Study on Effect of Overdraft facility on market liquidity and income of private banks in Bangalore

Title

Study on Effect of Overdraft facility on market liquidity and income of private banks in Bangalore

Creator

Sindhu. M. D Krupa

Description

This Dissertation depicts about the use of overdraft facility by the business men/women as customers of the private banks and how it affects the liquidity status and income of those private banks in Bangalore. This study helps the private bankers to identify the financial changes in the annual reports supported by statistical tools depicting the significant changes in relation to market liquidity and the income of the private banks. An overdraft allows an individual to continue withdrawing money even if the account has no funds in it and the bank will cover the checks which would otherwise bounce. The interest on the outstanding balance of an overdraft loan often is lower than credit cards. Market Liquidity is an asset's ability to be sold without causing a significant movement in the price and with minimum loss of value. Referring this meaning to the banks, overdraft plays a small part in changing the interest rates and also incurring a very minimal expense to maintain the OD account for the customers among the banks compared to cash credits and loan repayable on demand which are the major reasons for the influence on bank rates. In order to provide for the overdraft facility to the customers, even though for period of 22 days up to 45 days depending on the respective banks policies, banks must maintain a ready source to compensate the customers demand to withdraw beyond a nil balance. Thus Total Deposits are considered to represent the market liquidity of the banks. Income of private banks mainly in connection to the topic of the study considers only the interest earned on the overdraft for approximate comparison between the overdraft balance and interest earned on it. Thus giving no grounds for confusions as to why net profit or income earned through other sources is not considered. Reason for taking the liquidity and income to compare it with overdraft is that all three factors are of shorts terms in nature. It gives a common ground for significant comparison. It also provides appropriate data for correct statistical analysis giving accurate result. While increase in overdraft balance increases the interest amount earned on it or the banks have to increase the deposits to provide for the increasing overdraft balances. Other than the problem of the study, smooth or turbulent financial periods, behaviour of funds rate in response to declining required reserves, political scandals, bad cheques etc. are the various factors practically influencing the overdraft to affect the private banks market liquidity and income The scope of the study reckons to give the results as an answer for various queries of not only to the selected sample private banks but also to other banks that are providing the overdraft facility. It also helps the other researchers to carry on the further study. The hypothesis is to prove whether or not the overdraft affects the market liquidity and income. Sample size N=20 taken for data analysis includes the five years of the three variables of the study from 17 NSE Listed and 3 non listed private banks located in Bangalore which are available from annual reports the websites of sample banks, pay sites like report junction and CMIE-business beacon. This sample size is accumulated through convenient sampling of non-probabilistic sampling technique. Mainly Correlation is used as Statistical Technique for analysis and other than that, financial analytical tools are also employed i.e. Growth analysis, Peer group comparison and Industrial benchmarking. Through correlation analysis, findings are drawn that the effect of overdraft on market liquidity and as well as the effect of overdraft on income of the 20 banks are highly significant (p<0.01). Thus, the null hypothesis 1 and 2which shows that overdraft does not affect the market liquidity and income is proved otherwise. Increase in overdraft does affect the market liquidity and income positively.

Source

Management Studies

Date

2012