Income diversification and bank profitability: exploring the importance of macroeconomic factors in India

Abstract

Financial reforms in India intensified competition between bank ownership groups, resulting in narrowing of interest margins and forcing banks towards non-interest income (NII). Surging non-performing loans (NPLs) also pushed banks to diversify their incomes. This study employs panel data analysis to investigate the impact of income-diversification strategies of public, private and foreign banks in India during 2005–2020. Trends in NII have been explored, along with bank-specific and macroeconomic variables to study their impact on bank profits. Finally, inclusion of monetary and fiscal policy variables highlighted the importance of inflation on the banking sector, but its impact varied across ownership groups.