Income Diversification and Bank Stability: Evidence from India

20 Pages Posted: 2 Mar 2019

See all articles by Navneet Kaur

Navneet Kaur

Institute of Management Technology (IMT), Nagpur

Santosh Srivatsav

Institute of Management Technology (IMT), Nagpur

Nemiraja Jadiyappa

ICFAI Foundation for Higher Education (IFHE); IBS Hyderabad

Parneet Kaur

Punjabi University - School of Management Studies

Date Written: October 3, 2018

Abstract

Modern portfolio theory claims that diversification into non-correlated or negatively correlated activities reduces the overall risk of a portfolio. Considering the total income of a bank as a portfolio of interest income and non-interest income, this paper investigates how the variability of interest income and non- interest income, and covariance between interest income and non-interest income influence the various risk factors of banks. We set out a study in the Indian context. We have extracted data for the period 2005-2017 and employed an extended version of Ridge, Lasso and Elastics Net regression to take care of multi-collinearly in our data. We have considered 10-fold cross-validation techniques to get optimal values of tuning parameters for Ridge, Lasso, and Elastics Net regression (which is a convex combination of ridge and the LASSO). We have compared different regression techniques by comparing RMSE and R2. We observe that non-interest income is positively correlated with interest income in the Indian context, but it does stabilize variance, idiosyncratic risk & market risk (Beta) of Indian Banks.

Keywords: Income Diversification; Idiosyncratic Risk; Emerging Economies; Ridge/Lasso/ Elastics Net Regression

JEL Classification: G20, G21, G28

Suggested Citation

Kaur, Navneet and Srivatsav, Santosh and Jadiyappa, Nemiraja and Kaur, Parneet, Income Diversification and Bank Stability: Evidence from India (October 3, 2018). Available at SSRN: https://ssrn.com/abstract=3340806 or http://dx.doi.org/10.2139/ssrn.3340806

Navneet Kaur (Contact Author)

Institute of Management Technology (IMT), Nagpur ( email )

603 Khullar Apartments
Byramji Town
Nagpur, MA Maharashtra 440013
India

Santosh Srivatsav

Institute of Management Technology (IMT), Nagpur ( email )

603 Khullar Apartments
Byramji Town
Nagpur, MA Maharashtra 440013
India

Nemiraja Jadiyappa

ICFAI Foundation for Higher Education (IFHE) ( email )

Hyderabad
India

IBS Hyderabad ( email )

Plot No. 65, Nagarjuna Hills
Punjagutta
Hyderabad, 500082
India

Parneet Kaur

Punjabi University - School of Management Studies ( email )

India

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