Part 01 — Foundations & Market

Cost Structures & What the Data Says

The same “SME lender” label hides very different cost structures. A small-ticket secured lender has field cost and collateral friction but lower loss volatility. A digital unsecured lender has faster acquisition and shorter turnaround, but can face high opex, thin borrower buffers and sharp write-offs when vintages season. A co-lending-heavy lender may show high managed AUM with less own-book capital, but must carry integration and servicing cost across the full managed book.

The table below uses public disclosures, rating rationales and credible market reports available in July 2026. Where a metric is not disclosed in the source used, it is marked “not disclosed” rather than estimated.

Comparison Table

Lender	Model snapshot	Scale and growth	Yield, NIM or CoF	Opex and credit cost	RoA/RoE and asset quality	Sources
Five-Star Business Finance	Branch-led, small-ticket secured loans to self-employed borrowers.	FY2025 AUM ₹11,877 crore, up 23.2 percent YoY.	Incremental seven-year rates reduced to 21.5-22.5 percent in FY2025. CoF not disclosed in the page used.	Opex/AUM and credit cost not disclosed in the page used.	FY2025 PAT ₹1,072 crore; gross stage 3 assets 1.79 percent; CRAR 50.10 percent. A market note cited FY2025 RoA 8.22 percent and RoE 18.7 percent.	Five-Star directors’ report, JM Financial note
SBFC Finance	Secured MSME and gold loans, branch-led.	FY2026 AUM ₹11,270 crore, up 29 percent YoY; FY2025 AUM was ₹8,747 crore.	FY2026 yield 17.61 percent for Q4, cost of borrowing 8.52 percent for Q4; FY2026 NIM 10.33 percent.	FY2026 operating expenses 4.19 percent of average AUM; credit cost 1.27 percent of average AUM.	FY2026 RoA 4.58 percent, RoATE 14.18 percent, GNPA 2.61 percent.	SBFC management discussion, SBFC Q4 FY2025 call summary
UGRO Capital	MSME lender with secured, unsecured, machinery, ecosystem and co-lending channels.	FY2025 AUM ₹12,003 crore, up 33 percent; September 2025 AUM ₹12,226 crore, up 20 percent YoY. Off-book AUM 43 percent.	September 2025 portfolio yield 17.6 percent; cost of borrowings 10.37 percent.	Q2 FY2026 opex 7.9 percent of average on-book AUM and credit cost 2.5 percent, annualised. CRISIL said FY2025 credit cost was 1.3 percent.	September 2025 annualised RoA 2.5 percent, RoE 7.7 percent, GNPA 2.4 percent. FY2025 gross stage 3 on own book was 2.4 percent.	CRISIL UGRO rationale, 26 June 2025, UGRO Q2 FY2026 presentation mirror
Oxyzo Financial Services	SME purchase finance and secured/unsecured SME finance with industrial-cluster model.	FY2025 AUM ₹8,427 crore versus ₹6,667 crore in FY2024 and ₹4,780 crore in FY2023, a two-year CAGR of about 32.8 percent.	FY2025 total income ₹1,211 crore; yield on total assets above 15 percent per company post. CoF not disclosed in the source used.	FY2025 opex/total assets 2.8 percent per company post.	FY2025 PAT ₹339 crore; CRISIL RoMA 4.1 percent; GNPA 0.9 percent.	CRISIL Oxyzo rationale, 8 January 2026, Oxyzo FY2025 company post
Aye Finance	Branch-led micro-enterprise lender, shifting mix toward more secured loans.	FY2025 AUM ₹5,533.90 crore, up 23.99 percent YoY.	NIM and CoF not disclosed in the sources used.	India Ratings flagged rising credit cost and weaker collection efficiency; exact credit-cost percent not in accessible excerpt.	FY2025 GNPA 4.21 percent, NNPA 1.40 percent; FY2025 RoA 3.1 percent and RoE 12.1 percent cited in market note.	India Ratings Aye rationale, 8 July 2025, Economic Times directors’ report mirror, JM Financial note
MAS Financial Services	MSME, two-wheeler, commercial vehicle and housing-finance group with assignment/co-lending mix.	FY2026 consolidated AUM ₹15,304 crore, up 19 percent YoY.	FY2026 average cost of borrowing 9.39 percent; yield guidance 16-17 percent. FY2025 NIM was 7.4 percent in a market data summary.	FY2026 credit-cost guidance 1-1.25 percent on closing AUM; cost-to-income around 35 percent.	FY2026 GNPA 2.57 percent in market summary; RoA guidance 2.75-3.0 percent. FY2025 RoA 2.53 percent and RoE 11.9 percent in market data summary.	MAS Q4 FY2026 call summary, Equitymaster FY2025 analysis
Kinara Capital	Branch-led unsecured and secured micro-SME lender.	Current AUM not disclosed in the source used.	Published pricing model: 14.5 percent borrowing cost, 7.5 percent opex, 4.0 percent base RoA, 26.0 percent base rate. Loan rates 14-36 percent.	Pricing policy uses 7.5 percent operating cost.	India Ratings downgraded Kinara to IND BBB/Stable in February 2025, citing asset-quality deterioration and profitability pressure during 9M FY2025.	Kinara interest-rate policy, India Ratings Kinara rationale, 24 February 2025
Lendingkart	Digital-first unsecured MSME lender, cautionary case.	FY2025 AUM ₹5,000 crore, down 31 percent from ₹7,254 crore in FY2024; FY2020-FY2024 AUM CAGR was 31.5 percent before the downturn.	CoF not disclosed in CRISIL excerpt.	FY2025 credit cost 6.9 percent versus 3.4 percent in FY2024.	FY2025 net loss ₹450 crore, RoMA -5.9 percent; 90+ DPD 3.4 percent and adjusted 90+ including trailing write-offs 11.2 percent.	CRISIL Lendingkart rationale, 4 November 2025
Indifi	Digital MSME lender with term loans, LAP and supply-chain finance.	FY2025 AUM ₹2,064 crore, down 5 percent from ₹2,178 crore in FY2024.	NIM not disclosed in accessible excerpt; Ind-Ra said borrowing cost remained competitive.	FY2025 opex/AUM 7.0 percent and credit cost 6.5 percent per India Ratings; CRISIL cited FY2025 credit cost 4.5 percent.	FY2025 loss ₹45 crore; GNPA or 90+ DPD 4.4 percent and adjusted 90+ 9.9 percent.	India Ratings Indifi rationale, 27 October 2025, CRISIL Indifi rationale, 23 September 2025
FlexiLoans, Epimoney	Branchless digital MSME lender with ecosystem partners and co-lending.	FY2025 AUM ₹2,245 crore versus ₹1,760 crore in FY2024 and ₹1,067 crore in FY2023, a two-year CAGR of about 45.1 percent.	FY2025 NIM on total-income basis 12.3 percent.	FY2025 opex/average managed assets 7.6 percent and credit cost 4.5 percent.	FY2025 PAT ₹4.2 crore, RoMA 0.2 percent, 90+ DPD 4.7 percent; adjusted 90+ with trailing write-offs 8.0 percent.	CRISIL Epimoney rationale, 17 February 2026

Cost of Funds

Funding cost is the first structural divide. A high-rated secured NBFC can access bank lines, non-convertible debentures (NCDs), securitisation and sometimes external commercial borrowings at lower cost than a smaller unsecured digital lender. CRISIL’s FY2025-26 sector view said bank funding remained a key determinant for NBFC growth, especially for mid-sized entities, while larger NBFCs had better access to capital markets and external commercial borrowings (CRISIL NBFC AUM outlook, 24 November 2025).

Rating grade matters because it controls both price and certainty of refinancing. The practical ladder is:

Rating and profile	Funding reality
AA category, granular secured pools	Broader bank access, securitisation acceptance, lower spread over benchmark, better ability to raise during stress.
A category, profitable but smaller or mixed portfolio	Bank lines available, but covenants and concentration limits matter; NCD access depends on investor appetite.
BBB category, unsecured or still-seasoning book	Funding can be available but expensive, shorter-tenor and covenant-heavy; asset-quality weakness can quickly choke growth.
Below investment grade or stressed	Reliance on sponsor equity, private debt, assignment of clean pools or run-down.

This is not a regulatory table; it is a market-structure interpretation from rating rationales and sector commentary. It should be treated as a practical heuristic, not a pricing quote.

Opex Anatomy

Operating expense is not just technology. In SME lending it includes:

acquisition: branch sales, DSA payouts, digital marketing, partner fees, field staff;
underwriting: bureau pulls, GST data, bank-statement analysis, field investigation, fraud control, legal and valuation;
servicing: repayment setup, statements, top-ups, renewals, prepayment requests, customer service;
collections: telecalling, field collection, legal notices, repossession or enforcement support;
infrastructure: branches, credit policy, analytics, compliance, technology and audit.

Branch-led secured lenders spend more on people and property verification, but tickets can be larger and credit losses lower. Digital unsecured lenders may reduce front-end journey cost, but the table shows that opex can still sit around 7-8 percent of AUM for Indifi and FlexiLoans, and Kinara’s own pricing policy uses 7.5 percent operating cost. Exceptions, collections and small-ticket servicing do not disappear just because the application was digital.

DSA, Digital CAC and Branch Cost

Typical cost logic by channel:

Channel	Cost pattern	Hidden risk
DSA or connector	Variable payout, often tied to disbursal. Helps scale quickly.	Adverse selection, document quality, incentive conflict, early delinquency if controls are weak.
Digital acquisition	Marketing and funnel cost, plus technology and fraud controls.	High rejection cost, duplicate leads, thin-file borrowers, customer overleverage.
Branch-led	Fixed rent and staff cost before scale.	Slow ramp-up, but better local verification and collections touch.
Anchor-led or repeat borrower	Lower acquisition cost due to data and existing flow.	Platform dependency, concentration, data-quality and settlement-control risk.

Operating leverage appears when fixed branch and platform cost is spread over more AUM. UGRO’s rating rationale explicitly links modest profitability to upfront branch, human-capital and technology spend; CRISIL said PPOP to average managed assets was 3.1 percent in FY2025, down from 3.4 percent because of higher cost of funds and opex (CRISIL UGRO rationale). FlexiLoans’ opex improved from 8.2 percent to 7.6 percent as scale rose, according to CRISIL’s 2026 rationale.

Credit Cost by Product and Cycle

Credit cost behaves differently from gross NPA. A lender can keep GNPA moderate by writing off fast, selling pools or growing the denominator. The 2024-26 unsecured SME stress cycle makes this clear. TransUnion CIBIL and SIDBI said the overall commercial portfolio remained stable at 1.8 percent delinquency as of March 2026, but unsecured business loans to entities had 7.2 percent delinquency, up 274 basis points over three years; March 2025 originations of unsecured business loans showed early delinquency 2.9 times the overall level (TransUnion CIBIL MSME Pulse July 2026 release).

The result showed up in lender economics. Lendingkart’s FY2025 AUM contracted 31 percent, adjusted 90+ DPD rose to 11.2 percent and credit cost rose to 6.9 percent (CRISIL Lendingkart rationale). Indifi’s FY2025 credit cost was 6.5 percent in India Ratings’ view, with GNPA at 4.4 percent and debt covenant breaches tied to asset quality (India Ratings Indifi rationale). FlexiLoans remained profitable but at low RoMA, with elevated 90+ and credit cost (CRISIL Epimoney rationale).

What survived better? Secured, granular branch-led books with conservative LTV, local collections and stronger capital buffers. That does not mean secured lending has no risk. It means the loss path is slower and recoveries have collateral support, while unsecured books must detect weak vintages early.