The determinants of liquidity of Indian listed commercial banks: A panel data approach

Eissa A Al‐Homaidi,Faozi A Almaqtari,Mosab I Tabash,Najib H Farhan,Stephanos Papadamou

doi:10.1080/23322039.2019.1616521

Eissa A Al‐Homaidi, Faozi A Almaqtari + Show 3 more

Open Access

https://doi.org/10.1080/23322039.2019.1616521

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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 which 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 are found to have a significant negative impact on LQD. With respect to macroeconomic factors, the results indicated that 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.

Highlights

As banks have become one of the most vital components of any financial system, ensuring stability of the banking sector has gained significant importance as a policy initiative worldwide
The results indicated that 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
In the term of macroeconomics determinants, the findings reveal that only gross analysis domestic product (GDP) has a significant effect on LQD, while inflation rate (IFR) rate, interest rate (INTRT) rate, and exchange rate (EXCH) rate have an insignificant impact on LQD

Summary

Introduction

As banks have become one of the most vital components of any financial system, ensuring stability of the banking sector has gained significant importance as a policy initiative worldwide. “Liquidity risk, bank-size, deposit rate, profitability, asset quality, funding cost and the rate of capitalization, growth rate of gross domestic product (GDP) and the inflation rate”. “Liquidity risk, bank size, capitalization, assets Regression analysis quality, specialization, dummy crisis, dummy variables linked to the listed or non-listed aspect, growth rate of gross domestic product growth, and inflation rate”. The results indicated that among internal (bank-specific) determinants, the size, profitability level, funding cost, and the quality of assets negatively impact the LQD risk of Indian commercial banks. Inflation rate and GDP growth rate have a positive and negative association with bank LQD respectively

Data and methodology

Data analysis and results

Findings

Conclusion and recommendations