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The present study has been carried out to observe the impact of capital adequacy ratio on the profitability ratios of Punjab National Bank during the implementation period of Basel II.

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  1. International Journal of Management (IJM)
    Volume 8, Issue 2, March – April 2017, pp.89–105, Article ID: IJM_08_02_011
    Available online at
    http://www.iaeme.com/ijm/issues.asp?JType=IJM&VType=8&IType=2
    Journal Impact Factor (2016): 8.1920 (Calculated by GISI) www.jifactor.com
    ISSN Print: 0976-6502 and ISSN Online: 0976-6510
    © IAEME Publication

    THE IMPACT OF CAPITAL ADEQUACY RATIO
    UNDER BASEL II ON THE DETERMINANTS OF
    PROFITABILITY RATIOS OF PUNJAB
    NATIONAL BANK
    Amitabh Bhowmick
    Research Scholar, Institute of Management studies,
    Banaras Hindu University, Uttar Pradesh, India

    Dr. Shashi Srivastava
    Assistant Professor, Institute of Management Studies,
    Banaras Hindu University, Uttar Pradesh, India

    ABSTRACT
    Risks to a bank are responsible for an adverse impact on the capital and
    profitability. The profitability ratios play an important role in deciding the strength of
    a bank over the years. The present study has been carried out to observe the impact of
    capital adequacy ratio on the profitability ratios of Punjab National Bank during the
    implementation period of Basel II. The relationship between the Capital adequacy ratio
    and profitability ratios has also been explained in the present study. The profitability
    ratios like Dividend Payout Ratio, Return on Equity have shown decreasing trend
    during the Basel II period whereas ratios like Return on Capital Employed, Return on
    asset, Earning per Share and Dividend Payout Ratio have not shown consistent
    decrease.
    The correlation and regression analysis show positive relationship between all the
    profitability ratios and Capital Adequacy ratio except earnings per share.
    Key words: ROSF (Return on Shareholder’s Fund, ROA (Return on Assets), DRP
    (Dividend Payout Ratio), DPS (Dividend per Share), ROCE (Return on Capital
    Employed), ROE (Return on Equity), EPS (Earnings per share) and CAR (Capital
    Adequacy Ratio).
    Cite this Article: Amitabh Bhowmick and Dr. Shashi Srivastava, The Impact of
    Capital Adequacy Ratio Under Basel II On The Determinants of Profitability Ratios of
    Punjab National Bank. International Journal of Management, 8 (2), 2017, pp. 89–105.
    http://www.iaeme.com/IJM/issues.asp?JType=IJM&VType=8&IType=2

    http://www.iaeme.com/IJM/index.asp 89 editor@iaeme.com

  2. Amitabh Bhowmick and Dr. Shashi Srivastava

    1. INTRODUCTION
    Since 1960s, the Indian banking industry has become an important tool to facilitate the
    development of the Indian economy. The banking sector in India has undergone through several
    reforms like nationalisation and adoption of Narshimhan committee guidelines at par with
    international standards in nineties which had been the start of economic reforms in India. The
    banking sector has shown enormous responsiveness to the requirements of the planned
    economy like India. Maji and Dey, (2006) found how strongly the process of globalisation and
    liberalization has influenced the Indian Banking sector.
    In view of financial turmoil and other disruptions in the international financial markets, the
    governors of G10 countries established a committee on Banking Regulations and supervisory
    practices at the end of 1974. Later renamed the Basel committee on Banking supervision, the
    committee was designed as a forum for regular cooperation between its member countries on
    banking supervisory matters and to enhance financial stability. The 1988 accord, commonly
    known as Basel I, called for a minimum capital ratio of capital to risk – weighted assets of 8%
    to be implemented by the end of 1992. The committee also refined the framework to address
    risks other than credit risk which was the focus of 1988 accord. In January 1996, the committee
    issued market risk amendment to capital accord. The new accord introduces and thoroughly
    examines a type of risk which although well documented in the manufacturing sector, had been
    somewhat overlooked by banking sector until recently, i.e. operational risk, incorporated by the
    new accord on capital adequacy proposal (hereafter Basel II).
    In June 2004, the committee issued revised capital framework generally known as Basel II,
    which comprised of three pillars:
    • Pillar 1: Minimum capital requirement as set out in 1988 accord.
    • Pillar 2: Supervisory review of an institution’s capital adequacy and internal assessment
    process.
    • Pillar 3: Effective uses of disclosure as a means to strengthen market discipline encourage
    sound banking practices.
    Under Pillar I of Basel II, a regulated institution must calculate the ‘ minimum capital’
    required to cover losses for each of its Credit, Market and Operational risks and then add them
    together to arrive at an overall Minimum Capital requirement.
    Risk to a bank may arise due to expected and unexpected events which are responsible for
    an adverse impact on the bank’s capital and profitability. Todays, the zero risk business does
    not exist and risk has always existed in business. As to banking it is a risky business and the
    banks assume various kinds of risks in the process of providing financial services. Hassan
    (2001) studied the performance of Islamic banks worldwide during 1994-2001. A number of
    internal and external banking factors were used to predict profitability and the result remarked
    high capital lead to high profitability. Abreu (2002) found that well capitalized banks face lower
    expected bankruptcy costs and thus low cost of funding resulting in better profitability. Capital
    is essential and an important factor to the perpetual continuity of a bank. A minimum amount
    of capital is required to ensure safety and soundness of the bank and therefore the trust and
    confidence of the customers. Athanasoglou et al. (2005) opined that a bank with sound capital
    position can pursue the business transactions more effectively and efficiency to counter the
    unexpected losses and ensure the required profits.

    2. REVIEW OF LITERATURE
    Ijeoma, Ngoziblessing (2015) found that bank reforms had significant influence on profit of
    Zenith bank PLC before reform and after reform while studying “Impact of bank reform on the
    capital adequacy and profitability of Nigerian banks.”

    http://www.iaeme.com/IJM/index.asp 90 editor@iaeme.com

  3. The Impact of Capital Adequacy Ratio Under Basel II On The Determinants of Profitability
    Ratios of Punjab National Bank
    Ndifon Ojong Ejoh and Ubana Ubi Iwara (2014) in their work “The impact of Capital
    Adequacy on Deposit money banks’ profitability in Nigeria” revealed that capital adequacy
    plays an important role in explaining banks’ Return on Assets (ROA) which is a measure of
    banks’ profitability.
    Asikhia Olalekan & Sokefun Adeyinka (2013) in their research on “Capital Adequacy and
    Banks’ profitability: An Empirical Evidence from Nigeria” found that the secondary data
    analysis showed a positive and significant relationship between capital adequacy and
    profitability of banks.
    A.A Onadapo and Adebayo, E. Olufemi (2012) studied the effect of capital adequacy on the
    profitability of the Nigerian banking sector. They found that performance indicators Return on
    Assets, Return on capital employed and efficiency ratio among others do not reflect much on
    Capital adequacy ratio of the Nigerian Banking sector.
    Khalid Ashraf Chishty (2011) in his study on “ The impact of capital adequacy requirements
    on profitability of private banks in India ( A case study of J and K Bank, ICICI bank, HDFC
    bank and Yes bank) found that there was no significant impact of capital adequacy, non-interest
    income and net interest income on profitability of the private commercial banks. Various
    financial ratios employed along with regression suggest that null hypothesis stands committed.
    The study further finds out that the non- risk weighted capital adequacy measures (i.e. equity
    capital ratio) is negatively related with the profitability of a bank.
    Gilibert, Wheelock and Mostafa (2007) referred Capital which consists of equity and long
    term debts and considered a source of funds to the banks along with deposits and borrowings.
    In measuring the profitability of a bank, the regulators have used Return on Assets (ROA) and
    Return on equity (ROE) to access the performance of the bank. These two are used as inputs in
    statistical models to find out the bank’s failures and mergers and other purposes which need
    measuring profitability.

    Objectives of the study
    1. To find out the impact of capital adequacy norms on the profitability parameters of Punjab
    National Bank for the years 2009-2014 (Period of Basel II).
    2. The study also establishes the relationship between the capital adequacy ratio and profitability
    ratios of the bank for the period under study.

    Scope of the Study
    The study has been carried out on Punjab National bank. PNB is having second largest network
    next to SBI in public sector banks. It’s having lesser branch expansion abroad its area of
    operation is largely based in India. Dr. Manvinder et. All (2014) found that PNB has the highest
    return on net worth mean which indicates that management of PNB is at using leverage to
    increase profit and profit margins. It is also a sign of good management. Thus PNB can be taken
    as a representative bank for this study to find out the relationship of profitability ratios and
    capital adequacy ratio during the implementation period of Basel II.
    Data source: The data has been collected from “Statistical tables relating to banks in India”
    and “Report on Trend and progress of banking in India” published by reserve bank of India and
    money control. Com.
    Research Methodology: The present study is based on previous studies that addressed the
    research topic to explain the theoretical aspects along with using the annual reports of Punjab
    National bank for the applied part of this study. The other approach is based on the statistical
    analysis for which secondary data have been collected on the study subject for the period 2009-
    2014, focussing the impact of Basel II norms.

    http://www.iaeme.com/IJM/index.asp 91 editor@iaeme.com

  4. Amitabh Bhowmick and Dr. Shashi Srivastava

    The study focuses on the following statistics:
    1. Pearson Correlation Coefficient to find out the directions of the expected relationship between
    independent and dependent variable (capital adequacy ratio).
    2. Multiple linear regression analysis to determine the degree of impact of capital adequacy ratio
    requirements on profitability ratios of Punjab national bank.
    The profitability ratios are taken as independent variables and capital adequacy ratio is taken
    as dependent variable and vice versa.

    Description of variables
    A bank can earn profit to survive and grow over a long period of times. The following
    profitability ratios are calculated to measure the operating efficiency of the bank.

    Earnings per Share (EPS)
    The profitability of shareholders’ investment can be measured in many other ways. One such
    measure is to calculate the earnings per share (EPS) is calculated by dividing the profit after
    taxes by the total number of ordinary shares outstanding.
    Profit after tax
    EPS= ————————————————–
    Number of shares outstanding

    Dividends per share (DPS)
    The net profits after taxes belong to shareholders. But the income, which they really receive, is
    the amount of earnings distributed as cash dividends. Therefore, a large number of present and
    potential investors may be interested in DPS rather than EPS.
    DPS is the earnings distributed to ordinary shareholders divided by the number of ordinary
    shares outstanding.
    Earnings paid to shareholders (dividends)
    DPS= —————————————————————–
    Number of ordinary shares outstanding

    Dividend- Payout Ratio
    The dividend- payout ratio or simply payout ratio is DPS (or total equity dividends) divided by
    the EPS (or profit after tax).
    Equity dividends
    Payout ratio = ———————————-
    Profit after tax

    Dividends per share DPS
    = ——————————— = ———–
    Earnings per share EPS

    http://www.iaeme.com/IJM/index.asp 92 editor@iaeme.com

  5. The Impact of Capital Adequacy Ratio Under Basel II On The Determinants of Profitability
    Ratios of Punjab National Bank

    RETURN ON EQUITY
    The shareholders’ equity or net worth will include paid up share capital, share premium and
    reserves and surplus less accumulated losses. Net worth can also be found by subtracting total
    liabilities from total assets. The return on equity is net profit after taxes divided by shareholders’
    equity which is given by net worth.
    Profit after taxes
    ROE= ————————————-
    Net worth (Equity)

    Return on Shareholder’s Fund
    This ratio is used to interpret how efficiently the shareholders’ funds is used to maximise the
    net Profit. If the return on net worth is higher than the bank’s return on assets, it may be a sign
    that
    Management is using leverage to increase profits and profit margins. Thus it is the ratio of
    net
    Profit to total shareholders’ fund.
    Net profit after tax and interest
    Return on shareholders’ fund = ————————————————-
    Total shareholders’ fund

    Return on Capital Employed (ROCE)
    It is a measure to find out the performance of banks in terms of profit from its capital Employed.
    The performance of banks over the years can be compared by using profit generation from the
    capital of the bank.
    Profit before interest, tax and dividends
    ROCE= ——————————————————- * 100
    Capital employed

    RETURN ON ASSETS
    The conventional approach of calculating return on asset is to divide Profit after tax (PAT) by
    total assets. Assets represent pool of funds supplied by shareholders and lenders. It is therefore
    more appropriate to use following measure of ROA for computing the operating efficiency of
    banks.
    EBIT
    ROA= ————————–
    Total Assets

    Capital Adequacy Ratio
    It is an important aspect of a bank to maintain the depositors’ confidence and also indicates
    ability of management to with stands against unexpected losses.
    Tier 1 capital + Tier 2 Capital
    CAR= ——————————————
    Risk weighted assets
    CAR is arrived at by taking into account the ratio between Capital to risk weighted Assets.
    CAR covers credit, market and operational risk.

    http://www.iaeme.com/IJM/index.asp 93 editor@iaeme.com

  6. Amitabh Bhowmick and Dr. Shashi Srivastava

    Table 1 Profitability and Capital adequacy ratios of Punjab National Bank
    YEAR 2009 2010 2011 2012 2013 2014

    Return on Total Shareholder’s
    Fund 23.52 24.06 20.61 17.55 14.52 9.31

    Return on Capital Employed 10.14 9.24 9.09 9.71 9.86 9.29

    Return on Assets (ROA) 1.39 1.44 1.31 1.17 1.01 0.65

    Earnings per Share 98.03 123.86 139.94 144 134.31 92.32

    Dividends per share 20 22 22 22 27 10

    Dividend Payout ratio 23.86 20.74 15.72 15.27 20.1 10.83

    Return on equity (ROE) 22.92 24.12 22.6 19.8 15.7 9.69

    Capital adequacy Ratio 14.03 14.16 12.42 12.63 12.72 12.29
    From the above we find that almost all profitability ratios have decreased over the period
    during the Basel II. A decrease in Return on total shareholders fund shows that the bank is not
    generating sufficient net profit. ROCE is showing declining trend from 2009 to 2011 and
    thereafter it increases but decreases in the year 2014. ROA has increased in 2010 and thereafter
    decreases which indicates decrease in net profit of the bank in subsequent years due to increase
    in provisions and contingencies.
    Earnings per share depend on net profit and number of shares outstanding at the end of
    financial year. This ratio is also linked with capital market situations which are responsible for
    sale and purchase of shares. The trend showing an increase till 2012 and thereafter decreases in
    subsequent years till 2014.
    Dividend per share remains almost same except in 2013 when it witnessed a rise and then
    there was a sharp decline in the year2014. Dividend Payout Ratio shows a decrease till 2012,
    thereafter it increases in 2013 and then there is a sharp decline. Return on Equity (ROE)
    increases in 2010. This is because there has been an increase in Net Profit of PNB. Thereafter
    the net profit of bank declined resulting in decrease in ROE in subsequent years. CAR shows a
    minor increase in the year 2010 but later it decreased unevenly.

    http://www.iaeme.com/IJM/index.asp 94 editor@iaeme.com

  7. The Impact of Capital Adequacy Ratio Under Basel II On The Determinants of Profitability
    Ratios of Punjab National Bank

    GRAPH: Showing trends of profitability ratios vis a vis Capital
    Adequacy ratio of Pujab National Bank over the years 2009-2014
    160
    140 ROTS
    120 ROCE
    100 ROA
    RATIOS

    80 EPS
    60 DPS

    40 DPR
    ROE
    20
    CAR
    0
    2009 2010 2011 2012 2013 2014
    The graph of Earnings per Share shows much variation during the period of study but it
    reaches to almost same position in 2014 as it was in the year 2009.Dividends per Share remains
    constant throughout the years. Though there is a sharp increase in 2012 and thereafter it declines
    in 2014.The other parameters like ROCE, ROA, DPR and ROE have remained almost same.
    CAR remained almost same in 2009 and 2010 and it has decreased in the subsequent years.

    3. DATA ANALYSIS AND INTERPRETATION
    1. Analysis of determinants of CRAR
    The study will be carried out to find the relationship between the CRAR and the some important
    profitability Ratios. The analysis of these determinants will give an idea about the relationship
    that CRAR Share with them. We will observe whether the profitability ratios during the Basel
    II period of PNB have an impact on CRAR of the bank.

    1.1. CAR and Return on total Shareholder’s Fund

    Model Summary

    Model R R Square Adjusted R Square Std. Error of the Estimate
    a
    1 .781 .611 .513 .57963
    Predictors: (Constant), Return on Total Share holder’s Fund

    http://www.iaeme.com/IJM/index.asp 95 editor@iaeme.com

  8. Amitabh Bhowmick and Dr. Shashi Srivastava

    Coefficients
    Standardized
    Unstandardized Coefficients
    Model Coefficients t Sig.

    B Std. Error Beta

    1 (Constant) 10.955 .866 12.649 .000

    ROTSF .114 .046 .781 2.505 .066

    Dependent Variable: CRAR
    The positive value of R shows that there exists a positive correlation between Return on
    Total Share Holder’s fund and capital adequacy ratio. The value of R square at .611 depicts that
    61.1% of change in CAR is defined by Return on Total Share Holder’s Fund. We can say that
    change in one percentage in Return on Total Share Holder’s Fund can change The CAR by 61.1
    percent. This is a considerable impact by the variable on the dependent variable of CRAR.

    1.2. CAR and Return on Capital Employed
    Model Summary

    Model R R Square Adjusted R Square Std. Error of the Estimate
    1 .323a .105 -.119 .87905
    a. Predictors: (Constant), Return on Capital
    Employed

    Coefficients
    Standardized
    Unstandardized Coefficients
    Model Coefficients t Sig.

    B Std. Error Beta

    (Constant) 6.797 9.145 .743 .499
    1
    ROCE .654 .956 .323 .683 .532

    Dependent Variable: CRAR
    There is a positive relationship between Return on Capital Employed and the Capital
    Adequacy Ratio. The R square at .105 shows that only 10.50 percent of change in CAR is
    defined by the Return on Capital Employed. In other words change in one percentage in Return
    on Capital Employed ratio will change the CAR by 10.5 percent.

    http://www.iaeme.com/IJM/index.asp 96 editor@iaeme.com

  9. The Impact of Capital Adequacy Ratio Under Basel II On The Determinants of Profitability
    Ratios of Punjab National Bank
    1.3. CAR and Return on Assets (ROA)

    Model Summary

    Model R R Square Adjusted R Square Std. Error of the Estimate

    1 .713a .508 .385 .65174

    Predictors: (Constant), Return on Assets

    Coefficients
    Unstandardized Standardized

    Model Coefficients Coefficients t Sig.

    B Std. Error Beta

    1 (Constant) 10.714 1.176 9.107 .001

    ROA 2.004 .986 .713 2.031 .112

    Dependent Variable: CRAR
    There is a positive relationship between Return on Assets (ROA) and CRAR. The R square
    at .508 shows that only 50.8 percent of change in CAR is defined by the Return on Assets. In
    other words change in one percentage in Return on Asset ratio will change the CAR by 50.8
    percent. This is a significant result and shows that this variable is a significant one.

    1.4. CAR and Earnings per Share

    Model Summary

    Model R R Square Adjusted R Square Std. Error of the Estimate

    1 .257a .066 -.167 .89776

    Coefficients
    Standardized
    Unstandardized Coefficients
    Model Coefficients t Sig.
    B Std. Error Beta
    1 (Constant) 14.227 2.259 6.297 .003

    EPS -.010 .018 -.257 -.532 .623

    Dependent Variable: CRAR
    There is a negative relationship between Earning per share and CRAR. The R square at .066
    shows that only 6.6 percent of change in CAR is defined by Earning per Share. In other words
    change in one percentage in Earning per Share ratio will change the CAR by 6.6 percentages.
    This shows that there is lack of considerable impact by the variable on the dependent variable
    CRAR.

    http://www.iaeme.com/IJM/index.asp 97 editor@iaeme.com

  10. Amitabh Bhowmick and Dr. Shashi Srivastava

    1.5. CAR and Dividends per share

    Model Summary

    Model R R Square Adjusted R Square Std. Error of the Estimate

    1 .232a .054 -.183 .90370

    Predictors: (Constant), Dividends per share

    Coefficients
    Standardized
    Unstandardized Coefficients
    Model Coefficients t Sig.

    B Std. Error Beta

    1(Constant) 12.343 1.513 8.160 .001

    DPS .034 .072 .232 .476 .659

    Dependent Variable: CRAR
    Dividends per share and CAR has positive ratio. The R square at .054 shows that only 5.4
    of change in CRAR is defined by Dividends per share. This means there is insignificant result
    and shows that this variable is an insignificant one.

    1.6. CAR and Dividend Payout Ratio
    Model Summary

    Std. Error of the
    Model R R Square Adjusted R Square
    Estimate

    1 .827a .684 .605 .52229
    a. Predictors: (Constant), Dividend Payout Ratio

    Coefficients
    Unstandardized Standardized

    Model Coefficients Coefficients

    B Std. Error Beta t Sig.

    1 (Constant) 10.440 .910 11.478 .000

    DPR .147 .050 .827 2.942 .042

    Dependent Variable: CRAR
    There is a positive relationship between Dividend Payout Ratio and CRAR. The R square
    at .684 shows that only 68.4 percent of change in CAR is defined by DPR. In other words
    change in one percentage in Dividend Payout Ratio will change the CAR by 68.4percent.

    http://www.iaeme.com/IJM/index.asp 98 editor@iaeme.com

  11. The Impact of Capital Adequacy Ratio Under Basel II On The Determinants of Profitability
    Ratios of Punjab National Bank
    1.7. CAR and Return on Equity

    Model R R Square Adjusted R Square Std. Error of the Estimate

    1 .658a .432 .290 .69992

    a. Predictors: (Constant), Return on Equity
    Standardized
    Unstandardized Coefficients
    Model Coefficients
    B Std. Error Beta t

    1(Constant) 11.149 1.121 9.943

    Return on
    .099 .057 .658 1.745
    Equity

    Dependent Variable: CRAR
    There is a positive relationship between Return on Equity (ROE) and CRAR. The R square
    at .432 shows that only 43.2 percent of change in CAR is defined by Return on Equity. In other
    words change in one percentage in Return on Equity will change the CAR by 43.2 percent.

    2. Impact of CRAR on the profitability ratios of Punjab National Bank
    In the last section we have analyzed the relationship between profitability ratios and CRAR
    keeping former as independent and the later as dependent variable. In this section the CRAR is
    kept as an independent variable taking all others as dependent variable.

    2.1. Return on total Shareholder’s Fund and CRAR
    Model Summary
    Change Statistics
    Std. Error of the
    Model R R Square Adjusted R Square R Square Sig. F
    Estimate F Change df1 df2
    Change Change

    1 .781a .611 .513 3.96375 .611 6.274 1 4 .066

    a. Predictors: (Constant), CRAR
    b. Dependent variable: TSF

    Coefficients

    Standardized
    Unstandardized Coefficients 95% Confidence Interval for B
    Model Coefficients t Sig.

    B Std. Error Beta Lower Bound Upper Bound

    1 (Constant) -51.433 27.870 -1.845 .139 -128.813 25.948

    CRAR 5.344 2.133 .781 2.505 .066 -.579 11.267
    Dependent Variable: Total Shareholders Fund

    http://www.iaeme.com/IJM/index.asp 99 editor@iaeme.com

  12. Amitabh Bhowmick and Dr. Shashi Srivastava

    The correlation between the variables of CRAR and Total Shareholders fund is strong
    positive correlation with a value of .781 as shown by the value of R. The value of R square is
    .611 which means that 61.1 percentage of variation in the value of dependent variable is
    explained by the independent variable. This means that impact of Total Shareholders Fund on
    CRAR is more significant than other factors. The level of significance is well above the value
    of .005 as the test is performed in the 95% confidence level. This means that the null hypothesis
    of having no relationship between variables is rejected thereby showing significant between the
    variables considered.

    2.2. Return on Capital Employed and CRAR

    Model Summary

    Std. Error Change Statistics

    Model R R Square Adjusted R Square of t.he R Square Sig. F
    F Change df1 df2
    Estimate Change Change

    1 .323a .105 -.119 .43491 .105 .467 1 4 .532

    a. Predictors: (Constant), CRAR
    b. Dependent Variable : ROCE

    Coefficients
    Standardized
    Unstandardized Coefficients 95% Confidence Interval for B
    Model Coefficients t Sig.
    B Std. Error Beta Lower Bound Upper Bound
    1(Constant) 7.469 3.058 2.442 .071 -1.022 15.959
    CRAR .160 .234 .323 .683 .532 -.490 .810
    Dependent Variable: ROCE
    The correlation between the variables of CRAR and Return on Capital employed is
    moderate positive correlation with a value of .323 as shown by value of R. The value of R
    square is .105 which means that only 10.5 percentage of variation in the value of dependent
    variable is explained by the independent variable. This means that there are other factors that
    impact on Return on capital employed more significantly than CRAR. At confidence level of
    95%, the null hypothesis shows no relationship between variables is rejected. Thus there exists
    significant relationship between these variables.

    2.3. Return on Assets (ROA) and CRAR

    Model Summary

    Change Statistics
    Mode Adjusted R Std. Error of
    R R Square R Square
    l Square the Estimate F Change df1 df2 Sig. F Change
    Change

    1 .713a .508 .385 .23176 .508 4.126 1 4 .112

    a. Predictors: (Constant), CRAR

    http://www.iaeme.com/IJM/index.asp 100 editor@iaeme.com

  13. The Impact of Capital Adequacy Ratio Under Basel II On The Determinants of Profitability
    Ratios of Punjab National Bank
    Coefficient
    Standardized
    Unstandardized Coefficients 95% Confidence Interval for B
    Model Coefficients t Sig.

    B Std. Error Beta Lower Bound Upper Bound

    (Constant) -2.143 1.630 -1.315 .259 -6.667 2.381
    1
    CRAR .253 .125 .713 2.031 .112 -.093 .600

    Dependent Variable: Return on Assets
    The above results show strong positive correlation with a value of .713 between Return on
    Assets and CRAR. The value of R square is .508 which means that 50.8 percentage of variation
    in the value of dependent variable is explained by the independent variable. The null hypothesis
    of having no relationship between ROA and CRAR is rejected showing significant relationship
    since the level of significance is above the value of .005 i.e. 95%.

    2.4. Earnings per Share and CRAR
    Model Summary

    Adjusted R Std. Error of the
    Model R R Square Square Estimate
    1 .257a .066 -.167 23.75233

    a. Predictors: (Constant), Capital Adequacy Ratio
    b. Dependent Variable: Earning Per
    Share
    Coefficients
    Standardize
    95% Confidence
    Unstandardized Coefficients d
    Interval for B
    Model Coefficients t Sig.
    Lower Upper
    B Std. Error Beta
    Bound Bound
    1(Constant) 210.749 167.011 1.262 .276 -252.947 674.445
    Capital Adequacy
    -6.799 12.784 -.257 -.532 .623 -42.294 28.696
    Ratio
    Dependent Variable: Earnings per
    Share
    The correlation between Earning per Share and CRAR is a negative correlation with a value
    of .257 as shown by the value of R. The value of R square is .066, which means that 6.6
    percentage of variation in the value of dependent variable earning per share is explained by the
    independent variable CRAR. This means there is very little impact on the dependent variable
    by independent variable.

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  14. Amitabh Bhowmick and Dr. Shashi Srivastava

    2.5. Dividends per year and CRAR

    Model Summary
    Change Statistics
    Adjusted R Std. Error of Sig. F
    Model R R Square R Square
    Square the Estimate F Change df1 df2 Chang
    Change
    e
    1 .232a .054 -.183 6.14293 .054 .227 1 4 .659
    a. Predictors: (Constant), Capital Adequacy Ratio

    Coefficients
    Unstandardized Standardized
    95% Confidence Interval for B
    Model Coefficients Coefficients t Sig.

    B Std. Error Beta Lower Bound Upper Bound

    1(Constant) -.034 43.193 .000 .999 -119.957 119.889

    Capital Adequacy
    1.575 3.306 .232 .476 .659 -7.605 10.754
    Ratio

    Dependent Variable: Dividends Per Share
    The correlation between the variables of CRAR and Dividends per Share is a weak positive
    correlation with a value of .232 as shown in the above table. The value of R- square is .054
    which means that 5.4 percentages in the value of dependent variable is explained by the
    dependent variable Dividends per share.

    2.6. Dividend Payout Ratio and CRAR

    Model Summary
    Change Statistics
    Adjusted R Std. Error of the
    Model R R Square R Square
    Square Estimate F Change df1 df2 Sig. F Change
    Change
    1 .827a .684 .605 2.94774 .684 8.654 1 4 .042
    a. Predictors: (Constant), CRAR

    Coefficients
    Standardize
    Unstandardized Coefficients d 95% Confidence Interval for B
    Model Coefficients t Sig.

    B Std. Error Beta Lower Bound Upper Bound
    1 (Constant) -43.116 20.727 -2.080 .106 -100.663 14.430
    CRAR 4.667 1.587 .827 2.942 .042 .262 9.072
    Dependent Variable: Dividend Payment
    Ratio
    The correlation between the variables CRAR and Dividend Payment Ratio is seemingly
    strong positive correlation with a value of .827. The value of R square is .684 which means that
    68.4 percentage of variation in the value of dependent variable is explained by the independent

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  15. The Impact of Capital Adequacy Ratio Under Basel II On The Determinants of Profitability
    Ratios of Punjab National Bank
    variable. When the test of hypothesis is performed, the level of significance is well above the
    value of .005. Thus null hypothesis is rejected, which shows significant relationship between
    the variables discussed above.

    2.7. Return on Equity (ROE) and CRAR

    Model Summary
    Change Statistics
    Adjusted R Std. Error of
    Model R R Square R Square
    Square the Estimate F Change df1 df2 Sig. F Change
    Change
    1 .658a .432 .290 4.65418 .432 3.046 1 4 .156
    a. Predictors: (Constant), CRAR

    Coefficients
    Standardized
    Unstandardized Coefficients 95% Confidence Interval for B
    Coefficients
    Model t Sig.
    Lower
    B Std. Error Beta Upper Bound
    Bound
    1 (Constant) -37.882 32.725 -1.158 .311 -128.742 52.977
    VAR00002 4.372 2.505 .658 1.745 .156 -2.583 11.327
    Dependent Variable: Return on Equity
    (ROE)
    The correlation between the variables of CRAR and ROE is strong positive correlation with
    a value of .658 as shown by value of R. The value of R square change is .432 which means that
    43.2 percentage variations in the value of dependent are explained by the independent variable.
    It means that up to certain extent other factors that impact ROE more significantly than CRAR.
    Multiple Regressions: The following table shows impact of CRAR on important
    profitability ratios of Punjab National Bank. The relationship among these variables and their
    impact on CRAR when considered as an independent variable is explained.
    Table 3 Correlation between determinants of CRAR Correlations
    Return on Return
    Capital Return on Dividend Return
    Total on Earnings Dividends
    Adequacy Capital Payout on equity
    Sharehold Assets per Share per share
    Ratio Employed ratio (ROE)
    er’s Fund (ROA)
    Pearson Correlation Capital Adequacy Ratio 1.000 .781 .323 .713 -.257 .232 .827 .658
    Return on Total
    .781 1.000 .109 .989 .210 .487 .748 .980
    Shareholder’s Fund
    Return on Capital
    .323 .109 1.000 .111 -.175 .305 .596 .052
    Employed
    Return on Assets
    .713 .989 .111 1.000 .345 .590 .735 .995
    (ROA)
    Earnings per Share -.257 .210 -.175 .345 1.000 .751 .005 .384
    Dividends per share .232 .487 .305 .590 .751 1.000 .624 .568
    Dividend Payout ratio .827 .748 .596 .735 .005 .624 1.000 .669
    Return on equity
    .658 .980 .052 .995 .384 .568 .669 1.000
    (ROE)

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  16. Amitabh Bhowmick and Dr. Shashi Srivastava

    Table 4 Multiple Regression Output table

    Un standardized Standardized 95% Confidence
    Model Coefficients Coefficients t Sig. Interval for B

    B Std. Error Beta Lower Bound Upper Bound
    1 (Constant) 7.071 .000 . . 7.071 7.071

    Return on Capital Employed -.979 .000 -.484 . . -.979 -.979

    Earnings per Share .150 .000 3.965 . . .150 .150

    Dividends per share -.737 .000 -5.009 . . -.737 -.737

    Dividend Payout ratio .923 .000 5.211 . . .923 .923

    Return on equity (ROE) -.223 .000 -1.481 . . -.223 -.223

    The above table shows the variables which have been accepted by this model as significant
    ones. This indicates that these variables have the most impact on the CRAR and explain the
    variation in it. Return on capital employed is the most significant factor wherein the CRAR will
    change by negative .979 percent with one percent change in ROCE.

    4. OVERALL INTERPRETATION
    • The calculations of correlation and regression of the profitability ratios of PNB with the CRAR
    being dependent as well as independent variable shows differing results.
    • The Return on Total Shareholder’s fund has shown strong positive correlation with CRAR. Thus
    for a higher ratio of Return on Total Shareholder’s fund the CRAR will be high.
    • Return on assets (ROA) and Return on equity (ROE) are having strong positive correlation with
    CRAR. The higher the profits after taxes the ratios of Return on assets and Return on equity
    will go up .This indicates that higher profit is related with higher capitalisation and lesser
    provisions from the net profit.
    • The Dividend payout ratio has significant positive relationship with CRAR. Thus in orders to
    high dividend per share and to maintain required CRAR bank need higher capital.
    • The return on capital employed (ROCE), Dividends per share (DPS) have weak positive
    relationship with CRAR. This indicates that there are factors other than capital that have impact
    on these variables.
    • Earnings per share have weak negative relationship with CRAR. This means that there is very
    little impact of this variable on CRAR. The high profit may get distributed in provisioning and
    maintaining the capital adequacy norms resulting in low EPS. This means there are other factors
    which are responsible for variation.

    5. FINDINGS AND CONCLUSIONS
    Findings
    On the basis of available data and its analysis, following findings have been identified as
    described below
    • Seven profitability ratios of Punjab National Bank show almost constant with slight variations
    from year 2009 to 2014, the implementation of Basel II period.
    • CRAR is showing declining trends over the years 2009-2014.
    • A positive correlation exists between Return on Total Share Holders’ Fund (ROTSF) and
    CRAR and one percent change in Return on Total Share Holder’s fund can change CRAR by
    61.1%.

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  17. The Impact of Capital Adequacy Ratio Under Basel II On The Determinants of Profitability
    Ratios of Punjab National Bank
    • A positive correlation is found between Return on Capital Employed (ROCE) and CRAR
    but only 10.50 percentage of change in CRAR is defined by this variable.
    • Return on Assets (ROA) and CRAR have positive correlation. We also find that change in one
    percentage in ROA will change the CRAR by 50.8 percentages.
    • The result shows negative relationship between CRAR and Earning Per Share (EPS). Further
    one percentage of change in EPS can affect CRAR by 6.6 percentages.
    • Dividend per share and CRAR has weak positive ratio and only 5.4 percentage change in
    CRAR is defined by dividend per share.
    • There is a significant positive relationship exists between Dividend Payout Ratio and CRAR.
    The change in one percentage in Dividend Payout Ratio will change the CRAR by 68.4
    percentages.
    • We find a positive relation between Return on Equity and CRAR and one percentage change
    in ROE will change the CRAR by 43.2 percent.

    6. CONCLUSIONS
    The present study has been carried out to examine the impact of CRAR on the profitability
    ratios of Punjab National Bank during 2009 to 2014, the implementation period of Basel II. We
    find that the profitability ratios remain almost constant whereas the CRAR decreases
    throughout the period under study. The correlation and regression analysis of these variables
    taking as dependent variables as well as independent variables gives varying relationship with
    CRAR. Variables Total share Holders’ Fund, Return on Capital Employed, Return on Assets,
    Return on Equity, Dividends per share and Dividend payout ratio have positive correlation with
    CRAR which means changes in these variables are defined by CRAR. Earnings per share and
    CRAR show negative relationship. Thus the changes in EPS are not defined by the changes in
    CRAR and vice versa.

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