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The IUP Journal of Applied Finance

Bank Capital, Bank Liquidity and Credit Growth: Evidence from India

Article Details

Pub. Date	:April, 2019
Product Name	: The IUP Journal of Applied Finance
Product Type	: Article
Product Code	: IJAF21904
Author Name	: Sangeeta D Misra
Availability	: YES
Subject/Domain	: Finance
Download Format	: PDF Format
No. of Pages	: 20

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Abstract

This study aims at assessing the impact of bank capital, bank liquidity and interaction of bank capital and bank liquidity on the credit growth of Indian banks. The sample of the study includes 26 Indian public sector banks, 19 Indian private sector banks and 25 foreign banks incorporated in India. The time frame chosen for the study is from 2004-05 to 2015-16. The dynamic panel Generalized Method of Moments (GMM) system suggested by Blundell and Bond (1998) has been used to assess the impact of banks’ capital and banks’ liquidity on their credit growth. The results of the study indicate that after controlling for other bank-specific variables and after also controlling for macroeconomic variables, both bank capital and bank liquidity have a positive and significant impact on credit growth. The analysis of the impact of interaction of bank capital and bank liquidity on credit growth indicates that the effect of bank capital on credit growth is higher for banks which are less liquid than for banks which have high liquidity. The results further show that the impact of both bank capital and bank liquidity is higher for public sector banks than for private sector and foreign banks.

Description

The main concern of the central bank of any country is to ensure the financial stability of the banking system of its country. This concern has further intensified after the financial crisis of 2007-08. This concern of the central bank of a country can be addressed if the commercial banks of that country are adequately capitalized and have sufficient liquidity to mitigate their credit risk and liquidity risk which may arise as a result of loans and advances made by banks. However, pressure on commercial banks via regulatory norms to have high capital and liquidity may adversely affect the capacity of the banks to make loans and advances which in turn may hamper the economic growth of the country.