Effect of Financial Leverage on Financial Performance of Indian Public Sector Banks

The study aims to analyse the effect of financial leverage on financial performance of Indian Public Sector Banks using random effects regression model. The model is based on panel data consisting of 12 Indian Public sector banks studied over a period of 14 years from financial year 2010-11 to 2023-24. Financial performance is measured using Return on Equity (ROE) and financial leverage is measured using Debt-to-Equity ratio (DE) and Debt-to Total Assets ratio (DTA). It is observed that Return on Equity (ROE) bears a positive significant relationship with Debt-to-Equity ratio (DE) and Debt-to Total Assets ratio (DTA). The results are in consonance with agency cost theory and other empirical studies. The study indicates the efficient use of debt capital by the Indian Public Sector Banks in increasing the return to its shareholders. Financial leverage helps in increasing returns to shareholders, when the profit generated exceeds the debt-servicing costs.