Determinants of Profitability of Private Sector Banks in India

Abstract

As financial intermediaries banks play an important role in the operations of an economy. The paper examines the determinants of profitability in the private sector banks in India for the years 2006-07 to 2009-10. A sample of 23 banks in the private sector has been taken. Backward Stepwise Regression Analysis has been used to study the impact of these determinants on the performance of the banks. Return on Assets (ROA) has been taken as the dependent variable while other variables as Spread ratio, Provisions and contingencies, Non interest income, Credit/deposit ratio, Operating expense ratio, Profit per employee, Business per employee, Investment/deposit ratio, Capital adequacy ratio, Non performing assets and Type of bank have been controlled in the study. The results show that Spread ratio, Provisions and contingencies, Non interest income, Operating expense ratio, Profit per employee, Investment/ deposit ratio and Non performing assets are significant variables in affecting the profitability of banks in the private sector of Indian economy. It is also suggested that if banks concentrate on these variables, they would be able to generate better profitability in the present globalised era.

View PDF