Banking Sector Study

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:
1. Interest income
2. 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:

1. Commission/ exchange and brokerage

2. Profit or loss on Sale of investments

3. Profit or loss Sale of land& buildings

4. Profit/loss on revaluation of investments

5. Profit or loss on Exchange transaction etc.

6. 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:

1. 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.

2. 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)

3. 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)

4. 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:
1. 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).
2. To analyze the contribution of major components of the non interest income over a period
of 11 years (1994-2004).
3. 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.
4. 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.
5. To find out the contribution of interest and non interest income towards the total income
in each of the 11 years (1994-04).
6. To find out the correlation between the non interest income and the total income of the
banking sector over a period of 11 years.
7. 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: Interest income of the bank
Column 13: Noninterest income as a percentage of total income
Column 14: Interest income as a percentage of total income
Influence of interest and non interest income on profits of SBI& Associates

The above output is of the multiple regression equation where we have tried to find out that how
much of the profits of the SBI and its associates are determined by interest and non interest income.

1. We find non -interest income to be a significant variable in explaining the profits of SBI as the prob
value is less the .05 (.0095)and the value of t stat is more than 2(3.386)[ Rule: an independent
variable is said to be significant is its prob value is less than .05 or the t-stat is more than 2).
2. We find that in our regression model the percentage of variation in the profits of SBI and its
associate that is explained by interest and non interest income is 92.81% ( Rule: for a regression
model to be efficient the r-square shall be at least .6)
3. From the above output we find that Noninterest income had a significant influence on the profits of
SBI and its associates over a period of 11 years.

Influence of non interest components on profit of SBI& Associate

Model Summary

Std. Error
Mode Adjusted of the
l R R Square R Square Estimate
1 4040785.55
.990(a) .981 .943
743
a Predictors: (Constant), misc, plland, plexchange, pllinvest, plreav, comm

Coefficients(a)

Mode Unstandardized Coefficients Standardized t Sig.

l Coefficients
B Std. Error Beta
1 (Constant) -20565743.5
10099548.868 -2.036 .135
26
comm 2.109 .603 1.153 3.495 .040
pllinvest .970 .255 .944 3.805 .032
plreav 27.569 76.257 .100 .362 .742
plland 76.158 97.743 .221 .779 .493
plexchang
-1.077 .815 -.135 -1.322 .278
e
misc -4.728 2.151 -1.042 -2.198 .115
a Dependent Variable: profit
In the above regression output the independent variable used were various components of non
interest income i.e. commission/exchange /brokerage, profit/loss on sale of investment, profit
and loss on revaluation of investment, profit/loss on sale of land/building, profit/loss on
exchange transaction and miscellaneous income. And the dependent variable used was the profits
of the SBI& associates
The objective is to find out that which one of the non interest component had a major influence
on the profit of SBI & associates over a period of 11 years.
We find the following:
1. The percentage of variation in the profits of the SBI& associates explained by the 6
independent variables is 98.1% which is significant(as R square shall be more than .6)
2. We find that commission/exchange/brokerage and profit/loss on sale of investment had a
major influence on the profits of the SBI and its associates over a period of 11 years. As
they are having a prob values less than .05(level of significance) and is having a t-stat
more than 2.

This means that SBI and its associates shall focus more on commission exchange and brokerage
for its non interest income.

Contribution of various components of non-interest income of SBI& Associate(94-04)

The above pie graph
has been prepared
by taking into
account the
average values
of non interest
income
components
over a period of 11
years (94-04).
From the above
graph we find
that

commission/exchange and brokerage had around 59% (highest) contribution to the non interest
income followed by sale of investment (20%). Exchange transaction was having a contribution of
12% and miscellaneous income was having an influence of 9%. The sale of land/buildings,
revaluation of investment was having a very negligible influence on the non interest income.

Movements of interest and non interest income of SBI & Associates(94-04)

If we look at the movement of interest and non interest income of SBI and associates over a period of
11 years we will find that the non interest income has grown at a CAGR of 18.46% and the interest
income has grown at a CAGR of 13.15%.The noninterest income over a period of 11 years has grown
by 444.563% whereas interest income has increased by 244.14% which shows how aggressively the
bank is working on its non interest income.

Contribution of interest and non interest income of SBI & Associate

From the above table we find the contribution of interest and non interest income as a percentage of
total income in each of the 11 years period. We find the share of non interest income has increased
over a period of time from 14% to 21% and share of interest income has decreased from 85% to 78%.
On an average over a period of 11 years the contribution of non interest income as been 15% and
interest income has been 85% to the total income of the SBI and its associates.

Correlation between non interest income and total income
0.935642

There is a very positive correlation between non interest income and the total income of SBI and its
associates which shows that higher the non interest income higher the total income of the SBI&
associate.

Nationalized banks: Public sector banks

(Rs‘000)

Column1: Average
Column 2: Year

Influence of interest and non interest income on profits of Public sector banks (94-04)

much of the profits of the public sector banks are determined by interest and non interest income.
Non interest and Interest income are independent variables and profit is the dependent variable
From the above output we find:

1. We find non -interest income to be a significant variable in explaining the profits of public sector
banks as the prob value is less the .05 (.0268) and the value of t stat is more than 2(2.7056) [Rule: an
independent variable is said to be significant if its prob value is less than .05(level of significance) or
the t-stat is more than 2].
2. We find that in our regression model the percentage of variation in the profits of public sector banks
that is explained by interest and non interest income is 88.86%( Rule for a regression model to be
efficient the r-square shall be at least .6)
3. From the above output we find that noninterest income had a significant influence on the profits of
public sector banks over a period of 11 years.

Influence of non interest components on profit of Public sector banks(94-04)
Model Summary

Std. Error
1 14640946.9
.974(a) .948 .870
5589
a Predictors: (Constant), misc, plland, plreav, pllinvest, plexchange, comm.

Coefficients(a)

Mode Standardized
l Unstandardized Coefficients Coefficients t Sig.
B Std. Error Beta
1 (Constant) -84595095.339 58218744.505 -1.453 .220
comm .151 5.866 .024 .026 .981
pllinvest .017 .478 .014 .035 .974
plreav -13.928 8.434 -.348 -1.651 .174
plland 48.353 63.394 .105 .763 .488
plexchang
5.954 8.910 .276 .668 .541
e
misc 3.451 7.536 .470 .458 .671

of the public sector banks
The objective is to find out which one of the non interest component had a major influence on
the profit of public sector banks over a period of 11 years.
1. The percentage of variation in the profits of the public sector banks explained by the 6
independent variables is 94.8% which is significant(as r square shall be more than .6)

2. We find that none of the non interest component was individually sufficient in explaining
the profits of the public sector banks as we find that none of the non interest component
is having a significance value of less than .5 or having a t-stat of more than 2.

Contribution of various components of non interest income of Public Sector banks (94-04)

The above pie graph has been prepared by taking into account the average values of non interest
income components over a period of 11 years (94-04). From the above graph we find that
commission/exchange and brokerage had around 36% (highest) contribution to the non interest
income followed by sale of investment (35%). Miscellaneous income was having a contribution of
16% followed by exchange transaction i.e. 12%. The sale of land/buildings, revaluation of investment
was having a very negligible influence on the non interest income.

Movements of interest and non interest income of Public sector banks(94-04)

If we look at the movement of interest and non interest income of public sector banks over a period of
11 years we will find that the non interest income has grown at a CAGR of 19.85% and the interest

income has grown at a CAGR of 12.68%.The noninterest income over a period of 11 years has grown
by 511.87% whereas interest income has increased by 230.03% which shows how aggressively the
bank is working on its non interest income.

Contribution of interest and non interest income of the Public Sector banks(94-04)

interest income has been 87% to the total income of the public sector banks.

Correlation between non interest income and total income of Public sector banks
0.940162
There is a very positive correlation between non interest income and the total income of public sector
banks which shows that higher the non interest income higher the total income of the public sector
banks.

Private sector banks
(Rs ‘000)

Column1: Average
Column 2: Year
Influence of interest and non interest income on profits of Private sector banks(94-04)

much of the profits of the private sector banks are determined by interest and non interest income.

1. We find non -interest income to be a significant variable in explaining the profits of private sector
banks as the prob value is less the .05 (.0128) and the value of t stat is more than 2(3.188) [Rule: an
2. We find that in our regression model the percentage of variation in the profits of private sector banks
that is explained by interest and non interest income is 95.95 %( Rule for a regression model to be
efficient the R-square shall be at least .6)
3. From the above output we find that noninterest income had a significant influence on the profits of
private sector banks over a period of 11 years.

Influence of non interest components on profit of Private sector banks (94-04)
Model Summary

Std. Error
1 309483.838
.964 .912 .881
35
a Predictors: (Constant), misc, plreav, plexchange, pllinvest, plland, comm

Coefficients(a)

Mode Unstandardized Standardized
l Coefficients Coefficients t Sig.
Std.
B Error Beta
1 (Constant) -775200. 177724.
-4.362 .012
943 748
comm .493 .252 .311 1.955 .122
pllinvest .623 .147 .672 4.240 .013
plreav 4.129 2.209 .062 1.869 .135
plland 108.894 14.560 .923 7.479 .002
plexchang
-2.522 .513 -.268 -4.915 .008
e
misc 3.314 .310 1.114 10.680 .000

of the private sector banks
The objective to find out which one of the non interest component had a major influence on the
profit of private sector banks over a period of 11 years.
1. The percentage of variation in the profits of the private sector banks explained by the 6

2. We find that sale of investment , land & building and miscellaneous income and
exchange transactions have a major influence on the profits of private sector banks over a
period of 11 years as these variable are having a significance level of less than .05 and a
t-stat of more than 2.

3. According to the above output miscellaneous income had a major influence o the profits
of the as it’s is having the maximum t-stat i.e. 10.680 so bank shall focus on it for its non
interest income.

Contribution of various components of non interest income of Private Sector banks (94-04)

income components over a period of 11 years (94-04). From the above graph we find that sale of
investment has around 41%(highest) contribution to the non interest income followed by
commission/exchange /brokerage 34% followed by miscellaneous income(17%) and exchange
transactions 8%. The sale of land/buildings, revaluation of investment was having a very negligible
influence on the non interest income.

Movements of interest and non interest income of Private Sector banks(94-04)

If we look at the movement of interest and non interest income of private sector banks over a period
of 11 years we will find that the non interest income has grown at a CAGR of 43.50% and the interest
income has grown at a CAGR of 33.95%. The non interest income over a period of 11 years has

grown by 3604.74%% whereas interest income has increased by 1760.84% which shows how
aggressively the private sector banks are working on its non interest income.
Contribution of interest and non interest income of Private sector banks (94-04)

interest income has been 83% to the total income of the private sector banks.

Correlation between non interest income and total income of Private sector banks
0.987067
There is a very positive correlation between non interest income and the total income of private sector
banks which shows that higher the non interest income higher the total income of the private sector
banks.

Foreign banks
(Rs ‘000)

Column1: Average
Column 2: Year

Influence of interest and non interest income on profits of Foreign banks (94-04)

much of the profits of the foreign banks are determined by interest and non interest income.

1. We find non -interest income to be a significant variable in explaining the profits of foreign banks as
the prob value is less the .05 (.0006) and the value of t stat is more than 2(5.459) [Rule: an
2. We find that in our regression model the percentage of variation in the profits of foreign banks that is
explained by interest and non interest income is 94.64%( Rule for a regression model to be efficient
the r-square shall be at least .6)

From the above output we find that noninterest income had a major and significant influence on the
profits of foreign banks over a period of 11 years
Influence of non interest components on profit of Foreign banks (94-04)
Model Summary

Std. Error
1 891916.796
.995(a) .990 .975
48
a Predictors: (Constant), misc, plland, plreav, pllinvest, comm, plexchange

Coefficients(a)

Standardize
d
Mode Coefficient
l Unstandardized Coefficients s
B Std. Error Beta t Sig.
1 (Constant) 1103189.29
2987693.345 2.708 .054
7
comm -.182 .245 -.131 -.744 .498
pllinvest .371 .298 .158 1.248 .280
plreav -15.101 9.845 -.094 -1.534 .200
plland -9.579 5.393 -.123 -1.776 .150
plexchang
.808 .384 .485 2.101 .103
e
misc 2.657 .952 .580 2.790 .049

exchange transaction and miscellaneous income. And the dependent variable used as the profits
of the foreign banks
The objective is to find out which one of the non interest component had a major influence on
the profit of foreign banks over a period of 11 years.
1. The percentage of variation in the profits of the foreign banks explained by the 6

2. We find that only miscellaneous income have a major influence on the profits of foreign
banks over a period of 11 years as it is having a significance level of less than .05(.049)
and a t-stat of more than 2(2.790).

Contribution of various components of non interest income of Foreign banks (94-04)

income components over a period of 11 years (94-04). From the above graph we find that
commission/exchange /brokerage was having around 48% (highest) contribution to the non interest
income followed by exchange transactions 29%. The contribution of sale of investment was 17%
followed by miscellaneous income 6% .The sale of land/buildings, revaluation of investment was
having a very negligible influence on the non interest income

Movements of interest and non interest income of foreign banks (94-04)

If we look at the movement of interest and non interest income of foreign banks over a period of 11
years we will find that the non interest income has grown at a CAGR of 19.57% and the interest
income has grown at a CAGR of 13.49%. The non interest income over a period of 11 years has

grown by 497.394%% whereas interest income has increased by 254.54% which shows how
aggressively the bank is working on its non interest income

Contribution of interest and non interest income of foreign banks (94-04)

interest income has been 77% to the total income of the foreign banks.

Correlation between non interest income and total income of foreign banks
0.972437

There is a very positive correlation between non interest income and the total income of private sector
banks which shows that higher the non interest income higher the total income of the private sector
banks.

Findings

We have seen that the contribution of non interest income of our banking sector has increased
significantly over a period of 11 years. We have also seen that in each type of banks i.e. SBI, public
sector banks, private sector banks and foreign banks the contribution of non interest income towards
the total income has increased over a period of time and that of the interest income has decreased over
a period of time. If we look at the total banking sector we will find that in our banking system the non
interest income is having a significant influence on the profits of the banks. On an average the share
of the non interest income towards the total income of the banking sector has increased from 12% in
1994 to 20% in 2004.If we look at the components of non interest income of our banking sector we
will find that commission/exchange and brokerage earned by the banks had a major contribution i.e.
44% to the total noninterest income of the bank , after the commission the next big contribution to the
non interest income had been of the sale of investments which was 28%, followed by exchange
transactions having a share of 15%. Miscellaneous income was having the 13% contribution to the
total noninterest income of the banking sector. The contribution of sale of land, revaluation of
investments was having a negative or even a negligible influence on the noninterest income of the
banking sector. On an average the non interest income of the banking sector has grown at a CAGR of
25% as compared to interest income which has grown at a CAGR of 18%. The percentage increase in
the non interest income of the banking sector has increased by 1264.64% and interest income has
increased by 622%. The private sector banks had seen a significant contribution in the increase of its
non interest income over a period of 11 years as compared to other types of banks. Among the
various non interest components that had an influence on the profits of the banking sector we find that
commission, sale of investment, miscellaneous income had a significant influence on it. We also find
that there was a positive correlation between the non interest income and the total income of the
banking sector. We also find that in case of public sector banks none of the non interest component
was found to be statistically significant enough to influence the profits over a period of 11 years.

Reasons for increase in the non interest income

Now if we look at the reason for the increase in the non interest income of the banking sector we will
find that it has majorly increased due to following reasons:

1. Increased pressure on net interest margins of the banking sector.
2. With economy growing at an unprecedented rate of 9.4 per cent during 2006-07 and
acceleration in the growth rate being attributable to the buoyancy in the industrial and service
sector, the demand for fee-based services of banks has gone up and as a result of which the
non interest income has also risen up.
3. Noninterest income is an effective way used by banks to respond to its squeezing margins
4. At the bank level, greater reliance on noninterest income, particularly trading revenue, is
associated with lower risk-adjusted proﬁts attached to it.

Challenges involved
1. Not aggressive direct customer interaction of public sector banks.
2. High cost and less expertise involved in launching of innovative products/services as per the
customers’ expectations.
3. Technology requirements.
Conclusion

After studying the non interest growth pattern of the Indian banking sector over a period of 11
years we can say that it is slowly and gradually becoming one of the important avenues for our
Indian banks to generate revenue from. In this respect we see that not only private banks and
foreign banks are ahead but also our public sector banks are gradually catching it. We can say
that it to be an important source available with our banking sector to respond to the squeezing
margins and meeting the shareholders expectations.

Literature review
1. Business Efficiency of Public Sector Commercial Banks: A Data Envelopment Approach :
Ram Pratap Sinha (2008)
The article says that following the nationalization of 20 major commercial banks in 1969 and
1980, the government followed policies of financial repression up to the 1980s. During this
period the public sector commercial banks had rapid expansion of branches, especially in the
rural and semi urban areas and had reasonable success in the matter of deposit mobilization and
disbursement of loans. However, the operating efficiency of public sector commercial banks,
declined during the period due to various reasons. In the 1990s, the banking environment was
radically transformed by certain bold initiatives taken by RBI including the dismantling of entry
barriers, rate deregulation, introduction of prudential accounting norm and the implementation of
Basel I capital adequacy norms. The changed competition and accounting environment
compelled the commercial banks to provide unprecedented attention to cost cutting and
supplementing fund-based income by fee-based income.

2. Product mix and earnings volatility at commercial bank: evidence from a degree of leverage
model: Robert De young & Karin P Roland(1999)
The article says that the commercial banks lending and deposit taking business has declined in
recent years. Deregulation and new technology have eroded bank’s comparative advantages and
made it easier for non bank competitors to enter these markets. In response, banks have shifted
their sales mix towards noninterest income-by selling non bank fee based financial services such
as mutual funds, by charging fees for services that used to be bundled together with deposit or
loan products .It says that the conventional wisdom in the banking industry is that earnings from
fee based products are more stable than loan based earnings and that fee based activities reduce
bank risk via diversification.
1.

References
1. RBI website
2. Icfai Journal of Banking studies Sept 2008 issue pg 22-26
3. Ideas.repec.org

Banking Sector Study

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