Relationship between `Profitability, Efficiency and Risk: Evidence from Private Sector Banks in India

Abstract

The main objective of this paper is to estimate the impact of bank efficiency score and Capital Adequacy ratio on its Return on Assets (ROA) and Return on Equity (ROE) in the context of Indian private sector banks. The study is based on data pertaining to 16 private sector banks. The study uses a two stage approach in which, the first stage is devoted to the estimation of output oriented technical efficiency under variable returns to scale. The second stage uses panel data models for estimating the impacts of efficiency and capital adequacy on ROA and ROE. The outcome indicates that the impact of the two explanatory variables is more pronounced in case ROA than ROE.