Decoding Profitability Black Box of Indian Banking Sector – An Empirical Study

Abstract

The aim of this research study is to decode the profitability black box of Indian banking sector so as to identify important determinants of their profitability. Banking sector is closely interlinked with all sectors of economy and hence their financial health is a matter of importance not only for themselves but also for their share holders, vast customer base, employees, policy makers and economy as a whole. This research study comprises seven variables viz. Profit After Tax to Total Revenue, Capital Adequacy Ratio, Cash to Deposit, Employee Cost to Total Expenses, Growth in Net Profit, Total Debt to Equity and Yield on Advances. These variables were critically investigated over a period of ten years employing various statistical techniques including multiple regression analysis. The Yield on Advances emerged as the most important variable influencing the profitability of Indian banking sector. The Employee Cost to Total Expenses was found to be moderately influential on profitability. However, Capital Adequacy Ratio, Cash to Deposit, Growth in Net Profit and Total Debt to Equity were detected as statistically irrelevant variables in this attempt of decoding the profitability black box of Indian banking sector.