What influence the performance of banks? Evidence from public sector banks in India

Abstract

Purpose Every shock, starting from the banking sector reform in 1992 to the global crisis due to Covid-19 pandemic, affects the performance of banks. The shocks and transformations jeopardise the bank’s performance. This study cover period of 30 years starting from 1992. So, the reason behind taking only public sector banks is that after 1991–92 many banking sector reforms took place, and many new private sector banks and foreign sector banks entered into competition due to the liberalization, privatization, globalization (LPG) policy. So, it has been difficult for public sector bank to manage their performance in a competitive market. So, the purpose of this study is to find out influencing factors of bank performance especially public sector bank, because, it has been vital to identify factors influencing their performance. Design/methodology/approach The current study explores the determinant of the performance of public sector banks in India. Currently, in India, 12 banks are public sector banks, which capture 59.8% market share in the banking industry. After 1994 new licences were issued by Reserve Bank of India for many banks, and foreign sector banks entered the market as an effect of LPG policy, and market competition is one of the significant determinants of the performance of banks. Thus, the panel regression model is used to analyse the impact of various determinants on the performance of public sector banks (from 1992 to 2021). Return on equity and return on assets are used as indicators of performance, whereas influencing factors are divided into two parts, bank-specific factors, which include bank size, asset quality (AQ), liquidity, credit deposit ratio (CDR), capital adequacy, debt-equity ratio, employee’s productivity and macroeconomic factors which include inflation rate, tax rate and gross domestic product (GDP). Findings Results of the study show that bank size is not an essential factor for measuring bank performance because it is insignificant with both indicators of performance. AQ, liquidity ratio and CDR are significant in both models with negative impact. Macroeconomic factors like GDP are insignificant with both indicators with positive relations and tax rates are significant with a positive relationship. The inflation rate is significant but affects negatively to performance. Research limitations/implications This study only focuses on public sector banks. So, the results for private and foreign sector banks might differ. Considering the larger market share compared to other sector banks, the authors are focusing on public sector banks only. Foreign banks and cooperative banks are not included current analysis because of huge numbers and different working environments. Originality/value Determining influencing factors of bank performance is crucial because it will help the bank take various policy implications and formulation. Since independence measuring bank performance are important area.