Determinants of bank profits and its persistence in Indian Banks: A study in a dynamic panel data framework

The paper studies the impact of bank specific, industry specific and macroeconomic factors affecting profitability of Indian Banks in a dynamic model framework .The study uses panel data from 42 Indian Scheduled Commercial Banks for the period from 2000 to 2013 and addresses the problem of endogeneity of factors and persistence of bank profits by using Generalised Method of Moments (GMM).The study finds the presence of moderate degree of persistence of profits in Indian Banking Industry, implying that the product markets of Indian Banks are moderately competitive, less opaque due to asymmetry in information. Bank specific variables such as capital to assets ratio, operating efficiency and diversification have been found to be positively affecting the bank profits. Credit risk, measured by provisions for bad debts, negatively impacts the bank profitability. The study also finds evidence in support of the Structure conduct Hypothesis (SCP), using Herfindahl – Hirschman Index (HHI). Bank profits responds positively to the GDP growth, indicating that bank profits are pro-cyclical to the growth of economy whereas the increase in inflation rate affects bank profits negatively .It is observed that the crisis period did not make any significant effect on profitability of banks suggesting that Indian Banks in the last decade have been moving towards efficiency and dynamism