This article delves into the intricate relationship between revenue diversification and the financial performance and sustainability of both public and private sector banks in India. Through a comprehensive analysis of nine years’ panel data from 2015 to 2023 and applying descriptive statistics, the Herfindahl–Hirschman index, panel data regression models and generalized method of moments, our findings reveal a concerning trend—Revenue diversification is exerting a negative influence on the financial well-being of the Indian public sector banks (PSBs) and positively impacts the private sector banks. Contrary to conventional wisdom, the pursuit of diversifying revenue streams has not yielded the anticipated benefits for Indian PSBs. Instead, it has emerged as a source of financial instability and vulnerability. Hence, our findings suggest that a focused approach to revenue sources may be more advantageous for the PSBs. This study underscores the importance of strategic revenue planning and resource allocation for Indian PSBs to enhance their financial performance and self-sufficiency. The results have practical implications for policymakers, bank executives and stakeholders in the Indian banking sector, offering guidance on optimizing revenue strategies to ensure the long-term sustainability of PSBs in India.
AbuzayedB., Al-FayoumiN., & MolyneuxP. (2018). Diversification and bank stability in the GCC. Journal of International Financial Markets, Institutions and Money, 57, 17–43.
2.
AcharyaV. V., HasanI., & SaundersA. (2006). Should banks be diversified? Evidence from individual bank loan portfolios. Journal of Business, 79(3), 1355–1412.
3.
AddaiB., TangW., & AgyemanA. S. (2022). Examining the impact of income diversification on bank performance: Are foreign banks heterogeneous?Journal of Applied Economics, 25(1), 1–21.
4.
AhamedM. M. (2017). Asset quality, non-interest income, and bank profitability: Evidence from Indian banks. Economic Modelling, 63, 1–14.
5.
AliM. A., PervezA., BansalR., & KhanM. A. (2022). Analyzing the performance of banks in India: A robust regression analysis approach. Discrete Dynamics in Nature and Society, 2022, 1–9.
6.
BandyopadhyayA. (2022). Bank financial performance and its linkage with capital: A dynamic panel data analysis of public sector banks in India. The Indian Economic Journal, 70(3), 437–451.
7.
BapatD., & SagarM. (2019). Examining relationship of income diversification, asset quality with bank profitability: Implication for Indian banks. Editorial Team Editorial Advisory Board, 1, 1–11.
8.
BayaiI., & IkhideS. (2018). Financing structure and financial sustainability of selected SADC microfinance institutions (MFIs). Annals of Public and Cooperative Economics, 89(4), 665–696.
9.
BergerA. N., HasanI., & ZhouM. (2010). The effects of focus versus diversification on bank performance: Evidence from Chinese banks. Journal of Banking and Finance, 34(7), 1417–1435.
10.
BrahmanaR., KontesaM., & GilbertR. E. (2018). Income diversification and bank performance: Evidence from Malaysian banks. Economics Bulletin, 38(2), 799–809.
11.
BuyuranB., & Ekşiİ. H. (2020). Revenue diversification and bank performance: Evidence from Turkey. South-Eastern Europe Journal of Economics, 18(1), 7–18.
12.
ChenY. K., ShenC. H., KaoL., & YehC. Y. (2018). Bank liquidity risk and performance. Review of Pacific Basin Financial Markets and Policies, 21(01), 1850007.
13.
ChiorazzoV., MilaniC., & SalviniF. (2008). Income diversification and bank performance: Evidence from Italian banks. Journal Financial Services Research, 33(3), 181–203.
14.
DasS. K., & UppalK. (2021). NPAs and profitability in Indian banks: An empirical analysis. Future Business Journal, 7(1), 1–9.
15.
DeYoungR., & RolandK. P. (2001). Product mix and earnings volatility at commercial banks: Evidence from a degree of total leverage model. Journal of Financial Intermediation, 10(1), 54–84.
16.
DoanA. T., LinK. L., & DoongS. C. (2018). What drives bank efficiency? The interaction of bank income diversification and ownership. International Review of Economics and Finance, 55, 203–219.
17.
DuhoK. C. T., OnumahJ. M., & OwodoR. A. (2020). Bank diversification and performance in an emerging market. International Journal of Managerial Finance, 16(1), 120–138.
18.
EdirisuriyaP., GunasekarageA., & DempseyM. (2015). Bank diversification, performance and stock market response: Evidence from listed public banks in South Asian countries. Journal of Asian Economics, 41, 69–85.
19.
EshoN., KofmanP., & SharpeI. (2005). Diversification, fee income, and credit union risk. Journal of Financial Services Research, 27(3), 259–281.
20.
FrancisB. B., HasanI., KüllüA. M., & ZhouM. (2018). Should banks diversify or focus? Know thyself: The role of abilities. Economic Systems, 42(1), 106–118.
21.
GambacortaL., & Marques-IbanezD. (2011). The bank lending channel: Lessons from the crisis. Economic Policy, 26(66), 135–182.
22.
GithaigaP. N. (2022). Revenue diversification and financial sustainability of microfinance institutions. Asian Journal of Accounting Research, 7 (1), 31–43.
23.
GujaratiD. N. (2022). Basic econometrics. Prentice Hall.
24.
GuptaA. D., & Moudud-Ul-HuqS. (2020). Do competition and revenue diversification have significant effect on risk-taking? Empirical evidence from BRICS banks. International Journal of Financial Engineering, 7(01), 2050007.
25.
GürbüzA. O., YanikS., & AytürkY. (2013). Income diversification and bank performance: Evidence from Turkish banking sector. BDDK Bankacılık ve Finansal Piyasalar Dergisi, 7(1), 9–29.
26.
JouidaS., BouzgarrouH., & HellaraS. (2017). The effects of activity and geographic diversification on performance: Evidence from French financial institutions. Research in International Business and Finance, 39, 920–939.
27.
KimJ., & KimY. C. (2020). Heterogeneous patterns of income diversification effects in US bank holding companies. International Review of Economics and Finance, 69, 731–749.
28.
KindeB. A. (2012). Financial sustainability of microfinance institutions (MFIs) in Ethiopia. European Journal of Business and Management, 4(15), 1–10.
29.
LeharA. (2005). Measuring systemic risk: A risk management approach. Journal of Banking and Finance, 29(10), 2577–2603. https://doi.org/10.1016/j.jbankfin.2004.09.007
30.
LensinkR., MerslandR., VuN. T. H., & ZamoreS. (2018). Do microfinance institutions benefit from integrating financial and nonfinancial services?Applied Economics, 50(21), 2386–2401.
31.
MahaliM., & AnsariM. N. (2024). Income diversification and financial sustainability of Indian microfinance institutions (MFIs): An empirical study. International Journal of Banking, Risk and Insurance, 12(1), 40–49.
32.
MarkowitzH. M. (1952). Portfolio selection. Journal of Finance, 7, 77–91.
33.
MerciecaS., SchaeckK., & WolfeS. (2007). Small European banks: Benefits from diversification?Journal of Banking and Finance, 31(7), 1975–1998.
34.
MeslierC., TacnengR., & TaraziA. (2014). Is bank income diversification beneficial? Evidence from an emerging economy. Journal of International Financial Markets, Institutions and Money, 31, 97–126.
35.
MeyerJ. (2019). Outreach and performance of microfinance institutions: The importance of portfolio yield. Applied Economics, 51(27), 2945–2962.
36.
MishraP., AwasthiP., & SaurabhS. (2017). An evaluation of revenue diversification and its impact on profitability and efficiency of private sector banks in India. The Indian Journal of Commerce, 70(2), 45–50.
37.
Ngoc NguyenK. (2019). Revenue diversification, risk and bank performance of Vietnamese commercial banks. Journal of Risk and Financial Management, 12(3),138. https://doi.org/10.3390/jrfm12030138
38.
NguyenT. C., VoD. V., & NguyenV. C. (2015). Risk and income diversification in the Vietnamese banking system. Journal of Applied Finance and Banking, 5(1), 93–109.
39.
NguyenT. P. T., & NghiemS. H. (2016). Market concentration, diversification and bank performance in China and India: An application of the two-stage approach with double bootstrap. Managerial Finance, 42(10), 980–998.
40.
PaltrinieriA., DreassiA., RossiS., & KhanA. (2021). Risk-adjusted profitability and stability of Islamic and conventional banks: Does revenue diversification matter?Global Finance Journal, 50, 100517.
41.
PennathurA. K., SubrahmanyamV., & VishwasraoS. (2012). Income diversification and risk: Does ownership matter? An empirical examination of Indian banks. Journal of Banking and Finance, 36(8), 2203–2215.
42.
PetriaN., CapraruB., & IhnatovI. (2015). Determinants of banks’ profitability: Evidence from EU 27 banking systems. Procedia Economics and Finance, 20, 518–524.
43.
QuayesS. (2012). Depth of outreach and financial sustainability of microfinance institutions. Applied Economics, 44(26), 3421–3433.
44.
RahmanM., & MazlanA. (2014). Determinants of financial sustainability of microfinance institutions in Bangladesh. International Journal of Economics and Finance, 6(9), 107–116. https://doi.org/10.5539/ijef.v6n9p107
45.
SahooM. K., & MajhiM. (2020). Recovery management process of Indian commercial banks: A special reference to non-performing assets. International Journal of Banking, Risk and Insurance, 8(2), 27–34.
46.
SanyaS., & WolfeS. (2011). Can banks in emerging economies benefit from revenue diversification?Journal of Financial Services Research, 40(1–2), 79–101.
47.
SarkarS. (2016). The dynamics of revenue diversification and efficiency of banks in India. IIM Kozhikode Society and Management Review, 5(2), 156–172.
48.
Sarpong-KumankomaE., AborJ., AboagyeA. Q. Q., & AmiduM. (2018). Freedom, competition and bank profitability in sub-Saharan Africa. Journal of Financial Regulation and Compliance, 26(4), 462–481.
49.
SharmaS., & AnandA. (2018). Income diversification and bank performance: Evidence from BRICS nations. International Journal of Productivity and Performance Management, 67(9), 1625–1639.
50.
SharmaS., & SharmaG. (2017). Income diversification: A study on Indian banking industry. IUP Journal of Bank Management, 16(3), 41–58.
51.
StirohK. J. (2004). Diversification in banking: Is non-interest income the answer?Journal of Money, Credit, and Banking, 36(5), 853–882
52.
StirohK. J., & RumbleA. (2006). The dark side of diversification: The case of US financial holding companies. Journal of Banking and Finance, 30(8), 2131–2161.
53.
TehuluT. A. (2013). Determinants of financial sustainability of microfinance institutions in East Africa. European Journal of Business and Management, 5(17), 152–158.
54.
VidyarthiH. (2020). Dynamics of income diversification and bank performance in India. Journal of Financial Economic Policy, 12(3), 383–407.
55.
ZamoreS. (2018). Should microfinance institutions diversify or focus? A global analysis. Research in International Business and Finance, 46, 105–119.
56.
ZhouK. (2014). The effect of income diversification on bank risk: Evidence from China. Emerging Markets Finance and Trade, 50(sup3), 201–213.
