The Determinant of Financial Performance of Indian Public Sector Banks- A Panel Data Approach

Abstract

In the accelerated development of an economy, the role of a vibrant banking system and financial structure is considered as highly indispensable. The banking sector is recognized as an important element to portrait the financial and economic strength of a country. The economic importance of the banking system may be considered in the form of capital formation, inspiring innovation, monetization, and facilitator of monetary policy. The present research work investigates the association between banks' profitability and the banks’ specific factors of Indian Public Sector Banks. The research work is based on secondary data drawn from annual reports of banks from the period of 2015 to 2019. The panel data regression statistical technique has been employed to vindicate the influence of explanatory variables viz. Capital Adequacy, Human Capital, Liquidity, Management Efficiency, Asset Quality, and Earning Quality, which have been employed as independent variables and Return on Equity, as the dependent variable. Panel data regression model results have reported that the regression coefficients are found statistically significant and the high value of adjusted R- square expresses the overall best fit of the fixed effects model. A significant positive relationship has been found between the financial performance of bank (ROE) and human capital, liquidity, management efficiency, and asset quality. Whereas capital adequacy and earning quality of the banks have an insignificant impact on the profitability of banks. Hence, the financial performance evaluation enables the banks to analyze their financial strength and to follow necessary protective initiatives for its sustainability.