Non-interest income and commercial bank stability: some evidence for India

The impact of the share of non-interest income on bank risk in India for the period 1993-2018 is examined, using coefficients of variation and linear and quantile regression techniques. The higher share of non-interest income leads to diversification benefits and reduces bank risk. The share of non-interest income has declined and more and more banks have become unstable over the past decade. For nationalized and foreign banks, the increase in the share of non-interest income has led to greater stability. However, for some private banks, this relationship is not linear.

As part of the structural reforms of the economy in 1992, the Indian government initiated a series of reforms in the Indian banking sector. These measures have enabled banks to expand and diversify their activities in different dimensions. Banks continue to be an essential part of the financial system, as most household savings go through the banking system. Bank credit extended reached $ 1.3 trillion in 2018. As in other countries, after deregulation, Indian banks have diversified from traditional activities in search of higher profits. As a result, income from non-interest income sources, such as commissions, brokerage, and trading, has become an important part of bank profits (Mohan 2005).

The deregulation process allowed the liberal entry of foreign banks and the establishment of private banks. This has increased competition between banks. The reforms introduced micro-prudential measures, such as capital adequacy standards, in line with global practice (Pennathur et al 2012). In accordance with Basel I standards, different types of assets attract different risk weights. While banks’ investment portfolios attracted a 0% risk weight since they invested in government securities, lending to the commercial sector attracted a 100% weight in the calculation of the capital-to-weighted asset ratio. risk based. This made commercial lending unfavorable to banks. In addition, lending to priority sectors also restricted banks to some extent, as the rates for lending to certain sections of society had to be on non-commercial lines.

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