Five Star Business Credits raises Rs 114 crore from Morgan Stanley Private Equity Asia
Five Star’s typical clients include tea shop owners, vegetable vendors, small machine owners, provision stores, waste paper recycling units, tailors, and power looms.
The Matrix Partners-backed venture, registered as a non-banking finance company, plans to increase its loan portfolio by five-fold over the next three years to Rs 1,000 crore. The deal comes at a time when investors are seeing rising potential in the small business lending market, which they expect will grow as large as the microfinance industry.
Five Star’s typical clients include tea shop owners, vegetable vendors, small machine owners, provision stores, waste paper recycling units, tailors, and power looms. These customers typically don’t have a credit profile and cannot raise debt from banks.
Founded in 1984, Five Star started expanding its business by focusing on the small business space only in 2010 after the current managing director D Lakshmipathy took charge of the business. At that time, the company had a loan book of Rs 18 crore which has now expanded to Rs 200 crore primarily focused on Tamil Nadu. Five Star had earlier raised Rs 33 crore from Matrix Partners India in two rounds of funding in 2014 and 2015.
“Five Star has almost doubled its number of branches in the last year and is poised for growth in both small business loans and housing loans. We believe Five Star addresses a very large demand gap with great unit economics,” said Vikram Vaidyanathan, MD at Matrix Partners, who is also on the board of the company.
Five Star plans to grow the loan portfolio by over 50% this year, expand its branch network from 67 to 250 in the next three years and have a presence across Tamil Nadu, Karnataka, Andhra Pradesh, Telangana and Kerala. Its average loan size is Rs 3 lakhs, with a tenure of up to 7 years and it has 9,000 active customers right now. Five Star has also strengthened its management in the last one year, roping in Asirvad Microfinance’s Srikanth G as chief financial officer and Spark Capital’s Rangarajan Krishnan as chief operations officer.
Funding will be used by the Five Star Business to expand into housing loans as well. The company recently received a licence from National Housing Bank, and is poised to set up a subsidiary.
This is the second investment by Morgan Stanley, which has also backed former Citibank senior executive Ramesh Ramanathan’s microfinance company Janalakshmi.
“We think the portfolio in small business financing can pan out the way microfinance did in 2005-06,” said Venky Natarajan, managing partner at Lok Capital.