic conditions, attrition at the field level, deterioration in credit discipline and
overleveraging of borrowers in the sector. Nevertheless, the company wrote off portfolio of Rs. 134 crore in H1 FY2025, which
kept the gross non-performing assets (NPAs) under control at 1.5% as on September 30, 2024 (1.7% as on March 31, 2024).
Further, it continues to maintain 100% provision coverage on its NPAs and reported nil net NPAs as on September 30, 2024.

Given the deterioration in the asset quality, the credit costs increased to 3.2% (annualised) of average managed assets (AMA)
in H1 FY2025 from 2.3% in FY2024. Arohan’s net profit stood at Rs. 149 crore in H1 FY2025 compared to Rs. 314 crore in

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 FY2024, translating into a return on managed assets (RoMA) of 3.4% (4.1% for FY2024) and a return on net worth (RoNW) of
14.9% (19.3% for FY2024). ICRA expects the credit costs to remain elevated in the near term, given the asset quality stress
build-up in the past few months. This, along with the downward revision in lending rates, shall keep the earnings profile
subdued in the near term. Thus, Arohan’s ability to control its credit costs and improve the operating efficiency shall remain
key, going forward. The rating continues consider the high geographical concentration as well as the risks associated with
microfinance loans.

The Stable outlook considers Arohan’s comfortable capital profile, which shall support portfolio growth and provide a buffer
against any incremental asset quality related stress.

Key rating drivers and their description

Credit strengths

Established track record of operations – Arohan has an established track record of around 18 years in the microfinance space
with a presence in 17 states, catering to more than 23 lakh borrowers as on September 30, 2024. It reported an annualised
decline of 3% in H1 FY2025 with the AUM standing at Rs. 7,000 crore as on September 30, 2024 (Rs. 7,112 crore as on March
31, 2024), given the lower disbursements in H1 FY2025 amid asset quality challenges. The AUM had declined further in Q3
FY2025 owing to the lending restrictions imposed by the RBI. Nonetheless, given the removal of restrictions, disbursements
are expected to pick up pace in Q4, in line with past trends. ICRA takes comfort from Arohan’s long track record of operations
in the microfinance sector and expects a gradual improvement in disbursements.

Comfortable capitalisation profile – The company’s CAR stood at 30.2% as on September 30, 2024 (29.0% as on March 31,
2024), which was well above the regulatory requirement of 15%, while the gearing (managed) stood at 3.0 times (3.3 times as
on March 31, 2024). Arohan plans to raise fresh equity capital in the near term, which shall further strengthen its capital profile.
It plans to maintain the CAR well above 20% in the medium term and ICRA expects the capitalisation profile to remain
comfortable.

Credit challenges

Deterioration in asset quality and earnings profile – The company reported a deterioration in its asset quality in H1 FY2025
with the 0+ dpd increasing to 4.9% as of September 2024 from 2.8% as of March 2024, amid industry-wide stress in the asset
quality. The deterioration can be attributed to various factors including, but not limited to, adverse climatic conditions, attrition
at the field level, deterioration in credit discipline and overleveraging of borrowers in the sector. Arohan wrote off portfolio of
Rs. 134 crore in H1 FY2025, which kept the gross NPAs under control at 1.5% as on September 30, 2024 (1.7% as on March 31,
2024). Further, the company continues to maintain 100% provision coverage on its NPAs and reported nil net NPAs as on
September 30, 2024. ICRA notes that the slippage rate, which remained elevated in October and November 2024, moderated
in December 2024, though the sustained performance of the same remains a monitorable. While Arohan’s asset quality
indicators remain relatively better than some peers, ICRA expects the asset quality to remain under stress in the near term,
thereby impacting the earnings profile.

Given the deterioration in the asset quality, the credit costs increased to 3.2% (annualised) of AMA in H1 FY2025 from 2.3% in
FY2024. This led to a deterioration in the earnings profile with the company reporting a net profit of Rs. 149 crore in H1 FY2025
compared to Rs. 314 crore in FY2024, translating into RoMA of 3.4% (4.1% for FY2024) and RoNW of 14.9% (19.3% for FY2024).
Further, Arohan reduced its lending rate by 200 basis points (bps) to 22.5% (average) with effect from January 2025 as a part
of the remedial measures undertaken by it on account of the supervisory concerns raised by the RBI. Consequently, ICRA
expects the earnings profile to remain subdued in the near term and the company’s ability to control its credit costs and
improve the operating efficiency shall be key for incremental profitability.

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 Geographical concentration risk – The company had a presence in 316 districts across 17 states through a network of 1,082
branches as on September 30, 2024. However, the share of microfinance portfolio1 in West Bengal and Bihar remained high at
25% and 22%, respectively, as on September 30, 2024. The top 3 states comprised 63% of the AUM as on September 30, 2024
(68% as on September 30, 2023). ICRA notes that Arohan intends to reduce its geographical concentration and has expanded
its presence to support its growth plans, whereby it started operations in Maharashtra, Haryana, Gujarat and Tamil Nadu in
FY2024 and in Karnataka in H1 FY2025.

Further, there is scope for district-level diversification of the portfolio as the top 10 and 20 districts comprised 19% and 31%,
respectively, of the microfinance portfolio as on September 30, 2024 (19% and 33%, respectively, as on September 30, 2023)
and 64% and 104%, respectively, of the net worth as on September 30, 2024 (65% and 115%, respectively, as on September
30, 2023). Going forward, the company’s ability to improve its geographical diversification while scaling up its operations
remains important from a credit perspective.

Political, communal, and other risks in the microfinance sector, given the marginal borrower profile – Microfinance remains
susceptible to the risks associated with unsecured lending to marginal borrowers with limited ability to absorb income shocks
and the rising borrower leverage levels owing to an increase in multiple lending in the areas of operations. Further, political
and operational risks associated with microfinance may result in high volatility in the asset quality indicators. The microfinance
industry is prone to socio-political, climatic and operational risks, which could negatively impact its operations. Arohan’s ability
to onboard borrowers with a good credit history, recruit and retain employees as well as improve the geographical diversity
of its operations would be key for managing high growth rates while maintaining its credit profile.

Liquidity position: Adequate

As on November 30, 2024, Arohan had a free cash and liquid balance of Rs. 1,012 crore with scheduled debt repayments of
Rs. 3,378 crore for the 12-month period ending November 2025 and scheduled principal collections of Rs. 4,356 crore during
this period. Factoring in the expected collections from advances, the liquidity profile is likely to remain adequate to meet the
debt obligations in a timely manner. As per the company’s asset-liability management statement as on November 30, 2024,
there were no cumulative mismatches for up to 1 year at least, even if the collection efficiency was to be stressed up to 80%.

ICRA notes that Arohan also faces prepayment risk, given the possibility of debt acceleration upon the breach of covenants,
including financial, operating and rating-linked covenants. Upon failure to meet the covenants, if the company is unable to get
waivers from the lenders/investors or they do not provide it with adequate time to arrange for alternative funding to pay off
the accelerated loans, their liquidity profile shall face pressure.

Rating sensitivities
Positive factors – An increase in the scale, while maintaining healthy profitability (RoMA of more than 3%), a prudent
capitalisation profile and an improvement in the asset quality indicators on a sustained basis, would have a positive impact on
the rating.

Negative factors – Pressure on the rating could arise if the managed gearing exceeds 5.5 times on a continued basis or the
asset quality deteriorates significantly and/or the profitability (RoMA of less than 2%) weakens on a sustained basis.

Analytical approach
Analytical Approach Comments
Applicable rating methodologies Rating Methodology for Non-banking Finance Companies
Parent/Group support Not Applicable
Consolidation/Standalone Standalone

1
Microfinance portfolio excluding inorganic buyout

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 About the company
Arohan Financial Services Limited (Arohan) is a Kolkata-headquartered non-banking financial company – microfinance
institution (NBFC-MFI). It was incorporated on September 27, 1991. Arohan is engaged in the business of microlending, mainly
to women, and operates on the joint liability group (JLG) model. It was set up through the acquisition of an existing NBFC, ANG
Resources Ltd, with the support of Bellwether Microfinance Fund. The company’s name was changed to Arohan Financial
Services Limited in March 2008. Arohan became a part of the Aavishkar Group in September 2012. As on September 30, 2024,
it was operating through a network of 1,082 branches spread across 316 districts and 17 states while managing assets under
management (AUM) of Rs. 7,000 crore (limited review).

Key financial indicators

Arohan Financial Services Limited FY2023 FY2024 H1 FY2025

As per Ind-AS Ind-AS Ind-AS

Total income 1,091 1,635 936
Profit after tax 71 314 149
Total managed assets (grossed up for provisions) 6,635 8,654 8,611
Return on average managed assets 1.1% 4.1% 3.4%
Managed gearing (times) 3.6 3.3 3.0
Gross stage 3 assets 2.7% 1.7% 1.5%
CRAR 28.7% 29.0% 30.2%
Managed gearing = (On-book borrowings + Securitised/Assigned loan assets)/(Net worth)
Source: Company, ICRA Research; All ratios as per ICRA’s calculations; Amount in Rs. crore

Status of non-cooperation with previous CRA: Not applicable

Any other information: None

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 Rating history for past three years

Current (FY2025) Chronology of Rating History for the Past 3 Years

FY2025 FY2024 FY2023 FY2022

Amount Rated
Instrument Type Jan-14-2025 Date Rating Date Rating Date Rating Date Rating
(Rs. crore)

Long-term bank
[ICRA]A May 20, Aug 14, [ICRA]A- [ICRA]A- Jul 20, [ICRA]A-
facilities Long term 5,603.07 [ICRA]A (Stable) Apr 06, 2022
(Stable) 2024 2023 (Positive) (Negative) 2021 (Negative)
– Fund based
[ICRA]A; Rating
Oct 25, Watch with Nov 9, [ICRA]A- [ICRA]A- [ICRA]A-
Jun 21, 2022 Oct 05, 2021
2024 Negative 2023 (Positive) (Negative) (Negative)
Implications
[ICRA]A; Rating
Nov 11, Watch with Jan 10, [ICRA]A [ICRA]A- [ICRA]A-
Jul 01, 2022 Mar 25, 2022
2024 Negative 2024 (Stable) (Negative) (Negative)
Implications

[ICRA]A-
- - - - Jul 14, 2022 - -
(Negative)

[ICRA]A-
- - - - Sep 21, 2022 - -
(Negative)

[ICRA]A-
- - - - Dec 26, 2022 - -
(Stable)

[ICRA]A May 20, Aug 14, [ICRA]A- [ICRA]A- [ICRA]A-

NCDs Long term 325.00 [ICRA]A (Stable) Apr 06, 2022 Jul 20, 2021
(Stable) 2024 2023 (Positive) (Negative) (Negative)

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 Current (FY2025) Chronology of Rating History for the Past 3 Years

FY2025 FY2024 FY2023 FY2022

Amount Rated
Instrument Type Jan-14-2025 Date Rating Date Rating Date Rating Date Rating
(Rs. crore)

[ICRA]A; Rating
Oct 25, Watch with Nov 9, [ICRA]A- [ICRA]A- [ICRA]A-
Jun 21, 2022 Oct 05, 2021
2024 Negative 2023 (Positive) (Negative) (Negative)
Implications
[ICRA]A; Rating
Nov 11, Watch with Jan 10, [ICRA]A [ICRA]A- [ICRA]A-
Jul 01, 2022 Mar 25, 2022
2024 Negative 2024 (Stable) (Negative) (Negative)
Implications

[ICRA]A-
- - - - Jul 14, 2022 - -
(Negative)

[ICRA]A-
- - - - Sep 21, 2022 - -
(Negative)

[ICRA]A-
- - - - Dec 26, 2022 - -
(Stable)

May 20, Aug 14, [ICRA]A- [ICRA]A- [ICRA]A-

NCDs Long term - - [ICRA]A (Stable) Apr 06, 2022 Jul 20, 2021
2024 2023 (Positive) (Negative) (Negative)

[ICRA]A; Rating
Oct 25, Watch with Nov 9, [ICRA]A- [ICRA]A- [ICRA]A-
Jun 21, 2022 Oct 05, 2021
2024 Negative 2023 (Positive) (Negative) (Negative)
Implications
[ICRA]A; Rating
Nov 11, Watch with Jan 10, [ICRA]A [ICRA]A- [ICRA]A-
Jul 01, 2022 Mar 25, 2022
2024 Negative 2024 (Stable) (Negative) (Negative)
Implications

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 Current (FY2025) Chronology of Rating History for the Past 3 Years

FY2025 FY2024 FY2023 FY2022

Amount Rated
Instrument Type Jan-14-2025 Date Rating Date Rating Date Rating Date Rating
(Rs. crore)

[ICRA]A-
- - - - Jul 14, 2022 - -
(Negative)

[ICRA]A-
- - - - Sep 21, 2022 - -
(Negative)

[ICRA]A-
- - - - Dec 26, 2022 - -
(Stable)

Subordinated [ICRA]A May 20, Aug 14, [ICRA]A- [ICRA]A-

Long term 75.00 [ICRA]A (Stable) Sep 21, 2022 - -
debt (Stable) 2024 2023 (Positive) (Negative)

[ICRA]A; Rating
Oct 25, Watch with Nov 9, [ICRA]A- [ICRA]A-
Dec 26, 2022 - -
2024 Negative 2023 (Positive) (Stable)
Implications
[ICRA]A; Rating
Nov 11, Watch with Jan 10, [ICRA]A
- - - -
2024 Negative 2024 (Stable)
Implications
Source: Company

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 Complexity level of the rated instruments

Instrument Complexity Indicator

Subordinated debt Simple
NCD Simple
Long-term bank facilities – Fund based Simple

The Complexity Indicator refers to the ease with which the returns associated with the rated instrument could be estimated.
It does not indicate the risk related to the timely payments on the instrument, which is rather indicated by the instrument's
credit rating. It also does not indicate the complexity associated with analysing an entity's financial, business, industry risks or
complexity related to the structural, transactional or legal aspects. Details on the complexity levels of the instruments are
available on ICRA’s website: Click Here

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 Annexure I: Instrument details

Date of Issuance / Amount Rated Current Rating

ISIN Instrument Name Coupon Rate Maturity Date
Sanction (Rs. crore) and Outlook

INE808K08079 NCD Mar-31-2022 13.65% Jun-30-2027 200 [ICRA]A (Stable)

INE808K08061 NCD Oct-25-2019 12.85% Oct-25-2026 25 [ICRA]A (Stable)
INE808K08046 NCD Mar-29-2018 13.25% Apr-28-2025 65 [ICRA]A (Stable)
INE808K08053 NCD Aug-14-2018 13.25% Sep-30-2025 35 [ICRA]A (Stable)
Long-term bank facilities Jun-08-2018 to Jul-10-2023 to
NA 5.15-11.75% 5,603.07 [ICRA]A (Stable)
– Fund based Apr-02-2024 Apr-30-2027
Subordinated debt
NA Mar-07-2018 13.50% Apr-01-2025 50 [ICRA]A (Stable)
(term loan)
Subordinated debt
NA Mar-30-2021 14.25% Jun-04-2027 25 [ICRA]A (Stable)
(term loan)
Source: Company

Please click here to view details of lender-wise facilities rated by ICRA

Annexure II: List of entities considered for consolidated analysis

Not applicable

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 ANALYST CONTACTS
Karthik Srinivasan A M Karthik
+91 22 6114 3444 +91 44 4596 4308
[email protected] [email protected]

Prateek Mittal Arpit Agarwal

+91 33 7150 1132 +91 124 4545 873
[email protected] [email protected]

Arti Verma
+91 124 4545 313
[email protected]

RELATIONSHIP CONTACT
L Shivakumar
+91 22 2433 1084
[email protected]

MEDIA AND PUBLIC RELATIONS CONTACT

Ms. Naznin Prodhani
Tel: +91 124 4545 860
[email protected]

HELPLINE FOR BUSINESS QUERIES

+91-9354738909 (open Monday to Friday, from 9:30 am to 6 pm)

[email protected]

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