Relating Determinants of Profitability of Commercial Banks in India with Selected Financial Variables: a Dynamic Panel Data Analysis

Abstract

This article analyses the elements that determined the success of India's commercial banks between 1992 and 2016. Arellano and Bond's Dynamic Panel Data is used for the unbalanced panel data of 80 banks in India during the reform period, broken down into three ownership groups: Public Sector Banks, Domestic Private Banks, and Foreign Banks. The research also considers the NIM and ROA as supplementary measures of bank profitability. The Return on Assets (ROA) compares the profitability of a bank to its total asset base, while the Net Interest Margin (NIM) measures the profitability of the bank's interest-bearing activities. Explanatory variables include bank-specific (BS), industry-structural (IS), macroeconomic (ME), and other-specified (OS) factors. The empirical results demonstrate that industry-specific and macroeconomic factors, in addition to the banks' inherent features, impact profitability. Profitability of Indian banks is found to be heavily influenced by political and ownership issues. However, the profit-influencing factors differed widely among the groupings.