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

Abstract

The current study examines the determinants of profitability of Indian commercial banks. The analysis is conducted over a period of 10 years in which the Indian banking sector has gone under different changes such as demonetization and issues related to banking sector sustainability and banking sector frauds. The analysis is based on balanced panel data over a period ranging from 2008 to 2017 for 69 commercial Indian banks. 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, assets management, and the number of branches are used as bank‐specific factors. Further, a set of macroeconomic determinants such as gross domestic product, inflation rate, interest rate, exchange rate, financial crisis, and demonetization are used as independent variables. Stationary test along with pooled, fixed, random effect models and panel correction standard error are used in this study. The results revealed that bank size, the number of branches, assets management ratio, operational efficiency, and leverage ratio are the most important bank‐specific determinants that affect the profitability of Indian commercial banks as measured by ROA. Furthermore, among the bank‐specific determinants, the results revealed that bank size, assets management ratio, assets quality ratio, and liquidity ratio are found to have a significant positive impact on ROE. With regard to the macroeconomic determinants, the results revealed that the inflation rate, exchange rate, the interest rate, and demonization are found to have a significant impact on ROA. However, in the case of ROE, the results show that all macroeconomic determinants except demonization have a significant impact on the bank's profitability as measured by ROE.

Exchange Rate fluctuations and Financial Performance of Banks: Evidence from Sudan

“…As a result the banking sector in Sudan is insulated from the effect of international currency movements and its exposure to currency risk that may create unpredictable profits and losses is minimal. According to Almaqtari et al (2018), extent of deterioration of local currency as compared to other foreign currencies could be a reason for contradicting study results. The persistent worsening of the Sudanese Pound against the US dollar leads to a continuous devaluation of the national currency and changing, unstable fiscal and financial policies.…”

“…As stated by Kemisola et al (2016), the effect of exchange rate fluctuation on banks performance is materially affected by the specific measure used to judge the bank performance. According to Almaqtari et al (2018), extent of deterioration of local currency as compared to other foreign currencies may be a reason. Razi et al (2012) noted that magnitude of foreign direct investment may affect the extent and direction of association between exchange rare and bank profitability.…”

A Study on the Impact of Capitalization on the Profitability of Banks in Emerging Markets: A Case of Pakistan

“…Dietrich and Wanzenried (2011) argued that well-capitalized banks are safe, remain profitable, and can become resilient, even during economic difficulties, and rely less on external funding. Almaqtari et al (2019) recently reported that by increasing their equity, the banks can absorb the negative results of a higher volume of non-performing loans arising as a result of excessive lending during economic boom periods. They further suggested that a high amount of regulatory capital indicates creditworthiness, which help reduces the cost of borrowing.…”

The Determinant of Financial Performance of Indian Public Sector Banks- A Panel Data Approach

“…Along with the banks' specific factors, the researcher has also taken the macroeconomic factor to analyze its impact on the profitability such as; demonetization (Almaqtari et al 2018); inflation rate, oil price, market capitalization and rate of GDP rate, (Robin et al 2018); (Chowdhury & Rasid. 2017); competitive market and economy growth (Petria et al 2015); the rate of interest and rate of tax (Dietrich & Wanzenried, 2011); Inflation Rate and Financial Crisis, (Bouzgarrou et al 2017); GDP and Inflation, (Tan, 2016); political factors, (Yahya et al 2017) inflation and unemployment (Singh & Sharma 2016).…”