Impact of Bank Efficiency on the Profitability of the Banks in India: An Empirical Analysis Using Panel Data Approach

Abstract

This study aims to determine the impact of banking efficiency on the profitability of the Indian banking division. The ratios (key variables) used in the study are mentioned by the Reserve Bank of India—RBI (Central bank of India). Through a quantitative approach, pooled panel regression, univariate analysis, correlation, and descriptive statistics models are used by taking annual data of the Indian banking division from 2001 to 2020 available on the Thomson Reuters (Refinitiv) Database. Unbalanced cross-sectional data (panel data) comprising 527 bank-year observations for 33 Indian banks were studied. It was decided to evaluate the impact of efficiency (cost to income ratio and staff expenses to total expenses ratio) on the profitability (return on assets and net interest margin ratio) of the banks from the Indian banking division. The results revealed that the cost to income ratio has a significant negative impact on the bank return on assets and net interest margin ratio. The staff expenses to total expenses ratio has a significant positive impact on the bank return on assets and a positive nonsignificant impact on the bank net interest margin ratio.