Business segment diversification of private banks in India

Abstract

Diversification decisions in banks can be atypical owing to the nature of banking business. Banks diversify across business segments such as retail, wholesale or treasury, and spread their sources of liabilities, asset exposures and income types across customer groups, industry sectors and geographies. While the more granular decisions of diversification have regulatory and policy norms to follow, less guidance is available for making segment diversification. Using data of business segments from annual reports of five private sector banks in India for the period 2008–2009 to 2015–2016, the study attempts to find out the decision factors behind their diversification. It is found that though being highly diversified universal banks now, these banks were initially oriented toward certain segments from where they have shifted their portfolios over time. Bank diversification decision involves pursuing segment growth and executed by making capital expenditure and risk capital allocation to the segments. Banks make higher capital expenditure on segments that contribute more to generation of deposits and liabilities. On the other hand, risk capital allocation is determined by segment’s share of assets as well as their risk adjusted returns. Segment growth may be targeted with the intent of achieving higher profitability and capital efficiency, but the outcome appears to be uncertain. Business segment diversification of private banks, therefore, seem to be intended toward enhancing resources generation and targeting higher profitability while economizing on risk capital.