An Empirical Study on the Profit Effectiveness of Indian Public Sector Banks Due to Imposition of Priority Sector Lending Norms: A Panel Data Modelling Approach
This paper examines the impact of Priority Sector Lending (PSL) norms on both the profitability and the Indian Public Sector Banks (PSBs) with the help of panel data modelling. Based on an equal sample of 15 large PSBs between the years 2010-2024, this empirical study provides an estimate of the relationship between PSL exposure and profitability factors, Return on Assets (ROA) and Return on Equity (ROE). The analysis uses Fixed Effects, Random Effects, and Dynamic Panel Generalized Method of Moments (GMM) models to be able to capture short and long-run effects, endogeneity and bank specific heterogeneity. The simulated outcomes show that increased PSL ratios have been linked to a slight reduction in profitability which implies that the social mandate of PSL has opportunity costs on the performance of the banks. There are however adverse effects that are cushioned by diversification in PSL sub-sectors and regulatory support mechanisms. The results provide policy implications on the balance between the financial inclusion objectives and the stability of the banking sector in India.