Impact of Financial Risks on the Profitability of Commercial Banks in India

Abstract

The Indian banking sector is exposed to various types of risks which arise from both the external and internal environments. Banks long-term sustainability and financial feasibility are vulnerable financial risk. Credit risk, operationalrisk, marketrisk, and liquidity risk stances a major challenge, despite growth in the banking system. This study examines the relationship between profitability and financial risks of 43 Indian commercial banks for the period of 11 years, (2008 to 2018). The quantitative research design was adopted in this study and the profitability measures that have been used in this study are the Return on Assets (ROA) and Return on Equity (ROE) while the financial risks are Interest Rate Risk (IRR) and Foreign Exchange Risk (FER). In this study, Time- Series Cross-Sectional secondary balanced panel data regression analysis of fixed effect and random effect model have been implemented. The findings of the study indicated that the relationship between ROE and IRR were found to be weakly significant, and on ROA the effect of IRR is significant for all the commercial banks. On both profitability measures, the FER was found to have an insignificant impact. The study concludes that there exists an inverse relationship between banks profitability and financial risk. Hence, the commercial banks in India together with the bank supervisors should make a trade-off between profitability and financial risk.