Does Basel III – Liquidity Coverage Ratio Affect the Profitability of Indian Public Sector Banks?

Abstract

The article analyses the interrelation between the Liquidity Coverage Ratio (LCR) and the profitability of Indian public sector banks from March 2015 to March 2022. It uses the panel data technique to explain these relations. Further, this article also looked at the interactive effect of LCR through advances and the interest rate. It has gone through pre- and post-diagnostic checks finalizing the model and variables. The findings of the result surprisingly imply that Basel III regulatory directives like LCR positively impact the bank profitability in India rather than general apprehension about the negative impact. However, the interactive effects of LCR through advances negatively influence the banks’ profitability. Variables such as deposits, Economic Policy Uncertainty (EPU) and Gross Domestic Product (GDP) have no statistically significant relation with banks’ profitability. This article recommends that Basel III guidelines should not be looked at negatively for the performance of banks.