Description of variables
| Notation | Measure |
|---|---|
| Dependent variables: | |
| 1. Return on assets (ROA) | Return on assets (ROA) is a profitability ratio which indicates the net profit (net income) generated by total assets. It is computed by dividing net income by average total assets. Formula – (Profit after tax/Average total assets)*100 |
| 2. Return on equity (ROE) | Return on equity (ROE) is a ratio relating net profit (net income) to shareholders’ equity. Here equity refers to share capital reserves and surplus of the bank. Formula – Profit after tax/(Total equity + Total equity at the end of the previous year)/2}*100 |
| 3. Return on advances (ROADV) | ROADV is the ratio of interest earned on advances and bills to total advances |
| 4. Return on investments (ROI) | ROI is the ratio of interest earned on investments to the total investments |
| 5. Net non-performing assets (NNPA) | A non-performing asset, including a leased asset, becomes nonperforming when it ceases to generate income for the bank. NNPA is the Gross NPA – (Balance in interest suspense account + DICGC/ECGC claims received and held pending adjustment + Part-payment received and kept in suspense account + Total provisions held) |
| 6. Business per employee (BPE) | BPE is the ratio of total business to the number of employees |
| Monetary policy variables: | |
| 7. Cash reserve ratio (CRR) | CRR is a specified minimum fraction of the total deposits of customers, which commercial banks must hold as reserves either in cash or as deposits with the central bank. For the second preceding fortnight, a scheduled commercial bank must maintain a prescribed CRR as a percentage of its net demand and time liabilities (NDTL). Banks must maintain a minimum of 95% of the required CRR daily and 100% on average during the fortnight |
| 8. Statutory liquidity ratio (SLR) | SLR is the ratio of banks’ liquid assets in gold, cash or other approved securities to their net demand and time liabilities (NDTL). A scheduled commercial bank must invest in unencumbered government and approved securities, a certain minimum amount as SLR daily |
| 9. Policy repo rate (RR) | RR is the rate at which banks borrow funds from the central bank against eligible collaterals. The repo rate has emerged as the critical policy for signaling the monetary policy stance |
| 10. Reverse repo rate (RRR) | RRR is the rate at which banks place their surplus funds with the central bank under the liquidity adjustment facility (LAF) |
| 11. Bank rate (BR) | BR is the standard rate the central bank (Reserve Bank of India) is prepared to buy or re-discount bills of exchange or other commercial paper eligible for purchase under the Act |
| 12. Treasury bill rate (TBR) | TBR is the rate of the 91-day Treasury Bills (money market instruments) that are issued weekly by the Government of India |
| Bank-specific control variables: | |
| 13. Credit to deposit ratio (CDR) | CDR is the ratio of the loans created by the bank from the deposits it receives |
| 14. The ratio of deposits to total liabilities (RD) | RD is the ratio of the total deposits to the total liabilities |
| 15. The ratio of priority sector advances to total advances (PSR) | PSR is the ratio of the priority sector loans to the total advances |
| 16. Capital adequacy ratio (CAR) | CAR is the ratio that divides the bank’s capital with aggregated risk-weighted assets for credit, market and operational risks. The higher the CAR of a bank, the better capitalized it is |
| 17. The ratio of non-interest income to total assets (NITA) | NITA is the ratio of other income to the total assets |
| 18. Ratio of intermediation cost to total assets (OICTA) | OICTA is the ratio of operating expenses to the total assets |
| 19. The ratio of operating profits to total assets (OPPTA) | OPPTA is the ratio of operating profits to the total assets |
| Macroeconomic control variables: | |
| 20. GDP growth (GDPGR) | GDPGR is India’s annual percentage growth rate at market prices based on constant local currency. Aggregates are based on constant 2005 US dollars |
| 21. Inflation (INFL) | INFL, as measured by the consumer price index, reflects the annual percentage change in the cost to the average consumer of acquiring a basket of goods and services that may be fixed or changed at specified intervals, such as yearly |
| Notation | Measure |
|---|---|
| 1. Return on assets (ROA) | Return on assets (ROA) is a profitability ratio which indicates the net profit (net income) generated by total assets. It is computed by dividing net income by average total assets. Formula – (Profit after tax/Average total assets)*100 |
| 2. Return on equity (ROE) | Return on equity (ROE) is a ratio relating net profit (net income) to shareholders’ equity. Here equity refers to share capital reserves and surplus of the bank. Formula – Profit after tax/(Total equity + Total equity at the end of the previous year)/2}*100 |
| 3. Return on advances (ROADV) | ROADV is the ratio of interest earned on advances and bills to total advances |
| 4. Return on investments (ROI) | ROI is the ratio of interest earned on investments to the total investments |
| 5. Net non-performing assets (NNPA) | A non-performing asset, including a leased asset, becomes nonperforming when it ceases to generate income for the bank. NNPA is the Gross NPA – (Balance in interest suspense account + DICGC/ECGC claims received and held pending adjustment + Part-payment received and kept in suspense account + Total provisions held) |
| 6. Business per employee (BPE) | BPE is the ratio of total business to the number of employees |
| 7. Cash reserve ratio (CRR) | CRR is a specified minimum fraction of the total deposits of customers, which commercial banks must hold as reserves either in cash or as deposits with the central bank. For the second preceding fortnight, a scheduled commercial bank must maintain a prescribed CRR as a percentage of its net demand and time liabilities (NDTL). Banks must maintain a minimum of 95% of the required CRR daily and 100% on average during the fortnight |
| 8. Statutory liquidity ratio (SLR) | SLR is the ratio of banks’ liquid assets in gold, cash or other approved securities to their net demand and time liabilities (NDTL). A scheduled commercial bank must invest in unencumbered government and approved securities, a certain minimum amount as SLR daily |
| 9. Policy repo rate (RR) | RR is the rate at which banks borrow funds from the central bank against eligible collaterals. The repo rate has emerged as the critical policy for signaling the monetary policy stance |
| 10. Reverse repo rate (RRR) | RRR is the rate at which banks place their surplus funds with the central bank under the liquidity adjustment facility (LAF) |
| 11. Bank rate (BR) | BR is the standard rate the central bank (Reserve Bank of India) is prepared to buy or re-discount bills of exchange or other commercial paper eligible for purchase under the Act |
| 12. Treasury bill rate (TBR) | TBR is the rate of the 91-day Treasury Bills (money market instruments) that are issued weekly by the Government of India |
| 13. Credit to deposit ratio (CDR) | CDR is the ratio of the loans created by the bank from the deposits it receives |
| 14. The ratio of deposits to total liabilities (RD) | RD is the ratio of the total deposits to the total liabilities |
| 15. The ratio of priority sector advances to total advances (PSR) | PSR is the ratio of the priority sector loans to the total advances |
| 16. Capital adequacy ratio (CAR) | CAR is the ratio that divides the bank’s capital with aggregated risk-weighted assets for credit, market and operational risks. The higher the CAR of a bank, the better capitalized it is |
| 17. The ratio of non-interest income to total assets (NITA) | NITA is the ratio of other income to the total assets |
| 18. Ratio of intermediation cost to total assets (OICTA) | OICTA is the ratio of operating expenses to the total assets |
| 19. The ratio of operating profits to total assets (OPPTA) | OPPTA is the ratio of operating profits to the total assets |
| 20. GDP growth (GDPGR) | GDPGR is India’s annual percentage growth rate at market prices based on constant local currency. Aggregates are based on constant 2005 US dollars |
| 21. Inflation (INFL) | INFL, as measured by the consumer price index, reflects the annual percentage change in the cost to the average consumer of acquiring a basket of goods and services that may be fixed or changed at specified intervals, such as yearly |
Source(s): Reserve Bank of India database. We source the macroeconomic variables from the World Development Indicators of the World Bank Database
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