Final Year Dissertation Report FMS MBA F PDF

Final Year Dissertation Report
FINAL YEAR DISSERTATION
“Modeling determinants of financial performance of Non

Banking finance companies in India”
A project report submitted in partial fulfilment of the requirements for the

degree of Master of Business Administration (Full time) from FMS, DELHI.
Submitted by: Under guidance of:
Abhishek Kumar Singh Dr. Pankaj Sinha
FMS MBA(FT), Batch of 2014 Faculty of Management Studies
Roll no: F-77 University of Delhi
Date: 21/03/2014
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Table of Contents
CERTIFICATE .................................................................................................................................................. 3
ACKNOWLEDGEMENT ................................................................................................................................... 4
EXECUTIVE SUMMARY .................................................................................................................................. 5
RATIONALE OF THE STUDY............................................................................................................................ 6
INTRODUCTION ............................................................................................................................................. 7
LITERATURE REVIEW ..................................................................................................................................... 8
DATA & METHODOLOGY................................................................................ Error! Bookmark not defined.
Data ......................................................................................................................................................... 10
Econometric Methodology ..................................................................................................................... 11
Theoretical Framework ........................................................................................................................... 13
Model 1 ........................................................................................................................................... 13
Model 2 .......................................................................................................................................... 16
EMPIRICAL FINDINGS AND RESULTS ........................................................................................................... 19
Multiple Regression Model: Model 1 ..................................................................................................... 19
Multiple Regression Model: Model 2 ..................................................................................................... 25
CONCLUSION............................................................................................................................................... 31
BIBLIOGRAPHY ............................................................................................................................................ 32
APPENDICES ................................................................................................................................................ 33
Financial Data Excel................................................................................................................................. 33
Bloomberg data ...................................................................................................................................... 35
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CERTIFICATE
This is to certify that the Project Report titled “Modeling determinants of financial performance
of Non Banking finance companies in India” is based on my original work conducted under the
guidance of Dr.Pankaj Sinha and no part of this work has been copied from any other source.
Material wherever borrowed has been duly acknowledged.
Dated:21.03.2014
Dr.Pankaj Sinha Abhishek Kumar Singh

(Project Guide) FMS MBA(FT), 2012-14
Faculty Of Management Studies Roll No: F-077
University Of Delhi
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ACKNOWLEDGEMENT
First and foremost, I‟d like to thank my guide Dr. Pankaj Sinha, for providing me with an
opportunity to work under him through the medium of this research project. He has been
instrumental in my being able to complete this project to the best of my capabilities.
I would also take this opportunity to express my gratitude and thank all other individuals who
have been kind enough to spare their precious time in sharing insights with me, which has
facilitated in making this project a more fruitful outcome. A special mention to acknowledge the
assistance provided by some of our esteemed faculty members, my friends, family and industry
professionals, for always being available to attend to all my doubts, inhibitions and queries.
A word of thanks also to the administrative staff at FMS, for their perennial support in making
available all possible facilities, in turn aiding my research for this project.
Finally, I wish to thank all my colleagues at FMS for their constant support and motivation,
which has contributed in making this project a better effort.
Abhishek Kumar Singh

FMS MBA(FT), 2012-14
Roll No: F-077
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EXECUTIVE SUMMARY
A study was conducted based on modeling of financial performance of top performing NBFCs in
India. The study takes into account 8 financial variables of concerned companies. The study‟s
sample size consists of 10 Non Banking financial companies having significant asset size across
India. The study has been prepared using 5 years‟ of data. So the dataset is both cross-sectional
and time-series data. The mathematical modeling, statistical inferences have been drawn using
SPSS.
The financial performance gets reflected in the profitability of the firm and thus this study entails
modeling of profitability and finding its relationship with different financial parameters.
Traditionally Return on Asset and Return on Net Worth have been taken as measure of
profitability in different studies. But here, besides modeling profitability with ROA as measure
of profitability , in an another case Net Profitability Margin has been chosen as the proxy for
measuring profitability in accordance with CRISIL‟s methodology of ranking NBFCs; an
approach completely focused on NBFCs in India as regulatory environment vary a lot in
different economies and thus measures of performance can vary.
Profitability equation has been modeled using different financial parameters which are a part of
CAMEL approach concerning asset quality ,liquidity ,operating efficiency, credit costs, earnings
of the companies to result into development of a robust financial performance model. The
models have been tested for multi-collinearity, hetero-skedasticity and auto-correlation
The implications from the statistical inferences have also been documented in the report. The
study shows the relationship between the dependent variables and independent variables and its
business implications. This helps in interpreting the behavior of financial variables and
establishes a meaningful connection with operational activities.
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RATIONALE OF THE STUDY
With ever expanding financial system of the country, Non Banking Financial companies have
emerged as the torchbearers of this financial growth and the recent upsurge in the number of
registered NBFCs and series of regulatory steps taken by RBI to ensure a stable system has
posed an important question. What measures the profitability of these entities and how these
variables are connected to the general financial parameters of companies which serve as the
barometer of their growth and stability.
The present study will discover the factors involved for determination of financial performance
of Non Banking Financial companies in India. There has been always a disagreement over which
is the better measure of profitability: Return on Asset, Return on Net Worth or Net Profitability
margin. Traditionally Return on Asset and Return on Net Worth have been used to measure
profitability but with changing market environment and regulatory policies, firms have been
changing their financial yardsticks to measure profitability and financial performance. In current
scenario, credit rating companies like ICRA are moving towards using Net profitability margin
as a core measure of profitability; a better measure than Return on Asset.The study also covers
comparative analysis of how ROA depends on its determinants vs how Net profitability margin
is related to set of financial parameters. We will be able to find out the level of correlation
between parameters and how strongly they change with variations in values.
:
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INTRODUCTION
NBFC sector is undergoing through a landmark shift due to tightening regulatory norms and
expanding business portfolios of the companies. The new guidelines propose that all NBFCs,
whether deposit taking or not, are mandatorily required to maintain Tier l capital at 10% vs.
7.5% required to be maintained presently while the norms for overall capital adequacy ratio
have been kept unchanged at 15%.It would be an interesting situation to see how the
profitability of the these financial companies would get affected by the new capital requirements
of the companies.Thus it is very important in present context to come up with a model to express
true relationship between profitability and its determinants.
The NBFC sector is facing the dual heat of increasing credit costs and elevated funding costs in
current times; however, credit rating companies like CRISIL and ICRA have been doing stress
tests on the asset quality, capital provisions and funding costs of top performing NBFCs which
show that the efficient and safe level of pre-provision operating profit gives a strong cushion
against upcoming credit quality issues. Cost of funds for firms continue to sustain on the higher
level as the pie of bank funding in the overall borrowings of NBFCs remains be high along with
the high levels of bank base rates during financial year 2013. Furthermore, the cost of funding in
future years of would be significantly influenced by the RBI guidelines on the funds that can
be raised by NBFCs through private issue of debentures. According to industry estimates,
private placements with retail investors form close to 6.5% of entire borrowings. On the
contrary the pie for individual NBFCs can go as high as 50% of borrowings; in such a scenario
funding cost of these firms could get elevated in future by 4-50 bps as NBFCs would bring in
policies to replace their retail fund mobilization from the private route to the more expensive
bank borrowing/ public issue route depending upon the companies share of retail private issues
and the amount of outstanding retail private issue debentures. Credit costs is a major determinant
of long term profitability of a company and impacts in a big way. Its of utmost importance to
decipher how increasing credit costs can impact the profitability of the top NBFCs.
Post financial crisis of 2008,drastic changes in economic environment has led to acute pressure
on asset quality of the companies. Non performing loans have shot up putting pressure on the
profitability. Especially, the difficult operating economic environment around the heavy and
medium commercial vehicle and construction equipment segments will be keeping the a quality
of the asset under huge pressure. The light commercial vehicles segment which has grown its
share aggressively in recent years across regions is also likely to face moderate to high asset
quality issues in its business portfolio.
Another important part of the discussion is impact of RBI‟s tightening of rules on financial
performance of NBFCs that lend against gold .To keep check on the aggressive growth of gold
loan providing NBFCs, RBI first took strict measures in 2011 and removed the priority sector
status it had provided them since a long time under which they can receive loans advanced by
banks to them for further lending the money against gold
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LITERATURE REVIEW
Khandoker, Raul and Rahman, conducted a study which established a relationship between
independent variables as; Net shareholders worth, Total liability, Total asset, and Operating revenue
and dependent variable as; Net Profit. It was observed that the companies liquidity,leverage and
operational efficiency has a major bearing on Profitability of Non Bank financial companies in
Bangladesh. While Net profit has a positive and significant relationship with Total Assets, Total
Liability, Net shareholders worth & Operating Revenue; it enjoyed negative relationship with Term
deposits and operating expenses. From the study the independent variables combined could explain
98.3 % variation in value of Net profit which has been taken as the measure of profitability.
Operating revenue had the highest impact on profitability and Net worth had least impact on
profitability.
Nibedita Roy (2013) in her paper evaluated the performance and financial health of the
financial institutions, more specifically gold .The empirical findings of the study were very
crucial in wake of upsurge in the volume of gold loan among organized sector players viz. banks
and Non Banking Financial Companies (NBFCs). Accordingly, The findings of the study have
determined out that the companies have higher level of debt in their capital structure than
required as optimum, aggressive and risky lending policy, lower level of liquidity, decreasing
NNPA ratio and increasing trend of capital risk weighted asset ratio.The author has used global
method of CAMELS rating to identify dependent and independent variables which measure
financial performance based on earnings, management capacity,Liquidity,Capital Adequacy and
Asset quality of the firm. Profit after Tax has been found to be significantly and positively
related to Advances to assets, Liquid assets to total assets.On the contrary PAT has found to be
in negative relationship with majority of the variables viz.Debt Equity ratio, NNPA, Investments
to Assets ratio, Gsecs to Total Investments ratio. Capital adequacy ratio has improved across
years based on directives of RBI while NNPAs have decreased showing a marked improvement
in quality of assets of companies.. The loans and advances portfolios of the companies have
seen a sharp hike over the years as evident from advances to borrowings and advances to assets
ratio. Companies have not done a very great job in terms of increase in liquid assets with respect
to total assets in the portfolio which brings in a level of financial risk into the system. Companies
have been using high leverage to run their businesses which has eaten down the profits and have
thus led to reduced profitability. Spreads of firms have seen no major variations and thus
companies with lower spreads and High advance to borrowing ratio should be cautious of the
financial decisions that they make as it might adversely impact the profitability.
Alam,Raza & Akram (2011) examined the financial performance of asset leasing companies
from 2008-10. The number of leasing companies are gradually going down in recent years on
account of decreasing profitability and slow business. The factors attributable to decreasing
profits are due to the high provisioning cost, ever increasing discount rate, high
operating expenses, uncertain economic conditions, political anarchy, high competition
with banks and other financial companies and high dependence on borrowing from other
institutions. Researchers suggested to allow the leasing companies to expand business in real
estate segment to enhance profitability. A single regulatory body was suggested to exist in place
of multiple bodies for leasing companies and banking sector
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Kantawala(2011) examined the financial performance of different groups of NBFCs

Separately on account of the fact that business model of different categories of NBFCs differ
along with the operating environment and market dynamics.It was concluded from the study that
profitability,liquidity and leverage ratios bear a significant difference depeding on the NBFC
category for which they are being measured.Four categories of NBFCs have been considered in
the study viz. Leasing,Loan finance,Hire purchase,Trading and investment companies.From the
analysis of the study it was inferred that that Gross profit to Total income ratio,Profit before
Tax to Total Income ratio, Profit after Tax to Asset ratio and Retained earnings to Profit after
Tax ratios have come out to be maximum for the Trading and investment holding companies.
Dividend to Profit after Tax and Tax to Profit after Tax ratios are maximum for Loan
companies showing lowest Retained profit to Profit before Tax ratio for loan companies. Interest
coverage ratio and Profit after Tax to Net worth are found to be maximum for Hire purchase
companies. Total income to Total assets has been found to be maximum for asset leasing
companies. Amongst the leverage ratios Borrowings to Total assets, Debt to Total assets, Debt to
Net worth are maximum for Hire Purchase companies closely followed by asset leasing
companies due to a relatively higher threshold of level of permissible deposits that can be taken.
Bank borrowing to assets and Bank Borrowing to Total borrowing came out to be highest for
leasing companies whereas net worth to total assets has found to be maximum for trading and
Investment holding Companies
Suresh Vadde (2011) evaluated the financial and organizational performance of private financial
and investment companies (excluding insurance and banking companies) during the year 2008-
09.The post analysis results showed that growth in both main income and other income ,went
down during the year. Though on the other side, growth in total expenditure also decreased, still
it was at higher level than the income growth. The major reason for the growth in expenditure
was attributed to the growth in interest payments.Following, operating profits of the studied
companies went down along with the decreasing profitability. A huge chunk of funds raised
during this financial year was in form of borrowings. Other major share of funds was acquired
by raising new fresh capital from the capital market. Majority of the funds raised during the year
were put as advances and invesments in the credit market. However, its ratio in total
applications of funds went down..
Syal & Goswami(2011) analyzed financial performance and growth of the non-banking financial
institutions in India in the last 5 years which was insightful for the potential investors to get the
knowledge about the financial performance of the non-banking financial
institutions and be helpful in taking effective long-term investment decisions. The
growth of NBFCs has been mainly due to their advantage over the commercial banks because of
their strong customer orientation and connect which is inherently a result of the customer
oriented and customized services they provide to their clients, fast and simplified service
policies adopted by them and relatively high rate of interests on the term and other deposits.
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DATA
The research is empirical in nature. The data of 10 topmost listed NBFCs of India in terms of
asset size were selected for 5 years (2009-2013). The reason for selection for 5 years time span
was that one business cycle is completed in 5-6 years. The reason to select these 10 companies
were manyfold. Firstly NBFC market in India is still very concentrated and these top 10
companies combined have a major share in total asset size of all listed players in India.
Secondly,these 10 companies are truly representative of separate NBFC types of companies
whether it be gold loan ,asset financing,leasing,vehicle financing or others.Vast and mix of
business portfolios of the sample companies make it representative of effects that can happen on
NBFC market either due to economic conditions or market specific reasons.Thirdly,getting all
the data required for the empirical analysis was a major obstacle too as number of listed NBFCs
in India is still very less and getting their financial data is also a majorThe data for this study was
collected from different sources like from the Bloomberg terminal, audited financial results
published by the l10 companies. Further, other sources like research reports, journals, financial
newspapers and websites, etc. were considered whenever found necessary. Hence the data is
totally transparent in context of authenticity. SPSS software was used for data analysis.
A detail of these companies is given below:
COMPANY TOTAL ASSETS (Rs Mn) MARKET CAP(Rs Mn)
Shriram Transport 539057 1,30,253
IDFC LTD 535330 1,69,210
M&M Financial Services 270708 146372
IFCI LTD 245980 39970
SREI Infra 226591 9181
Cholamandalam Finance 215707 31365
Bajaj Finance 203207 58330
Sundaram Finance 158227 55975
Shriram City 155886 63201
Magma Fincorp 50963 12051
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ECONOMETRIC METHODOLGY
For the analysis of panel data for five years i.e. 2008 to 2013, the following steps were taken on
the data:
Tests to check conditions of Regression

Multiple Regression
 Tests to check conditions of Regression
Three econometric problems are being tested here to check for violation of assumptions of
regression, namely:
I. Heterokedasticity:
The condition of classic linear regression model implies that there should be homoskedasticity
between variables. This means that the spread should be constant and same. Variance of
residuals should be constant otherwise, the condition for existence of regression,
homoskedasticity, would be violated and the data would be heteroskedastic.
II. Autocorrelation:
Another basic assumption of regression model says that the covariance between error terms
should be zero. This means that error term should be random and it should not exhibit any kind
of pattern.
Cov (µt , µs) = 0
If there exists covariance between the residuals and it is non zero, this phenomenon is called
autocorrelation. To test for autocorrelation, Durbin Watson statistic is used.The Durbin–Watson
statistic is a test statistic used to find the existence of autocorrelation (a relationship between
values of variables separated from each other by a certain time lag) in the residuals (prediction
errors) from a regression analysis. Mathematically, auto-correlation represents the degree of
similarity between a given time series and a lagged version of itself over successive time
intervals
The value of the Durbin-Watson statistic generally ranges from 0 to 4. As a general rule,if the
residuals are uncorrelated then the Durbin-Watson statistic is somewhere around 2. A value close
to 0 shows very strong positive correlation, while a figure of 4 indicates very strong negative
correlation.
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III. Multicollinearity:
The problem of multicollinearity arises, when there exists a linear relationship between the
explanatory variables of regression. multicollinearity is the error situation in a regression
equation where the correlations among the variables are very strong. Multicollinearity tend to
enhance the standard errors of the coefficients. Enhanced standard errors due to multicollinearity
problem means that coefficients for some independent variables could be found not to be
significantly very different from zero, whereas without lower standard errors, these same
coefficients may appear to be significant.
In other words, multicollinearity misleadingly inflates the standard errors. Thus, presence of such
an error makes few variables statistically insignificant while they should have been otherwise
ideally significant.This results in biased and inconsistent estimates of OLS as well as Beta. T-
statistics are also affected and biased that leads to biased hypothesis testing.
Multicollinearity can be detected through 2 methods. One is checking the level of correlation
among the variables in correlation matrix. While the other is checking for the value to be in
tolerable limit through variance inflationary function test.
III.i. Correlation Matrix

The correlation matrix below shows that there is reasonable relationship among all the variables
of the model.In case there are correlations figures greater than 0.7 or lesser than -0.7 then there
are evident signs of multicolinearity. In general the range of correlation is from -1 to +1 and the
threshold limit of 0.7 is typical in time series analysis. In case there is multicollinearity existing
in the model than then omit one of the variables with high correlation.
III.ii. Variance Inflationary Function

Variance inflation factors (VIF) measure by how much the variance of the modeled coefficients
from the regression increase in case there is no correlation among the independent variables. If
no two independent variables are correlated, then all the VIFs should be 1. The benchmark for
tolerable limit is 5.In case VIF for one of the variables is somewhere around 5, then there is
collinearity associated with that particular variable.
 Multiple Regression
Multiple regression technique has been used to model the relationship between profitability and
its determinants. In this regard, an attempt was made to develop a multiple regression equation
using identified key variables. In one case, The Net Profitability margin was used as dependent
variable and in another case Return on Assets was used as dependent variable with other
variables like (Cost to income ratio, Net Interest Margin, Gross Non performing asset ratio,
Capital risk weighted asset ratio, Return on equity, Debt equity ratio) being used as independent
variables in both the cases. The regression coefficients indicate the amount of change in the
value of dependent variable for a unit change in independent variable.
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THEORETICAL FRAMEWORK
Model 1 :
To investigate the six variables identified in this study associated with the impact on Net
Profitability Margin of top ten listed NBFCs, this study undertook an empirical testing of a
model with the following framework:
Net Profitability Margin = f (Cost to income ratio, Net Interest Margin, Gross Non performing
asset ratio, Capital risk weighted asset ratio, Return on equity, Debt equity ratio)
NPM = β0 + β1NIM + β2CI + β3 GNPA + β4CRAR + β5ROE + β6 DE

where
NPM= net profitability margin
NIM= net interest margin
CI= cost to income ratio
GNPA=Gross Non performing asset
CRAR=Capital risk weighted asset ratio
ROE= Return on equity
DE= Debt equity ratio
The above model tests the following null hypothesis “there is no significant impact of the factors
upon the profitability.
Dependent Variable
Net Profitability Margin
Net profit margin is the percentage of revenue remaining after all operating expenses,
interest, taxes and preferred stock dividends (but not common stock dividends) have been
reduced from a company's total revenue.Post financial crisis of 2008 as regulatory concerns
have deepened over NBFC functions and supervision, credit rating companies like CRISIL have
come up with the concept of core profitability measured by Net Profitability Margin . CRISIL
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believes that the NPM is a better measure of profitability than traditional indicators such as
return on asset.
Independent variables
1. Cost to Income Ratio
Cost to income ratio is defined as non interest cost,excluding bad debt expenses ,divided by the
total of net interest income and non interest income. Although the ratio is related to both cost and
income, the focus of the ratio is more on the cost side .Non interest costs are seen as those share
of a banks costs which can be contolled..The reason cost to income ratio does not contain bad
and doubtful debt expense is because such an expense generally shows the quality of financial
decisions made in earlier periods rather than current performance of bank. And this ratio would
be severely disturbed in case major write offs are done.
2. Capital Risk Weighted Asset Ratio
CRAR is the measure of firm capitalization and is a ratio of NBFCs Tier1+Tier2 capital to risk
adjusted assets. This ratio below a minimum threshold indicates that the bank is not suitably
capitalized to expand its operations and portfolio and should take necessary steps to capitalize
itself as directed by RBI mandatory regulations
CAR = Tier I capital + Tier II capital / Risk weighted assets
Tier I Capital includes paid-up equity capital, statutory reserves, capital reserves, and perpetual
debt instruments eligible. Tier II capital is classified as secondary capital which includes
undisclosed reserves, loss reserves, subordinated term debt, etc.
3.Gross Non Performing Asset(%)
The gross NPA to loans ratio is considered as a measure of the asset quality and gives a look
into company's loan portfolio. An NPA are the assets for which interest has not been paid for
more than 180 days (or 6 months).Higher ratio shows increasing bad quality of loans are
present in the portfolio
4.Net Interest Margin
Net Interest margin is an important measuring performance metric that evaluates the success of
a firm‟s investment decisions as opposed to its debt structure of the company. A negative Net
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Interest Margin depicts that the firm failed to take optimal financial decision, as interest expenses
were greater than the returns generated by investments.
Net Interest Margin is the ratio of net interest income to average interest-earning assets Where,
Net interest income is the difference between interest income and interest expense. Average
Interest-earning assets are loans / advances given to borrowers and investors by NBFCs.
Average of the beginning to end of the period is considered for exact calculation.
5.Return on Equity
This ratio indicates profitability of a company by comparing its net profit to its average
shareholders' equity. ROE measures how much the stockholders and investors earned on their
investment in the company. The higher is the return on shareholders equity, the more efficiently
management is operating and utilizing its equity in the company.
6.Debt to equity ratio
A measure of a company's financial leverage found out by dividing its total liabilities by average
shareholders' equity. It indicates the level of equity and debt the company is using to finance its
assets or in short the level of financial leverage company is resorting to run its business. A high
debt/equity ratio usually means that a firm has been very much aggressive in financing its
operations and growth with debt. This might bring in a factor of financial risk as earnings could
become volatile as a result of the excessive interest expense
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Model 2 :
To investigate the six variables identified in this study associated with the impact on Return on
Asset of top ten listed NBFCs, this study undertook an empirical testing of a model with the
following framework:
Return on Asset = f (Cost to income ratio, Net Interest Margin, Gross Non performing asset
ratio, Capital risk weighted asset ratio, Return on equity, Debt equity ratio)
ROA = β0 + β1NIM + β2CI + β3 GNPA + β4CRAR + β5ROE + β6 DE

where
ROA=Return on Asset
NIM= net interest margin
CI= cost to income ratio
GNPA=Gross Non performing asset
CRAR=Capital risk weighted asset ratio
ROE= Return on equity
DE= Debt equity ratio
The above model tests the following null hypothesis “there is no significant impact of the factors
upon the profitability.
Dependent Variable
Return on Asset
This ratio indicates how profitable a firm is with respect to its total asset base. The return on
assets (ROA) ratio shows the capacity of the management in employing the company's total
assets to realize high profits. The higher the return on assets , the more efficiently company‟s
management is utilizing its asset base.
Independent variables
1. Cost to Income Ratio
Cost to income ratio is defined as non interest cost,excluding bad debt expenses ,divided by the
total of net interest income and non interest income. Although the ratio is related to both cost and
income, the focus of the ratio is more on the cost side .Non interest costs are seen as those share
of a banks costs which can be contolled..The reason cost to income ratio does not contain bad
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and doubtful debt expense is because such an expense generally shows the quality of financial
decisions made in earlier periods rather than current performance of bank. And this ratio would
be severely disturbed in case major write offs are done.
2. Capital Risk Weighted Asset Ratio
CRAR is the measure of firm capitalization and is a ratio of NBFCs Tier1+Tier2 capital to risk
adjusted assets. This ratio below a minimum threshold indicates that the bank is not suitably
capitalized to expand its operations and portfolio and should take necessary steps to capitalize
itself as directed by RBI mandatory regulations
CAR = Tier I capital + Tier II capital / Risk weighted assets
Tier I Capital includes paid-up equity capital, statutory reserves, capital reserves, and perpetual
debt instruments eligible. Tier II capital is classified as secondary capital which includes
undisclosed reserves, loss reserves, subordinated term debt, etc.
3.Gross Non Performing Asset(%)
The gross NPA to loans ratio is considered as a measure of the asset quality and gives a look
into company's loan portfolio. An NPA are the assets for which interest has not been paid for
more than 180 days (or 6 months).Higher ratio shows increasing bad quality of loans are
present in the portfolio
4.Net Interest Margin
Net Interest margin is an important measuring performance metric that evaluates the success of
a firm‟s investment decisions as opposed to its debt structure of the company. A negative Net
Interest Margin depicts that the firm failed to take optimal financial decision, as interest expenses
were greater than the returns generated by investments.
Net Interest Margin is the ratio of net interest income to average interest-earning assets Where,
Net interest income is the difference between interest income and interest expense. Average
Interest-earning assets are loans / advances given to borrowers and investors by NBFCs.
Average of the beginning to end of the period is considered for exact calculation.
5.Return on Equity
This ratio indicates profitability of a company by comparing its net profit to its average
shareholders' equity. ROE measures how much the stockholders and investors earned on their
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investment in the company. The higher is the return on shareholders equity, the more efficiently
management is operating and utilizing its equity in the company.
6.Debt to equity ratio
A measure of a company's financial leverage found out by dividing its total liabilities by average
shareholders' equity. It indicates the level of equity and debt the company is using to finance its
assets or in short the level of financial leverage company is resorting to run its business. A high
debt/equity ratio usually means that a firm has been very much aggressive in financing its
operations and growth with debt. This might bring in a factor of financial risk as earnings could
become volatile as a result of the excessive interest expense
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EMPIRICAL FINDINGS AND RESULTS
Multiple regression model: Model 1
Model Details
b
Variables Entered/Removed
Model Variables Entered Variables Removed Method
1 Net Interest Margin, Debt-Equity . Enter

Ratio, Cost to Income Ratio ,
Return on Equity, CRAR, GNPA
a. All requested variables entered.
b. Dependent Variable: Net Profitability Margin
Descriptive Statistics
Mean Std. Deviation N
Net Profitability Margin 17.0298 7.85238 50
Cost to Income Ratio 27.6656 9.90499 50
GNPA 1.8854 1.95632 50
CRAR 19.4142 4.70356 50
Return on Equity 16.8968 6.53947 50
Debt-Equity Ratio 4.290 2.2367 50
Net Interest Margin 6.0528 3.23045 50
Explanation: In the above table different descriptive statistics such as mean and standard deviation
of all variables in the model has been displayed.
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Correlation matrix:
Explanation: In this table the correlation between all the variables of the model
has been shown.
Especially the correlation between variables of the model viz dependent variable and its relation
to independent variable is worth noticing.
Explanation:
The relationship among the independent variables in relative terms can be found with the help of
coefficient of multiple correlations (R) which can be found out in the model summary. A value
of R= 0.769 shows that there is a high degree of relationship involved among the variables
From the value of R2 in the table,we can conclude that all these 6 predictor independent
variables together combined explain 59.2% of the variance in Net Profitability margin. The P-
value (0.00) of F- test clearly states that the regression is significant
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ANOVA
Null Hypothesis: Predictor independent variables have no combined impact on Profitability of the
firm or coefficients of the independent variables of the model viz β1 = β2 = β3 = β4 = β5 = β6 = 0
Alternative Hypothesis: βi >0, where, i=1……6
b
ANOVA
Model Sum of Squares df Mean Square F Sig.
a
1 Regression 1788.518 6 298.086 10.397 .000
Residual 1232.813 43 28.670
Total 3021.332 49
a. Predictors: (Constant), Net Interest Margin, Debt-Equity Ratio, Cost to Income Ratio , Return
on Equity, CRAR, GNPA
b. Dependent Variable: Net Profitability Margin
Interpretation: The SPSS output for ANOVA clearly shows that F value is 10.397 and along with that the level of
significance is .000. Because the F value as seen from the table is greater than the critical F value of 5.11 or 8.17
and the significance level .000 is much lower than the threshold level of significance .05, we can reject the null
hypothesis.
MODEL EQUATION:
NPM = 11.459 + (-0.268) CI + (0.172) GNPA + (0.216) CRAR + (0.712) ROE + (-0.233)
DE+ (-0.530) NIM
21 | P a g e
Explanation: Profitability related with determinants in following ways:

 The impact of the Cost to Income Ratio on the Profitability is negative. This finding goes
in line with the empirical findings and indicates that profitability increases with
decreasing cost to income ratio.
 Gross non performing asset ratio has a very less significant relationship with profitability
though they bear a positive relationship with each other as p value is greater than 0.05.
 The relationship between profitability and Return on Equity is positive and they share a
highly significant relationship. Companies with high return on equity realize high profits
by judiciously using shareholders wealth and thus have a very positive impact on
profitability.
 The relationship between Profitability and Debt to Equity ratio is negative .Companies
with high leverage put pressure on profitability and increased financial risk too .
 The impact of Net Interest Margin on profitability is negative which is empirically and
theoretically not the case. Generally increasing interest margins result from increasing net
interest income and thus should lead to increased profitability.Though Net interest
margins could significantly reduce in case net interest income of the company increases
very less with respect to a sharp increase in asset size.
 Capital risk weighted asset ratio bears a positive relationship profitability of the
company though the level of relationship has very less significance as p value is greater
than 0.05.
Test for Normality
22 | P a g e
All of the plots for residuals suggest that the residuals are almost normally distributed, the skewness
and kurtosis are approximately zero, the histogram looks normally distributed, and the Q-Q plot
looks normal too. Based on these observations, the residuals from this regression model makes us to
have assumption of being normally distributed.
Autocorrelation test:
Because Durbin -Watson statistic is less than 2 , autocorrelation is present though lesser.
23 | P a g e
Multicollinearity Test:
As VIF values for all variables are less than 5,multicollineariy is not present.
Heteroskaedasticity test:
The residuals look good and Line of Fit is pretty flat which shows absence of heteroskaedasticity
24 | P a g e
Multiple regression model: Model 2
Model Details
b
Variables Entered/Removed
Model Variables Entered Variables Removed Method
1 Net Interest Margin, Debt-Equity Ratio, . Enter

Cost to Income Ratio, GNPA, CRAR,
Return on Equity
a. All requested variables entered.
b. Dependent Variable: Return on Assets
Descriptive Statistics
Mean Std. Deviation N
Return on Assets 2.5926 1.51323 50
Debt-Equity Ratio 4.290 2.2367 50
Return on Equity 16.6428 6.69753 50
CRAR 19.4142 4.70356 50
GNPA 4.2834 8.63427 50
Cost to Income Ratio 27.6656 9.90499 50
Net Interest Margin 6.0528 3.23045 50
Explanation: In the above table different descriptive statistics such as mean and standard deviation
of all variables in the model has been displayed.
25 | P a g e
Correlation Matrix
Explanation: In this table the correlation between all the variables of the model
has been shown.
Especially the correlation between the variables of the model viz dependent variable and
independent variable and how they are related is worth noticing
Explanation:
The relationship among the independent variables in relative terms can be found with the help of
coefficient of multiple correlations (R) which can be found out in the model summary. A value
of R= 0.921 shows that there is a high degree of relationship involved among the variables
From the value of R2 in the table,we can conclude that all these 6 predictor independent
variables together combined explain 85% of the variance in Net Profitability margin. The P-
value (0.00) of F- test clearly states that the regression is significant
26 | P a g e
ANOVA
Null Hypothesis: Predictor independent variables have no combined impact on Profitability of the
firm or coefficients of the independent variables of the model viz β 1 = β2 = β3 = β4 = β5 = β6 = 0
Alternative Hypothesis: βi >0, where, i=1……6
b
ANOVA
Model Sum of Squares df Mean Square F Sig.
a
1 Regression 95.250 6 15.875 40.263 .000
Residual 16.954 43 .394
Total 112.204 49
a. Predictors: (Constant), Net Interest Margin, Debt-Equity Ratio, Cost to Income Ratio, GNPA,
CRAR, Return on Equity
b. Dependent Variable: Return on Assets
Interpretation: The SPSS output for ANOVA clearly shows that F value is 40.263 and along with that the level of
significance is .000. Because the F value as seen from the table is greater than the critical F value of 5.11 or 8.17
and the significance level .000 is much lower than the threshold level of significance .05, we can reject the null
hypothesis..
MODEL EQUATION:
ROA = -1.008 + (0.577) ROE + (0.114) CI + (0.705) GNPA + (0.192) CRAR + (-0.188)
DE+ (-0.084) NIM
27 | P a g e
Explanation: Profitability related with determinants in following ways:

 The relationship between profitability and Return on Equity is positive and they share a
highly significant relationship. Companies with high return on equity realize high profits
by judiciously using shareholders wealth and thus have a very positive impact on
profitability.
 Cost to Income ratio has a very less significant relationship with profitability as p value is
greater than 0.05, though they bear a positive relationship with each other which is
empirically and theoretically inconsistent.
 The relationship between Return on Asset and Debt to Equity ratio is negative
Companies with high leverage put pressure on profitability and increased financial risk
too .
 Gross non performing asset ratio has a positive relationship with profitability though
theoretically inconsistent.
 Capital risk weighted asset ratio bears a positive relationship with profitability of the
company and has very high significance relationship with Return on Asset. Theoretically
better the capital provisions the company has higher is the chance of company getting
profitable in long term.
Test for Normality:
28 | P a g e
All of the plots for residuals suggest that the residuals are almost normally distributed, the skewness
and kurtosis are approximately zero, the histogram looks normally distributed, and the Q-Q plot
looks normal too. Based on these observations, the residuals from this regression model makes us to
have assumption of being normally distributed.
Autocorrelation Test:
Because Durbin Watson statistic is closer 2,this model suffers with insignificant level of
autocorrelation
29 | P a g e
Multicollinearity Test:
As VIF values for all variables are less than 5,multicollineariy is not present.
Heteroskaedasticity Test:
The residuals look good and Line of Fit is pretty flat which shows absence of heteroskaedasticity
30 | P a g e
CONCLUSION
The study proposes regression models for profitability of a firm where Return on Asset and Net
profitability margin have been used as determinants of profitability. According to the study it is
clear that profitability depends on host of variables like Return on equity, Cost to Income ratio,
Debt equity ratio, CRAR, NNPA etc.
The results of multiple regression for model1 where Net Profitability Margin has been modeled
as dependent variable,suggest that the selected independent variables explain around 60%
changes in the net profitability margin.Cost to income along with Debt to equity is found to have
a significant negative relationship with profitability margin. CRAR has a positive impact on
profitability though insignificant.GNPA bears an insignificant relation with the profitability.
The results of multiple regression for model1 where ROA has been modeled as dependent
variable,suggest that the selected independent variables explain around 85 % changes in the net
profitability margin.CRAR along with Return on equity is found to have a significant positive
relationship with profitability margin.Debt to equity is negatively and significantly related to
profitability.Cost to Income along with Net Interest Margin bears an insignificant relation with
the profitability.
31 | P a g e
BIBLIOGRAPHY
Suresh Vadde, 2011 „Performance of non-banking financial companies in india - an evaluation‟

Journal of Arts Science & Commerce ,Vol.– II, Issue –1,January 2011
Khandoker, Raul and Rahman, ’ Determinants of profitability of Non Bank Financial Institutions:
Evidence from Bangladesh‟, International Journal of Management Sciences and Business
Research Volume 2, Issue 4
Harihar T.S. “Non-Banking Finance Companies, The Imminent Squeeze”, Chartered Financial
Analyst, February 1998, p. 40-47..
Seema Saggar, “Financial Performance of Leasing Companies, During the Quinquennium

Ending 1989-90” Reserve Bank of India: Occasional Papers, Vol. 16, No. 3 September 95, pp.
223-236.6.
Nibedita Roy,2013, „The golden route to liquidity: a performance analysis of gold loan
companies‟, International journal of research in commerce, it & management, Volume No. 3
(2013), Issue No. 06 (June)
Kantawala 2011, Financial performance of non banking finance companies in India
Alam,Raza & Akram ,2011, „Financial Performance of Leasing Sector. The Case of Pakistan‟,
Interdisciplinary journal of contemporary research in business,Vol 2 No 12
Syal & Goswami,2012,’ Financial Evaluation of Non-Banking Financial Institutions: An

Insight‟, Indian journal of applied research,Vol 2 Issue 2 Nov 2012
P Vijaya Bhaskar,2013‟ Non-Banking Finance Companies: Game Changers‟, Working

Paper,RBI
32 | P a g e
APPENDICES
FINANCIAL DATA EXCEL
33 | P a g e
34 | P a g e
BLOOM BERG DATA
35 | P a g e
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37 | P a g e
38 | P a g e
39 | P a g e
40 | P a g e
41 | P a g e
42 | P a g e
FINANCIAL RATIOS USED AS PER CAMELS APPROACH
43 | P a g e
FINAL
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Final Year Dissertation Report

FINAL YEAR DISSERTATION

“Modeling determinants of financial performance of Non

A project report submitted in partial fulfilment of the requirements for the

Submitted by: Under guidance of:

Abhishek Kumar Singh Dr. Pankaj Sinha

FMS MBA(FT), Batch of 2014 Faculty of Management Studies

Roll no: F-77 University of Delhi

Dr.Pankaj Sinha Abhishek Kumar Singh

Abhishek Kumar Singh

RATIONALE OF THE STUDY

Kantawala(2011) examined the financial performance of different groups of NBFCs

A detail of these companies is given below:

COMPANY TOTAL ASSETS (Rs Mn) MARKET CAP(Rs Mn)

Shriram Transport 539057 1,30,253

IDFC LTD 535330 1,69,210

M&M Financial Services 270708 146372

IFCI LTD 245980 39970

SREI Infra 226591 9181

Cholamandalam Finance 215707 31365

Bajaj Finance 203207 58330

Sundaram Finance 158227 55975

Shriram City 155886 63201

Magma Fincorp 50963 12051

Tests to check conditions of Regression

 Tests to check conditions of Regression

Cov (µt , µs) = 0

III.i. Correlation Matrix

III.ii. Variance Inflationary Function

NPM = β0 + β1NIM + β2CI + β3 GNPA + β4CRAR + β5ROE + β6 DE

Net Profitability Margin

1. Cost to Income Ratio

2. Capital Risk Weighted Asset Ratio

CAR = Tier I capital + Tier II capital / Risk weighted assets

3.Gross Non Performing Asset(%)

4.Net Interest Margin

6.Debt to equity ratio

ROA = β0 + β1NIM + β2CI + β3 GNPA + β4CRAR + β5ROE + β6 DE

1. Cost to Income Ratio

2. Capital Risk Weighted Asset Ratio

CAR = Tier I capital + Tier II capital / Risk weighted assets

3.Gross Non Performing Asset(%)

4.Net Interest Margin

6.Debt to equity ratio

EMPIRICAL FINDINGS AND RESULTS

Multiple regression model: Model 1

Model Variables Entered Variables Removed Method

1 Net Interest Margin, Debt-Equity . Enter

a. All requested variables entered.

b. Dependent Variable: Net Profitability Margin

Mean Std. Deviation N

Net Profitability Margin 17.0298 7.85238 50

Cost to Income Ratio 27.6656 9.90499 50

GNPA 1.8854 1.95632 50

CRAR 19.4142 4.70356 50

Return on Equity 16.8968 6.53947 50

Debt-Equity Ratio 4.290 2.2367 50

Net Interest Margin 6.0528 3.23045 50

Model Sum of Squares df Mean Square F Sig.

Residual 1232.813 43 28.670

b. Dependent Variable: Net Profitability Margin

Explanation: Profitability related with determinants in following ways:

Test for Normality