LIABILITY MANAGEMENT

LIABILITY MANAGEMENT

PREFACE
I have selected the project Liability Management for completing the curriculum of IV semester of B.com Banking and Insurance. For the past three semester I have been walking through various concepts of Banking and I believe that Liability Management is one of the key factor to make any bank successful and survive in difficult circumstances. To broaden my ideas I have opted for this subject. It was not so easy for me to collect information and data related to my project topic. I have seen various books related to my topic but I have selected only that information which is relevant to my project. I have also visited various websites for project purpose but information which is website provided is not so much relevant to my project. In that case the college library and college faculty has helped me in getting true and fair information relating to my project.

LIABILITY MANAGEMENT

1. WHAT IS BANKING?
The development of Banking is evolutionary in nature. There is no single answer to the question of what is banking? Because, a bank performs a multitude of functions and services which can be comprehended into a single definition. For a common man a bank means a store house of money, for a business man it is an institution of finance and for a worker it may be a depository for his savings. It may be explained in brief as Banking is what a bank does. But it is not clear enough to understand the subject in full. The oxford Dictionary defines a bank as an establishment for the custody of money which it plays out on customers order. According to section 5 (b) of the Banking Regulation Act 1949, Banking means, accepting for the purpose of lending or investment of deposit of money from the public repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise. According to above definition, the main function of a bank is to collect deposits from the public and use these funds for lending and investment. For the deposits collected from the public interest paid to the depositors. Similarly, interest is earned on lending and investment. In this process, bank creates liabilities by way of deposits and borrowing and assets by way of lending and
1

LIABILITY MANAGEMENT

investment. For each rupee collected in the form of deposit, equal asset is created in the form of advances and investments or cash/balance with banks.

Functions of Banks:Following are the functions perform by Bank:I) II) III) IV) V) Primary Functions. Agency Functions. General Utility Functions. Foreign Trade Management. Credit Creation.

I)

Primary or Traditional Functions:These functions are classified into 2 categories, namely:1) 2) Accepting Deposits. Advancing of Loans.

LIABILITY MANAGEMENT

1)

Accepting Deposits:-

The primary function of bank is accepting deposits and advancing of loans. Banks require money to make loans and advances. Their share capital does not create adequate funds for advancing loans. Hence they accept deposits as interest. For the safety point people and institutions deposit their money with the banks and they get interest. For this purpose bank operate various types of accounts as given under:-

i) Fixed Deposits Account:It is also called time deposit account. In such accounts money is deposited for a fixed period. After the maturity of the account the bank repays the principal plus interest for that given period. The interest on such accounts is pre-decided. Generally, such accounts are having duration of 6 months to 10 years. The rate of interest varies as per the duration of the account. Generally, the rate of interest is high as such accounts as the bank is free to use the deposits for a long period. Bank gives a receipt to the depositor. The receipt is returned to the bank while getting the payment.

LIABILITY MANAGEMENT

ii) Current Account:This account is generally open by traders, businessman and industrialist. Customers have facility to deposit and withdraw from such account as many times as they wish. The daily transactions of such account holders are frequent and many. Hence they open such accounts in the bank. There is uncertainty in the withdrawals from such accounts and bank cannot use the deposits. No interest is paid on such accounts. Customers are also given overdraft facility as per their credit.

iii) Saving Account:Such accounts are opened for the convenience of middle and lower salaried or income groups. There is no restriction of the deposits but there is a restriction on the withdrawals. A customer cannot withdraw more than 50 times during 6 months from the accounts. Bank pays rate of interest, which is generally 4.5% per annum.

iv) Other Deposits Accounts:Bank also accepts deposits for the accounts other than the above mentioned. Some of these accounts are as under:-

LIABILITY MANAGEMENT

a) Recurring deposit Account:Account holder deposits a given amount every month and it is deposited for a given period. At the time of maturity the principal and interest earned is paid to the account holder. The rate of interest is higher than the saving bank account and lower than fixed deposit account.

b) Daily Saving Deposit Scheme:Under this scheme bank employee goes to residence of account holder and daily is collected by him. It is useful to daily wage earners and small shopkeepers.

c) Retirement scheme:Under this scheme saver saves a given amount for a given period. After a given period the amount is repaid in installments with the interest. It assists the pensioners in their old age.

LIABILITY MANAGEMENT

2) Advancing of Loans:Another important primary function of commercial bank is advancing of loans. It is performed because banks have to pay interest on various deposits. Thus bank charge high rate of interest on advancing of loans and earn profit. Banks collect small savings and are used for advancing of loans for production purposes. Bank makes advancing of loans to industrialist, traders, farmers, selfemployed persons. Generally commercial banks advance loans for the following purposes:-

i) Cash Credit:Under this scheme bank advances the loans for a given period on the security of shares, debentures and movable and immovable properties. The loanee withdraws money from the bank as per his requirements from time to time. Generally bank charges interest on the amount which has been withdrawn by the account holder. Sometimes traders borrow from banks on the security of goods. Borrower has the right to get the dividend and interest on the securities pledged for loan.

ii) Loans and Advances:Under it banks provide loans and advances to its customer on adequate security. Such amount of loans and advances are deposited in the account of the borrower and the borrower can withdraw the amount as and when he requires.
1

LIABILITY MANAGEMENT

Such facility is given for a specific period. After the specific periods the loans and advances are repaid to the bank.

iii) Overdraft:When a bank allows its customer having current account to withdraw the amount more than the deposits in the account it is called overdraft. The overdraft depends on the credit of the customers. Such facility is given for short term and emergency purposes. Such facility is given on current account only.

II) Agency Function:Commercial banks act as agent of their customers and rendered services. Some charges levied by the banks on such services. Some services rendered free of charges. The following are the agency functions of commercial banks provided to their customers:-

1) Collection of payment of cheques, Bills of Exchange and Other letters of credit:Bank collect payment of cheques, bills of exchange, and other letter of credit deposited by the customers in the bank. Banks act as an agent on behalf of the customers and collect deposit. The local collection is free of charge while outstation collection of these instruments attracts charges.

LIABILITY MANAGEMENT

2) payment of cheques, Bills of Exchange and other letters of credit:Banks make payment on the basis of various instruments written by the customers and the amount is debited. Many a times, bank accepts a bill of exchange on behalf of customers makes payment in time.

3) Receiving payments for customers:Banks also received rent, interest, installment of loan, pension, dividend, etc. on behalf of their customers and the amount is deposited in their accounts.

4) Payment on behalf of customers:Banks not only received payment on behalf of their customers but also make payment on behalf of customers in the form of rent, interest, dividend, installment of loan, insurance premium, commission, etc, such amount written in customers account and banks charge commission for these functions.

5) Transfer of money:Banks transfer money from one place to another as directed by their customers. Bank draft, postal and telegraphic transfers are the methods through which such transfers take place. Bank charges some commission for conducting these functions.

6) Purchase and sale of shares securities:1

LIABILITY MANAGEMENT

Banks purchases and sale shares and securities on behalf of their customers. Generally, banks have more knowledge regarding such activities. Banks charges commission for this purpose.

III) General Utility Function:Banks also carry on some utility functions, which are useful to their customers. These functions are as under:-

1) Security of wealth and Assets:Lockers are provided by banks to their customers. Their valuables namely important documents, ornaments, gold, shares, debentures, deposit receipts, etc. are kept in these lockers. Some annual charges are charged by the banks for the purpose.

2) Financial Adviser:Banks advise their customers on economic and financial matters. It helps customers to take correct decision.

LIABILITY MANAGEMENT

3) Personal Credit:Banks provide customer loans to their customers on the basis of personal credit. These loans are provided to purchase consumers goods like car, scooter, refrigerator, washing machine, air conditioner, etc. such loans are repaid in installments.

4)

Management of public debt:-

Commercial bank manages public debt on behalf of central bank when central and state government raise loans through debentures or bonds.

5) Share Market Function:Banks also settle the accounts on behalf of their customers when they are purchasing and selling shares and debentures in the share market.

IV) Financial and Managerial Arrangement for Foreign Trade:Commercial banks have played a dominant role in the expansion of foreign trade. Short term credit is provided for foreign trade by banks. These banks accept and discount the commercial bills, letter of credit. It facilitates in the international transactions. Banks contract the importers and exporters and finalize the transactions between two parties.

LIABILITY MANAGEMENT

It facilitates the international payment and increases the international payments and increases the foreign trade.

v)

Function of credit creation:-

Banks attract deposits from the public on the basis of these deposits; they make loans and advances to the public. Such amount of loan is deposited in the account of loanee. Thus loans create deposits. On the basis of these deposits loans are further granted. Thus loans from deposits and deposits from loans are encouraged. This process is called credit creation.

LIABILITY MANAGEMENT

2. INTRODUCTION OF LIABILITY MANAGEMENT

In recent years, commercial banks have devoted increased attention to the concept of liability management. Liabilities management is concerned with the activities related to the collection of funds from depositors and other creditors and the determination of an appropriate mix of these funds. Mobilization of deposits is become a challenging task for banks in these days. Banks collect funds through different types of deposits having different maturities. A bank invests the funds raised from different creditors to earn income. These activities involved some risk. Liabilities management stresses that a bank should consider the cost and risk of different sources of funds as well as the expected return on their investments. In this way the inter relationship between assets management and liabilities management is the determining factor in the context of profitability. A commercial bank serves as a financial intermediary between those having funds and those needing funds. While raising and lending funds banks have to consider liquidity and profitability factors. In this connection there is need for the use of financial leverage to improve return on capital. In recent years special attention is being paid to liabilities management to improve the profitability of banks. Large banks are stressing credit instead of assets conversion to meet their liquidity needs, particularly since nationalization.

LIABILITY MANAGEMENT

The liability management involves:a) Choosing the source of financing to be used, i.e. choosing between deposits finances and non- deposit financing. b) Determining the amount of funds needed and c) Obtaining funds at lowest possible cost with the least risk exposure.

LIABILITY MANAGEMENT

3. NEED FOR LIABILITY MANAGEMENT

The basic problem facing a bank manager is to have a satisfactory trade off between liquidity and profitability- the two principle but conflicting goals of a bank. A bank deals in the money of the people. The success of the business of bank depends partly on the efficiency with which it can provide services to its depositors, but mainly on the confidence it inspires among the depositors. It has been able to attract the deposits of the people not only by promising some returns on their money but also by committing itself to repayment on demand. This is why the public accepts bank deposits as being as good as cash. The banker must, therefore, ensure an adequate amount of liquidity in his assets so that he may be able to meet any claims upon it in cash on demand. The perfectly liquid asset is cash itself because it can fully satisfy the depositors claims. The more cash a banker holds, the more obviously he can, without difficulty of any kind, offer cash in exchange for deposits. Further, the bankers with an adequate amount of cash in hand meet the credit needs of the community and can make speculative gains. However, cash in a sterile asset which earns bank is to make earnings on its business which are sufficient to compensate it for the cost which it incurs on raising funds, besides paying the wages of the staff and meeting other expenses. If a banker holds a large portion of his fund in ready cash without earnings any income on it, his business will
1

LIABILITY MANAGEMENT

result in losses, and sound the death-knell of the offer sometime. He must, therefore, employ the bulk of the banks resources in giving loans and advances, and in investing them in high yielding securities. Such investment are, however, subject to credit risk-the risk arising from default in repaying money lent out and the money rate risk-the risk arising out of fluctuations in the market role of interest. The banker will not able to satisfy the cash requirements of the depositors on demand with the funds deployed in the above investments. Once the depositors cheques are not honoured, the bank will lose the confidence of the public, which will results in a mass run on banks counter and jeopardize the liquidity position of the bank. Ultimately, the very survival of the bank is endangered. Liquidity and profitability are, therefore, inimical to each other. Cash has perfect liquidity but lacks yield. At the other end are some loans and investments, which yield a high rate of interest, but are hardly liquid at all. The conflict between liquidity and income is not as sharp as it appears. In order to ensure long-run earnings, the commercial bank must retain public confidence in order to continue to survive and provide for the liquidity needs of the bank. The art of commercial banking lies in the resolution of the conflicts between liquidity and profitability. It is an art because science has not furnished inviolable rules; banks must be managed with discrimination and good judgment. Rules and scientific procedures for doing the whole job cannot be framed. A number of approaches, ways and means of
1

LIABILITY MANAGEMENT

resolving the conflicts have been developed from time-totime.

LIABILITY MANAGEMENT

4. MANAGEMENT OF LIABILITIES
The management of liabilities is very difficult and important job of a banker. For better liquidity and profitability there is a need of liability management. In liability management there are various liabilities are involved, but management of capital and deposits are very much important, because they are major liabilities in banks.

Management of Capital Fund

The capital fund constitutes one of the sources of funds for a commercial bank. It represents owned resources, and includes the share capital subscribed by its shareholders as well as reserve built up by the bank by ploughing back a part of its business earnings. Success and survival of a bank depend on its strength, which in turn, dispenses public confidence in it. Failure of individual banks, particularly large ones, might erode public confidence in the banking system. This is why regulators all over the world strive to minimize the magnitude and scope of bank failures by clamping minimum capital requirement for banks. Management of capital funds entails risk returns trade off. Increasing capital fund reduces the risk of bank failure by acting as cushion against the losses. On the other hand, it also reduces expected returns on equity, a measure that the investors focus on increasingly as the basis for valuing a banks share.
1

LIABILITY MANAGEMENT

Functions of Capital Fund in Commercial Banks: Bank Capital Acts as Loss Absorber:Like other business, a commercial bank needs capital to commence its operations, and to continue its existence as a running business. Commercial and industrial companies require capital initially to finance their operations and secondly to provide a bailout for creditors or to cover possible losses. From the standpoint of a bank, the reverse is generally true. The primary role of bank capital is to act as buffer. It provides a cushion to absorb possible losses so that depositors may be fully protected at all times. Although the capital fund is regarded as the absorber of losses arising from the realization of assets and from other contingencies, yet this function can be fulfilled only in the extreme case of the liquidation of the bank. The true nature of the protection function of the capital fund is that it is ultimate of final protection from the risk of insolvency. In the short run, a major portion of the banks losses may be offset by its current earnings, not by its capabilities. Even in the long run, the capital fund may not fulfill the protective role because, if a bank had poor earnings, losses internal control and a large quantity of risk assets- symptoms of bank liquidation the bank management would step in long before the capital funds were severely impaired. In a recent decision, it was held that the primary function of the bank capital fund is to absorb the losses resulting from
1

LIABILITY MANAGEMENT

events that are managerial foresight cannot be reasonably expected to anticipate. It should provide a margin of safety that preferably would allow bank to continue operations without loss of momentum and, at the least, would by time for it in which may re-establish its operational momentum. Normal risk- risks that cannot be anticipated should be cover by gross earning and not by the capital fund. Banks Capital Supplies Working Tools of Banks:The secondary function of the capital fund is to provide the where withdrawal from the acquisition of such fixed assets as buildings, equipments, furniture, etc. The provision of the permanent assets is a continuous function of the bank capital fund, mainly because depositors cannot be expected to supply the funds for such assets, say a new branch building. Under condition of expansion, therefore, the capital base must, of necessity, be strengthened in line with the expansion of the bank. Banks Capital Acts as a Source of Loan Funds:Another important function of bank capital is the assurance that the bank will be able to fulfill the credit needs of the community and assume the risks inherent in its safety. In other words, there are certain types of investments for which borrowed funds may not be helpful; reliance is placed on capital funds. Bank capital represents the private ownership of commercial banks, which distinguishes these institutions
1

LIABILITY MANAGEMENT

from the mutual savings associations, co-operative banks, cooperative credits and thrift societies and post office savings, banks, etc., which compete with commercial banks for savings.

Management of Deposits:The survival of a commercial bank depends, on the quantum of deposits held by it and the way deposits are managed. Deposits in fact, constitute a vital source of funds in a bank, which places an almost exclusive reliance on public deposits for its operation, for the fact that equity capital invested in a bank is very insignificant part of the total funds of the bank. Lending and investment operations of a bank are influenced essentially by the magnitude of deposits, their composition and ownership. This is why a banker always thinks of ways and means of increasing his deposits. It is true that individual banks do not have complete control over the level of the total deposits with the banking system and savings of the community because a host of factors including the monetary policy of the Central Bank determine it. However a banker can influence, to some extent amount of deposits held by it by adopting marketing approach.

In practical sense deposits are managed as given below:Suppose the borrower, Mr. X, pays a cheque of Rs. 800 to Mr. Y, who has an account in Bank of Baroda. Then Bank
1

LIABILITY MANAGEMENT

of Baroda receives Rs.800 as primary deposits, which increases the liabilities of the bank by Rs. 800. It balance sheet appears as follows:

BANK OF BARODA Liabilities Demands deposits ( primary) Assets Rs. 800 Cash received Cash reserves Excess reserves Rs. 800 Rs. 160 Rs. 640

As noted in the balance sheet of the Bank of Baroda, the increased deposit liabilities of Rs. 800, accompanied by equivalent in cash reserves of Rs. 800 have resulted in excess reserves of Rs. 640, on account of the 20 percent cash reserves ratio. Thus, Bank of Baroda is now in position to expand its loan and deposits by the amount of its excess reserves. If Bank of Baroda expanded its loans and deposits by the amount of its excess reserves, its balance sheet would then change to:

LIABILITY MANAGEMENT

BANK OF BARODA Liabilities Demand deposits (Primary) Demand deposits (Derivative) Rs. 640 Loans Rs. 640 Rs. 800 Assets Cash received Rs. 800

Now, suppose the borrower, Mr. Z, passes on the amount of (Rs. 640) to somebody (in meeting his business obligations), who is turn may deposit it with the Canara Bank. That increases the liabilities of the Canara Bank, by Rs. 640 and its balance sheet appears as: CANARA BANK Liabilities Demand deposits (Primary) Assets Rs. 640 Cash received Cash received Excess reserves Rs. 640 Rs. 128 Rs. 512

The balance sheet shows that Canara Bank now has an excess reserve of Rs. 512 which can be loaned out and which in turn creates a derivative deposit of Rs. 512. It follows from this that, as the process continues, every time- the liabilities with the banks go on increasing at
1

LIABILITY MANAGEMENT

diminishing rate. This process will continue to operate until all the original excess reserves of Rs. 800 with the first bank have been parceled out among the various banks and have become the required reserves. As a result, it may be found that the aggregate of derivative deposits in the entire banking system, over a period of time approximates five the initial derivative deposit (credit).

LIABILITY MANAGEMENT

5. MAIN LIABILITIES OF BANK

I) Share capital a) Authorized Capital. b) Issued Capital. c) Subscribed capital. d) Paid Up Capital.

II) Reserve Fund and Other Reserves

III) Deposits a) Saving Deposits. b) Fixed Deposits. c) Recurring Deposits. d) Current Deposits.

IV) Borrowing from Other Bank a) Borrowings from other banking companies, agents, b) Borrowing from RBI.

V)

Borrowing from financial institutions.

1

LIABILITY MANAGEMENT

VI)

Bills payable.

VII)

Contingent liabilities.

VIII) Profit and loss account.

IX)

Other Liabilities.

LIABILITY MANAGEMENT

I) SHARE CAPITAL:Commercial banks are generally organized in the form of joint stock companies. As joint stock companies collect capital in the form of selling shares and debentures, so also raise capital through the issue of shares to the public. This is called share capital. This represents the initial capital provided by the public in the form of buying shares. Share capital is called by different names at different stages of the development of the company. The different forms of share capital are:a) Authorized Capital:Authorized capital is the maximum amount of capital that the bank is empowered to raise from the public in the form of shares. The maximum amount that a bank can raise is mentioned in the memorandum of association. Generally the entire authorized capital is not raised from the public in the beginning itself. Only a part of the authorized capital is issued for public subscription. The other part is kept as reserve. As and when the bank needs capital, it can release from authorized capital. The issued capital is capital is that portion of the authorized capital. b) Issued Capital:The issued capital is capital is that portion of the authorized capital, announced for public subscription. c) Subscribed Capital:1

LIABILITY MANAGEMENT

Subscribed capital is that part of the issued capital which is actually subscribed by the public. There is no guarantee that the whole of issued capital is subscribed by the people. The issued capital may be at par value of the share or at premium. A part of the subscribed capital may remain unsubscribed for a number of years, or it may be oversubscribed. d) Paid Up Capital :Paid up capital is the real capital of the bank. It is that part of subscribed capital, which the subscribers are actually called upon to pay. The paid up capital is the one, which is actually paid by the shareholders at the time of starting the bank. Generally speaking, only a part of the subscribed capital is called up to be paid and the other part is kept as reserve. The uncalled capital is a source of strength to the bank. Whenever the bank needs it can ask the subscribers to pay that capital also. Regarding the issue of shares to the public, the banks are expected to follow the regulations of the Banking Regulations Act of 1949. According to this Act, the subscribed capital should not be less than 50% of the subscribed capital. The paid up capital should not be less than 6% of subscribed capital. This provision is made only to prevent unscrupulous persons from starting a bank with a huge authorized capital and a very small amount of paid up capital. Actually, authorized capital is not a very important thing. It is only paid up capital, which is important in this context.
1

LIABILITY MANAGEMENT

II) Reserve Funds and Other Reserves:Reserve fund and others reserves from second items on the liabilities side of the balance sheet of a bank. Reserve fund constitutes the accumulated profits of the bank. As and when the banks make profits, a certain percentage of profit should be set apart to meet unforeseen contingencies. This forms the reserve fund. Reserve fund is generally used whenever the bank faces losses. Though this is not contributed by the shareholders, it belongs to them as it is accumulated profits of the organization. According to Indian law, the reserve fund should be equal to its paid up capital. The law stipulates that 20% of the profit should be transferred to the reserve fund. So long as the bank maintains higher reserve fund, the greater is the confidence the public have in the bank. Generally, the reserve fund is not kept in the form of cash. It is invested in the form of government securities. In addition to the published reserve, the bank maintains other reserves. They may be kept secret. The secret reserves are not shown in the balance sheet, but it form additional safety to the bank. They are hidden by undervaluation of assets. For example, the market value of the securities is not shown in the balance sheet, in the same way the market value. These reserves are used in exceptional periods of difficulty.

LIABILITY MANAGEMENT

III) Deposits:The real resources for the bank are various types of deposits accepted by the bank. The deposits are the largest single item on the liabilities side. Deposits occupy an important place in the banking activity. Without deposits banks cannot do business effectively. The deposits of banks are broadly categorized into. a) Demand Deposits. b) Time Deposits. Demand Deposits are those repayable on demand by a customer. They include:i) Current Account.

ii) Saving Account. iii) Overdue Deposits, i.e. fixed and other term deposits past their due dates, but not withdrawn by customer. iv) Other small collections, if they are withdrawable on demand. v) Called Deposits, i.e. deposits received from other banks repayable on demand. Time deposits are those which are repayable after a period or subject to notice from the depositors. The following deposits fall under this category:-

LIABILITY MANAGEMENT

i)

Fixed Deposits.

ii) Notice Deposits, i.e. deposits from other banks repayable at the expiry of the notice period. iii) Recurring / cumulative deposits. iv) Reinvestment plan deposits. v) Annuity Deposits. vi) Daily Collection scheme. vii) Permanent Income Plan.

a) Saving Account :Saving deposit accounts are opened by banks to inculcate the habit of savings among the public. These deposits are generally for fixed income persons. It is intended primarily for small savers. These accounts are intended to facilitate personal transactions only. A minimum balance of Rs.100 at rural centers, Rs.250 at semi-urban centres and Rs.500 at other centres will be maintained in such accounts and for cheque book facility the minimum balance will be maintain is Rs.1000. Any sum not less than Rs.50 can be withdrawn by cheque. No maximum limit is prescribed. 50 debit entries are permitted in each half year. For this purpose half year is
1

LIABILITY MANAGEMENT

calculated from April to September and October to March every year. Saving deposit account carry low rate of interest i.e. 3.5% to 4% depending upon the type of bank.

Special Features of Saving Bank Account:A saving bank account is meant for the people of the lower and middle classes who wish to save a part of their current incomes to meet their future needs and also intend to earn on income from their savings. It has the following special features:1) These accounts are intended to cater to the requirements of low income and middle class families who are having regular income. 2) The banks mop up the savings of the people through the savings bank accounts. That is the basic objective of saving bank account is developing the savings habit among people. 3) Any person can open a saving bank account with as little as rupees. 4) Saving bank balances carry some interest. At present interest allowed on these accounts is 4.5%. This more attractive than the current account where virtually no interest is paid. 5) A depositor can withdraw as small a sum as Rs. 10/1

LIABILITY MANAGEMENT

6) If the banker is satisfied the customer can get the use of cheque book facility. 7) Accounts can be opened in the individual or joint names of depositor. Accounts can be opened and operated by minors, provided they have the power of understanding. 8) Saving bank accounts can be transferred from one branch to another at the request of the account holder.

b) Fixed Deposits Account:Opening of account:The minimum amount for which a term deposits receipt can be issued is Rs. 1000/-. Account can be opened for a period raring between 30 days to 10 years in multiples of completed months or even for a period where terminal month or quarter is incomplete on selective basis. Fixed deposits are repayable after the completion of fixed period. Every term deposit receipt must carry the information:a) Period of deposit. b) Date of maturity. c) Date of issue. Calculation of Interest: Interest on term deposits for less than six months is calculated
1

LIABILITY MANAGEMENT

by the number of days and on the term deposits for 6 months and above by the number of months. Interest on term deposits can be paid at yearly/half-yearly/quarterly/monthly intervals at depositors choice, rounded off to the nearest rupee. Premature payments:Depositor has no right to claim money before maturity. Bank may at discretion, allow such premature payments. Such request must be made by all the depositors in case of joint term deposits accounts. In such case, interest payable would be 1% less than the applicable, for the period for which deposit has actually run. Bank should charge such penalty on staff accounts also. Payment on maturity:If the amount of term deposits is Rs. 20,000/- or more it should not be paid in cash. It must be paid either through depositors account or by way of account payee banker cheque/draft (section-271 of Income Tax Act, 1961). On maturity term deposits receipt can be sent for collection through another branch of the same bank or through any other bank. Collecting bank in such case dose not charges collection charges but paying bank may charge remitting charges.

c) Recurring Deposit Account:1

LIABILITY MANAGEMENT

Recurring deposit accounts are introducing by the banks to inculcate the habit of saving on a regular basis. Opening and conducting an account:Recurring deposit account can be opened by any sum in multiples of Rs. 50 with a minimum Rs. 100/-. At the time of opening of an account, depositors should stipulate the amount and the period of installments which shall not be allowed to be altered. Minimum period of the account can be 120 months and minimum 6 months. If the depositors fail to pay monthly installments in arrears, penalty at Rs. 1.50 for every Rs. 100/per month shall be charged if the account is for the period of 5 years or less. Rate of such penalty shall be 10 paise for every Rs. 5/- per month, if the account is for a period longer than 5 years. Standing instructions from depositor for transfer of monthly installments from his/her savings bank or current account will be accepted and complied with provided here is a balance in the account. Installment for each month shall be payable on or behalf last working day of that month. Loan Against Deposits:Loan at the of 2% per annum above the interest allowed may be granted up to 75% of the actual amount deposited by the depositor subject to a minimum of Rs. 100/1

LIABILITY MANAGEMENT

On maturity, if any loan is outstanding, the same will be recovered from the maturity amount. Payment Before Maturity:Where the payment in the account is made before maturity, 1% less than the rate of interest applicable for the period for which the deposit has remained with the bank, shall be paid. Such penalty will not be charged if the depositor reinvests the balance in any of the term deposit schemes. If less than six installments have been paid by the depositors and no further installments are forthcoming, bank to the depositor along with interest-applicable for the period after penalty. If the account has run for less than three months, no interest is payable. Transfer of Deposits:At the request of the depositor, account can be transfer, free of charge. Deposit is not transferable from one person to another.

LIABILITY MANAGEMENT

d)

Current Deposit Account:-

Purpose:A current account is a running account which is meant for the convenience of the customers who are relieved from maintaining large cash balances with them for their day to day business (or other) transactions. Opening an account:A current account can be opened with an initial cash deposit of Rs. 1,000/- at rural and semi-urban centers and Rs. 5,000/- at Metro centers. A current deposit holder is required to maintain a minimum balance of Rs. 1,000/-, Rs. 3,000/-and Rs. 5,000/- at rural/semi-urban, urban and metro centers. Normally current account is not opened in the name of a minor. Operations in account:A current account may be operated upon any number of times during a working day. Practice of obtaining balance confirmations from the current account holders has been discontinued because no useful purpose is served and lot of time and manpower is wasted. Moreover, balance confirmation is required from the debtors side and not from the creditors side. But in case of overdraft, confirmation is required.
1

LIABILITY MANAGEMENT

Statements of accounts are issued to constituents monthly or more frequently at their request. Duplicate statements are issued on demand against payments of a minimum charge of Rs. 1/- per page. This is credited to commission account under sub-head incidental charges. Third party cheques are accepted from the depositor for collection. Statement of accounts/Pass Books:With a view to avoiding inconvenience to depositors, banks are advised to avoid inscrutable entries in pass books/statements of account, such as, By clearing or By cheque. Bank should ensure that when so requested, cheque books are delivered over the counter to depositors or their authorized representative. Dormant/Inoperative accounts:A current is treated as dormant if no transaction is made by the deposit for a continuous period of 6 months. A current account is treated as inoperative if no transaction is made by the depositor for a continuous period of 12 months. No operations are made in inoperative account and balances are transferred to current deposit account titled as Inoperative Current Deposit Account. Third party cheques:1

LIABILITY MANAGEMENT

While collecting third party cheque (and cheques favoring other banks) a commission at 6 paise% should be charged. PIN code on cheques:It has been decided to print the pin code number on the cheque leaves to facilitate the identification of place (to which cheque is to be sent for collection) as there are several places with similar names.

IV) Borrowing from Other Banks:Banks generally borrow from other banks as and when required. Banks borrow from other banks for a short period only. Banks borrow from the R.B.I, the I.D.B.I, the A.R.D.C, and from the non-bank financial institutions (the L.I.C, the U.T.I, the G.I.C, and its subsidiaries and the I.C.I.C.I) that are permitted to lend by the R.B.I in the inter bank call money market. Individual banks borrow from each other as well through the call money market and otherwise. Call money market deals in one day loans which may or may not be renewed the next day. Participants are mostly banks, therefore, it is called inter bank call money market.

Borrowed Funds:-

LIABILITY MANAGEMENT

Borrowing from other banking companies, agent, etc:In order to transact their business, banks in India, quite frequently, open their current accounts with other banks in India and abroad (Foreign Correspondents) at places where they are not represented and make overdraft arrangements with them on secured or unsecured basis. Such overdraft arrangements are generally made by the Head Office of the two banks involved against the securities lodged by the borrowing bank with the other apportioning at the local branches of the borrowing bank. The securities lodged to secure the borrowings represent a part of investment of the borrowing bank. However, banks usually utilize the overdraft facility in emergencies and not as a regular feature, to save interest charges on overdrafts.

Certificate of Deposits:Certificate of deposits are another useful source of wholesale deposits (i.e. for larger sum of money) for banks and important instrument in the management of short-term funds. On the recommendations of Vaghul Committee, the R.B.I formulated a scheme in June 1989 permitting schedule commercial banks at a discount on face value and the discount rate could be determined freely. The R.B.I issued detailed guidelines for the issue of CDs and with changes introduced subsequently, the schemes for CDs has been liberalized.

LIABILITY MANAGEMENT

The minimum amount should be Rs.50 lakhs (reduced from Rs.1 crore initially); the denomination of CDs could be in multiples of Rs.10 lakhs (reduced from Rs.25 lakhs initially). The CDs above Rs.50 lakhs will be in multiples of Rs.10 lakhs. The amount relates to face value (i.e. not maturity value) of CDs issued. The maturity period of CDs should not be less than 3months and not more than one year. It has been classified by the reserve Bank that the banks can issue at their discretion, the CDs for any number of months/days beyond the minimum usance of three months and within the maximum usance of one year The CDs issued by the bank and outstanding at any point of time should not exceed two percent of the fortnightly outstanding aggregate deposits during the financial year 198990 (enhanced from one percent of the fortnightly average outstanding aggregate deposits in 1988-90). The limit of two percent of the fortnightly average aggregate deposits in 198990 (i.e. the ceiling up to which banks can issue CDs) shall refer to aggregate discounted value (i.e. issue price and not face value) of CDs issued and outstanding at any point of time. The ceiling on outstanding at any point of time are prescribed by the R.B.I for each bank. Banks are advised to ensure the individual bank wise limits prescribed for issue of CDs are not exceed at any time. CDs can be issued to individuals, corporations, companies, trust funds, associations etc. NRIs
1

LIABILITY MANAGEMENT

can also subscribe to CDs but only on a non-representation basis. CDs are freely transferable by endorsement and delivery but only after 45 days of its issue and are in the form of usance promissory note payable on a fixed date without any days of grace. Banks have to maintain CRR and SLR on the issue price of CDs and report them as deposits to the R.B.I. Banks not permitted to grant loans against CDs or to buy them back prematurely.

Borrowing from R.B.I:-

The R.B.I is traditionally the lender of last resort. This means that the R.B.I will provide liquidity to the banks and other institutions when other sources dry up. The R.B.I usually provides such liquidity to scheduled commercial banks by way of food credit refinance against pledge of Government Securities in times of mismatch between-sources and uses of funds and discretionary refinance to tide over temporary financial stringencies during the busy season. Refinance on 182 days. Treasury bill is available to banks from the R.B.I up to certain percentage of their holdings at concessional rates of interest. The difference between stand by refinance and discretionary refinance is that the later:-

a) Is at the discretion of the R.B.I. b) Is charged higher rate of interest and

1

LIABILITY MANAGEMENT

c) Need not be secured by pledge of Government Securities. Such R.B.I assistance certainly argument loan able resources but most of the assistances are highly discretionary and for short periods. Very often the R.B.I advises banks not to treat R.B.I assistance as par of their loan able resources. The extent and terms and conditions under which refinance is available from Reserve bank under different refinance limits is subject to charges which are generally stated in the periodic credit policy announcements. Banks refinance and rediscounting of bills and to call money market must hang together and must stem from an integrated approach as each source of finance has its own distinct advantages. Methods of borrowing from the R.B.I:The reserve bank may grant accommodation to scheduled banks by way of: Rediscounting of Bills. Sections 17(2) of the R.B.I Act authorize the R.B.I to grant accommodation by way of purchase or discount of the various kinds of bills specified therein.

LIABILITY MANAGEMENT

REDISCOUNTING OF BILLS:According to section 17(2), bills of the following categories are eligible for the re-discounting with the Reserve Bank: Commercial Bills:-

A commercial bill must be one arising out of bonafide commercial or trade transactions bearing two or more good signatures, one of which should be that of a scheduled commercial bank or state co-operative bank. It should be drawn on and payable in India and mature within 90days from the date of purchase or re-discount. The period of maturity of bills arising out of export of goods from India may be 180days. Bills for financing seasonal Agricultural operations or marketing crops:Bills drawn or issued for this purpose should mature within 15 months from the date of discount. They should be drawn and payable in India and bear two signatures, one of which should be that of a scheduled bank or a state cooperative bank. Bills for Financing Cottage and Small Industries:-

These bills should be drawn or issued for the purpose of financing the production or marketing of activities of cottage and small-scale industries approved by the bank and maturing within 12months from the date of discount.
1

LIABILITY MANAGEMENT

They should be drawn on and payable in India bearing two or more good signatures, on of which should be that of a state co-operative bank or a state financial corporation provided the payment of principal and interest of such bills is guaranteed by the State Government. Bills for holding or Trading in Government Securities:Such bills should be drawn and payable in India, bear the signatures of a scheduled bank and mature within 90days from the date of purchase or discount. Foreign Bills:-

The Reserve Bank may purchase or discount foreign bills which arise out of bonafide transactions relating to the export of goods from India and maturing within 180days and drawn in or any place in any country outside India which is a member of International Monitory Fund. The period of maturity of foreign bills not relating to the export of goods from India will be 90 days. The basic object of the Reserve Banks policy has been to insulate the export sector from the impact of its policy to restrict domestic credit. The history of its policy in respect of export credit has been one of liberalizing refinance facilities to commercial banks. Refinance of exports is made on concessional terms and borrowing scheduled commercial bank for the purpose is not taken into account in calculating the net liquidity ratio. Export credit by scheduled

LIABILITY MANAGEMENT

banks is also exempted from the norms relating to unsecured advances and guarantees given by banks to exporters. To encourage practice of rediscounting of bills, the R.B.I introduced the Bill Rediscounting scheme which became effective from November 1, 1970.

V) Borrowings from financial institution:A part from borrowing from R.B.I, banks supplements their resources by recourse to refinancing and/or bill discounting facilities from the following financial institutions. 1) Refinance from IDBI:

The IDBI operates two schemes for providing financial assistance to commercial banks:i) ii) Refinance of term finance to industry provided by banks and Bill rediscounting scheme.

The IDBI under its chapter has been, inter alias, and assigned the task of being the main purveyor of term finance to the industrial sector in the country. Under its various schemes of project finance, commercial banks are provide refinance in respect of financial assistance to projects below Rs.300 lakhs and to medium and small industrial units, small road transport operators and artisans, village and cottage industrial units in the tiny sector.
1

LIABILITY MANAGEMENT

Under its Bill rediscounting schemes, commercial banks etc the bills discounted by them to industrial concerns rediscounted from the IDBI. A new scheme, discount of machinery bills, was launched by the IDBI in June, 1988. This scheme, which is operated concurrently with the existing bills rediscounting scheme, provides for the discounting of bills and promissory notes arising from sale of machinery on deferred payment basis. 2) Refinance from NABARD:The National Bank for Agriculture and Rural development (NABARD) is an apex institution connected with all matters concerning policy, planning and operations in the field of credit for agriculture and other economic activities in rural areas. It also serves as an apex refinancing agency for the institutions providing investments and production credit for various developmental activities in rural areas. NABARD refinance is available to schedule commercial banks for term lending for such purpose as minor irrigation and development, farm mechanization, plantation, horticulture, poultry, fisheries, dairy development, etc. and to state land development banks, state co-operative banks and Regional Rural Banks for short, medium and long-term requirements not only for credit but also for marketing and distribution arrangements. 3) Refinance from EXIM Banks:The Export-Import Bank of India (EXIM Bank) operates various lending programmes under three board heads, i.e.
1

LIABILITY MANAGEMENT

loans, rediscounting and guarantees. The lending facilities are extended to commercial banks in India, Indian companies and foreign Governments companies and financial institutions. There are two lending programmes available to commercial banks. i) Export Bills Rediscounting Schemes under which banks authorized to deal in foreign exchange can discount their short term export bills for a period of 180 days. This facility enables banks to fund post shipment export credit extended to Indian exporters. ii) Refinance of export credit bills under which banks can obtain from export of Indian capital goods for an export contract up to Rs.20 million. For contract above Rs. 20 million, commercial banks can obtain financial participation under EXIM Banks other programmes. 4) Refinance from NHB:-

The National Housing Bank (NHB), a wholly-owned subsidiary of the R.B.I, has finalized a refinance scheme for certain types of housing loans sanctioned by scheduled commercial banks on or after January 1, 1989. The refinance will be made available only for direct lending to individuals or formal or informal group of borrowers including cooperative societies. The housing finance routed through RRBs by sponsor banks will be taken as direct lending of the sponsor banks for this purpose. The quantum of refinance will be limited to housing loans up to Rs.50000/- per individuals for acquiring or constructing a new housing unit
1

LIABILITY MANAGEMENT

not exceeding 40 sqr. Meters of build-up area and up to Rs. 30000/- for upgrading or major repairs irrespective of buildup area. The refinance for this purpose will be limited to 25% of total refinance related. The refinance by NHB will be in addition to and separate from the housing loans sanctioned under the annual housing finance allocation made by the Reserve Bank and housing loans up to Rs. 5,000/- at concessional interest rate of 4% given to scheduled castes and scheduled Tribes. The NHB refinance will be available to banks for 15 years irrespective of the actual repayment period or moratorium allowed by them in individual cases. Bank will have to change interest rates on housing loans in accordance with those prescribed by NHB.

VI) Bills payable:In any business firms all are not payable instantaneously; therefore, it always carries bills payable and bills receivables. This makes bills payable as source of funds and bills receivable a use of funds. This is a liability for the banks who accept the responsibility of making payments of bills from its resources.

LIABILITY MANAGEMENT

VII) Contingent Liabilities :Contingent liabilities are those liabilities which do not exist at the time of preparation of the balance sheet but may or may not arise in future. For e.g. if a bankers has given a guarantee for customer, such liability is a contingent liability because it may arise in future if the customer fails to performs his promise and the guarantee holder in invokes the guarantee. The following items are included in the contingent liabilities:1) Claims against the bank not acknowledged as debts.

2) Liability for party paid investments and such as liabilities on partly paid shares, debentures. 3) Liability on account of outstanding forward exchange contracts. 4) Guarantees given on behalf of constituents in India and outside India. 5) Acceptances, endorsements and other obligations which includes letter of credit and bill accepted by the bank. In such cases, the bank takes upon itself the responsibility for payment. In order to keep proper record of such liability the bank maintains a customer acceptance, endorsements and guarantees register. All obligations undertaken by the bank as a result of guarantees, endorsements, acceptances etc. are recorded in the register.
1

LIABILITY MANAGEMENT

At the end of the year, if some of these obligations remain undisbursed, they are not being shown as contingent liabilities. 6) Other items for which the Banks is continuously liable, such as arrears of cumulative dividends, bills discounted, underwriting contracts, estimated amounts of contracts remaining to be executed on capital account and not provided for are to be included.

VIII) Profit and loss:Profit earned by the bank is shown under this head. Since profit is payable to shareholders in the form of dividends, it becomes a liability to the bank.

IX)

Other liabilities:-

There is an entry of other liabilities which are miscellaneous items of various descriptions. The there is a category of per contra items. These are variety of liabilities which off set identical items on the asset side of the balance sheet.

LIABILITY MANAGEMENT

6. ASSET LIABILITY MANAGEMENT

Because the business of banking involves the identifying, measuring, accepting managing the risk, the heart of bank financial management is risk management. One of the most important risk management functions in banking is Asset Liability Management (ALM) Asset and Liability Management has today become the most typical subject of any financial institution. It encompasses the analysis and development of goals and objectives, the development of long term strategic plans, periodic profit plans and rate sensitivity management. In one way or another it has always been the function or responsibility or Treasury and other financial/strategic departments. However, of late Asset Liability Management departments are being established and Asset and Liabilities committees are being formed within financial institutions. These committees are often given extraordinary powers regarding the mix and match of Assets and Liabilities and have large influence in winding up activities which do not fit business strategy. Asset Liability management is concerned with strategic balance sheet management involving risk caused by changes in interest rates, exchange rate, credit risk and the liquidity position of the banks. Asset Liability Management can hence be broadly defined as coordinated management of a banks balance sheet to allow for an alternative interest rate, liquidity and pre1

LIABILITY MANAGEMENT

payment summaries. It is a flexible methodology that allows the banks to test the inter-relationships between the wide variety of risk factors including market risks, liquidity risk, management decisions, uncertain product cycles, etc. Important of Asset Liability Management:Why do we need asset liability management? In simple terms-a financial institution may have enough assets to pay off its liabilities. But what if 50% of the liabilities are maturing within the same period? Though the financial institution has enough assets, it may become temporarily insolvent due to severe liquidity crisis. Even if the assets and liability maturity is matched to a large extent, the interest rates can change during the period thereby affecting the interest income from assets and interest expenses on liabilities. Depending upon the movement of interest rates the net interest margin may increase or decrease resulting in corresponding increase or decrease resulting in profit during a certain period. Some of the reasons for growing significance of Asset Liability Management are:1. Volatility:-

Deregulation of financial system changed the dynamics of financial markets. The vagaries of such free economic environment are reflected in interest rate structure, money supply and the overall credit position of market, the exchange rates and price levels. For a business, which
1

LIABILITY MANAGEMENT

involves trading in money, rate fluctuations invariably affect the market value of the bank and its Net Interest Income (NII). 2. Product Innovation:-

The second reason for growing the importance of ALM is rapid innovations take place in financial products of the bank. While there were some innovations that came as passing fads, others have received a tremendous response. In several cases, the same product has been repeated with certain differences and offered by various banks. What ever may be features of the products, most of them have an impact on the risk profile of the bank thereby enhancing the need for ALM. For example, flexi-deposits facility. 3. Regulatory Environment:-

At the international level, the bank for international settlements (BIS) provides a frame work for banks to tackle the market risks that may arise due to rate of fluctuations and excessive credit risk. Central Bank in various countries (including R.B.I) has issued frameworks and guidelines for banks to develop Asset Liability Management policies. 4. Management recognition:-

All the above mentioned aspects forced bank managements to give a serious thought to effective management of assets and liabilities. The management has realized that it is just not sufficient to have a very good franchisee for credit disbursement, nor is it enough to have
1

LIABILITY MANAGEMENT

just a very good retail deposit base. In addition to these, a bank should be in a position to relate and link the asset side with liability side. And this calls for efficient Asset Liability Management. This is increasing awareness in the top management that banking is now a different game all together since all risk of the game have since changed. Objectives of Asset Liability Management:The basic objectives of ALM is to manage market risk in such a way to minimize the impact of net interest income fluctuations in the short run and protect the net income value of the bank in the long run. Thus, the objectives of ALM are as follows:1) To control liquidity risk. 2) To control the volatility of net interest income and net economic value of a bank. 3) To control volatility in all targets accounts. 4) To ensure an acceptable balance between profitability and growth rate.

LIABILITY MANAGEMENT

Functions of Asset Liability Management:The basic function of ALM is to guide the management in establishing optimal match between the assets and liabilities of the bank in such a way as to maximize its net income and minimize the market risk. This is seeks to do by informing the management as to what the current management risk profile of the bank is and the impact that various alternative business decisions would have on the future risk profile. The manager can then choose the best course of action depending on the Boards risk performance. Suppose for example, existing assets and liability structure of a bank is such that in aggregate the maturity of assets is longer than the maturity of liabilities. This would obviously expose the bank to greater interest rate because if interest rates tend to increase in future, it would adversely affect the banks net interest income. So as to either reduce the average maturity of its assets (possibly by reducing its holdings of government securities) or by increasing the average maturity of its liabilities (perhaps by reducing its reliance on call/money market funds) Thus, the bank manager equipped with the interest rates related information about existing risk profile of the bank can reduce its future risk by marketing its long term deposits product more aggressively and whatever necessary even by increasing the rates offered on tong term deposits and/or decreasing rates on the shorter term deposits.

LIABILITY MANAGEMENT

In order to make prudent decisions with regard to procurement of funds and their allocation among assets, the bank manager may need other information such as competitive pressures, demand and supply factors, and the part of the decisions on the banks retail lending products etc. ALM approach focuses on supplying this information to the management for better and more rational decisions. Process of Asset Liability Management:ALM is strategic approach to measure, minor and manages the market risk of a bank. Thus, it is a three stage process which involves:i) ii) Measurement and determination of risk. Enhancement of long term profitability for given level of risk.

iii) Management of risk. Measurement of Risk:-

The first step to ALM in a commercial bank is to decide what should be the risk measurement parameters that the management would need to focus on. The appropriateness of risk measurement depends upon the volatility in the operating environments, availability of supporting data and expertise within the bank and the expected market and business developments. Generally, these are two major parameters which banks all over the world employ to measure their balance
1

LIABILITY MANAGEMENT

sheet risks, viz. Risk to the net interest income and market value of portfolio equity. While the former seeks to measure the risk to the immediate profits that emanate from cash flow mismatches occurring in the accounting year, the latter measures the risk arising out of the maturity mismatches in its assets and liabilities over the future years. These two parameters together attend to the short term and long term balance sheet risks. There are several methods to measure interest rate, important being: Gap Method. Duration Method. Simulation Method. Value at Risk Method. Enhancement of long term profitability:-

The second stage of ALM is identification of favorably priced assets/liabilities and off balance sheet items so as to enhance long term profitability for a given level of risk. In these field branch managers plays crucial role. They should resist the temptation of accession to equity found high priced liabilities. Instead every effort should be made to find low priced liabilities. While building up core business and creating assets and liabilities for the bank trust of the management has to be on client market and not on financial market. Mismatches are usually built in client markets as
1

LIABILITY MANAGEMENT

assets and liabilities are created sequentially but not simultaneously and the same are managed in financial markets. Management of risk:-

For effective management of market risk of a bank, the board of directors should formulate overall investment policy, liquidity policy and policy regarding financing. It should also determine the acceptable level of risk in terms of the parameter chosen. Within the framework of these policies the bank should undertake strategic planning exercise for its assetliability. This exercise has to be done at the corporate level. It involves managing the CRR and SLR for the bank as a whole, formulating schemes having refinance facilities to have better leverage in managing the asset liability and as a spin-off earning better profit. While formulating plan, the management should focus on products and services that are made available to branches which have special advantage like acquiring funds at low cost, providing services which do not entail funds outflow but results in additional income, schemes which provide for recycling of funds, instruments that provide hedge against exchange rate fluctuations, interest rate fluctuations and depreciation in value of assets. The policies and strategies of the bank need to be reviewed from time to time keeping in view the banks liquidity experience and developments in the business.
1

LIABILITY MANAGEMENT

So as to ensure that policies and strategies are regularly reviewed and monitored, a comprehensive mechanism needs to be developed. The Board should also determine how frequently risks are to be monitored keeping in view the availability of data, fluctuations of interest and exchange rates and the pace of change of the risk profile of the banks balance sheet.

LIABILITY MANAGEMENT

CONCLUSION
The proper management of liability is important for every bank. Liability management is the activity related with the collection of funds from depositors and other creditors and these funds are invested and lent out, in these activities bank earns some interest. There are various liabilities of a bank, but capital and deposits are major liabilities of a bank. Therefore there is a need of proper management of capital and deposits. The capital represents the owned fund and it includes the share capital. If bank have to increase their funds then there is a need to gain public confidence. The deposits are real source of a bank. Without deposits bank cannot do business effectively. Managements of deposits are also an important responsibility of a banker. Management of liability is one of the critical functions of a bank. It is easier said than done. Banks normally devise policies for accepting or creating certain liabilities. The simplest method used for encouraging liabilities in a specific time zone is allotting incentives by way of higher interest rate for a particular time zone and offer lower rate in a time zone where the deposit liabilities are not wanted by the bank. Each bank follows different practices depending upon their need, Geographical spread and such other relevant factors.