Performance of Indian Commercial Banks-Identifying the Key Discriminators

Profitability of Banks assumes greater importance in the changing scenario of autonomy and financial reforms. The objective of the study is to develop a Discriminant function for bank profitability using the most significant ratios and is confined to 78 commercial banks. This Analysis identified only five variables i.e., X4 (Priority Sector Advance/Net Advances), X5 (Interest Income/Total Assets), X6 (Net interest Spread/Total Assets, X7 (Noninterest income/Total Assets) and X9 (Wage Bills/Total Expenses) among the 13 variables as the significant discriminators of bank profitability (ROA-the dependent variable). The canonical correlation of the Discriminant function is 0.653 which indicates a fairly strong relationship between the groups and the Discriminant function. The classification accuracy was 75% (21/28) in Foreign banks, 54% (13/23) in private banks and the least 60% (17/27) in Public Sector banks. The Discriminant model developed and the reduced set of five key variable provide an empirical tested framework for financial decision-making in the Indian banks.