Volume 16, Number 4 Article by Mitali Sen December, 2004
Award Winning Student Essay : A Decompositional Analysis of the Liability Structure of Indian Commercial Banks :
Much of the financial literature over the past four decades has revolved around different theories that try to explain just exactly what does matter in determining capital structure.The existing literature in corporate finance still lacks adequate depth in empirical research on the issue of capital structure choice in Indian firms.The little existing empirical research on capital structure in the Indian context is mainly confined to manufacturing firms.Very little work has been done in the context of the Indian service sector in general and the banking sector in particular. This creates a need for investigating the capital structure of the Indian banking industry in depth.
In this award winning student essay,Mitali Sen analyses the determinants of capital structure for a sample of 82 Indian commercial banks,using different types of debt.In order to achieve this,a multiple regression analysis was conducted for each leverage measure on a set of six explanatory variables independently.By decomposing the total liabilities into sub-components, significant differences are uncovered in the influence of these six explanatory variables on various types of debt components:the various short-term debt elements and long-term borrowings are negatively correlated with profitability,while deposits demonstrated a significant positive correlation.It is also observed that the correlation between all forms of debt and size is positive and highly significant with the exception of long-term borrowings.Contrary to expectation,a positive significant correlation is found between fee-based earnings with current liabilities and long-term borrowings.However,this result appears to be driven entirely for short run.In addition,deposits and long-term borrowings are found to be significantly negatively correlated to NPA ratio but not significantly related with any form of short-term debt.Sen thus argues that analysis of capital structure based solely upon one single measure of leverage provides only part of the story,and a clear understanding of capital structure and its determinants require a detailed analysis of all forms of debt,including a decompositional analysis of its liability structure.
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