Determinants of Bank Asset Quality and Profitability - An Empirical Assessment

Swamy, Vighneswara (2013): Determinants of Bank Asset Quality and Profitability - An Empirical Assessment.

Abstract

Determinants of default risk of banks in emerging economies have so far received inadequate attention in the literature. Using panel data techniques, this paper seeks to study the determinants bank asset quality and profitability using robust data sets for the period from 1997-2009. The findings of the study reveal some interesting inferences contrary to the established perceptions. Priority sector credit has been found to be not significant in affecting the NPAs contrary to the general perception and similar is the case with that of rural branches implying that aversion to rural credit is a falsely founded perception. Bad Debts are dependent more on the performance of the industry than other sectors of the economy. Public sector banks have shown significant performance in containing bad debts private banks have continued to be stable in containing the bad debts as they have better risk management procedures and technology, which definitely allows them to finish up with lower levels of NPAs. Further, investigating the effect of determinants on profitability it is established that while capital adequacy and investment activity significantly affect the profitability of commercial banks apart from other accepted determinants of profitability, asset size has no significant impact on profitability.

• Item Type: MPRA Paper
• Language: English
• Keywords: Banks, Risk management, Ownership structure, Financial markets, Non-Performing Assets, Lending Policy, Macro-economy, Central Banks, Banking regulation, Financial system stability
• Subjects: E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages; G - Financial Economics > G2 - Financial Institutions and Services > G28 - Government Policy and Regulation; G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy ; Financial Risk and Risk Management ; Capital and Ownership Structure ; Value of Firms ; Goodwill

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