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Bank's liquidity management
is the process of generating funds to meet contractual or relationship obligations
at reasonable prices at all times.
·
good management information
systems, central liquidity control, analysis of net funding requirements under
alternative scenarios, diversification of funding sources, and contingency
planning are crucial elements of strong liquidity management at a bank of any
size or scope of operations.
·
The residual maturity
profile of assets and liabilities will be such that mismatch level for time
bucket of 1-14 days and 15-88 days remains around 80% of cash outflows in each
time bucket.
·
Flow approach is the basic
approach being followed by Indian banks. It is called gap method of measuring
and managing liquidity
·
Stock approach is based on
the level of assets and liabilities as well as off-balance sheet exposures on a
particular date.
·
Ratio of Core Deposit
toTotal Assets: - Core Deposit/Total Assets: More the ratio, better it is.
·
Net Loans to Totals
Deposits Ratio:- Net Loans/Total Deposits: It reflects the ratio of loans to
public deposits or core deposits. Loan
is treated to be less liquid asset and therefore lower the ratio, better it is.
·
Ratio of Time Deposits to
Total Deposits:-Time deposits provide stable level of liquidity and negligible
volatility. Therefore, higher the ratio better it is.
·
Ratio of Volatile
Liabilities to Total Assets:- Higher portion of volatile assets will pose higher
problems of liquidity. Therefore, lower the ratio better it is.
·
Ratio of Short-Term
Liabilities to Liquid Assets:- Short-term liabilities are required to be
redeemed at the earliest. It is expected to be lower in the interest of
liquidity.
·
Ratio of Liquid Assets to
Total Assets:- Higher level of liquid assets in total assets will ensure better
liquidity. Therefore, higher the ratio, better it is.
·
Liquid assets may include
bank balances, money at call and short notice, inter bank placements due within
one month, securities held for trading and available for sale having ready
market.
·
Ratio of Short-Term
Liabilities to Total Assets:- A lower ratio is desirable
·
Short-term liabilities may
include balances in current account, volatile portion of savings accounts
leaving behind core portion of saving which is constantly maintained. Maturing
deposits within a short period of one month.
·
Ratio of Prime Asset to
Total Asset - Prime Asset/Total Assets:- More or higher the, ratio better it
is.
·
Prime assets may include
cash balances with the bank and balances with banks including central bank
which can be withdrawn at any time without any notice.
·
Ratio of Market Liabilities
to Total Assets:- Lower the ratio, better it is.
·
Market liabilities may
include money market borrowings, inter-bank liabilities repayable within a
short period.
·
A maturity ladder should be
used to compare a bank's future cash inflows to its future cash outflows over a
series of specified time periods.
·
The need to replace net
outflows due to unanticipated withdrawal of deposits is known as Funding risk.
·
The need to compensate for
non-receipt of expected inflows of funds is classified as Time Risk
·
Call risk arises due to
crystallisation of Contingent liabilities
·
Maturity ladders enables
the bank to estimate the difference between Cash inflows and Cash Outflows in predetermined periods.
·
Liquidity management
methodology of evaluating whether a bank has sufficient liquid funds based on
the behaviour of cash flows under the different 'what if scenarios is known as
Alternative Scenarios
·
The capability of bank to
withstand a net funding requirement in a bank specific or general market
liquidity crisis is denoted as
Contingency planning
