The Determinants of Commercial Banks Profitability in India

Abstract

Using an unbalanced bank level panel data, this study tries to examine how bank-specific characteristics and macroeconomic factors affect the profitability of commercial banks (108 commercial banks) in India in the post reform period from 1999 to 2011. The results indicate that profitability of commercial banks in India, regardless of their ownership, is affected by both internal and external characteristics and changes in the overall banking environment. However, the study finds that the impact is not uniform across bank types. The results indicate that banks’ liquidity conditions and size do not impact neither return on equity (ROE) or return on asset (ROA) of the profitability measure. On the other hand, it is found that profitability of private and foreign banks is positively related to their credit risk. The results indicate that overhead cost affects ROE of private and foreign banks positively while public sector banks negatively. Whereas the impact of overheads cost on ROA is positively significant in the case of all banks and negatively significant in the case of private banks. There exists a negative relationship between the level of capital strength and ROE and a positive relationship between the level capital strength and ROA in the case of all banks and public banks, which indicates that the more is the capital strength, the more is the profitability of these banks. The impact of Macroeconomic factors on ROE is insignificant for all cases with conflicting signs across ownership types of the banks. On the other hand on ROA, these indicators are significant when we pool the whole sample together (i.e. all banks) and private banks as a group.