Significant Determinants of Profitability of Banking Sector in India

The global banking system in recent times has moved away from unnecessary boundaries of regulations to more deregulated arena, which has not only stimulated competition but has exposed banks world-wide to credit and market risks. Though risks are inherent in banking business but in recent times, they have become more volatile and complex due to problems in resource mobilization and allocation in the context of new banking policy pursued recently in India. The paper reveals that the secret of successful banking in modern times hinges on reconciling between risk and return, which move in opposite direction. Hence, the profitability of a banking business in the era of deregulation and competition largely depends on its ability to efficiently manage the various risks, to which they are exposed in the changed scenario. Profits, in banking terms refer to the excess of interest spread over burden, whereas profitability is a ratio of net earnings to the total funds used. Profitability in the banking parlance denotes the efficiency with which a bank deploys its total resources to optimize its net profits and thus serve as an index to the degree of asset utilization and managerial effectiveness.