An empirical investigation of the effects of competition, efficiency and risk-taking on profitability: an application in Indian banking

Abstract

The study investigates whether changes in bank competition, efficiency, and risk-taking affect the profitability of Indian commercial banks during 1996− 2016. While assessing the determinants of profitability, this study considers a wide range of bank-specific, macroeconomic, and institutional factors that explain the variations in bank profitability. Results estimated through the two-step system GMM indicate that a higher level of bank competition deteriorates bank profitability in Indian banking. Regarding risk-taking, results reveal that the growing incidence of credit risk hampers bank profitability for the whole banking industry and across ownerships. However, higher levels of profit and cost efficiency are positively associated with bank performance. Other bank-specific, macroeconomic, and institutional variables appear to have influenced bank profitability in India. The joint effect of competition and efficiency (or risk-taking) has further been examined in this study.