A comparative study of liquidity determinants of private and public sector banks

Abstract

India is one of the few countries in the world, which follows a prescriptive regulatory policy for liquidity management in banks. These policies affect different groups of banks in different ways. The main objective of this study is to examine the liquidity determinants of private and public sector banks in India on a comparative basis to assess the effectiveness of liquidity management policies for each type of bank in India. For this purpose, this study analyses the long-term effect of various macroeconomic, microeconomic, and regulatory policies on liquidity management by both groups of banks from 1996 to 2016. The findings of the study show that public sector banks rely on asset-based liquidity, and private sector banks also rely on asset-based liquidity. In the case of both private and public sector banks, this study found a significant relationship between the liquidity and several explanatory variables – call rate, discount rate, cash reserve ratio, capital to total assets, foreign exchange reserve with RBI and Size (LogTA). It also observed that in private banks some factors – LogTA (in L1); CapitalTA (in L1 & L4) and SLR (in L3 & L4) – had a significant positive effect while other factors – Fxreserve and ROE (in L2) – had a significant negative relationship with the liquidity. Similarly, in public banks, some factors – discount rate (in L4); ROE (in L2 & L3) and NPA/Advances (in L4) – had a significant positive effect while other factors – CapitalTA (in L3 & L4); CRR (in L4); NPA/Advances (in L3), and LogTA (in L1) – had a significant negative relationship with the liquidity. The findings of this study question the appropriateness of applying a similar type of regulatory measures for all groups of banks by the regulators for liquidity creation