Regulatory Liquidity Management and Asset Quality in Indian Banks: A Comparative Data-Driven Panel Analysis (JOURNAL OF MANAGEMENT)

Summary

• The study examines the link between the Liquidity Coverage Ratio (LCR) and non-performing assets (NPAs) using a balanced panel of 28 banks.p.2
• The final balanced panel consists of 28 banks observed over 10 years.p.7
• Mean NPA is 3.03 across banks, 4.50 for public sector banks and 1.93 for private sector banks.p.8
• The average LCR is 158.31, with a range between 40 and 498.61.p.8
• Across the sector, LCR is positively associated with NPA at the 5% level, with β = 0.00616 under the Random Effects model.p.9
• For public sector banks LCR is positive but insignificant (β = 0.00176, p = 0.551).p.10

Key insights

1. Higher liquidity buffers are related to deteriorating asset quality across the overall Indian banking system.p.2
2. Under Basel III the LCR must be at least 100%, meaning high-quality liquid assets fully cover expected stressed outflows.p.4
3. Up to 75% of total outflows can be offset by inflows in the LCR calculation.p.4
4. The Hausman test (p = 0.083) favours the random effects model, and approximately 58% of the variation in NPAs is explained.p.9
5. The mean LCR is 163.43 for public sector banks and 154.57 for private sector banks.p.8
6. Capital adequacy and return on assets show negative coefficients with NPAs, so better-capitalised and more profitable banks have fewer NPAs.p.9
7. Private sector banks show a positive relationship between LCR and NPA that is significant at the 5% level.p.10
8. The author argues that uniform Basel III liquidity rules for public and private banks are ineffective and recommends differentiated LCR thresholds.p.13