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Estimation of liquidity created by banks in India

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  • Sinha, Pankaj
  • Grover, Naina

Abstract

Risk transformation and liquidity creation are the two key functions of a bank. Liquidity Creation plays a very important role in the economy, but there is no comprehensive measure of liquidity creation that exists in our country. This study estimates the notional value of liquidity created by Scheduled commercial banks in India during the period 2005 to 2018. We have developed four measures of liquidity creation by Indian Banks,following Berger and Bouwman (2009). We have estimated Liquidity created by Banks in India is Rs.41524096 million in FY 17-18, which is 27.2 percent of total assets of all Scheduled Commercial Banks (excluding Regional Rural Banks),as per broad measure. We found off-balance sheet activities play a significant role in liquidity creation, 25 percent of the total liquidity creation as per broad measure is found to be determined by the off-balance sheet activities. Recently, there have been discussions to privatize the nationalized banks, but our study found that for FY17-18, nationalized banks contributed around 68.2 percent of total liquidity creation whereas private banks and foreign banks contributed 29.7 percentand 2.0 percent, respectively. Nationalized banks are performing quite well in liquidity creation. Though the total number of foreign banks has increased from 31 in 2005 to 45 in 2018, we found a declining trend in creating liquidity by the foreign banks. We have also estimated liquidity creation based on size. The study finds that large banks are contributing significantly towards the liquidity creation, which constitutes 94% of total liquidity creation as per broad measure.

Suggested Citation

  • Sinha, Pankaj & Grover, Naina, 2019. "Estimation of liquidity created by banks in India," MPRA Paper 92563, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:92563
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    References listed on IDEAS

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    Cited by:

    1. azahar, intan nur asyiqin, 2019. "An Analysis Of Performance In E-Commerce Industry," MPRA Paper 97210, University Library of Munich, Germany.
    2. Pankaj Sinha & Naina Grover, 2021. "Interrelationship Among Competition, Diversification and Liquidity Creation: Evidence from Indian Banks," Margin: The Journal of Applied Economic Research, National Council of Applied Economic Research, vol. 15(2), pages 183-204, May.
    3. Abdul Latif, Nurul Atikah, 2019. "The Impact of Liquidity Risk on Internal and External Factors," MPRA Paper 97222, University Library of Munich, Germany.
    4. Grover, Naina & Sinha, Pankaj, 2019. "Determinants, Persistence and value implications of liquidity creation: An evidence from Indian Banks," MPRA Paper 94280, University Library of Munich, Germany.

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    More about this item

    Keywords

    Risk transformation; liquidity creation; Scheduled commercial banks; Off-balance sheet activities;
    All these keywords.

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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