Efficiency, Credit Risk & Profitability of Banks

The massive changes in macroeconomic fundamentals as well as the innovation in the banking industry have rapidly increased the importance of the sector as it is currently considered one of the key pillars supporting the Indian economy. The banking and financial soundness plays a vital role in the economic development of a particular country. A strong banking sector allows the efficient management of funds and financial investments, strengthening the financial and economic system of a country (Claessens and Laeven, 2005; Ayadi et al., 2015). Furthermore, instability in the banking sector negatively affects economic growth (Creel et al., 2015).Nominal GDP growth (real GDP growth and inflation) ¿ studies are unanimous with regard to the positive relationship of nominal GDP with loans and advances growth. Higher growth in nominal GDP increases the demand for loans and advances. (ii) Deposit growth ¿ again, the impact is precise and positive. Commercial banks with a greater availability of funds in deposit form will be in a better position to provide more loans and advances to borrowers.