IPO Alert: Five-Star Business Finance prepares for a public listing

Non-banking finance companies (NBFC) have played an important role in the Indian financial system by offering low-cost banking services and providing savings and investments services to small-scale and retail customers.

As of January 2021, there were 9,425 non-banking finance companies registered with the RBI, categorized as asset finance companies, loan companies etc. It is estimated that loans of less than ₹10 lakhs outstanding account for around 41% of all small business loans processed by NBFCs. They have been an integral part of MSMEs financing in small rural and unbanked sectors.

Five-Star Business Finance Limited recently filed preliminary papers with capital markets regulator SEBI to raise up to ₹2,752 crores through an initial public offering. According to the draft papers, the issue will entirely be an offer-for-sale, wherein promoters and existing shareholders offload their stake.

Specialized NBFC

Five-Star Business Finance is an NBFC-ND-SI that provides secured business loans to micro-entrepreneurs and self-employed individuals, which are largely excluded by traditional financing institutions. The company provides secured business loans of around ₹2-10 lakh against the security of self-occupied residential property to micro-entrepreneurs as well.

The Chennai-based company has grown from 173 branches in 2019 to 268 branches as of September 2021 across 126 districts in eight states and one union territory. Five-Star Business’ live accounts grew from 15,803 in fiscal 2017 to 1.92 lakh as of September 2021. As of March 2021, Tamil Nadu, Karnataka, Andhra Pradesh and Telangana accounted for 95% of the overall portfolio.

Key Number

Five-Star Business posted a 34% growth in total income to ₹1,051 crores in FY21 from ₹787 crores in FY20. Net profit jumped 37% to ₹359 crores in FY21 from ₹262 crores in FY20. It also recorded a profit-after-tax of ₹218 crores for the first half of the current financial year.

Meanwhile, Five-Star Business has a lot of first-time borrowers who are new to the lending ecosystem. Such customers generally are at a higher risk of defaulting. The company’s risk management system won’t be sufficient if the percentage of defaults is high and that would affect its profitability.