Abstract
The present paper explores the determinants of liquidity risk in Indian banks by examining the bank specific and macroeconomic factors that affect a bank's liquidity holdings. The bank specific determinants analysed in the study include bank-size, deposit rate, profitability, asset quality, funding cost and the rate of capitalization in a bank. While the growth rate of Gross Domestic Product (GDP) and the inflation rate constitute the macroeconomic determinants. To analyse the effect of these determinants on bank liquidity, the study employs a panel data analysis on 45 Indian banks comprising of State Bank of India (SBI) group banks, Nationalized banks and Private banks observed over a period of 12 years from Financial Year (FY) 2005 to 2016. The findings of the empirical analysis reveal that among bank-specific determinants, the size, profitability level, funding cost and the quality of assets negatively influence the liquidity risk of Indian banks. Whereas the rate of deposits and the capitalization rate have a positive effect. Amongst the macroeconomic determinants inflation rate and GDP growth rate is found to have a positive and negative association with bank liquidity respectively.
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