The IUP Journal of Bank Management
What Determines the Size of Bank Nifty?

Article Details
Pub. Date :May, 2019
Product Name : The IUP Journal of Bank Management
Product Type : Article
Product Code : IJIT31905
Author Name : Rajveer S Rawlin, Savitha Rani Ramachandran and Ramaswamy Shanmugham
Availability : YES
Subject/Domain : Finance
Download Format : PDF Format
No. of Pages : 11

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Abstract

Banking stocks have been rebounding of late despite the lingering asset quality issues that have been plaguing the banking sector over the past few years. The bank Nifty index is the key index that tracks the performance of the largest bank stocks in India. Understanding the key drivers of bank size of this index would throw light on the performance of the banking sector at large. This paper studied the influence of key internal determinants on the size of bank Nifty components over a 10-year period from 2009 to 2018. The measure of bank size chosen was the logarithm of stock market capitalization. The internal determinants chosen for the study comprised a key profitability measure, the return on assets; a key lending measure, the credit/deposit ratio; income measures that include interest income/average working funds and non-interest income/ average working funds; a key productivity measure, business per employee; a key asset quality measure, the logarithm of percentage net non-performing asset; and a measure of capital adequacy, the capital adequacy ratio. Lending, profitability, capital adequacy and income measures proved to be the important drivers of size of bank Nifty components. Stakeholders of banks should focus on these determinants as they seek to understand the rapidly evolving Indian banking landscape.


Description

Banking stocks have been rebounding of late. This is on the back of severely deteriorating asset quality in the Indian banking landscape. The deteriorating asset quality coupled with the implementation of Basel III norms by the Reserve Bank of India (RBI) has continued to keep bank margins under pressure. Given that the banking sector often serves as the backbone of the economy, it would be useful to ascertain the drivers of size of this key sector. This paper looks at the drivers of bank size of the bank Nifty index which consists of India’s largest public and private sector banks.


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