Abstract
The paper examines the factors influencing the profitability of Indian commercial banks considering increased globalization, intensified competition, and enhanced concentration. The sample is a balanced panel dataset of 89 banks operating in India for the period 2005 to 2015. We consider the return on assets (ROA) and the return on equity (ROE) as proxy for measurement of banks’ profitability. The results indicate that profitability of banks in India is affected by both internal and external factors. Strength of equity capital, operational efficiency, ratio of banking sector deposits to the gross domestic product (GDP), had significantly positive effect on profitability of banks and credit risk, cost of funds, non-performing assets (NPA) ratio and consumer price index (CPI) inflation have significantly negative influence on banks’ profitability while bank size and ratio of priority loans to total loans do not have any influence on the profitability. The GDP growth and inflation have significantly negative relation with ROA and inflation has positive influence on ROE.
Highlights
During the last three decades, major banking reforms have been introduced by the Reserve Bank of India (RBI) to improve the strength, health, performance and profitability of the banking industry
Literature review reveals that higher capital ratio, high interest margin, higher inflation rates, operational efficiency and higher non-interest income are positively associated with bank profitability while higher credit risk and cost of capital are negatively associated with bank profitability
Sources of Data—Data for bank specific variables were collected from RBI published ‘Statistical Tables Relating to Banks in India
Summary
During the last three decades, major banking reforms have been introduced by the Reserve Bank of India (RBI) to improve the strength, health, performance and profitability of the banking industry. These reforms and changes were aimed to improve the quality of regulation, create healthy competition, and efficient functioning of banking industry. The main contribution of this study is how bank-specific, industry-specific and macroeconomic determinants affect performance and profitability of Indian banking industry as measured by return on assets (ROA), and return on equity (ROE). This paper investigates, in a single equation framework, the effect of bank-specific, industry specific and macroeconomic determinants on bank profitability.
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