Determinants of bank profitability in India

Abstract

This study makes an attempt to examine the determinants of bank profitability in India taking panel data of 121 banks from the year 2000 to 2011. Two measures of profitability have been considered, namely return on assets (ROA) and return on equity (ROE) and two fixed effects regression equations have been run taking ROA and ROE as dependent variables. The regression results show asset quality; ratio of loans to total assets; net interest margin; and non–interest income as a percentage of total assets emerging as significant determinants of both measures of bank profitability. For the ROA measure, apart from these indicators, two more variables have come out to be significant determinants of profitability, namely size of bank and capital adequacy ratio. Both regression equations also show that macroeconomic factors of the Indian economy are not significant determinants of bank profitability in India.