Interrelationship Among Competition, Diversification and Liquidity Creation: Evidence from Indian Banks

Pankaj Sinha and Naina Grover

Margin: The Journal of Applied Economic Research, 2021, vol. 15, issue 2, 183-204

Abstract: This study analyses the impact of competition on liquidity creation by banks and investigates the dynamics between diversification, liquidity creation and competition for banks operating in India during the period from 2005 to 2018. Using the broad and narrow measures of liquidity creation, an inverse relationship is determined between liquidity creation and competition. The study also indicates a trade-off between pro-competitive policies to improve consumer welfare and the liquidity-destroying effects of competition, and it highlights how diversification affects liquidity creation. Highly diversified banks in India create less liquidity compared with less-diversified banks, both public and private. The liquidity-destroying effects of competition is intensified among highly diversified private banks, which suggest that diversification has not moderated the adverse impact of competition. JEL Codes: G01, G18, G21, G28

Keywords: Competition; Crisis; Diversification; Liquidity creation; Scheduled commercial banks (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:sae:mareco:v:15:y:2021:i:2:p:183-204

DOI: 10.1177/0973801021990398

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