Determinants of Public Sector Bank's Profitability in India: An Empirical Study

Abstract

The economic development of country depends on the effective banking system. In recent years, there have been considerable pressures on the profitability of banks. The study investigates the long run equilibrium relationship between the return on assets (ROA) and nine variables over the period 2005 to 2014. Johansen's co-integration test and vector error correction model have been applied to explore the long-run equilibrium relationship. The analysis reveals that the returns on assets of the Indian public sector banks are positively co-integrated with all the nine variables under the study and hence, a long-run equilibrium relationship exists between them. The results of VECM reveal that secured advances to total advances, burden to total assets, burden to interest income, operating profits to total assets, non-interest income to total assets and profit per employee causes return on asset in long run and short run. While, non performing assets, deposits to total liabilities and net interest margins causes return on assets in short run only. The findings from Granger causality based on the VECM indicate bidirectional causality exists between all the variables tested and return on assets except non-performing assets. Non-performing assets granger causes return on assets but not the other way round.