Journal of Applied Finance & Banking

Profitability of Banks in India: Impacts of Market Structure and Risk

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• Abstract

   

  This paper investigates the impacts of market structure and risk on profitability of Indian banks after controlling the influences of some bank specific and macroeconomic determinants. Employing two-step Generalized Method of Moments (GMM) system estimator on a data set of 40 listed Indian commercial banks over a period of 15 years (2002 – 2016), our results suggest that there is a moderate degree of persistence of profit in Indian banking sector during the study period. We find significant negative impact of bank risk on profitability in the Indian banking Industry. With regard to the influence of market structure, the study observes negative association between concentration and profitability and thus, our finding does not support the traditional SCP hypothesis. Regarding the other explanatory variables, the findings show that diversification and capitalization positively influences profitability of Indian banks. In contrary, employee productivity and growth in GDP have negative influence on profitability. On the other hand, the study fails to discern any significant impact of liquidity and bank size on the profitability of Indian banks.

   

  JEL classification numbers: G21, D4

  Keywords: Market Structure; Structure-Conduct-Performance Hypothesis; Efficient-Structure Hypothesis; Bank Risk; Bank Profitability; Generalized Method of Moments.