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

Author

Listed:
  • Pankaj Sinha

    (Pankaj Sinha (corresponding author) is Professor, Faculty of Management Studies, University of Delhi, New Delhi, India.)

  • Naina Grover

    (Naina Grover is Research Scholar, Faculty of Management Studies, University of Delhi, New Delhi, India. E-mail: naina9711@gmail.com)

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

Suggested Citation

  • Pankaj Sinha & Naina Grover, 2021. "Interrelationship Among Competition, Diversification and Liquidity Creation: Evidence from Indian Banks," Margin: The Journal of Applied Economic Research, National Council of Applied Economic Research, vol. 15(2), pages 183-204, May.
    • Handle: RePEc:sae:mareco:v:15:y:2021:i:2:p:183-204
    DOI: 10.1177/0973801021990398
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    More about this item

    Keywords

    Competition; Crisis; Diversification; Liquidity creation; Scheduled commercial banks;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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