Forecasting the Future: Impact of Capital Adequacy and NPAs on Profitability in Indian Banks

The banking industry is a cornerstone of economic stability, with the capital adequacy ratio (CAR) serving as a critical metric to evaluate a bank's financial strength.In India, CAR ensures that banks maintain adequate capital to absorb potential financial shocks, with Tier I capital being a fundamental component of this stability (Basel Committee on Banking Supervision, 2011).However, the growing prevalence of non-performing assets (NPAs) has emerged as a major hurdle for profitability, requiring banks to divert significant resources toward provisions for bad loans (Bajpai, 2020).Research highlights that while robust capital adequacy can help mitigate the detrimental impact of NPAs on profitability, it may simultaneously place limitations on credit expansion (Das & Ghosh, 2018).This study aims to explore the interconnection between capital adequacy, NPAs, and profitability in Indian banks, focusing on the period from 2019 to 2027, to provide insights into their combined influence on the sector's performance and sustainability. LITERATURE REVIEW: Capital Adequacy and ProfitabilityResearch consistently underscores the critical role of capital adequacy in driving bank profitability.Harbi (2019) asserts that maintaining a high capital adequacy ratio not only ensures adherence to regulatory standards but also supports profitability by lowering the costs tied to financial risks.A study by Gupta and Kumar (2021), examining the link between capital adequacy and the performance of Indian public and private sector banks, revealed a significant positive correlation.Their findings suggest that banks with robust capital reserves are better equipped to weather economic fluctuations, enabling steady profit generation.