Abstract
The present study attempts to evaluate the financial performance of selected Indian commercial banks for the period from 2012/13 to 2016/17. The study comprises 16 commercial banks, 11 representing public sector and 5 from private sector, and the financial performance of these banks are analysed using the financial ratios. The study shows that the financial performance of private sector banks is relatively better than the public sector banks throughout the study period. Besides, the study examines the impact of liquidity, solvency and efficiency on the profitability of the selected Indian commercial banks by employing the panel data estimations, viz. the Fixed Effect and Random Effect models. The empirical results from the panel data estimations revealed that the liquidity ratio and solvency ratio, and the turnover ratio and solvency ratio are found to have positive and significant impact on the profitability of selected public sector and private sector banks, respectively, bearing testimony to the fact that profitability is a function of those ratios.
Highlights
Solvency and liquidity are very significant for banks since its assets and loans have diverse maturities
The present study attempts to evaluate the financial performance of selected Indian commercial banks for the period from 2012/13 to 2016/17
The study examines the impact of liquidity, solvency and efficiency on the profitability of the selected Indian commercial banks by employing the panel data estimations, viz. the Fixed Effect and Random Effect models
Summary
Solvency and liquidity are very significant for banks since its assets and loans have diverse maturities. Banks have the principal role of converting liquid deposit (liabilities) to illiquid assets such as loans, which makes them intrinsically vulnerable to liquidity risk. The liquidity management shows how efficiently a bank manages its short duration requirement and invests the funds to raise the profitability of the organization. The optimum level of liquidity guarantees a bank to meet their short term debts and the proper management of flow can be promised by a profitable business. It is impossible for banks to endure without making profits and there exists positive association between liquidity and profitability, which implies that lower liquidity position may result in lower profitability due to greater requirement for loans, and low profitability would not generate sufficient cash flows, creating a viscous cycle [1]. The liquidity is negatively associated with profitability of the banks because of holding liquid assets tend to condense income due to the lower rates of return connected with liquid assets [2]
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