The Hindu : Rated NBFCs in good shape

Online edition of India's National Newspaper
Sunday, Mar 21, 2004

Business

Business

Rated NBFCs in good shape — CRISIL

By Our Corporate Reporter

CHENNAI, MARCH 20. The improved interest spreads on the back of a fall in interest costs have resulted in a doubling of the core profitability of non-banking finance companies in two years. The core profitability, as measured by the net profitability 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 improve their profitability, says CRISIL in a recent report.

NBFCs rated by CRISIL, have a higher consolidated NPM than banks. The rating agency has stated that this was mainly due to the progressive improvement in the resources profile of NBFCs, their greater business diversity, a relatively higher decline in funding costs and the absence of a negative carry on their investments in government securities.

In addition, the NBFCs have harnessed their intrinsic strengths such as their wide 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 difficulty in maintaining yields in a fiercely competitive business environment.

CRISIL has considered the agglomerated financial performance of 21 NBFCs from financial years 2000-01 to 2002-03 which had total funds deployed of Rs. 29,700 crores. Out of them 17 were primarily into vehicle financing. The NPM of these vehicle 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 of 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 NBFCs. 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 between 2000-01 to 2002-03.

On a stock basis, however, their interest costs are still higher than those of banks, which are increasingly emerging as active competitors to NBFCs in retail financing while being already entrenched in wholesale or corporate financing, according to the CRISIL study. Nevertheless, incrementally, on an all-inclusive funding 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 continue 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 interest spreads since interest yields are not expected to decline significantly in the near term.

Printer friendly page
Send this article to Friends by E-Mail

Business

News Update

Stories in this Section

Study predicts 8 p.c. growth in textile exports

BoI to appeal against London HC order

Rated NBFCs in good shape — CRISIL

Increased Russian enquiries for Indian tea

IDFC top managers resign

Saudi JV for fibreglass pipes in Goa

Forex reserves up $464 m

Smart revival seen in refrigerators

Medical transcription industry staging a comeback