4. Impact of Macroeconomic and Bank-Specific Indicators on Net Interest Margin: An Empirical Analysis

The purpose of this paper is to identify the indicators from macroeconomic and bank environment, which tend to affect earning capacity (quantified by net interest margin) of public sector banks (PSBs) of India. The paper also quests to explore the possible linkages between the indicators under the purview of this paper. The financial statements, financial notes, and annual reports of the sample banks, publications from Government of India, Reserve Bank of India, and World Bank have been accessed to get the data regarding the variables under the study. The classical multiple regression analysis has been employed with diagnostic tests to derive concrete inferences from the data. The empirical evidences illuminated the positive correlation of gross domestic product (GDP), inflation, lending interest rate (LIR), and capital to risk-weighted assets ratio (CRAR) with the net interest margin (NIM) of sample banks, while as non-performing loans (NPLS) established an indirect relationship. The study established that favorable macroeconomic environment proves to be a main driver for encouraging net interest margin (NIM) with a prudent control over CRAR along with NPLs on the part of sample banks. The study suggested installing latest advances and practices of risk management especially on the credit front, which will also help the banks to utilize excessive capital rather than accumulating it unnecessarily. It is also suggested for the PSBs to merge for better consolidation, allocation of funds, and better investment prospects.