Liquidity analysis in Indian banking sector: A case study of Punjab national bank

Abstract

Banking sector is vital financial intermediary in mobilization of public savings (deposits) and effective channelization of mobilized public funds in economy through advances and loans. Banking sector deals with large public funds which are characterized of both demand and time maturity period. In Indian banking sector nearly half of bank liabilities are in the form of current and saving deposits which indicates need of high liquid assets to meet demand and short period liabilities. In contrast, in bank assets more assets are in the form of less liquid assets (medium and long term loans and advances) which indicates mismatch between assets and liabilities management. This mismatch between assets and liabilities adversely affects cash flows, liquidity and ultimately financial strength of the banks. Therefore, compared to corporate sector, banks need to keep high liquid assets line with the proportion of short maturity period liabilities. On the other hand, maintenance of high liquid assets is adversely affects firms growth and profitability. Therefore, a tradeoff between liquidity, growth and profitability is a challenging task to every professional fund managers. Analysis of liquidity in banks sector is a differ compare to liquidity analysis of corporate and other sectors in the economy. Therefore, in the present study we analyzed liquidity position of Punjab national bank for period of ten years (2010-2019). The study found that Punjab national bank cash flows are reported downfall during the study period. This is due to the reason that Punjab national banks has huge outflow of cash in form of investment, advances and other assets and repayment of borrowing at large quantity. Similarly, bank financial strength is not at acceptable level during the study period which indicates its inability to meet additional demand of loan and liquid needs. In contrast, liquidity position of Punjab national bank is at satisfactory level during the study period.