Does Unemployment Affect Banking Performance? A Case Study of Indian Commercial Banks

This study attempts to examine whether unemployment has any role in influencing the performance of commercial banks in India. Taking the data of all public and private sector commercial banks which were continuously in operation over the period from 2001 to 2017, we have attempted to investigate the influence of unemployment on the performance of Indian banking sector. We have considered return on equity and net interest margin as the measure of banking performance, unemployment as the focused independent variable, asset quality, operating efficiency, quality of loan as the bank-specific control variables and gross domestic product, inflation and unemployment as the macroeconomic control variables for this study. Applying GMM estimation method developed by Arellano and Bover we have tried to observe whether unemployment leave any impact on banking performance of India. Estimation results suggest that unemployment has significant positive association with banking performance and this result remains unchanged with the sequential inclusion of bank-specific and macroeconomic control variables. All the bank specific control variables exert significant negative influence on the banking performance whereas in case of macroeconomic control variables we observe mixed findings. The results arrived in this study have profound implications in formulating suitable policy decisions for the growth and development of the Indian banking sector.