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Banking Innovations and New Income Streams: Impact on Banks' Performance

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  • Smita Roy Trivedi

Abstract

Banks in India have focused on non-interest income streams to complement their income from traditional interest earning activities for some years now. This move to innovation adoption and new income streams has been more pronounced for new private and foreign banks, while there appears to have been certain hesitation on the part of public sector and old private banks. This article studies the impact of the move to new income streams and the consequent rising diversification on performance (as measured by profitability and stability of income) for Indian banks. A comparative analysis of income generated from these income streams for different bank groups in India shows that new private banks and foreign banks in India have been more successful than public sector banks in generating a greater proportion of their income from non-interest and fee-based sources. However, this increasing diversification cannot be linked to better risk-adjusted performance in the Indian context. Using multiple regression analysis, the impact of diversification and increasing share of fee-based income on profitability and risk-adjusted profitability is questioned for all banks in India over the period 2005–2012. The article finds that the rising share of fee-based income and non-interest income in total income and diversification has a positive impact on profitability, but the impact on risk-adjusted performance and hence stability is not statistically significant. While the results show a positive impact of diversification on profitability, the article underlines that the impact direction of diversification measures may be negative, which is in agreement to what many studies have shown in the US, European, Australian and Indian contexts. This article considers the impact of diversification in non-interest income separately from diversification in total income. This diversification score helps to know if the banks are generating their non-interest income from only fee income or only their o
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  • Smita Roy Trivedi, 2015. "Banking Innovations and New Income Streams: Impact on Banks' Performance," Vikalpa: The Journal for Decision Makers, , vol. 40(1), pages 28-41, March.
    • Handle: RePEc:sae:vikjou:v:40:y:2015:i:1:p:28-41
    DOI: 10.1177/0256090915573616
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    Cited by:

    1. Sherika Antao & Ajit Karnik, 2022. "Bank Performance and Noninterest Income: Evidence from Countries in the Asian Region," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 29(3), pages 477-505, September.
    2. Thuy Thu Nguyen & Hai Hong Ho & Duy Van Nguyen & Anh Cam Pham & Trang Thu Nguyen, 2021. "The Effects of Business Model on Bank’s Stability," IJFS, MDPI, vol. 9(3), pages 1-12, August.
    3. Ranjan Kumar Nayak, 2022. "Performance of Odisha State Co-operative Bank: An ARDL Approach," Arthaniti: Journal of Economic Theory and Practice, , vol. 21(1), pages 7-26, June.
    4. Iraj Noor & Danish Ahmed Siddiqui, 2019. "Evidence of Non-Linear Relationship between Non-Interest Income and Profitability of Commercial Banks in Pakistan," Asian Journal of Economic Modelling, Asian Economic and Social Society, vol. 7(1), pages 14-26, March.
    5. Keliuotytė-Staniulėnienė Greta & Smolskytė Gintarė, 2019. "Possibilities for Financial Technology Sector Development and its Impact on Banking Sector Profitability in Lithuania," Economics and Culture, Sciendo, vol. 16(1), pages 12-23, June.
    6. Helmi Hamdi & Abdelaziz Hakimi & Khemais Zaghdoudi, 2017. "Diversification, bank performance and risk: have Tunisian banks adopted the new business model?," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 3(1), pages 1-25, December.
    7. Osama Mohamed Ahmed Enad & Salah Murtada Abdelrahman Gerinda, 2022. "Enhancing financial performance of the banks: the role of customer response and operations management," Journal of Innovation and Entrepreneurship, Springer, vol. 11(1), pages 1-16, December.

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    More about this item

    Keywords

    Banking Innovation; Diversification; New Income Streams; Profitability; Stability;
    All these keywords.

    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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