Non-banking finance companies (NBFCs) are recording higher consolidated net profitability margin (NPMs) than banks. At least this is the case with 21 NBFCs rated by Crisil.

According to a Crisil study, NBFCs, in their rated portfolio, more than doubled their core profitability between financial year 2000-01 and 2002-03.

The NPM of NBFCs increased sharply from an average 0.77 per cent in 2000-01 to 1.90 per cent in 2002-03 on the back of their growing interest spreads.

The net NPM of vehicle finance NBFCs increased from 0.54 per cent to 1.55 per cent during the period.

For the study, Crisil has considered the aggregated financial performance of 21 NBFCs between 2000-01 and 2002-03.

The growing interest rate spread is the key driver of profitability. NBFCs' interest rate spread increased by 1.18 percentage points between 2000-01 and 2002-03.

Since NBFCs finance their operations from market borrowings, this resulted in a sharp decline in their interest cost in the reporting period. On an aggregate basis, interest cost declined by around 2.48 per cent for all NBFCs between financial year 2000-01 and 2002-03.

However, their interest costs are still higher than those of banks.

For the period under review, the fee-based income of all NBFCs improved marginally from 0.55 per cent in 2000-01 to 0.64 per cent in 2002-03, resulting in a cumulative increase of nine basis points during the period.

According to Krishnan Sitaraman, head, financial sector ratings, in the near term, Crisil believes that NBFCs, in their portfolio, will continue to maintain their core profitability at close to their financial year 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.

This, coupled with the control on overheads, will enable NBFCs to maintain their core profitability in the near term, the study said.

In the medium-term, however, the rating agency said NBFCs will witness an up to 50 basis point decline in their core profitability as interest yields are expected to decline at a sharper rate than interest costs.

This will happen as high-yielding contracts are replaced by relatively lower-yielding ones because of the intense competition in segments such as vehicle finance.

However, it added that the drop in profitability will not be higher than this estimate since it expects most of its rated NBFCs to follow a strategy of profitable growth, whereby NBFCs will focus on their niche strengths and not sacrifice profitability for the sake of business growth.