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Modelling profitability of Indian banks

Author

Listed:
  • Sinha, Pankaj
  • Dutta, Dipanwita

Abstract

This paper identifies the key determinants of profitability of Indian banks. It integrates the macroeconomic environment and industry level variables of India for predicting profitability of Indian banks. A simultaneous equation system has been formulated to derive the estimates of net interest income (NII) and Credit for the banking system as a whole. Net interest income as well as efficiency ratio have significant role in determining profitability in Indian banking scenario. The Net interest income reacts inversely to bond yields and positively to credit. This stems from the inverse relationship of credit demand to bond yields and positive relationship of GDP with credit creation. Further, Deposit mix (higher share of low cost deposit in the total deposits) has favourable impact on NII%.

Suggested Citation

  • Sinha, Pankaj & Dutta, Dipanwita, 2011. "Modelling profitability of Indian banks," MPRA Paper 31156, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:31156
    as

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    References listed on IDEAS

    as
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    5. Kwast, Myron L. & Rose, John T., 1982. "Pricing, operating efficiency, and profitability among large commercial banks," Journal of Banking & Finance, Elsevier, vol. 6(2), pages 233-254, June.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Profitability; Net Interest Income; GDP; Interest Rate; Efficiency Ratio;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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