I have selected the project “Liability Management” for completing the curriculum of IV semester of 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.



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 customer’s 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

LIABILITY MANAGEMENT investment. For each rupee collected in the form of deposit. Credit Creation. General Utility Functions. Advancing of Loans. Foreign Trade Management. I) Primary or Traditional Functions:These functions are classified into 2 categories. namely:1) 2) Accepting Deposits. equal asset is created in the form of advances and investments or cash/balance with banks. 1 . Agency Functions. Functions of Banks:Following are the functions perform by Bank:I) II) III) IV) V) Primary Functions.

Generally. Banks require money to make loans and advances. For the safety point people and institutions deposit their money with the banks and they get interest. Hence they accept deposits as interest. For this purpose bank operate various types of accounts as given under:- i) Fixed Deposits Account:It is also called time deposit account. 1 . After the maturity of the account the bank repays the principal plus interest for that given period. In such accounts money is deposited for a fixed period. The interest on such accounts is pre-decided. Bank gives a receipt to the depositor.LIABILITY MANAGEMENT 1) Accepting Deposits:- The primary function of bank is accepting deposits and advancing of loans. The receipt is returned to the bank while getting the payment. Their share capital does not create adequate funds for advancing loans. The rate of interest varies as per the duration of the account. Generally. such accounts are having duration of 6 months to 10 years. the rate of interest is high as such accounts as the bank is free to use the deposits for a long period.

No interest is paid on such accounts. Bank pays rate of interest. iv) Other Deposits Accounts:Bank also accepts deposits for the accounts other than the above mentioned. Hence they open such accounts in the bank. A customer cannot withdraw more than 50 times during 6 months from the accounts. Customers are also given overdraft facility as per their credit.5% per annum. Some of these accounts are as under:- 1 . Customers have facility to deposit and withdraw from such account as many times as they wish. businessman and industrialist. which is generally 4. iii) Saving Account:Such accounts are opened for the convenience of middle and lower salaried or income groups.LIABILITY MANAGEMENT ii) Current Account:This account is generally open by traders. The daily transactions of such account holders are frequent and many. There is no restriction of the deposits but there is a restriction on the withdrawals. There is uncertainty in the withdrawals from such accounts and bank cannot use the deposits.

LIABILITY MANAGEMENT a) Recurring deposit Account:Account holder deposits a given amount every month and it is deposited for a given period. After a given period the amount is repaid in installments with the interest. At the time of maturity the principal and interest earned is paid to the account holder. 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. It assists the pensioners in their old age. 1 . The rate of interest is higher than the saving bank account and lower than fixed deposit account.

Banks collect small savings and are used for advancing of loans for production purposes. ii) Loans and Advances:Under it banks provide loans and advances to its customer on adequate security. Sometimes traders borrow from banks on the security of goods. 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. Generally bank charges interest on the amount which has been withdrawn by the account holder. selfemployed persons. traders. debentures and movable and immovable properties. The loanee withdraws money from the bank as per his requirements from time to time. Bank makes advancing of loans to industrialist.LIABILITY MANAGEMENT 2) Advancing of Loans:Another important primary function of commercial bank is advancing of loans. Thus bank charge high rate of interest on advancing of loans and earn profit. Borrower has the right to get the dividend and interest on the securities pledged for loan. It is performed because banks have to pay interest on various deposits. 1 . farmers. 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.

bills of exchange. 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. Such facility is given for short term and emergency purposes. After the specific periods the loans and advances are repaid to the bank. 1 . The local collection is free of charge while outstation collection of these instruments attracts charges. Banks act as an agent on behalf of the customers and collect deposit. Some charges levied by the banks on such services. The following are the agency functions of commercial banks provided to their customers:- 1) Collection of payment of cheques. Such facility is given on current account only. and other letter of credit deposited by the customers in the bank. Some services rendered free of charges. The overdraft depends on the credit of the customers. Bills of Exchange and Other letters of credit:Bank collect payment of cheques.LIABILITY MANAGEMENT Such facility is given for a specific period. II) Agency Function:Commercial banks act as agent of their customers and rendered services.

pension. interest. Bank charges some commission for conducting these functions. insurance premium. dividend. on behalf of their customers and the amount is deposited in their accounts. installment of loan. such amount written in customer’s account and banks charge commission for these functions. dividend. 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. etc. Many a times. etc. 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. bank accepts a bill of exchange on behalf of customers makes payment in time. 6) Purchase and sale of shares securities:1 . commission.LIABILITY MANAGEMENT 2) payment of cheques. installment of loan. Bank draft. interest. 3) Receiving payments for customers:Banks also received rent. postal and telegraphic transfers are the methods through which such transfers take place. 5) Transfer of money:Banks transfer money from one place to another as directed by their customers.

debentures. It helps customers to take correct decision.LIABILITY MANAGEMENT Banks purchases and sale shares and securities on behalf of their customers. etc. III) General Utility Function:Banks also carry on some utility functions. These functions are as under:- 1) Security of wealth and Assets:Lockers are provided by banks to their customers. Some annual charges are charged by the banks for the purpose. are kept in these lockers. deposit receipts. banks have more knowledge regarding such activities. Their valuables namely important documents. ornaments. 2) Financial Adviser:Banks advise their customers on economic and financial matters. gold. 1 . which are useful to their customers. shares. Generally. Banks charges commission for this purpose.

refrigerator. 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. It facilitates in the international transactions. such loans are repaid in installments. scooter. 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. air conditioner. etc. These banks accept and discount the commercial bills. These loans are provided to purchase consumers goods like car. letter of credit.LIABILITY MANAGEMENT 3) Personal Credit:Banks provide customer loans to their customers on the basis of personal credit. Banks contract the importers and exporters and finalize the transactions between two parties. washing machine. 1 . 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.

Thus loans from deposits and deposits from loans are encouraged. 1 . On the basis of these deposits loans are further granted. they make loans and advances to the public. v) Function of credit creation:- Banks attract deposits from the public on the basis of these deposits.LIABILITY MANAGEMENT It facilitates the international payment and increases the international payments and increases the foreign trade. Such amount of loan is deposited in the account of loanee. This process is called credit creation. Thus loans create deposits.

commercial banks have devoted increased attention to the concept of liability management. In this way the inter relationship between assets management and liabilities management is the determining factor in the context of profitability. In this connection there is need for the use of financial leverage to improve return on capital.LIABILITY MANAGEMENT 2. 1 . INTRODUCTION OF LIABILITY MANAGEMENT In recent years. A commercial bank serves as a financial intermediary between those having funds and those needing funds. Mobilization of deposits is become a challenging task for banks in these days. particularly since nationalization. A bank invests the funds raised from different creditors to earn income. 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. In recent years special attention is being paid to liabilities management to improve the profitability of banks. 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. These activities involved some risk. Banks collect funds through different types of deposits having different maturities. While raising and lending funds banks have to consider liquidity and profitability factors. Large banks are stressing credit instead of assets conversion to meet their liquidity needs.

choosing between deposits finances and non. i.deposit financing.LIABILITY MANAGEMENT The liability management involves:a) Choosing the source of financing to be used. 1 .e. b) Determining the amount of funds needed and c) Obtaining funds at lowest possible cost with the least risk exposure.

If a banker holds a large portion of his fund in ready cash without earnings any income on it. NEED FOR LIABILITY MANAGEMENT The basic problem facing a bank manager is to have a satisfactory trade off between liquidity and profitability. but mainly on the confidence it inspires among the depositors. 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. However. The banker must. his business will 1 . This is why the public accepts bank deposits as being “as good as cash”. the bankers with an adequate amount of cash in hand meet the credit needs of the community and can make speculative gains.the two principle but conflicting goals of a bank. offer cash in exchange for deposits. Further. The success of the business of bank depends partly on the efficiency with which it can provide services to its depositors. The perfectly liquid asset is cash itself because it can fully satisfy the depositor’s claims. 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. the more obviously he can. 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. therefore. besides paying the wages of the staff and meeting other expenses.LIABILITY MANAGEMENT 3. A bank deals in the money of the people. The more cash a banker holds. without difficulty of any kind.

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

1 .LIABILITY MANAGEMENT resolving the conflicts have been developed from time-totime.

Management of Capital Fund The capital fund constitutes one of the sources of funds for a commercial bank. MANAGEMENT OF LIABILITIES The management of liabilities is very difficult and important job of a banker. 1 . a measure that the investors focus on increasingly as the basis for valuing a bank’s share. In liability management there are various liabilities are involved.LIABILITY MANAGEMENT 4. might erode public confidence in the banking system. dispenses public confidence in it. Increasing capital fund reduces the risk of bank failure by acting as cushion against the losses. particularly large ones. Failure of individual banks. For better liquidity and profitability there is a need of liability management. which in turn. On the other hand. but management of capital and deposits are very much important. 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. Success and survival of a bank depend on its strength. because they are major liabilities in banks. 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. Management of capital funds entails risk returns trade off. It represents owned resources. it also reduces expected returns on equity.

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

equipments. etc. Bank capital represents the private ownership of commercial banks. It should provide a margin of safety that preferably would allow bank to continue operations without loss of momentum and. would by time for it in which may re-establish its operational momentum. mainly because depositors cannot be expected to supply the funds for such assets. therefore.  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. be strengthened in line with the expansion of the bank. say a new branch building.risks that cannot be anticipated should be cover by gross earning and not by the capital fund. Normal risk. which distinguishes these institutions 1 . there are certain types of investments for which borrowed funds may not be helpful. reliance is placed on capital funds. of necessity. at the least. Under condition of expansion. The provision of the permanent assets is a continuous function of the bank capital fund.LIABILITY MANAGEMENT events that are managerial foresight cannot be reasonably expected to anticipate. furniture. In other words. the capital base must.  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.


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


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:



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

II) Reserve Fund and Other Reserves III) Deposits a) Saving Deposits. d) Current Deposits. b) Issued Capital. c) Subscribed capital. 1 . V) Borrowing from financial institutions. b) Fixed Deposits.LIABILITY MANAGEMENT 5. c) Recurring Deposits. agents. IV) Borrowing from Other Bank a) Borrowings from other banking companies. b) Borrowing from RBI. MAIN LIABILITIES OF BANK I) Share capital a) Authorized Capital. d) Paid Up Capital.

VIII) Profit and loss account. 1 . VII) Contingent liabilities.LIABILITY MANAGEMENT VI) Bills payable. IX) Other Liabilities.

b) Issued Capital:The issued capital is capital is that portion of the authorized capital. Only a part of the authorized capital is issued for public subscription. As and when the bank needs capital. Generally the entire authorized capital is not raised from the public in the beginning itself. announced for public subscription. The other part is kept as reserve. 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.LIABILITY MANAGEMENT I) SHARE CAPITAL:Commercial banks are generally organized in the form of joint stock companies. Share capital is called by different names at different stages of the development of the company. The issued capital is capital is that portion of the authorized capital. This represents the initial capital provided by the public in the form of buying shares. This is called share capital. it can release from authorized capital. 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. c) Subscribed Capital:1 .

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

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

but not withdrawn by customer. b) Time Deposits. They include:i) Current Account. Deposits occupy an important place in the banking activity. v) Called Deposits.LIABILITY MANAGEMENT III) Deposits:The real resources for the bank are various types of deposits accepted by the bank. ii) Saving Account. The deposits are the largest single item on the liabilities side.e. i. The following deposits fall under this category:- 1 . iii) Overdue Deposits. fixed and other term deposits past their due dates. a) Demand Deposits. The deposits of banks are broadly categorized into. deposits received from other banks repayable on demand.e. Time deposits are those which are repayable after a period or subject to notice from the depositors. Without deposits banks cannot do business effectively. if they are withdrawable on demand. Demand Deposits are those repayable on demand by a customer. i. iv) Other small collections.

50 can be withdrawn by cheque.100 at rural centers.250 at semi-urban centre’s and Rs. ii) Notice Deposits. a) Saving Account :Saving deposit accounts are opened by banks to inculcate the habit of savings among the public. vi) Daily Collection scheme. v) Annuity Deposits. These accounts are intended to facilitate personal transactions only. iii) Recurring / cumulative deposits. i.LIABILITY MANAGEMENT i) Fixed Deposits. For this purpose half year is 1 . iv) Reinvestment plan deposits. These deposits are generally for fixed income persons. vii) Permanent Income Plan.500 at other centre’s will be maintained in such accounts and for cheque book facility the minimum balance will be maintain is Rs. 50 debit entries are permitted in each half year. Rs.e. It is intended primarily for small savers. deposits from other banks repayable at the expiry of the notice period. A minimum balance of Rs. No maximum limit is prescribed.1000. Any sum not less than Rs.

3. 3) Any person can open a saving bank account with as little as rupees. 10/1 .5% to 4% depending upon the type of bank.5%.LIABILITY MANAGEMENT calculated from April to September and October to March every year. 2) The banks mop up the savings of the people through the savings bank accounts. At present interest allowed on these accounts is 4. That is the basic objective of saving bank account is developing the savings habit among people. 4) Saving bank balances carry some interest. This more attractive than the current account where virtually no interest is paid.e. 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. 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. 5) A depositor can withdraw as small a sum as Rs. Saving deposit account carry low rate of interest i.

Every term deposit receipt must carry the information:a) Period of deposit. provided they have the power of understanding.LIABILITY MANAGEMENT 6) If the banker is satisfied the customer can get the use of cheque book facility. b) Fixed Deposits Account:Opening of account:The minimum amount for which a term deposits receipt can be issued is Rs. Accounts can be opened and operated by minors. 7) Accounts can be opened in the individual or joint names of depositor. b) Date of maturity. 1000/-. Calculation of Interest: Interest on term deposits for less than six months is calculated 1 . c) Date of issue. 8) Saving bank accounts can be transferred from one branch to another at the request of the account holder. 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.

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

100/1 . depositors should stipulate the amount and the period of installments which shall not be allowed to be altered. if the account is for a period longer than 5 years.  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. 1. 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.per month. 5/.LIABILITY MANAGEMENT Recurring deposit accounts are introducing by the banks to inculcate the habit of saving on a regular basis. Installment for each month shall be payable on or behalf last working day of that month. 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. If the depositors fail to pay monthly installments in arrears. penalty at Rs. Minimum period of the account can be 120 months and minimum 6 months.50 for every Rs. At the time of opening of an account. 100/-. 50 with a minimum Rs.  Opening and conducting an account:Recurring deposit account can be opened by any sum in multiples of Rs.

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

3. 5.  Opening an account:A current account can be opened with an initial cash deposit of Rs. A current deposit holder is required to maintain a minimum balance of Rs. Moreover.  Operations in account:A current account may be operated upon any number of times during a working day. balance confirmation is required from the debtor’s side and not from the creditor’s side. 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. 1 . But in case of rural and semi-urban centers and Rs. Rs.000/. urban and metro centers.000/. Normally current account is not opened in the name of a minor.000/ Metro centers.000/-and Rs. 1. confirmation is required.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. 1.000/.at rural/semi-urban. 5.

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

I. it is called inter bank call money market.I.R.T. Banks borrow from other banks for a short period only. the A.C. Banks borrow from the R.B. Call money market deals in one day loans which may or may not be renewed the next day.LIABILITY MANAGEMENT While collecting third party cheque (and cheques favoring other banks) a commission at 6 paise% should be charged.I in the inter bank call money market.D.C. and from the non-bank financial institutions (the L.I. Individual banks borrow from each other as well through the call money market and otherwise. and its subsidiaries and the I. the G.I. Participants are mostly banks.B.B.I) that are permitted to lend by the R.C.I. the U.C. IV) Borrowing from Other Banks:Banks generally borrow from other banks as and when required.C.  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.D. therefore. the I.I. Borrowed Funds:- 1 .

1 . the R.  Certificate of Deposits:Certificate of deposits are another useful source of wholesale deposits (i.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. 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. 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. the schemes for CDs has been liberalized. On the recommendations of Vaghul Committee. banks usually utilize the overdraft facility in emergencies and not as a regular feature. However. etc:In order to transact their business. agent.I issued detailed guidelines for the issue of CDs and with changes introduced subsequently.B. The securities lodged to secure the borrowings represent a part of investment of the borrowing bank.LIABILITY MANAGEMENT Borrowing from other banking companies. The R.B. quite frequently. to save interest charges on overdrafts.e. banks in India. for larger sum of money) for banks and important instrument in the management of short-term funds.

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

B.I up to certain percentage of their holdings at concessional rates of interest. Refinance on 182 days. Banks have to maintain CRR and SLR on the issue price of CDs and report them as deposits to the R.B.I.I. The R. 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.B.B.B. Banks not permitted to grant loans against CDs or to buy them back prematurely.I is traditionally the ‘lender of last resort’.I will provide liquidity to the banks and other institutions when other sources dry up. Treasury bill is available to banks from the R. This means that the R.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.LIABILITY MANAGEMENT can also subscribe to CDs but only on a non-representation basis. b) Is charged higher rate of interest and 1 .I:- The R. The difference between stand by refinance and discretionary refinance is that the later:- a) Is at the discretion of the R.B.B.  Borrowing from R.

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.I:The reserve bank may grant accommodation to scheduled banks by way of:• Rediscounting of Bills.I Act authorize the R.I to grant accommodation by way of purchase or discount of the various kinds of bills specified therein.B.I advises banks not to treat R.I assistance as par of their loan able resources.B.I assistance certainly argument loan able resources but most of the assistances are highly discretionary and for short periods. Sections 17(2) of the R.B.B. Very often the R. Such R.LIABILITY MANAGEMENT c) Need not be secured by pledge of Government Securities. Methods of borrowing from the R.B. 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.B. 1 .

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. 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.  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. It should be drawn on and payable in India and mature within 90days from the date of purchase or re-discount.LIABILITY MANAGEMENT • REDISCOUNTING OF BILLS:According to section 17(2). one of which should be that of a scheduled commercial bank or state co-operative bank. one of which should be that of a scheduled bank or a state cooperative bank. 1 .

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 Bank’s 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. bear the signatures of a scheduled bank and mature within 90days from the date of purchase or discount. 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.  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. 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.  Bills for holding or Trading in Government Securities:Such bills should be drawn and payable in India.LIABILITY MANAGEMENT They should be drawn on and payable in India bearing two or more good signatures. Export credit by scheduled 1 .

V) Borrowings from financial institution:A part from borrowing from R. and assigned the task of being the main purveyor of term finance to the industrial sector in the country. The IDBI under its chapter has been.I introduced the Bill Rediscounting scheme which became effective from November 1.LIABILITY MANAGEMENT banks is also exempted from the norms relating to unsecured advances and guarantees given by banks to exporters. 1 . inter alias. the R.B. 1970. Under its various schemes of project finance.B. To encourage practice of rediscounting of bills.I. small road transport operators and artisans. banks supplements their resources by recourse to refinancing and/or bill discounting facilities from the following financial institutions. village and cottage industrial units in the tiny sector. commercial banks are provide refinance in respect of financial assistance to projects below Rs.300 lakhs and to medium and small industrial units. 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 bank’s and Bill rediscounting scheme.

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

a wholly-owned subsidiary of the R. The lending facilities are extended to commercial banks in India. 4) Refinance from NHB:- The National Housing Bank (NHB).B. commercial banks can obtain financial participation under EXIM Bank’s other programmes. The refinance will be made available only for direct lending to individuals or formal or informal group of borrowers including cooperative societies.50000/. ii) Refinance of export credit bills under which banks can obtain from export of Indian capital goods for an export contract up to Rs.per individuals for acquiring or constructing a new housing unit 1 . The quantum of refinance will be limited to housing loans up to Rs. Indian companies and foreign Governments companies and financial institutions. The housing finance routed through RRBs by sponsor banks will be taken as direct lending of the sponsor banks for this purpose. has finalized a refinance scheme for certain types of housing loans sanctioned by scheduled commercial banks on or after January 1. 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. For contract above Rs. 20 million. 1989. There are two lending programmes available to commercial banks. This facility enables banks to fund post shipment export credit extended to Indian exporters.I.20 million.LIABILITY MANAGEMENT loans. rediscounting and guarantees.

1 . it always carries bills payable and bills receivables. 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. VI) Bills payable:In any business firms all are not payable instantaneously. 5. This makes bills payable as source of funds and bills receivable a use of funds. Meters of build-up area and up to Rs. therefore. 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.for upgrading or major repairs irrespective of buildup area. 30000/.000/. The refinance for this purpose will be limited to 25% of total refinance related.LIABILITY MANAGEMENT not exceeding 40 concessional interest rate of 4% given to scheduled castes and scheduled Tribes. This is a liability for the banks who accept the responsibility of making payments of bills from its resources.

1 . if a bankers has given a guarantee for customer.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. acceptances etc. 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. For e. 4) Guarantees given on behalf of constituents in India and outside India.g. In such cases. endorsements. are recorded in the register. endorsements and guarantees register. the bank takes upon itself the responsibility for payment. All obligations undertaken by the bank as a result of guarantees. 5) Acceptances. endorsements and other obligations which includes letter of credit and bill accepted by the bank. debentures. The following items are included in the contingent liabilities:1) Claims against the bank not acknowledged as debts. In order to keep proper record of such liability the bank maintains a customer acceptance. 3) Liability on account of outstanding forward exchange contracts. 2) Liability for party paid investments and such as liabilities on partly paid shares.

bills discounted. 6) Other items for which the Bank’s is continuously liable. These are variety of liabilities which off set identical items on the asset side of the balance sheet. VIII) Profit and loss:Profit earned by the bank is shown under this head. if some of these obligations remain undisbursed. it becomes a liability to the bank. 1 . 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. Since profit is payable to shareholders in the form of dividends. such as arrears of cumulative dividends. they are not being shown as contingent liabilities.LIABILITY MANAGEMENT At the end of the year. estimated amounts of contracts remaining to be executed on capital account and not provided for are to be included. underwriting contracts.

It encompasses the analysis and development of goals and objectives. Asset Liability Management can hence be broadly defined as coordinated management of a banks balance sheet to allow for an alternative interest rate. Asset Liability management is concerned with strategic balance sheet management involving risk caused by changes in interest rates. In one way or another it has always been the function or responsibility or Treasury and other financial/strategic departments. accepting managing the risk. exchange rate. credit risk and the liquidity position of the banks. 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. measuring. of late Asset Liability Management departments are being established and Asset and Liabilities committees are being formed within financial institutions. the heart of bank financial management is risk management. liquidity and pre1 . 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 Because the business of banking involves the identifying.LIABILITY MANAGEMENT 6. However. the development of long term strategic plans. periodic profit plans and rate sensitivity management.

Some of the reasons for growing significance of Asset Liability Management are:1. 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. money supply and the overall credit position of market. uncertain product cycles. liquidity risk. Volatility:- Deregulation of financial system changed the dynamics of financial markets. which 1 . management decisions. But what if 50% of the liabilities are maturing within the same period? Though the financial institution has enough assets. the interest rates can change during the period thereby affecting the interest income from assets and interest expenses on liabilities. It is a flexible methodology that allows the banks to test the inter-relationships between the wide variety of risk factors including market risks.LIABILITY MANAGEMENT payment summaries. Even if the assets and liability maturity is matched to a large extent. etc. The vagaries of such free economic environment are reflected in interest rate structure. 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. the exchange rates and price levels. it may become temporarily insolvent due to severe liquidity crisis. For a business.

Regulatory Environment:- At the international level. 3. 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. most of them have an impact on the risk profile of the bank thereby enhancing the need for ALM. others have received a tremendous response. Management recognition:- All the above mentioned aspects forced bank managements to give a serious thought to effective management of assets and liabilities. 2. The management has realized that it is just not sufficient to have a very good franchisee for credit disbursement. While there were some innovations that came as passing fads. the same product has been repeated with certain differences and offered by various banks. flexi-deposits facility. In several cases.I) has issued frameworks and guidelines for banks to develop Asset Liability Management policies.B.LIABILITY MANAGEMENT involves trading in money. For example. 4. rate fluctuations invariably affect the market value of the bank and it’s Net Interest Income (NII). nor is it enough to have 1 . Product Innovation:- The second reason for growing the importance of ALM is rapid innovations take place in financial products of the bank. What ever may be features of the products.

Thus. 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. 1 . In addition to these. 3) To control volatility in all targets accounts. 4) To ensure an acceptable balance between profitability and growth rate.LIABILITY MANAGEMENT just a very good retail deposit base. 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. 2) To control the volatility of net interest income and net economic value of a bank. the objectives of ALM are as follows:1) To control liquidity risk.

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. Suppose for example. The manager can then choose the best course of action depending on the Board’s risk performance. 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. existing assets and liability structure of a bank is such that in aggregate the maturity of assets is longer than the maturity of liabilities. 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. This would obviously expose the bank to greater interest rate because if interest rates tend to increase in future.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. it would adversely affect the banks net interest income. 1 .

it is a three stage process which involves:i) ii) Measurement and determination of risk. The appropriateness of risk measurement depends upon the volatility in the operating environments. Generally. the bank manager may need other information such as competitive pressures. Enhancement of long term profitability for given level of risk. ALM approach focuses on supplying this information to the management for better and more rational decisions. iii) Management of risk. availability of supporting data and expertise within the bank and the expected market and business developments. Process of Asset Liability Management:ALM is strategic approach to measure. demand and supply factors. minor and manages the market risk of a bank.LIABILITY MANAGEMENT In order to make prudent decisions with regard to procurement of funds and their allocation among assets. Thus.  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. these are two major parameters which banks all over the world employ to measure their balance 1 . and the part of the decisions on the banks retail lending products etc.

• Value at Risk Method. Risk to the net interest income and market value of portfolio equity. viz. Instead every effort should be made to find low priced liabilities.  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. the latter measures the risk arising out of the maturity mismatches in its assets and liabilities over the future years.LIABILITY MANAGEMENT sheet risks. In these field branch managers plays crucial role. There are several methods to measure interest rate. • Simulation Method. 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. These two parameters together attend to the short term and long term balance sheet risks. They should resist the temptation of accession to equity found high priced liabilities. While the former seeks to measure the risk to the immediate profits that emanate from cash flow mismatches occurring in the accounting year. important being:• Gap Method. • Duration Method. Mismatches are usually built in client markets as 1 .

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

fluctuations of interest and exchange rates and the pace of change of the risk profile of the banks balance sheet. The Board should also determine how frequently risks are to be monitored keeping in view the availability of data. a comprehensive mechanism needs to be developed. 1 .LIABILITY MANAGEMENT So as to ensure that policies and strategies are regularly reviewed and monitored.

Each bank follows different practices depending upon their need. It is easier said than done. in these activities bank earns some interest. Geographical spread and such other relevant factors. 1 . Liability management is the activity related with the collection of funds from depositors and other creditors and these funds are invested and lent out. Managements of deposits are also an important responsibility of a banker. The deposits are real source of a bank. Without deposits bank cannot do business effectively. Management of liability is one of the critical functions of a bank. If bank have to increase their funds then there is a need to gain public confidence. Therefore there is a need of proper management of capital and deposits. 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. The capital represents the owned fund and it includes the share capital. but capital and deposits are major liabilities of a bank. There are various liabilities of a bank.LIABILITY MANAGEMENT CONCLUSION The proper management of liability is important for every bank. Banks normally devise policies for accepting or creating certain liabilities.

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