Non-traditional Income Research Articles

Determinants of income diversification: empirical evidence from Indian banks

PurposeThis study aims to explore the determinants (bank-specific, industry-specific and macroeconomic) of income diversification across interest income and non-interest income as well as for non-traditional income sources (non-interest income) from 2004–2005 to 2021–2022.Design/methodology/approachAn unbalanced data set comprising 110 Indian commercial banks with 1480 observations is sampled in this study. Because of the bounded nature of the dependent variables (proxies of income diversification), the panel Tobit regression model is used.FindingsThe findings reveal that income diversification is positively influenced by bank size, technological advancements, cost–income ratio, return on assets, market competition and inflation in the economy. However, the decision to diversify income sources is adversely impacted by the capital ratio, GDP and financial intermediation ratio. Moreover, factors such as asset quality (loan loss provisions) and liquidity ratio do not directly influence the diversification strategies in the Indian banking industry.Practical implicationsThe present study uses an extensive set of variables to provide insights into key factors for bank managers, regulators and policymakers to consider before developing diversification strategies.Originality/valueTo the best of the authors’ knowledge, this is the first study to examine the various bank-specific and macroeconomic determinants that affect income diversification in the Indian banking sector. The current study also investigates new variables such as technological advancements and a market concentration index for measuring competition, which have not been investigated in existing literature concerning bank income diversification in the Indian context.

Impact of Noninterest Income on Bank Risk-Taking and Bank Lending Spread

This study investigates the impact of diversification between traditional margin income and nontraditional income (noninterest-based income) on bank risk-taking and bank lending spread for banks operating in Pakistan. Bank risk is measured with the nonperforming loan ratio and bank [Formula: see text]-score. Data of this study is obtained from financial statements, which are an annual publication of State Bank of Pakistan, for the period 2006–2016 for 52 banks in Pakistan. Panel regression with the generalized method of moments (GMM) estimator is employed. The study reveals that an increase in noninterest income increases bank risk-taking (spending on highly risky assets), as noninterest income is riskier than interest income. It is also revealed that banks with greater dependence on noninterest income may grant a loan with lower lending spread. These results have implications for the betterment of the banking system, regulatory authority, and stakeholders as well. From a regulatory perspective, the study provides guidelines for making rules and regulations to control and monitor the dependence on noninterest income as well as on interest income. Pakistan banks regulatory authority should focus on the increase in disclosure of the composition of noninterest income and this disclosure would increase understanding of changing environment of banking in Pakistan.

Diversification, corporate governance, regulation and bank risk-taking

PurposeThe purpose of this paper is to investigate the impact of diversification, corporate governance and capital regulations on bank risk-taking in Asian emerging economies.Design/methodology/approachThe authors applied the generalized method of moments to analyze a sample of 116 listed banks of ten Asian emerging economies for the years 2010–2018.FindingsThe authors found that diversification, board size, CEO duality and board independence, block holders and capital regulations significantly affect bank risk-taking. In particular, nontraditional income sources such as noninterest income and adoption of diversification strategies minimize bank risk-taking.Practical implicationsIt is expected that the outcomes of this study can be used by banks in Asian emerging economies that seek to reduce risk-taking by managing the diversification of their income streams and managing the impacts of capital regulation and implementing sound corporate governance features in monitoring their operations. This study suggests practical risk minimizing strategies for banks. First is the sourcing of nontraditional income and adoption of diversification strategies. Second, maintaining nonexecutive directors on the board would enhance monitoring of business activities. Third, maintaining deposit insurance would reduce bank’s risk. Government provides insurance to depositors to motivate them to deposit their funds into the banks. This, in return, facilitates banks to overcome risk. However, banks need to be cautious of any increase in capital ratio, as channeling funds into risky investments would increase risk.Originality/valueThis study is the first to investigate the impacts of corporate governance, diversification and regulation on bank’s risk-taking in a cross-country setting of ten Asian emerging economies.

Income structure, diversification strategy and owners’ benefit in cooperative financial institutions

PurposeThe purposes of this paper are twofold. First, it analyses the income structure in cooperative financial institutions and examines how traditional and non-traditional incomes are related. Second, it evaluates whether increasing diversification towards non-traditional incomes facilitates or hampers the benefits of financial cooperative owners.Design/methodology/approachData are collected from over 3,100 US credit unions over the period of 1994–2016. A number of modern econometric techniques are employed throughout the analysis, including the use of panel fixed effect, generalised method of moments (GMM) and two-stage least square (2SLS) methodologies.FindingsUsing US credit unions as the empirical setting, the empirical results reveal that the expansion of traditional income leads to a corresponding increase in income from non-traditional activities. However, an increasing reliance on non-traditional income causes a significant drop in interest margins. The authors also find that the extent to which income diversification affects owner benefit varies across credit union types and period of time. While income diversification negatively affects owners' benefits in single common bond credit unions, it has no significant influence on multiple common bond and community credit union owners' benefits. Third, diversification can be beneficial during crisis time, but can be detrimental to owner benefit during normal time.Originality/valueThis paper provides some of the first empirical investigations on the diversification strategy of cooperative financial institutions. Therefore, the results offer significant policy implications for policymakers and market participants on whether financial cooperatives should diversify or specialise.

Income Diversification and its Impact on Profitability of Banks

The paper is studying diversification in income of Indian banks and impact of income diversification on profitability and sustainability of industry, mainly in environment shift of recent financial crisis. Statistical analysis: The study is a multivariate regression analysis to find diversification score on the secondary data for Indian banking industry for sample period of 10 years, from 2008 to 2017. Score of diversifications are calculated at two stages as DS (1), DS (2) to find share of non-traditional income in total income and categorization in non-traditional income respectively. The impact on the different income categories ; Share of Non- Interest Income(SNI), Share of fee Based Income (S FI), Share of Other Income(SOT), are tested against selected control variables. F-test used to test hypothesis as direct association with two set of variables. Further criterion scores techniques (SIC), (AIC) and (HQIC) are use as model improvement to test goodness of fit of the model. The study found that income shift of new business lines helps banks to improve their profitability by dint of many barriers in implementation. The growth trend of such income is not stable during whole study period, majorly due to global financial crisis. In the library of literatures, the share of non-interest based income activities and fee based income sources has been more distinct for Private and Foreign banks, even though SBI and Its associate’s banks are not far behind them. The role of the study to highlight the path for banks adopting new Non-interest income streams to enhance profitability and continuity in profitability. As reported, diversification in non-interest income sources may have positive impact on overall profitability and risk-adjusted performance along with improvement in stability of banking system. Other non-interest incomes are more changeable in compare to Fee based income generated by fee, commission and brokerage activity. By dint of many good effect of diversification banks, mainly in Indian context should take appropriate majors while diversification of its income.

Strategic scope and bank performance

One of the most dramatic trends in banking since the 1980s has been the secular movement away from core banking and interest generating activities towards enhanced reliance on non-interest-generating activities that focus largely on fees and trading profits. In this paper, we draw on a dataset covering nearly a million quarterly observations on more than 12,000 US banks and find no evidence that this shift in the bank business model harms bank profitability. To the contrary, a higher share of non-traditional bank income is associated with a higher profitability. The increase in profitability does not seem to come at the cost of substantially larger bank-level risk taking, at least not for large banks, which are the banks mostly involved in non-traditional bank business. There is also no conclusive evidence that a larger share of non-traditional income is associated with a larger contribution to systemic risk. The net benefits of non-traditional income increased in the 2000s, when both interest rates and bank margins started to decline. Estimation techniques that mitigate endogeneity concerns resulting from unobserved heterogeneity also show larger net benefits associated with greater bank reliance on generating non-traditional income.

Do Non-Traditional Income, Size, and Growth Affect the Performance of the Banks?

Purpose- The aim of this study is to examine the impact of non-traditional income, size and growth on the performance of the banks in big three economies of South Asia, as in the modern banking, non-traditional income plays a vital role by acting as a link between bank and its customers.
 Design- This study utilized the annual data over the period from 1996 to 2015, data were obtained from Federal Reserve Economic Data (FRED). This study examines the long-run as well as the short-run relationship among variables through the statistical technique of Panel ARDL.
 Findings- The findings of this study showed a significant and positive relationship between non-traditional income and return on assets as well as bank size and return on assets. While the association among the growth and return on assets is negative but significant.
 Policy Implications- Policy recommendation of this study suggests that banks should also explore new avenues of non-interest valued added services to their customers which will not only facilitate their customers also attract new customers which ultimately enhance the performance of the banks as well as the country.

Empirical evidence on bank market power, business models, stability and performance in the emerging economies

This paper studies the nexus between market power and business models in the banking industry. Business models are represented by non-interest income and non-deposit short-term funding share. We also examine the impact of bank business models on banking stability and performance. Using a sample comprising six ASEAN country banking sectors from 2002 to 2015, we find that banks with a strong capital base but lower net interest margin perform better in translating their market power into generating non-traditional income as alternative sources of revenues. Our findings also show that the implementation of the Basel 2 Accord encourages banks to create non-interest income from trading and derivatives activities as well as from other non-interest income. We also document that banks with higher market power tend to increase non-deposit short-term funding in their financing mix. In the evaluation of banking stability, our results suggest that banks with greater non-traditional income are associated with less overall banking risk. Moreover, non-traditional incomes also contribute to better bank performance.

The Effect of Ownership and Global Crisis to Income Diversification of Indonesian Banking

This paper attempts to examine the effect of ownership and global crisis to income diversification of Indonesian Banks during period of 2005 to 2012. The income diversification is classified as the taxonomy of De Young and Rice (2004), therefore income diversification is classified in to non-traditional stakeholder non-interest income and traditional and fee for service non-interest income. Apart of regress the whole bank sample, analysis is conducted to each of ownership types as well. Pooled effect and random effect panel data are run to produce the estimation result. The result suggests that ownership affects income diversification of Indonesian banks. In terms of traditional and fee for service non-traditional income, public banks significantly generate less than the other ownership types. On the other hand ownership doesn’t affect the effort of Indonesian banks in generating traditional and fee for service non-interest income. The effect of global crisis has different direction to each non-interest income, it significantly encourages banks to generate traditional and fee for service non-interest income, and although it is not significant, it has negative effect to non-traditional stakeholder non-interest income.

Empirical Evidence on Bank Market Power, Business Models, Stability and Performance in the Emerging Economies

This paper studies the nexus between market power and business models in the banking industry. Business models are represented by non-interest income and non-deposit short-term funding share. We also examine the impact of bank business models on banking stability and performance. Using a sample comprising six ASEAN country banking sectors from 2002 to 2015, we find that banks with a strong capital base but lower net interest margin perform better in translating their market power into generating non-traditional income as alternative sources of revenues. Our findings also show that the implementation of the Basel 2 Accord encourages banks to create non-interest income from trading and derivatives activities as well as from other non-interest income. We also document that banks with higher market power tend to increase non-deposit short-term funding in their financing mix. In the evaluation of banking stability, our results suggest that banks with greater non-traditional income are associated with less overall banking risk. Moreover, non-traditional incomes also contribute to better bank performance.

Changing organizational form in the stock exchange industry and risk-taking

Recent developments in the stock exchange industry have compelled some exchanges to demutualize and become for-profit entities. We examine the risk-taking behavior of demutualized exchanges and find that prior to the conversion, the exchanges exhibited higher risk than their mutual counterparts. Following demutualization, however, the exchanges experienced a significant decrease in risk, which is not attributable to industry-wide effects. Our results are consistent with the conjecture that higher risk induced the conversion to equity ownership. Interestingly, we find that publicly listed exchanges that have gone through the three organizational structures exhibit risk-taking behavior somewhat similar to that of the mutual, demutualized, and publicly listed exchanges. We also document significant increases in nontraditional income after demutualization and this increase in nontraditional income is significantly related to the reduction in risk. We therefore attribute the risk reduction experienced by the converted exchanges to diversification.

Changing Organizational Form in the Stock Exchange Industry and Risk Taking

Recent developments in the stock industry including technological development and the emergence of electronic communication networks have forced some exchanges to change their organizational structure by demutualizing and becoming for-profit entities. We examine the risk-taking behavior of demutualized exchanges and find that prior to the conversion the demutualized exchanges exhibited higher risk than their mutual counterparts. Following demutualization however, the exchanges experienced a significant decrease in risk and the observed reduction in risk is not attributed to industry-wide effects. Our results are consistent with the conjecture that higher risk induced the conversion to equity ownership. Interestingly, we find that a sub-sample of publicly listed exchanges that have gone through the three phases (mutual, demutualized and publicly traded) exhibit risk taking behavior somewhat similar to that of our full sample of mutual, demutualized and publicly traded exchanges. We also document evidence of significant increases in non-traditional income for the converted exchanges after demutualization and the increase in non-traditional income is significantly related to the reduction in risk. We therefore attribute the reduction in risk experienced by the converted exchanges to diversification.

Impact of Financial Crisis on Non-Traditional Income : Islamic Banks Vis a Vis Conventional Banks

The present study aims to investigate the existing of shock due to the subprime financial crisis (2008) to the commercial banks performance in ASEAN-5 countries (Indonesia, Malaysia, Singapore, Thailand, and Philippine) particularly on the non-traditional activities aspect. Commercial banks in the present study are classified into Islamic and conventional banks. The data of 136 commercial banks in ASEAN-5 countries during the period of 2004-2012 from have been collected from the Bankscope database. The composition of sample based on type of bank is twenty samples are categorised as Islamic banks and the remaining 116 samples are under the category of conventional banks. We manage to run panel data regression using three estimation methods namely pooled-OLS, fixed effects and random effects methods. Based on the Breusch and Pagan Lagrangian Multiplier (LM) and Hausman tests, the random effects method is preferred. Islamic banks earn relatively lower non-traditional income compared to conventional banks. During the 2008 financial crisis commercial banks earn relatively lower non-interest income. Additionally, we find no evidence than Islamic and conventional banks non-traditional incomes are significantly different during the 2008 global financial crisis.

The growth, determinants, and profitability of nontraditional activities of Chinese commercial banks

Using a panel data set for China's commercial banks between 1998 and 2007, we investigate the relation between a bank's nontraditional income ratio and its operational and financial characteristics after controlling for ownership type, government policy changes, and cross-regional institutional environment differences. We find that banks with narrow net interest margins have stronger incentives to develop nontraditional activities. Moreover, banks located in regions with less local government intervention have fewer nontraditional banking activities. We find evidence that the ownership type of the bank has some influence on the pursuit of nontraditional activities. Nontraditional income has not led to improved bank profitability and we present some conjectures on why this is so. In contrast to the results reported in prior research, we find that the financial performance of the big-four state-owned banks is not inferior to the performance of other banks.

Quality of Life, Nontraditional Income, and Economic Growth: New Development Opportunities for the Rural West.

Quality of Life, Nontraditional Income, and Economic Growth: New Development Opportunities for the Rural West.