4. The Dynamics of Revenue Diversification and Efficiency of Banks in India

Abstract

This article attempts to understand how income diversification influences efficiency of scheduled commercial banks in India across ownership and over crises periods. We explore two competing hypotheses prevalent in the literature— strategic focus and conglomeration. Input-oriented technical and pure technical efficiency scores are calculated using data envelopment analysis following two approaches in the literature—intermediation and operating. We find support for the conglomeration hypothesis under the intermediation approach while the strategic focus hypothesis holds under the operating approach regarding influence of revenue diversification on both types of efficiency. Furthermore, foreign banks indulge in higher revenue diversification in the post-crisis period and, therefore, report greater efficiency as compared with their domestic counterparts. These results have important policy ramifications for regulators and supervisors.