Impact of Interest Rates on Bank Profitability in India

Abstract

This study examines the interest rate changes effect on banks profitability and Net Interest Margin at the theoretical level and attempt to measure empirically the extent to which the interest profitability and Net Worth of commercial banks have been affected during the period of changing interest rates between 2011 – 2015. It as well as measures the extent to which the factors that determine interest rate movement affect interest rate and which of the factors that determine interest rate movement affect interest rate and which of the factors has more effect on interest rate. The bank used for this analysis is State Bank of India . Analysis was further carried out separately on both the bank to see the effort of interest rate fluctuations on them. Data required by the model was obtained from annual financial statements of the banks for the period of five years. It was found that fluctuations on interest rate (repo rate) affect the profit of commercial banks. As the Repo rate increases, the profit of commercial bank increases. It was also found that interest rate changes as well affect the net worth of commercial banks. The Macroeconomic factors that determine the interest rates do not have direct effect on bank profit, but have significant effect on the banks’ net worth, especially that of small banks. As the rate of inflation, the rate of money supply and uncertainty increase the net worth of the commercial banks also increase.