Explanatory Factors of Indian Private Banks' Profitability: A Panel Data Approach

The large and growing level of nonperforming assets in the Indian banking sector is unarguably one of the biggest problems, wiping off the profitability of banks irrespective of their ownership. The present study examines the impact of different macroeconomic and bank-specific drivers of profitability on private-sector banks operating in India. The study takes return on assets (ROA) and return on equity (ROE) as a proxy for the banks’ profits covering the period from 2005 to 2020. Both fixed-effect and randomeffect models are used. The findings reveal that bank size, net interest margin, noninterest income (NII), and gross domestic product (GDP) have a favourable impact on ROA, whereas non-performing assets (NPAs) exert a considerable negative impact on ROA. The impact of capital adequacy ratio (CAR), efficiency (EFF), and inflation (INF) on ROA are statistically insignificant. Further, the results show that bank size, capital adequacy, efficiency, and asset quality have a considerable negative effect on ROE, but noninterest income and GDP influence positively. The study has significant implications for bankers and regulators when it comes to making strategic decisions to improve bank profitability while developing policies.