Impact of Absolute and Systemic Size of Banks on Performance and Business Model: Empirical Evidence from India

Abstract

This article attempts to analyse the impact of bank size, both absolute and systemic, on performance in terms of returns and risk and business model in terms of activity mix. The sample includes 550 firm year observations of commercial banks in India between 2006 and 2016, spanning a time period of 11 years. On the performance front, the results indicate that neither of the size measures affects the return on assets or ROE of either public or private sector banks. On the other hand, the absolute size reduces the risk of bank insolvency. At the business model level, the proportion of fee-based and net-interest income decreases with increasing absolute size and increases with increasing systemic size. Conversely, the proportion of interest income increases with increasing absolute size and decreases with increasing systemic size. This highlights the banks’ increasing reliance on non-traditional sources of income with increasing systemic size in the Indian context.

Keywords: Bank Size, Systemic Size, Absolute Size, Performance, Return, Risk, Business Model, Activity Mix, India

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