We examine the impact of unclaimed deposits on the banking stability using a sample of 33 Indian scheduled commercial banks for the period 2005–2022. We also examine the impact of increasing unclaimed deposits on the banks’ profitability. We find that there is a significant negative impact of unclaimed deposits on banks’ stability. Result shows a significant moderating effect of banks’ interest income on the relationship of unclaimed deposits and banks’ stability, indicating banks with higher reliance on interest income might experience lower negative impact of unclaimed deposits, while banks with low-interest income may find it more challenging to offset the negative effect of unclaimed deposits. Further, we find that unclaimed deposits significantly influence banks’ profitability and exhibit a non-monotonic relationship. If the unclaimed deposits exceed more than 50% of the total deposits of the bank, it may have a detrimental effect on the banks’ profitability as the associated cost or risk will be higher, operational complexity may rise, leading to compliance failure as well. JEL Codes: C23, E58, G21
Hati et al. (Tue,) studied this question.