Income Diversification: A Study on Indian Banking Industry

The IUP Journal of Bank Management, Vol. XVI, No. 3, August 2017, pp. 41-58

Posted: 7 Aug 2018

See all articles by Shraddha Sharma

Shraddha Sharma

Devi Ahilya University, International Institute of Professional Studies (IIPS), Students

Geeta Sharma

Devi Ahilya Vishwavidyalaya

Date Written: 2017

Abstract

Internationally, the transformation in banking industry has opened up new opportunities for banks to diversify through own expansion and/or strategic association. They are focusing more on non-interest income as it enables to setoff the reduction in their interest income due to falling interest rate as well as increasing income from fee-based activities. Indian banking industry is also going through a phase of changing strategies to evolve in the competitive environment. Considering the importance of income diversification, it had become imperative to investigate how the prospects of non-interest income work in the Indian banks. This paper makes an attempt to explore income diversification in the Indian banking industry. Applying trend analysis and correlation, the paper analyzes the trends in interest income and non-interest income using aggregate and bank-wise secondary data from 2003 to 2016. Also, the paper studies the share of non-interest income components. The results reveal that in Indian banking industry, interest income is still the dominant source of income though the share of non-interest income is also increasing due to higher growth rate of non-interest income as compared to interest income. In non-interest income components, the share of investment-related other income is also the highest compared to the banking-related other income. Aggregate as well group-wise, public and private sector banks are having negative correlation between non-interest income share and interest income share, which means Indian banking sector is enjoying income diversification benefits. The results of Herfindahl-Hirschman Index (HHI) also show that private sector banks are more diversified compared to public sector banks.

Suggested Citation

Sharma, Shraddha and Sharma, Geeta, Income Diversification: A Study on Indian Banking Industry (2017). The IUP Journal of Bank Management, Vol. XVI, No. 3, August 2017, pp. 41-58, Available at SSRN: https://ssrn.com/abstract=3215647

Shraddha Sharma (Contact Author)

Devi Ahilya University, International Institute of Professional Studies (IIPS), Students ( email )

Indore
India

Geeta Sharma

Devi Ahilya Vishwavidyalaya ( email )

RNT Marg
Indore, ME Madhya Pradesh 452001
India

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