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Are Bank Revenue Diversification Strategies Paying off for India?

In: Studies in International Economics and Finance

Author

Listed:
  • Nagaraju Thota

    (Birla Institute of Technology & Science, Pilani-Hyderabad Campus)

  • Pranesh Bhargava

    (Birla Institute of Technology & Science, Pilani-Hyderabad Campus)

  • A. C. V. Subrahmanyam

    (University of Hyderabad)

Abstract

Banks worldwide are strategically diversifying their revenues to stabilize the earning profile and improve profitability. We revisit this hypothesis in the Indian context using a longer time series of bank performance data from 1999 to 2020, which coincides with the onset of 2nd financial reforms in the country. We observe that the increasing share of non-interest income in the total income of Indian banks reflects the adoption of revenue diversification strategies. We assessed the impact of non-interest income on profitability and risk of banks and find evidence that profitability and risk of the banks are positively associated with the non-interest income with varied trends for individual bank groups. We also investigated the impact of components of non-interest income, viz. fee, trading and miscellaneous income on bank profitability and risk, and observed that the impact is varied across banking groups. Overall, our findings suggest that the benefits from revenue diversification strategies for banks in India is positive, but it is dependent on bank ownership type and the components of the non-interest income. Our results are robust and provide measures of revenue diversification and its impact on profitability and risk.

Suggested Citation

  • Nagaraju Thota & Pranesh Bhargava & A. C. V. Subrahmanyam, 2022. "Are Bank Revenue Diversification Strategies Paying off for India?," India Studies in Business and Economics, in: Naoyuki Yoshino & Rajendra N. Paramanik & Anoop S. Kumar (ed.), Studies in International Economics and Finance, pages 389-410, Springer.
    • Handle: RePEc:spr:isbchp:978-981-16-7062-6_21
    DOI: 10.1007/978-981-16-7062-6_21
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    More about this item

    Keywords

    Banks; Non-interest income; Diversification; Profitability; Risk;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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