The latest RBI study says profitability has a relatively high degree of variability and spreads are relatively impervious to interest earnings and interest expenses. The critical pre-condition for a smaller burden is the maximisation of non-interest income like commission, exchange and brokerage.

Accordingly, low interest income-generating banks need to concentrate on improving customer services to become more profitable and efficient. Reduction of establishment expenses in particular wage bills is also identified as a potential profit maximising strategy for public sector banks.

The cost of mechanisation does not reduce profit. In fact, mechanisation enhances profitability indirectly, the study adds.

Although there exists a significant positive correlation between profitability and size of advances portfolio, the co-relation between profitabilityand size of investment portfolio is significantly negative.

The study shows that higher growth of the size of of the investment portfolio may eventually lead to less profit. In the short-run, public sector banks may find it easier to invest in safer government securities to avoid the problems arising from non-performing assets (NPA) and risk-assets based capital adequacy requirements.

However, it is felt that that in the near future, public sector banks will have to focus more on loans and advances as a regional response to the risk-return trade-off facing commercial banking.

In general, the study observes that the difference between the average and the best bank recorded a noticeable reduction in the post reform period. Thus, the deregulation process may have the biggest impact on the weak banks by improving their level of performance towards the highest potential.

The study, which dealt with the factors of differences in the profitability of one bank with others during the pre and post reformperiods, said that public sector banks have recorded a reduction in the burden of rising working funds in terms of non-interest expenses adjusted for non-interest income in the post liberalisation period.

This can be attributed to a gradual shift away from traditional banking to the improved provisions of financial services and enhanced earnings there of. Thus, financial sector reforms are inducing subtle shifts in banking intermediation. There is also a distinct risk aversion supporting these shifts, as indicated by the preference for investments over advances in bank portfolio.

In comparison to international banks, Indian banks are found to carry a large and disproportionate contingent staff as compared to their assets. Further, interest income of Indian banks is found to be very high while income from non-interest sources had been significantly low.

The findings shows the preponderance of traditional banking business in India and stresses the need for diversification of banking business.