Project report on gdp and inflation

CHAPTER 3

1. Data Presentation

The study deals with two particular banks in the banking industry. One is the public

sector banks (Punjab national bank) and another is the private sector bank (Axis Bank).

The project specifies the impact of six variables on banks profitability out of which three

are macroeconomic determinants and the remaining three are bank specific or internal

factors. The various ratios of both the banks Punjab national bank and axis bank are

considered to measure the bank’s profitability in terms of Return on Asset.

1.1 Gross Domestic Product

Gross domestic product (GDP) is the market value of all officially recognized final goods

and services produced within a country in a year, or other given period of time. GDP per

capita is often considered an indicator of a country's standard of living. GDP per capita is

not a measure of personal income. GDP per capita exactly equals the gross domestic

income (GDI) per capita. GDP is related to national accounts, a subject in

macroeconomics. GDP is not to be confused with gross national product (GNP) which

allocates production based on ownership. GDP can be determined in three ways, they are

the production (or output) approach, the income approach, or the expenditure approach.

The Gross Domestic Product is derived by the following formula: GDP = Rent +

Interests + Profits + Statistical Adjustments + Wages.

Years Gross Domestic Product

2000 3.8

2001 4.8

2002 3.8

2003 7.9

2004 7.9

2005 9.3

2006 9.3

2007 9.8

2008 3.9

1

http://en.wikipedia.org/wiki/Income_approach

2009 8.5

2010 10.5

2011 6.3

2012 3.2

Mean 6.84

Standard deviation 2.64

C.V 38.66

Table 1: GDP of India

Source: Planningcommission.gov.in

As shown in the table, the Gross Domestic Product of India over a period of thirteen

years. The Gross domestic Product for both the banks is same. The mean value for the

Gross Domestic Product is 6.84 and the standard deviation for the same is 2.64. The

coefficient of variation for the GDP of India is obtained to be 38.66.

Figure 1: GDP of India


2

20002001

20022003

20042005

20062007

20082009

20102011

20120

2

4

6

8

10

12

GDP

GDP

Years

GDP

The graph above displays the flow of gross domestic product of the country over a period

of thirteen years ranging from 2000 to 2013. GDP of India showed a high number of

highs and lows in the above mentioned specific period of time. GDP was highest in the

year 2010 and lowest in the year 2012 showing a downfall.

1.2 Inflation rate

Inflation is a sustained increase in the general price level of goods and services in an

economy over a period of time. When the general price level rises, each unit of currency

buys fewer goods and services. Consequently, inflation reflects a reduction in the

purchasing power per unit of money – a loss of real value in the medium of exchange and

unit of account within the economy. A chief measure of price inflation is the inflation

rate, the annualized percentage change in a general price index (normally the

consumer price index) over time. Inflation's effects on an economy are various and can be

simultaneously positive and negative. Negative effects of inflation include an increase in

the opportunity cost of holding money, uncertainty over future inflation which may

discourage investment and savings, and if inflation were rapid enough, shortages of

goods as consumers begin hoarding out of concern that prices will increase in the future.

Positive effects include ensuring that central banks can adjust real interest rates (to

mitigate recessions), and encouraging investment in non-monetary capital projects.

Years Inflation rate

2000 4

2001 3.7

2002 4.4

2003 3.8

2004 3.8

2005 4.2

2006 6.1

2007 6.4

2008 8.4

2009 10.9

3

2010 12

2011 8.9

2012 9.3

Mean 6.60


C.V 44.81

Table 2: Inflation Rates of India


As shown in the table, the Inflation Rates of India over a period of thirteen years. The

Inflation Rates for both the banks are same. The mean value for the Inflation Rates is

6.60 and the standard deviation for the same is 2.96. The coefficient of variation for the

Inflation Rates of India is obtained to be 44.81.

Figure 2


4

20002001

20022003

20042005

20062007

20082009

20102011

20120

2

4

6

8

10

12

14

Inflation Rates

Inflation

Years

Rate

s

The graph above displays the statistics of Inflation rate of the country over a period of

thirteen years ranging from 2000 to 2013. Inflation Rate of India showed a upward

movement till the year 2010 and a declining phase after 2010. Inflation Rate was highest

in the year 2010 and lowest in the year 2011 showing a downfall in 2012 also.

1.3 Interest rate

An interest rate is the rate at which interest is paid by a borrower (debtor) for the use of

money that they borrow from a lender (creditor). Specifically, the interest rate (I/m) is a

percent of principal (P) paid a certain amount of times (m) per period (usually quoted per

annum). For example, a small company borrows capital from a bank to buy new assets

for its business, and in return the lender receives interest at a predetermined interest rate

for deferring the use of funds and instead lending it to the borrower. Interest rates are

normally expressed as a percentage of the principal for a period of one year. Interest-rate

targets are a vital tool of monetary policy and are taken into account when dealing with

variables like investment, inflation, and unemployment.

Years Interest rate

2000 8.3

2001 8.6

2002 7.9

2003 7.3

2004 4.9

2005 6.2

2006 4.5

2007 6.9

2008 4.3

2009 5.8

2010 -0.5

2011 1.7

2012 2.3

Mean 5.24

5


C.V 52.67

Table 3: Interest Rates of India


As shown in the table, the Interest Rates of India over a period of thirteen years. The

Interest Rates for both the banks are same. The mean value for the Interest Rates is 5.24

and the standard deviation for the same is 2.76. The coefficient of variation for the

Interest Rates of India is obtained to be 52.67.

Figure 3: Interest Rates of India


The graph above displays the statistics of Interest rates of the country over a period of

thirteen years ranging from 2000 to 2013. Interest Rates of India showed downward,

upward, downward movement in the above mentioned specific period of time. Interest

Rates were stable and then fall in 2002, after that it showed a little rise till and then a

continuous lows or stable positions were observed. The highest value was in the year

2002 whereas the lowest was in the year 2010.

1.4 Credit to deposit Ratio

6

20002001

20022003

20042005

20062007

20082009

20102011

2012

-2

0

2

4

6

8

10

Interest Rate

Interest Rate

Years

Rate

s

Total credits as a percentage of total deposits are shown in Table below. The CDR is

nothing but the quantum flow of advances to the deposits mobilized by banks in terms of

percentage. This ratio explains about the bank’s credit deployment and mobilization

capacity of the banks. The credit / deposit ratio (CD ratio) is used to examine the liquidity

of a bank. More the CD ratio more the effectiveness of the bank to utilize the fund it

collected. The CD ratio is derived by the following formula: Total Credit/Total deposit

collected×100.

Years Punjab National Bank Axis Bank

2000 25.18 64.79

2001 27 50.22

2002 22.48 47.59

2003 32.48 42.84

2004 35.44 43.63

2005 30.19 47.4

2006 31.00 52.79

2007 30.30 59.85

2008 23.10 68.89

2009 21.53 64.89

2010 22.19 71.87

2011 19.95 31.57

2012 16.52 10.01

Mean 25.95 50.48

Standard deviation 5.59 16.88

C.V 21.55 33.44

Table 4: Credit to Deposit Ratio of banks

Source: www.pnbindia.in and www.axisbank.com

As shown in the table, the ratio of Axis Bank is higher than Punjab national bank. The

ratio of Axis Bank is 50.48% whereas that of Punjab National Bank is 25.95%. The risk

7

http://www.pnbindia.in/

factor which is the standard deviation is also more for Axis Bank as compared to Punjab

National Bank from 16.88 to 5.59. The coefficient of variation is also greater in case of

Axis Bank when compared with Punjab National Bank by a difference of 11.89%.

Figure 4: Liquidity of Banks


The graph stated the liquidity position of both the banks. The liquidity is expressed in

terms of credit to deposit ratio. The flow of Punjab national bank is more stable as

compared to that of axis bank. The graph of axis bank over the period after 2010 showed

a downfall in the ratio and was outperforming in the previous years. The highest value of

Axis bank was reflected in the year 2010 and of Punjab National Bank was in the year

2004 which is much lower than Axis Bank. The lowest of both the banks were in the year

2012.

1.5 Capital Adequacy Ratio

8

20002001

20022003

20042005

20062007

20082009

20102011

20120

10

20

30

40

50

60

70

80

Liquidity

Liquidity PNBLiquidity Axis

Years

Cred

it to

Dep

osit

Ratio


This ratio is a measure of bank's capital. It is expressed as a percentage of a bank's risk

weighted credit exposures. It is also known as "Capital to Risk Weighted Assets Ratio

(CRAR)". This ratio is used to protect depositors and promote the stability and efficiency

of financial systems around the world. Two types of capital are measured: tier one

capital, which can absorb losses without a bank being required to cease trading, and tier

two capital, which can absorb losses in the event of a winding-up and so provides a lesser

degree of protection to depositors.

The Capital Adequacy Ratio is derived by the following formula: Total Capital/Risk

Weighted Assets×100.


2000 10.31 11.37

2001 10.24 9

2002 10.70 10.05

2003 12.02 10.9

2004 13.10 11.21

2005 14.78 12.66

2006 11.95 11.08

2007 12.29 12

2008 13.45 13.73

2009 14.03 13.69

2010 14.16 15.8

2011 14.42 12.65

2012 12.03 14

Mean 12.58 12.16


C.V 12.39 15.13

Table 5: Capital Adequacy Ratios of banks


9

http://www.axisbank.com/


As shown in the table, the ratio of Punjab national bank is higher than Axis Bank. The


factor which is the standard deviation is more for Axis Bank as compared to Punjab

National Bank from 1.84 to 1.55. The coefficient of variation is also greater in case of

Axis Bank when compared with Punjab National Bank by a difference of 2.74%.

Figure 5: Risk of Banks


The graph stated the Risk factor of both the banks. The Risk is expressed in terms of

Capital Adequacy Ratio. The flow of both the banks is stable over the period of thirteen

years. The graph of axis bank reached the highest point in the year 2010 and Punjab

National Bank showed the highest in year 2011. The lower values of both the banks were

shown in the initial years of the data collected.

1.6 Operating Expenses to Income Ratio

Operating expenses consists of those expenses which are essential for the operation of the

business. The major constitutes of operating expenses are like Payment to and provisions

for employee, Rent, taxes and lighting, Printing and stationery, Advertisement and

10

20002001

20022003

20042005

20062007

20082009

20102011

201202468

1012141618

Risk

Risk PNBRisk Axis

Years

Capi

tal A

dequ

acy

Ratio


publicity, Law charges etc. The income in the ratio is the total Income including interest

incomes also. The Operating to income ratio is derived by the following formula: Total

Operating expenses/Total Income×100.


2000 47.15 9.39

2001 48.84 10.17

2002 51.89 10.58

2003 53.31 19.45

2004 53.41 28.38

2005 50.33 21.02

2006 60.00 23.13

2007 65.97 23.00

2008 70.55 26.20

2009 72.88 24.95

2010 74.34 30.96

2011 33.19 25.69

2012 33.10 21.95

Mean 54.99 21.14


C.V 24.46 33.17

Table 6: Operation Expense to Income Ratio of banks


As shown in the table, the ratio of Punjab national bank is higher than Axis Bank. The


factor which is the standard deviation is also more for Punjab National Bank as compared

to Axis Bank from 13.45 to 7.01. The coefficient of variation is greater in case of Axis

Bank when compared with Punjab National Bank by a difference of 8.71%.

11


Figure 6: Cost of banks


The graph stated the Cost factor of both the banks. The Cost is expressed in terms of

Operating Expenses to Income Ratio. The flow of Axis Bank is more stable as compared

to Punjab National Bank over the period of thirteen years. The graph of axis bank reached

the highest point in the year 2010 and Punjab National Bank showed the highest in the

same year 2010 only. The lower values of both the banks were shown in the initial years

of the data collected but Axis Bank Reflected a low in some future years also and when

compared with Punjab National Bank the values are much lower over the period of time.

1.7 Return on Asset

An indicator of how profitable a company is relative to its total assets. ROA gives an idea

as to how efficient management is at using its assets to generate earnings. Calculated by

dividing a company's annual earnings by its total assets, ROA is displayed as a

percentage. Sometimes this is referred to as "return on investment". The formula for

return on assets is: Net Incomes/Total Assets. Some investors add interest expense back

into net income when performing this calculation because they'd like to use operating

returns before cost of borrowing.

12

20002001

20022003

20042005

20062007

20082009

20102011

20120

10

20

30

40

50

60

70

80

Cost

Cost PNBCost Axis

Years

Ope

ratin

g ex

pens

e to

inco

me

ratio



2000 27.51 18.16

2001 27.51 22.85

2002 151.53 32.05

2003 152.01 39.89

2004 188.91 49.07

2005 258.84 87.96

2006 297.38 103.06

2007 330.97 120.80

2008 390.68 245.13

2009 464.75 284.50

2010 562.09 395.99

2011 678.91 462.77

2012 820.13 551.99

Mean 334.70 185.70

Table 7: Return on Assets of banks


As shown in the table above, the Return on assets of Punjab national bank is higher than

Axis Bank. The average Return on Assets of Axis Bank is 185.70 whereas that of Punjab

National Bank is 334.70. The value of Return on Assets of Punjab national Bank was

much higher as compared to Axis Bank for all the years over the period of thirteen years.

The value of Return on assets of Punjab national bank increased over the period of

thirteen years (2000 to 2012) from 27.51 to 820.13, which states a huge growth and

development. On the other hand values of Return on assets Axis bank also increased over

the same period of thirteen years from 18.16 to 551.99, stating a huge growth and

development.

13


Figure 7: ROA of banks


The graph stated the Return on asset of both the banks. The ROA of Axis Bank is less as

compared to Punjab National Bank over the period of thirteen years ranging from 2000 to

2012. The values of ROA of Punjab National Bank were high throughout the period of

time in comparison to Axis bank. The ROA of both the banks showed an upward

movement from 2000 to 2012. The graph of both the banks reached the highest point in

the year 2012 and the lowest were in the year 2000 again for both the banks.

14

20002001

20022003

20042005

20062007

20082009

20102011

20120

100200300400500600700800900

Return on Assets

ROAROA

Years

ROA


2. Data Analysis

2.1 Testing Hypothesis

For testing the Hypothesis Regression test has been applied

2.2 Formula

2.3 Elements of a regression equation:

The regression equation is written as Y = a + bX +e

‘Y’ is the value of the Dependent variable (Y), what is being predicted or explained.

‘a’ or Alpha, a constant; equals the value of Y when the value of X=0

‘b’ or Beta, the coefficient of X; the slope of the regression line; how much Y changes

for each one-unit change in X.

‘X’ is the value of the Independent variable (X), what is predicting or explaining the

value of Y ‘e’ is the error term; the error in predicting the value of Y, given the value of

X (it is not displayed in most regression equations

2.4 HYPOTHESIS 1

Ho: There is no significant impact of Gross Domestic Product on Return on asset of

Punjab National Bank.

H1: There is significant impact of Gross Domestic Product on Return on asset of Punjab

National Bank.

15

2.41 Regression

Reg

ressi

onM

odel

R R

Squar

e

Adjusted

R

Square

Std. Error

of the

Estimate

Change Statistics Durbin

-

Watson

R

Square

Change

F

Chang

e

df

1

df

2

Sig. F

Change

1.05

3a

.003 -.088 253.69042 .003 .031 1 1

1

.863 .122

a. Predictors: (Constant), GDP

b. Dependent Variable: ROA

2.42 Correlations

ROA GDP

ROA

Pearson

Correlation

1 .053

Sig. (2-tailed) .863

N 13 13

GDP

Pearson

Correlation

.053 1


N 13 13

Model Unstandardized

Coefficients

Standardized

Coefficients

t Sig.

B Std. Error Beta

1(Constant) 301.296 202.044 1.491 .164

GDP 4.881 27.665 .053 .176 .863

2.43 Analysis

16

The value of correlation between the two variables ROA and GDP is .053, which is

positive in direction. The value of the R2 .003 which means that GDP does not have

significant impact of on ROA as with GDP the profitability of bank on the basis of ROA

is not affected.

Regression equation between the two variables can be established as follows

Y = 301.296 + 4.88b.

2.44 Interpretation

As the p value (=0.863) obtained from regression table is more than the value of alpha

0.05, so the null hypothesis is accepted and the alternate hypothesis is rejected. Thus it is

verified that Gross Domestic Product has no significant impact on Return on Assets of

the Punjab National bank.

2.5 HYPOTHESIS 2

H0: There is no significant impact of Inflation on Return on asset of Punjab National

Bank.

H1: There is significant impact of Inflation on Return on asset of Punjab National Bank.

2.51 Regression

Mode

l

R R

Squar

e

Adjusted

R Square

Std. Error of

the Estimate

Change Statistics Durbin-

WatsonR Square

Change

F

Change

df

1

df

2

Sig. F

Change

1 .834a .695 .667 140.34875 .695 25.042 1 11 .000 .724

a. Predictors: (Constant), Inflation


2.52 Correlation

ROA Inflation

ROA

Pearson

Correlation

1 .834**


N 13 13

17

Inflatio

n

Pearson

Correlation

.834** 1


N 13 13


Coefficients

Standardized

Coefficients

t Sig.

B Std. Error Beta

1(Constant) -117.737 98.437 -1.196 .257

Inflation 68.473 13.683 .834 5.004 .000

2.53 Analysis

The value of correlation between the two variables ROA and Inflation is .834, which is in

positive in direction. The value of the R2 .695 which means that Inflation has 69.5%

significant impact on ROA as with Inflation the profitability of bank on the basis of

ROA is affected.


Y = -117.737 + 68.47b.

2.54 Interpretation

As the p value (=0.000) obtained from regression table is less than the value of alpha

0.05, thus the null hypothesis is rejected and the alternate hypothesis is accepted. Thus it

is verified that Inflation Rates have significant impact on Return on Assets of the Punjab

National bank.

2.6 HYPOTHESIS 3

Ho: There is no significant impact of Interest Rates on Return on asset of Punjab National

bank.

H1: There is significant impact of Interest Rates on Return on asset of Punjab National

bank.

18

2.61 Regression

Mode

l

R R

Square

Adjusted

R Square

Std. Error of

the Estimate


WatsonR Square

Change

F

Change

df

1

df

2

Sig. F

Change

1 .839a .704 .677 138.17863 .704 26.183 1 11 .000 1.935

a. Predictors: (Constant), Interest


2.62 Correlation

ROA Interest

ROA

Pearson

Correlation

1 -.839**


N 13 13

Interest

Pearson

Correlation

-.839** 1


N 13 13


Coefficients

Standardized

Coefficients

T Sig.

B Std. Error Beta

1(Constant) 722.206 84.873 8.509 .000

Interest -73.863 14.435 -.839 -5.117 .000

19

2.63 Analysis

The value of correlation between the two variables ROA and Interest Rate is -.839, which

is negative in direction. The value of the R2 .704 which means that Inflation has 70.4%

significant impact on ROA as with Interest Rate the profitability of bank on the basis of

ROA is affected.


Y = 722.206 - 73.863b.

2.64 Interpretation


0.05, so the null hypothesis is rejected and the alternate hypothesis is accepted. Thus it is

verified that Interest Rates have significant impact on Return on Assets of the Punjab

National bank.

2.7 HYPOTHESIS 4

Ho: There is no significant impact of Liquidity on Return on asset of Punjab National

bank.

H1: There is significant impact of Liquidity on Return on asset of Punjab National bank.

2.71 Regression

Model R R

Square

Adjusted

R Square

Std. Error of

the Estimate


WatsonR Square

Change

F

Change

df

1

df

2

Sig. F

Change

1 .127a .016 -.073 251.97855 .016 .182 1 11 .678 .101

a. Predictors: (Constant), Liquidity


2.72 Correlation

ROA Liquidity

ROA Pearson Correlation 1 -.661*

20


N 13 13

Liquidit

y

Pearson Correlation -.661* 1


N 13 13


Coefficients

Standardized

Coefficients

T Sig.

B Std. Error Beta

1

(Constant) 1079.971 260.842 4.140.002

Liquidity-28.718 9.843 -.661 -

2.918

.014

2.73 Analysis

The value of correlation between the two variables ROA and Liquidity is -.661, which is

negative in direction. The value of R2 is .016 which means that Inflation has 1.6%

significant impact on ROA as with Liquidity the profitability of bank on the basis of

ROA is affected.


Y = 1079.97 – 28.718b.

2.74 Interpretation



verified that Liquidity has no significant impact on Return on Assets of the Punjab

National bank.

2.8 HYPOTHESIS 5

Ho: There is no significant impact of Risk on Return on asset of Punjab National bank.

H1: There is significant impact of Risk on Return on asset of Punjab National bank.

21

2.81 Regression

Model R R

Square

Adjusted

R Square

Std. Error of

the Estimate


WatsonR Square

Change

F

Change

df

1

df

2

Sig. F

Change

1 .574a .329 .268 208.10349 .329 5.393 1 11 .040 .548

a. Predictors: (Constant), Risk


2.82 Correlation

ROA Risk

ROA

Pearson

Correlation

1 .574*


N 13 13

Risk

Pearson

Correlation

.574* 1


N 13 13


Coefficients

Standardized

Coefficients

t Sig.

B Std. Error Beta

1(Constant) -791.709 488.452 -1.621 .133

Risk 89.573 38.570 .574 2.322 .040

2.83 Analysis

The value of correlation between the two variables ROA and Risk is .574, which is


22

significant impact on ROA as with Risk the profitability of bank on the basis of ROA is

affected.


Y = 791.709 + 89.573b.

2.84 Interpretation



verified that Risk has significant impact on Return on Assets of the Punjab National

bank.

2.9 HYPOTHESIS 6

Ho: There is no significant impact of Cost on Return on asset of Punjab National bank.

H1: There is significant impact of Cost on Return on asset of Punjab National bank.

2.91 Regression

Model R R

Square

Adjusted

R Square

Std. Error of

the Estimate


WatsonR Square

Change

F

Change

df

1

df

2

Sig. F

Change

1 .661a .436 .385 190.74249 .436 8.513 1 11 .014 .379

a. Predictors: (Constant), Cost


2.92 Correlation

ROA Cost

ROA

Pearson

Correlation

1 -.127


N 13 13

23

Cost

Pearson

Correlation

-.127 1


N 13 13


Coefficients

Standardized

Coefficients

T Sig.

B Std. Error Beta

1(Constant) 461.379 305.416 1.511 .159

Cost -2.303 5.406 -.127 -.426 .678

2.93 Analysis

The value of correlation between the two variables ROA and cost is -.127, which is

negative in direction. The value of the R2 .436 which means that Inflation has 43.6%

significant impact on ROA as with Cost the profitability of bank on the basis of ROA is

affected.


Y = 461.379 – 2.303b.

2.94 Interpretation



verified that Cost have significant impact on Return on Assets of the Punjab National

bank.

2.10 HYPOTHESIS 7

Ho: There is no significant impact of Gross Domestic Product on Return on asset of Axis

bank.

H1: There is significant impact of Gross Domestic Product on Return on asset of Axis

bank.

2.10.1 Regression

24

Model R R

Square

Adjusted

R Square

Std. Error of

the Estimate


WatsonR Square

Change

F

Change

df

1

df

2

Sig. F

Change

1 .060a .004 -.087 192.04897 .004 .040 1 11 .846 .097

a. Predictors: (Constant), GDP


2.10.2 Correlation

ROA GDP

ROA

Pearson

Correlation

1 -.060


N 13 13

GDP

Pearson

Correlation

-.060 1


N 13 13


Coefficients

Standardized

Coefficients

t Sig.

B Std. Error Beta

1(Constant) 214.249 152.952 1.401 .189

GDP -4.169 20.943 -.060 -.199 .846

2.10.3 Analysis

The value of correlation between the two variables ROA and GDP is -.060, which is


significant impact on ROA as with Gross Domestic Product the profitability of bank on

the basis of ROA is affected.

25


Y = 214.249 - 4.169b.

2.10.4 Interpretation



verified that Interest Rates have no significant impact on Return on Assets of the Axis

bank.

2.11 HYPOTHESIS 8

Ho: There is no significant impact of Inflation Rate on Return on asset of Axis bank.

H1: There is significant impact of Inflation Rate on Return on asset of Axis bank.

2.11.1 Regression

Model R R

Square

Adjusted

R Square

Std. Error of

the Estimate


WatsonR Square

Change

F

Change

df

1

df

2

Sig. F

Change

1 .859a .737 .713 98.64949 .737 30.840 1 11 .000 .759

a. Predictors: (Constant), Inflation


2.11.2 Correlation

ROA Inflation

ROA

Pearson

Correlation

1 .859**


N 13 13

Inflatio

n

Pearson

Correlation

.859** 1

26


N 13 13


Coefficients

Standardized

Coefficients

t Sig.

B Std. Error Beta

1(Constant) -167.208 69.190 -2.417 .034

Inflation 53.410 9.618 .859 5.553 .000

2.11.3 Analysis

The value of correlation between the two variables ROA and Liquidity is .859, which is


significant impact on ROA as with Inflation the profitability of bank on the basis of ROA

is affected.


Y = -167.208 + 53.410b.




verified that Interest Rates have significant impact on Return on Assets of the Axis bank.

2.12 HYPOTHESIS 9

Ho: There is no significant impact of Interest Rate on Return on asset of Axis bank.

H1: There is significant impact of Liquidity on Return on asset of Axis bank.

2.12.1 Regression

Model R R Adjusted Std. Error of Change Statistics Durbin-

27

Square R Square the Estimate WatsonR Square

Change

F

Change

df

1

df

2

Sig. F

Change

1 .840a .705 .678 104.52150 .705 26.271 1 11 .000 1.536

a. Predictors: (Constant), Interest


2.12.2 Correlation

ROA Interest

ROA

Pearson

Correlation

1 -.840**


N 13 13

Interest

Pearson

Correlation

-.840** 1


N 13 13


Coefficients

Standardized

Coefficients

t Sig.

B Std. Error Beta

1(Constant) 479.310 64.200 7.466 .000

Interest -55.965 10.919 -.840 -5.125 .000

2.12.3 Analysis




ROA is affected.


Y = 479.310 - 55.965b.

28




verified that Interest Rates have significant impact on Return on Assets of the Axis bank.

2.14 HYPOTHESIS 10

Ho: There is no significant impact of Liquidity on Return on asset of Axis bank.

H1: There is significant impact of Liquidity on Return on asset of Axis bank.

2.14.1 Regression

Model R R

Square

Adjusted

R Square

Std. Error of

the Estimate


WatsonR Square

Change

F

Change

df

1

df

2

Sig. F

Change

1 .359a .129 .050 179.55215 .129 1.630 1 11 .228 .178

a. Predictors: (Constant), Liquidity


2.14.2 Correlation

ROA Liquidit

y

ROA

Pearson

Correlation

1 -.359


N 13 13

Liquidit

y

Pearson

Correlation

-.359 1


N 13 13

29


Coefficients

Standardized

Coefficients

t Sig.

B Std. Error Beta

1(Constant) 383.585 162.801 2.356 .038

Liquidity -3.919 3.070 -.359 -1.277 .228

2.14.3 Analysis



significant impact on ROA as with Liquidity the profitability of bank on the basis of

ROA is affected.


Y = 722.206 - 73.863b.




verified that Liquidity has no significant impact on Return on Assets of the Axis bank.

2.15 HYPOTHESIS 11

Ho: There is no significant impact of Risk on Return on asset of Axis bank.

H1: There is significant impact of Risk on Return on asset of Axis bank.

2.15.1 Regression

Model R R

Square

Adjusted

R Square

Std. Error of

the Estimate


WatsonR Square

Change

F

Change

df

1

df

2

Sig. F

Change

1 .775a .601 .565 121.51788 .601 16.574 1 11 .002 1.067

30

a. Predictors: (Constant), Risk


2.15.2 Correlation

ROA Risk

ROA

Pearson

Correlation

1 .775**


N 13 13

Risk

Pearson

Correlation

.775** 1


N 13 13


Coefficients

Standardized

Coefficients

t Sig.

B Std. Error Beta

1(Constant) -757.892 234.218 -3.236 .008

Risk 77.569 19.054 .775 4.071 .002

2.15.3 Analysis




ROA is affected.

Regression equation between the two variables can be established as follows :-

Y = -757.892 + 77.569b.


31



verified that Risk has significant impact on Return on Assets of the Axis bank.

2.16 HYPOTHESIS 12

Ho: There is no significant impact of Cost on Return on asset of Axis bank.

H1: There is significant impact of Cost on Return on asset of Axis bank.

2.16.1 Regression

Model R R

Square

Adjusted

R Square

Std. Error of

the Estimate


WatsonR Square

Change

F

Change

df

1

df

2

Sig. F

Change

1 .559a .312 .249 159.58721 .312 4.988 1 11 .047 .369

a. Predictors: (Constant), Cost


2.16.2 Correlation

ROA Cost

ROA

Pearson

Correlation

1 .559*


N 13 13

Cost

Pearson

Correlation

.559* 1


N 13 13


Coefficients

Standardized

Coefficients

t Sig.

32

B Std. Error Beta

1(Constant) -124.392 145.738 -.854 .412

Cost 14.666 6.567 .559 2.233 .047

2.16.3 Analysis



significant impact on ROA as with Cost the profitability of bank on the basis of ROA is

affected.


Y = -124.392 + 14.666b.




verified that Risk have significant impact on Return on Assets of the Axis bank.

2.17 Impact of various factors on Return on Assets

2.17.1 GDP, Gross Domestic Product is the total amount of services and goods produced

in a given country’s borders. The correlation between gross domestic product and returns

on assets are very poor and the slope of the line is wrong. Growth and returns are also

unrelated. A higher profit pushes the investors into equities and at the same time, lower

GDP measurements can have the opposite effect on return on assets as businesses begin

to suffer.

2.17.2 Inflation is the rise in price of goods and services which reduces the purchasing

power each unit of currency can buy. The expected inflation can either positively or

negatively impact profitability or ROA, depending on the ability to hedge and the

government’s monetary policy, But unexpected inflation did show more conclusive

findings. A strong correlation is thought to stem from the fact that unexpected inflation

contains new information about future prices. Likely, greater volatility of return on assets

was correlated with higher inflation rates. Inflation puts aside the goal of increasing long

33

http://www.investopedia.com/terms/p/purchasingpower.asp

http://www.investopedia.com/terms/p/purchasingpower.asp

term purchasing power of investors. The rising inflation erodes the value of the principal

on fixed income securities.

2.17.3 Interest is the cost someone pays for the use of someone else's money. The rise in

interest rate reduces the amount of money in circulation, which works to keep inflation

low. It also makes borrowing money more expensive, which affects how consumers and

businesses spend their money; this increases expenses for companies, lowering earnings

somewhat for those with debt to pay. Finally, it tends to make the stock market a slightly

less attractive place to investment. With expensive borrowings, companies might not

borrow as much and will pay higher rates of interest on their loans. Less business

spending can slow down the growth of a company, resulting in decreases in profit thus

affecting the profitability of banks.

2.17.4 Liquidity the lending and borrowing capacity without incurring extra costs by the

banks which are rising further as a vital indicator of the resources. Lending in the banking

system is at life-time high, hopes of loan repayment pressures. High credit to deposit

ratios indicating that banks are borrowing from the market to lend rather than from lower-

cost deposits to lend for projects and working capital.

2.17.5 Risk is the level of uncertainties for bank. Risk is used for the evaluation of banks

profitability. Higher profits might be the result of higher risk levels and vice versa. Banks

are exposed to different risk categories, including financial risks, environmental risks,

management risks, and delivery risks. The leverage risk of an institution is directly

related to capital adequacy since a higher capital base translates into lower leverage.

Local banks tend to apply credit risk only in case of personal loans and improve the

operating efficiency of banks. Interest rate risk is mainly dependent on the re-pricing

mismatches of assets and liabilities.

2.17.6 Cost, Operating costs are related to the bank’s various different types of

operations. An increased operating cost decrease or reduces the Net Income and thus the

profitability. Operating Cost to Income ratio is considerably higher for private sector

34

banks. It leads to the management of various issues like proper management structure,

internal controls and contingency planning. Thus, the increased cost affects the return on

assets of the banks. They are inversely correlated and have significant impacts on the

profitability of the banks.

CHAPTER 4

Findings of the study

35

The study deals with the impact of Macroeconomic and bank specific factors on banks

profitability in terms of return on assets, since the objective of the study was to study the

effect of gross domestic product, inflation, interest rates, liquidity, risk and cost of two

banks one each from public sector and private sector, Punjab National Bank and Axis

bank respectively on the Return of assets of the banks used to measure the profitability.

a) Gross Domestic Product has no significant impact on the profitability in relation to

return on assets of both the banks Punjab national bank and Axis bank.

b) It has been statistically approved that Return on Assets of both the banks are not

directly related with Interest Rates. The correlation between the interest rates over the

period of time and return on assets for the same period is negative but the interest rates

have impact on the profitability of the banks.

c) Some past studies also showed the impact on some determinants as negative and no

correlated and also no significant relation with gross domestic product.

d) Liquidity measured in terms of credit to deposit ratio has no significant impact on the

profitability of the banks and the correlation effect between ROA and liquidity also came

out as negative.

e) Cost measured in terms of operating cost to income ratio significantly affects the

profitability of banks and is also positively correlated.

f) Risk measured in terms of capital adequacy ratio also significantly affects the

profitability of banks and is also positively correlated.

g) Changes in the Inflation Rates of India over the period of time also have a significant

impact on the profitability of the banks, when measured in terms of Return on assets and

are positively correlated also.

h) Gross Domestic Product of Punjab National Bank and return of assets has positive

correlation whereas the correlation in case of return of assets of Axis Bank and Gross

domestic Product have negative relation.

Limitation of the study

a) Scope of the study was restricted to two banks only which acted as a constraint

36

b) The data collected provided with certain discrepancies as the data available on

websites may not be accurate.

c) Data collection is a time consuming process and some time constraints were faced by

the researcher.

d) This study is limited to Delhi only and result may differ if conducted in other regions.

e) The measures the impact of only six factors on Return on Assets, if the same study is

repeated on other factors the impact may vary.

f) Evaluation is based on the secondary data generated through various secondary data

sources and accuracy of the findings entirely depends on the accuracy of such data.

Scope for Further Study

The scope of the present is that the focus of the study is limited to the impact of six

determinants named gross domestic product, inflation, interest rates, liquidity, risk and

cost on the Return of Assets of Punjab National Bank and Axis Bank. The study is

focused on one public sector bank and one private sector bank. Geographically study is

confined to Delhi. The main scope of this study is to ascertain the Impact macroeconomic

and bank specific factors on two above stated banks profitability in terms of return on

assets.

The researcher of the present study believes that the basic questions of the study have

been answered. The current study was aimed at yielding descriptive result on which

impact of internal and external determinants of profitability of specific banks. The other

important finding of the current study was the relationship between such variables and

Return on Assets. However, this will not answer the question - how these relationships

occurred. Therefore, in this regard further study is needed to investigate the reasons

behind these associations. As it is mentioned in the study, the purpose was to investigate

impact of various variables on profitability of banks. The authors of this study strongly

believe that significant findings can be generated by investigating the topic under

different sector of banks as well as in other banks apart from the two specific banks

considered by the researcher.

37

Project report on gdp and inflation

Economy & Finance

inflation rate inflation

inflation rate of india

gdp years gdp gdp

future inflation

statistics of inflation

inflation ratesis

years gross domestic

gdp of india source