This document provides background information and a literature review for a study on the relationship between liquidity and profitability in select public and private sector banks in India. It begins with an introduction to the topic, outlining the trade-off between liquidity and profitability for banks. It then reviews 10 previous research papers on similar topics, analyzing factors like liquidity ratios, efficiency, and performance comparisons between public and private sector banks. The reviewed papers examine issues like the effect of liquidity on profitability, comparing liquidity positions between bank types, and evaluating banks' financial health using the CAMEL model.

1. REG.
NO
NAME
AREA OF
SPECIALISATION
AREA OF
EMPIRICAL
STUDY
SIGNATURE
181150 Supriya Mondal BFSI &
MARKETING
FINANCE
TITLE OF THE STUDY: A Study on Effect of Liquidity Management on Profitability with
Select Private and Public Sector Banks in India.
NAME OF THE COMPANY:
NAME OF THE GUIDE : Prof. Jeevitha R
DESIGNATION : Assistant Professor
QUALIFICATION : Post Graduate, MBA in Finance
SIGNATURE OF THE GUIDE :
RAMAIAH INSTITUTE OF MANAGEMENT
NEW BEL ROAD, BANGALORE-560054
Batch 2019 - 2020
Public Sector Bank State Bank of India, Bank
of Baroda, Canara Bank
Private Sector Bank HDFC Bank, ICICI
Bank, Axis Bank

2. Brief introduction of the background subject:
This study empirically examines the relation between liquidity and profitability, as measured
by financial ratio on a sample of private and public sector banks in India. The trade-off between
liquidity and profitability has been a burning issue in the corporate world. Theoretically, both
liquidity and profitability are affected by the working capital decisions of any company. Excess
of investment in working capital may result in low profitability and lower investment may
result in poor liquidity. Therefore, the management needs to trade-off between liquidity and
profitability to maximize shareholders’ wealth. Every organization, whether profit-oriented or
not, irrespective of size and nature of business, requires necessary amount of working capital.
Working capital is the most crucial factor for maintaining liquidity, survival, solvency and
profitability of business. It is observed that if a firm wants to take a bigger risk for mammoth
profits, it minimizes the dimension of its working capital in relation to the revenues it generates.
If it intends to improve its liquidity, that in turn raises the level of its working capital.
Nonetheless, this technique might tend to reduce the sales volume and consequently, it would
affect the profitability. Thus, a company needs to have a striking balance between liquidity and
profitability.
In order to maintain high profitability levels, companies might need to forfeit their solvency by
maintaining relatively low levels of current assets. As soon as the companies start doing so,
their profitability would improve as less amount of money is fastened up to the idle current
assets and their solvency would be in danger.
Therefore, excessive levels of current assets may have a negative effect on the firm’s
profitability, whereas a low level of current assets may lead to lower level of liquidity and stock
outs, resulting in difficulties in maintaining smooth operations. In today’s developing and
competitive world, the banking sector has emerged as a key player that contributes to the
growth of economy, development of financial sector and more importantly, creation of
employment in the country. Banks are the fulcrum of financial system of any economy and
they play an important role in contributing to a country’s economic development. 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 their 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 the prompt
demands of customers and profitability is required to meet the expenses of banks. But both the
terms are contradictory in nature. If banks maintain more liquidity, their profitability decreases,
and if they increase their profitability, they will have to reduce their liquidity.
Liquidity of bank refers to reserves of cash, securities, bank’s ability to convert an asset into
cash, and unused bank lines of credit. Liquidity must be adequate to meet all maturing
unsecured debt obligations due within a one-year time horizon. Despite different approaches
that can be used to analyse bank’s liquidity, the following are the key ratios that can be used to
examine bank’s liquidity: Cash-Deposit Ratio (CDR), Credit-Deposit Ratio (CRDR) and
Investment-Deposit Ratio (IDR) and whether they could be converted quickly to cover
redemptions.
On the other hand, profitability of the bank determines its ability to increase capital (through
retained earnings), support the future growth of assets, absorb loan losses and provide return
to investors. The key financial ratios that are used in assessing the profitability of a bank

3. include: Return on Assets (ROA), Return on Equity (ROE) and Return on Investment (ROI ).
Keeping this in mind, banks have to do a balancing act between liquidity and profitability.
Review of Previous literature:
1. The research paper on “The Effect of Liquidity Management on Profitability: A
Comparative Analysis of Public and Private Sector Banks in India” by Birajit
Mohanty and Shweta Mehrotra - 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.
2. The research paper on “A Study on Liquidity Position of Public Sector Banks in India after
Liberalisation” by Dr.M.Krishnaveni, N. Umamaheswari - Introduction of reforms in the
banking sector has changed the face of Indian banking industry. The globalization of operations
and implementation of new technologies have led to increase in resource productivity,
increasing level of deposits, credit and profitability. The objective of the study is to know the
growth of the performance of Indian banks and to analyses the liquidity position of public sector
banks after liberalization. In this study all the public sector banks were selected such as a19
Nationalised banks, 5 SBI Associates and SBI. We have chosen the liquidity ratios to analyse
the liquidity position of the public sector banks. The statistical tools also used in this study such
as standard deviation, co-efficient of variation, compound annual growth rate and two way
ANOVA. Through this study we found that the overall liquidity position of Nationalized banks
and SBI Associates are comparatively better than SBI.
3. The research paper on “A Comparative Study on the Performance of Selected
Public Sector and Private Sector Banks in India ” by Cheenu Goel and Chitwan
Bhutani Rekhi - Efficiency and profitability of the banking sector in India has assumed
primal importance due to intense competition, greater customer demands and changing
banking reforms. Since competition cannot be observed directly, various indirect
measures in the form of simple indicators or complex models have been devised and
used both in theory and in practice. This study attempts to measure the relative
performance of Indian banks. For this study, we have used public sector banks and
private sector banks. We know that in the service sector, it is difficult to quantify the
output because it is intangible. Hence different proxy indicators are used for measuring
productivity of banking sector. Segmentation of the banking sector in India was done
on bank assets size. Overall, the analysis supports the conclusion that new banks are

4. more efficient that old ones. The public sector banks are not as profitable as other
sectors are. It means that efficiency and profitability are interrelated. The key to
increase performance depends upon ROA, ROE and NIM.
4. The research paper on “Trade-Off between Liquidity and Profitability: A
Comparative Study between State Banks and Private Banks in Sri Lanka ” by
A.Nishanthini and J.Meerajancy - Banks are the one of the most popular financial
institution and those banks contribute the economic development and growth of
economic. The banks play a crucial role in the competitive environment. Nowadays
various types of human society wants to invest in banks and to earn more interest and
obtain the other additional facilities such as leasing, loan, pawing and mortgage. An
efficient and effective liquidity management provides an enjoyable profitability and
leads to survival. There the purpose arises on the study is to find out the effect of
liquidity on banks and also compare the banking organization that which bank play a
better role, and also give suggestion based on the findings. The present study is initiated
on liquidity and profitability trade –off with the samples of State Banks and private
Banks in Sri Lanka over period of 2008-2012. All samples are licensed commercial
banks. Current ratio (CR) and Quick ratio (QR) were used to measure liquidity as well
as Net Profit margin (NP), Return on Assets (ROA) and Return on Equity (ROE) were
used to measure the dependent variable as Profitability. The Statistical tests were used
to find out the effects of liquidity and Profitability these are: descriptive statistics,
correlation and regression analysis. The study found that insignificant correlation
between liquidity and profitability both State Banks and Private Banks. And regression
shows the negative impact of liquidity on profitability in selected Banks in Sri Lanka.
5. The research paper on “Efficiency and Profitability of Public and Private Sector
Banks in India: Data Envelopment Analysis Approach” by Ravi Inder Singh and
Simran Kaur - This paper examines the inter-bank relative efficiency of public and
private sector commercial banks in India. This study includes analysis of slacks which
remain to be explored for getting a clear picture about the causes of inefficiency.
Though the issue is important, no recent study, to the best of our knowledge, has
addressed it. Data Envelopment Analysis (DEA) approach has been used to examine
the efficiency level achieved and to identify the slacks. The results reveal that private
(Indian) sector banks are relatively more efficient compared to public sector banks. It
was found that State Bank of Hyderabad, Bank of Maharashtra, Central Bank of India,
United Bank of India, Dhanlaxmi Bank and ING Vysya could not achieve 100%
efficiency even in a single year, whereas the Federal Bank, HDFC Bank, Kotak
Mahindra Bank, Nainital Bank and Yes Bank Ltd., all private sector banks, achieved
full efficiency in all the ten years. The strategies suggested in this study to the
comparatively less efficient banks would help them not only in improving their
efficiency, but also in lowering the cost of their products for the overall benefit of their
customers. Efficiency is also found to be directly affecting the profitability of banks.

5. 6. The research paper on “Financial Analysis of Public and Private Sector Banks of
India: A Comparative Study of Punjab National Bank and HDFC Bank” by Dr.
Mohd Taqi and Maj. S.M. Mustafa - Banking sector occupies an important role in
the economic development of a nation. It is one of the fastest growing sectors in India
as it is featured by a large network of bank branches, serving many kinds of financial
services to its customer. Bank plays an important role to mobilize savings of general
public, remittance of money and other general banking services. The performance of a
bank may be evaluated for several reasons depending upon various objectives. Profit is
the main motive for the continued existence of every commercial organization and
profitability depicts the relationship between the absolute amounts of profit with
various other factors. As compared to other business concerns, banks in general have
to pay much more attention for balancing profitability and liquidity. Liquidity is
required to meet the prompt demands of customers whereas profitability is required to
meet the expenses of banks. Hence, the present research is an effort to measure and
compare the financial performance of Punjab National Bank and HDFC Bank as both
the banks are big giants in public and private sector respectively. The study focused on
the growth and performance analysis of both the banks for a period of ten years, i.e.
from 2006-07 to 2015-16. Quantitative analysis has been undertaken by looking at
various financial ratios like management efficiency, liquidity and profitability which
are the reliable indicators of a bank performance. It is found that PNB is more
financially sound than HDFC Bank but in context of deposits and expenditure HDFC
bank has better managing efficiency than PNB.
7. The research paper on “PERFORMANCE EVALUATION OF PUBLIC SECTOR
AND PRIVATE SECTOR BANKS – A COMPARATIVE STUDY ” by Mrs. N.
VIJAYALAKSHMI and Dr. G. KARUNANITHI - Banking sector occupies an
important role in the economic developmentof a nation. It is one of the fastest growing
sectors in India as it is featured by a large network of bank branches, serving many
kinds of financial services to its customer. Bank plays an important role to mobilize
savings of general public, remittance of money and other general banking services. The
performance of a bank may be evaluated for several reasons depending upon various
objectives. Profit is the main motive for the continued existence of every commercial
organization and profitability depicts the relationship between the absolute amounts of
profit with various other factors. As compared to other business concerns, banks in
general have to pay much more attention for balancing profitability and liquidity.
Liquidity is required to meet the prompt demands of customers whereas profitability is
required to meet the expenses of banks. Hence, the present research is an effort to
measure and compare the financial performance of Punjab National Bank and HDFC
Bank as both the banks are big giants in public and private sector respectively. The
study focused on the growth and performance analysis of both the banks for a period of
ten years, i.e. from 2006-07 to 2015-16. Quantitative analysis has been undertaken by
looking at various financial ratios like management efficiency, liquidity and
profitability which are the reliable indicators of a bank performance. It is found that
PNB is more financially sound than HDFC Bank but in context of deposits and
expenditure HDFC bank has better managing efficiency than PNB.

6. 8. The research paper on “Performance Evaluation of Public Sector, Private Sector
and Multistate Cooperative Banks in India-A Study” by Ashish M Joshi and K. G.
Sankaranaryanan - The banking industry in India as a whole is making significant
contributions for the development of the economy and helping to achieve sustainable
growth. The banks are helping the economy in terms of effective capital formation,
effective lending and contributing to the development of the nation, thus banks need to
be more closely watched. In India banks are one of the healthiest performers in the
world banking industry seeing tremendous competitiveness, growth, efficiency,
profitability and soundness, especially in the recent years. The main goal of banks today
is to ensure stability and make sure that they are internally sound and sensible. Hence,
it is important to measure soundness across various banks in the country and identify
the weaker sections of the banking sector, devise appropriate strategies and policies to
lift these sections and eventually create an environment that leads banks to be sound
and results in stability. The CAMEL model in banking sector is widely used all over
the world to ascertain the performance of the banks operating in various sectors. In the
present study an attempt is made to evaluate relative performance of banks in India
using CAMEL approach. In the present study while the comparing the performance of
three categories of banks in various sectors it is observed that among the banks in public
sector Bank of Baroda was considered to be better, whereas among private sector banks
ICICI banks was better and in multistate cooperative banks the Punjab Maharashtra
cooperative bank was better on certain parameters of camel model.
9. The research paper on “Performance Evaluation of Public Sector, Private Sector
and Multistate Cooperative Banks in India-A Study” by Kajal Chaudhary and
Monika Sharma - The economic reforms in India started in early nineties, but their
outcome is visible now. Major changes took place in the functioning of Banks in India
only after liberalization, globalisation and privatisation. It has become very mandatory
to study and to make a comparative analysis of services of Public sector Banks and
Private Sector banks. Increased competition, new information technologies and thereby
declining processing costs, the erosion of product and geographic boundaries, and less
restrictive governmental regulations have all played a major role for Public Sector
Banks in India to forcefully compete with Private and Foreign Banks. this paper an
attempt to analyze how efficiently Public and Private sector banks have been managing
NPA. We have used statistical tools for projection of trend.
10. The research paper on “Profitability of Public Sector Banks in India : A Study of
Determinants” by Prashanta Athma, K.P.Venugopala Rao and Farha Ibrahim -
The “Profitability of Public Sector Banks in India: A Study of Determinants” examines
the factors influencing the financial performance of 26 Indian Public Sector Banks post
global financial crises. The Random Effect Model on the balanced panel data for the
period 2012-2017 was performed to determine the impact of the macroeconomic and
bank specific factors based on the CAMELS framework. The bank specific factors that
influence the profitability of the Public Sector Banks in India are Total Investments to
Total Assets, Operating Profit to Total Assets and Provisions on Loans whereas the
effect of macroeconomic factors on the banks profitability were insignificant.

7. 11. The research paper on “A STUDY ON LIQUIDITY AND PROFITABILITY OF INDIAN
PRIVATE SECTOR BANKS” by DR. V. R. NEDUNCHEZHIAN and MS. K.
PREMALATHA - The study aims to know about the relationship between liquidity and
profitability of the Indian private sector banks.5out of the 20 new private sector banks and new
private sector banks involved in the study. The study was descriptive in nature and it was
adopted to collect secondary data for the study. The selected financial reports of the ten private
selected banks are studied for the relevant liquidity and profitability were determined by the
use of the time series analysis and regression on profitability ratio. The result provides that
there is no significant relationship between ROA with cash and bank balances to total liabilities.
In the liquidity measures, here also there is no statistical significant relationship between ROE
with loans and advances to total assets, and cash and bank advances to total liabilities.
12. The research paper on “Management Efficiency and Profitability Of Selected Indian Public
And Private Sector Banks” by J.Kumar and Dr. R. Thamilselvan - Commercial banks play a vital
role in the development of the industry and trade. They are performing not only the curator
of the country but also resource of country. The present study aims at identify Management
Efficiency and Profitability of selected Indian public and private sector banks. The study
considered a sample of top ten Banks (7 public sector banks and 3 private sector banks) for
the period from 1, April 2005 to March 31, 2016. The study is based on the secondary data,
procured and extracted from financial statements of the selected banks. The collected data
has analysed using various financial ratios and statistical tools like Geometric Mean Standard
deviation and Compounded Annual Growth Rate have been accomplished .Indian banking will
brace for new challenges for entry of new types of lenders intensifies competition while high
bad loan. I t is found that in management efficiency IDBI bank has top rank followed by AXIS
bank and ICICI bank it shows that better ability of the banks. Punjab National Bank has last
position followed by Canara Bank and State Bank of India. In terms of profitability HDFC bank
has top position followed by Canara Bank Punjab National Bank. Industrial Development of
India bank has last position due to under utilization of assets followed by Bank of India and
Canara Bank
13. The research paper on “Management Efficiency and Profitability Of Selected Indian Public
And Private Sector Banks” by M.Sukanya - CAMEL model analysis is an important tool to
analyse the banks’ and financial institutions’ performance and to suggest the necessary
measures for its improvement where it is required. In the present study, Indian banks-five
public and five private sector banks based on its total assets have been considered. This study
is taken up for the five year period from 2012-17. The present study analyses the financial
performance of the select banks. Five parameters of CAMEL-Capital Adequacy, Asset Quality,
Management Efficiency, Earnings Ability and Liquidity are considered to rank the banks on its
performance. The study found that Kotak Mahindra has performed better and ranked first
among all the banks and Punjab National bank ranked the least position. Among all, private
sector banks have outperformed compared to public sector banks. The top five positions are
of private sector banks and Bank of Baroda being public sector bank ranked top third with
HDFC bank.
14. The research paper on “Analysis of Financial Performance of Selected Commercial Banks
in India” by Palamalai Srinivasan and John Britto - The present study attempts to evaluate
the financial performance of selected Indian commercial banks for the period from 2012/13 to
2016/17. The study comprises 16 commercial banks, 11 representing public sector and 5 from
private sector, and the financial performance of these banks are analysed using the financial
ratios. The study shows that the financial performance of private sector banks is relatively better
than the public sector banks throughout the study period. Besides, the study examines the
impact of liquidity, solvency and efficiency on the profitability of the selected Indian

8. commercial banks by employing the panel data estimations, viz. the Fixed Effect and Random
Effect models. The empirical results from the panel data estimations revealed that the liquidity
ratio and solvency ratio, and the turnover ratio and solvency ratio are found to have positive
and significant impact on the profitability of selected public sector and private sector banks,
respectively, bearing testimony to the fact that profitability is a function of those ratios.
15. The research paper on “An analysis of profitability position of private bank in India” by Amit
Kumar Singh - Profit is a measure of success of business and the means of its survival and
growth. Profitability is the ability of a business to earn profit for its owners. The objective of
this study was overall profitability analysis of different private sector banks in India based on
the performance of profitability ratio like interest spread, net profit margin, return on long
term funds, return on net worth, return on assets & adjusted cash margin. Profitability is a
measure of efficiency and control it indicates the efficiency or effectiveness with which the
operations of the business are carried on. Profitability ratios provide different useful insights
into the financial health and performance of a company. A business that is not profitable
cannot survive. Conversely, a business that is highly profitable has the ability to reward its
owners with a large return on their investment. Increasing profitability is one of the most
important tasks of the business managers. Managers constantly look for ways to change the
business to improve profitability. These potential changes can be analysed with a support of
income statement and balance sheet.
Statement of the problem:
The study is undertaken to analyse the relationship between liquidity management and bank’s
profitability and also to the impact of liquidity management on profitability between select
public sector and private sector banks in India for the period of last 5 years (2014 to 2019).
Objectives of the study
• To analyse the relationship between liquidity management and profitability of public
and private sector banks in India
• To understand the liquidity-profitability trade-off between public and private sector
banks in India
• To examine the effect of liquidity management on bank’s profitability of select public
and private sector banks in India
Scope of the study
Period: 5 years data (2014 to 2019)
Industry: Banking
Companies:
1) Public Sector Bank: State Bank of India, Bank of Baroda, Canara Bank
2) Private Sector Bank: HDFC Bank, ICICI Bank, Axis Bank

9. Hypothesis
Based on the above objectives, the following hypothesis are framed:
H0: There is no significant relationship between the liquidity management and
profitability with public and private sector banks in India
H1: There is a significant relationship between the liquidity management and
profitability with public and private sector banks in India
Methodology
Types of Research: Descriptive Research
Sampling Plan: 3 Public sector banks & 3 private sector
banks
Sources of data: Secondary data
Tools use Ratio analysis, T-test, Correlation
Financial Ratios use:
For Liquidity: Cash-Deposit Ratio (CDR),
Credit-Deposit Ratio (CRDR) and
Investment-Deposit Ratio (IDR)
For profitability: Return on Assets (ROA),
Return on Equity (ROE) and Return on
Investment ( ROI )
Plain of analysis: Excel is used
Limitation:
The study is done to analyse liquidity management on profitability on select public and Private
sector banks in India. There are 27 public sector bank and 21 private sector banks In India. But
the present study covers only 6 banks (3 public sector and 3 Private sector). Only last 5 years
data (2014 to 2019) are considered for the study because of the time constrain. Also, there are
only 6 key financial ratios (3 for liquidity and 3 for profitability) are considered for the study.
They are Cash-Deposit Ratio (CDR), Credit-Deposit Ratio (CRDR) and Investment-Deposit
Ratio (IDR) for examine the liquidity, on the other hand Return on Assets (ROA), Return on
Equity (ROE) and Return on Investment (ROI) for examine the profitability.

10. Bibliography:
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• www.sbi.co.in
• www.bankofbaroda.com
• www.canarabank.com
• www.hdfc.com
• www.icici.com
• www.axisbank.com
• www.economictimes.com
• www.rbi.com