Bank Financial Performance and its Linkage with Capital: A Dynamic Panel Data Analysis of Public Sector Banks in India

Abstract

This article empirically investigates the linkage of capital infusion in the Public Sector Banks (PSBs) in India with the capital adequacy, asset quality, profitability, operational efficiency and the market position of the banks. Utilising a balanced panel data of total 21 PSBs over 9 years (2009 to 2017), we analyse the key determinants of the Indian PSBs’ profitability, net interest margin (NIM), solvency and market efficiency. The study applies a two-step dynamic panel generalised methods of moments. We find empirical evidence that the Capital Infusion programme of the Government during 2008–2009 to 2016–2017 has significant impact on the performance of PSBs in India. We have observed that with frequent infusion of capital by the government, banks were able to meet the regulatory Basel II/III capital adequacy requirements and it has positive influence on their market capitalisation as well as NIM. However, capital infusion has an insignificant impact on improving return on assets (ROA) of banks. Our study suggests that a higher common equity tier 1 capital ratio leads to better market reputation and solvency position of the banks. The results of the study provides insight for bank management, regulators and policymakers for improving bank performance and better utilisation of scarce capital and public money. JEL Code: G21, G32, G34