Purushottam Naidu, Gowri Lakshmi, G.V.K.Kasthuri, Syed Hasan Jafar, Kattamuri Satish, Narasimha Swamy and Sheela
Relevance: Inflation profoundly affects various sectors, including banking, and understanding its impact on financial performance holds significant potential for enhancing shareholder returns. Purpose : This study pursues a threefold objective. It investigates the influence of inflation on earnings in Indian public sector commercial banks, explores the mediating roles of credit risk and operating profit margin, and ultimately addresses the impact of inflation on financial stability and shareholder returns. Methods: Employing structural equation modelling with predictive capabilities, this research assesses data from ten Indian public sector commercial banks over a decade (2013-2022). A multi-group approach is used to evaluate how inflation levels affect return on equity, with operating profit margin and credit risk as mediators. Results: The results point to a complex relationship under different inflationary settings (below and above 5.1%). Inflation has a positive impact on the operating profit margin (β from 0.383 to 0.581).However, it also has a negative effect on gross non-performing assets ((β from -0.037 to -0.430)), consequently leading to a decrease in return on equity. Furthermore, the operating profit margin negatively influences credit risk, with a decrease (β: from -0.579 to -0.252) observed at higher inflation levels. Conclusion: This study provides an original contribution by examining inflation's impact on shareholder returns in Indian public sector commercial banks, while considering the mediating roles of gross non-performing assets and operating profit margin. The insights offer valuable guidance to bank management and policymakers for mitigating inflation's effects and maximizing shareholder returns across varying inflation levels