Analysis of Income Composition, Asset Quality and Profitability of Indian Commercial Banks
Fifth International Scientific Conference Proceedings, ERAZ 2019
8 Pages Posted: 17 Jun 2020
Date Written: May 23, 2019
Commercial banks are traditional financial institutions accepting deposits and lending whereby maintaining financial stability. Stability of the banking system and viability of banks is considered to be of principal significance growth of the economy. The shifting landscape of financial system has brought transition in the businesses of the banks along with rise in stressed asset levels. Quality of assets of bank directly affect the income, expense and balance sheet of the banks. The paper attempts to investigate the change in the income composition of banks further it also examines the change in the asset quality of banks over a period of 10 years. The research also aims to review the relationship between the asset quality and profitability of banks. Using a sample of public and private banks from India, a panel regression analysis affirmed the interrelationship between income, asset quality and earnings which indicates banks focus on nontraditional income has improved the quality of earnings, however higher credit to deposit ratio has declined the asset quality over the time span. Lower asset quality lead to lower return on assets and return on equity which confirms to the study by Lown and Friedman (1991) lower asset quality in economies defer economic recovery by decreasing operating profit margin and eroding capital base for new loans.
Keywords: Financial Stability, Asset Quality, Return on Asset, Income, Balance Sheet
JEL Classification: E, G
Suggested Citation: Suggested Citation