Modelling profitability of Indian banks

Abstract

This paper identifies the key determinants of profitability of Indian banks. It integrates the macroeconomic environment and industry level variables of India for predicting profitability of Indian banks. A simultaneous equation system has been formulated to derive the estimates of net interest income (NII) and Credit for the banking system as a whole. Net interest income as well as efficiency ratio have significant role in determining profitability in Indian banking scenario. The Net interest income reacts inversely to bond yields and positively to credit. This stems from the inverse relationship of credit demand to bond yields and positive relationship of GDP with credit creation. Further, Deposit mix (higher share of low cost deposit in the total deposits) has favourable impact on NII%