Impact of terrestrial diversification on profitability of Indian banks
Dr. Richa Jain
Diversification is one of the important subject of the finance literature. This strategy is also crucial for a bank as a financial institution. This paper examines the effect of terrestrial diversification on the performance of Indian banks and tries to show how the diversification affects banks’ performance and profitability. The study asks whether diversification via sectoral and Geographical credits helps banks. This paper analyzes the impact of terrestrial diversification on bank value by employing a data set comprising the banks across the country, originating from both Public and Private Sector. Terrestrial 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 terrestrially 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 1994-2015. In order to examine the impact of terrestrial 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 Terrestrial diversification has a negative impact on the returns of the banks.