Liquidity and Profitability Analysis of Commercial Banks in India – A Comparative Study

Abstract

Indian economic environment is witnessing path breaking reform measures. The financial sector, of which the banking industry
is the largest player, has also been undergoing a metamorphic change. This reform has not only influenced the productivity and
efficiency of many of the Indian Banks, but has left everlasting footprints on the working of the banking sector in India. Certain
trends like growing competition, product innovation and branding, focus on strengthening risk management systems, emphasis on
technology have emerged in the recent past. Today the banking industry is stronger and capable of withstanding the pressures of
competition. While internationally accepted prudential norms have been adopted, with higher disclosures and transparency, Indian
banking industry is gradually moving towards adopting the best practices in accounting, corporate governance and risk management. The major role of banks is to collect money from the public in the form of deposits and then along with its own funds to serve
the demands of the customers quickly, paying interest for the deposits and to meet out the expenses to carry out its activities. For
this purpose, banks maintain adequate liquidity and earn profits from its activities. Profit is the main reason for the continued
existence of every commercial organization and profitability depicts the relationship of the absolute amount of profit with various
other factors. In any case, compared to other business concerns, banks in general have to pay much more attention for balancing
profitability and liquidity. Liquidity is required to meet out the prompt demands of customers and profitability is required to meet
out the expenses of banks. But both the terms are contradictory in nature. If banks maintain more liquidity, their profitability
decrease and if they increase their profitability they will have to reduce their liquidity. In this way, banks act as an engine for a business organization. So in the present study an attempt has been made to evaluate the performance of different categories of banks
viz. public, private and foreign bank groups in India. For evaluating the performance, eleven financial ratios have been used. These
ratios further have been categorized into two categories viz. liquidity and profitability. The period of study cover the years 2005-06
to 2011-12. From the results, it has been found that during the study period the liquidity and profitability position of public sector
bank group declined while it has improved in other two groups.