Income Analysis of Indian Commercial Banks to Make Informed Decision: An Empirical Investigation (original) (raw)

2010

Abstract

(ProQuest: ... denotes formulae omitted.)IntroductionBanking in India has undergone a drastic change during the recent times. Financial liberalization along with forces of globalization has played the perfect catalyst to trigger the change. The basic function of banking has not changed over the period of time although the modes of providing the basic function of bank have changed. The financial innovation along with the entry of more competitive forces has increased the competition in the Indian banking industry. Traditional advantage of getting low cost fund and the handsome spread the banks used to gain in providing loans and advances has decreased. Thus traditional banking has started to provide less profit and banks have started to look into new avenues and techniques of increasing their bottom-line.Based on the above mentioned premises the increase in non-interest income or in other words an increase in fee based income can be the solution. Conventional wisdom of banking suggests that the risk can be diversified by increasing fee based income. Fee based income is also considered to be more stable than interest income. Net interest margin of banks are highly correlated with economic cycles and interest rate movements thus is more volatile. Hence, it can be said that a strategy which blends interest income and non-interest income can provide stability to bank profit.It is widely believed that banking is turning to be more competitive than ever before. Thus to prosper, banks need to device strategies to stabilize their bottom line. Indian banking industry is also focusing on fee based income apart from their traditional kitty of interest income from loan portfolios. The increase in fee based income stabilizes bank profit. But, the positive effect of fee based income is marred by increase in operational cost associated with increase in fee based activities.The Indian banking industry has started to rely on fee based income like developed nations. But the contribution of fee based income to total income was approximately 25% as on 31st march 2008 according to industry estimates. Indian banking sector has a long way to go. Thus, it becomes imperative to understand the dynamics of interest income, non-interest income, total profit and total income, the interplay of this factors in providing stability to the banking business as well as increasing their bottom line.Review of LiteratureDuring the past the main source of income for the banking companies were interest income or the income they earned from advances and loans. But during the recent past banking companies have relied heavily on other sources of income as well. Many empirical studies have indicated this diversification of the banking companies into non-banking activities and the benefit they reaped thereof (Eisemann, 1976, Brewer, 1989 and others).In their study Gallo, Apilado and Kolari (1996) have pointed that during the period 1987-94 the bank holding companies increased their income substantially and reduced their risk as well due to presence of high proportion of mutual funds assets in their total assets.Also in the study conducted by Canals (1993) it was revealed that the bank performance improved significantly due to increased income from new business activities and diversification into new areas of revenue generation. Thus, the importance of other sources of income is justified and can also be told that fee-based income stabilizes profitability.It is well observed in different studies that risk reductions of banks are the results of expansion of activities, although, the main contribution is of insurance activities rather than securities activities. The authors Saunders and Walters (1994) also advocated that the studies which observed risk reduction due to asset diversification were reported based on the findings as potential results not actual.In the empirical study by Heggestad (1972) it was also observed that the potential of risk reduction can be enhanced with an increase in fee earning activities. …

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