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.