Financial Performance of Private Sector and Public Sector Banks in India An Empirical Analysis

International Center for Business Research
Issue: Volume 1 Dec 2012; Link: icbr.net/0112.3
Financial Performance of Private Sector and Public

Sector Banks in India: An Empirical Analysis
Ramachandran Azhagaiah1, Sandanam Gejalakshmi
1
KanchiMamunivar Centre for Post Graduate Studies (Autonomous with A Grade and Centre with Potential for
Excellence by UGC) (Government of Puducherry) Affiliated to Pondicherry University
Puducherry 605 008, India
Abstract: The objective of this study is to analyze the financial performance of banking sector in India by
classifying the banks based on their financial characteristics. A total of thirty six banks (17 private and 19 public
sector banks) were considered for analysis, and simple regression model was used to estimate the impact of asset
management, operational efficiency, and bank size on the financial performance. The study reveals that the banks
with higher total capital, deposits, and total assets do not always mean that they have better financial performance.
The overall banking industry is strongly influenced by asset utilization (ASSTUTZ), operational efficiency
(OPEFF), log of asset size (Log of ASSTSIZ), in addition to return on assets (ROA) and interest income (INTINC).
Private sector banks are positively influenced by asset utilization (ASSTUTZ), and operational efficiency (OPEFF)
with interest income (INTINC).While, public sector banks are strongly and positively influenced by operational
efficiency (OPEFF), asset management (ASSTMGT), return on assets (ROA) and interest income (INTINC). This
shows that public sector banks performed remarkably well during the period than that of the private sector banks.
The overall regression analysis shows that the financial performance of the banking industry is strongly and
positively influenced by the operational efficiency, asset management, and interest income size.
Keywords: Asset management, commercial bank, financial performance, operational efficiency
JEL Classification: M12, M 41, G 24
Introduction
The banking sector is considered to be an important
source of financing for most businesses. The
common assumption, which underpins much of the
financial performance research and discussion, is that
increasing financial performance will lead to
improved functions and activities of the
organizations. The subject of financial performance
and research into its measurement is well advanced
within finance and management fields. Generally,
there are three principal factors to improve financial
performance viz., the institution size, its asset
management, and the operational efficiency. To that
there have been few published research studies to
explore the impact of these factors on the financial
performance, especially the commercial banks.
In general, banks mobilize, allocate, and invest much
of societys savings, so bank performance has
substantive repercussions on investment, firm
growth, industrial expansion, and economic
development. Thus, research on the banking
Ramachandran Azhagaiah (Correspondence)

drrazhagaia@yahoo.co.in
+ 91(413) 2255017
operations, market structure and its effects on

competition and performance have important policy
implications. While there has been rapidly a growing
literature on banking efficiency issues in developed
countries, little attention has been paid so far to the
efficiency of banks in developing countries like India
yet there is an increasing recognition that financial
sector development is a top priority to sustain
economic growth in developing countries,
particularly among the more successful reformers,
such as Uganda. The available literature suggests a
relationship between competition and efficiency as
well as between market structure and performance.
The present study proposes that there are measurable
linkages among the banks size, asset management,
the operational efficiency and financial performance.
The objective of the study is to analyze the financial
data of 36 banks which are selected based on multi
stage sampling method for the financial periods
2008-2012 focusing on examining the relationship
among the measures such as bank's size, operational
efficiency, asset management, return on assets
(ROA), interest income, and to discuss their impact

on the bank's performance. Therefore, the present
study is to assess the financial performance of
selected banks in India.
Statement of the Problem and Significance of the
Study
Very few studies have been made in relation to
financial performance in the banking sector in
India. Therefore, the present study is a maiden
attempt to analyze the financial performance of
private sector and public sector banks in India.
Review of Literature
Spathis and Doumpos (2002)1 investigated the
effectiveness of Greek banks based on their assets
size. They used a multi criteria methodology to
classify Greek banks according to the return and
operation factors, and showed the differences of the
banks profitability and efficiency between small and
large banks. Chien Ho and Song Zhu (2004)2
showed that most previous studies concerning
company performance evaluation focus merely on
operational efficiency and operational effectiveness
which might directly influence the survival of a
company. By using an innovative two-stage data
envelopment analysis model, the empirical result of
the study is that a company with better efficiency
does not always mean that it has better effectiveness.
Duncan and Elliott (2004)3 showed that all the
financial performance measures viz., interest margin,
return on assets, and capital adequacy are positively
correlated with customer service quality scores.
Generally, the concept of efficiency can be regarded
as the relationship between outputs of a system and
the corresponding inputs used in their production.
Within the financial efficiency literature, efficiency is
treated as a relative measure which reflects the
deviation from maximum attainable output for a
given level of input. Sura (2006)4 stated that stable
dividend policy is followed by commercial banks in
India.
The study indicated that the major
determinants of current dividend are lagged dividend
and the current earnings.
The study also gave
support to argument of information content of
dividend in the context of dividend proceeds. Hence,
dividend can be used as a signaling device by the
management of the banks.
Chaudhary and Sharma (2011)5 performed
comparative analysis of services of public sector
banks and private sector banks and stated that the
increased competition and information technologies
reduce processing costs, the erosion of product and
geographic boundaries, and less restrictive

governmental regulations have all played a major role
for public sector banks in India to forcefully compete
with private and foreign banks. Das and Drine
(2011)6 attempted to explore the efficiency levels and
the performance of the Indian banking sector in the
context of financial liberalization and found that there
have been significant changes in the performance of
the banking sector in India. The relative importance
of the public sector banks has been declining with the
emergence of the domestic private sector banks and
more foreign banks. The assets, deposit and the credit
share shows that the share of public sector has been
declining and the share of the private banks has been
increasing, which implies that there has been a
declining concentration and increasing competition.
The foreign banks are found to be the more profitable
in comparison to the domestic private and the public
sector banks. The public sector banks are found to be
the most efficient banks followed by the domestic
private sector and foreign banks.
Bhandari and Pokharel (2012)7 attempted to
elucidate the dividend practices of commercial banks
in Nepal. Based on the analysis the study concluded
that commercial banks of Nepal did not show
uniform trend of dividend policy. Dividend policy
practiced by commercial banks is neither fully
explained by residual theory nor stable theory. With
the development of financial institutions in Nepal,
they used to follow a robust method of dividend
policy, so investors can predict stock market and
make
a
reasonable
investment
decision.
Dhanabhakyam and Kavitha (2012)8 stated that the
Indian banking system faces several difficult
challenges. The selected public sector banks have
performed well on the sources of growth rate and
financial efficiency during the study period. The old
private sector banks and new private sector banks
play a vital role in marketing of new type of deposits
and advances schemes.
Jamal and Shariff (2012)9 attempted to shed light on
dividend policy and propensity to pay cash dividend
implemented by US commercial banks as a possible
alternative choice for dividend seeking investors.
The study showed that most banks paid dividend at
increasing rate, more banks have started paying
dividend, while a few have stopped paying dividend.
The study also indicated that the main predictor
variables in predicting cash dividend are: total
assets, return on equity and equity to liability.
Yeboak and Agyei (2012)10 attempted to ascertain
the relationship between WCM and bank cash
holdings in the Ghana. Based on the analysis the
study concluded that debtors collection period, cash
conversion cycle, capital structure, and bank size
20
have significant negative relationship with the cash

position of banks in Ghana.
Objectives and Hypotheses of the Study
The objective of the study is to analyze the
performance of the selected banks in India. The
following are the specific objectives:
To analyze the financial performance of the
private sector and public sector banks in
India.
To analyze the variation in the impact of
operational efficiency, asset management,
and bank size on the financial performance
of the private sector and public sector banks
in India.
Hypotheses Relating to Private Sector Banks in
India
H01: There is no significant impact of assets
utilization on log of interest income in private sector
banks in India
H02: There is no significant impact of operational
efficiency on log of interest income in private sector
banks in India
efficiency on return on assets in private sector banks
in India
H04: There is no significant impact of log of assets
size on return on assets in private sector banks in
India
Hypotheses Relating to Public Sector Banks in
India
utilization on log of interest income in public sector
banks in India
efficiency on log of interest income in public sector
banks in India
size on log of interest income in public sector banks
in India
Hypotheses Relating to Banking Industry
(together Private sector and Public sector) in
India
utilization on log of interest income in banking
industry in India
efficiency on log of interest income in banking
industry in India
size on log of interest income in banking industry in
India
utilization on return on assets in banking industry in
India
efficiency on return on assets in banking industry in
India
size on return on assets in banking industry in India
H014: There is no significant impact of return on
deposit on log of interest income in banking industry
in India.
Research Methodology
To achieve the aforementioned research objectives,
the data for the study is collected from the annual
reports of the banks concerned. The annual data for
selected banks during 2008-2012 are used for
calculating key financial ratios to analyze the
financial performance of the banks. Besides, another
source of data forms in the form of reference to the
library and the review of different articles, papers,
and relevant previous studies.
Sources of Data
The study used secondary data collected from the
money control data source and websites of various
banks. The period covered by the study extends to 5
years ranging from 2008 to 2012.
Sampling Technique
The study used multistage sampling technique to
select sample units for the study. Out of 27 public
sector banks and 24 private sector banks in India, 45
banks only have been selected for the study based on
the data availability in the data source concerned.
Out of the selected 45 banks, we have taken only 36
banks (17 private sector banks and 19 public sector
banks) to which full-fledged data were available in
the data source concerned.
Research Methods and Plan of Analysis
Financial ratios viz., return on assets (ROA), asset
utilization (ASSTUTZ), log of asset size (log of
21
ASSTSIZ), log of interest income (log of INTINC),

return on deposit (ROD) and operational efficiency
(OPEFF) are calculated and used; control variables
viz., assets size and the interest income size are used
to analyze the variation in financial performance of
banks. It is hypothesized that there exists a positive
correlation between return on assets, asset
management, operational efficiency, bank size, and
the interest income size. Further, it is hypothesized
that there is an impact of asset management,
operational efficiency, and the banks size on the
financial performance of the banks.
Financial performance is the responding variable,
which is measured by two elements viz., return on
assets (ROA) and the interest income size (INTINC).
The predictor variables used for analysis are the
following:
Total assets.
Asset management (measured by

asset utilization ratio i.e. operational income
divided by total assets)
Operational efficiency (measured

by the operating efficiency ratio i.e. total
operating expenses divided by net interest
income)
In order to classify the banks into sub-groups, the

study used the major banking activities which
comprise total deposits, total assets, total
shareholders equity, return on equity, and return on
deposits. Hence, financial performance ratios,
correlation, and simple regression are used to analyze
and study the impact of predictor variables on the
responding variable (financial performance). Table 1
shows the various (measures) ratios used to measure
the financial performance of banks
The study used major banking activities, comprising
total deposits, total assets, total shareholders equity,
return on equity, and return on deposits. Also, the
study tries to explore the variance, if any according to
various variables. Therefore, the financial
performance measures- ratios have been extensively
used with in support of correlation and regression to
examine and study the impact of predictor variables
on the responding variable. Regression is also used to
test the hypothesis and to measure the differences and
similarities between the private sector and public
sector banks according to their different
characteristics. Correlation coefficient is used to
study the correlation between the predictor variables
and responding variable.
Table 1 - List of Measures (ratios) Used in the Study for Analysis

Sl.
no.
1
2
3
4
Variable /
Measure
Formula
Return on Assets
(ROA)
Net Profit /
Total Assets
Interest Income
(INT INC)
Return on Equity
(ROE)
Log of Interest
Income
Net Profit /
Owners Equity
Asset Utilization
(ASST UTZ)
Operational
Income / Total
Assets
Inference
ROA gives an idea as how efficiently management uses its assets to generate
earnings. Higher return on assets reflects good utilization of available assets and
lower return indicates otherwise.
INTINC is an indicator of a firms overall financial health.
ROE measures the rate of return on shareholders equity. It measures a firms
efficiency in generating profit from every unit of shareholders equity.
ASSTUTZ measures managements ability to make the best of its available assets to
generate revenue. A high ratio means more efficient management and low ratio
indicates otherwise.
In order to attain OPEFF a firm needs to minimize redundancy and waste while
leveraging the resources that contribute most to its success and utilizing the best of
Operational
its workforce, technology and business processes. The reduced internal costs that
5
Efficiency
result from OPEFF enable a firm to achieve higher profit margins or be more
(OPEFF)
successful in highly competitive markets. On the other hand, lower OPEFF results
to lower profit margin.
Total assets or total net assets are used to describe a funds size. If the assets rise,
Asset Size (ASST
the number of appropriate new stock prospects shrinks and transaction costs
6
Log of Assets
SIZ)
increases. If the assets size is high there is high scope for more investment and low
the assets size which indicates otherwise.
Source: www.scibd.com/essays/finance/gross profit.php
Total
Operational
Expenses / Net
Interest Income
General Form of the Regression Model
22
Log of INTINC = 1 (ROD) + 2 (ASSTUTZ) + 3 (OPEFF) + 4 (Log of ASSTSIZ) + e

ROA = 1 (ROD) + 2 (ASSTUTZ) + 3 (OPEFF) + 4 (Log of ASSTSIZ) + e
ROA=Return on Assets; INTINC = Interest Income; ROE = Return on Equity; ROD =Return on Deposit; ASSTUTZ
= Asset Utilization; OPEFF= Operational Efficiency; ASSTSIZ= Asset Size
Industry Analysis and Discussion
Descriptive Analysis
Table 2 Descriptive Statistics of Selected Variables of Overall Banks in India from 2008-2012 ( in crore)
Variables
Minimum
Maximum
Mean
Std. Deviation
ROE
36
-0.07
13.70
4.04
3.74
ROD
36
0.00
0.14
0.02
0.02
ROA
36
0.00
0.04
0.01
0.01
ASSTUTZ
36
0.07
0.41
0.10
0.05
OPEFF
36
0.15
1.33
0.30
0.19
Log of INTINC
36
2.76
6.02
4.68
0.63
Log of ASSTSIZ
36
2.85
5.60
3.93
0.64
Source: Computed results based on compiled data from Annual Financial Reports moneycontrol.com
Table 2 shows the results of descriptive statistics of
selected predictor variables of banks. The mean of
ROE is 4.04, and standard deviation is 3.74, which
show that the ROE deviates to the extent of 3.74
times from both the ends. The maximum of ROE is
13.7 and minimum is -0.07. The mean of ROD,
ROA, ASSTUTZ and OPEFF is 0.02, 0.01, 0.10, and
0.30 respectively; the standard deviation of which is
0.02, 0.01, 0.05 and 0.19 respectively. To study the
profitability, ROA and log of INTINC are taken into
consideration. The maximum of ROA is 0.04 and
minimum is 0.00 respectively. OPEFF shows the
average of 0.30 and the standard deviation of 0.19 for
the period. The mean of log of assets is 3.93 and that
of the log of interest income is 4.68 over the period
ROE measures the rate of return on the ownership
interest (shareholders equity) of the common stock
owners.
It measures the firms efficiency at
generating profit from every unit of shareholders
equity. The average ROE is 4.04, which shows the

banks use of invested funds to generate earnings.
Banks with high ROA are better in translating assets
into profits. The mean of ROA is 0.01, i.e., the extent
to which the assets are used. Asset utilization
measures the ability of management to make best use
of its assets. The mean of asset utilization is 0.10,
which shows the extent of efficiency of management.
The total assets or total net assets are also used to
describe a fund size. The average log of asset size is
0.10, which helps to determine if the fund is
progressing towards its goal. The mean of log interest
income is 4.68, which is an indication of banks
overall financial health. A financial measure for
banks is calculated by the amount of money the bank
receives from interest on assets (Commercial loans,
Personal-Mortgages) minus the amount of money the
banks pay out of interest on liabilities.
Table 3 Results of Correlation Analysis for Selected Variables of Banks in India from 2008-2012 ( in
crore)
VARIABLES
ROD
ROA
ASSTUTZ OPEFF
23
ROA
ASSTUTZ
Pearson
Correlation
.301
Sig. (2-tailed)
N
Pearson
Correlation
.075
36
36
.291
.866**
Sig. (2-tailed)
N
Pearson
Correlation
.085
36
.000
36
36
.320
.758**
.941**
OPEFF
Sig. (2-tailed)
.057
.000
.000
N
36
36
36
36
** Significant at 1% level
Correlation Analysis
Pearsons correlation analysis is used to study the
relationship between predictor variables and
responding variable, and the relationship between
ROA and ASSTUTZ (0.86); ROA and OPEFF (0.75);
ASSTUTZ and OPEFF (0.94) is highly significant
positively at 1% level; whereas the relationship
between ROD and ROA (0.30); ASSTUTZ and ROD
(0.29) is significant positively at 10% level; however
the relationship between OPEFF and ROD is
significant positively (0.32) at 5% level.
Regression Analysis
Table 4 shows that ASSTUTZ has significant negative

co-efficient (-43.38) on log of INTINC in private
sector banks in India. H01: there is no significant
impact of ASSTUTZ on log of INTINC is rejected at
5% level; while ROD has insignificant positive coefficient (-0.10) on log of INTINC. OPEFF has
significant negative co-efficient (-3.07) on log of
INTINC in private sector banks in India. H02: there is
no significant impact of operational efficiency on log
of INTINC is rejected at 5% level. However, log of
ASSTSIZ has insignificant positive co-efficient (0.10)
on log of INTINC. The value of F statistics is 5.62
with R 0.65.
Table 4 Results of Regression Analysis for Selected Variables of Private Sector Banks in India with Log of
INTINC as Responding Variable from 2008-2012 ( in crore)
Variables
Log of INTINC
ROD
ASSTUTZ
OPEFF
Log of ASSTSIZ
Un-standardized
Coefficients
Std.
Error
8.73
1.69
-0.10
3.40
-43.38*
18.36
-3.078*
1.33
0.10
0.13
Standardized
Coefficients
Sig.
Beta
-0.01
-0.48
-0.50
0.15
5.17
-0.03
-2.36
-2.31
0.73
0.00
0.98
0.04
0.04
0.48
R2
0.652
2
Adjusted R
0.536
F-Statistics
5.625 (0.009)**
** Significant at 1% level; Figure in parenthesis shows p value
The regression result shows (see table 5) that OPEFF
has significant negative co-efficient (-0.024) on ROA
in private sector banks in India. Hence, H03: there is
no significant impact of OPEFF on ROA is rejected

at 5% level. Log of ASSTSIZ has significant positive
co-efficient (0.00) on ROA in private sector banks in
24
India. Hence, H04: there is no significant impact of

log of ASSTSIZ on ROA is rejected at 10% level.
ROD has insignificant positive co-efficient (0.02) on
ROA. ASSTUTZ (0.03) and log of ASSTSIZ (0.00)

have insignificant positive coefficient on ROA. The
F- statistics is 2.98 with R 0.49.
Table 5 Results of Regression Analysis for Selected Variables of Private Sector Banks in India with ROA as
Responding Variable from 2008-2012 ( in crore)
Un-standardized
Standardized
Coefficients
Coefficients
Variables
t
Sig.
Std.
Error
Beta
ROA
0.01
0.01
0.54
0.60
ROD
0.02
0.02
0.22
0.99
0.34
ASSTUTZ
0.03
0.13
0.05
0.22
0.83
OPEFF
-0.026*
0.01
-0.74
-2.86
0.01
Log of
ASSTSIZ
0.00
0.00
0.48
1.99
0.07
R2
0.499
Adjusted
R2
0.332
F-Statistics 2.987 (0.063)
Table 6 Results of Regression Analysis for Selected Variables of Public Sector Banks in India with Log of
INTINC as Responding Variable from 2008-2012 ( in crore)
Un-standardized
Standardized
Coefficients
Coefficients
Variables
t
Sig.
Std. Error
Beta
Log of INTINC
1.07
0.09
11.42
0.00
ROD
-0.02
2.60
0.00
-0.01
0.99
ASSTUTZ
-1.26*
0.65
-0.28
-1.93
0.07
OPPEFF
0.40*
0.19
0.30
2.15
0.05
Log of ASSTSIZ
1.01**
0.02
0.98
45.69
0.00
R2
0.996
2
Adjusted R
0.995
F-Statistics
827.39 (0.00)**
Table 6 shows that ASSTUTZ has negative copublic sector banks in India. Hence, H07: there is no
efficient (-1.26) on log of INTINC in public sector
significant impact of log of ASSTSIZ on log of
banks. Hence, H05: there is no significant impact of
INTINC is rejected at 1% level. However, ROD has
ASSTUTZ on log of INTINC is rejected at 10%
insignificant negative co-efficient (-0.02) on log of
level. OPEFF has significant positive co-efficient
INTINC. The overall regression model represented
(0.40) on log of INTINC in public sector banks in
by R is at 99% of the changes in log of interest
India. Hence, H06: there is no significant impact of
income. F statistics (827.39) is significant at 1%
OPEFF on log of INTINC is rejected at 5% level.
level, indicating the extent of variance in the
However, log of ASSTSIZ (1.01) has highly
responding variable explained by the predictor
significant positive co-efficient on log of INTINC in
variables.
Table 7 Results of Regression Analysis for Selected Variables of Public Sector Banks in India with ROA as
Responding Variable from 2008-2012 ( in crore)
25
Variables
Un-standardized
Coefficients
ROA
ROD
ASSTUTZ
OPEFF
Log of ASSTSIZ
0.00
0.00
0.06
0.01
0.00
Standardized
Coefficients
Std. Error
0.01
0.27
0.07
0.02
0.00
Sig.
Beta
0.45
0.01
0.94
0.46
-0.29
0.66
0.99
0.36
0.65
0.78
R2
0.909
Adjusted R2
0.883
F-Statistics
34.846 (0.00)**
Table 7 shows the determinants of financial
INTINC for all the banks selected for the study.
performance of public sector banks in India with R
Hence, H09: there is no significant impact of OPEFF
0.90. All the variables selected for the study are in
on log of INTINC is rejected at 5% level. Log of
positive domain. The F statistics is 34.84 (0.000),
ASSTSIZ has highly significant positive co-efficient
which shows that the model is justifiable for the
(0.38) on log of INTINC for the overall banks
purpose. The ROE, ROD, ASSTUTZ, OPEFF, and
selected for the study in India. Hence, H010: there is
log of ASSTSIZ have insignificant positive cono significant impact of log of ASSTSIZ on log of
efficient on ROA.
INTINC is rejected at 5% level. ROD has significant
negative co-efficient (-8.59) on log of INTINC for all
Table 8 shows that the ASSTUTZ has significant
the banks selected for the study. Hence, H014: there
positive co-efficient (14.02) on log of INTINC for all
is no significant impact of ROD on log of INTINC is
the banks selected for the study. Hence, H08: there
rejected at 10% level. The F statistics is 2.421(0.069),
is no significant impact of ASSTUTZ on log of
which shows that the model is justifiable at 10% level
INTINC is rejected at 5% level. OPEFF has
for the purpose.
significant negative co-efficient (-4.04) on log of
0.00
0.64
0.30
-0.03
Table 8 Results of Regression Analysis of Selected Variables of Banks (Both Public & Private Sector) in
India with Log of INTINC as Responding Variable from 2008-2012 ( in Crore)
Variables
Un-standardized
Coefficients
Std. Error
Standardized
Coefficients
Sig.
Beta
Log of INTINC
ROD
ASSTUTZ
OPEFF
3.17
-8.59
14.02*
-4.04*
0.76
4.70
6.11
1.74
-0.31
1.21
-1.21
Log of ASSTSIZ
0.38*
0.18
0.39
4.17
-1.83
2.29
-2.32
0.00
0.08
0.03
0.03
2.14
0.04
0.238
2
Adjusted R
0.14
F-Statistics
2.421(0.069)
** Significant at 1% level; Figure in bracket shows p value
Table 9 Results of Regression Analysis of Selected Variables of Banks (Both Public & Private Sector) in
India with ROA as Responding Variable from 2008-2012 ( in crore)
26
Variables
Un-standardized
Coefficients
ROA
ROD
ASSTUTZ
OPEFF
Log of ASSTSIZ
Std. Error
-0.01
0.01
0.17**
-0.02**
0.00
0.02
0.03
0.01
0.00*
0.00
Standardized
Coefficients
Sig.
Beta
0.04
1.62
-0.80
-2.03
0.45
6.30
-3.11
0.05
0.65
0.00
0.00
0.20
2.27
0.03
R2
0.816
2
Adjusted R
0.792
F-Statistics
34.415(0.00)**
** Significant at 1% level; Figure in bracket shows p value
Table 9 shows that ASSTUTZ has highly significant
positive co-efficient (0.17) on ROA for all the banks
selected for the study. Hence, H011: there is no
significant impact of ASSTUTZ on ROA is rejected
at 1% level. OPEFF has highly significant negative
co-efficient (-0.02) on ROA for all the banks selected
for the study. Hence, H012: there is no significant
impact of OPEFF on ROA is rejected at 1% level.
Log of ASSTSIZ has significant positive co-efficient
(0.00) on ROA for all the banks selected for the
study. Hence, H013: there is no significant impact of
log of ASSTSIZ on ROA is rejected at 5% level. The
overall regression model is represented by R
(>81%), which shows that the predictor variables
determine more than 81% of the changes in ROA.
The F statistics (34.41) is significant @ 1% level,
indicating that the variance in the responding variable
is explained by the predictor variables to the extent of
79%.
Summary of Findings of the Study
The major findings of the study are:
ROA and ASSTUTZ show an average of 0.01
times and 0.10 times respectively, which
implies that the private and public sector
banks are better in translating the assets into
profits.
The average log of assets is 3.93, which
helps to describe fund size and also use that
fund to attain future goals.
The mean of log of INTINC is 4.68, which is
an indication that the financial health of both
the private and public sector banks is good.
ROA and ASSTUTZ (0.86); OPEFF and
ROA (0.75); OPEFF and ASSTUTZ (0.94)
have highly significant positive association
at 1% level.
ROA, as a measure of the profitability

performance in respect of total assets, could
be treated as a measure of financial
performance which contains two elements
viz., efficiency (total assets turnover), and
effectiveness (profit margin).
OPEFF (-0.02) has highly significant
negative co-efficient at 1% level with ROA
in private sector banks, while ASSTUTZ (43.38) and OPEFF (-3.07) have significant
negative co-efficient at 5% level.
The ROD, ASSTUTZ, OPEFF and log of
ASSTSIZ have insignificant positive coefficient on ROA in public sector banks
while the overall regression model
represented by R is above 90%, which
shows that predictor variables determine
more than 90% of the changes in ROA.
Log of ASSTSIZ (1.01) has highly
significant positive co-efficient at 1% level
with log of INTINC in public sector banks.
OPEFF (0.40) has significant positive coefficient at 5% level with log of INTINC in
public sector banks. ASSTUTZ (-1.26) has
significant negative co-efficient at 5% level
on log of INTINC. The overall regression
model represented by R is above 99%,
which shows that the predictor variables
explain to the extent of more than 99% of
the variance in log of INTINC.
ASSTUTZ (0.17) has highly significant
positive co-efficient at 1% level on ROA in
overall banking industry in India. OPEFF (0.02) has significant negative co-efficient at
5% level on ROA in overall banking
industry in India. ASSTUTZ (14.02) and log
of ASSTSIZ (0.38) have significant positive
27
co-efficient at 5% level on log of INTINC.

level.
The F statistics is 2.421 (0.069) at 10%
Log of INTINC = 1 (ROD) + 2 (ASSTUTZ) + 3 (OPEFF) + 4 (Log of ASSTSIZ) + e
(-8.59)
(14.02)
(-4.04)
(0.38)
ROA = 1 (ROD) + 2 (ASSTUTZ) + 3 (OPEFF) + 4 (Log of ASSTSIZ) + e
(0.01)
(0.17)
(-0.02)
(0.00)
Concluding Remarks
The importance of the study may be viewed from its
contribution to fill an important gap in literature.
That is, findings of the study can add to the existing
body of literature, and can serve as a starting point on
which future studies can be done. On the practical
dimension, the study may help policy makers of the
banks to focus on the major banking activities that
may improve the financial position of the banks.
Such information should help the management of
banking industry in creating appropriate financial
strategies for attaining the expected financial
performance.
The regression analysis used in the study to estimate
the impact of predictor variables on the responding
variable shows that the financial performance of the
banks, specifically the public sector banks is strongly
and positively influenced by the operational
efficiency, asset management, and the interest
income size. This was supported with the correlation
analysis, which shows the existence of positive
relationship between the ROA, ASSTUTZ and
OPEFF. The overall banking industry in India is
strongly influenced by asset utilization (ASSTUTZ),
operational efficiency (OPEFF), log of asset size (log
of ASSTSIZ), return on assets (ROA) and interest
income (INTINC). The private sector banks are
positively influenced by asset utilization (ASSTUTZ),
operational efficiency (OPEFF) on interest income
(INTINC) while the public sector banks are strongly
and positively influenced by operational efficiency
(OPEFF), asset management (ASSTMGT), return on
assets (ROA) and interest income (INTINC). The
OPEFF (-0.02) has highly significant negative coefficient on ROA at 1% level in private sector banks
in India, while ASSTUTZ (-43.38) and OPEFF (3.07) have significant negative co-efficient on ROA
at 5% level.
Log of ASSTSIZ (1.01) has highly significant positive
co-efficient on log of INTINC at 1% level in public
sector banks. The OPEFF (0.40) has significant
positive co-efficient at 5% level on log of INTINC in
public sector banks. ASSTUTZ (-1.26) has significant
negative co-efficient on log of INTINC at 5% level.
The overall regression model represented by R is
above 99%, which shows that the predictor variables
explain to the extent more than 99% of the variance
in log of INTINC. Public sector banks show an

average of ROE (4.80), ROA (0.010), ASSTUTZ
(0.10), and OPEFF (0.313) proving that the public
sector banks performed remarkably well than that of
the private sector banks during the period of the study
in respect of financial performance. The results of
the study imply that it might be necessary for a
management to take all the required decision to
improve the financial performance, which is the base
for operational efficiency of any bank.
Limitations and Scope for Further Studies
The study is based on secondary data collected from
the secondary data source, internet and websites of
various banks concerned. Therefore, the quality of
the study depends upon the accuracy, reliability, and
quality of secondary data source.
In the study, a sample of 36 banks has been
considered for analyzing the financial performance
of the banking industry in India. In future,
researchers can consider inclusion of more banks to
take up a study with large sample units to explore out
more accurate results. In the study, basic financial
ratios, correlation, and regression were only used for
analysis, therefore inclusion of some or more
predictor variables will change the result of financial
performance of the banking industry in India.
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Elizabeth, D., and G. Elliot. 2004. Efficiency, customer
service and financial performance among Australian financial
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Sura, J. 2006. Dividend policies followed by commercial
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29

Financial Performance of Private Sector and Public Sector Banks in India An Empirical Analysis

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International Center for Business Research

Issue: Volume 1 Dec 2012; Link: icbr.net/0112.3