Liquidity Regulation and Bank Performance: The Industry Perspective

The present study examines the impact of the new liquidity framework on the performance of Indian banks by conducting in-depth interviews with industry experts. The study adopts a holistic performance framework by including both profitability measures and non-performing asset levels of banks. The study further investigates the role of bank-specific factors like ownership structure [promoters vs. institutional investors, Transparency and Disclosure Practices (T&D), and Information, Communication, and Technology (ICT)] in altering the association of liquidity ratios with bank performance. The industry experts highlight that initially, as banks begin to comply with the LCR standard and liquidity is low, banks’ profitability tends to suffer. However, as the LCR of banks increases further and banks hold sufficient liquid assets, the profits start improving. When analyzing the impact of NSFR on bank profitability, experts confirm that NSFR adversely impacts bank profits. On the NPA side, practitioners argue that though NSFR would have no bearing on the NPA levels of banks, LCR has a favorable influence on the same. The study provides crucial information that can be leveraged by national regulators/policymakers and bank strategists to re-align the regulation or compliance strategies to augment the outcome of the benefits of the new regulatory framework.