The Hindu Business Line : RBI tightens norms to manage liquidity better

Mumbai, Sept. 5 In a bid to make banks’ management of asset-liability mismatches more effective, the Reserve Bank of India on Wednesday issued draft guidelines amending the Asset-Liability Management (ALM) system.

The amendments are also in line with the liquidity management norms under Basel II, said bank officials.

According to the RBI release, these changes would not only make liquidity management more effective, but also provide a stimulus for the development of the term-money market.

Currently, banks monitor their cumulative mismatches across two time buckets of 1-14 days and 15-28 days. As per the revised guidelines, banks must adopt a more granular approach to measurement of liquidity risk by splitting the first time bucket of 1-14 days in the Statement of Structural Liquidity into three time buckets – next day, 2-7 days and 8-14 days.

The net cumulative negative mismatches during the next day, 2-7 days, 8-14 days and 15-28 days should not exceed 5 per cent, 10 per cent, 15 per cent and 20 per cent of the cumulative cash outflows in the respective buckets in order to recognise the cumulative impact on liquidity, the RBI guidelines said.

IMPACT ON BANKS

An officer of the Asset Liability Committee desk of a public sector bank said this could prove to be a problem for public sector banks as not all their branches are online.

For them, computing the asset-liability mismatches would not be possible on the ‘next day’ but only a day after. It could also mean that banks may have to invest more in strengthening their Management Information Systems and Data Mining Systems, said the official.

Banks would have to determine more accurately their liquidity requirements in future, the official said.

“The guidelines on ALM management will institutionalise the inflow and outflow of banks on a day-to-day basis and this will help improve the general liquidity situation in the system,” said Mr K. Harihar, Executive Vice-President, Treasury and Financial Institutions Group, Development Credit Bank.

Bankers also feel that RBI wants to ensure that banks maintain their short-term liquidity conditions well following the sub-prime crisis.

The RBI release said that the revised norms and the supervisory reporting as per the revised format would begin from January 1, 2008. The reporting frequency would continue to be monthly for now.

However, the frequency of supervisory reporting of the Structural Liquidity position shall be fortnightly, with effect from the fortnight beginning April 1, 2008.

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