MSME-focused non-banking finance company (NBFC) UGRO Capital is entering a new phase of growth as it pivots away from low-yield corporate lending businesses and sharpens its focus on small-ticket lending in tier-2 and tier-3 markets.

In an interview with Fortune India, Shachindra Nath, founder & managing director, said UGRO is gradually winding down its direct selling agent (DSA)-led low-yield origination channels and shifting toward higher-yield emerging market loans against property (LAP).

The Mumbai-based company, which has expanded its assets under management (AUM) from around ₹3,000 crore in FY22 to over ₹15,000 crore in FY26, is now prioritising profitability over aggressive balance-sheet expansion.

“FY27 and FY28 will largely be years of portfolio rebalancing, with overall assets remaining broadly stable while the mix shifts toward higher-yield businesses,” Nath said.

“From a current base of around 2.1% return on assets, we should be in the range of 3% to 3.5% RoA by FY29,” he added.

According to Nath, nearly ₹10,000 crore of UGRO’s loan book currently sits in lower-yield segments, while only about ₹5,000 crore is allocated to higher-yield businesses.

“We realised that to improve return ratios, we needed to enhance yields rather than depend on lower borrowing costs,” he said.

Structural reset plan

As part of its strategic transition, UGRO Capital on February 7, 2026 unveiled a structural reset plan to pivot the business toward two high-yield verticals - Emerging Market LAP and Embedded Finance - while gradually running down its Prime Intermediated portfolio.

The company also aims to deliver ₹200–220 crore in annualised cost savings, maintain capital adequacy without fresh equity infusion, and improve return on assets (RoA) to 3–3.5% by FY29.

“The focused vertical mix has already moved from 32% to 38% of AUM, which is the fastest quarterly shift on record. We stopped fresh disbursements in the Prime Intermediated business from February 7 itself,” Nath said.

Nath explained that co-lending played a crucial role during UGRO’s capital-constrained growth phase, with nearly 38% of FY26 AUM remaining off-balance sheet through partnerships with 16 banks.

However, he acknowledged that the model had limitations on profitability and long-term operating leverage.

“The model was a treadmill - growing, but not compounding,” Nath said.

Betting on LAP and embedded finance

UGRO is now focusing on Emerging Market LAP, which offers 18–22% yields through branch-led small-ticket property loans, and Embedded Merchant Finance via MyShubhLife, where yields exceed 25% through partnerships with platforms such as PhonePe and BharatPe.

The embedded finance business has already reached ₹2,280 crore AUM within five quarters of launch, serving over 2.5 lakh customers.

Meanwhile, the company’s cost-rationalisation programme is aimed at reducing DSA-led and intermediated business expenses as UGRO shifts toward a direct-origination model.

“Removing these costs is not austerity - it is the elimination of expenses that were producing diminishing returns in a business we have deliberately exited,” Nath said.

Profectus acquisition strengthens secured lending

UGRO further strengthened its secured lending franchise through the acquisition of Profectus Capital in July 2025 in a ₹1,400 crore all-cash deal. The acquisition added a ₹3,500 crore secured asset book and is expected to generate annual cost synergies of nearly ₹150 crore.

“We raised around ₹900 crore of equity capital and wanted to make productive utilisation of that capital. The acquisition gave us scale, a secured portfolio and immediate cash profitability,” Nath said.

The company expects its higher-yield businesses to become key growth engines over the next few years. Nath said the loan-against-property portfolio could expand from ₹3,500 crore to nearly ₹7,000 crore, while embedded merchant financing may grow from around ₹2,500 crore to approximately ₹5,000 crore.

Macro risks and technology edge

Despite concerns around inflationary pressures and global uncertainty arising from geopolitical tensions in West Asia, Nath believes UGRO’s MSME customer base remains relatively insulated from external shocks.

“These are small retailers, bakeries, shopkeepers and local manufacturers servicing domestic demand in tier-2 and tier-3 markets. They are not linked to global exports,” he said.

Nath also highlighted the company’s investments in technology and analytics as a key differentiator in the competitive MSME lending space.

“We have invested more than ₹150 crore in data analytics and technology. Our proprietary underwriting engine, GRO Score, is a patented MSME scoring model,” he said.

For the financial year ended March 31, 2026, UGRO reported a profit after tax (PAT) of ₹174.8 crore, up 21% year-on-year, while net total income rose 31% to ₹1,067 crore. Consolidated assets under management stood at ₹15,334 crore at the end of FY26.