Dynamics of income diversification and bank performance in India

Abstract

PurposeThe purpose of this paper is to examine the dynamics between income diversification and performance (cost, profit, revenue, technical, pure technical and scale efficiency) for 38 listed Indian banks within panel data framework during the period 2004-2005 to 2015-16.Design/methodology/approachThis study computes bank’s cost, profit, revenue, technical, pure technical and scale efficiency within intermediation approach with data envelopment analysis (DEA) as a performance indicator, followed by exploring the association between income diversification and bank performance using truncated Tobit regression within panel data framework.FindingsTobit regression results revealed inverted U-shaped relationship between the income diversification and estimated efficiency parameters for the overall panel. Size and bank intermediation ratio seems to be a major factor in exploiting the potential benefits of income diversification. The author reconfirmed the inverted U-shaped relationship with these efficiency parameters for exclusive subsamples consisting of government-owned and private sector banks.Research limitations/implicationsInverted U-shaped relationship between the income diversification and estimated efficiency parameters suggest that banks should go for limited diversification to improve performance. Thus, regulators and banks should pursue limited diversification strategy for improving banking efficiency.Originality/valueThis study computes bank performance (cost, profit, revenue, technical, pure technical and scale efficiency) based on DEA followed by exploring the association between performance and income diversification for 38 Bombay stock exchange listed banks.