Ownership Structure, Size and Interest Income Substitution by Banks: An Exploratory Study in Indian Context

Abstract

This study explored that how emerging economy banks are rebalancing their interest income and non-interest income to ensure stability. We set our study in Indian during the period 2015 to 2017. Interetsingly, we observe that time series correlation of Interest Income growth and Non-interest income growth for public sector banks as well as private banks is on the negative side. By applying panel VAR and GMM methodology, it has been found that when bank interest income falls, they try to increase their non-interest income to offset their losses to a certain extent and trend is increasing. Public sector banks are overall substituting non-interest income for a reduction in the margin, and there is an increasing trend for this substitution. When comparison of large and small banks is made, it has been found that change in non-interest income in the subsequent year due to change in interest income in the previous year is there for large banks, whereas no such significant change has been found in case of small banks.

Keywords: Correlation, diversification, Risk, Return, Banking sector, VAR, GMM

JEL Classification: G20, G21, G28