Study on liquidity of Indian banks: an empirical analysis of scheduled commercial banks

Abstract

We study the impact of profitability, net interest margin, non-performing assets, capital adequacy ratio, bank size, deposits and cost of funding on liquidity of Indian banks. To examine this relationship, we have taken annual data pertaining to 64 Indian banks from the period 2000 to 2014. Banks considered include all private, foreign and public sector banks operating in India from 2000 to 2014. Using fixed effect estimates, we find that capital adequacy ratio, deposits and profitability influence Indian bank liquidity positively while bank size, non-performing assets and net interest margin affect Indian bank liquidity negatively. Cost of funding does not affect liquidity of Indian banks significantly. Findings of our study have significant implications for bankers, policy makers and researchers advocating the relationship of liquidity and factors such as bank size, profitability, net interest margin, non-performing assets, capital adequacy ratio, cost of funding and deposits and highlighting the possible reason behind that. The study would help in appropriate policy formulation, decision making and maintaining adequate liquidity in the banking system.