Five-Star Business Finance Limited

Management characterized the current stress in small-ticket lending as a 'behavioral crisis' triggered by aggressive lending and subsequent mass write-offs by other industry players. They argue that when competitors write off loans, it destroys the credit culture, leading borrowers to believe they don't need to repay any lender. Five-Star is resisting this trend by refusing to take large technical write-offs, which they believe would further damage borrower behavior. Instead, they are focusing on a '3-step approach'—understand, fix, and move ahead—and claim to be in the final leg of the 'fixing' stage.

In a deliberate move to prioritize asset quality, Five-Star reduced disbursements to ₹976 crores in Q3, an 18% decline from the previous quarter. Management stated that 'disbursement is the easier part' and they will not accelerate growth until they are fully satisfied with the stability of their collections. They have significantly increased their collection infrastructure, growing the number of collection officers to 2,452 from 1,329 a year ago, and are building a full-fledged collection vertical from the ground up.

Despite a 50 bps YoY compression in NIMs and a steady 20 bps quarterly drop in yields due to lower incremental disbursement rates, the company has managed to protect its spreads at approximately 13.9%. This stability is driven by a significant reduction in the cost of funds, which fell to 9.12% from 9.63% a year ago. Management expects a further 10-15 bps benefit in the next 3-6 months as recent repo rate cuts transmit through their benchmark-linked borrowings.

The company reported a slight spike in Stage-3/NPA assets but remains confident due to the secured nature of its portfolio. Recoveries from NPAs and technical write-offs amounted to ₹23 crores during the quarter. Management maintains a prudent provisioning stance, with an overall coverage of 1.83%, and intends to keep this in the 1.7% to 1.8% range. They emphasized that their Stage-2 assets remained stable at ₹1,249 crores, indicating that fresh slippages from softer buckets are under control.

Despite the temporary slowdown in growth, Five-Star continues to invest in long-term capacity. The company added 35 branches and 678 employees during Q3. They are also slowly building an affordable housing book, having sanctioned nearly 100 files to date. Management views these investments as essential for the 'acceleration' phase they expect to enter once the current behavioral stress in the portfolio is fully resolved, likely within the next 1-2 quarters.