An empirical study on default risk and its impact on the profitability of selected public sector banks in India

The banking sector serves as the fundamental infrastructure of the Indian economy, where the financial health of Public Sector Banks acts as a primary determinant of national economic stability. This study empirically evaluates the impact of default risk on the financial performance of selected Public Sector Banks, specifically examining how Gross Non-Performing Assets and Capital Adequacy Ratio influence Return on Assets. By analyzing aggregate data from six major Public Sector Banks (State Bank of India, Canara Bank, Union Bank of India, Bank of Baroda, Bank of Maharashtra and Punjab National Bank), the research utilizes a Panel Least Squares regression model to test the relationship between the dependent variable (Return on Asset) and key indicators including Gross Non-Performing Assets, Capital Adequacy Ratio, Provision Coverage Ratio and Net Interest Margin. The empirical results reveal a statistically significant negative impact of GNPA on bank profitability, confirming that default risk remains a critical detractor of earnings. Conversely, the Capital Adequacy Ratio demonstrates a significant positive relationship with Return on Asset, suggesting that robust capital buffers are essential for enhancing profit-generating capacity. With an Adjusted R-squared of 0.74, the model confirms that credit risk variables are strong predictors of overall performance. The study concludes that maintaining asset quality is more vital for long-term profitability than traditional interest margin expansion.