Financial Liberalisation And Determinants of Profitability of Commercial Banks in India

Financial liberalisation efforts since 1991 have made perceptible impacts on the profitability of commercial banks in India with varying levels between public and private sectors. One of the objectives of the reform measures is to influence and change in the trends of determinants of profitability of banks towards the attainment of higher levels of profit. The regulated credit flow region wise and sector wise, restriction on the use pattern of deposit mobilised, prudential accountancy norms for asset classification and capital adequacy were some of important factors which acted as a drag on the profability of banks. The financial liberalisation measures were targeted to reverse these identified factors for maintaining the financial viability of banks. The trends on profit and profitability unequivocally proved the significant positive impacts of reform measures on both public and private sector banks. However, the performance improvement with respect to profitability among public sector banks particularly SBI group was astounding. The identified determinants of profitability of all bank groups have changed to the direction favourable for its improvements as explicitly desired in financial liberalisation measures. However, in this process of singled focussed leap towards profit, the social objectives of banking including priority sector lending and branch expansion were turned to be casualty. The withdrawal of public sector banks from their social obligation was not compensated by any other mechanism and this unfilled gap may have the possibility of opening up of another pandoras box of financial exclusion.