| 52 Annual Report | 2025-2026 of customer protection and financial inclusion. To further contain our credit cost, the company has also enrolled in the Credit Guarantee Fund for Micro Units (CGFMU) scheme, which is sponsored by the Ministry of Finance. Under this scheme, the Company has to bear the first 3% of loss and will then receive 75% of the balance which effectively is 72.5% of the outstanding. As of March 31, 2026, 69% of our eligible portfolio is covered under this scheme. Inorganic Credit Our inorganic business was established with the objective of pursuing a low operating-expense and low credit-cost model, focused on deploying debt capital to small and medium-sized non-banking financial companies. Our target borrowers primarily comprise NBFC-MFIs that are members of recognised self-regulatory organisations and other registered NBFCs. Our corporate exposures are structured through term loans, direct assignments, and sourcing and collection arrangements. The inorganic credit function operates under a structured credit appraisal framework approved by the Inorganic Credit Committee, which sets out appraisal standards for both quantitative and qualitative assessment parameters. In evaluating corporate borrowers, we assess the overall risk profile by considering factors such as industryspecific risks and prospects, the borrower’s financial position through analysis of audited financial statements, historical performance, capital-raising capability, cash flows and capital adequacy, geographic concentration, portfolio-at-risk (“PAR”) trends, collection efficiencies validated through banking records, the borrower’s competitive position, operational efficiency and quality of management. As part of our due-diligence process, onsite visits are conducted for new corporate borrowers by members of the credit team and/or business team. For unsecured micro-enterprise loans, the Inorganic Credit Committee oversees credit policies, ensuring that they are formulated following detailed deliberation among key stakeholders. Credit appraisal in the MEL segment involves a structured evaluation of the borrower’s credit history, fixed obligations, business stability and cash flows, household income and bankstatement analysis, including assessment under a fixed-obligations-to-income ratio (“FOIR”) framework. All KYC requirements are verified in compliance with applicable regulatory guidelines. This appraisal is further strengthened through a two-level physical verification of the borrower’s business premises, initially by the field officer and subsequently cross-verified by the respective branch head. Final loan sanction is subject to a real-time video personal discussion conducted by our centralised credit underwriting team, providing an additional layer of validation prior to approval or rejection. Given that this segment operates within the MFI-plus category, we adopt a balanced approach combining objective metrics and qualitative judgement to assess borrower creditworthiness and business viability. In addition, our team continuously monitors portfolio performance and provides periodic updates to management and the Board on key credit developments, supporting strong governance, ongoing oversight and adherence to our risk-management standards. RISK MANAGEMENT Over the years the Risk Management function has evolved at Arohan in line with Regulatory mandates and stakeholder expectations. Risk management oversight is therefore, spread across all functions in the Company, in the light of the changing business and economic environment, especially in the microfinance segment in the year FY 2026. The Business & Risk strategies that were deployed not only ensured that Arohan remained well-prepared for facing and mitigating challenges throughout the financial year. The Risk Management function of the Company is led by the Chief Risk Officer and has independent reporting to the Risk Management Committee of the Board of Directors, headed by an eminent Independent Director, with regular administrative guidance from the Managing Director of the Company. The first half of the financial year of FY 2026 has been challenging for the microfinance sector. This was in the backdrop of adverse impact on portfolio quality across the sector owing mainly to aggressive funding practices in the post Covid-period, sluggish rural economy, geopolitics and other socio-political headwinds. Availability of liquidity to the sector remained a challenge with lending institutions slowing on advances to the sector impacting growth and money supply to the microfinance customers. The overall microfinance Industry shrunk in the first half of the year and then recovered in the second half. Overall, the sectoral numbers reflected lower largely due to a few very large players moving their Credit Bureau reporting of some segment of microfinance customers from Microfinance to Retail. Our SRO, MFIN’s Guardrail 2.0 became effective in Q1 of FY 2026, which capped level of indebtedness & number of lenders. The factors of Guardrail’s credit discipline adopted by and large by the sector and backed by reduction of GST, well spread normal monsoons in Arohan’s geographies Management Discussion & Analysis
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