Impact of Fee-Based Services on the Financial Performance of the Banks: An Empirical Study

Abstract

The banking industry forms an integral part of the entire economy. For long, the basic function of banks was to lend and receive funds and earn the difference in the form of interest. But after liberalization, the entry of several private and foreign banks led to intense competition and deregulation of interest. As a consequence, the profitability of banking sector declined considerably. To overcome this growing instability in profits, the banks shifted their focus from fund-based to fee-based activities that involve the receipt of revenue by providing services. Though private banks and foreign banks have extensively increased their share in fee income, public banks still operate majorly on the traditional sources of income generation. The purpose of this research is to identify the problems faced by banks in expanding their fee-based services and study the effect of increasing share of fee income on the financial performance of the banks. Using the regression analysis and paired t-test, the impact of fee income on the overall profitability is tested. It is observed that fee income has a positive impact on the profitability and financial performance of the banks. Using the trend forecasting, it is validated that increasing the share of fee income in public banks leads to increase in profitability. Moreover, a model is developed that indicates the problems faced by banks in diversifying their fee-based services, the measures to be undertaken and the anticipated outcomes therein.

Keywords: Fee Income, Fund-based Income, Total Income of Banks, Interest Expended, Profitability, Diversification

JEL Classification: G21, G24