The 38-year-old non-banking financial company (NBFC) has over the past seven years recorded numbers that any other non-bank would give its right arm for. Loan growth of 65% over the last five years (that was 15-16% compound annual growth rate for NBFCs), net-interest margins of over 14% (when other NBFCs clocked anywhere from 3-14% on the higher end) and bad loans of just about 1% (the best NBFCs pulled 1%, and for those worse-off 15%). These numbers, especially the bad loans, puts Five Star in league with those like India’s largest private bank, HDFC Bank.
Lenders live and die by bad loans; a high proportion of such loans can suck capital dry and send companies into a death spiral. A loan turns bad when a borrower has not paid their equated monthly installment (EMI) for more than 90 days, and has at least three installments pending. HDFC Bank has among the lowest gross non-performing assets (GNPA)—only 1.17% in the year ended March 2022. Barely different from the Chennai-based mid-sized Five Star, which was at 1.05% for the same period.
Except, HDFC Bank and Five Star are like chalk and cheese.
HDFC Bank mostly gives loans to the salaried, with a robust credit history, and at interest rates less than 10%. Five Star, on the other hand, focuses on self-employed, new-to-credit borrowers in tier-2 cities and beyond. It charges them interest rates of over 20%.
Its customers are mostly single-shop owners such as vegetable sellers or barber-shop owners. These borrowers are more prone to defaulting given the irregularity of their cash flow. Their earnings, while dependable, are not entirely predictable like a salary. Still, for Five Star they are the best of borrowers.
That’s why investors like Matrix Partners, Sequoia Capital, TPG Partners, Norwest Venture Partners, and Morgan Stanley flocked to invest nearly Rs 2,000 crore (US$242 million) in the company over the last eight years. Five Star went public late last month, but saw a lukewarm debut debut Moneycontrol Five Star Finance raises Rs 1,588.5 crore via IPO Read more . It raised about Rs 1,600 crore (US$194 million)—20% less than what it had intended.
Analysts and those in the industry say a bunch of factors were at play—from being an offer for sale to not being a consumer brand, and operating in a niche of small-business loans weighed it down. “High Networth Individuals and retail response was weak because Five Star was compared with housing finance companies like Aptus and Aavas, which have not performed well.