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
Abstract
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
Non-interest diversification in Banking, the new paradigm shift after liberalization and its relevance as a Marketing Strategy
Subrato Bhadury
Abstract
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
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