ANALYSING THE IMPACT OF CAPITAL STRUCTURE ON THE PROFITABILITY OF PUBLIC SECTOR BANKS IN INDIA

Abstract

Capital structure refers to the composition of a company's funding, primarily through debt and equity, which it uses to finance its operations and growth. In the banking industry, capital structure plays a crucial role in determining a bank's ability to absorb losses, manage risks, and comply with regulatory requirements. A well-optimized capital structure can lower the cost of capital, enhance profitability, and ensure long-term financial stability. Banks need to balance the benefits of debt, such as tax shields and lower cost compared to equity, with the potential risks of financial distress and bankruptcy. Effective capital management is vital for maintaining investor confidence, meeting regulatory capital adequacy standards, and supporting sustainable growth in the competitive banking environment. This study investigates the relationship between capital structure and profitability in three major public sector banks: State Bank of India (SBI), Bank of Baroda (BoB), and Bank of India (BoI). Using financial data spanning from 2018-19 to 2022-23, the research examines key financial metrics, including the net profit margin, net interest income to total funds ratio, and capital adequacy ratio, to discern patterns and impacts. The study reveals that while a robust capital adequacy ratio positively influences net profit margins, its impact on net interest income efficiency is less direct, indicating the multifaceted nature of financial performance determinants in the banking sector.