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A well-developed banking sector is vital in driving and sustaining economic growth. Furthermore, the banking sector undertakes a significant role in financial intermediation by mobilising deposits from households with surplus savings and disbursing credits to various sectors of the economy. Therefore, the effective functioning of the banking sector is a sign of progress in the economy. Overall, the banking sector, specifically the Indian Banking sector, is considered more fragile to address financial shocks, as all the economies disintegrated after the liberalisation of 1991. From the manufacturing and the real estate sectors to the financial sector, every industry witnessed the shock of the crisis, which originated in the United States of America on a large scale after the Great Depression of the 1930s and expanded its roots to significant world economies. The problems noticed in the early stage of the crisis in the United States were the subprime mortgage market crisis, which gradually spilt over into the real estate and financial sectors in later stages. It simultaneously moved into other international markets through a contagion effect, which affected both developed and emerging economies. Though the magnitude of the crisis was not that severe, its impact rippled onto the other economies, which was seen as significant like the earlier crises.
The Indian banking sector plays a prime role in providing a healthy financial facility; dominates the mainstream of scheduled commercial banking operations in India (Sinha, 2010). The liberalised policy in the financial sector reforms of 1991 integrated the domestic economy with the world economy to free flow of goods and services at a large scale. While this brought about the opportunity for global investments, geopolitical and economic shocks surfaced on the other side, which became inevitable. Many foreign banks ventured their banking services into India to expand their newly liberalised and open Indian economy operations. Still, the dominance of the scheduled commercial banks remained intact as it was completely controlled and regulated by the Reserve Bank of India. The Global Financial Crisis, which started in 2007-08, devastated large economies. Although the global financial crisis had outspread into several emerging economies, including India, the domestically operated commercial banks were less prone to global shocks due to the regulator's well-administered and strict policy implementation. The limited exposure to foreign instruments and the rigorous regulatory policy implementation by the RBI created a secure pathway that significantly minimised the direct shock of the global crisis on the Indian financial sector. The banking sector in India had minimal exposure to off-balance-sheet investments because its growth was driven predominantly by domestic consumption and investments, which protected the Indian financial system from external shocks (Mohan, 2009; Mohanty et al., 2021). Although the foreign banks, notably Lehman Brothers, had fourteen operating offices in India, there were no considerable effects on the Indian banking sector due to the small size of its operations. Only ICICI Bank had limited exposure to the U.S subprime market among the leading domestic banks. However, the bank managed to absorb the losses well because of its substantial capital base and the on-time prudential regulatory measures (Viswanathan, 2010). Numerous questions were raised about the profitability of the Indian Banking sector due to the global financial crisis. Though Indian Banks were not directly exposed to risk, it was expected that their profitability might be affected due to inevitable shocks because of their integration into global financial markets (Srivastava, U. & Gopalkrishnan, S., 2015). In India, during the 1970s (Verghese, 1983), the profitability of scheduled commercial banks by arguing on profits and profitability of the commercial Banks’ performance was a pathfinder to many researchers in banking. It is found that external determinants affect bank profitability owing to exposure from the outside world because of operations and branch expansion. Further, to assess the magnitude of the global financial shocks spilt over on scheduled commercial banks in India, this study weighs the decisive factors of the profitability of the Indian Banking sector by employing secondary data from 2002 to 2016.