Ladies and gentlemen, good day, and welcome to the Five-Star Business Finance Limited Q4 FY 2026 earnings conference call. As a reminder, all participant lines will be in the listen only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during this conference call, please signal an operator by pressing Star, then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Raghav Garg from Ambit Capital. Thank you, and over to you, sir.
Good morning, everyone. On behalf of Ambit Capital, I would like to welcome you all to the Q4 FY 2026 earnings call for Five-Star Business Finance. Joining us from the management today we have Mr. Lakshmipathy Deenadayalan, Chairman and Managing Director; Mr. Srikanth Gopalakrishnan, Joint Managing Director and CFO; and Mr. Prashant, Chief of Treasury and Investor Relations. I thank the management for the opportunity to host this earnings call. We can now begin with opening remarks from Mr. Lakshmipathy, post which we can open the floor for questions. Thank you, and over to you, Mr. Pa-
Good morning, everyone. Thank you, Raghav. We have just completed one of the most challenging years for Five-Star. The asset quality headwinds faced by MFIs and unsecured loans, unsecured loan lenders over the last couple of years creeped into the portfolios of secured loan lenders also, especially those providing small ticket loans. As a company, we all know Five-Star provides loans to small business owners and self-employed individuals with a higher proportion of MFI overlap. This resulted in increase in DPDs and NPA for Five-Star during the course of this financial year. The actions taken by us over the last few quarters have helped us to tide over these challenging times, and I'm very happy to state that the worst is behind us, and the coming quarters will see us moving in one direction, onwards and upwards.
Let me get into the quarter that's just got completed. The current quarter has been very encouraging with collection efficiency across all buckets showing excellent improvements and getting back to the robust levels. This shows our strength in credit underwriting and collection infrastructure. I wanted to share a few collection metrics that clearly show this trend. For the quarter ended March 31, 2026, we clocked a unique customer collection efficiency of 98.1%, which is one of our best in the history of Five-Star. Our X bucket collections for the quarter came in at 99.3%, which has helped contain forward flows from X buckets. Our slippage ratio has dropped from 1.09% in last quarter to 0.7% in this quarter.
This has helped our NPA remain largely stable between the quarters at 3.37%. Credit cost has remained largely stable at 1.88% of the average AUM for the Q4, compared with 1.76% in last quarter. After quarters of continuous drop, the current proportion, customers who are in current buckets has moved up almost by close to 1% from 81.77% in Q3 to 82.69% in Q4. All the above metrics, what I said, clearly shows the collection efficiency across all buckets are back to our normal trends. With our collection strategies in place and our collection efforts showing strong traction, we started to refocus on distribution and portfolio growth during the current quarter.
Our disbursement for the quarter came in at INR 1,213 crore, an increase of 24% over the previous quarter. Our disbursement for the full year came in at INR 4,675 crore, which has allowed us to clock a portfolio growth of 11% even during a challenging year. During the quarter ended March 31, 2026, we availed the incremental debt of INR 928 crore at an all-inclusive cost of 8.53%. We raised $100 million from Asian Development Bank, ADB, one of the largest development financial institutions across the globe during this quarter, which is a reinforcement of lenders' belief in Five-Star. While the all-inclusive cost was slightly higher than the previous quarter, it was primarily on account of higher hedging cost we have to pay on this transaction.
Our cost of funds for the quarter dropped from 9.12% in Q3 to 8.95% in Q4. For the full year, we saw a drop in our cost of fund from 9.64% in last year to 9.21% this year. For the quarter, we achieved a PAT of INR 269 crore. While this is 3% lower as compared to the previous quarter on account of higher personnel expense. I want to reinforce the fact our PAT for the full year, we grew even in such a challenging year by 2%. We clocked a full year PAT of INR 1,099 crore. Our return on average AUM and return on equity for the financial year 2026 remains healthy at 8.68% and 16% respectively.
I also want to touch upon another aspect that has created a bit of overhang on us during this year. There was a senior management exit during this year, but I want to clearly lay down the fact this has no impact on our performance. As can be seen from our results, this is a testimony to the strength and depth of our team, both at the management and the branches level. We have built a team that has never been and will never be dependent on one or few individuals. It may sound clichéd, but men may come and men may go, but we go forever. Now, as we step into a new financial year, we are geared up to get back on the track of growth and well-poised to achieve an AUM growth of around 20% for the financial year 2027.
Thereafter, we will slowly move upwards. As in the past, we will aim at achieving strong yet sustainable growth, quality and profitability through robust credit underwriting, strong collections and proactive risk management backed by use of adoption of technology and AI, and supported by a diversified and cost-effective fund profile. The way we handled the challenges gives me immense confidence and clearly shows that we have emerged stronger and will move onwards and upwards. Thank you. Now I'll hand over the call to Srikanth for more in detail.
Very good morning to all of you. As Mr. Pathy has highlighted, I think this has been a quarter which has reinforced our confidence in the business model and the execution capability of Five-Star, and we are very hopeful and confident that each of you on the call and the investors will also feel reinforced with the kind of results that we have been able to demonstrate in this quarter. Let me touch upon just few aspects on the numbers before I hand it over for any questions. Despite dropping our yields by 2% about a year and a half back, our spreads continue to remain quite healthy. In fact, the drop in spread for the full year has just been at 40 basis points, despite the incremental disbursements coming in at about 200 basis points.
We have been able to get good cost of funds to stem the drop in spread. This has resulted in strong return on average AUM at 8.37% and an ROE of close to 16% for the full year. From the borrowing perspective, I think we are being looked at very attractively by the lenders. Like Mr. Pathy said, ADB has given a $100 million line to us, out of which we have drawn $50 million during this quarter, and another $50 million is available for us to draw any time over the next financial year.
While this has come in at slightly higher cost because of the hedging cost involved, but this reinforces the fact that even some of the largest lenders of the world are ready to back the company because of its strong underwriting capability and collection infrastructure. Our PAT for the quarter stood at about INR 269 crore because of slight increase in personal expenses. This is lower on a sequential basis and on a YOY basis. Our net worth stands at a very healthy number of about INR 7,400 crore. INR 7,380 crore to be precise. We continue to have a good provision coverage ratio both on the overall assets and on the Stage 3 assets.
Our overall coverage is at 1.84%, and on Stage 3 we are at 41.4%. Given that there has been some betterment in the buckets, especially in the Stage 2 composition, the Stage 2 proportion has dropped a little bit. In fact, our 61 to 90-day bucket has actually come down from about 5.1% to 4.8%, because of which you see a small drop in the Stage 2 provision coverage. We generally track the overall provision coverage because this is what gives confidence on the balance sheet and on the quality of assets that we are holding. As a management team, we are very confident that we have bounced back in the best manner possible. We have taken the right set of actions.
As a company, we have faced multiple challenges during this year, asset quality challenges, people-related challenges, but every one of them have been faced by us, and we have overcome them in the best manner possible. Like Mr. Pathy said, I think from here onwards, the performance is going to be in one direction, which will be onwards and upwards. That's the confidence we as a management team have, and we would like to make each and every one of you feel confident about the ability of the company to bounce back and grow in the coming years. On that note, we'll take a pause and very happy to address any questions any of you may have. Thank you.
Thank you. We will now begin the question and answer session. Anyone who wishes to ask a question may press star-
We'll probably just take a couple of minutes for the question queue to assemble.
Sure, sir. Anyone who wishes to ask a question may press star and one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. Our first question comes from the line of Renish from ICICI. Please go ahead.
Yeah. Hi, sir, and congrats on a good set of numbers. Just two things. One, you know, on this asset quality metric. Just wanted to know how April is trending, you know, in terms of collection and flows. Also if you can give some insight on disbursement run rate in April as well.
Renish, April is a seasonally weak quarter, but given that we are coming off a year when we had some challenges, we don't expect material deterioration to happen in April. At the same time, given that it's a seasonally weak quarter, we also don't expect material improvements to come through. So far, April is trending quite well. I think we are largely in line with a typical April month, both in collections across various buckets. Our belief is that I think this quarter also should be fairly good from an asset quality perspective. Disbursements are looking up. In fact, one of the things that we have done, and we had also highlighted this in the commentary in the presentation and in the exchange release.
The split between business and collections is fully operational from the 1st of April. We expect that this will pave for a strong disbursement to come in. It's early days, obviously. You know, people are just getting acclimatized to doing different things. You know, things are looking good. We are getting, you know, strong lead indicators. We believe that even in this quarter, we should be able to show a good disbursement growth. So far, you know, the way April is trending is giving us that belief that this quarter should be good both in terms of disbursement and asset quality.
Got it. Got it. Just lastly on this credit cost front. When, you know, when we look at net slippage rate, which is obviously, you know, coming down pretty sharply in Q4, and also when we look at X-bucket, it clearly suggests that incremental flows are far lower than, you know, what it used to be during first time in month of FY 2026. If this trend has to sustain, you know, what kind of a credit cost we are building in for 2027?
Renish, I think, for FY 2027. See, if you look at it, the trajectory of credit cost has been, you know, marginally going up over the last four quarters. For Q4, we ended with about 1.88% on average AUM.
Sure.
which is the number from where we will start showing an improvement. Definitely there'll be an improvement. At this point of time, we will probably be guiding you for a credit cost of 1.7% to 1.75% for the next financial year. Depending on how the buckets trend over the year, this could look better from here, but our guidance will be about 1.7% to 1.75%.
Got it. Got it. Just a follow-up on that. I'm sure because, you know, we are coming out from a, you know, a sort of prolonged credit cycle and from peak, obviously it will improve in 2027. What kind of a steady-state credit cost, you know, one should build in the segment where you operate? Also keeping in mind, you know, we are sort of pivoting towards better rated customers, you know, in terms of ticket size. How should, you know, one should think about the steady-state credit cost, you know, let us say from INR 3 lakh-INR 5 lakh perspective?
Renish, I think FY 2027, we gave you the numbers. 2028-2030, obviously with buckets getting better, the credit cost will trend better. We are probably looking at anywhere between 1.5%-1.6% of credit cost as a steady-state number. I think we are confident about that. Like you rightly said, collections are getting better. The focus on slippages are a lot higher today. You know, to some extent, we are also moving to slightly better quality customers. Maybe 1.5%-1.6% would be the steady-state cost for the next couple of years.
Got it. It's very helpful, sir. Thank you, and best of luck.
Thanks, Renish.
Thank you. The next question comes from the line of Abhijit Tibrewal from Motilal Oswal. Please go ahead.
Good morning, sir. Thank you for taking my question.
Abhijit, your voice is quite low.
Is it better now, sir?
Yes.
Sir, thank you for taking my question. The first question I had is just a follow-up on what you just answered to Renish, that steady-state credit costs could be 1.5%-1.6%. Sir, if you could help us understand what has really changed in the last one year since this asset quality stress that we started seeing in the lower ticket LAP. Basically, what I am trying to understand is going forward, we are saying that the overlap with MFI customers will gradually become lower. We are moving to higher ticket sizes. You just mentioned we are moving to a better customer segment. Versus the credit cost at which we used to operate earlier, and now steady state credit cost of 1.5%, 1.6%, what has changed?
I mean, earlier credit cost used to be, let's say, 70-80 basis points. Now we are looking at 1.5-1.6. What has changed in the environment?
Abhijit, I think the earlier guidance that we gave was based on total assets, which was about 0.8%-1%. If you just convert into an AUM, that will probably read more like a 1.3%-1.35%. From where we are actually moving to 1.5%-1.6%. What has changed is, I think, our understanding of the environment, our understanding of this customer segment and the skews that they'll probably go through, and the necessity to be a lot more consistent in our approach towards the credit cost buildup is what we are saying. We will probably be, you know, operating at slightly elevated credit cost than what we are, than what we have been handling. 'Cause there are also macroeconomic events which are happening.
There are other, you know, issues or stress that keeps cropping up. At that point of time, you know, if you are looking at a much lower credit cost, then you know you're actually putting a lot of pressure on the field force. Especially with our focus on growth also, we need to maintain a good balance between the right growth number and the right credit cost. Which is where we believe that I think 1.5%-1.6% will be a comfortable number to achieve the stated growth objectives, and we wanna operate at those levels.
Got it. Got it, sir. The 2nd question I had was around, basically, I mean, every earnings call, right? We've been asking this, that are there any disruptions that we are seeing today on the ground? While most of them have acknowledged that there is nothing in April, which is very different or very alarming from March, and I think you also alluded to when you answered the previous participant that April is seasonally weak. There is some deterioration that typically happens in April, but business is picking up. Just trying to understand, given that we cater to a self-employed segment, which is often perceived as a little more vulnerable compared to other customers.
Is your reading today that they have not been impacted as yet, and they'll kind of continue to pay for some more time, basically their EMIs? Do you think that maybe in the coming months there is a need to monitor this segment, the collections and as things shape up, right?
Abhijit Tibrewal, I'm presuming you are alluding to, you know, the macroeconomic, the geopolitical scenario, right?
Yes, sir. That's exactly what I'm alluding to.
Anyway. I don't think that has had any major impact like what others have been highlighting. I think we are also not seeing any major impact of that. In fact, we did look at some parts of the portfolio which could potentially be impacted, like those small eateries and NRI remittances and all that. The proportion of that portfolio is firstly extremely small for us, sub 1%, and even on that, we are not seeing any alarm signals at this point of time. The repayments are coming in, you know, well, in line with the other portfolio. At this point of time, we are also of the belief that, you know, we have not seen or not unlikely to see any material impact of the geopolitical scenario.
Again, it's something that we keep, you know, keep an eye on, and we'll keep monitoring. Hopefully, we are probably getting to some solutions, and if that happens, I think that'll be a positive impact for us.
Got it. Srikanth, sir, last question I had was, in the last 6- 12 months, have we seen?
Alaric, we should probably go to the next participant. I think Abhijit has dropped off.
Sir, Abhijit is connected.
Connected.
He's still connected.
Can you hear me, sir?
Yeah, now I can hear you. Did you hear our answer?
Sir, I heard you. I heard you. Maybe there's some problem with the line. I heard your answer. The last question that I had was in the last 6-12 months, have we seen.
Alaric, let's just move on. We'll probably take it offline with Abhijit.
Sure, sir. The next question comes from the line of Suraj Das from Sundaram Mutual Fund. Please go ahead.
Yeah. Hi, sir. Thanks for the opportunity. Sir, one question on ROA. I mean, how do you see the ROA panning out from here on, given that your steady-state credit cost is only 20, 30 basis point lower than the current levels and, therefore, the ROA driver would be only margin. How do you see that margin panning out? Do you see the margin probably a bit of coming down over a period of time while you scale because you increase on the ticket size and so forth? Hence probably ROA could be here only at the current level of the fourth quarter or how you see ROA? That is the only one question, sir.
... yields and cost, but it is also driven by leverage, and that will keep going down obviously with leverage coming in. Our belief is, I think even for the current financial year, which is FY 2027 and thereafter, we should be able to operate at a spread of around 13.5%. Depending on the leverage, the margins will stack up where they are. From an ROA perspective, I think we believe that we should be able to operate at about 8.25%-8.5% for this year. You know, on a fairly steady state also about 8 .25% levels, we should be able to operate.
Today it is also a function of a bit of leverage, which is much lower. I think as the leverage keeps kicking in, you will see some impact on the ROAs, that will have a positive impact on ROE. For this year, I think, 8 .25%- 8 .5% is an ROA that we should be able to operate at.
Sure. Got it. Thank you so much.
Thank you. The next question comes from the line of Viral Shah from IIFL Capital. Please go ahead.
Hi. Thanks for the opportunity and congrats on good set of results. Srikanth, wanted to check three things, if I may. One is, you mentioned about the personal expenses. Was there any one-off, or is this just a reflection of the full build-out cost of the collections vertical that we have built up?
It's a combination of both, Viral. Typically in Q4 you also give slightly higher incentives, some schemes that we put in to actually spur the people to, you know, to run for good collections and good growth. I wouldn't call it as a one-off, but it's a very typical phenomenon that you will see in, you know, in the last quarter. Like, like how you see in the first quarter the increment impact coming in. Because the growth was slightly lower for this year, you know, the personal cost looks, looked a little bit on the higher side. But for these two, I think, it's largely business as usual.
Got it. Srikanth, Mr. Pathy mentioned about the growth of 20% for next year on AUM basis. I understand there is some element of arithmetic behind that, given the book tenures of it. How do you see it, say, on a steady state basis, 2028, and maybe even beyond? What is the kind of growth outlook or aspiration that you would have?
Viral, I think given that, 1, we are coming off a slightly lower growth year, there is some bit of pent-up demand that will be there, which we should be able to cater to. Also, given the fact that our base is not as high. For example, even growing at 20% by the end of FY 2027, we'll probably somewhere around close to INR 16,000 crore. We still remain confident that at least for the next 2- 3 years, we should be able to clock a growth around 20%. If I have to be conservative and give you a range, it'll probably be somewhere between 18%-20%.
You know, we are definitely, at least for the next, two to three years, we are gonna be aiming for, close to 20% growth.
Got it. My last question, Srikanth, was just with regards to the yields. How much more pass-through of the rate cuts that we had taken 1.5 years back is still remaining? Understand this is on incremental basis, but is it fully reflected on the book? Secondly, given that now we are shifting also segments somewhat in terms of customers, do you foresee, say, some bit of element of yield compression in this year?
Viral, I think the yields has largely been factored. If I have to put a number, maybe you have another 40 to 50 basis points of impact. We are today incrementally lending at around 22.5%. You know, factoring for some delinquencies and all that, the book yield should be closer to about 22%-22.25%. For Q4 we are at about 22.6. I would probably say about 30, 40 basis points of further impact that may come in over the, over the next 3 to 4 quarters. See, the other point that you asked, I think we've been reiterating consistently, is that this is not a very price-sensitive segment, and it's not like we are completely shifting our segment.
We are going to be lending at INR 15 lakh-INR 20 lakh, where the borrowers are extremely price sensitive. We have to drop our yields. This is a segment where we have been operating at similar yields even in the past. For the last 12 months also, we have been giving similar yields to these customers. It doesn't change primarily on account of, you know, us focusing more on the, let's say, closer to INR 5 lakh customers, rather than the closer to INR 3 lakh customers. We're not really envisaging any material disruption to the yields on account of the slightly different focus that we may be carrying.
Got it. Very clear, Srikanth. Thank you and all the best.
Thank you.
The next question comes from the line of Kunal Thanvi from Banyan Tree Advisors. Please go ahead.
Hi. Thank you for the opportunity. I had three questions. one was, you know.
I'm sorry to interrupt, Kunal. You're not quite audible. Could you please use your phone on the handset mode?
Sorry, we can't hear you.
Is it better now?
Yes, please go ahead.
I had three questions. The first one was, when we have done this restructuring, organizational restructuring in terms of business and collection, being different teams, can you throw some light on what were the gaps that you saw? We've been in the business for last 20 years, and this is like one of the first time when we have seen a over-leveraging cycle that we saw. In the first instance itself, we have to reorganize the entire team. Really interested in understanding what were the things that went wrong and how did we, how does this reorganization kind of correct it?
Second question was on your last quarter's comment on, you know, permanent over-leveraging in the, you know, microfinance sector. Sector is now playing out, what is your sense on the over-leveraging bit? The third thing is, like, Given our size, we've been always saying we, you know, the structural growth will be closer to 25%. Now, Srikanth Gopalakrishnan just alluded to the fact that we'll be tracking closer to 18%-20% over next three years. Is it that, you know, structurally our growth rates would be lower than what we were anticipating, say, two years back? If yes, if you can, you know, help us understand why.
Like, at one stage we are moving to a slightly higher ticket size, and still if we will be growing slower than what we had anticipated three years back, are there any things that we should know or any reasons that we should know for the slower growth? Thanks. These are three questions that I had.
I hope that I am audible. Let me go one by one. We are not extremely going higher on the ticket size. If you see the average ticket size between last year and this year, it has moved from INR 3.5 lakh per customer to INR 4.2 lakh per customer. We are still operating in the sweet spot of INR 3 lakh-INR 5 lakh. That is where we see the potential for a higher growth, and we see there is the challenges for other people to get in. That is the sweet spot of Five-Star. We will be operating in INR 3 lakh-INR 5 lakh, definitely.
What we have been saying three quarters before was below 3 lakh, that had some bit of pain where we want to slow down in below 3 lakh and concentrate a bit more on above INR 5 lakh. Structurally, INR 3 lakh-INR 5 lakh will be our core. Even if you see our presentation, close to 50% plus of our total AUM lies in INR 3 lakh-INR 5 lakh . There is no big movement that we have made to go and get into the bigger ticket size customers. We remain in the range bound of INR 3 lakh-INR 5 lakh . That's our sweet spot forever, and we remain there stronger. On what happened last year on the structural problem, there was no structural problems at all.
As we have been seeing, the problem has come from over-leverage caused by unsecured and microfinance lenders that has also peeped into the secured lenders like Five-Star. First it started as a over-leverage issues, then it translated into behavioral issues. That is where Five-Star was addressing the behavioral issues of our customers in last 3 to 6 months. That is getting set right at now by a continuous effort that what we have been putting with the existing customers. Structurally, if you want to say what is the improvement that we have done is earlier the business and collections was together. Now the business verticals and collection vertical has been separated since from April 1st, fully functional.
Business team now will be focusing more on new businesses, and collection team will be more focusing on stabilization in the DPDs across all the customers in Five-Star. I hope so I have broadly answered all the questions. There is some kind of disruption that we are not able to hear the entire questions. If any question that we have not answered, please come again.
Yeah. The last question was structurally, we have been saying, you know, the business is because of the lower base and the opportunity, 25% was the growth number that we have been giving for last 2- 3 years. Now, in one of the comments, Srikanth mentioned that we'll be growing at 18%-20% over the next three years. Is it fair to assume that structurally our growth rates would be lower compared to what we had anticipated, say, three years back, 2-3 years back?
See, when we were growing at 30%+, our AUM size was close to INR 5,000 crore-INR 7,000 crore. Now we are sitting on INR 13,000 crore, and we are coming out from a growth of 10%-11% for a full year. We are intent to grow at 20%. That is why if you see my earlier opening remarks, this will even go up as we move forward year-on-year. Please understand from a current of 10%-11%, we are doubling in this financial year. Maybe we'll be even higher growth as we go forward.
Okay. Sure. Last question is on, you know, the, our cost to assets, like because of this reorganization and slower growth this year, we see some inch up in the cost to assets number, right? Can you know, help us understand what should be the structural cost OpEx to assets from a steady state basis?
See for Q4, if you look at our OpEx to average AUM, we ended slightly higher than 7%. This year, obviously there'll be some benefit of scale that will come in, that'll come in. But we have also made some investments in the collections vertical and, you know, there are also, with competition, people getting into this segment, it is also important for us to retain the right set of people by giving slightly higher costs. Our sense is I think it'll largely remain around the 7%-7.25% levels and not show any big decline during the year despite the 20% growth that we'll achieve.
Okay. Perfect. Thank you so much. All the very best.
Thank you.
Thank you.
Thank you. The next question comes from the line of Yuval Aiya from Nuvama Institutional Equities. Please go ahead.
Hi, sir. Thanks for taking my question. My first question was on our AUM outlook for the next year. From the current year, if we want to, I understand that there's a low base and therefore we are confident of achieving the 20% growth. If we look at disbursements, sir, we've only improved our disbursement sequentially. Before that, we were declining our disbursements because of the stress that we saw on asset quality. Also, sir, we've seen the GNPA ratio increasing for the past several quarters. Do you look at it at this way that we'll go for higher disbursements to achieve that 20% growth only after you see some early indicators for the GNPA ratio decreasing or it won't be contingent on that aspect, sir?
No, we will be pushing up disbursements. Like we said, I think, in Q4, sequentially our disbursements was higher by about 24%. You will definitely see a sequential growth. See the quick back of the envelope computation is we did close to INR 5,000 crore last year. Even if we had grown our disbursements by 15% this year, that number should have been about close to INR 6,000 crore. Another 15% will mean close to INR 7,000 crore for FY 2027. Given that this year we did not push up on our disbursements, like I even said earlier, there is a bit of a pent-up demand which we can definitely address. This is a segment where the demand is of the least concern because it's a very huge market out there.
We should be able to get close to about INR 6,500 crore-INR 7,000 crore of disbursements in the coming year. Definitely we have started, you know, looking at ways and means to bring in quality customers, at the same time push our disbursements up.
Just to continue that, as I said in my opening remarks, we are already seeing a very good uptick in our collections. Just to go a little deeper, for last 6 months we are seeing a good trend in upwards in collections. That is why we are able to do ever best in our collections in both in the X-bucket as well as the unique customer collection efficiency. You will see the NPAs slowing down from next quarter onwards. But that is the outcome because if current customers, X-customers forward flow is lower, eventually the arrears will be lower, eventually the NPAs will be lower. That's why we are confident to say that we'll be growing at 20%.
Definitely in coming quarters you'll see NPAs downing towards the south.
Understood, sir. Thanks. Sir, my second question was on our OpEx outlook for this year. What plans do we hold in terms of increase in headcount and branch expansion for FY 2027? If there'll be a breakup of in terms of Tier 1, Tier 2, et cetera, towns for the branch expansion, that will be helpful.
Our endeavor is, keep opening the new branches. Last year also, we opened close to 90 branches. I'm happy to say that out of 90 branches, 95% of my new branches breakeven has happened. The infrastructure should be ready in place. That's why we keep opening, because that's one of the important levels for growth for Five-Star. Going closer and closer to the customer in city, where we have lesser competition and very understanding the ground level reality of the customer, which is more important. Our catchment area around the branches will be 25 to 30 kilometers. We want to be as close to the customer whom we intend to serve. Even for this financial year, we intend to open 60 to 75 branches.
From a operation cost, Srikanth Gopalakrishnan, you want to take?
No. like we said, I think these branches will come in, and we are very confident that over a 9-12 month period, these branches will start breaking even or becoming profitable. Which is what we said, that the OpEx to AUM level, we should be at about 7-7.25% for this year, which is same as what we did in Q4. Because obviously to retain our good people today, we have to, you know, compensate them at the appropriate levels, which would mean you're not going to get too much upscale benefits coming in in this financial year.
Sure. Thanks a lot. Thank you.
Thank you. The next question comes from the line of Aravind Ravichandran from Sundaram Alternates. Please go ahead.
Sorry, we are unable to hear you.
Sorry. Can you hear me now?
Hello? Hello?
Sir, can you hear us?
Hello? Hello?
Hello?
Yes, sir. We can hear you.
Yeah. Please go ahead.
Okay. Yeah. Can you hear me, sir? This is Aravind.
Yes. Please, go ahead.
Yeah, yeah. Thank you so much for the opportunity, sir. Like, you know, like congratulations on the good set of numbers, especially on the asset quality side. Especially on the early delinquency indicators. You have mentioned, you know, like, there'll be, like, subsequent improvement in NPAs and all. My one question is on, like, you know, we have built, you know, so much capacity, especially in the last two, three years.
You know, telling, I mean, I understand, like, 20% growth for FY 2027, but even beyond that, like, you know, like the capacity kind of, we kind of built and we are continuously going to build, like, you know, can I assume that the 20% growth for the medium term, let's say 2028 or 2029, would be on the conservative side rather than on the even the maximum, like could be like maybe better than that, better than 20%, let's say 2028 or 2029. Similarly, on the credit cost, like, you know, if your, the steady state credit cost is going to be this way, like, you know, should we relook at our pricing also?
Aravind, I think Mr. Pathy did answer the first question. He very clearly said that for the medium term, we are definitely going to be looking at around 20% growth. You know, 20% is not the highest number that we are putting in. If, you know, we, if we get more confidence, we are able to, you know, sustain this level of asset quality and credit cost, we can even look at growing slightly on the higher side. 20% is a number that we are confident of achieving, and possibly we could see some upsides coming in the years. On the credit cost, right now we are guiding you for, you know, 1.5%-1.6%.
It is based on the profile of customers that we'll be onboarding during this year and thereafter. At this point, we are not saying that we are going to be onboarding, you know, much higher quality customers, which means credit costs will come down. If that happens and the asset quality trends a lot better, naturally you'll see credit costs being better than our guidance.
Sure, sir. There's one more question on the yield side. Like, you know, considering our steady-state credit cost itself, we are, you know, looking at a slightly higher than what we had initially anticipated. Like, should we relook at our pricing also? Like, you know, if a steady-state credit cost is going to be high.
At this point, Aravind, there is no necessity for us to relook at our pricing because we dropped our pricing by 200 basis points about 1.5 years back. If you really look at the pricing that is being given by lenders to this segment of borrowers, we would largely be on the lower end rather than on the higher end of the range. At this point, there is no issue from a pricing perspective, and it is not like we are, you know, we are being slow on disbursements because of pricing. The slowdown in disbursements is a conscious call given the challenges that we faced. We don't really envisage at this point of time for any pricing drop to happen, at least in FY 2027.
Okay. My question was, on the other side, you know, like should we look at, relook at our pricing in terms of revising upwards? That was my question. Fine. Thank you. Sure.
Aravind, We'll keep evaluating it, but at this point of time, there is no proposal on the table to revise the pricing downwards or upwards.
Understood. Thank you.
Thank you. The next question comes from the line of Shubhranshu Mishra from PhillipCapital. Please go ahead.
Hi. Good morning. Two or three questions. The first part is, of the disbursement that you have got in FY 2026, what proportion is coming from the top-up loans, and what proportion is to repeat customers? Second is, what is the proportion of collections which is still cash collections? Third is what has been the write-off in FY 2026? Thanks.
Shubhranshu, I think the proportion of top-ups and repeats continue to be at the same level. What we used to tell you is about 10%-15% of loans, you know, are people who are running multiple loans with Five-Star. You'll probably see similar levels from a disbursement side also, which is about 10%-12% coming in through top-ups and repeats. On your second question, in terms of the cash collections, I think we had given this data. We are about 84% of collections that came in digital, you know, in Q4 FY 2026, so 16% will be in cash. This has been gradually moving up. If you look at over the last one year, we have moved this up from 80% to 84%.
If you look at the last two years, we've actually moved it from about, 53% to 84%. Our intent is how close can we get to about 90%. You will always have to handle some level of cash given the profile of borrowers that we are operating in.
What is the proportion of write-offs in 2026?
You're talking about Q4?
No, no. The entire FY 2026.
FY 2026, our write-off would have been about close to INR 160 crore. I can give you the exact number later, but somewhere around INR 160 crore-INR 165 crore.
Right. Just one follow-up. What is the proportion of repeat customers in the disbursement? 10%-15% is top-up. How much is repeat?
Shubhranshu, we don't distinguish. Yeah, top-up and repeat are pretty much, you know, we track it as a same metric. The 10%-15% that we are putting is a combination of top-up and repeat.
Right. Thank you so much.
Thank you. The next question comes from the line of Rahul Kumar from Vakaria Fund. Please go ahead. Rahul, please go ahead with your question and unmute your line in case if you're on mute. Since there is no response, we will move to the next participant. The next question comes from the line of Vansh Solanki from RSPN Ventures. Please go ahead.
hello. good morning, management. hope I am audible.
Yes.
I'm new to with this company, I want to understand the process of sourcing and underwriting with a collection. Like, I have read in many research reports and also with the other companies which I'm tracking that the below INR 5 lakh segment is very connector-based segment, and we have to submit a lead from a connector majorly. Also, what is turnaround time for our disbursement and what kind of risk profile customers we are approaching in below INR 5 lakh segment and INR 5-10 lakh segment?
See, Vansh, we have a very proprietary underwriting which is based on, you know, evaluation of the character, cash flow and collateral. This is a methodology. That we have perfected over the last 20 years of operating in this segment. I think we can, you know, we should probably get into a call separately so that we can actually take you in detail. Because in an earnings call, it will be very unfair for us to explain all of these to the other investors and analysts who are present. Please, you know, you have the mail IDs of Prashant and me, you know, on the presentation. Do write to us. We'll fix up a mutual time, and we'll take you in detail through the underwriting process, the turnaround time and various aspects.
Okay. Sure. Another question. If I can ask here or all the question I need to ask on the offline only?
Let's connect offline because you're new to the company. I think it'll be good for you to understand the company first before coming out with your questions. Let's connect offline and we'll clarify. We'll explain to you about the company and also clarify any queries you may have.
Okay. Sure. Sure.
Thank you. The next question comes from the line of Divyansh Gupta from Latent PMS. Please go ahead.
Hi, sir. Couple of questions. Just wanted to understand how does the sourcing and fulfillment strategy for the more than 5 lakh ticket size differs from our, let's say, existing less than 5 lakh customer profile? Does the CIBIL profile that we are targeting any different?
No, Divyansh. The underwriting process is largely the same. Like I said, it's based on evaluation of the character, cash flow and collateral, and we look at credit bureau footprint of the customers, what kind of loans they already have, and what is the performance on those loans. There is actually no difference between underwriting, let's say, a INR 5 lakh-INR 10 lakh customer vis-a-vis a INR 3 lakh-INR 5 lakh customer. Again, like, we offered to Vansh, happy to take you through the detailed underwriting process over a, you know, over a discussion. Please write to us in case you need any further clarifications, and we'll be happy to take you through in detail.
Sure. My question was actually also on the sourcing part, not necessarily underwriting.
No, no.
... is the sourcing challenges.
Both of them are same.
Both of them?
No, no. Yeah.
Got it. Got it. The second question is that we mentioned in the call that, let's say, 84% customers are paying us digitally, right? When we want to take it to, let's say, 90. The question was that if the customers are paying digitally, then they start to have a digital footprint, right? Which goes against one of the reasons why Five-Star is a better lender to those customers because they don't have banking history, right? Now, with if they are making digital payments, they have banking history. Does this lead to any, let's say, insight from any fintech or any player coming in and saying that, "Okay, now I have some banking data of these customers. I can also lend maybe a small personal loan." I'm not saying same ticket size or secured loan.
Just the data availability, does it lead to any player coming in? Anything that you have seen from your data?
Definitely whether Five-Star wishes or not, now more and more digital prints are being taken by people everywhere. That is inevitable. Coming to the direct answer, yes, Fintech can take up our customers, but you have to understand the need of our customers. Yeah, the need of our customer is not INR 25,000 or INR 50,000 or less than INR 1 lakh. Our average ticket size today, it's around INR 4 lakh. That's being used for business improvement, starting a business or a home renovation, or some personal in nature, which is used for marriage or education or health. First, the ticket size matters a lot when Five-Star comes into picture. Second is the tenure.
The fintechs can operate close to 6 to 12 months, whereas we can operate at seven years period. The really the EMI becomes more thinner when they come to Five-Star rather than going into fintech. We never saw fintech as our competitors. Ever since we have been saying because they operate in a, for a different working capital in nature, whereas Five-Star's loans are more into business constructing purpose. The end use is completely different. They may be giving a competition to the gold loans, who are also in the similar ticket size and similar tenure, but not the loans like secured lenders like Five-Star, where our loans are close to 4 to 5 and tenures are close to seven years.
Got it. Got it. Just one data question. In the Deck, we have the split of AUM that we give by cities, right? From, let's say last quarter it was around 1%, now it is showing as 2%. Just a data roundup or we are, let's say, putting in more effort to source higher ticket size from Tier 1 and 2 cities. Within a quarter it has optically showing a doubling.
I think, in Maharashtra we have started our operations, right? Maharashtra looks very.
Promising
... promising state. We are moving our branch network from close to 40 to 70, 80 branches in Maharashtra. When we enter into Maharashtra, we put branches in Tier 1 and Tier 2. Nashik will have a branches, Pune will have a branch, and Aurangabad will have a branch. Those branches have been shown in Tier 1 and 2, so that you see a little uptick in the percentage.
Got it. Got it. Just last question. In the last year, we had opened 96 branches, and let's say that was a tough period for us from a lending perspective. Assuming that the current collection trends holds or improve, we have mentioned that we are looking to open only 60 to 75 branches. Shouldn't we be getting more aggressive in launching more branches? Why slow it down?
No, I think, predominantly in last three years, our split branch mechanism and new branch mechanism has worked out very well. In Tamil Nadu, Telangana, A.P., where the major chunk of branches were put in in last three years, have given us a right foundation and infrastructure right in place when we want to double our growth comparing to last year. We think, this financial year we will take a little smaller number and run with 60 to 75 branches. If promising things that we see from newer states like M.H., Rajasthan, Gujarat, U.P., Chhattisgarh, definitely we will also increase the number of counts in those locations.
Got it. Got it. Understood. Understood. Thank you for your answers. All the best.
Thank you. The next question comes from the line of Chandrasekhar Sridhar from Fidelity International. Please go ahead.
Hi, good morning. I had a few questions. One, if you see the composition of the growth, a large chunk of the growth has come from the non-South markets, in the last, this year, on the AUM. Just maybe you can some geographical sense around different markets. I mean, AP has been notably weaker this year. Anything around that? That's my first question. Second, you had briefly sometime in the middle of last year said that you look at, affordable housing or getting to vehicles. I mean, where does that fit into your scheme of things at this point in time, maybe over the next 1-2 years?
Third question, to get to about 20% AUM growth, we need about INR 6,200-INR 6,300 crore of disbursements, which means that we need to sort of step up to INR 1,500, INR 1,400-INR 1,500 crore on the first quarter itself, where typically it's weak. How do you just think of that? Fourth, just how much more is left in terms of cost of funds to drop? Obviously this quarter a lot of the borrowing happened via ECB, so the incremental borrowing was largely ECB, so that's why we didn't see that. Just any more medium-term sense on how much more cost of fund can drop. The very last question is that asset quality is beginning to improve.
You're still holding on to somewhat similar credit cost level. Is this because we are trying to sort of up the coverage, you know, on some of the lower stages? I mean, the background also has been that RBI has now prescribed a minimum floor of even a 5% on Stage 2 for banks, and our Stage 2 coverage is lower than, you know, what the RBI prescription itself is. Thank you.
Yeah. Chandra, good morning. Many questions at one go. Last two questions on disbursement and quality, I'll ask Srikanth to answer it. Going from the first question, yes, last year, definitely the non-South growth was going up. As I rightly said, in Maharashtra, Rajasthan, Gujarat and Chhattisgarh and UP, the branches were put in. Our portion of South to non-South, close to 85% of our AUM, or even much higher, will be in South, where this over-leverage problem started to creep in. We had a hold on that very tightly for the first two quarters, for the June and September. We put our muted growth there and started to focus more on collections, as we've been talking for last 12 months.
Having said that, next, this financial year, you see all the big states coming back in a big way. That's how we see Tamil Nadu, Andhra, Telangana, and of course, to some extent Karnataka also, because the collections are stabilizing there. X-bucket collections in Karnataka also showed 99% in the last quarter. For the FY 2027, it'll be the growth of South for us, which will predominantly give us that 20% or even little more than that what we anticipate for the full year from South. On the second question.
Second question, products.
On the products, as, yes, we have been introduced affordable housing in some of the locations, but our focus was mainly to get back the micro LAP product back to its original growth. That was our first option because the yields are good, the returns are good, and the runway is great there. We will see micro LAP, the sweet spot of INR 3 lakh-INR 5 lakh in Five-Star kicking back in a big way in this financial year. Slowly we'll be getting into the affordable housing product where we want our sweet spot to be around INR 7 lakh-INR 8 lakh.
Next two years we may see even one more product getting added, that maybe we can call it out little later. On the asset quality and disbursement, you're right, INR 1,400 crore-INR 1,500 crore of disbursement has to happen. Yes, Srikanth.
Chandra, this is what we alluded. For example, last year, not FY 2026, even in FY 2025, we did about INR 5,000 crore of disbursements for the full year, which is almost at close to INR 425 crore-INR 450 crore on a monthly basis. This year, obviously we have consciously pulled back. The ability to push it by 20% on the back of one-year-old numbers is not a challenge at all. Today, you will probably see, and this will give you a lot more confidence maybe post the first quarter. Even the first quarter, we are targeting quite strong disbursements to come in. We don't really see a challenge getting to about INR 6,200 crore-INR 6,400 crore of disbursements to achieve a 20% growth.
See, credit cost levels, mathematically you are right. I think, with asset quality improving, we should start seeing benefit on the credit cost. At this point of time, there is not any tearing hurry for us to, you know, keep creating buffers on the provisions. Obviously, we will continue to keep creating appropriate level of ECL on our book. Like you said, while, I don't think that is going to come to NBFCs anytime soon because the ECL framework for bank itself is coming in only from 1st April 2027. I don't think that 5% is going to come on Stage 2 anytime soon for the NBFCs. Just that we are given that we are coming off a year when we have seen some challenges, possibly we are playing a little conservative from a credit cost levels.
Depending on how the DPDs stack up, you could see some benefit on the credit cost line kicking in in actuals. Lastly, to your question on the drop in cost of funds. See, if you exclude the ADB borrowings that we did, our overall cost for this quarter will be somewhere around 8.25%-8.3%. Given the, you know, macroeconomic challenges, the geopolitical challenges, it is, you know, creating a little bit of uncertainty in the, you know, in the, you know, borrowing space. At this point of time, I would probably say we don't expect, you know, too much of benefit to come in from cost of funds in the next financial year, but they'll continue to be a monitorable.
We will obviously keep pushing banks for much finer rates. Rating upgrade at least till the end of the year or maybe till the second half of the year is out of question till we start showing some benefit. Most likely, I think we should be borrowing at average rates of closer to 8.5 levels. Which means, you know, at a book level, you still have another 30, 40 basis points of cost, but that'll come over the next 2-3 years. If you're borrowing at 8.5, naturally the book has to come to about 8.5, right? But it'll probably take 2-3 years. You know, that much of juice could still be there in the book.
Geopolitical challenges are creating some, you know, some murmurs, especially on the liquidity side. We will get to know. Obviously, in April, we have not borrowed any monies, given the strong liquidity position that we are in. We'll get to know a little better over the next couple of months, and I think we'll be able to give you a better perspective in the next earnings call. At this point of time, we would say, I think we will largely be where we were in FY 2026. Yeah, FY 2026.
Thank you.
Thank you. We take the last question from the line of Aditya Das from Samatvam Capital. Please go ahead.
Hi, am I audible?
Yes.
Yes. Please go ahead with your question. Since there is no response from the participant, that brings us to the end of the question and answer session. I would now like to hand the conference over to the management for the closing remarks.
Yeah. Thank you all for taking this call with us. As we said in the opening remarks, you'll see the onward and forward growth coming back to Five-Star. I'm happy to give a closing comment that I'm happy to share that board has declared the same dividend what we got in last financial year. That gives also a good positive sign to the retail shareholders. With this positive comment, I'm thanking each and everyone who have joined this call. See you soon in the next earnings call. Thank you.