Geographic Diversification in Indian Banking : Assessing the Impact on Risk and Returns

Indian banking sector has undergone sea changes over the years. Much of these changes are the consequences of irreversible process of liberalization, globalization and privatization. Banks in India, to a large extent, have become functionally dynamic and operationally efficient. One of the important developments one can witness in the sector is the growing scale of geographical and revenue diversification over the years. Geographical diversification is expected to bring positive results by way of reduced risks and increased returns for the Indian banks. Against the backdrop of existing literature which renders diverse views about the diversification benefits, the present study examines the manner and the extent to which banks are geographically diversified in the case of both public and private sector banks and analyzes its impact on the performance measured in terms of returns. The study uses a panel dataset of 40 observations for the period 1994-2014. In order to examine the impact of geographical diversification on bank's risk and returns, a Least Square Dummy Variable (LSDV) regression model is used. The results indicate that public sector banks are more diversified than private sector banks and the geographical diversification has a negative impact on the returns of the banks