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Rated NBFCs in good shape CRISIL
By Our Corporate Reporter
CHENNAI, MARCH 20. The improved interest spreads on the back of a fall in intere
st costs have resulted in a doubling of the core profitability of non-banking fi
nance companies in two years. The core profitability, as measured by the net pro
fitability margin (NPM), more than doubled to 1.90 per cent in 2002-03 from 0.77
per cent in 2000-01. The marginal increase in fee income and strict control on
overheads, especially in NBFCs engaged in vehicle financing, also helped to impr
ove their profitability, says CRISIL in a recent report.
NBFCs rated by CRISIL, have a higher consolidated NPM than banks. The rating age
ncy has stated that this was mainly due to the progressive improvement in the re
sources profile of NBFCs, their greater business diversity, a relatively higher
decline in funding costs and the absence of a negative carry on their investment
s in government securities.
In addition, the NBFCs have harnessed their intrinsic strengths such as their wi
de reach and strong customer relationships.
CRISIL also believes that these NBFCs will maintain their core profitability in
the near term. However, over the medium term the net profit margins will decline
by up to 50 basis points due to the pressure on interest spreads, given the dif
ficulty in maintaining yields in a fiercely competitive business environment.
CRISIL has considered the agglomerated financial performance of 21 NBFCs from fi
nancial years 2000-01 to 2002-03 which had total funds deployed of Rs. 29,700 cr
ores. Out of them 17 were primarily into vehicle financing. The NPM of these veh
icle finance NBFCs have increased to 1.55 per cent from 0.54 per cent in the two
-year period under reference. CRISIL believes that the NPM is a better measure o
f profitability than traditional indicators such as return on average assets.
Growing interest spread
The increase in interest spreads was the key driver of the NBFCs' enhanced core
profitability. Overall the interest spread increased by 118 basis points for the
21 NBFCs between 2000-01 and 2002-03.
The secular decline in interest rates witnessed in 2000-01 has benefited the NBF
Cs. Since many of them finance their operations through market borrowings, this
resulted in a sharp decline in interest costs in the period under reference. On
an aggregate, interest costs declined by around 248 basis points for all NBFCs b
etween 2000-01 to 2002-03.
On a stock basis, however, their interest costs are still higher than those of b
anks, which are increasingly emerging as active competitors to NBFCs in retail f
inancing while being already entrenched in wholesale or corporate financing, acc
ording to the CRISIL study. Nevertheless, incrementally, on an all-inclusive fun
ding cost basis, highly rated NBFCs have been able to source funds at rates that
are even lower than that of banks.
Outlook
In the near term, CRISIL believes that the NBFCs in their portfolio will continu
e to maintain core profitability at close to their 2002-03 levels.
The decline in interest costs in 2003-04 will enable them to maintain their inte
rest spreads since interest yields are not expected to decline significantly in
the near term.