The Determinants of Liquidity of Indian Listed Banks

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The Determinants of Liquidity of Indian Listed Commercial Banks is a well-researched topic, it can be used as a guide or framework for your Academic Research.

Abstract:

The objective of this study is to examine the liquidity (LQD) determinants of Indian listed commercial banks. The study has applied both GMM and pooled, fixed and random effect models to a panel of 37 commercial banks listed on the Bombay Stock Exchange (BSE) in India for the period from 2008 to 2017.

The banks’ LQD was taken as a dependent variable that functioned against both bank-specific and macroeconomic determinants. The results indicated that among the bank-specific factors, bank size, capital adequacy ratio, deposits ratio, operation efficiency ratio, and return on assets ratio are found to have a significant positive impact on LQD, while assets quality ratio, assets management ratio, return on equity ratio, and net interest margin ratio is found to have a significant negative impact on LQD.

With respect to macroeconomic factors, the results indicated that the interest rate and exchange rate are found to have a significant effect on LQD. The Reserve Bank of India (RBI) should give benchmarks for the above-mentioned ratios to achieve smooth LQD of commercial banks in India. The study recommended that bankers should consider assets quality in such a way that improves banks’ performance. Finally, the current study provides useful insights for bankers, analysts, regulators, investors, and other interested parties on the LQD of listed commercial banks.

Introduction

As banks have become one of the most vital components of any financial system, ensuring the stability of the banking sector has gained significant importance as a policy initiative worldwide. Banking stability as an economic indicator can be used to determine whether an economy is robust enough to withstand both internal and external shocks. Banking stability in itself is a function of several health parameters of individual banks. For example, asset quality, LQD risk, capital adequacy, performance, etc. (Reserve Bank of India, 2013).

LQD in the context of banking may be explained as the capacity of a bank to fund asset growth and meet both expected and unforeseen cash and collateral obligations at a sensible cost and without incurring unacceptable losses (Settlements, B. for I, 2008).

“Liquidity risk is the bank’s inability to meet such obligations as they become due, without adversely affecting the bank’s financial condition” (RBI, 2012). According to the guidelines of the Reserve Bank of India (2012), “liquidity is a bank’s capacity to fund an increase in assets and meet both expected and unexpected cash and collateral obligations as they become due”.

“Although Indian banks have largely been able to adhere to the guidelines of the Reserve Bank of India for managing liquidity, factors affecting liquidity in Indian banks remain relatively unidentified owing to a scarcity of studies on the management of liquidity in Indian banks” (Bhati & Zoysa, 2012).

Many investigators, such as Ratnovski (2013), report that the primary role of banks as creators of LQD makes them vulnerable to LQD risks. Arif and Nauman Anees (2012) noted that the LQD risk is at a rate of the inability of the bank to meet its financial obligations without loss of incurring the undesirable expenditure. Such a situation would depend on financial stability.

It is better for banks to maintain adequate liquid storage. After putting off the financial reason, assume that bank solvency is the root cause. Basel Committee on Banking Supervision (2010) suggested solvency, LQD formation by banks, and new capital rules such a situation in the future. Mandatory Seals. Matz and Neu (2007) found that LQD management was often considered a secondary risk in banking literature before the global financial crisis.

However, after the performance, the attention of policymakers and researchers has been drawn. However, it should be noted that subsurface literature on banks’ inadequate risk management practices. So, inadequate LQD has gained considerable attention and a major concern for banks (Jenkinson, 2008).

The present study aims to examine the determinants of LQD of Indian listed commercial banks. In the process, it will empirically investigate both internal (bank-specific) and external (macro-economic) determinants that affect the listed banks’ LQD in India.

The present study seeks to fill the existing gap by empirically analyzing bank specifics variables such as assets size (LOGA), capital adequacy (CA), deposits (DEP), assets quality (AQ), assets management (AM), profitability (ROA, ROE, NIM), operation efficiency (OPEF), and non-interest income (NII)), and macroeconomic determinants such as (economic activity (GDP), inflation rate (IFR), an exchange rate (EXCH), and interest rate (INTRT).

The study is organized in the following manner. Section 2 presents an overview of Indian banking and LQD trends of Indian listed banks. Section 3 discusses the relevant literature of the study. Section 4 explains the data and methodology used in the study. Section 5 shows the results of our empirical analysis, and Section 6 conclusion, recommendations, and directions for future research.

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Additional information

Type

Project Topic and Material

Category

Accounting

No of Chapters

5

Reference

Yes

Format

PDF

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