Comparative study of non interest income of the Indian Banking Sector, a study of non interest income
Overview Of Banking Project
Title: Comparative study of non interest income of the Indian Banking Sector
Submitted by:
Gaurav Sharma
BBA(Finance, Gold Medal),MBA(Finance)
gksindia1@gmail.com
Index
Introduction 1
Methodology 3
SBI& Associates 5
Nationalized banks(Public sector banks) 10
Private sector banks 15
Foreign banks 20
Findings 25
Conclusion 26
Literature review 26
References 26
Introduction
There are two broad sources of bank revenues:
Interest income Non-interest income.
Interest income is generated from what is known as “the spread.” The spread is the difference between the interest a bank earns on loans extended to customers, corporate etc and the interest paid to depositors for the use of their money. It is also earned from any securities that the banks own, such as treasury bills or bonds.
Non-interest income is earned by providing a variety of services, such as trading of securities, assisting companies to issue new equity financing, securities commissions and wealth management, sale of land, building, profit and loss on revaluation of assets etc.
As compared to the developed world, the Indian banking sector, apart from the relying on traditional sources of revenue like loan making are also focusing on the activities that generate fee income, service charges, trading revenue, and other types of noninterest income. While noninterest income plays an important role in banking revenues in the developed world, its contribution to the total income of the Indian banking was 25% as on 31st March 2008.
Components of non interest income
The major components of non interest income in our banking sector are as follows:
Commission/ exchange and brokerage Profit or loss on Sale of investments Profit or loss Sale of land& buildings Profit/loss on revaluation of investments Profit or loss on Exchange transaction etc. Miscellaneous income source which includes advisory, trading etc.
Share of various sources of non interest income
The share of various sources of non interest income to the total income of banking sector as on 31st march 2008 is shown in the pie chart below:
In the above figure we find that the highest contribution to the non interest income has been of the commission followed by sale of investments, miscellaneous income and exchange transactions.
Movements of interest and non interest income of the Indian banking sector (1994-2004)
Methodology
Under this I have done a comparative study of non interest income of the Indian banking sector by classifying banks into four categories:
SBI and associates which includes State bank of India, State bank of Bikaner and Jaipur, State bank of Hyderabad, State bank of Mysore, State bank of Patiala, State bank of Saurashtra and State bank of Travancore. Nationalized banks: (Public sector banks) which includes Allahabad bank, Andhra bank, Bank of Baroda, Bank of India, Bank of Maharashtra, Canara bank, Central Bank of India, Corporation bank, Dena bank, Indian bank, Indian Overseas bank, New bank of India, Oriental bank of Commerce, Punjab &Sind bank, Punjab National Bank, Syndicate bank, UCO bank, Union bank of India, United bank of India, Vijaya bank.( Total 19) Other scheduled banks: (Private sector banks) which includes Development credit bank, Times bank, Axis bank, Indus land Bank, ICICI bank, Bank of Rajasthan, Catholic Syrian bank, Lakshmi Vilas bank, HDFC bank, Centurion bank, Bank of Punjab, Tamilnad Mercantile Bank, Federal bank, Punjab Cooperative bank, Lord Krishna bank, ING Vyasya bank, IDBI bank, Dhanlakshmi bank.(total 18 banks) Foreign banks: which includes Barclays bank, ING bank, ABN Amro bank, Bank of America, BNP Paribas, Standard Chartered bank, DBS bank ,Citibank, HSBC, Deutsche bank, Mashreq bank, Bank of Nova Scotia, Bank of Bahrain & Kuwait, American Express bank (total 14 banks)
The banks used under private sector and foreign sector category are reflective of major portion of their respective market/category. Moreover data was not available for other banks within that category.
The period of study taken was 11 years i.e. 1994-2004. The period of study was taken as 11 years because, for the above mentioned period the data was available for all the bank and to ensure uniformity.
Objectives of the study:
To analyze the growth of non interest income as a source of revenue for the Indian banking sector over a period of 11 years (1994-2004). To analyze the contribution of major components of the non interest income over a period of 11 years (1994-2004). To find out statistically that how much of the profits of the banking sector over a period of 11 years is determined by non interest income and interest income. To find out statistically the contribution of various components of Non interest income towards the profits of the bank over a period of 11 years. To find out the contribution of interest and non interest income towards the total income in each of the 11 years (1994-04). To find out the correlation between the non interest income and the total income of the banking sector over a period of 11 years. To find out the reasons for the increase in the non interest income and what are the challenges involved to generate non interest income.
Tool used:
Data regarding the interest income, non interest income, profits, various components of non interest income, total income of the banking sector has been collected from the RBI website.
To find out the influence of interest and non interest income on the profits of the banking sector, I have made use of multiple regression tool in E-views software.
The interest and non interest income were independent variable and the profits of the bank was the dependent variable
Two Multiple Regression equation was used for the study:
Equation 1
Profits=a+b1*interest income+b2*noninterest income
Where b1 and b2 were coefficient and a is the intercept term which shows the profits of the bank had been c if interest and non interest income had been 0
Equation 2
Profits: a+b1*commission+b2*profit/loss on sale of land+ profit/loss on sale of investment+ profit/loss on revaluation of investment +profit/loss on exchange transactions+ Miscellaneous income
Where profits was the dependent variable and various components of non interest income were independent variable and a is the constant term
The equation 2 was used to find out the influence of various components of non interest income on the profits of the bank.
SBI and Associates
(Rs‘000)
In the above table we see the following:
Column1: Average
Column 2: Year
Column 3: Other income or the non interest income of the bank
Column 4: Commission, exchange and brokerage
Column 5: Net profit/loss on sale of investment
Column6: Net profit/loss on revaluation of investment
Column7: Net profit/loss on sale of land, building and other assets
Column 8: Net profit/ loss on exchange transactions
Column 9: Miscellaneous income
Column 10: Total income of the bank
Column 11: Profit/loss of the bank
Column 12:
Tags: Banking, Comparative, income, Indian, interest, Sector, study