This paper examines profitability determinants in Indian commercial banks by employing fixed and random effects models for an unbalanced panel data of 87 commercial banks for the period 1992-2006. Two alternative measures of bank profitability such as Returns on Assets (ROA) and Returns on Capital (ROC) are used. The empirical results reveal that the profitability of banks was affected not only by banks' own characteristics but also by industry structural variables and macroeconomic variables. Bank ownership and political parties in power also play a vital role in determining bank profitability in India. However, the determinants of bank profitability vary significantly across the banks groups.

The role of banks remains central in the financing of economic activities, despite the increased trend towards bank intermediation observed in many countries. Banks play an important role in attracting savings from public and mobilizing the same in productive activities. A sound, efficient and profitable banking sector would be able to resist negative shocks and contribute to the stability of the financial system by making financial resources accessible to economic needs. Therefore, the determinants of bank performance have attracted the attention of the academic researchers as well as of the policy makers (Athanasoglou et al., 2005).

The Indian banking system has undergone drastic changes since 1969, with the policy on nationalization of commercial banks. After nationalization, the Indian banking system registered tremendous growth in terms of branch expansion and credit allocation. The Reserve Bank of India (RBI) stipulated lending targets to priority sector, offered refinancing facilities, set up credit guarantee schemes, and asked banks to open branches in rural and semi-urban areas to make banking facilities available to each part of the country. The lending bank scheme came into being for designing and implementing credit plans at micro level. These measures led to the significant growth of the banking sector, in general, and the public sector banks, in particular. Consequently, by the early 1990s, the share of rural branches increased from 22.2% to 58.46% and public sector banks accounted for nearly 90% of total deposits and advances (Kumbhakar and Sarkar, 2004).

Despite the undeniable and multiple gains of bank nationalization, the Indian banking system was subjected to central direction and control. In the name of social control over banks, operations of foreign banks were restricted to a few large cities. Reserve Bank of India (RBI) mandated banks to hold government securities in their asset portfolios, in order to finance government fiscal deficits through Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR). Interest rates were regulated.

Indian Commercial Banks, Returns on Assets, ROA, Returns on Capital, ROC, Reserve Bank of India, RBI, Cash Reserve Ratio, CRR, Statutory Liquidity Ratio, SLR, Non-Performing Assets, NPAs, Automatic Teller Machines, ATM, Gross Domestic Product, GDP, Structure-Conduct-Performance , SCP, Relative Market Power , RMP, Least Squares Dummy Variable, LSDV.