Five Star Business Finance opens for subscription: Key things to know

About the company

What does Five Star Business Finance do: Five Star Business Finance is a non-banking finance company that provides business loans (62 per cent of gross term loans as of June 2022) and loans for asset creation and meeting expenses such as home renovation, education, marriage, etc. (accounting for 38 per cent of gross term loans as of June 2022). The company targets customers who generate income from cash and carry businesses. These customers are mostly micro-entrepreneurs and self-employed individuals. All of its loans are secured by its borrowers' property. Headquartered in Chennai, the company's network comprises 311 branches across 150 districts (predominantly in south India).

Strengths

• Prudent underwriting: The company is one of the few institutions to have developed an underwriting model that evaluates the cash flows of small business owners and self-employed individuals (according to CRISIL). This has allowed it to keep net non-performing assets at less than 1 per cent of gross loans even after growing its loan book by more than five times in four years.
• Sourcing and collections framework: Five Star Business Finance sources all its loans in-house. This gives it complete control over the quality of the customer and thereby risk assessment. Moreover, the responsibility of sourcing and collections is kept with the same relationship officer. This incentivises them to source suitable customers. Each relationship officer is responsible for no more than 120 customers (on average), so there is sufficient capacity to attend to each loan effectively.

Weaknesses

• High share of first-time borrowers: As of June 2022, 30.4 per cent of the company's customers were first-time borrowers. Such customers generally have a higher risk of default.
• Highly regulated industry: The company is subject to many regulations put in place by the RBI including periodic inspections. Failure to comply with such regulations could impact the company adversely.

Risk score (The lower the score, the riskier the stock)

Disclaimer: This is not a stock recommendation. Do your due diligence before investing.

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