Profitability of Non-Banking Financial Companies in India during Covid-19 Pandemic: A DuPont Analysis

Abstract

The Non-Banking Financial Companies (NBFCs) flourished in Indian landscape since 1980s and since then the sector has undergone various changes. The services provided by these Indian NBFCs are quite similar to those of banks. The uniqueness, however, lies in its credit extension to unbanked customers and customization of financial products. The global financial markets, including India have been severely hit by the COVID-19 pandemic. The present study takes a sample of 52 NBFCs-D (Non- Banking Financial Companies accepting Public Deposits) and 312 NBFCs-ND-SI (Systemically Important Non-Deposit Taking Non-Banking Financial Companies) currently registered with the Reserve Bank of India (RBI). The period of study spans over the financial years 2019-2020 and 2020-2021, during which Covid-19 Pandemic was prevalent. The three-step DuPont Analysis method was applied to analyze the profitability position of the select NBFCs during the years of Covid-19 pandemic. In this analysis, Return on Equity is disintegrated into Net Profit Margin (which measures the net profit generated as a percentage of net revenue), Total Asset Turnover (which measures the efficiency in utilization of assets in generating revenue) and Equity Multiplier (measures the proportion of assets financed by shareholders' equity),to report on profitability performance. The results of the analysis indicate the grim profitability position of Indian NBFCs during the Covid-19 Pandemic. During both the years of the pandemic, i.e., 2019-2020 and 2020-2021, the net profit generated by the select NBFCs was appreciably low. This was reflected in the value of Net Profit Margin for both the years. The revenue generated on utilizing the assets was also very low. This was indicated by the low value of Total Assets Turnover of the select NBFCs in both the years of pandemic. The Equity Multiplier ratio indicated the fact that, a high amount of debt was employed to finance the assets of the select NBFCs in 2019-2020 and 2020-2021.Debt is a cheaper source of finance in comparison to equity. However, incurrence of high amount of debt, when revenue generation is substantially low, leads to failure in servicing of debt. This is a financially risky situation. Along with that low profit indicates, that the low cost of debt did not yield any advantage as far as profit is concerned. The findings of the study indicate that the Indian NBFC sector was critically reeling under pressure with issues of, inadequate profit, fault in generating revenue from assets and inefficient allocation of own funds in assets.