Description
explanation of liquidity management, RBI norms and BASEL norms around liquidity and funding sources of liquidity management.
LIQUIDITY MANAGEMENT
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LIQUIDITY IS THE EASE WITH WHICH AN INSTITUTION CAN OBTAIN CASH BY SELLING NON CASH ASSETS. BANKS LIQUIDITY IS THE ABILITY TO RAISE A CERTAIN AMOUNT OF FUNDS AT A CERTAIN COST WITHIN A CERTAIN AMOUNT OF TIME AN INSTITUTION IS LIQUID IF IT CAN MEET ALL THE DEMANDS MADE FOR CASH (BOTH DEPOSITS AND LOANS) AT PRECISELY THE CORRECT TIME. LIQ. RISK- POSSIBILITY THAT AN INSTITUTION MAY BE UNABLE TO MEET ITS MATURING COMMITMENTS OR MAY DO SO ONLY BY BORROWING FUNDS AT PROHIBITIVE COSTS OR BY DISPOSING ASSETS AT ROCK BOTTOM PRICES. THIS COULD BE DUE TO MISMATCHING IN THE MATURITY PATTERN OF ASSETS AND LIABILITIES
• Liquidity risk could manifest in different dimensions • Funding Risk- Need to replace the outflows due to unanticipated withdrawal. • Time Risk- need to compensate for non receipt of expected inflows of funds, Performing assets turning into Non performing assets. • Call risk- Due to crystallisation of any contingent liab.
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NEED FOR LIQUIDITY 1. DEMAND FROM DEPOSITORS 2. DEMAND FROM BORROWERS 3. STATUTORY REQUIREMENTS – CRR, SLR SOURCES OF LIQUIDITY 1. MONEY AT CALL AND SHORT NOTICE 2. SHORT TERM CENTRAL GOVT SECURITIES 3. BILLS REDISCOUNTING 4. Refinance from RBI
• SOURCES OF LIQUIDITY RISK • 1. MISMATCH OF TENOR PROFILES OF ASSETS AND LIABILITIES • 2.EMBEDDED OPTIONS FOR EARLY PAYMENTS • 3. NON PERFORMING ASSETS • 4. UNDRAWN CREDIT LIMITS, O/D ETC
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REGULATORY ASPECTS OF LIQUIDITY MGT RBI GUIDELINESASSET LIABILITY MGT IN FIN INST FOR MANAGING LIQ RISK. SET UP OF ALCO. LIQUIDITY HAS TO BE TRACKED THRU MATURITY OR CASH FLOW. BANKS TO PREPARE STRUCTURAL LIQ . STATEMENT ON FORTNIGHTLY BASIS. MISMATCH IN FIRST TWO TIME BUCKETS NOT MORE THAN 20% BASEL NORMSAGREED STRATEGY OF DAY TO DAY LIQ MGT TO BE COMMUNICATED THROUGHOUT THE ORG. BANKS TO HAVE ADEQUATE INFORMATION SYSTEMS FOR MEASURING, MONITORING, CONTROLLING AND REPORTING LIQUIDITY RISK. BANK SHOULD ANALYSE LIQ WITH “WHAT IF” SCENARIOS. MAKE CONTINGENCY PLANS.
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STRUCTURAL LIQUIDITY GAP ANALYSIS TO BE PREPARED BY BANKS BY PLACING ALL CASH INFLOWS AND OUTFLOWS IN THE MATURITY LADDER ACCORDING TO EXPECTED TIMING OF CASH FLOWS. 1-14 DAYS 15 TO 28 DAYS, 29 DAYS TO 3 MTHS 3 MONTHS TO 6 MTHS 6 MTHS TO 1 YEAR 1 TO 3 YEARS 3 TO 5 YRS. OVER 5 YEARS
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OUTFLOWS CAPITAL, (Over Five Years) RESERVES AND SURPLUS( Over Five years) DEPOSITS, Savings and Demand Deposits can be classified into Volatile and Core. TERM DEPOSITS – According to Maturity BORROWINGS, BILLS REDISCOUNTED, INTEREST PAYABLE INFLOWS- CASH, BALANCES WITH RBI, OTHER BANKS, INVESTMENTS, ADVANCES ( PERFORMING AND NPA’S), FIXED ASSETS, INTERST RECEIVABLE,
• The classification into time buckets is on the basis of remaining maturity. In respect of Assets and Liabilities where no repayment schedule is fixed, classification is on the basis of behavioural pattern is taken. • The following aspects are analysed • Any negative mismatches in the first two time buckets beyond the RBI prescription of 20% of outflows, • Composition of deposits, Advances and Investments in each bucket • Whether significant portion of long term assets are financed thru long term liabilities.
• Ratios • 1. Liquid Assets to total Assets--- Cash +Balances with RBI + Balances with Other Banks+ Investments available for sale • 2. Liquid Assets to total Deposits • 3. Loans to Deposits --- The degree to which the bank has used up its available resources to accommodate the credit needs of the customers. • 4. Loans to assets– Ratio of illiquid assets of the bank • 5. Loans to Investments• 6. Cash Flow associated ratios- Net cash Flow to Total assets, to total Liabilities, to total Deposits, To core deposits, To volatile deposits
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DYNAMIC LIQUIDITY GAP ANALYSIS REQUIRED BY RBI TO MONITOR THE SHORT TERM LIQUIDITY ON A DYNAMIC BASIS OVER A TIME HORIZON SPANNING 1- 90 DAYS ON THE BASIS OF BUSINESS PROJECTIONS AND OTHER COMMITMENTS FOR PLANNING PURPOSES. 1-14 DAYS, 15 -28 DAYS, 29-90 DAYS OUTFLOWS- NET INCREASE IN LOANS AND ADVANCES, NET INCREASE IN INVESTMENTS, INFLOWS- NET CASH POSITION, NET INCREASE IN DEPOSITS, INTEREST ON INVESTMENTS. MISMATCH MISMATCH AS A % OF TOTAL OUTFLOWS
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ESTIMATE ABOUT NET INCREASE IN LOANS AND ADVANCES WILL HAVE TO BE BASED ON PROJECTIONS AND ESTIMATES.
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SCENARIO ANALYSIS BANK SPECIFIC, MARKET SPECIFIC BANK SPECIFIC- ON ACCOUNT OF SPECIFIC PROBLEMS FACED BY THE BANK, UNSATISFACTORY FIN RESULTS OF THE BANK, SHARP FALL IN SHARE PRICES ETC.TERM DEPOSITS MAY NOT BE EASILY ROLLED OVER, DD DEPOSITS MAY BE WITHDRAWN MARKET SPECIFIC- MONETARY POLICY OF THE GOVT. BANK MAY HAVE TO SELL INVESTMENTS AT DISCOUNTS SCENARIOS
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A. 25% of term deposits not rolled over on Maturity. Volatile portion of Dd deposits will be withdrawn B. 50% of term deposits will not be rolled over. Volatile portion of Dd deposits will be withdrawn C. Advances to grow at 150% of normal growth whereas deposits are growing at 75% of normal growth. D. Deposits are assumed to grow at 125% of normal growth while advances at 50% of normal growth 10% of demand deposits are volatile . Bank has Rs. 500 crs of term deposits and Rs. 2000 crs of demand deposits.
Outflows Net Increase in Loans and Advances Net Increase in Investments Net decrease in Deposits Total Outflows Inflows Net Cash position Net increase in deposits Other Inflows 40 400 10 200 120 320
Total Inflows Mismatch
% Mismatch
450 130
40.62%
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LIQUIDITY PLANNING OPTIMUM LEVEL OF LIQUIDITY- TRADE OFF BETWEEN MAXIMIZING PROFITS AND MEET ALL LIQUIDITY NEEDS FACTORS THAT INDICATE A HIGH LEVEL OF LIQUIDITY REQ - COMPETITIVE ENVIRONMENT - LARGE PORTION OF DEPOSITS FOR SHORT TERM - LARGE FUNDS BLOCKED IN LOANS WITH LONG TERM MATURITIES - ACCESS TO CAPITAL MARKET LIMITED.
LIQUIDITY NEEDS IN SHORT, INTERMEDIATE AND LONG TERM . SHORT TERM- AGRICULTURAL SECTOR- DEMAND FOR LOANS DURING PROCUREMENT , HARVEST ETC.NORMALLY SEASONAL IN NATURE. BANKS CAN RESORT TO CALL MONEY MARKET, INTER BANK TERM MONEY MARKET INTERMEDIATE- CYCLICAL- ECONOMIC RECESSION, BOOM, INTEREST RATE MOVEMENTS. BANKS HOLD LIQUID ASSETS IN SLACK PERIODS TO MEET RISING LOAN DEMAND IN BOOM TIMES.LIQUID ASSETS- BAL WITH RBI, T BILLS LONG TERM- RELATED TO THE COMMUNITY OR MARKETS THE BANKS ARE SERVICING.
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FUNDING SOURCES FOR LIQ MGT 1. INVESTMENT PORTFOLIO- INVESTMENT PORTFOLIO IN TO THREE CATEGORIES- HELD TO MATURITY(HTM), AVAILABLE FOR SALE(AFS), HELD FOR TRADING(HFT). HTM CANNOT BE MORE THAN 25% OF TOTAL INVESTMENTS 2. LIQUIDITY ADJUSTMENT FACILITY- REPOS AND REVERSE REPOS. BACK STOP FACILITY- RBI PROVIDES BANKS WITH LIQUIDITY SUPPORT THRU COLLATERALISED LENDING FACILITY(CLF) AVILABLE TO BANKS AT .125% OF ITS AVERAGE DEPOSITS. BORROWINGS-
doc_704000897.pptx
explanation of liquidity management, RBI norms and BASEL norms around liquidity and funding sources of liquidity management.
LIQUIDITY MANAGEMENT
• • •
•
•
LIQUIDITY IS THE EASE WITH WHICH AN INSTITUTION CAN OBTAIN CASH BY SELLING NON CASH ASSETS. BANKS LIQUIDITY IS THE ABILITY TO RAISE A CERTAIN AMOUNT OF FUNDS AT A CERTAIN COST WITHIN A CERTAIN AMOUNT OF TIME AN INSTITUTION IS LIQUID IF IT CAN MEET ALL THE DEMANDS MADE FOR CASH (BOTH DEPOSITS AND LOANS) AT PRECISELY THE CORRECT TIME. LIQ. RISK- POSSIBILITY THAT AN INSTITUTION MAY BE UNABLE TO MEET ITS MATURING COMMITMENTS OR MAY DO SO ONLY BY BORROWING FUNDS AT PROHIBITIVE COSTS OR BY DISPOSING ASSETS AT ROCK BOTTOM PRICES. THIS COULD BE DUE TO MISMATCHING IN THE MATURITY PATTERN OF ASSETS AND LIABILITIES
• Liquidity risk could manifest in different dimensions • Funding Risk- Need to replace the outflows due to unanticipated withdrawal. • Time Risk- need to compensate for non receipt of expected inflows of funds, Performing assets turning into Non performing assets. • Call risk- Due to crystallisation of any contingent liab.
• • • • • • • • •
NEED FOR LIQUIDITY 1. DEMAND FROM DEPOSITORS 2. DEMAND FROM BORROWERS 3. STATUTORY REQUIREMENTS – CRR, SLR SOURCES OF LIQUIDITY 1. MONEY AT CALL AND SHORT NOTICE 2. SHORT TERM CENTRAL GOVT SECURITIES 3. BILLS REDISCOUNTING 4. Refinance from RBI
• SOURCES OF LIQUIDITY RISK • 1. MISMATCH OF TENOR PROFILES OF ASSETS AND LIABILITIES • 2.EMBEDDED OPTIONS FOR EARLY PAYMENTS • 3. NON PERFORMING ASSETS • 4. UNDRAWN CREDIT LIMITS, O/D ETC
• • • • • • • • • • • •
REGULATORY ASPECTS OF LIQUIDITY MGT RBI GUIDELINESASSET LIABILITY MGT IN FIN INST FOR MANAGING LIQ RISK. SET UP OF ALCO. LIQUIDITY HAS TO BE TRACKED THRU MATURITY OR CASH FLOW. BANKS TO PREPARE STRUCTURAL LIQ . STATEMENT ON FORTNIGHTLY BASIS. MISMATCH IN FIRST TWO TIME BUCKETS NOT MORE THAN 20% BASEL NORMSAGREED STRATEGY OF DAY TO DAY LIQ MGT TO BE COMMUNICATED THROUGHOUT THE ORG. BANKS TO HAVE ADEQUATE INFORMATION SYSTEMS FOR MEASURING, MONITORING, CONTROLLING AND REPORTING LIQUIDITY RISK. BANK SHOULD ANALYSE LIQ WITH “WHAT IF” SCENARIOS. MAKE CONTINGENCY PLANS.
• •
• • • • • • • •
STRUCTURAL LIQUIDITY GAP ANALYSIS TO BE PREPARED BY BANKS BY PLACING ALL CASH INFLOWS AND OUTFLOWS IN THE MATURITY LADDER ACCORDING TO EXPECTED TIMING OF CASH FLOWS. 1-14 DAYS 15 TO 28 DAYS, 29 DAYS TO 3 MTHS 3 MONTHS TO 6 MTHS 6 MTHS TO 1 YEAR 1 TO 3 YEARS 3 TO 5 YRS. OVER 5 YEARS
• • • • • • •
OUTFLOWS CAPITAL, (Over Five Years) RESERVES AND SURPLUS( Over Five years) DEPOSITS, Savings and Demand Deposits can be classified into Volatile and Core. TERM DEPOSITS – According to Maturity BORROWINGS, BILLS REDISCOUNTED, INTEREST PAYABLE INFLOWS- CASH, BALANCES WITH RBI, OTHER BANKS, INVESTMENTS, ADVANCES ( PERFORMING AND NPA’S), FIXED ASSETS, INTERST RECEIVABLE,
• The classification into time buckets is on the basis of remaining maturity. In respect of Assets and Liabilities where no repayment schedule is fixed, classification is on the basis of behavioural pattern is taken. • The following aspects are analysed • Any negative mismatches in the first two time buckets beyond the RBI prescription of 20% of outflows, • Composition of deposits, Advances and Investments in each bucket • Whether significant portion of long term assets are financed thru long term liabilities.
• Ratios • 1. Liquid Assets to total Assets--- Cash +Balances with RBI + Balances with Other Banks+ Investments available for sale • 2. Liquid Assets to total Deposits • 3. Loans to Deposits --- The degree to which the bank has used up its available resources to accommodate the credit needs of the customers. • 4. Loans to assets– Ratio of illiquid assets of the bank • 5. Loans to Investments• 6. Cash Flow associated ratios- Net cash Flow to Total assets, to total Liabilities, to total Deposits, To core deposits, To volatile deposits
• •
• • • • •
DYNAMIC LIQUIDITY GAP ANALYSIS REQUIRED BY RBI TO MONITOR THE SHORT TERM LIQUIDITY ON A DYNAMIC BASIS OVER A TIME HORIZON SPANNING 1- 90 DAYS ON THE BASIS OF BUSINESS PROJECTIONS AND OTHER COMMITMENTS FOR PLANNING PURPOSES. 1-14 DAYS, 15 -28 DAYS, 29-90 DAYS OUTFLOWS- NET INCREASE IN LOANS AND ADVANCES, NET INCREASE IN INVESTMENTS, INFLOWS- NET CASH POSITION, NET INCREASE IN DEPOSITS, INTEREST ON INVESTMENTS. MISMATCH MISMATCH AS A % OF TOTAL OUTFLOWS
•
ESTIMATE ABOUT NET INCREASE IN LOANS AND ADVANCES WILL HAVE TO BE BASED ON PROJECTIONS AND ESTIMATES.
• • •
•
SCENARIO ANALYSIS BANK SPECIFIC, MARKET SPECIFIC BANK SPECIFIC- ON ACCOUNT OF SPECIFIC PROBLEMS FACED BY THE BANK, UNSATISFACTORY FIN RESULTS OF THE BANK, SHARP FALL IN SHARE PRICES ETC.TERM DEPOSITS MAY NOT BE EASILY ROLLED OVER, DD DEPOSITS MAY BE WITHDRAWN MARKET SPECIFIC- MONETARY POLICY OF THE GOVT. BANK MAY HAVE TO SELL INVESTMENTS AT DISCOUNTS SCENARIOS
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• • • • •
A. 25% of term deposits not rolled over on Maturity. Volatile portion of Dd deposits will be withdrawn B. 50% of term deposits will not be rolled over. Volatile portion of Dd deposits will be withdrawn C. Advances to grow at 150% of normal growth whereas deposits are growing at 75% of normal growth. D. Deposits are assumed to grow at 125% of normal growth while advances at 50% of normal growth 10% of demand deposits are volatile . Bank has Rs. 500 crs of term deposits and Rs. 2000 crs of demand deposits.
Outflows Net Increase in Loans and Advances Net Increase in Investments Net decrease in Deposits Total Outflows Inflows Net Cash position Net increase in deposits Other Inflows 40 400 10 200 120 320
Total Inflows Mismatch
% Mismatch
450 130
40.62%
• • • • • • •
LIQUIDITY PLANNING OPTIMUM LEVEL OF LIQUIDITY- TRADE OFF BETWEEN MAXIMIZING PROFITS AND MEET ALL LIQUIDITY NEEDS FACTORS THAT INDICATE A HIGH LEVEL OF LIQUIDITY REQ - COMPETITIVE ENVIRONMENT - LARGE PORTION OF DEPOSITS FOR SHORT TERM - LARGE FUNDS BLOCKED IN LOANS WITH LONG TERM MATURITIES - ACCESS TO CAPITAL MARKET LIMITED.
LIQUIDITY NEEDS IN SHORT, INTERMEDIATE AND LONG TERM . SHORT TERM- AGRICULTURAL SECTOR- DEMAND FOR LOANS DURING PROCUREMENT , HARVEST ETC.NORMALLY SEASONAL IN NATURE. BANKS CAN RESORT TO CALL MONEY MARKET, INTER BANK TERM MONEY MARKET INTERMEDIATE- CYCLICAL- ECONOMIC RECESSION, BOOM, INTEREST RATE MOVEMENTS. BANKS HOLD LIQUID ASSETS IN SLACK PERIODS TO MEET RISING LOAN DEMAND IN BOOM TIMES.LIQUID ASSETS- BAL WITH RBI, T BILLS LONG TERM- RELATED TO THE COMMUNITY OR MARKETS THE BANKS ARE SERVICING.
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• •
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FUNDING SOURCES FOR LIQ MGT 1. INVESTMENT PORTFOLIO- INVESTMENT PORTFOLIO IN TO THREE CATEGORIES- HELD TO MATURITY(HTM), AVAILABLE FOR SALE(AFS), HELD FOR TRADING(HFT). HTM CANNOT BE MORE THAN 25% OF TOTAL INVESTMENTS 2. LIQUIDITY ADJUSTMENT FACILITY- REPOS AND REVERSE REPOS. BACK STOP FACILITY- RBI PROVIDES BANKS WITH LIQUIDITY SUPPORT THRU COLLATERALISED LENDING FACILITY(CLF) AVILABLE TO BANKS AT .125% OF ITS AVERAGE DEPOSITS. BORROWINGS-
doc_704000897.pptx