International Journal of Control Theory and Applications

ISSN : 0974-5572

„ International Science Press

Volume 10  •  Number 40  •  2016

Impact of m-Banking on Profitability of Scheduled Commercial

Banks in India
Shobhit Wadhwaa
Assistant Professor, ACCF, Amity University, NOIDA
a

Abstract : Banking sector has always been the lifeblood of any economy and specifically of developing economies.
With advent developments and technological advancements this sector has seen a transformation from its conventional
form to e-banking and recently to m-banking. The present study is an attempt to describe the current state of Mobile
banking in India. This paper is an assessment towards the impact of m-banking on the profitability of scheduled
commercial banks in India.The data pertaining to the usage of mobile banking and profitability measures of all
scheduled commercial banks in India has been collected through RBI website for the period from 2012 to 2016. It
was found in the study that although the usage of m-banking has tremendously increased during the period of study,
it has not played any significant role towards improvisation in the profitability of these banks. Also m-banking has
been suffering from network effect as currently it is in its developing stage and most of the banks have recently
included the concept of m-banking in the portfolio of their services. It has been opined in the paper that if all the
banks could proceed to the path of m-banking in a proper manner, the overall profitability due to m-banking will
improve in coming years.
Keywords:

1. INTRODUCTION
Banking sector has always been an important sector in the economy of any country and developing economies
are primarily dependent on the growth of this sector. This sector is the back bone of any economy. In India
also this sector has been considered as one of the most crucial sector for the growth of the economy. But
even after almost 70 years of independence, this sector is facing a major challenge of less financial inclusion.
As per Census 2011, there were around 35% people having accounts in Banks and according to a report of
World Bank this figure rose to around 53% in 2014 which is the result of liberal government policies, rapid
globalizationand increase in the purchasing power of people. Even when the people are getting connected to
banks with their bank accounts, it was also reported that mere 15 per cent of adults use an account to make or
receive payments and this is due to lack of interests, culture, illiteracy or unawareness. The ‘Household Survey
on India’s Citizen Environment & Consumer Economy’ (ICE 360° survey) also found that 99% of households
in both rural and urban India have at least one member with a bank account which has been a major achievement
of Pradhanmantri Jan DhanYojana of current government. Numerous policies have been introduced by various
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 Shobhit Wadhwa

governments at the centrefromtime to timerealizingthe needs and tried to revive the banking sector in India. It is
the result of these policies that the banking sector in India has undergone a tremendous change during the past
few decades. There has been an enormous increase not only in the number of banking institutions but also in the
banking facilities. The banking sector in India is being expected to rise to be the fifth largest banking industry
in the world by 2020 as per a report presented by KPMG-CII. At present the Indian banking industry is worth
Rs. 81 trillion (US $ 1.31 trillion). With enormous growth and opportunities ahead, the banking industry in
India is also facing stringent competition, convertible customer loyalty, technological advancements, increasing
lifestyle and obligatory demands of customers. This has forced the banks to adopt new models and strategies
to improve productivity and render efficient customer service. In the past decade technology has advertently
affected the operations of banks with computerization of bank branches, provision of ATMs and facility of
banking through mobiles.
1.1. Indian banks: Then and now
The financial performance of Indian banks has been continuously declining during past few years. These banks
are putting all their efforts to revive the situation. This can be done through basic three measures: expansion in
consumer market, innovative products and services to woo customers and reducing their operating costs.
Our economy is being transformed into an information society. The vision of the government of digital
India is gradually becoming an integral part of the life of each and every human being.Digitalisationof economy
cannot be done without digitalization of banking services. Use of financial innovation can contribute to improved
bank performance by increasing banks market share, expand products range and customized products, improving
service delivery, reducing banks overheads and transaction related costs and increasing the geographical reach
all which contribute to profitability (Lee, Lee and Kim, 2007).Therefore banking sector is transforming itself
innovatively from its traditional appearance to e-banking and recently to m-banking approach. It is being
prospected thatthese and other next-generation solutions will help in further digitalization of transactions
making India a cashless economy in coming years. As an estimate if there is 5% growth in cashless transactions
it will effect into a saving of 500 crore rupees in a year. The effect of e-banking has also been highlighted in a
report by Pricewaterhouse Coopers (PwC) stating that branchless banking in India could expand the percentage
of citizens who have access to formal banking services (and actively using those services) from 35 per cent in
2012-2013 to 70 per cent in 2024 and 90 per cent in 2034 through investments of $28 billion, much lower than
what needs to be spent using traditional methods.
1.2. m-Banking
In India mobile services were first used in 1995 and have become the second largest in the world by number
of mobile phone users with 1.028 billion subscribers. In addition India has 462.12 million internet users with a
penetration of 34.8%. Realising the potential of mobile phone services and their possible advantages, of reducing
the cost of handling transactions,banks have adopted the concept of mobile banking as through m-banking there
will be reduced need for customers to visit a bank branch physically.
Mobile banking or m-Banking is the latest technological advancement in which all the financial transactions
can be performed by a customer through his mobile phone. In other words, m-Banking is an all-time bank in the
pocket of its customers.It uses a mobile application which is a software provided by the financial institution for
the performance of such transactions.
Tiwari, Buse and Herstatt (2006) define mobile banking as any transaction, involving the transfer of
ownership of rights to use goods and services, which is initiated and/or completed by using mobile access to
computer- mediated networks with the help of an electronic device.
Mobile banking is most often performed via SMS or mobile internet, but can also be used by special
programs called clients downloaded to the mobile device (Al-Jabir, 2012)

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 Impact of m-Banking on Profitability of Scheduled Commercial Banks in India

1.3. Typically, mobile-banking services include the following:

1.3.1. Account information

1. Mini statements and account history
2. Alerts on account activities
3. Monitoring term deposits
4. Access to loan and/or card statements
5. Insurance policy management

1.3.2. Funds transfer

1. Fund transfers between customer-linked accounts
2. Fund transfers to other accounts
3. Bill payments
4. Credit card payments

1.3.3. Investment
1. Portfolio management
2. Real-time stock quotes
3. Personalized alerts and notifications on security prices

1.3.4. Support services

1. Chequebook and card requests
2. Complaint filing and tracking
3. ATM location

2. REVIEW OF LITERATURE
Malhotra & Singh (2009) studied the impact of internet banking on Indian banks performance and found that
there is no significant association between adoption of Internet banking by banksand their performance. They
also concluded that internet banking has a negative and significantimpact on profitability of private sector banks
particularly new private sectorbanks. The reasons of lower profitability of these banks were pointed out to be
higher cost of operations, including fixed cost and labour cost.
Gakure and Ngumi (2013) studied the influence of innovations in profitability of commercial banks, and
concluded that bank innovations have a moderate influence on profitability of commercial banks in Kenya.
The analysis produced a coefficient of determination of 47.8% which showed the percentage of variations in
profitability which is explained by bank innovations.
Young, Lang and Nolle (2006) studied the effect of Internet on output and performance of community
banks in US and concluded that   Internet adoption improved community bank profitability, chiefly through
increased revenues from deposit service charges.

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 Shobhit Wadhwa

Sumra, Manzoor& Abbas (2011) in their study ‘The Impact of E-Banking on the Profitability of Banks: A
Study of Pakistani Banks’ found that  e-banking has increased the profitability of banks and enabled the banks
to meet their costs and earn profits.
Shirley and Sushanta (2006) studied the impact of information technology on the banking industry and
analyzed both theoretically and empirically how information technology related spending can affect bank profits
via competition in financial services that are offered by the banks.
Kigen (2010) studied the impact of mobile banking on transaction costs of microfinance institutions and
found that, mobile banking had reduced transaction costs considerably. It was also found that the banks did not
feel such impact due to small mobile banking customer base.
Kathuo, Rotich &Anyango (2015) in a study of banks in Kenya found that due to the offering of various
mobile banking products, the financial performance of these banks had improved.
The evidence of the impact of internet on performance of banks has been majorly explored in many
researches and it has been found that the usage of internet in banking services generally known as e-banking
has shown significant relationship with the profitability of banks. The most important and recent advancement
in e-banking is m-banking. Mobile banking is providing financial intermediation to banks by extending their
geographical reach. Greater accessibility, convenience and attractiveness in general has been increasing the
customer base of banks. Attracting more customers means more business for banks creating higher revenues
and reduced operating costs, thus affecting the profitability of the banks. With the advent of cashless economy
and demonetization policy of present Government of India there is a huge growth in the provision and usage of
m-banking services in India. But the relationship of these two concepts and effects of m-banking on profitability
of Indian banks has been an area unexplored. This paper is an attempt to study whether the same correlation of
e-banking and financial performance is applicable in case of m-banking and profitability also.

3. OBJECTIVES OF THE STUDY

1. To determine the relationship of m-Banking on the profitability of scheduled commercial banks of India
2. To assess the impact of m-Banking on the profitability of scheduled commercial banks of India.

4. RESEARCH METHODOLOGY

4.1. Research Design

The present study is empirical in nature and has adopted the descriptive research design as it intends to study
the past performance of banks and the impact of m-banking on their performance.

4.2. Population
The study is based on all scheduled commercial banks in India. The scheduled commercial banks are those
banks which are included in the second schedule of RBI Act 1934 and which carry out the normal business
of banking such as accepting deposits, giving out loans and other banking services. As per RBI Scheduled
Commercial Banks can be grouped under following categories:
1. State Bank of India and its Associates
2. Nationalised Banks
3. Foreign Banks
4. Regional Rural Banks
5. Other Scheduled Commercial Banks.

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 Impact of m-Banking on Profitability of Scheduled Commercial Banks in India

In all there are around 300 Scheduled Commercial Banks in India.

Figure 1: Classification of Scheduled Banks in India

4.3. Concept Diagram

In order to analyse the impact of m-banking on the profitability of scheduled commercial banks, the researcher
has considered Volume of transactions and Value of transactions as the factors of m-banking and Profitability
has been considered in terms of Return on Assets (ROA) and Return on Equity (ROE).

Figure 2

4.4. Data Collection

Data has been collected from secondary sources i.e. from the statistics provided by the regulating authority of
commercial banks in India i.e. RBI. Various reports published by RBI have also been considered. The period of
study is from 2011-12 to 2015-16.

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 Shobhit Wadhwa

5.4. Tools and Techniques

The establishment of relationship and the study of impact of m-banking on ROA and ROE has been done
through multiple regression technique. The following regression model has been used:
Y = β0 + β1X1 + β2X2
Where Y = Profitability of banks
X1 = Volume of mobile banking transactions
X2 = Value of mobile banking transactions
β0 = Constant
β1, β2 = relationship coefficients between dependent and independent variables

5.5. Data Analysis and Interpretation

Figure 2

Source: RBI

The analysis of above data presents that the number of transactions performed through m-banking have
significantly shown a growth during the period of study. From a nominal number of 25.56 million transactions
during 2011-12 it rose to 389.5 million transactions during 2015-16. This shows the attraction of customers
towards m-banking which may be assigned to various reasons such as convenience, technological advancement,
literacy etc.

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 Impact of m-Banking on Profitability of Scheduled Commercial Banks in India

Figure 3
Source: RBI
The above data shows that there has been a huge rise in the value of transactions performed through
m-banking as it rose from Rs18.2 billion in 2011-12 to Rs4040.9 billion in 2015-16. The technological
advancement, RBI guidelines, Reduced risk may be the factors for this unprecedented growth.
The profitability of the banks has been analysed on the basis of Return on Assets (ROA) and Return on
Equity (ROE). The performance of banks in relation to ROA and ROE has been presented in Fig. 3 & Fig. 4

Figure 3
Source: RBI

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 Shobhit Wadhwa

The data related to ROA (Fig. 3) and ROE (Fig. 4) establish that there has been a sharp and continuous
decline in the profitability of commercial banks during the period of study. ROA was slightly above 1 in 2011-
12 and was quite satisfactory but declined in 2013 to 0.81 and further drastically to 0.31 in 2015-16 and posed
a question of concern. Similarly ROE was near to 15 in 2011-12 and declined poorly to 3.59 in 2015-16.
The analysis provides that this declination in profitability is quite contrast to the expectation as provided by
technological advancements in the banking sector.

Figure 4
Source: RBI

5.6. Impact of m-banking on ROA of banks

Table 1

Regression Statistics
Multiple R 0.980638881
R Square 0.961652614
Adjusted R Square 0.923305229
Standard Error 0.084373033
Observations 5

Table 2

ANOVA
  df SS MS F Significance F
Regression 2 0.357042383 0.178521191 25.0774 0.038347
Residual 2 0.014237617 0.007118809
Total 4 0.37128      

The probability value of 0.038347 indicates that the regression relationship was highly significant in predicting
how mobile banking affect profitability of commercial banks. The F calculated at 5% level of significance is
25.0774 and since F calculated is greater than the F critical (F.05,2,2 =19), this shows that the overall model was
significant.

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 Impact of m-Banking on Profitability of Scheduled Commercial Banks in India

Table 3

  Coefficients Standard Error t Stat P-value Lower 95% Upper 95%

Intercept 1.143194434 0.108066065 10.57866254 0.008818 0.678224 1.608165
X Variable 1 -0.002702662 0.001742005 -1.551465728 0.260959 -0.0102 0.004793
X Variable 2 5.7732E-05 0.000149275 0.38675001 0.736213 -0.00058 0.0007

Y = 1.1431 + (-0.0027) X1 + 0.000057 X2

The regression equation above has established that taking two factors of mobile banking (volume and
value of mobile banking transactions) at zero, the Return on Assets of commercial banks in India will be 1.143.
The findings presented also show that taking all other independent variables at zero, a unit increase in the
volume of mobile banking transactions would lead to a 0.0027 decrease in the ROA of commercial banks in
India while a unit increase in the annual amount of money moved through mobile banking scores of number of
users of mobile banking would lead to a 0.000057 increase in the ROA of commercial banks in India.

5.7. Impact of m-banking on ROE of banks

Table 4

Regression Statistics
Multiple R 0.983995
R Square 0.968246
Adjusted R Square 0.936493
Standard Error 1.096104
Observations 5

Table 5

ANOVA
  df SS MS F Significance F
Regression 2 73.27023 36.63512 30.49257 0.03175352
Residual 2 2.402888 1.201444
Total 4 75.67312      

The probability value of 0.03175352 indicates that the regression relationship was highly significant
in predicting how mobile banking affect profitability of commercial banks. The F calculated at 5% level of
significance is 30.49257 since F calculated is greater than the F critical (F.05,2,2 =19), this shows that the overall
model was significant.
Table 6

  Coefficients Standard Error t Stat P-value Lower 95% Upper 95%

Intercept 15.64466 1.403904 11.14368 0.007957 9.604151305 21.68517
X Variable 1 -0.04285 0.022631 -1.89343 0.198811 -0.140221648 0.054522
X Variable 2 0.00119 0.001939 0.613757 0.601884 -0.007153704 0.009534

Y = 15.6446 – 0.0428 X1 + 0.00119 X2

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 Shobhit Wadhwa

The regression equation above has established that taking two factors of mobile banking (volume and
value of mobile banking transactions) at zero, the ROE of commercial banks in India will be 15.6446. The
findings presented also show that taking all other independent variables at zero, a unit increase in the volume of
mobile banking transactions would lead to a 0.0428 decrease in the ROE of commercial banks in India while
a unit increase in the annual amount of money moved through mobile banking scores of number of users of
mobile banking would lead to a 0.00119 increase in ROE of commercial banks in India.

5. FINDINGS
The findings of the present study reveal that there is a huge growth in m-banking during the last 5 years.
Usage of m-banking has accelerated both in terms of volume of transactions and value of transactions during
this period. It has also been found that this enormous growth in m-banking has somehow not showed any
significant role in increasing the profitability of scheduled commercial banks in India. The two determinants
of profitability viz. Return on Assets and Return on Equity both have reduced significantly. Also the effect of
Volume of transactions on profitability has been found to be negative which may be due to transaction costs
while the impact of Value of transactions on profitability has been found positive. The profitability at present
may be low due to cost of set up and installation of system for m-banking. Shirley and Sushanta (2006) have
also opined the same in their study, that though IT might lead to cost saving, higher IT spending can create
network effects lowering bank profits. They further contend that the relationship between IT expenditures
and bank’s financial performance is conditional to the extent of network effect. They say that if network
effect is too low, IT expenditures are likely to reduce payroll expenses, increase market share, and increase
revenue and profit.
There have been initiatives from the side of the government to reduce transaction costs for m-banking
as TRAI has already announced for such reduction. It has also been found that 92% of the total value and
85% of the total volume of mobile banking transactions are accounted to only 5 banks viz. SBI, ICICI,
HDFC, Axis and Kotak Mahindra Bank. This has been one of the reason that despite of supporting the
financial performance of banks by reducing operating and administrative costs, the banking sector has been
suffering of low profitability.

6. CONCLUSION
The present study concludes that there has been a significant growth in the volume and value of mobile
transactions during the last five years. On the other hand it has also been found that the profitability of these
banks has gradually decreased. The study also found that there was significant relationship between m-banking
and profitability of banks. The decrement in the profitability due to mobile banking has been explained to be on
account of the networking effect of mobile banking.
M-Banking is one of the biggest social change being witnessed by current generation. It has eventually
affected the modes of trade and payment systems keeping in mind the convenience, demands and lifestyle of
the current generation. But still this concept of mobile banking is still in theinfant stage. The physical currency
which was earlier converted to plastic money has been transformed into virtual currency through this m-banking.
But despite of huge popularity of mobile banking, it still is affected by the networking effect and is yet unable
to explore its potential in order to increase the profitability of Indian banks. If all the banks could proceed to
the path of m-banking in a proper manner, the overall profitability will rise significantly. To further motivate
mobile banking and to support the demonetization policy as a means towards the cashless economy, TRAI has
also reduced the transaction costs of m-banking recently. Risk control, government policies and innovative
applications will further enhance the scope of mobile banking and will surely eliminate the networking effect
so as to prove as a factor in the profitability of commercial banks in India.

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 Impact of m-Banking on Profitability of Scheduled Commercial Banks in India

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