To read this content please select one of the options below:

Determinants, persistence and value implications of liquidity creation: an evidence from Indian banks

Naina Grover (Faculty of Management Studies, University of Delhi, New Delhi, India)
Pankaj Sinha (Faculty of Management Studies, University of Delhi, New Delhi, India)

Journal of Asia Business Studies

ISSN: 1558-7894

Article publication date: 19 February 2021

Issue publication date: 9 April 2021

407

Abstract

Purpose

The purpose of this paper is to explore the micro and macro factors affecting liquidity creation by scheduled commercial banks (excluding Regional Rural Bank) in India from 2005 to 2018.

Design/methodology/approach

Two measures of liquidity creation, the broad and narrow measures, are constructed using RBI data available on Indian banks. System generalized method of moments has been applied to explore the factors affecting liquidity creation.

Findings

This study finds high level of persistence in liquidity creation in banks. Variation in the broad measure is explained by equity ratio, market share, GDP, gross savings and lending rate, whereas the narrow measure is explained by equity ratio, market share, size and lending rate. The Global Financial Crisis had a negative effect on liquidity creation as per both the measures, and the impact was more severe for the broad measure as compared to the narrow measure.

Research limitations/implications

This study finds a positive correlation between bank value and liquidity creation which suggests that the investors favourably evaluate banks that create more liquidity. This study is confined to India only.

Practical implications

There is a negative influence of capital on liquidity created by banks, which implies a trade-off that exists between financial stability and liquidity creation. Basel III norms impose higher capital and liquidity standards which will have negative implications for liquidity creation.

Originality/value

To the best of authors’ knowledge, this is the first study in the Indian context that focusses on factors affecting liquidity creation in a dynamic framework and determines the relationship between liquidity creation and market value of a bank.

Keywords

Acknowledgements

Authors would like to thank the anonymous reviewers for their insightful suggestions and comments.

Citation

Grover, N. and Sinha, P. (2021), "Determinants, persistence and value implications of liquidity creation: an evidence from Indian banks", Journal of Asia Business Studies, Vol. 15 No. 2, pp. 384-400. https://doi.org/10.1108/JABS-06-2019-0192

Publisher

:

Emerald Publishing Limited

Copyright © 2021, Emerald Publishing Limited

Related articles