Fusion Finance Limited (BSE: 543652, NSE: FUSION), formerly known as Fusion Micro Finance Limited, reported a net loss of ₹92.25 crore for the first quarter of FY26, underscoring the strain of elevated credit costs, a sharp year-on-year contraction in assets under management (AUM), and breaches in certain borrowing covenants. The performance was tempered by a notable improvement in net interest margin (NIM) and a healthy capital adequacy ratio (CRAR), offering some reassurance to a market that remains divided over the lender’s short-term resilience.
The Gurugram-headquartered non-banking financial company–microfinance institution (NBFC-MFI) released its unaudited and limited-reviewed results after market hours, following a board meeting that also addressed liquidity positioning and strategic initiatives for rural and MSME lending. The Q1 FY26 update reflects a delicate balance between operational recovery and ongoing structural challenges that could influence investor sentiment in the months ahead.
How severe was the earnings decline for Fusion Finance in Q1 FY26 compared with recent quarters?
For the three months ended June 30, 2025, Fusion Finance’s total income came in at ₹445.57 crore, down 36.95% year-on-year from ₹706.68 crore in Q1 FY25 and 6.39% sequentially from ₹475.99 crore in Q4 FY25. Interest income accounted for ₹421.89 crore, a steep decline from ₹621.28 crore in the same quarter last year, reflecting reduced loan book size and moderated disbursement activity.
Net interest income (NII) was stable at ₹267.96 crore versus ₹267.93 crore in Q4 FY25, as funding cost reductions helped offset the impact of lower yields from the shrinking portfolio. However, credit costs remained heavy, with ₹178.86 crore booked in provisions during the quarter. Pre-provision operating profit (PPOP) stood at ₹86.61 crore, down 3.89% quarter-on-quarter.
The after-tax loss of ₹92.25 crore widened sharply from the ₹35.62 crore loss in Q1 FY25. Annualised return on assets (ROA) slipped to -4.70%, while return on equity (ROE) fell to -20.58%, highlighting the scale of profitability erosion.
What do the latest results reveal about Fusion Finance’s asset quality and borrower retention?
AUM fell to ₹7,687.60 crore at the end of June 2025, marking a 36.95% year-on-year decline from ₹12,192.58 crore and a 14.39% drop from the ₹8,979.92 crore reported in Q4 FY25. The active borrower base contracted to approximately 28.5 lakh, down 27.85% year-on-year and 11.21% sequentially.
Gross non-performing assets (GNPA) improved to 5.43% from 7.92% in Q4 FY25, largely due to improved collection efficiencies and resolution efforts, while net NPA was contained at 0.19%. The company maintained a Stage 3 provision coverage of around 97%, signalling a conservative approach to credit risk despite the drop in GNPA.
Branch network expansion slowed, with 1,560 outlets in 22 states and three Union Territories, marginally down from 1,571 in the previous quarter but still up 11.59% year-on-year.
How is Fusion Finance managing funding costs, liquidity buffers, and covenant compliance?
Funding costs moderated in Q1 FY26, with the cost of funds dropping to 10.27% from 10.52% in Q4 FY25. Management attributed this improvement to a better mix of liabilities and active cost control in borrowing arrangements.
Liquidity remained a bright spot, with ₹724 crore in cash and liquid assets — equivalent to 9.76% of total assets — and a liquidity coverage ratio (LCR) of 150.56%, comfortably above regulatory thresholds.
However, the lender disclosed breaches in financial covenants on borrowings amounting to ₹3,567 crore as of June 30, 2025. Extensions on covenant testing dates have been secured from lenders representing ₹2,570.29 crore of this total, while negotiations with remaining creditors are ongoing. The company’s going concern assumption is contingent on obtaining further waivers, executing planned loan sales, calling up the remaining ₹399.93 crore from the April 2025 partly paid-up rights issue, and refinancing certain borrowings.
Why did net interest margin and capital adequacy improve despite a shrinking loan book?
Net interest margin rose sharply to 10.29% in Q1 FY26 from 8.57% in Q4 FY25, aided by a decline in cost of funds and a tighter focus on high-yield lending segments. The improvement also reflected a shift toward differentiated products and better pricing discipline.
Capital adequacy remained strong, with CRAR at 29.52% following a ₹799.86 crore rights issue in April 2025. The issue, priced at ₹131 per share and subscribed 1.5 times, resulted in the allotment of over 6.10 crore equity shares, partly paid at ₹65.50 per share, raising ₹399.93 crore in the first instalment. These proceeds have been temporarily parked with scheduled commercial banks and are earmarked for deployment in portfolio growth and balance sheet strengthening.
What strategic initiatives are in place to drive growth in rural and MSME markets?
Managing Director Devesh Sachdev said the company had made “progress toward normalcy” through measures that strengthened credit quality and discipline. He noted that the Reserve Bank of India’s move to lower the qualifying asset threshold for NBFC-MFIs from 75% to 60% would support sector sustainability and Fusion’s growth prospects.
Chief Executive Officer Sanjay Garyali highlighted the launch of new products such as the “Ujala” and “Sugam” loans to meet evolving customer needs and the planned rollout of MSME-focused lending solutions. He emphasised that sustainable growth would be anchored in technology-led underwriting, deeper customer engagement, and expansion in emerging rural and semi-urban markets.
These measures are intended to diversify the loan portfolio and offset some of the pressures from the shrinking core microfinance book.
How are institutional investors reacting, and what is the outlook for FY26?
Institutional sentiment is divided. Some investors are encouraged by the margin improvement, capital strength, and conservative provisioning, seeing them as a base for recovery. Others remain concerned about the steep AUM contraction, covenant breach risk, and the need for consistent borrower acquisition to return to growth.
Analysts suggest that the next two quarters will be pivotal. The successful resolution of covenant issues, efficient use of rights issue proceeds, and sustained improvement in NIM will be key to restoring confidence. Portfolio diversification into MSME lending could provide incremental growth, but execution risks remain high given the current operating environment.
With a strong liquidity buffer and above-average CRAR, Fusion Finance has the financial headroom to navigate short-term challenges. However, any delay in resolving funding uncertainties or further slippage in asset quality could weigh heavily on performance and market sentiment.
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