African Journal of Business and Economic Research Volume 15 Issue 3 Number 9 2020

ISSN: 1750-4554 / E-ISSN: 1750-4562

Sustainable Financial Performance of Select Banks

Mohmad Mushtaq Khan

K. Bhavana Raj
Assistant Professor, IPE (Institute of Public Enterprise),
Survey No. 1266, Shamirpet (V&M),
Medchal-Malkajgiri Dist., Hyderabad,
Telangana – 500101, India .
[email protected]

Abstract

The paper discusses the CSR implications in the Indian banking sector, corporate conscience disclosure practices and
their effect on monetary performance. ‘Solvency’ shows ability to pay its bills in the long term and ‘Profitability’ shows
the ability of a business to earn profits in relation to investments. So, all these variables shows performance of a business
in different areas. Previous studies show that these variables are correlated and if one variable increases or decrease, it
impacts the one or the other. This paper throws a light on the CSR activities in a developing country's financial sector.

Key words: Corporate Social Responsibility, Liquidity, Profitability, Efficiency, Profitability.

Introduction

In the financial sector, CSR emerged as a hedge against financial scandals and banks' declining credibility. Nowadays,
banks' role goes beyond monetary and commercial stability. The banking segment is a critical constituent in contributing
to broader public external welfare. It includes a range of stakeholders–owners, administrators, investors, debtors, and
regulators. The CSR definition and its related problems were adopted relatively late by this field in the corporate world.

Significance of the study

Profitability is a firm's ability to make money from the investments. A business that does not make money would be
unable to survive for a prolonged period of time. Liquidity is very important when it comes to banks, because it is the
contemporary and potential threat that results from a bank's helplessness to meet its financial commitments when due.
All these variables are correlated as per the previous studies. So, if a bank invests more resources into liquid assets it will
end up earning less profits and if it is not functioning efficiently it will have severe implications on its survival. The
present research examines the bank’s profitability, and its effect on the CSR activities that each bank is able to handle
these variables well to prevent losses on its earnings. The primary explanation for this analysis is the fact that most CSR
disclosure work has been performed in developing countries. Equally, research on CSR activities are ineffective in
developed nations.

Mohmad Mushtaq Khan and K.Bhavana Raj (2020). Sustainable Financial Performance of Select Banks.
African Journal of Business and Economic Research, Vol.15, Issue 3, No.9. DOI: doi.org/10.31920/1750- 1
4562/2020/09/20n3a8
African Journal of Business and Economic Research Volume 15 Issue 3 Number 9 2020
ISSN: 1750-4554 / E-ISSN: 1750-4562

Review of Literature

The widespread public amalgamations and social groups nurtured disgruntled with the widespread unscrupulous
company designs and groups now not being answerable. Jones (1995) has claimed that businesses abide first-rate
expenses, and its accompanying entities and individuals. Corporate conscience initiatives in companies endeavour to
boost and extend social and eco-friendly things to do in such corporations besides larger governance concerns. It is
worried with how organizations encompass these community advantage matters in their elementary enterprise
processes (Sethi ,1979). Smith (2003) continues that along with corporate conscience in groups is a key attention area. Lee
et al. (2009) agree with that the companies sketch their duties headquartered on CSR intentions, which includes social,
financial and ecological duties, which are critical for turning into an appropriate corporate citizen.

Khan et al., (2016) in their study “Exploring Liquidity-Profitability Nexus: A Reference of Modaraba Companies”
attempted to locate association between profitability and liquidity on a pattern of 26 Modaraba companies’ profitability
isn’t influenced by indicators of liquidity, only CATCL had a large have an effect on over ROA in Pakistan from 2006 to
2012.

Owolabiet al., (2011) observed that the endurance of an enterprise relies on liquidity-profitability relationship in three
exceptional enterprise sectors like banking, processing and manufacturing agencies in Nigeria.

Research Gap

The majority of the studies conducted had an impact on firms’ profitability and they were mainly conducted in non-
banking companies and there are very few studies which have included efficiency and solvency for the impact analysis,
because efficiency shows the firm’s ability to use its assets in earning income, but does it have an impact on profitability?
Similarly impact of solvency on profitability will also have to be analysed. This study will analyse the impact of these
three variables (Liquidity, Efficiency and Solvency) on profitability.

Objectives

1. To analyse the profitability and liquidity of select banks.

Methodology

The leading Indian banks considered are SBI, HDFC Bank, ICICI Bank and PNB. The ratios used in the study are Current
Ratio (CR), Quick ratio (QR), Asset Turnover Ratio (ATR), Loans Turnover Ratio (LTR), Debt Equity Ratio (DE) and
Return on Net worth (RONW). The timeframe was five years i.e. from 2014-2019. The impact analysis was done using
SPSS 24.

Mohmad Mushtaq Khan and K.Bhavana Raj (2020). Sustainable Financial Performance of Select Banks.
African Journal of Business and Economic Research, Vol.15, Issue 3, No.9. DOI: doi.org/10.31920/1750- 2
4562/2020/09/20n3a8
African Journal of Business and Economic Research Volume 15 Issue 3 Number 9 2020
ISSN: 1750-4554 / E-ISSN: 1750-4562

Data Analysis
Ratios of select banks
Bank\Year Ratios 2019 2018 2017 2016 2015
CR 0.08 0.07 0.07 0.06 0.03
QR 13.83 11.94 10.89 11.02 13.81
SBI ATR 0.08 0.07 0.08 0.08 0.09
LTR 0.13 0.12 0.12 0.12 0.12
DE 15.79 15.08 14.24 13.87 13.34
RONW -3.37 6.69 6.89 10.20 9.20
CR 0.04 0.06 0.07 0.04 0.06
QR 17.48 11.19 14.51 12.69 8.55
HDFC ATR 0.08 0.09 0.09 0.09 0.09
LTR 0.13 0.14 0.15 0.15 0.15
DE 8.58 8.02 8.25 8.00 9.36
RONW 16.45 16.26 16.91 16.47 19.50
CR 0.12 0.12 0.13 0.06 0.09
QR 20.44 16.31 14.97 13.81 11.31
ICCI ATR 0.07 0.08 0.08 0.08 0.08
LTR 0.11 0.12 0.13 0.14 0.14
DE 7.28 6.58 6.86 6.64 6.65
RONW 6.63 10.11 11.19 13.89 13.40
CR 0.05 0.03 0.03 0.02 0.02
QR 22.72 28.98 28.09 24.23 25.19
PNB ATR 0.07 0.07 0.08 0.08 0.09
LTR 0.11 0.11 0.12 0.13 0.13
DE 18.80 17.39 17.28 14.51 14.48
RONW -32.85 3.47 -11.20 8.12 9.69
Source: Annual reports of the select Banks

The current ratio of SBI used to be beneath the trendy of 2:1 for all the years of study, the place as in terms of speedy
ratio, financial institution has carried out very well. The bank has proven a desirable overall performance in terms of
profitability. The present day ratio of HDFC financial institution was once below the well-known for all the years of
study however its quick ratio has been above standard, which shows financial institution has a higher liquidity. The
profitability performance of the bank measured with the aid of return on internet really worth has been very incredible
and high-quality amongst the pick banks. The modern ratio of ICICI financial institution used to be beneath the
preferred of 2:1 for all the years of study, the place as banks quick ratio has been above standard, which capacity bank
has carried out nicely in phrases of liquidity. The profitability performance of ICICI financial institution has shown a
decreasing fashion in terms of return on internet well worth from 2015 to 2019. The modern-day ratio of PNB was under
the standard for all the years of find out about and lowest among the selected banks. The financial institution has proven
very best quick ratios for all the years, which potential greater idle funds. The financial institution has not carried out
properly in terms of profitability, the return on internet worth has shown a poor ratio for 2017 and 2019, which shows
banks overall performance has no longer been good.

Mohmad Mushtaq Khan and K.Bhavana Raj (2020). Sustainable Financial Performance of Select Banks.
African Journal of Business and Economic Research, Vol.15, Issue 3, No.9. DOI: doi.org/10.31920/1750- 3
4562/2020/09/20n3a8
African Journal of Business and Economic Research Volume 15 Issue 3 Number 9 2020
ISSN: 1750-4554 / E-ISSN: 1750-4562

Descriptive Statistics
Mean Std. Deviation N
Return on Net worth 7.48 8.894 4
Current Ratio .00 .000 4
Quick Ratio 16.00 6.164 4
Asset Turnover .00 .000 4
Loans Turnover .10 .000 4
Debt Equity 11.00 4.761 4

Model Summary
Change Statistics
R Adjusted R Std. Error of
Model R R Square F Sig. F
Square Square the Estimate df1 df2
Change Change Change
1 .957a .917 .750 4.450 .917 5.492 2 1 .289
a. Predictors: (Constant), Debt Equity, Quick Ratio

ANOVAa
Model Sum of Squares df Mean Square F Sig.
Regression 217.504 2 108.752 5.492 .289b
1 Residual 19.803 1 19.803
Total 237.307 3
a. Dependent Variable: Return on Net worth
b. Predictors: (Constant), Debt Equity, Quick Ratio

Coefficientsa
Unstandardized Standardized 95.0% Confidence
Coefficients Coefficients Interval for B
Model t Sig.
Lower Upper
B Std. Error Beta
Bound Bound
(Constant) 31.035 7.499 4.138 .151 -64.252 126.321
1 Quick Ratio -.763 .506 -.529 -1.508 .373 -7.197 5.670
Debt Equity -1.031 .656 -.552 -1.573 .361 -9.362 7.299
a. Dependent Variable: Return on Net worth

Findings

It was determined that SBI financial institution has proven a true performance in phrases of profitability and liquidity.
The cutting-edge ratio of HDFC financial institution was under the popular for all the years of find out about but its
speedy ratio has been above standard, which suggests bank has a better liquidity. The profitability overall performance
of the financial institution measured with the aid of return on internet really worth has been very mind-blowing and
pleasant amongst the choose banks. The current ratio of ICICI financial institution was once below the general of 2:1 for
all the years of study, the place as banks quick ratio has been above standard, which potential financial institution has
performed properly on the basis of liquidity. The overall performance of ICICI bank has shown a lowering vogue in
phrases of return on internet really worth from 2015 to 2019, which have to be a signal of worry for the bank.

Mohmad Mushtaq Khan and K.Bhavana Raj (2020). Sustainable Financial Performance of Select Banks.
African Journal of Business and Economic Research, Vol.15, Issue 3, No.9. DOI: doi.org/10.31920/1750- 4
4562/2020/09/20n3a8
African Journal of Business and Economic Research Volume 15 Issue 3 Number 9 2020
ISSN: 1750-4554 / E-ISSN: 1750-4562

The contemporary ratio of PNB used to be under the general for all the years of learn about and lowest amongst the
chosen banks. The bank has shown best possible speedy ratios for all the years, which capacity extra idle funds. The
financial institution has now not carried out properly in phrases of profitability, the return on internet well worth has
proven a negative ratio for 2017 and 2019, which indicates banks overall performance has now not been good. The
reason for reduce in profitability can be more funding in quick assets, which do not give returns. The study additionally
located that liquidity, efficiency and solvency did no longer have a sizable influence on profitability. Liquidity had an
adverse impact on profitability of pick out banks, therefore if liquidity increases, there will be decline in profitability.
The study additionally discovered that solvency had a bad influence on profitability of pick out banks.

To sum up

To assess the influence regression analysis was used in SPSS 24. The find out about did now not locate a big influence of
these variables on profitability, but liquidity and debt fairness ratio had an adverse impact on profitability, therefore
banks ought to focus on retaining a moderate degree of liquidity so that it does no longer affect profitability. CSR
initiatives in firms strive to boost and make bigger social and environmental things to do in such corporations
(Commission of European Communities, 2001). Lee et al. (2009) consider that companies outline their responsibilities
founded on CSR motives, consisting of social, monetary and environmental duties that are essential for becoming a
properly corporate citizen.

References

1. Bagchi, B., & Khamrui, B. (2012). Relationship between Working Capital Management and Profitability: A
Study of Selected FMCG Companies in India. Business And Economics Journal, 2012 (BEJ-60), 1-11. doi:
10.5539/ijbm.v7n22p1.
2. Bayoud, N.S.; Kavanagh, M.; Slaughter, G. (2012). Factors Influencing Levels of Corporate Social Responsibility
Disclosure by Libyan Firms: A Mixed Study. Int. J. Econ. Financ., 4, 13–29.
3. Brumm, J. (2005). The Japanese perspective. In Corporate Social Responsibility: The Corporate Governance of
the 21; Mullerat, I.R., Ed.; Kluwer Law: The Hague, The Netherland ; pp. 337–341.
4. Cannon, T. (1994) .Corporate Responsibility: A Textbook on Business Ethics, Governance, Environment, Roles
and Responsibilities; Pitman: London, UK.
5. Campbell, D.J. (2000). Legitimacy Theory or Managerial Reality Construction? Corporate Social Disclosure in
Marks and Spencer Plc Corporate Reports, 1969–1997. Account. Forum, 24, 80–100.
6. Cho, S.J.; Chung, C.; Young, J. (2019). Study on the Relationship between CSR and Financial Performance.
Sustainability, 11, 343.
7. Commission of European Communities (2001). Promoting a European framework for Corporate Social
Responsibility; Commission of European Communities: Brussels, Belgium.
8. Deegan, C. (2002). The legitimising effect of social and environmental disclosures–a theoretical foundation.
Account. Audit. Account. J., 15, 282–311.
9. Doh, J.; Guay, T.R. (2006). Corporate Social Responsibility, Public Policy, and NGO Activism in Europe and the
United States: An Institutional-Stakeholder Perspective. J. Manag. Stud., 43, 47–73.
10. Ehsan, S.; Nazir, M.S.; Nurunnabi, M.; Khan, Q.R.; Tahir, S.; Ahmed, I. (2019). A Multimethod Approach to
Assess and Measure Corporate Social Responsibility Disclosure and Practices in a Developing Economy.
Sustainability, 10, 2955.
11. Freeman, R.E. (1994). The Politics of Stakeholder Theory: Some Future Directions. Bus. Ethics Q. , 4, 409–421.

Mohmad Mushtaq Khan and K.Bhavana Raj (2020). Sustainable Financial Performance of Select Banks.
African Journal of Business and Economic Research, Vol.15, Issue 3, No.9. DOI: doi.org/10.31920/1750- 5
4562/2020/09/20n3a8
African Journal of Business and Economic Research Volume 15 Issue 3 Number 9 2020
ISSN: 1750-4554 / E-ISSN: 1750-4562

12. Freeman, R.E.; Harrison, J.S.; Wicks, A.C.; Parmar, B.L.; De Colle, S. (2010). Stakeholder Theory: The State of the
Art; Cambridge University Press: New York, NY, USA.
13. Gray, R.; Kouhy, R.; Lavers, S. (1995). Corporate social and environmental reporting. Account. Audit. Account.
J., 8, 47–77.
14. Guthrie, J.; Farneti, F. (2008). GRI Sustainability Reporting by Australian Public Sector Organizations. Public
Money Manag. , 28, 361–366.
15. Hartman, L.P.; Rubin, R.; Dhanda, K.K. (2007). The Communication of Corporate Social Responsibility: United
States and European Union Multinational Corporations. J. Bus. Ethics, 74, 373–389.
16. Hopkins, M. (2012). The Planetary Bargain; Informa UK Limited: London, UK.
17. Hossain, M.; Islam, K.; Andrew, J. (2006). Corporate social and environmental disclosure in developing
countries: Evidence from Bangladesh. In Proceedings of the Asian Pacific Conference on International
Accounting Issue, Honolulu, HI, USA, 15–18 October 2006; pp. 1–22.
18. Ibrahim, S. (2018). The Impacts of Liquidity on Profitability in Banking Sectors of Iraq: A Case of Iraqi
Commercial Banks. International Journal of Finance & Banking Studies (2147-4486), 6(1), 113. doi:
10.20525/ijfbs.v6i1.650.
19. Jamali, D.; Karam, C.; Yin, J.; Soundararajan, V. (2018). CSR logics in developing countries: Translation,
adaptation and stalled development. J. World Bus., 52, 343–359.
20. Jones, T.M. (1995). Instrumental stakeholder theory: A synthesis of ethics and economics. Acad. Manag. Rev. 20,
404–437
21. Khan, M., Khan, M., & Azad, T. (2016). Exploring Liquidity-Profitability Nexus: A Reference of Modaraba
Companies. International Journal Of Accounting And Financial Reporting, 1(1), 63. doi: 10.5296/ijafr.v5i1.6803.
22. Khan, R., & Ali, M. (2017). Impact of Liquidity on Profitability of Commercial Banks in Pakistan: An Analysis
on Banking Sector in Pakistan. Global Journal of Management And Business Research: C Finance, 16(1), 53-59.
https://globaljournals.org/GJMBR_Volume16/4-Impact-of-Liquidity-on Profitability.pdf
23. Krishnamoorthi, M. (2017). Impact of Liquidity, Turnover and Profitability on Dividend Payment of Select Steel
Companies in India. Asian Journal of Research in Social Sciences And Humanities, 6(7), 1176. doi:
10.5958/2249-7315.2017.00502.5.
24. Lee, M.; Fairhurst, A.; Wesley, S. (2009). Corporate social responsibility and corporate social performance. Corp.
Reput. Rev. , 12, 140–158.
25. Levine, R. (2005). Chapter 12 Finance and Growth: Theory and Evidence. In Handbook of Economic Growth;
Elsevier BV: Berlin, Germany; Volume 1, pp. 865–934.
26. Lin, C.-S.; Chang, R.-Y.; Dang, V.T. (2016). An Integrated Model to Explain How Corporate Social
Responsibility Affects Corporate Financial Performance. Sustainability, 7, 8292–8311.
27. Lux, J.; Thorsen, S.S.; Meisling, A. (2005). The European Initiatives. In Corporate Social Responsibility: The
Corporate Governance of the 21st Century; Mullerat, I.R., Ed.; Kluwer Law International: Alphen aan den Rijn,
The Netherland; pp. 279–298.
28. Malik, M., Awais, M., & Khursheed, A. (2017). Impact of Liquidity on Profitability: A Comprehensive Case of
Pakistan’s Private Banking Sector. International Journal Of Economics And Finance, 8(3), 69. doi:
10.5539/ijef.v8n3p69.
29. Muthuri, J.N.; Gilbert, V. (2010). An Institutional Analysis of Corporate Social Responsibility in Kenya. J. Bus.
Ethics, 98, 467–483.
30. Nasrullah, N.M.; Rahim, M. (2013).Trends in CSR Practices in Developed and Developing Countries. In
Essential Issues in Corporate Social Responsibility; Springer Science and Business Media LLC: Berlin, Germany;
pp. 41–74.

Mohmad Mushtaq Khan and K.Bhavana Raj (2020). Sustainable Financial Performance of Select Banks.
African Journal of Business and Economic Research, Vol.15, Issue 3, No.9. DOI: doi.org/10.31920/1750- 6
4562/2020/09/20n3a8
African Journal of Business and Economic Research Volume 15 Issue 3 Number 9 2020
ISSN: 1750-4554 / E-ISSN: 1750-4562

31. NjorogeMuiruri, J. (2018). The Effect of Liquidity on Profitability of Commercial Banks in Kenya (Masters).
University of Nairobi.
32. Owolabi, S. A., Obiakor, R. T. &Okwu, A. T. (2011). Investigating Liquidity – Profitability Relationship in
Business Organisation: A Study of Selected Quoted Companies in Nigeria. British Journal of Economics,
Finance and Management Sciences, Vol (1), No 2.
33. Perrini, F. (2006). Corporate Social Responsibility: Doing the Most Good for Your Company and Your Cause
Corporate Social Responsibility: Doing the Most Good for Your Company and Your Cause Edited by
KotlerPhilip and LeeNancy. Hoboken, New Jersey: Wiley, 2005. 307 pages, hard cover, $29.95. Acad. Manag.
Perspect., 20, 90–93.
34. Platonova, E.; Asutay, M.; Dixon, R.; Mohammad, S. (2017). The Impact of Corporate Social Responsibility
Disclosure on Financial Performance: Evidence from the GCC Islamic Banking Sector. J. Bus. Ethics, 151, 451–
471.
35. Polychronidou, P.; Ioannidou, E.; Kipouros, A.; Tsourgiannis, L.; Simet, G.F. (2014). Corporate Social
Responsibility in Greek Banking Sector—An Empirical Research. Procedia Econ. Financ., 9, 193–199.
36. Porter, M.E.; Kramer, M.R. (2002). The competitive advantage of corporate philanthropy. Harv. Bus. Rev., 80,
56–69
37. Sethi, S.P. (1979). A conceptual framework for environmental analysis of social issues and evaluation of
business response patterns. Acad. Manag. Rev., 4, 63–74.
38. Sharma, A., & Kumar, S. (2011). Effect of Working Capital Management on Firm Profitability. Global Business
Review, 12(1), 159-173. doi: 10.1177/097215091001200110.
39. Sheehy, B. (2014). Defining CSR: Problems and Solutions. J. Bus. Ethics, 131, 625–648.
40. Smith, N.C. (2003). Corporate Social Responsibility: Whether or How? Calif. Manag. Rev., 45, 52–76.
41. Ullah, M.S. (2013). Corporate social responsibility practices in the banking sector in Bangladesh-An assessment.
Bank Parikrama, XXXVIII(3&4), 129–152.
42. Viganò, F. (2013).CSR in the European Banking Sector: Evidence from a Survey. In Corporate Social
Responsibility in Europe; Edward Elgar Publishing: Chalone, UK; pp. 95–108.
43. Waleed, A. (2017). Exploring the Impact of Liquidity on Profitability: Evidence from Banking Sector of Pakistan.
SSRN Electronic Journal. doi: 10.2139/ssrn.2899817.
44. Yamak, S.; Süer, Ö. (2005). State as a stakeholder. Corp. Gov. Int. J. Bus. Soc., 5, 111–120.

Mohmad Mushtaq Khan and K.Bhavana Raj (2020). Sustainable Financial Performance of Select Banks.
African Journal of Business and Economic Research, Vol.15, Issue 3, No.9. DOI: doi.org/10.31920/1750- 7
4562/2020/09/20n3a8