“Modelling the effects of capital adequacy, credit losses, and efficiency ratio on return on assets and return on equity of banks during COVID-19 pandemic”

ABSTRACT

The study aims to determine the impact of Capital Adequacy Ratio, Credit Losses Ratio and Efficiency Ratio on the two significant profitability ratios, namely Return on Assets (ROA) and Return on Equity (ROE), during the pandemic. Panel Data Regression is used to model the effects of Capital Adequacy, Credit Losses and Efficiency Ratio on Return on Assets and Return on Equity of Indian banks. A suitable model has been developed by analyzing the results of the Hausman test and the p-values. It has been found that Capital Adequacy Ratio (CAR) with coefficient value of –0.664, CET1 with coefficient value of 1.83 and efficiency ratio with coefficient value of 1.825 have significantly affected the return on assets as their p-values are less than 0.05. However, the accepted relationship between CAR and ROA, efficiency ratio and ROA were inverse, but their coefficients were significant. The provision for credit losses (PCL) was not affecting the ROA significantly during the pandemic and hence was not considered while framing the model. Again, the dependent variable is the return on equity, except CAR. Other ratios, i.e., CET1, efficiency ratio, and PCL ratio have unacceptable correlations and are even non-significant as their p-values are less than 0.05. © The author(s) 2022. This publication is an open access article.