An empirical analysis of macroeconomic and bank-specific factors affecting liquidity of Indian banks

Abstract

This paper investigates bank-specific and macroeconomic factors that determine the liquidity of Indian banks. To explore the association, we perform OLS, fixed effect and random effect estimates on a data set of 59 banks from 2000 to 2013. Studied bank-specific factors include bank size, profitability, cost of funding, capital adequacy and deposits. GDP, inflation and unemployment are the macroeconomic factors considered. We also perform liquidity trend analysis of Indian banks based on ownership. Findings reveal that bank ownership affects liquidity of banks. Based on panel data analysis, we suggest that bank-specific (except cost of funding) and macroeconomic (except unemployment) factors significantly affect bank liquidity. These include bank size, deposits, profitability, capital adequacy, GDP and inflation. Further, bank size and GDP were found to have a negative effect on bank liquidity. On the other hand, deposits, profitability, capital adequacy and inflation showed a positive effect on bank liquidity. Cost of funding and unemployment showed an insignificant effect on bank liquidity. Our paper highlights new facts for enhanced understanding of liquidity in emerging economies like India.

Keywords

• Banks liquidity
• Bank specific
• Macroeconomic
• Fixed and random effect