Post Liberalization Non-Interest Diversification in Banking and Its Relevance as a Marketing Strategy

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Non-interest diversification in Banking, the new paradigm shift after liberalization and its relevance as a Marketing Strategy Subrato Bhadury
The Indian commercial banking system partly because of its strategic marketing shift and partly due to investment management and volatility reduction effort is gradually inclining towards non-conventional activities that generate non interest income in the form of fee based income and earnings from currency exchange brokerage and miscellaneous income. Although diversification effort is welcome in view of stringent Basel II norms coupled with global recessionary tendency, but there is always a hidden danger that it‘s over emphasis as a marketing tool may lead to higher volatility in bank revenue and lower risk adjusted profits while bank‘s bread and butter earning (interest income) may remain grossly overlooked. Keywords: non-interest income, diversification, panel regression, stationary Introduction

After nationalization and prior to liberalization bank business was mainly focused towards interest earning activity by way of loans and advances which was guided by the administered rates. Banks were provider of few basic services, which used to generate even and predictable revenue. Liberalization of the financial sector brought a total paradigm shift, with increasing frontiers of demand. Banks have now become provider of a wide range of solutions. One such prominent field is non-interest income. However non interest income related activities of banks which has the potential to contribute substantially to bank profitability, involving much lower cost and operational problems, remained by and large overlooked. This is more important because in the face of severe competition and adherence of various prudential norms (Basel II), the business opportunities as well as the scope of earning profit in the traditional interest earning business activities are slowly getting restricted. In order to address the above research issues the study hypothesizes the following: 1. There exists variation among the different bank groups (by ownership category) in their operational strategy towards relying upon non-interest income for enhancing profitability in the post liberalization period. 2. Secondly there is difference between individual banks in the same group as well. Page 2 of 131

Sources of secondary data
The present study is empirical by nature and is based on the Indian banking data for the period 1991-2006 collected from Reserve Bank of India‘s official web site ( ―Annual accounts data of commercial banks‖. We have selected our sample of commercial banks as 2 independent sample groups according to their ownership. The 2 main commercial bank groups undertaken are: 12 foreign banks &14 private commercial banks. In the representative sample we included those banks for which the data for the reference period (1991-2006) are continuously available. Banks under consideration

Private commercial banks are- Bank of Madura, Catholic Syrian Bank, Sangli Bank, Tamilnadu Mercantile Bank, Nainital Bank, Bharat overseas Bank,Lord Krishna bank, Jammu & Kashmir Bank, Bank of Rajasthan,Laxmi Vilas Bank, Federal Bank, Dhanalaxmi Bank. Foreign banks are-ABN Amro Bank, Abu Dhabi Commercial Bank, American express Bank, ,Bank of America, Bank of Tokyo, Barclays Bank ,BNP Paribus, CITI Bank, Deutsche Bank, ,Hong Kong and Sanghai Bank, Bank of Nova Scotia, Oman International Bank, Sonali Bank, Standard& Chartered Bank, Financial data for time trend analysis

The data selected for all commercial banks and financial variables for the time period 1991-2006 are as follows-total income of commercial banks, interest income, other income and its 6 different components (Commission exchange and brokerage, Net sale investment, Net revaluation of investment, Net land, Net exchange &Miscellaneous income), Profit, Assets and Reserves of the commercial banks. Methodological Approach

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