Bank specific determinants of liquidity of public and private sector banks

Abstract

For the upliftment of an economy, a healthy and strong banking sector is of paramount importance. The efficiency and viability of banks is much affected by the liquidity level they possess. Liquidity refers to the assets that are either in form of cash or immediately convertible into cash without any serious loss of time and money. Direct cash holding in currency or holding creditworthy securities including government bills with short term maturities provides liquidity to a bank. This paper investigates the factors that determine liquidity of Indian banks and compares the determinants in case of public and private sector banks. Using panel data, empirical analysis is carried out on the commercial banks of India for the period 2005 to 2017. The bank specific factors included are bank size, deposits, cost of funds, capital adequacy ratio, non performing assets and ROE. The result shows determinants of liquidity vary for both banking groups. Public sector banks with an increase in their size, increases the amount of liquid assets adequately to manage liquidity risk. However, private sector banks relying more on financial markets with their increasing size holds less liquidity.