They are events outside the banks. These external determinants should be foreseen by taking into various factors into consideration and appropriate steps should be undertaken to combat such a situation external determinants also can be classified into:

1. Macro economic variables:

During the all round of economic growth, there will be a great demand for huge capital for the purpose of investment both in capital intensive goods and consumer goods. Setting up of an industry in a backward regions or hilly place where there exists potential for tourism development will have a spiralling effect. It will create employment opportunity and thereby increasing the purchasing power of the people. This increase in purchasing power of the people will create many wants in the minds of the people which in turn create demand. So production of goods and services require more funds and such funds can be provided by the banks.

During this time which is a boom time, the credit risk is less. Because of employment opportunity, and increasing purchasing power of the people the debt servicing ability of the people will raise.

Thus Inflation plays a vital role in increasing the earning capacity of the banks.

2. Financial Structure Variables

“Many studies in the banking literature investigate whether financial structure which is defined as the relative importance of banks, plays a role in determine banking performance. In general a high bank asset to GDP ratio implies that financial development plays an important role in the economy. This relative importance may reflect a higher demand for banking services, which in turn attracts more potential competitors to enter the market when the market becomes more competitive, banks need to adopt different strategic moves in order to sustain their profitability”