Five Star Business Finance Ltd, a Chennai-based non-banking finance company that specialises in small-ticket business and housing loans, has raised ₹114 crore from a fund managed by Morgan Stanley Private Equity Asia.

This is the second institutional investor in Five Star. In March 2014, Matrix Partners India, a venture capital firm, had invested an undisclosed amount in the company for a minority stake.

Matrix followed it up with another investment in 2015. Matrix continues to be an investor in the venture.

Expansion Five Star will use the money to expand its business in all Southern States. It is now present in Tamil Nadu, Andhra Pradesh and Karnataka.

Since the last fund raise, Five Star has grown in terms of the number of branches it operates and the loan book. It now has 67 branches, which will go up to 100 by the end of this financial year and to 250 by 2019, according to K Rangarajan, Chief Operating Officer, Five Star Business Finance (earlier Five Star Business Credits Ltd).

For the year ended March 31, the company had a loan book of ₹200 crore, up 50 per cent over the previous year. This will go up to ₹1,000 crore by 2019, says Rangarajan. Two-thirds of this business will come from the small-business finance vertical and the rest from housing finance. Its profit after tax for last financial year was ₹13.7 crore.

Besides its main small-business lending business, the company is also into housing finance now. It received housing finance licence from the National Housing Bank, while in December 2015, FMO, the private sector development bank of the Netherlands, subscribed to ₹30 crore of non-convertible debentures.

Thanks to its borrowing cost coming down, the lending cost for Five Star Business is also down — from 20-22 per cent at the time of its first fund raise in March 2014 to about 20-22 per cent now.

According to D Lakshmipathy, Chairman and Managing Director, Five Star Business Finance, Morgan Stanley’s investment in the company is a validation of its business model. It is now focussing on urban, semi-urban and fast-growing rural areas for business and the average loan size is up from ₹2 lakh at the time of the first fund raise to about ₹4 lakh now. The company’s net NPA on a six-month basis is 1.5 per cent and for three months it is 4.5-5 per cent.

Financial services The financial services industry in India offers tremendous opportunity and this investment marks Morgan Stanley Private Equity Asia’s second investment in this space in India, according to Arjun Saigal, co-head of Morgan Stanley Private Equity Asia.

Along with the growth, Five Star Business has strengthened its management team, with Rangarajan joining as COO, a new CFO and three independent directors — Bhama Krishnamurthy, previously with SIDBI; A Ramanathan, a former Nabard executive; and, Kalpana Iyer, formerly with Citibank.

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