MBFI

Risk Management in Banks

Risks on a Banks Balance Sheet

Liquidity Risk
Credit Risk
Market Risk
Operational Risk

Liquidity Risk
CASA
Withdraw able on demand
Core portion & volatile portion
FDs - Pre-Mature withdrawal
Loans inflow only on maturity
Cash Credit inflow unpredictable
Liquidity risk inherent
on a commercialbanks balance sheet

Issues in Liquidity Management

Day-to-Day liquidity management
Sufficient cash in the vaults to meet
withdrawals (depositors and Cash Credit)
Maintenance of CRR
Investing day-to-day surplus
Borrowing to cover day-to-day shortages
Potential/ unforeseen liquidity crunch

Managing liquidity risk

Cash in vaults
Liquid assets (SLR) -T Bills & GOI, SDL
Call Money
RBI Repos & Reverse Repos
CBLO
Repos with other Banks & FIs
Liquidity management is a trade-off
between need for liquidity and return

Call Money Market

Overnight funds / deposits
Participants -Banks & Primary Dealers
Demand And Supply :
Temporary surpluses / deficits of
banks and PDs

Characteristics of Call Money Market

Clean Lending (without any security backing)

In the form of an overnightdeposit

Interest rates - determined by the market forces

Volatile : wide fluctuations even during the day

Intervention of RBI through LAF, OMO

Contracted over the telephone

High Value transactions

Brokers not allowed

Treasury Bills

Short Term Debt of Government of India -Maturity

less than a year

Issued
through RBI
at a discount to face-value and redeemed at F V
for 91, 182 days and 364 days
by auction

Good secondary market

Good instrument for cash management

Government Debt

Very Large requirements of GOI every year

RBIs role : advise, issue management and
registrar
Forms : D-Mat : SGL Balances (maintained by
RBI) & C-SGL (Constituent SGL) through
intermediaries
Coupons: semi-annual, zero, floating rate
Indexed Bonds
Issued thro auctions : normal or price auctions
State Development Bonds Bonds issued by
State Governments through RBI

Repos and Reverse Repos

Repurchase agreement / RPs Buy-Backs/ Ready Forward

Combination of a Ready Transaction and a Forward Deal
Simultaneous sale of an asset (today)
And an agreement (contract)
To repurchase the same asset on a future date at a price fixed
today
Two legs
Sale
Give the asset and receive rupees
Title passes on day one
Re-purchase
Give rupees and receive back the asset
Title restored on the date of maturity

Repo a form of borrowing ?

RBI and the Money Market

RBI intervention and signaling through the money market

RBI Reverse Repo sells GOI bonds from own holding and buys back
Implications
Borrows from the market
Sucks up liquidity
Influences interest rate s- floor

RBI Repo
Buys GOI bonds into own holding and sells them back
Implications
Lends to banks / PDs
Injects liquidity
Influences interest rates ceiling

RBI

LAF and OMO

LAF (Liquidity Adjustment Facility)

Every day one to 3 days Repo & Term repos
Both REPO and Reverse Repo window
Pre-announced interest rates (Monetary Policy)
Very effective fine tuning of money supply /
liquidity / interest rates
Useful for banks in da-to-day liquidity management

OMO sale or purchase of RBI on own account

Influences the money supply / liquidity
Longer-term effect that LAF

C B L Os

Collateralized Borrowing and Lending Obligations

Separates the claims of a lender and the repayment

obligations of the borrowers

Effectively makes the Claims & Obligations liquid

Mechanism to borrow and lend funds against

securities for the desired period

Platform for the lenders and borrowers to come

together

Not only for banks but also for primary dealers,

financial institutions, mutual funds, non-banking
finance companies and corporates.