Five-Star Business Finance Navigates Q2 FY26 with Stability and Strategic Shifts

Five-Star Business Finance Limited, a prominent player in providing secured financial solutions to small business owners and self-employed individuals, has reported a stable performance for the second quarter of Fiscal Year 2026. Despite a challenging market, the company demonstrated resilience, with management expressing confidence in a stronger second half of the fiscal year. The quarter saw a strategic focus on asset quality, controlled growth, and the introduction of new product offerings.

The company's Profit After Tax (PAT) for Q2 FY26 stood at 286.1 crore rupees, marking a 7% increase both year-on-year and sequentially. This growth underscores the company's ability to maintain profitability even amidst tightening credit filters and increased provisions. Net Interest Income (NII) also saw a healthy rise, growing by 15% year-on-year to 626.5 crore rupees. However, disbursements for the quarter were 1,195.9 crore rupees, a slight decrease from the previous year, attributed to the implementation of additional controls for onboarding quality customers. The Asset Under Management (AUM) grew by 18% year-on-year to 12,847.1 crore rupees, reflecting continued portfolio expansion.

Asset Quality and Credit Costs

Asset quality metrics showed some pressure, with Gross Stage 3 assets (Gross NPA) increasing to 2.64% in Q2 FY26 from 1.47% in Q2 FY25. Similarly, the 30+ DPD (Days Past Due) rose to 12.17% from 8.44% in September 2024. Management acknowledged these trends, attributing them partly to the over-leverage crisis in the sub-3 lakh segment and behavioral issues influenced by microfinance write-offs. Despite this, the overall collection efficiency improved to 96.7% in Q2 FY26 from 96.3% in Q1 FY26, indicating the effectiveness of enhanced collection efforts and a strengthened legal recovery team.

The credit cost guidance has been revised and maintained at 1.25% to 1.35% of total assets for the next 18-24 months, reflecting a more conservative approach given the current environment. The provision coverage ratio on Stage 3 assets stood at 45.19%, which management considers healthy compared to industry peers. The company has also undertaken technical write-offs, which, while reducing the provision coverage ratio mathematically, are expected to yield good recoveries over time due to the secured nature of the loans.

Strategic Initiatives and Growth Levers

Five-Star Business Finance is actively pursuing several strategic initiatives to drive future growth and enhance operational efficiency. A significant development is the launch of a housing loan product in October 2025. This new offering targets an average ticket size of 6-8 lakh rupees with yields of 16%-18% and is expected to contribute 1%-1.5% to the AUM in FY26. This move diversifies the product portfolio and taps into a less competitive segment of affordable housing.

The company continues its branch network expansion, adding 33 branches in Q2 FY26 to reach a total of 800. Concurrently, 769 business and collection officers were recruited, strengthening the on-ground presence and operational capabilities. Management is also strategically shifting its focus towards higher ticket size loans (3-5 lakh and 5-10 lakh rupees) in its core business, coupled with tighter underwriting controls, to ensure quality growth. Robust investments in technology, including an ERP solution and a paperless underwriting model, are aimed at improving productivity and reducing costs.

Outlook and Management Confidence

Management expressed strong confidence in a turnaround, expecting Q3 FY26 to show better performance and Q4 FY26 to deliver significantly stronger results. They reiterated their guidance of 25% AUM growth for the full year FY26 and a steady-state spread of 13%-13.5%. The company's robust liquidity position of 2,360 crore rupees and diversified borrowing relationships with 46 lending partners provide a strong foundation for future expansion. The focus remains on disciplined execution, customer-centric strategies, and leveraging technology to navigate the evolving financial landscape.

Five-Star Business Finance Limited is clearly demonstrating strategic clarity and disciplined execution, positioning itself for sustained growth and enhanced investor trust in the coming quarters.