PROJECT PROPOSAL

“DETERMINANTS OF PRODUCTIVITY OF BANKING

INSTITUTIONS”
By

ANJU FRANCO

Under the guidance of

Prof. (Dr.) SANTHOSH KUMAR P. K.

FACULTY GUIDE
SCHOOL OF MANAGEMENT STUDIES, CUSAT.

SCHOOL OF MANAGEMENT STUDIES

COCHIN UNIVERSITY OF SCIENCE AND TECHNOLOGY
COCHIN- 682022. KERALA
 INTRODUCTION
Banking system plays a very significant role in the economy of a country. India is not only the world’s
largest independent democracy, but also an emerging economic giant. Without a sound and effective banking
system, no country can have a healthy economy. Productivity of banks is generally expressed as a function of
several bank and industry specific factors. Some of these factors may be neither inputs nor outputs in the
production process, but rather circumstances faced by a particular bank ( Sufian , Fadzlan 2007). The factors,
which may have significant association with the efficiency of banks, can be classified into three groups viz.
internal bank-specific or micro economic variables, external or macro economic factors and other factors. The
internal bank–specific factors are termed as the endogenous factors, originate from bank accounts and these are
under the control of management, and have limited influence over particular industry segments. The internal
bank–specific factors include the factors such as organization of management, capital employed, input
utilization, balance sheets and profit and loss accounts, labor productivity. The bank specific variables are
within the scope of the bank and differ from bank to bank. The macro economic factors include exogenous
factors such as GDP, per capita income, inflation rate, stock market capitalization, liberalization that are not
related to bank management but reflect the economic and legal environment that affects the operation and
performance of financial institutions and which have a strong influence on the efficiency and productivity of
banks. The macroeconomic or external factors are beyond the control of the company and affect the profitability
of banks. Other factors include the factors such as ownership, merger, number of branches, bank branch
concentration that may have significant impact on the performance measures of banks.

SIGNIFICANCE

This study will help bank authorities to understand their strengths and to analyze the areas that need
improvement. Understanding of how bank performance is influenced by different internal and external factors
can serve as a guide for regulators concerning when any regulatory requirements should be imposed on banking
organizations to ensure at least stability of the banking sector in particular and the whole economy in general

OBJECTIVES

 to find out the determinants of productivity of banking institutions

 to analyze micro bank specific and macro economic factors which influence productivity of
banking institutions
  to understand how different factors related to the profitability of the organization
 to find out the areas that need to be improved to have high productivity
 to give suggestions for the improvement of productivity of banking institutions

LITERATURE REVIEW

There is a large and diverse empirical literature dealing with bank profitability and a lot of studies that
investigate the determinants of bank performance. Short (1979) and Bourke (1989) are among the first who
empirically assessed bank profitability. Some empirical studies are country specific, while others have focused
on panels of countries. Many of them are focusing on developed countries.

The determinants of bank profitability can be grouped into internal and external. Internal, micro or bank-
specific determinants reflect bank-specific features such as size, capital, risks and efficiency. External
determinants are factors that are not related to bank management but reflect the specifics of the industry and
macroeconomic environment that affect the performance of the financial institution. Most of the studies
concluded that the internal factors explain large portion of bank profitability, however, the results vary across
countries since both datasets and environments differ (Athanasoglou, Brissimis & Delis, 2008). Therefore, the
latest studies consider the combination of both internal and external factors, namely bank-specific, industry-
specific and macroeconomic.

The bank’s risk exposure and the necessity for its management usually encompass solvency risk,
liquidity risk and credit risk. Solvency risk is related to the capital strength of the bank and it is considered to be
an important factor in affecting and explaining bank profitability. Sufficient amount of equity, measured by
ratio of equity to total asset, allows bank to absorb any shocks that it may experience. Higher capitalization,
which serves as a safety cushion, implies lower insolvency risk (bank is safer) and according to the risk-return
hypothesis, a lower profitability is expected (negative relationship). However, creditworthiness of better
capitalized and safer banks encourage the confidence of depositors which lowers interests as funding costs and
the need for external financing, thereby lowering interest expenses. Therefore, higher equity to asset ratio
(lower risk) would imply higher profitability (positive relationship). Liquidity risk reflects the possible
inability of bank to meet its obligations which can eventually lead to bank failure. The exposure to liquidity risk
is usually measured as ratio of loans to deposits (Kosmidou, 2008).
 Apart from lending, which is bank traditional interest-earning activity, bank income can be also
generated through non-interest bearing activities. Proportion of fees and commissions in total income can be
used as proxy for non-traditional bank activities and as proxy for bank diversification into non- traditional
activities (Sufian & Habibullah, 2009).

GDP, which is used as a macroeconomic determinant of bank profitability, measures total economic
activity within a country whereas the GDP growth reflects its annual change. GDP growth is expected to have a
positive effect on bank profitability according to the literature on the relationship between economic growth and
financial sector profitability (Athanasoglou, Brissimis & Delis, 2008; Demirguc- Kunt & Huizinga, 1999).

Inflation is another important macroeconomic condition which may affect both bank costs and revenues.
The extent to which inflation affects profitability depends on whether the inflation is anticipated or not
(Athanasoglou, Brissimis & Delis, 2008). Fully anticipated inflation rates mean that bank can timely adjust
interest rates in order to raise revenues and eventually bank profits (positive impact). However, in case of
unanticipated inflation, bank inappropriately (slowly) adjust its interest rates which results in faster increase of
bank costs comparing to revenues and consequently in lower profitability (negative impact).

Deposits are the basis for the bank loans and thus represent the ultimate source of bank profits and
growth. The efficiency of the bank can be gauged by finding whether the deposits are raised at the lower
possible cost and whether enough deposits are available to fund those loans the banks propose to make. Thus
the present study has been conducted to know the factors Affecting efficiency of public and private sector
banks. The study revealed that the sub-parameter of capital adequacy, debt-equity ratio influencing output
constructs assets and advances.( K. V. N. Prasad & Dr. A. A. Chari,2010)

METHEDOLOGY

The project will be based on the sample that includes 5 different banks operating in Kerala. Both internal
and external determinants of bank profitability will be analyzed in a single equation framework. The variables,
number of the banks included in the sample and length of analyzed period are determinate by the data
availability. Regarding the sources, the data of the bank-specific determinants are collected from the banks
financial statements (balance sheet and income statement). The Reserve bank of India provided data on the
banking industry concentration variable and the data on GDP growth are obtained from World Bank’s World
development indicators database.
 HYPOTHESIS

H0 – There is no linear relationship between productivity of banking institutions and different macro-
economic and micro economic factors

H1 – These factors affects the productivity of banking institutions

REFERENCE

 http://www.sbank.in/2013/02/role-of-banks-in-indian-economy.html
 Determinants of Efficiency Among Indian Commercial Banks
 Determinants of Productivity and Profitability of Indian Banking Sector: A Comparative Study,
Eurasian Journal of Business and Economics 2015, 8(16), 35-58. DOI: 10.17015/ejbe.2015.016.03
 Profitability Determinants of the Macedonian Banking Sector in Changing Environment, Procedia -
Social and Behavioral Sciences 44 ( 2012 ) 406 – 416
 Banks’ Profitability in Selected Central and Eastern European Countries, 21st International Economic
Conference 2014, IECS 2014, 16-17 May 2014, Sibiu, Romania
 Athanasoglou, Brissimis & Delis, 2008; Demirguc- Kunt & Huizinga, 1999
 Sufian, F., & Habibullah, M. S. 2009. Asian Financial Crisis and the Evolution of Korean Banks
Efficiency: Perspectives on East Asian Economies and Industries, 38 (4): 335-369.