Part 01 — Foundations & Market

Evaluating Growth: The AUM Math and Rational CAGR

Growth in lending is not the same as growth in software. Every new disbursal creates an asset, a funding need, a collection obligation and a future vintage-risk data point. Fast growth can make reported gross NPA look better for a while because new current loans enlarge the denominator before losses season. The right question is not “can disbursals grow?” It is “can disbursals grow while funding, capital, opex and seasoned credit cost remain inside the model?”

AUM Evolution

For an amortising term-loan book:

closing AUM = opening AUM + disbursals - scheduled principal runoff - prepayments - write-offs + accrued items, if included

In a simplified equal-principal model:

monthly scheduled runoff from a cohort = original cohort disbursal / average tenor in months

If a lender disburses ₹100 crore every month into 24-month equal-principal loans, the mature average AUM is approximately:

monthly disbursal x (tenor + 1) / 2 = ₹100 crore x 25 / 2 = ₹1,250 crore

A short-tenor book needs constant re-origination. A 12-month merchant loan book with ₹100 crore monthly disbursals matures around ₹650 crore of average AUM, while a 36-month book matures around ₹1,850 crore. The short book may look operationally agile, but every month has a large replacement requirement.

Vintage Seasoning

Vintage seasoning is the passage of time after origination that lets delinquency and loss emerge. Fast growth can suppress the reported GNPA percentage because new loans dominate the denominator.

Illustrative arithmetic, not market data:

Cohort	Opening principal	Months on book	90+ DPD amount	90+ DPD rate within cohort
FY2024 seasoned cohort	₹500 crore	24	₹25 crore	5.0%
FY2025 cohort	₹900 crore	12	₹18 crore	2.0%
FY2026 new cohort	₹1,600 crore	3	₹8 crore	0.5%
Total book	₹3,000 crore	Mixed	₹51 crore	1.7%

The portfolio GNPA is 1.7 percent, but the seasoned cohort is already at 5.0 percent. If the FY2026 cohort seasons badly, the reported percentage will rise later. This is why portfolio analytics uses ever-30, ever-90 and MOB curves rather than only point-in-time GNPA.

The market warning is current. SIDBI and TransUnion CIBIL’s July 2026 MSME Pulse said outstanding commercial balances including individual business-oriented loans were ₹65.8 lakh crore as of March 2026, but unsecured business-loan accounts originated in March 2025 showed 2.9 times higher ever-90+ delinquency within 12 months than the overall early-delinquency level (SIDBI MSME Pulse July 2026, TransUnion CIBIL newsroom release).

Capital Constraint

Capital adequacy is the hard balance-sheet governor. NBFCs are subject to regulatory capital rules, and 15 percent CRAR is the common minimum benchmark referenced in NBFC prudential architecture. Strong lenders often run above the minimum to preserve rating comfort and growth headroom. Five-Star reported CRAR of 50.10 percent at March 2025 (Five-Star directors’ report); UGRO reported CRAR of 25.4 percent in September 2025 (UGRO Q2 FY2026 presentation mirror); SBFC reported capital adequacy of 32.8 percent for Q4 FY2026 in a market call summary (SBFC Q4 FY2026 call article).

Scenario formula:

equity required = target equity ratio x AUM

If target equity ratio is 20 percent, every ₹100 crore of AUM needs ₹20 crore of equity or retained earnings. Co-lending, assignment and securitisation reduce own-book AUM, but they do not remove operating, conduct and partner risk.

Funding as Practical Ceiling

Funding can bind before capital. CRISIL said NBFC AUM growth would be shaped by competition, risk calibration and access to bank funding; unsecured MSME business loans had seen delinquency increase, while larger NBFCs had more alternatives such as debt capital markets and external commercial borrowings (CRISIL NBFC AUM outlook, 24 November 2025). A lender that doubles disbursals without committed liabilities is making a refinancing bet.

Scenario Assumptions

The following scenario tables are arithmetic from labeled assumptions, not predictions. The assumptions are anchored to the benchmark page: secured lenders around 16-18 percent yield and 1-2 percent credit cost; mixed MSME lenders around 17-20 percent yield and 2-4 percent credit cost; stressed digital unsecured lenders showing 4.5-6.9 percent credit cost and 7-8 percent opex in rating rationales.

Common formulas:

AUM month t = sum of each prior disbursal still outstanding after equal-principal runoff

pre-tax RoA = yield - (cost of funds x debt share) - opex/AUM - credit cost

post-tax RoA = pre-tax RoA x (1 - 25%) when pre-tax RoA is positive

RoE = post-tax RoA / equity ratio

equity required = closing AUM x equity ratio

break-even AUM = fixed annual opex / contribution margin

contribution margin = yield - (cost of funds x debt share) - variable opex - credit cost

Shared assumptions: debt share 80 percent, equity ratio 20 percent, tax 25 percent on positive pre-tax profit.

Scenario	Monthly disbursal start	Monthly growth	Avg tenor	Yield	CoF	Opex/AUM	Credit cost	Fixed annual opex	Variable opex
Conservative secured-led	₹60 crore	1.0%	36 months	17.0%	10.0%	5.0%	2.0%	₹24 crore	2.5%
Base mixed MSME	₹100 crore	1.5%	30 months	20.0%	10.5%	6.0%	3.5%	₹45 crore	3.0%
Aggressive unsecured-led	₹150 crore	2.2%	24 months	23.0%	11.5%	7.5%	6.0%	₹80 crore	4.0%

Scenario Outputs

Scenario	Year 1 AUM	Year 3 AUM	Year 5 AUM	Implied AUM CAGR from Y1 to Y5	Post-tax RoA	RoE	Equity required at Y5	Break-even AUM
Conservative secured-led	₹626 crore	₹1,333 crore	₹1,693 crore	28.2%	1.5%	7.5%	₹339 crore	₹533 crore
Base mixed MSME	₹1,029 crore	₹2,136 crore	₹3,053 crore	31.2%	1.6%	7.9%	₹611 crore	₹882 crore
Aggressive unsecured-led	₹1,506 crore	₹3,172 crore	₹5,348 crore	37.3%	0.2%	1.1%	₹1,070 crore	₹2,105 crore

Read the aggressive case carefully. It has the highest yield and fastest growth, but it barely earns after funding, opex and credit cost. This is not a prediction that unsecured lending fails. It is the arithmetic lesson from 2024-26: high yield cannot rescue a model if credit cost and opex rise together.

Formula Walkthrough

Base scenario, Year 5:

pre-tax RoA = 20.0% - (10.5% x 80%) - 6.0% - 3.5%

pre-tax RoA = 20.0% - 8.4% - 6.0% - 3.5% = 2.1%

post-tax RoA = 2.1% x 75% = 1.575%, rounded to 1.6%

RoE = 1.575% / 20% = 7.875%, rounded to 7.9%

Year 5 equity required = ₹3,053 crore x 20% = ₹611 crore

contribution margin = 20.0% - 8.4% - 3.0% - 3.5% = 5.1%

break-even AUM = ₹45 crore / 5.1% = ₹882 crore

These formulas are intentionally simple. A production model would add prepayment, write-off timing, collection recoveries, fee amortisation, DLG accounting, stage-wise ECL, tax-loss carry-forward, capital risk weights and off-book servicing income.

Rational CAGR

A rational growth rate is the rate at which four constraints remain true:

Vintages remain within policy loss bands after seasoning.
Funding is committed or repeatable without dangerous maturity mismatch.
Capital remains above management and regulatory buffers after stress.
Opex per AUM falls with scale rather than rising because collections and exceptions overwhelm the platform.

This explains why a 25-35 percent AUM CAGR can be rational for a well-funded secured or mixed lender, while the same headline CAGR can be reckless for a thinly capitalised unsecured lender with weak early buckets. CRISIL expected unsecured MSME business-loan growth to slow to 13-14 percent from 31 percent highs, while secured MSME/LAP growth could remain stronger at 26-27 percent (CRISIL NBFC AUM outlook).

Nuances to Watch

Seasoning risk: reported GNPA can look clean when growth is fresh. Track ever-30 and ever-90 by vintage.

DLG cost drag: a 5 percent DLG cap can support alignment, but cannot make a bad cohort good. DLG calls consume platform fee income and lock collateral.

Co-lending dependence: off-book AUM improves capital velocity, but partner appetite can change if early delinquencies rise or reconciliation breaks.

Funding polarisation: stronger, higher-rated NBFCs have broader funding options; BBB or stressed lenders face tighter covenants and higher cost.

Regulatory fee compression: KFS/APR disclosure, penal-charge rules and prepayment restrictions make hidden or back-ended fee revenue less durable.

Growth is therefore an underwriting, treasury and operations decision, not only a sales target.