Chapter 4

NATURE AND EXTENT OF DIVERSIFICATION IN

BANKS IN INDIA

Diversification strategy can be described by the extent of participation in different

businesses and the underlying pattern of relationships among various businesses of firms
(Nayyar, 1992). Banks may go for expansion via diversifying geographically or/and via
product market diversification i.e. by adding new products and business lines.
Diversification can be across financial products (services) and geographic domestic
diversification (intrastate), or international (Landskroner and Ruthenberg, 2004). Besides
diversification types and industry structure, researchers have also looked at the ways the
firms diversify (Pandya and Rao, 1998). Simmonds (1990) examined the combined
effects of breadth (related vs. unrelated) and mode (internal expansion versus mergers &
acquisitions) and found that related diversified firms are better performers than unrelated
diversified firms and R & D based product development is better than mergers and
acquisition- led diversification (Simmonds, 1990; Lamont and Anderson, 1988).

Banking industry may adopt diversification route in the following forms; -

1) Vertical or horizontal integration to create diversified financial group.

2) Alliance diversification via joint ventures, tie-ups etc.

Before discussing the nature of diversification in banks, a brief discussion is given

on the underlying relationship between the three important segments of financial markets.
i.e., commercial banks, insurance and investment business. This relationship provides a
base for diversification of banking activities and integrating these three different
businesses. Investment and insurance business generally finance a growing volume of
assets and do not have adequate capital base. In such situations commercial banks can
provide a substantial capital base. Also, wide bank-branch network can provide scope to
investment and insurance business for the distribution of their financial products like
mutual funds, debentures, policies etc. Moreover, as in the present scenario when the
proportion of bank credit in corporate debt is declining, the banks are increasingly turning

78
to new, non-traditional financial activities as a way of maintaining their position as
financial intermediaries. Integration of all the three business in the form of diversified
financial group can play a compensatory role. But inspite of this significant relationship
these three businesses require varying business skills and operational skills. There is also
a difference in attitude towards risk. Commercial banks avoid risk, insurance business
aims to cover risk while investment banks specialize in risk management. Moreover,
these three businesses have different approach towards customers. Therefore, these
factors have to be kept in consideration, while integrating and diversifying the banking
operations.

Major objective of this chapter is to study the nature and extent of diversification
in the Indian banking sector. Further, other two sub-objectives are also discussed in this
chapter i.e. to study the degree of diversification in Indian banks and the type of
relatedness in diversified banks.

The diversification of activities in the banking industry has led to the entry of
banks and other financial organizations into new segments of the financial services
industry (Canals, 1997). Diversification in financial services also enables banks to sell
services to customers who demand multiple products (financial supermarkets). In the
present study, those banks will be included in the definition of diversified banks, which
have atleast one insurance subsidiary or investment institution or both. These may be in
the form of a subsidiary, joint venture or in any other mode such as alliance distribution
etc.

4.1 Nature of Diversification in Banks

An alternative approach as prescribed by (Pitts and Hopkins, 1982) is to measure

firm's diversity is to count the number of products constituting the firm's total portfolio.
This business count method assumes that different products or services represent
different businesses, typically uses SIC codes to identify individual businesses and then
counts the number of businesses (Pitts and Hopkins, 1982).

79
 Banking sector practices a wide range of organization structures to expand
their business. Nature and Extent of Diversification in Banks is analyzed through
the framework used by Ramanujam and Varadarajan (1987). This framework is
based on a two dimensional, categorical measure of firm diversity developed from the
work of Berry (1971) and Wood (1971). Berry (1971) used the SIC (Standard
Industrial Classification) data to distinguish between two distinct patterns of firm-
level diversification that is NSD (Narrow Spectrum Diversification) and BSD (Broad
Spectrum Diversification). The SIC coding system is used to differentiate between
related and unrelated business areas, related business areas being termed “Narrow
Spectrum Diversity (NSD)” and unrelated business areas “Broad Spectrum Diversity
(BSD)” (Dautwiz, 2009). A third category named as AD (Alliance Diversification) is
used to identify the nature of diversification in banks in India. For the purpose,
following definitions are used to study nature and extent of diversification in Indian
banking sector.

BSD (unrelated product diversification) - Diversification into a new four digit SIC
industry category outside the firm's present scope of activities at the two digit SIC
industry (Jacquemin and Berry, 1979). Broad Spectrum Diversification refers to
expansion other than vertical integration into a different four-digit business. i.e., into a
different non-banking business like merchant banking, factoring etc.

NSD (related product diversification) – Diversification into a new four digit SIC
industry category but within the firm's present scope of activities at the two-digit SIC
industry category level (Jacquemin and Berry, 1979). Narrow Spectrum Diversification
refers to expansion through vertical integration into similar banking business through
banking subsidiaries.

AD - Alliance Diversification refers to expansion of banking and non-banking

through tie-ups, joint ventures. Alliance Diversification may be done into related or
unrelated business.

80
Table 4.1: Nature and Extent of diversification in Indian banking sector

BSD (Broad Spectrum Diversification) and UB (Unrelated Business), NSD (Narrow Spectrum
Diversification) and RB (Related Business), AD (Alliance Diversification)

DIVERSIFIED NON-
BANKS DIVERSIFIED
BSD NSD AD BANKS
I Public Sector Banks
1. State Bank of India and ***** **** ****
Associates UB RB RB &
UB
2. Allahbad bank ****
UB
3. Andhra Bank ****
RB
4. Bank of Baroda **** **** ****
UB RB RB
5. Bank of India **** ****
UB RB
&UB
6. Bank of Maharastra ****
ND
7. Canara Bank **** ****
UB RB &
UB
8. Central Bank of India ****
UB
9. Corporation bank ****
UB
10. Dena Bank ****
ND
11. Indian Bank **** ****
UB UB
12. Indian Overseas Bank ****
ND
13. Oriental bank of Commerce ****
ND
14. Punjab & Sind Bank ****
UB
Contd…

81
 15. Punjab National bank ****
UB
16. Syndicate Bank ****
ND
17. UCO Bank ****
ND
18. Union Bank of India ****
ND
19. United Bank of India ****
ND
20. Vijaya Bank ****
ND
II Other Public Sector Bank
21. IDBI Ltd. ****
UB
III Private Sector Banks
22. Bharat Overseas Bank ****
ND
23. City Union Bank Ltd ****
ND
24. Karnataka Bank ****
ND
25. Lord Krishna Bank ****
ND
26. Nainital Bank ****
ND
27. SBI Commercial & ****
International Bank RB
28. Tamilnad Mercantile Bank ****
ND
29. The Bank Of Rajasthan Ltd. ****
ND
30. The Catholic Syrian Bank ****
Ltd. ND
31. The Dhanlaxmi Bank Ltd ****
ND
Contd…

82
32. The Federal Bank Ltd ****
ND
33. The Ganesh Bank Of ****
Kurundwad Ltd ND
34. The Jammu & Kashmir Bank ****
Ltd. ND
35. The Karur Vysya Bank Ltd ****
ND
36. The Laxmi Vilas Bank Ltd ****
ND
37. The Ratnakar Bank Ltd ****
ND
38. The Sangli Bank Ltd ****
ND
39. The South Indian Bank Ltd ****
ND
40. The United Western Bank Ltd ****
ND
41. HDFC Bank Ltd **** ****
UB UB
42. ICICI Bank Ltd **** ****
UB UB
43. Indusind Bank Ltd ****
UB
44. Kotak Mahindra Bank Ltd **** ****
UB UB
45. AXIS bank (formerly ****
UTI)Bank Ltd UB
46. Yes Bank Ltd. ****
ND
47. ING Vysya Bank Ltd. **** ****
UB UB
48. Development Credit Bank ****
Ltd. ND
Total No. Of Banks 13 3 13 30

83
 Table 4.1, shows the nature of diversification in Indian banking sector. In respect
of public sector banks in India, out of a total of 21 banks, 12 banks were diversified and 9
banks were non-diversified as on 31st march 2008. This includes IDBI ltd (other public
sector bank), which is a well-diversified bank. State Bank of India is highly diversified.
It has adopted both BSD (Broad Spectrum Diversification) move and NSD (Narrow
Spectrum Diversification) move along with AD (Alliance Diversification). It has six
banking subsidiaries and four non-banking subsidiaries along with many foreign
subsidiaries. SBI has entered into a number of new businesses with strategic tie-ups –
Pension Funds, General Insurance, Custodial Services, Private Equity, Mobile Banking,
Point of Sale, Mergers and Acquisition, Advisory Services, Structured Products etc. SBI
Life is a joint venture with Cardiff, while SBI Asset Management a joint venture with
Societe Generale is an example of alliance diversification.

Bank of Baroda is another bank, which has adopted all the three moves of
diversification. In NSD, it has one associate bank i.e., Nanital Bank and several
subsidiaries dealing with banking and non-banking business. It has diversified into areas
of merchant banking, housing finance, credit cards and mutual funds as a move to
become a one stop financial supermarket. As part of diversification plan the bank has
ventured into the life insurance business. Bank of Baroda Asset Management Company, a
subsidiary of the Bank of Baroda in collaboration with the Italian company 'Pioneer' and
has formed a joint venture for mutual fund business. The Bank has a very large overseas
presence amongst the Indian banks and have branches and representative offices in
countries like USA, UAE, UK, Singapore, Thailand, Malaysia, Mauritius, South Africa,
Kenya, Hong Kong, China, Bahrain, Australia etc. The global business of the Bank is
over Rs.3, 71,000 crores by the end of March, 2009.

Canara Bank has adopted Broad Spectrum Diversification move and has been
scaling up its market position to emerge as a major 'Financial Conglomerate' with nine
subsidiaries/sponsored institutions/joint ventures in India and abroad. In the year 2008,
Canara bank incorporated two joint ventures namely, Canara Robeco Asset Management
Company Ltd and Canara HSBC Oriental Bank of Commerce Life Insurance Company

84
Ltd. To give a thrust on augmenting non-interest income sources and avenues, the bank
has entered into a Corporate Agency agreement with ECGC (Export Credit Guarantee
Corporation of India Ltd) for soliciting and procuring export credit insurance business.

Banks like Central Bank of India, Corporation Bank, Allahbad bank have
diversified through BSD move. As a part of plan to diversify into gold trade,
Corporation Bank has opened a gold desk at Mumbai. It has already started marketing
gold and launched dealings at Ahmedabad, Bangalore, Delhi, Mangalore and Mumbai.
While Allahbad bank Instituted AllBank Finance Ltd., a wholly owned subsidiary for
Merchant Banking. In a bid to diversify its revenue stream, Allahabad Bank set up its
syndication desk to generate more fee based income.

Other State-owned banks such as Union Bank of India, Bank of India,

Corporation Bank, UCO, United Bank of India are gradually making inroads to
become diversified through BSD move to enter into the domain of loan syndication and
giving the traditional leaders a tough competition in the field of loan syndication market
such as SBI Capital Markets, Axis Bank, IDBI Bank. Also, Life Insurance Corporation of
India has entered into an agreement with the Corporation bank in a bid to market its
credit card business across the country.

Indian Bank has adopted both BSD move and AD move for diversifying.
Indian Bank has a separate subsidiary dealing in Merchant Banking, as Indbank Merchant
Banking Services Limited (Indbank) incorporated in the year 1989.

Andhra Bank and Punjab and Sind Bank have started diversification move
through AD. i.e., Alliance Diversification. Andhra Bank entered MOU with Bank of
Baroda and Legal & General Group of UK to form a joint venture life insurance
company. To provide all the insurance related services under one roof, Punjab & Sind
Bank has tie-up arrangements for Non Life insurance business with M/s Bajaj Allianz
General Insurance Company and Life Insurance business arrangements with M/s Aviva
Life Insurance Company India Pvt. Ltd.

85
 In case of Private sector banks, old private sector banks are not diversified at
all, while most of the new generation private sector banks are highly diversified.
HDFC Bank, ICICI Bank, Indusind Bank, Kotak Mahindra Bank and ING Vysya
Bank are categorized as banks that have followed BSD (Broad spectrum
Diversification) and AD (Alliance Diversification) to expand their banking and non-
banking products and services.

HDFC Bank’s target market ranges from large, blue chip manufacturing
companies in the Indian corporate to small & mid-sized corporate and agri-based
businesses. HDFC India commenced operations as a Scheduled Commercial Bank in
January 1995. The bank provides a wide range of commercial and transactional banking
services, including working capital finance, trade services, transactional services, cash
management, etc. HDFC bank has entered into a strategic merger with Standard Life
(largest insurer in the UK to form HDFC Standard Life Insurance Company. HDFC
Bank, offer exposure to the real estate asset class through portfolio management schemes.

ICICI Bank is India's second-largest bank. ICICI Bank offers a wide range of
banking products and financial services to corporate and retail customers through a
variety of delivery channels and through its specialized subsidiaries and affiliates in the
areas of investment banking, life and non-life insurance, venture capital and asset
management. ICICI bank is expanding and diversifying in fund-generation profiles and
revenue streaming activities like insurance intermediaries, reinsurance brokers,
consultants, risk managers, loss assessors and to buy sell, market, distribute deal in or
dispose of insurance products and related instruments. In the fiscal year 1985, bank had
a networth of Rs 1.75 billion, assets of about Rs 21 billion and profits of Rs 0.36
billion. In the fiscal year 2009, it had a networth of about Rs 500 billion, assets of about
Rs 3,800 billion and profits of Rs 37.58 billion. This represents over 20 per cent
compounded annual growth over a 24-year period. Most of the new generation private
sector banks are diversifying through Broad Spectrum diversification, either through
their own non-banking subsidiaries such as securities houses or insurance companies or
have become heavily involved in product sales such as bancassurance or mutual funds
etc.

86
 Yes bank is dealing in single banking business only. Yes bank was established
in the year 2004. Yes bank is the only bank which has been bestowed with the
Greenfield3 License by the RBI. The main activities of the bank include offering
banking and financial solutions, corporate and institutional banking services, retail
banking services, and wealth management. However, Yes bank is associated with
several global leadership forums like initiatives like Clinton Global Initiative (CGI),
Triple Bottom Line Investing (TBLI) and Tallberg Forum.

ING Vysya Bank was formed in October 2002 when the former Vysya Bank
Ltd, entered into collaboration with ING, a global financial powerhouse of Dutch
origin. ING Vysya Bank has diversified through BSD move as it has four subsidiaries
dealing in banking, insurance and asset management.

Kotak Mahindra Bank another diversified bank offers a variety of products

like commercial banking, stock broking, mutual funds, life insurance and investment
banking through its subsidiaries namely Kotak Mahindra Primus Ltd (KMPL), Kotak
Securities, Mahindra Invests, Kotak Forex Brokerage, Kotak Mahindra Capital Co.,
Kotak Mahindra Trustee Co. and Kotak Mahindra Asset Management. The net worth of
the Kotak Mahindra Group, to which the Kotak Mahindra Bank belongs, is over
Rs.7,100 crore.

IndusInd Bank is also diversifying through AD into distribution of life and

non-life insurance products. The Bank became one of the first bank to implement the
RBI - Electronic Funds Transfer Scheme. It has its representative Office in Dubai.

4.2 Measurement of Degree of Diversification

Different methods have been devised for representing the relative importance of
the individual business areas more precisely and allow the weighting of the individual
business units when measuring their relatedness (Dautwiz, 2009). In the Table 4.2

3
Greenfield investment is defined as an investment in a start-up project, usually for a major capital
investment and the investment starts with a bare site in a greenfield.

87
below, different approaches to measure the degree of diversification is presented as cited
in (Dautwiz, 2009).

Table 4.2: The development of continuous approaches to measuring the

diversification of companies

Index Formula Definition

Weighted Index Weighting of the individual business
units P for assessing their relative
importance. Disadvantages: arbitrary
choice of the weighting factor W
Herfindhal - Weighting of the relative proportion
Index of overall turnover for the business
unit Pi. The value for H measures
the degree of concentration and
becomes smaller as diversification
increases.
Berry-Index A transferal of the Herfindhal-Index
from a measured of concentration to
one of diversification by subtraction
it from the value 1.
Jacquemin-Berry Determination of diversification
Index/Entropy growth taken a refined matrix for
Measure structuring economic activity as its
because Pi as a business unit’s
proportion of the overall turnover
after predefinition of a level of
structural depth in the classification
matrix (e.g. a 4 stage SIC matrix).
Source: Dautwiz, 2009

88
 To measure the degree of diversification numerous methods like Entropy measure
(Jacquemin & Berry, 1979), Concentric Index and Herfindhal Index have been used in
the literature of strategic and financial management. However, entropy measure
“quantified as a continuous one” has remained widely used as a measure for
diversification (Palepu, 1985). Using the Berry-Index and the entropy measure from
Jacquemin and Berry it is possible to assess the relative importance (in terms of size,
generally measured as size of turnover) of individual business units (Dautwiz, 2009). The
entropy measure is calculated using the following formula:

Entropy Measure of Diversification

n
Entropy measure = ∑ Pi ln (1 / Pi )
i =1

where,
(Pi) is the proportion of total operations within each segment I, i.e.,
proportion of ‘income from diversified operation and services’.
n is number of segments in which bank operates.
1n is natural logarithm of the inverse of the proportion of total operation in
each segment.
(1/Pi) is the relative weight of each segment i.

In the Table 4.3 below, diversification index for banking groups namely SBI
Group (State Bank of India and associates), NB (Nationalized banks) and PB banks
(New Generation Private Bank) operating in India is computed for the time period
between 1994 to 2008.This time period is selected because most banks have started
diversification moves after the implementation of economic and financial sector
reforms of 1991. From these respective banking groups, income of those banks which
are not diversified (as shown in Table 4.1) is excluded as they operate in single
banking business. For computing Pi i.e., proportion of total operations within each
segment I i.e., proportion of ‘income from diversified operation and services’, which
is income from other sources, is taken. Income from other sources consist of
commission, exchange and brokerage, net profit (loss) on sale of land, building &
other assets, net profit (loss) on exchange transaction, miscellaneous income, net
profit (loss) on sale of investments, net profit (loss) on revaluation of investments, is
taken. By using the entropy index of Jacqueimin and Berry (1979), diversification
index of banking sector operating in India is computed.

89
 Table 4.3: Measure of Diversification in Indian Banks (Entropy measure)

YEAR SBI Group NB PVTBS

1994 0.529644 0.4099 0.22

1995 0.526056 0.4151 0.2810

1996 0.53017 0.3286 0.4082

1997 0.529484 0.3274 0.4360

1998 0.521502 0.3275 0.3833

1999 0.528029 0.3280 0.3593

2000 0.522042 0.3294 0.4031

2001 0.524283 0.3296 0.3722

2002 0.499872 0.3221 0.4431

2003 0.501679 0.4256 0.4470

2004 0.512042 0.3231 0.4571

2005 0.512246 0.3542 0.4582

2006 0.509631 0.4301 0.4872

2007 0.464591 0.3286 0.5163

2008 0.472091 0.3376 0.5191

90
 Diversification Index in Indian Banks

0.6

0.5
Diversification Index

0.4

0.3

0.2

0.1

0
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

SBI GROUP NB PVTBS

Fig. 4.1: Diversification index in Indian Banks

As shown in the Table 4.3 and Fig. 4.1, in the year 1994, diversification level is
the highest in SBI group (0.529) followed by nationalized banks (0.4099). It is least i.e.
(0.223) in private sector banks. This was the period when new generation private sector
banks were being setup. By 1995-96, a total of nine new generation private sector banks
were in operation. From the year 1994 to 1999, a mixed trend is seen but after 2002 year
onwards, index of private banks has increased continuously indicating that these banks
emphasize more on diversified source of income that is on “other income”. In the year
2008, the diversification index of private banks rose to 0.519, which is even higher then
SBI group followed by nationalized banks

Diversification index of state bank of India, over the time period of 1994 to 2006
remained the highest with six banking subsidiaries and a number of non-banking
subsidiaries and joint ventures. But after year 2002, a declining trend is seen because of

91
the competition given by new generation private banks along with foreign sector banks in
the field of retail banking and micro banking segment. Another, reason is that in the year
2002-03, trading income of SBI group has increased in larger proportion as compared to
its non-interest income

In respect of nationalized banks, a mixed trend is seen in their diversification

index, which indicates that banks have started realizing the significance of diversification
in the present scenario and are becoming diversified in their approach.

4.3 Diversification Status and Type of Relatedness

The diversity status and mode is an indication of how diversified the firm is in
terms of product/market combinations (Verweire, 1999). Relatedness and Unrelatedness
concepts are of relevance to highlight the nature of business combinations. Some
business combinations may result in more synergetic potential. Stimpert and Duhaime
(1997) interviewed top managers of diversified companies regarding their perception and
understanding of the relatedness in their portfolio of business and came to the conclusion
that executives should try to capture synergies by coordinating activities across their
firms’ businesses. Stimpert and Duhaime (1997) and Nayyar (1992), emphasized on
managerial conceptualism with regards to diversification strategy.

Rumelt (1982) defined relatedness as “drawing on the same common core skill,
strength, or resource”.

As per Nayyar, (1992), “relatedness either encompasses (1) sharing of markets,

distribution systems, product and process technologies, or manufacturing facilities, (2)
relying on common technologies, managerial capabilities and routines and repertoires”.

While Prahalad and Hamel (1990) described, relatedness as based on the idea of
leveraging core competences across multiple businesses. Verweire (1999) in his study
found four types of relatedness namely; -

• Differentiation relatedness-all items are included which are associated with

porter’s generic model of differentiation (a product's difference from other
products of a similar nature) or the functional skills of marketing.

92
• Strategic relatedness encompass of all items, which are considered in strategic
decisions.
• Size relatedness encompasses variables, which managers perceive as related in
terms of equality of size of the different parts of the group.
• The product-market relatedness-all the items that load on this factor reflect
similarities in businesses' product characteristics or market segments.

In the present study, to analyse the nature of relatedness in diversified banks, a

standardized questionnaire was drafted in which managers of different diversified public
and private banks were asked as to how they perceived the relatedness of their banking
business with other lines of business like insurance, investment and other non-banking
business. To test the validity of data collected, Bartlett’s test of sphericity and Kaiser-
Meyer-Olkin (KMO) Measure of sampling adequacy value is calculated.

Measure of Sample Adequacy -KMO and Bartlett’s Test

Measure of sample adequacy such as Bartlett’s test of spherecity and KMO Value
(Table 4.4) showed that data is fit for factor analysis. Generally, KMO value greater than
0.5 is desirable. As the Table 4.4, shows that KMO value is 0.685, it makes the data fit
for factor analysis and Bartlett’s test also satisfies the condition of significance of chi
square value.

Table 4.4: KMO and Bartlett’s test

KMO and Bartlett’s test

Kaiser-Meyer- Olkin Measure of Sampling Adequacy 0.685

Bartlett’s Test of Sphericity Approx. Chi-Square 485.94

Df 105

Sig. 0.000

93
In the questionnaire twenty-two variables (as shown in Table 4.5(I)) with respect to the
underlying nature of relatedness in diversified banks were measured on a five point scale
(Likert scale) ranging from 5 to 1 depending on the importance attached to each variable.
For example, “Strongly agree” was ranked 5 followed by “Agree” with value 4, “Neither
Agree nor Disagree” with 3, “Disagree” with 2 and “Strongly Disagree” with 1.

Table 4.5 (I): Nature of Relatedness (List of Variables)

S.No. List of Variables

V01 Businesses are required to meet financial targets
V02 Businesses share customers
V03 Businesses share distribution network
V04 Businesses emphasize on low costs/cost leadership strategy
V05 Businesses are similarly impacted by economy
V06 Businesses emphasize on product development
V07 Businesses produce high value-added services
V08 Businesses share back office
V09 Businesses emphasize on R&D
V10 Businesses emphasize on marketing
V11 Businesses share management information system (M.I.S.)
V12 Businesses require the same management skills
V13 Businesses have strong brand names
V14 Businesses share technology
V15 Businesses share corporate culture
V16 Businesses aim at the same corporate goals
V17 Businesses use the same strategic concepts to run the business
V18 Businesses share common core business
V19 Businesses are about the same size
V20 Businesses have about the same market share
V21 Businesses serve niche markets
V22 Businesses pay attention to service

94
Table 4.5 (II): The correlation matrix (Nature of Relatedness)
Correlation
Matrix
VAR00001 VAR00002 VAR00003 VAR00004 VAR00005 VAR00006 VAR00007 VAR00008 VAR00009 VAR00010 VAR00011
VAR00001 1
VAR00002 -0.2496 1
VAR00003 -0.26342 0.236221 1
VAR00004 -0.06104 0.393702 0.349488 1
VAR00005 -0.0428 0.222681 -0.26149 0.10991 1
VAR00006 -0.0706 0.455334 0.244125 0.262014 0.108253 1
VAR00007 0.178516 0.166715 -0.09997 0.204389 0.699753 0.024559 1
VAR00008 -0.26264 -0.41077 -0.14633 -0.32636 0.064754 -0.32785 -0.12306 1
VAR00009 0.402422 0.038169 -0.05798 -0.15169 0.028048 0.2591 -0.13999 -0.11065 1
VAR00010 -0.1416 -0.01343 0.069796 -0.27713 0.065795 0.170941 0.190879 0.237934 -0.0406 1
VAR00011 0.034157 -0.0216 -0.08634 -0.21788 -0.32007 0.345154 -0.23963 -0.25741 0.335163 0.022974 1
VAR00012 0.097823 0.222681 0.037091 0.354548 0.215909 0.183702 0.161645 -0.04981 -0.18699 0.065795 0.10581
VAR00013 0.28995 -0.27212 -0.02314 0.287611 -0.05318 0.073691 0.021235 -0.25487 -0.15169 -0.04106 0.313622
VAR00014 0.203785 -0.27704 -0.4855 -0.11079 0.359037 -0.3508 0.336739 0.254228 -0.24021 0.268418 -0.2443
VAR00015 0.051879 0.118094 -0.01049 0.476336 0.345518 -0.22268 0.397043 -0.06692 -0.40328 -0.23262 -0.37409
VAR00016 -0.5035 0.40452 0.170694 0.051525 0.075691 -0.03178 -0.18031 0.048259 -0.33968 0.119523 -0.39724
VAR00017 0.141598 -0.29547 -0.0698 0.041056 0.312527 0.047484 0.3756 -0.23793 -0.27067 0.095238 -0.02297
VAR00018 0.226294 -0.4722 -0.24311 -0.18591 -0.20592 -0.27319 -0.15417 -0.02689 -0.10093 0.152204 -0.03672
VAR00019 0.009429 0.186018 0.085803 0.442894 -0.10515 0.308601 -0.07872 -0.29191 -0.26675 0.152204 0.150941
VAR00020 0.291492 -0.1614 -0.20551 0.03198 0.453923 0.207122 0.655013 -0.16688 -0.07228 0.317928 0.040903
VAR00021 0.400332 -0.16357 -0.00934 0.321441 0.143091 -0.29328 0.107128 0.012544 -0.0883 -0.44531 -0.17987
VAR00022 0.004336 -0.14146 0.220938 0.203649 -0.5117 -0.01861 -0.48716 -0.01236 0.258567 -0.19829 0.155692
Contd…

95
Correlation
Matrix
VAR00012 VAR00013 VAR00014 VAR00015 VAR00016 VAR00017 VAR00018 VAR00019 VAR00020 VAR00021 VAR00022
VAR00001
VAR00002
VAR00003
VAR00004
VAR00005
VAR00006
VAR00007
VAR00008
VAR00009
VAR00010
VAR00011
VAR00012 1
VAR00013 0.680731 1
VAR00014 0.0868 0.002462 1
VAR00015 0.53033 0.361012 0.142283 1
VAR00016 -0.08257 -0.3435 -0.06212 0.068119 1
VAR00017 -0.0658 0.277131 0.38835 -0.03489 -0.11952 1
VAR00018 -0.10515 0.191374 0.410716 0.086744 -0.19101 0.13952 1
VAR00019 0.701 0.694414 -0.14907 0.229253 0.05306 0.13952 -0.08784 1
VAR00020 0.117141 0.242133 0.536356 0.062124 -0.399 0.657051 0.141137 0.011291 1
VAR00021 0.4722 0.526807 0.01242 0.657674 -0.33792 -0.03107 0.204124 0.204124 -0.0507 1
VAR00022 -0.04835 0.145823 -0.35812 -0.02564 -0.08783 -0.60654 0.173984 0.031068 -0.53215 0.152204 1

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 The inter correlation among the variables were calculated as shown in Table
4.5 (II). The Table 4.5 (II) revealed the following variables, which showed greater
correlation:

1. Businesses produce high value-added services with Businesses are similarly

impacted by economy.

2. Businesses have about the same market share with Businesses produce high
value-added services

3. Businesses are about the same size with Businesses have strong brand names

4. Businesses serve niche markets with Businesses share corporate culture

5. Businesses have about the same market share with Businesses use the same
strategic concepts to run the business.

To analyze the perceived significance of variables showing the nature of

relatedness among diversified banks, twenty-two variables (as shown in Table
4.5(I)) have been used for factor analysis. These variables were coded using a five-
point scale. The results of factor analysis have been shown in Table 4.5 (III) and 4.5
(IV). Principal Component Analysis was used for extracting factors from Table 4.5
(III) and six (6) factors were retained depending on Eigen values and variance
explained by each factor. Components with Eigen values over 1 are usually said to
be the factors are considered. Eigen values are the variances of the factors.

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 Table 4.5 (III): Eigen Values and Percentage of Variance

Total Variance Explained

Component Initial Eigen values Cumulative %
Total % of Variance
1 3.770239 17.13745 17.13745
2 3.464241 15.74655 32.884
3 3.04332 13.83327 46.71727
4 2.436326 11.07421 57.79148
5 1.950882 8.867645 66.65912
6 1.473923 6.699652 73.35877
7 0.88456 5.646464 79.00523
8 0.848619 3.857359 82.86259
9 0.75361 3.425534 86.28809
10 0.639006 2.904571 89.19266
11 0.602656 2.739344 91.93201
12 0.414715 1.885067 93.81708
13 0.383126 1.741484 95.55856
14 0.302703 1.375925 96.93448
15 0.233058 1.059354 97.99384
16 0.190662 0.866645 98.86048
17 0.084161 0.38255 99.24303
18 0.061378 0.278992 99.52202
19 0.049997 0.227258 99.74928
20 0.040141 0.182461 99.93174
21 0.008467 0.038488 99.97023
22 0.006549 0.029768 100
Extraction Method: Principal Component Analysis.

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Total variance explained by extracted six factors was 73.35%. Eigen Values and
Percentage of Variance are shown in Table 4.5 (III).
Rotated Component Matrix
The results were obtained through orthogonal rotations with variance and all
factors loadings greater than 0.50 (ignoring the sign) were retained. The twenty-two
variables from the Tables were then loaded on the six factors respectively (Table 4.5
(IV)).
Table 4.5 (IV): The Rotated Factor Matrix, The Final Statistics.
Component Matrix
Component
1 2 3 4 5 6
V01 0.252686 0.825631 0.211675 -0.37081 0.267838 -0.13189
V02 -0.09359 0.236153 -0.01774 0.464786 0.361721 0.519236
V03 -0.23426 0.309869 0.075731 0.510553 -0.35076 -0.19413
V04 0.351909 0.681094 0.005925 0.112274 0.002321 -0.14525
V05 0.411093 -0.12006 -0.50146 0.307723 0.309997 0.187732
V06 -0.06133 0.404418 0.653679 0.312785 -0.05436 -0.0139
V07 0.242324 -0.09039 0.660253 0.269379 0.130901 -0.05319
V08 -0.13105 -0.4206 0.601852 0.301279 -0.32648 0.277911
V09 -0.40074 -0.22282 0.401137 0.226926 0.826025 0.179991
V10 -0.44014 -0.19815 0.406056 0.801967 0.395461 0.174626
V11 0.735754 -0.43766 0.225508 0.287329 -0.38587 0.470359
V12 0.755009 0.078384 -0.050321 -0.22572 0.204708 0.044801
V13 -0.17023 -0.00912 0.350826 -0.34676 0.501134 0.128065
V14 0.4559174 0.498607 0.101309 -0.21799 0.852236 0.242434
V15 0.576454 0.290902 0.328465 -0.38929 -0.07577 0.114961
V16 0.572964 -0.45394 -0.29576 0.016793 0.146009 0.065894
V17 0.567547 0.352623 -0.33741 0.006328 0.114622 0.19807
V18 -0.22976 0.354459 -0.20636 0.268891 0.73382 -0.06543
V19 0.279613 -0.24718 0.21267 0.101136 -0.1882 0.52547
V20 0.223712 -0.43002 -0.15046 0.509616 -0.03787 -0.15895
V21 0.407813 0.261831 0.211345 0.635056 -0.13529 0.154998
V22 0.292196 -0.34306 0.880227 0.270291 -0.04414 -0.19888
Extraction Method: Principal Component Analysis.

Naming of the factors has been done on the basis of the size of factor loadings of
the variables. Factors are being named according to the factor loading values, larger the

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value, greater is the chance of the factor being named after these variables.

Table 4.5 (V): Types of Relatedness in Diversified Banks

Factor Factor Statements Score

No Name
1 Managerial V11 0.734
Relatedness Businesses share management information
system (M.I.S.)
V12 0.755
Businesses require the same management skills
V15 0.576
Businesses share corporate culture
V16 0.572
Businesses aim at the same corporate goals
V17 Businesses use the same strategic concepts 0.567
to run the business
2 Financial V01 0.825
Relatedness Businesses are required to meet financial targets
V04 0.681
Businesses emphasize on low costs/cost
leadership strategy
3 Service V06 0.653
Relatedness Businesses emphasize on product development
V07 0.660
Businesses produce high value-added services
V22 0.880
Businesses pay attention to service
V05 0.501
Business are similarly impacted by economy
V08 0.601
Business share back office

Contd…

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4 Marketing V10 0.801
Relatedness Businesses emphasize on marketing
V20 0.509
Businesses have about the same market share
V21 0.635
Businesses serve niche markets
V03 0.510
Business share distribution network.
V09 0.826
5 Technology Businesses emphasize R&D
Relatedness V13 0.501
Businesses have strong brand names
V14 0.852
Businesses share technology
V18 0.733
Businesses share common core business
6 Size V19 0.524
Relatedness Businesses are about the same size

V02 0.519
Businesses share customers

Further, in order to find out significance level of factors, the factor wise average
scores (from the five point Likert scales) are calculated and accordingly ranking is done.
The level of the importance of factors on the basis of factor wise average scores has been
categorized as follows in table 4.5 (VI).

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 Table 4.5 (VI): Ranking and Average score of factors

Factors Average scores Ranking

Managerial Relatedness 1.53 6

Financial Relatedness 4.34 1

Service Relatedness 3.40 3

Marketing Relatedness 3.44 2

Technology Relatedness 2.03 5

Size Relatedness 2.86 4

Explanation of Table 4.5 (IV), Table 4.5 (V) and Table 4.5 (VI)

Financial Relatedness

The Financial Relatedness has been perceived as the first important factor in
banks decision to adopt diversification move. “Financial relatedness” factor includes
variables V01 “Businesses are required to meet financial targets” and V04
“Businesses emphasize on low costs strategy” which indicate that diversification will
result in a greater financial synergies by meeting financial targets.

Marketing Relatedness

Marketing Relatedness factor ranked second important factor of relatedness in

diversified banks. Diversification strategy mainly aimed at expanding scale of
business. Variables V10 “Businesses emphasize on marketing”, V20 “Businesses
have about the same market share”, V03 “Business share distribution network” and
V21 “Businesses serve niche markets” reflects relatedness in term of marketing
characteristics. Diversified banks can use the marketing strategy in offering one
service to recommend their other services in order to expand scale of business.

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Service Relatedness

Service relatedness is ranked as third important factor of relatedness in

diversified banks. All variables loaded under “service relatedness” factor reflect
similarities in businesses' product characteristics or market segments like V06
“Businesses emphasize product development” and V07 “Businesses produce high
value-added services” which help in developing core competencies for the business as
a whole. Though nature of business is different in banking and non-banking business
but the product in which they deal is mainly “money and finance” which is same. It
includes variables namely, V08 “Businesses share back office”, V05 “Banks are
similarly impacted by economy” and V22 “Businesses pay attention to service”.

Size Relatedness

“Size relatedness” ranked as fourth important type of relatedness, which

diversified banks aimed to achieve from diversification. It consisted of variable V19
“Businesses are about the same size” and V02 “Businesses share customers”. As
market share is often used as a proxy for size, so it depicts that size relatedness is
another variable, which shows the relatedness of business.

Technology Relatedness

As diversified banks operate in different businesses like retail banking,

investment banking and other specialized financial and non-banking activities (such
as leasing, factoring, etc.). Some business combinations depending upon their
relatedness may result into more synergetic potential. Technology relatedness factor
encompasses variables V09 “Businesses emphasize R&D”, V13 “Businesses have
strong brand names”, V14 “Businesses share technology” and V018 “Businesses
share common core business”. It is ranked as fifth important factor. Technology helps
in creating synergy, which occurs when the sum of all businesses together equals,
more than the sum separately (Hitt et al., 2001). Amit and Livnat (1988) argue that
diversification into related businesses may augment the market power of the

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diversified company which in turn may help the company enhance its long-term
strategic position. Sharing technology in turn leads to cross-promotion.

Managerial Relatedness

“Managerial relatedness” factor encompasses five variables namely V11

“Businesses share management information system (M.I.S.)”, V12 “Businesses
require the same management skills”, V15 “Businesses share corporate culture”, V16
“Businesses aim at the same corporate goals” and V17 “Businesses use the same
strategic concepts” to run the business. This factor encompassed of those items, which
are important in strategic decisions. “Managerial Relatedness” factor is ranked as
sixth important factor.

So, it was found through the questionnaire that managers perceive financial
relatedness as highest important followed by market relatedness and service
relatedness, which are ranked as second and third respectively. Size relatedness and
Technology relatedness perceived as fourth and fifth important factors respectively,
according to the ranking. Managerial relatedness ranked as sixth important type of
relatedness aimed to be perceived from diversification.

4.5 Conclusion

This chapter has outlined the nature and extent of diversification in banks in
India. In respect of the nature of diversification in banks in India, mostly banks have
started adopting diversified measures after the enactment of financial and economic
sector reform of 1991.Out of the total 48 banks, consisting of public and private
sector banks, 19 banks are diversified while majority of banks i.e, 29 banks are not
diversified. But here it is important to mention that those of the non-diversified banks
hold very less proportion in term of market and asset size. The trend towards adopting
diversification in banks was found highest in respect of SBI and nationalized banks
followed by private sector banks as only new generation banks are diversified. SBI
group has emerged as one of the well-diversified bank by venturing into number of

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banking and non-banking business through subsidiaries, joint ventures and tie-ups.

In second part, diversification index of banking sector in India is measured in

which State Bank of India, over the time period of 1994 to 2006 remained highly
diversified as per entropy measure. A mixed trend is seen in the diversification index
of private banks and nationalized banks. However from year 2002 onwards,
diversification index of private banks has increased continuously. In the third part,
manager’s perception regarding type of relatedness, across different business lines of
banks. It was found that managers perceive broadly six types of relatedness from
diversification in the banking sector namely, Financial Relatedness, Managerial
Relatedness, Service relatedness, Size Relatedness, Technology Relatedness and
Marketing relatedness.

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