Does diversification of income source influences bank's risk-return characteristics? evidence from the Indian market

Abstract

This paper examines how diversification of banks income sources is associated with bank risk and return for Indian banks. We document that income diversification is positively related to bank profitability and risk adjusted returns but does not have any significant impact on banks asset quality for full-sample. Although for large banks no direct diversification benefits are recorded. But for small and medium banks, diversification improves the profitability but adversely affects the bank's asset quality. These results hold against an array of robustness tests using alternative diversification measures, testing for the role of banks asset size and ownership as moderating variables.