One of the most perplexing issues confronted by bank managers is demystifying the effect of capital structure on bank profitability. Bank capital has an all-important role as it acts as a self-insurance against bank runs and helps manage the risks more prudently. Since the bank shareholders have more skin in the game as the capital increases, the managers will act more carefully without causing losses. Given this rationale, enough capital is critical for faster banking development.

Adequate bank capital is crucial because of the following reasons. First, undercapitalized banks cannot provide ample credit to borrowers. Second, undercapitalized banks may evergreen their loans to zombie businesses, thus undermining the banking activities. Third, an undercapitalized banking system is vulnerable to crisis-contagion. How do banks look at their capital structure? Drawing inferences from the classical theory of corporate finance-the Modigliani-Miller (MM) theorem-banks tend to violate the MM assumptions under a specific set of circumstances, for they "will be indifferent between equity and debt finance". Given an opportunity to choose, the banks typically go with debt capital, thus minimizing their reliance on equity capital.

Why do banks prefer debt to equity? Because they perceive equity as expensive compared to debt as a means of capital. Higher capital requirements in terms of higher levels of equity raise banks' private costs. However, they increase the ability of the banks to face difficult times by not chucking the risks on to the clientele. As capital is an important source of funds for the banks to acquire assets, the capital structure assumes greater significance. Much research is available on the effects of capital structure on bank performance, yet the ever-changing landscape requires a critical analysis of the bank capital structure to elicit better insights.

The first paper , "The Impact of Capital Structure on the Profitability of Nepalese Commercial Banks", presents an interesting analysis of the capital structure of Nepalese commercial banks and its effect on bank profitability. The authors, Radhe Shyam Pradhan and Krishna Maya Kafle, study the capital structure of 28 commercial banks in the land-locked country of Nepal for the period 2010-11 to 2018-19. The study examines five hypotheses:

(i) Does capital adequacy have a positive relationship with bank profitability? (ii) Does the debt level of the banks positively impact profitability? (iii) Is there a negative relationship between debt-equity ratio and bank profitability? (iv) Does bank size negatively impact bank profitability? and (v) Does the short-term debt to total assets ratio impact bank profitability positively? Their findings reveal that the debt-assets ratio, debt-equity ratio, and short-term debt to assets ratio have a negative association with return on assets. Similarly, capital adequacy ratio, debt-equity ratio, and short-term debt to assets ratio show a negative association with return on equity. However, the total debt-assets ratio and bank size show a positive association with net interest margin and return on equity. Further, the authors observe that bank size is the most influencing factor in explaining the changes in bank profitability.

In the second paper, "Issues in Group Lending as a Source of Microfinance: A Literature Review", the authors, Nishi Malhotra and Pankaj Baag, explore the challenges faced by Joint Liability Groups (JLGs) while providing credit to the unbanked and the underbanked. Applying the agency theory and social contracting concepts, the review observes that most underbanked and unbanked persons suffer from a lack of collateral and creditworthiness. Accordingly, the lenders face the problems of moral hazard and adverse selection. In overcoming such challenges, the JLGs are found to use peer monitoring methods and rely on social capital to finance the economically poor. The study observes that the group's success is determined by financial literacy and social intermediation. Peer monitoring and enforcement are found to help improve loan repayments and the financial sustainability of JLGs. The authors note that building credit agreements and proper social contracts with micro-borrowers will enhance the efficacy of financial intermediation through JLGs. The last paper, "Payments Banks in India: An Analysis of Their Business Performance", presents an interesting assessment of the role played by the payments banks in India in providing low-value payment services and accepting small deposits with the use of sophisticated financial technologies in aiding financial inclusion. The author, V S Kaveri, observes that payments banks will experience a breakthrough in their size and composition of business in the immediate future as digital banking gains prominence. Further, the author emphasizes that promoting customer education in digital banking, particularly in rural areas, will hugely benefit these payments banks in meeting their expectations in terms of reach and business viability.