Impact of Capital Adequacy and NPAs on Bank Profitability: Evidence from Indian Public Sector Banks

Abstract

The objective of this article is to analyse how capital adequacy and non-performing assets affect the Indian public sector banks’ profitability. Panel regression is used to analyse data from 12 public sector banks of India for the period 2014-2023. A total of 12 hypotheses are tested. The findings indicate that capital adequacy norms exert a beneficial effect on return on assets, return on equity and net interest margin, hence, aiding public sector banks in enhancing their profitability. On the contrary, the profit margin of Indian public sector banks is diminished by non-performing assets, which have an adverse effect on the return on assets, return on equity and net interest margin. Additionally, it was determined that profitability is positively impacted by the credit deposit ratio, whereas business per employee has a negative link with return on assets.

Keywords: Public Sector Banks, Capital adequacy, Profitability, Return on Assets, Return on Equity, Non-Performing Assets, Credit Deposit Ratio, Net Interest Margin, Business Per Employee

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