The Effect of Liquidity Management on Profitability : A Comparative Analysis of Public and Private Sector Banks in India

This paper makes an attempt to study the effect of liquidity management on the profitability of public and private sector banks in India. For this purpose, 27 public sector banks and 20 private sector banks have been considered for the periods 2011-12 and 2015-16. Cash-Deposit Ratio (CDR), Credit-Deposit Ratio (CRDR) and Investment-Deposit Ratio (IDR) have been used as independent variables to denote the liquidity management of the banks, while Return on Assets (ROA) and Return on Equity (ROE) have been used as proxy variables for the profitability of the banks. It is found that there is a significant negative effect of CDR and IDR on ROA. However, in the case of ROE, it is found that there is no significant relationship between banks' profitability and liquidity taking all the variables into consideration, irrespective of the type or form of commercial banks in India. This leads to the conclusion that the commercial banks can focus on increasing their profitability without affecting their liquidity and vice versa