Banks liquidity management is the process of generating funds to meet contractual or relationship obligations at reasonable prices at all times.

New loan demands, existing commitments, and deposit withdrawals are the basic contractual or relationship obligations that a bank must meet.

a. b. c.

Historical Funding requirement Current liquidity position Anticipated future funding needs

d.
e. f. g. h.

Sources of funds
Options for reducing funding needs Present and anticipated asset quality Present and future earning capacity and Present and planned capital position

To satisfy funding needs, a bank must perform one or a combination of the following:
a. b. c. d.

Dispose off liquid assets

Increase short term borrowings

Decrease holding of less liquid assets Increase liability of a term nature Increase Capital funds

e.

Liquidity Exposure can stem from both internally and externally. External liquidity risks can be geographic, systemic or instrument specific. Internal liquidity risk relates largely to perceptions of an institution in its various markets: local, regional, national or international

Funding Risk - Need to replace net outflows due to unanticipated withdrawals/non-renewal

Time Risk
- Need to compensate for non-receipt of expected inflows of funds

Call Risk
- Crystallization of contingent liability

All Assets & Liabilities to be reported as per their maturity profile into 8 maturity Buckets: 1 to 14 days 15 to 28 days 29 days and up to 3 months Over 3 months and up to 6 months Over 6 months and up to 1 year Over 1 year and up to 3 years Over 3 years and up to 5 years Over 5 years

i. ii. iii. iv. v. vi. vii. viii.

Places all cash inflows and outflows in the maturity ladder as per residual maturity Maturing Liability: cash outflow Maturing Assets : Cash Inflow Classified in to 8 time buckets Mismatches in the first two buckets not to exceed 20% of outflows Shows the structure as of a particular date Banks can fix higher tolerance level for other maturity buckets.

Mismatches can be positive or negative Positive Mismatch: M.A.>M.L. and Negative Mismatch M.L.>M.A.

In case of + ve mismatch, excess liquidity can be deployed in money market instruments, creating new assets & investment swaps etc.
For ve mismatch, it can be financed from market borrowings (Call/Term), Bills rediscounting, Repos & deployment of foreign currency converted into rupee.

To meet the mismatch in any maturity bucket, the bank has to look into taking deposit and invest it suitably so as to mature in time bucket with negative mismatch.

The bank can raise fresh deposits of Rs 300 crore over 5 years maturities and invest it in securities of 1-29 days of Rs 200 crores and rest matching with other out flows.

Liabilities
1. 2. 3. 4. 5. Capital Reserve & Surplus Deposits Borrowings Other Liabilities

Assets
1. Cash & Balances with RBI 2. Bal. With Banks & Money at Call and Short Notices 3. Investments 4. Advances 5. Fixed Assets 6. Other Assets

Contingent Liabilities

Definition

A risk management technique designed to earn an adequate return while maintaining a comfortable surplus of assets beyond liabilities, taking interest rates, earning power, and degree of willingness to take on debt into consideration.

Also called surplus management

It is a dynamic process of Planning, Organizing & Controlling of Assets & Liabilities- their volumes, mixes, maturities, yields and costs in order to maintain liquidity and NII.