The determinants of profitability of Indian listed commercial banks: A panel data approach

Abstract

This study aims at finding out the determinants of Indian commercial banks profitability. Profitability of Indian banks is measured by three important variables namely, Return on Assets (ROA), Return on Equity (ROE) and Net Interest Margin (NIM). The study also uses a set of independent variables such as bank specific factors which include bank size, assets quality, capital adequacy, liquidity, operating efficiency, deposits, leverage, assets management and the number of branches. Pooled, fixed and random effects models and Generalized Method of Moments (GMM) are built on panel data of 10 years for more than 60 commercial banks of India. The study also takes into account Gross Domestic Product (GDP), inflation rate, interest rate and exchange rate as macroeconomic determinants. The results of the survey show that all bank-specific factors, except the number of branches, had a significant impact on the profitability measured by NIM. The results also show that all macroeconomic determinants used in the study are important and have a negative impact on the profitability of Indian commercial banks.