Determinants of Profitability in Indian Housing Finance Companies: An Empirical Analysis

Abstract: Housing Finance Companies (HFCs) are essential non-banking financial institutions (NBFIs) in emerging economies where housing remains an active area of development. To ensure that low-cost and hassle-free housing finance is accessible to customers, it is crucial that HFCs function profitably. While previous studies have studied determinants of risk in financial intermediaries that provide housing finance, this is the first study which focuses on the issue of profitability in the case of HFCs. Specifically, this empirical study identifies determinants of profitability in the case of Indian Housing Finance Companies (HFCs) using the panel data regression method. The study employs a panel dataset of 57 Indian HFCs for the period 2011-2019. The profitability of HFCs is measured using the Return on Assets ratio. The results present three interesting findings. First, HFCs with a larger size exhibit higher profitability, suggesting that smaller HFCs face diseconomies of scale and scope. Second, an increase in interest expenses and compensation to employees is associated with reduced HFC profitability. Lastly, ownership characteristics of the HFC are key determinants of profitability. Specifically, we find that being a subsidiary of a commercial bank increases HFC’s profitability. Contrarily, being government-owned and being affiliated to a large business group is negatively associated with HFC profitability.