Abstract
The banking sector plays a crucial role in the economic growth of a nation. The purpose of this study is to examine the long-term association between banks’ performance and the economic growth of a developing economy: India. The study used a panel of data of 20 public sector banks for the period 2009 to 2019. It applied the Pedroni and Kao test of co-integration, panel vector error correction model (VECM) dynamic, panel fully-modified ordinary least squires OLS (FMOLS), and dynamic OLS (DOLS) to estimate the relationship of interest margin return on assets, bank investment, and lending capacity of the bank with gross domestic product (GDP) of the country. The identification and incorporation of these bank-related variables are the innovations of this study. The results indicate that the bank-related variables are co-integrated with economic growth. Further analysis indicates a significant relationship between interest margin and return on assets with economic growth. In addition, lending capacity and investment activities are not significantly associated with economic growth, leading to the policy recommendation to improve upon these two factors in order to achieve higher growth rates.
Highlights
The financial services industry plays a significant part in the overall growth of an economy by generating employment, providing various investment avenues to the investors and financial services to the customers and the community (Berger et al 1999)
If the co-integration exists among the study variables, we use fully-modified ordinary least squires OLS (FMOLS) estimations to identify the long-run association between economic growth, return on assets, lending capability, interest margin, and bank investment
We examined the co-integration relationship between lending capability, bank investment, return on assets, interest margin, and India’s economic growth for the period 2009 to 2019
Summary
The financial services industry plays a significant part in the overall growth of an economy by generating employment, providing various investment avenues to the investors and financial services to the customers and the community (Berger et al 1999). Economic growth leads to economic development, for which capital required is provided through the financial services industry (Beckett et al 2000). The banks in the economy aid in making funds accessible by moving excess funds from depositors (with no instant requirements of those funds) and channeling those funds as a credit to investors who have excellent ideas for generating surplus funds in the economy, but have a deficiency of the funds to implement those ideas (Nwanyanwu 2010). This generates income for the banks, ensuring profitability. It is enlightening to understand that the banking sector is a prominent one in the financial sector, as it has stood as one of the most extensive means of attracting many developing nations (Adeniyi 2006)
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