Impact of bank’s liquidity on financial distress of Indian banks under the influence of profitability and competition

Jagjeevan Kanoujiya, Aman Pushp, Shailesh Rastogi and Venkata Mrudula Bhimavarapu ()
Additional contact information
Jagjeevan Kanoujiya: Symbiosis Institute of Business Management Nagpur, Symbiosis International (Deemed University) Pune
Aman Pushp: Symbiosis Institute of Business Management Nagpur, Symbiosis International (Deemed University) Pune
Shailesh Rastogi: Symbiosis Institute of Business Management Nagpur, Symbiosis International (Deemed University) Pune
Venkata Mrudula Bhimavarapu: Symbiosis institute of business Management, Bengaluru; Symbiosis International (Deemed University), Pune, India

Humanities and Social Sciences Communications, 2025, vol. 12, issue 1, 1-10

Abstract: Abstract A bank’s capability to have sound liquidity and financial health is essential for smooth business operations. Hence, this study’s aim is to estimate the liquidity’s impact on bank’s financial distress in India. Altman Z-score as the measure of financial distress is taken for the study. A panel data econometrics is performed to a sample of 24 banks in India from 2012-2022. Here, banks are panel units with 13 years of time dimensions. All diagnostic tests are performed to ensure the appropriateness of the model development. This study finds that a bank’s liquidity positively affects a bank’s financial distress (FD) or lowers the financial stability in a linear establishment. It is further observed in the non-linear establishment that two variables (liquidity and FD) have a significant connection with a U-curved association. It implies that liquidity is beneficial for reducing FD but only helps banks to a certain extent; after that, it increases FD or reduces financial stability, as found in linear association. It is also found that profitability and competition as moderators lower the liquidity and financial stability connection association. It also means liquidity enhances a bank’s FD if profitability and competition are higher. The current findings deliver policy and management implications to all stakeholders. It indicates liquidity is one of the key elements for a bank’s financial soundness. However, if liquidity does not gain competitive advantage (or market power) and profitability benefits, it can not improve a bank’s financial soundness. Hence, liquidity should be taken very critically for banking decisions. A few studies in the literature talk about liquidity’s connection with FD. This study looks at the relation between liquidity and FD comprehensively. It investigates linear and non-linear links between them. In addition, it also looks for the influence of profitability and competition on their association. We believe no other study has been conducted to determine the liquidity and FD connection in the manner this study is done to give a comprehensive view by exploring different scenarios.

Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1057/s41599-025-06015-z Abstract (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pal:palcom:v:12:y:2025:i:1:d:10.1057_s41599-025-06015-z

Ordering information: This journal article can be ordered from
https://www.nature.com/palcomms/about

DOI: 10.1057/s41599-025-06015-z

Access Statistics for this article

More articles in Humanities and Social Sciences Communications from Palgrave Macmillan
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().