Five Star Q4FY26: Collections improve, growth set to re-accelerate

Five-Star Business Finance Limited ended Q4FY26 with a tone of stabilization after a difficult year. The company, a secured-lending NBFC focused on small business owners and self-employed borrowers with informal incomes, reported total income of ₹8,261 Mn for the quarter, up 9% year on year. Profit after tax came in at ₹2,693 Mn, down 4% year on year and down 3% quarter on quarter. The quarter mattered less for top-line momentum and more for what sat beneath the headline numbers: stronger collection efficiency, a moderation in slippages versus Q3, and management conviction that the worst of the asset quality stress is behind the franchise.

For the full year FY26, Five Star delivered 11% AUM growth to ₹132,246 Mn and a 2% increase in PAT to ₹10,988 Mn. That performance came despite higher credit cost and a sharp increase in gross NPA compared with the prior year. In a year where disbursements fell 6% and reported return ratios stepped down, the company still expanded its distribution network to 844 branches across 11 states and union territories and continued to lower its cost of funds. The operating model remained intact and management argued that execution at branch level did not weaken even amid senior management exits during the year.

A quarter defined by collections and contained incremental stress

Management’s Q4 commentary centered on collections, especially in softer buckets. Unique customer collection efficiency excluding NPA loans was reported at 98.1% for Q4FY26. X bucket collections were 99.3%, which management highlighted as critical to containing forward flows into delinquency. This improvement showed up in slippage behavior. The slippage ratio, defined as increase in NPAs plus write offs as a percentage of opening standard AUM, declined from 1.09% in Q3FY26 to 0.70% in Q4FY26.

Asset quality still reflected the stress of FY26, but the quarter looked more stable than the trend line suggested. Gross NPA moved to 3.37% at March 31, 2026 from 3.18% in Q3FY26, while net NPA was 2.00% versus 1.94%. The 30 plus DPD ratio was 12.69% in Q4FY26, slightly better than 12.81% in Q3FY26. Provisioning coverage on GNPA improved sequentially to 41.40% from 39.84%, though it remained below the 51.31% level seen in Q4FY25.

Disbursements recovered sequentially but stayed lower year on year. Q4FY26 disbursement was ₹12,133 Mn, up 24% quarter on quarter, but down 17% year on year. AUM increased 2% quarter on quarter to ₹132,246 Mn. The branch footprint expanded by nine branches in the quarter and by 96 over the full year, signaling that the company has not paused expansion even while dealing with higher delinquencies.

Profitability held up, but credit cost reset the earnings profile

Five Star’s operating engine remained strong in Q4FY26. Net interest income rose 10% year on year to ₹6,447 Mn on the back of higher AUM and a falling cost of borrowings. Net interest margin for the quarter was 20.07% computed as a percentage of average AUM, higher than 19.57% in Q3FY26 though below 20.72% in Q4FY25. This is consistent with a gradual decline in portfolio yields, which reduced to 22.58% in Q4FY26 from 23.70% in Q4FY25, while the cost of borrowing declined to 8.95% from 9.63% over the same period.

The challenge for profitability was not spread. It was the credit cycle. Credit cost in Q4FY26 was ₹604 Mn versus ₹254 Mn in Q4FY25. For FY26, loan losses and provisions were ₹2,163 Mn compared with ₹890 Mn in FY25. That increase pushed the total cost to income ratio to 41.82% for FY26 from 35.05% in FY25. Operating expenses also rose, reflecting network scale-up and a higher employee base. Q4FY26 operating expenses increased 21% year on year to ₹2,271 Mn, while FY26 operating expenses were ₹8,297 Mn versus ₹6,785 Mn in FY25.

Even with higher credit cost, the company remained profitable at scale. FY26 PBT was ₹14,628 Mn, up 2% year on year, and FY26 PAT was ₹10,988 Mn, also up 2%. Return on average AUM declined to 8.68% in FY26 from 9.96% in FY25, and ROE declined to 16.06% from 18.68%. These numbers describe a reset year rather than a broken model. They show that the franchise can absorb higher provisions and still generate meaningful returns, but also that the next phase of performance depends on asset quality normalization.

The ECL disclosure explains how provisioning is positioned at year-end. As of March 31, 2026, gross loans outstanding were ₹132,246 Mn, with Stage 1 at ₹115,468 Mn, Stage 2 at ₹12,317 Mn, and Stage 3 at ₹4,461 Mn. Total ECL provision was ₹2,432 Mn, translating to 1.84% of overall AUM. Stage 3 ECL provision coverage was 41.40%, with Stage 3 net loans at ₹2,614 Mn.

A distribution-led secured lending model with a tech-heavy backbone

Five Star’s core pitch remains consistent: secured loans against self-occupied residential property to borrowers who are largely cut off from formal credit due to documentation gaps. Average ticket size is ₹3 to ₹5 lakhs, and target households have gross income of ₹25,000 to ₹40,000 per month. The underwriting model is designed for informal cash flows, using surrogate checks such as lifestyle, asset ownership, and neighborhood or trade checks. Importantly, approval powers sit only with the credit team, while the business team has no sanction authority. The company also emphasizes registered mortgages as a structural risk mitigant.

The distribution model is branch-driven and contiguous. At March 31, 2026, the company operated 844 branches across 11 states and union territories and employed 14,159 people. Andhra Pradesh and Tamil Nadu together contributed a majority of portfolio, with AP at 36% and TN at 28% in FY26, while Telangana contributed 19%. Over time, the company has added new markets like Madhya Pradesh, Maharashtra, and other states, though the southern footprint remains central.

Technology is positioned as an operational lever rather than a standalone growth engine. The company highlighted a robust loan origination system integrated with banks, bureaus, account aggregators, and data providers, backed by a secure API ecosystem and cloud architecture. Turnaround time improved to 8 days in Q4FY26, matching Q1FY26 and better than FY25’s 9 days. The collections function has seen a steady rise in digital adoption, with digital collections at 84% in Q4FY26 versus 80% in Q4FY25.

This matters because FY26 was a year of elevated delinquency risk. Better collections tooling, faster verification, and tighter feedback loops can improve behavior scores and field productivity. Management also pointed to AI-led initiatives such as intelligent document processing, local-language voice bots for collections, and voice to data conversion. These are described as in-progress capabilities, but they align with the company’s emphasis on keeping underwriting and collections largely in-house and tightly controlled.

Funding costs fell, liquidity stayed strong, and growth ambitions returned

While asset quality grabbed attention, Five Star’s liability franchise quietly improved. Book cost of funds declined to 9.21% in FY26 from 9.64% in FY25, continuing a multi-year trend down from 10.51% in FY22. Quarterly, book cost of funds reduced to 8.95% in Q4FY26 from 9.63% in Q4FY25. Portfolio yields also declined, but spreads remained robust. In FY26, portfolio yield was 23.10% and cost of borrowing was 9.21%, implying a spread of 13.89%. In Q4FY26, the spread was 13.63%.

The funding mix at March 2026 was led by bank term loans at 53%, followed by securitisation at 17%, term loans from Indian DFIs and others at 15%, NCDs at 10%, and ECB at 6%. The emergence of ECB in the mix at 6% is a notable shift from the prior periods shown, where ECB was largely 1%. Lender diversification also increased the role of multilateral DFIs, with lender type data showing multilateral DFI borrowings rising to 13% of borrowings outstanding at March 2026 from 7% in the prior quarters shown.

Liquidity metrics were presented clearly. As of March 2026, the liquidity buffer was ₹27,453 Mn, made up of ₹22,953 Mn of unencumbered cash and cash equivalents and ₹4,500 Mn of unavailed sanctions. The projected quarterly cash flow schedule for FY27 showed positive closing liquidity through all quarters, ending at ₹33,025 Mn by Q4FY27. The ALM table highlighted no cumulative mismatch in any time bucket.

Management used this combination of stabilizing collections, strong liquidity, and cost of funds improvement to frame the next phase. The company stated it is geared to get back on track and is well poised to achieve around 20% AUM growth for FY27 and thereafter. The growth stance is paired with familiar guardrails: robust underwriting, strong collections, proactive risk management, and a diversified and cost-effective funding profile.

Investor takeaways: FY26 was tough, but the business model still showed resilience

Five Star’s FY26 narrative is best read as a stress year in a high-yield secured lending model that is built for underserved borrowers. AUM still grew 11% and PAT still grew 2%, which management positioned as proof of model strength. But the sharp rise in gross NPA to 3.37% and the increase in credit cost changed the earnings quality and pulled down return ratios.

The more constructive signals came late in the year. Q4 collections improved materially, the slippage ratio fell from Q3 levels, and DPD metrics were stable to slightly better sequentially. The franchise also expanded its branch network, held a strong liquidity buffer, and continued to reduce funding costs. If collections strength sustains, FY27 becomes less about rebuilding spreads and more about normalizing credit cost while scaling disbursements.

The key question for investors is whether the Q4 improvement is durable across quarters. Management sounded confident, pointing to strong softer bucket collections and high x bucket performance as leading indicators. If those indicators translate into lower forward flows and lower incremental Stage 3 additions, the company’s high NIM structure and operating leverage could reassert themselves. FY26 ended with the company insisting that the direction of travel is now onwards and upwards. The next few quarters will decide how quickly that optimism converts into cleaner asset quality and faster AUM growth.