Five-Star Business Finance in Q4FY26: Stabilising Collections, Holding Margins, and Resetting for FY27 Growth

Five-Star Business Finance closed FY26 after what management called one of the most challenging years in the company’s recent history. The year still ended with growth, but the key storyline was asset quality pressure in a small-ticket secured lending book, and the operational actions taken to stabilise collections.

For Q4FY26, the company reported total income of INR 826.1 crore and profit after tax of INR 269.3 crore. For FY26, total income rose to INR 3,246.0 crore (up 13% YoY) and PAT increased to INR 1,098.8 crore (up 2% YoY). Assets under management ended the year at INR 13,224.6 crore, up 11% YoY, supported by a 96-branch expansion to 844 branches.

But FY26 was also the year in which asset quality metrics moved sharply higher. Gross NPA rose to 3.37% by March 31, 2026 versus 1.79% a year ago, and 30+ DPD increased to 12.69% from 9.65%. Management attributed the stress to over-leverage in the broader retail credit ecosystem, particularly among borrowers with overlap in microfinance and unsecured loans, and said these headwinds “crept into” secured lenders as well.

Q4FY26 performance: higher costs, but early signs of stabilisation

Sequentially, Q4FY26 was positioned as a quarter of improving trend indicators. The company reported unique customer collection efficiency (excluding NPAs) at 98.1% and x-bucket collections at 99.3%. Slippage ratio reduced to 0.70% in Q4FY26 from 1.09% in Q3FY26, helping keep gross NPA broadly stable sequentially at 3.37% (versus 3.18% in Q3FY26).

Financially, Q4FY26 showed steady income but higher operating costs. Total income was flat QoQ at INR 826.1 crore, while operating expenses increased to INR 227.1 crore (up 9% QoQ and 21% YoY). Credit cost remained elevated at INR 60.4 crore (1.88% of average AUM), resulting in PAT of INR 269.3 crore, down 3% QoQ and 4% YoY.

The margin structure remained strong. In Q4FY26, portfolio yield was 22.58% and cost of borrowing was 8.95%, leading to a spread of 13.63%. Net interest margin was 20.07% (computed as net interest income over average AUM).

FY26: growth held up, but credit costs rose sharply

Despite a challenging operating environment, Five-Star delivered 11% AUM growth and 2% PAT growth for the full year. FY26 disbursements were INR 4,675.7 crore, down 6% YoY, reflecting management’s decision to restrain growth while collections and delinquency metrics were under pressure.

The cost line was the main swing factor. FY26 operating expenses increased 22% YoY to INR 829.7 crore. Provisions rose sharply, with FY26 credit cost at INR 216.3 crore versus INR 89.0 crore in FY25. This pushed total cost-to-income (including credit cost) to 41.82% in FY26 from 35.05% in FY25.

In parallel, asset quality deterioration reduced profitability ratios. Return on average AUM declined to 8.68% in FY26 from 9.96% in FY25, and ROE declined to 16.06% from 18.68%.

Balance sheet and funding: strong capital and liquidity, gradual cost-of-funds benefits

Five-Star ended March 2026 with total assets of INR 15,789.8 crore and equity of INR 7,380.2 crore, with debt-to-equity at 1.11. The company reported CRAR at 51.89% for FY26, indicating a high capital buffer.

On liquidity, the presentation disclosed a buffer of INR 2,745.3 crore as of March 2026, comprising INR 2,295.3 crore of unencumbered cash and cash equivalents and INR 450.0 crore of unavailed bank sanctions. The company also reported no cumulative mismatch across ALM buckets.

Funding profile remained diversified across bank loans, DFIs, NCDs, securitisation and ECBs. In Q4FY26, the company raised a USD 100 million facility from Asian Development Bank (with USD 50 million drawn during the quarter). Management said the Q4 incremental borrowing cost was 8.53%, with the ADB transaction carrying higher hedging costs.

Book cost of funds continued to trend down, though management flagged uncertainty due to macro and geopolitical factors. Book COF reduced to 8.95% in Q4FY26 (from 9.12% in Q3FY26) and to 9.21% for FY26 (from 9.64% in FY25).

FY27 outlook: growth reset, credit cost normalisation, and organisational changes

Management’s forward commentary focused on a return to growth, with AUM growth guided at around 20% for FY27. The company also guided credit cost at 1.7% to 1.75% of average AUM for FY27, and suggested a longer-run steady-state credit cost of around 1.5% to 1.6%.

Operationally, the most concrete change discussed was an organisational split between business and collections, made fully operational from April 1, 2026. Management framed this as a way to allow the business team to focus on disbursements while the collections team focuses on stabilising DPDs.

The company also reiterated ongoing investments in technology. Turnaround time was reported at 8 days in Q4FY26, and the proportion of digital collections increased to 84% in Q4FY26 (from 80% in Q4FY25). The presentation also outlined AI initiatives such as GenAI-enabled document processing and voice bots for collections, though without quantified impact.

Branch growth is expected to continue at a moderated pace, with management guiding 60 to 75 new branches in FY27, compared with 96 added in FY26. Management said the focus will remain on Tier 3 to Tier 6 towns, though it also indicated expansion opportunities in states such as Maharashtra.

Takeaways

FY26 tested Five-Star’s operating model with a sharp rise in delinquencies and credit costs, but the company still delivered AUM growth and a modest PAT increase. Q4FY26 improved trend indicators, especially collections and slippages, and management’s guidance suggests FY27 is expected to be a year of returning growth with still-elevated but moderating credit costs.

The critical monitorables into FY27 remain straightforward: whether early delinquency buckets keep improving, whether gross NPA starts trending down as management expects, and whether operating cost stays contained while the company re-accelerates disbursements.