A Comparative Study of Profitability Determinants of Banks in India

Abstract

Performance evaluation is a critical approach for an enterprise to provide incentive as well as restraint to their operators. It is an important channel for stakeholders of the enterprise to become aware of the performance. The performance of banks can be evaluated in terms of profitability. This paper attempts to study the performance of public, private and foreign banks (FBs) in India in terms of profitability in the post-reform era. The current research is exploratory in nature and considers secondary data for the quantitative analysis. The study is based on a balanced panel data of 70 banks, which consists of 26 public-sector banks, 18 private domestic banks and 26 FBs for the period 1999–2012, that is, 14 years. The profitability in terms of return on assets (ROA) is regressed on bank specific, industry specific and macroeconomic variables. The results show that ROA is determined significantly by non-interest income, credit risk, operating expenses, size and capital strength. A sector-wise analysis reveals that these variables have different impact on profitability across different categories of banks. The bank-specific factors are found to be significant factors impacting profitability in comparison to industry-specific and macroeconomic factors. The study has important implications for bank management, policy makers and investors.