Interrelationship Among Competition, Diversification and Liquidity Creation: Evidence from Indian Banks. (May 2021)

• Record Type: Journal Article
• Authors: Sinha, Pankaj; Grover, Naina
• Is Part Of: Margin. Volume 15:Number 2(2021)
• Page Start: 183
• Page End: 204
• Publication Date: 2021-05
• Subjects: Competition -- Crisis -- Diversification -- Liquidity creation -- Scheduled commercial banks; Economics -- Periodicals; Economics -- India -- Periodicals; Economics -- Asia -- Periodicals; Economic policy -- Periodicals; Economic development -- Periodicals; Economic development -- India -- Periodicals; Economic development -- Asia -- Periodicals; India -- Economic policy -- Periodicals; Asia -- Economic policy -- Periodicals; 338.9
• DOI: 10.1177/0973801021990398
• Languages: English
• ISSNs: 0973-8010

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