THE DETERMINANTS OF PROFITABILITY OF SCHEDULED COMMERCIAL BANKS IN INDIA: A TIME SERIES AND CROSS-SECTIONAL ANALYSIS

Abstract

The current study examines the determinants of profitability of Indian scheduled commercial banks. The analysis is conducted over a period of 17 years in which the Indian banking sector has faced different challenges such as implementation of Basel II (2008), Basel III (2013) accord and issues related to demonetization (2016), banking sector sustainability and financial crisis in U.S (2008).The analysis is based on balanced panel data over a period ranging from 2005 to 2021 for 33 scheduled commercial banks of India. Profitability of Indian banks is measured by two proxies, namely,return on assets (ROA) and return on equity (ROE),whereas bank size,assets quality,capital adequacy,liquidity, operating efficiency, deposits, leverage, and assets management are used as bank-specific factors. Further, a set of macroeconomic determinants such as gross domestic product,inflation rate, export,import,interest rate, and financial crisis are used as independent variables.Stationary test along with correlation matrix, pooled, fixed, random effect models and Hausman test are used in this study. The results revealed that bank size; assets management ratio, and operational efficiency, are the most important bank-specific determinants have positively and significantly affect the profitability of Indian commercial banks as measured by ROA as well as ROE.However,leverage ratio and asset quality have significant and negative impact on ROA and ROE during the period of study.With regard to the macroeconomic determinants,the results revealed that the GDP,export,and interest rate are found to have a positive significant impact on ROA and ROE.However,inflation rate and crisis have significant and negative impact on ROA and ROE during the period of study.