Asian Journal of Research in Banking and Finance
Year : 2013, Volume : 3, Issue : 4
First page : ( 52) Last page : ( 70)
Online ISSN : 2249-7323.

An analysis of nontraditional activities and their impact on efficiency at Indian commercial banks from 1980 to 2012

Nagaraju Thota

Research Associate, Indian School of Business, Hyderabad, India

Online published on 17 April, 2013.

Abstract

This study investigates the impact of non-traditional activities on bank efficiency levels. This study also examines the features common to banks that are heavily engaged in noninterest income generating activities in Indian commercial banking industry over the period from 1980 to 2012. The empirical analysis is done in two parts. First part examines technical efficiency of banks using a traditional function that considers loans and investments as the only outputs and the inputs being uniform across the functions. This study estimates two more additional functions to account for non-traditional activities, one with noninterest income and the other with only fee income as an additional output. Results reveal that the exclusion of non-traditional outputs understates bank efficiency irrespective of the regulatory regime. There is no significant difference between efficiency scores when noninterest income and fee income, used as the output variable. The second part examines the features common to banks that are heavily engaged in nontraditional activities. The empirical analysis suggests that in the pre-liberalization period (1980–1991) banks with higher levels of noninterest income activities tend to have higher net interest margins with few core deposits and with high liquidity and exhibits less risk. During liberalization (1992–98) and post-liberalization (1999–2012) periods, the results are approximately similar to pre-liberalization period, however results are not holding when sample is further divided based on the ownership.

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Keywords

Banks, Nontraditional activities, DEA, Efficiency.

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