Project report on gdp and inflation

1
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

2
2008 3.9
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
0
2
4
6
8
10
12
GDP
Years
GDP
GDP

3
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

4
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 Ratesis 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
0
2
4
6
8
10
12
14
Rates
Years
Inflation Rates
Inflation

5
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

6
Mean 5.24
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.
-2
0
2
4
6
8
10
Rates
Years
Interest Rate
Interest Rate

7
1.4Credit to deposit Ratio
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

8
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
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.
0
10
20
30
40
50
60
70
80
CredittoDepositRatio
Years
Liquidity
Liquidity PNB
Liquidity Axis

9
1.5 Capital Adequacy 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

10
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
0
2
4
6
8
10
12
14
16
18
CapitalAdequacyRatio
Years
Risk
Risk PNB
Risk Axis

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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%.

12
Figure 6: Cost of banks
The graph stated the Cost factor of both the banks. The Costis 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.
0
10
20
30
40
50
60
70
80
Operatingexpensetoincomeratio
Years
Cost
Cost PNB
Cost Axis

13
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.

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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.
0
100
200
300
400
500
600
700
800
900
ROA
Years
Return on Assets
ROA
ROA

15
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.

16
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 11 .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
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

17
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
Model R R
Square
Adjusted
R Square
Std. Error of
the Estimate
Change Statistics Durbin-
WatsonR Square
Change
F
Change
df1df2Sig. 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
Inflatio
n
Pearson
Correlation
.834**
1

18
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
.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 Rateshave 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.

19
2.61 Regression
Model R R
Square
Adjusted
R Square
Std. Error of
the Estimate
WatsonR Square
Change
F
Change
df1df2Sig. 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
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

20
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
df1df2Sig. 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*
N 13 13

21
LiquidityPearson Correlation -.661*
1
N 13 13
Coefficients
Standardized
Coefficients
T Sig.
B Std. Error Beta
1
(Constant) 1079.971260.842 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.

22
2.81 Regression
Model R R
Square
Adjusted
R Square
Std. Error of
the Estimate
WatsonR Square
Change
F
Change
df1df2Sig. 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

23
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
df1df2Sig. 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

24
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
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.

25
2.10.1 Regression
Model R R
Square
Adjusted
R Square
Std. Error of
the Estimate
WatsonR Square
Change
F
Change
df1df2Sig. 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

26
significant impact on ROA as with Gross Domestic Product the profitability of bank on
the basis of ROA is affected.
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
df1df2Sig. 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

27
Inflatio
n
Pearson
Correlation
.859**
1
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.

28
2.12.1 Regression
Model R R
Square
Adjusted
R Square
Std. Error of
the Estimate
WatsonR Square
Change
F
Change
df1df2Sig. 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

29
ROA is affected.
Y = 479.310 - 55.965b.
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
df1df2Sig. 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

30
Liquidit
y
Pearson
Correlation
-.359 1
N 13 13
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 hasno 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.

31
2.15.1 Regression
Model R R
Square
Adjusted
R Square
Std. Error of
the Estimate
WatsonR Square
Change
F
Change
df1df2Sig. F
Change
1 .775a
.601 .565 121.51788 .601 16.574 1 11 .002 1.067
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
.601which means that Inflation has 60.1%
ROA is affected.

32
Regression equation between the two variables can be established as follows :-
Y = -757.892 + 77.569b.
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
df1df2Sig. 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

33
Coefficients
Standardized
Coefficients
t Sig.
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 Riskhave 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

34
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
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.
2.17.4Liquiditythe 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 Riskis 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.

35
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
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.

36
CHAPTER 4
Findings of the study
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 significantimpact 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.

37
Limitation of the study
a)Scope of the studywas restricted to two banks only which acted as a constraint
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.

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