An Interaction of Credit Risk And Liquidity Risks and Its Impact on Bank Stability: Evidence from Indian Commercial Banks

Authors

  • Venkati Ponnala Department of Management Studies, Pondicherry University, Puducherry
  • R. Kasilingam Department of Management Studies, Pondicherry University, Puducherry

DOI:

https://doi.org/10.33516/maj.v54i1.60-67p

Abstract

Banks are indispensable in everyone’s lives. The effectiveness of the country’s financial system largely depends on the well-functioning of banking and deposit taking institutions. Banks are currently operating in highly volatile environment and are facing numerous risks such as liquidity risk, credit or default risk, operational risk, foreign exchange rate risk, interest rate risk, market risk, reputation risk and other risks. These risks are influencing on the success and failure of banks. However, among all these risks default risk and liquidity risk are not only crucial but also directly connected to the success and failure of the banks. The aim of the paper is to examine the relationship and interaction between default and liquidity risk and their individual and joint impact on stability of commercial banks in India. To achieve the very purpose of the study the quantitative research approach with survey method adapted. The study uses panel data econometric approach with Simultaneous equation approach by employing Two Stage Linear Regression (2SLS) and The Generalized Methods of Movements (GMM). The results shows that the credit risk is significantly influenced by Size, ROA, Loan Assets, Income diversity, priority sector lending, ownership type, inflation and GDP and liquidity risk influenced significantly by credit risk, priority sector lending, ownership type and GDP growth. We found there is no evidence of any significant economic relationship between default and liquidity risk. The GMM result shows bank stability is significantly influenced by credit risk, liquidity risk, the interaction between default and liquidity risk (CR*LR), along with other variable such as Loan growth, Size, ROA and inflation. The results indicates that joint management of default risk along with liquidity risk can increase the bank stability significantly and provide better insights to the regulators and bank management to improve the overall stability of the banks with framing the policies of joint management of default and liquidity risks. The results are in line with the current regulatory framework of Basel III which emphases on the significance of the joint risk management policies to manage liquidity and default risks effectively.

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Published

2019-01-31

How to Cite

Ponnala, V., & Kasilingam, R. (2019). An Interaction of Credit Risk And Liquidity Risks and Its Impact on Bank Stability: Evidence from Indian Commercial Banks. The Management Accountant Journal, 54(1), 60–67. https://doi.org/10.33516/maj.v54i1.60-67p

Issue

Volume 54, Issue 1, January 2019

Section

Cover Story
Crossref
Scopus
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Europe PMC

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