Profitability determinants of Indian scheduled commercial banks: a classification-based analysis
Bateshwar Singh, Lal Bahadur Singh, C.A. Athira, Megha Rani PatelPurpose
This study challenges the homogeneous treatment of banks in prior literature by investigating how the determinants of profitability vary across different groups of 70 Indian scheduled commercial banks (SCBs) from 2017–18 to 2022–23, aiming to uncover heterogeneous profitability dynamics.
Design/methodology/approach
Using a classification-based heterogeneity approach, SCBs are categorised into groups on the off-balance sheet exposure to total liabilities ratio (OBS), net profit to total assets ratio, net NPA to net advances ratio, lending to sensitive sectors as a percentage of total advances, and business per employee and profit per employee. Profitability (ROA, ROE) is then analysed using panel regressions selected through diagnostic, with robustness confirmed by dynamic system GMM estimations.
Findings
The drivers of profitability vary significantly across bank profiles. Capital adequacy is a critical positive driver for banks with high NPAs but is not statistically significant for stronger banks. On the other hand, poorer asset quality (higher NPAs) is associated with higher ROE, suggesting a short-term risk-return trade-off specific to the Indian market. Bank size exhibits economies of scale for ROA but diseconomies for ROE. Operational efficiency is a consistently significant determinant across most groups.
Research limitations/implications
Future research should extend this classification framework to analyse specific regulatory shifts (the Basel III transition) and incorporate non-banking financial companies to provide a broader systemic perspective.
Practical implications
The findings demonstrate that a uniform approach to bank management and regulation is inadequate. We provide empirical insights for tailoring strategies to specific bank profiles, such as weaker banks prioritising capital augmentation, to enhance performance and support systemic financial stability.
Originality/value
This study contributes to the literature by applying a classification-based heterogeneity framework to Indian SCBs, addressing a key limitation of prior studies that treat banks homogeneously.