Five-Star says bad loans will stay sticky for two quarters

Five-Star Business Finance Limited expects slippages of about 70 basis points to remain flat for the next couple of quarters, even as its collection overhaul contains fresh stress. Management cited a 99.4% current-bucket collection rate in the prior quarter, but said 61-to-90-days-past-due accounts need settlements or multiple repayments, delaying improvement in reported bad loans.

Why will Five-Star's bad loans remain sticky for two quarters?

Five-Star expects bad loans to remain sticky because accounts overdue by 61 to 90 days require substantial repayment or settlement before they can improve their classification. Management said slippages should stay around 70 basis points for the next couple of quarters, as the stock in this bucket takes longer to resolve even if new flows into delinquency are contained.

The company drew a distinction between early overdue accounts and non-performing assets, or NPAs, already on its books. It said collections can hold an account in the one-to-90-day buckets by securing one instalment, and a further instalment can help roll it back. By contrast, an NPA needs multiple additional instalments or a settlement, making the 61-to-90-day and 90-days-plus pools more persistent.

Management said credit cost should not rise above current levels despite the sticky NPA stock. That expectation rests on flat slippages and collection performance rather than a near-term reduction in deeper delinquencies. Five-Star said a more visible decline in slippages is likely to be a couple of quarters away, subject to its ability to curb flows into the 61-to-90-day bucket.

Are Five-Star's collections holding up across its markets?

Five-Star said collections were holding up across its markets, with October tracking July and September despite holidays reducing available collection days. Tamil Nadu, Andhra Pradesh and Telangana account for more than 80% of assets under management, or AUM, and management said it did not see drought-like conditions in those core states.

For the first 25 days of October, overall collections were in line with July and September, which management described as good collection months. Tamil Nadu generally recorded better collections than other states, followed by Andhra Pradesh and Telangana, but management said there was no material discrepancy or alarm across geographies, including parts of North Karnataka, Madhya Pradesh and Maharashtra.

Five-Star reported that current-book collections in the first 15 days of October were about 1.5% higher than in the first 15 days of September. Its overall first-day collection measure was about 98% in September, and management expected October to be close to 98%. Business teams and an in-house calling operation, combining manual and artificial intelligence-led processes, manage the current book.

Karnataka showed month-on-month collection improvement, according to management, which said the worst impact from a state ordinance introduced about 18 months earlier had passed. The company said contained slippages and better collections had given it confidence to increase disbursements more noticeably in Karnataka, while October collections there were holding up relative to July and September.

How has Five-Star changed its collections and legal operations?

Five-Star said the costs of its expanded collections and legal infrastructure have been fully absorbed, so it does not expect further operating-expense increases specifically for those functions. The operating-expense ratio was about 7.5% in the quarter and 7.35% to 7.40% for the year, with management expecting it to fall by 50 to 75 basis points over the next couple of years toward 6.75% to 7%.

The revised model separates loan origination from arrears management. Previously, the same employee handled both activities, meaning a greater focus on business or collections could weaken the other task. Five-Star now assigns the entire arrears book to a dedicated collections team, while the legal infrastructure is intended to support resolutions of deeper delinquency without interrupting business activity.

Management contrasted the current stress cycle with COVID-19. It said COVID-19 disrupted borrowers' ability to operate businesses, whereas the recent cycle affected repayment behaviour after borrowers observed large write-offs by microfinance institutions. Five-Star estimated that 35% to 40% of its customers had microfinance loans, while noting that it had not conducted a new scrub analysis for the quarter.

What controls is Five-Star using to limit fresh stress?

Five-Star said its controls limit top-up loans to current customers with at least 12 to 18 months of repayment vintage, an acceptable past-due history and no deterioration in credit score from the original sanction. It said no top-up loans are made to Stage 2 borrowers, and that the filters are designed to avoid restructuring or evergreening concerns.

Top-up loans account for about 10% to 15% of disbursements. Using quarterly disbursements of about Rs 2,000 crore as an illustration, management said top-ups would be about Rs 200 crore to Rs 300 crore, with incremental cash disbursal generally about 50% of the outstanding loan. The top-up share may decline as new-loan disbursements grow, though the absolute amount could rise.

From October, Five-Star began deducting all obligations shown in credit-bureau data when assessing borrower cash flows, including an imputed obligation for gold loans. Management said the approach supplements loan-to-value and debt-burden assessments and is intended to ensure that higher ticket sizes do not lead to higher borrower leverage. Its intended portfolio mix is 25% below Rs 3 lakh, 50% in the Rs 3 lakh to Rs 5 lakh range and 25% above Rs 5 lakh.

When could Five-Star's reported asset quality improve?

Five-Star said it is working toward improving gross NPAs in financial year 2028, although management said it would provide a clearer perspective toward the end of the current financial year. For the next couple of quarters, its stated outlook is flat slippages near 70 basis points and only a marginal, gradual improvement in the deeper overdue book.

Written-off loan recoveries can take 18 to 24 months because loans below Rs 20 lakh cannot use the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act route, management said. The company expects recoveries from loans written off in the current and prior year to become more visible in financial years 2028 and 2029, after reporting Rs 20 crore of such recoveries in the first half.

Five-Star said even deep-delinquent written-off loans were yielding recovery of principal plus roughly 12% internal rate of return, reflecting collateral realisations, though legal resolution takes time. Management added that NPA resolutions including write-offs rose to about Rs 35 crore in the latest quarter from about Rs 25 crore in the preceding quarter, and it expects full-year resolutions to exceed Rs 100 crore.

Conclusion

Five-Star's collection overhaul appears to be containing fresh stress, as shown by the 99.4% current-bucket collection rate and October performance that tracked July and September. However, its reported NPA position will improve more slowly because 61-to-90-day and older accounts require multiple repayments or settlements, leaving slippages near 70 basis points for the next couple of quarters.

The next indicators are the flow of accounts into the 61-to-90-day bucket, the pace of NPA resolutions and whether October's near-98% first-day collection outcome is sustained. Management plans to provide a better asset-quality perspective toward the end of the current financial year, while recoveries from recent write-offs are expected to become more visible in financial years 2028 and 2029.