liabilities.

The lower a company’s solvency ratio, the greater the probability that it will
default on its debt obligations
3. Activity ratios: An activity ratio is a type of financial metric that indicates how efficiently
a company is leveraging the assets on its balance sheet, to generate revenues and cash.
Commonly referred to as efficiency ratios, activity ratios help analysts gauge how a company
handles inventory management, which is key to its operational fluidity and overall fiscal
health.
4. Profitability ratios: Profitability ratios are a class of financial metrics that are used to assess
a business’s ability to generate earnings relative to its revenue, operating costs, balance sheet
assets, and shareholder’s ; equity over time, using data from a specific point in time.
Advantages of ratio analysis
• It helps to analyse and understand financial health and trend of a business, its past
performance, and makes it possible to forecast the future state of affairs of the
business.
• They diagnose the financial health by evaluating liquidity, solvency, profitability etc.
This helps the management to assess the financial requirements and the capabilities
of various business units. It serves as a media to link the past with the present and
the future.
• It serves as a useful tool in management control process, by making a comparison
between the performance of the business and the performance of similar types of
business.
• Ratio analysis plays a significant role in cost accounting, financial accounting,
budgetary control and auditing.
• It accelerates the institutionalization and specialization of financial management
accounting ratios summarize and systematize the accounting figures in order to make
them more understandable in a lucid form. They highlight the inter-relationship
which exists between various segments of the business expressed by accounting
statements.
Limitations of ratio analysis
• Usefulness of ratios depends on the abilities and intentions of the persons who handle
them. It will be affected considerably by the bias of such person
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 • Ratios are worked out on the basis of money-values only. They do not take into
account the real values of various items involved. Thus, the technique is not realistic
in its approach.
• Historical values (specially in balance sheet ratios) are considered in working out the
various ratios. Effects of changes in the price levels of various items are ignored and
to that extent the comparisons and evaluations of performance through ratios
become unrealistic and unreliable. Ratios are only as accurate as the accounts on the
basis of which these are established. Therefore, unless the accounts are prepared
accurately by applying correct values to assets and liabilities, the statements
prepared wherefrom would not be correct and the relationship established on that
basis would not be reliable
ANOVA TABLE
ANOVA, which stands for Analysis of Variance, is a statistical test used to analyze the
difference between the means of more than two groups.
A one-way ANOVA uses one independent variable, while a two-way ANOVA uses two
independent variables.

One-way ANOVA example

As a crop researcher, you want to test the effect of three different fertilizer mixtures on crop
yield. You can use a one-way ANOVA to find out if there is a difference in crop yields
between the three groups.
ANOVA tells you if the dependent variable changes according to the level of the independent
variable.
For example:
Your independent variable is social media use, and you assign groups to low, medium, and
high levels of social media use to find out if there is a difference in hours of sleep per night.
Your independent variable is brand of soda, and you collect data on Coke, Pepsi, Sprite, and
Fanta to find out if there is a difference in the price per 100ml.
Your independent variable is type of fertilizer, and you treat crop fields with mixtures 1, 2
and 3 to find out if there is a difference in crop yield.
The null hypothesis (H0) of ANOVA is that there is no difference among group means.
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The alternate hypothesis (Ha) is that at least one group differs significantly from the overall
mean of the dependent
variable.
If you only want to compare two groups, use a t-test instead.

How does an ANOVA test work?

ANOVA determines whether the groups created by the levels of the independent variable are
statistically different by calculating whether the means of the treatment levels are different
from the overall mean of the dependent variable.
If any of the group means is significantly different from the overall mean, then the null
hypothesis is rejected.
ANOVA uses the F-test for statistical significance. This allows for comparison of multiple
means at once, because the error is calculated for the whole set of comparisons rather than
for each individual two-way comparison (which would happen with a t-test).
The F-test compares the variance in each group mean from the overall group variance. If the
variance within groups is smaller than the variance between groups, the F-test will find a
higher F-value, and therefore a higher likelihood that the difference observed is real and not
due to chance
When to use a one-way ANOVA
Use a one-way ANOVA when you have collected data about one categorical independent
variable and one quantitative dependent variable. The independent variable should have at
least three levels (i.e., at least three different groups or categories).
ANOVA tells you if the dependent variable changes according to the level of the independent
variable.

Assumptions of ANOVA
The assumptions of the ANOVA test are the same as the general assumptions for any
parametric test:
Independence of observations: the data were collected using statistically-valid methods, and
there are no hidden relationships among observations. If your data fail to meet this
assumption because you have a confounding variable that you need to control for statistically,
27
use an ANOVA with blocking variables. Normally-distributed response variable: The values
of the dependent variable follow a normal distribution.
Homogeneity of variance: The variation within each group being compared is similar for
every group. If the variances are different among the groups, then ANOVA probably isn’t
the right fit for the data.

One-way ANOVA summary

The ANOVA output provides an estimate of how much variation in the dependent variable
that can be explained by the independent variable.
The first column lists the independent variable along with the model residuals (aka the model
error).
The Df column displays the degrees of freedom for the independent variable (calculated by
taking the number of levels within the variable and subtracting 1), and the degrees of freedom
for the residuals (calculated by taking the total number of observations minus 1, then
subtracting the number of levels in each of the independent variables).
The Sum Sq column displays the sum of squares (a.k.a. the total variation) between the group
means and the overall mean explained by that variable. The Mean Sq column is the mean of
the sum of squares, which is calculated by dividing the sum of squares by the degrees of
freedom.
The F-value column is the test statistic from the F test: the mean square of each independent
variable divided by the mean square of the residuals. The larger the F value, the more likely
it is that the variation associated with the independent variable is real and not due to chance.

Source of Degress of Sums of square Means of square F

variation freedom
Between the H-1 =v1 S.S.C M.S.C=M1 F= m1/m2
classes
Within classes N-h =v2 S.S.E M.S.E = M2
Total N-1

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CHAPTER 2

LITREATURE
REIVIEW

29
REVIEW OF LITREATURE
There is universal agreement that a properly functioning financial system is required for a
thriving modern economy (Kroszner, 2010). In all advanced economies, for instance,
sophisticated financial systems efficiently deliver a broad range of financial services and act
as a critical pillar in contributing to macroeconomic stability and sustained economic growth
and prosperity (World Bank, 2003). Moreover, the well developed financial markets facilitate
mobilization of savings, by offering savers and investors wider choice of instruments. With
NBFCs coming up on the financial system, investors could park their funds at more lucrative
returns in comparison to the bank deposits.
Referring to NBFIs, Greenspan (1999) had stated: “enhance the resilience of the financial
system to economic shocks by providing it with an effective ‘spare tyre’ in times of need”.
Moreover, while short term loans needed by the industry and agriculture are offered by the
banking system, the other forms of services needed by industry as well as other segments of
economy are offered by NBFCs and other similar financial institutions, like factoring,
venture finance and so on.
Hasriman Kaur A. and Dr. Bhawdeep Singh Tanghi (2013) analyzed that NBFCs played
an essential role in terms of macroeconomic prospective as well as strengthening the structure
of the Indian monetary system. Consolidation in the sector and better regulatory structure has
become more focused.
Dr. Amardeep (2013) analysed that “The role of NBFCs in creation of productive national
assets can hardly be undermined. This is more than evident from the fact that most of the
developed economies in the world have relied heavily on lease finance route in their
development process”.
Dr. Yogesh Maheshwari (2013) in his paper state that “Changing Monetary scenario have
opened up opportunities for NBFCs to expand their global presence through self-expansion
strategic alliance etc. The Monetary reforms have brought Indian Monetary system closer to
global standards”.
Sornaganesh and Maria Navis Soris17 (2013) B “A Fundamental Analysis of NBFCs in
India” in ‘Outreach’. The study was made to analyze the performance of five NBFCs in India.
The annual reports of these companies are evaluated so as to ascertain investments, loans

30
disbursed, growth, return, risk, etc. To sum up, the study is concluded that the NBFCs are
earning good margins on all the loans and their financial efficiency is good.
Jency (2017) tried to learn the performance of non-banking financial institutions. She has
found that the NBFC sector assumes a critical role in financial inclusion as it caters to a wide
range of financial activities particularly in areas where commercial banks have limited
penetration. Moreover, the profitability of NBFCs has risen significantly than that of
commercial banks.
Akanksha Goel in her article in ‘ELK Asia Pacific Journal’ studied the growth prospects of
NBFCs in India.
Sunita yadav in her article in ‘International journal of recent scientific research’ studied the
financial performance of selected NBFCs on parameters like Net profit ratio, Return on
Investment, Annual growth rate etc.
Ranjan kshetrimayum in his article in ‘A journal of Radix International educational and
research consortium’ studied the evolution, growth and development of NBFCs in India.
Shollapur M.R in his article in ‘The Indian Journal of Commerce’ has revived concept of
NBFCs. As per him the abstract NBFCs constituted a significant part of financial system and
compliment the service provide by commercial bank in India. The efficiency of financial
services and flexibilities helped them build a large body of client including small borrower
and bigger corporate establishment. The pace of financial liberalization has a intensified the
competition. As a result, there has been a shift towards strategic perspective marketing
process of NBFCs. This perspective enable them to predict the future impact of change and
help to move out of week area and grab new opportunity through continuous monitoring
system.
R.M Srivastava & Divya Nigam in his book Management of Indian Financial Institution
background material for economic growth and financial institution, types of financial
institution, recent trend Indian financial market. He put enfaces on the fact that the money
market has passed through a phase of substantial adjustment and advancement in recent year.
K.C Shekhar & Lakshmy Shekhar in his book has explain role of NBFCs in India has
shown rapid development especially in 1990 owing to their high degree of orientation
towards consumers and implication of section requirement. The role of NBFCs as effective
financial intermediaries arise has been well recognized as they have inherent abilities to take
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quicker decision, assume risk and customize their services provided by bank and market the
components on a conceptual basis.
E. N. Murty suggests the advantage and outlook of NBFCs. In remarkable surgeon under
stringent production like prudential limit and capital adequacy just like M&M Finance, DBS
Chula, Sundaram Finance Sri Ram Transport Finance etc. In outlook NBFCs has been
searching for avenue for future growth, if they get regulatory treatment on for with the bank.
So that large NBFC will be converting and making available credit to credit.
L M Bhole in his book define the NBFCs perform a diversified range of function and other
various financial services to individual, corporate and institutional client. It also play positive
role in accessing certain depositor segment and clearing credit requirement of borrowers. It
also discussing the major financial market in India. Along with related financial instrument
and services i.e. call money, call loan, other short term interest rate instrument and the recent
development in money market.
Shashi K. Gupta, Nisha Gupta & Neeti Gupta in his book define money market is an
opportunity for balancing the short-term surplus fund of the investor with the short-term
requirement to borrowers. Another feature of money market is that they are liquid with
varying degree. It also defines NBFCs play an important role in financial intermediaries
because they can take quick decision making assume greater risks and design their product
to the need of customer.
Kantawala, (1997), in his study “Financial Performance of Non-Banking Finance
Companies in India”, examined the performance of non-banking financial companies for the
period from 1985-86 to 1994-95. Based on secondary data collected from different RBI
bulletins regarding financial and investment companies, the study concluded that there was
a significant difference in the profitability ratios, leverage ratios, and liquidity ratios of
various categories of NBFCs. When two categories were compared, the selected ratios were
not statistically different from each other in majority of the cases. When all the companies
were taken together, null hypothesis was accepted for only three ratios, indicating thereby
that there was no significant difference. From this, it can be inferred that the ratios for all
categories of NBFCs were generally different from each other.

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CHAPTER 3

RESEARCH
METHODOLGY

33
RESEARCH AND METHODOLOGY
3.1 Meaning of research methodology
Research methodology is the specific procedures or techniques used to identify, select,
process, and analyze information about a topic. In a research paper, the methodology section
allows the reader to critically evaluate a study’s overall validity and reliability.
3.1.1 Meaning of research:
Research is defined as the creation of new knowledge and/or the use of existing knowledge
in a new and creative way so as to generate new concepts, methodologies and understandings.
Research is an organized and systematic way of finding answers to questions” Systematic
because there is a definite set of procedures and steps which you will follow. There are certain
things in the research process which are always done in order to get the most accurate results.
3.2 Objective of the study:
1. To analyze the short-term solvency of the selected NBFCS.
2. To appraise the long-term solvency of the selected NBFCS.
3. Financial performance of NBFCS in terms on profitability.
4. Financial performance of NBFCs in terms of return on net worth equity and return on
capital employed
5. To study whether the NBFCs are different or similar in terms of debt-to-equity ratio,
current ratio, return on net worth ratio, return on equity ratio. Net profit ratio

3.3 Research problem

The first step while conducting research is careful definition of Research problem. To ERR
IS THE HUMAN is a proverb which indicates that no one is perfect in this world. Every
researcher has to face many problems which conducting any research that is why problem
statement is defined to know which type of problems a researcher has to face while
conducting any study. It is said that, problem well defined is problem half solved. The
problem statement here is:
“A STUDY ON FINANCIAL PERFORMANCE AND GROWTH OF NON-BANKING
FINANCIAL COMPANIES”

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