The Reserve Bank has ordered commercial banks to tighten their asset-liability management and suggested parameters based on time buckets and the sensitivity of both deposits and advances to interest rate fluctuations.
In a circular to commercial banks dated February 12, the RBI said, With progressive liberalisation of financial markets, deregulation of interest rates and greater risks being faced by banks on account of maturity mismatches, comprehensive risk management has become essential. We propose to advise the banks to put in place appropriate system of asset-liability management.
The Reserve Bank has decided to test a model on a few leading banks, whereby it has asked banks to furnish data in the format outlined by it before February 25.
On the liabilities side, the RBI has said that as a general rule 20-25 per cent of the demand deposits, including savings, should be considered as withdrawable on demand and shown under the 1-14 day time bucket. The RBI has told banks to study the behavioral pattern of deposits on the basis of historical trends.
Based on this, the RBI has said that deposits should be classified into volatile and core portions. While volatile deposits can be placed in the 1-14 day bucket, the core portion should placed in the one-two year bucket. Term deposits will fit into the respective maturity bucket.
The NPAs net of provisions should be shown under the two to five year bucket and the substandard assets should be in the one to two year bucket. On the credit front also, RBI has stated that banks should study the behavioral and seasonal pattern in drawal based on outstanding and the core and volatile portion should be identified. While the volatile portion could be shown as an outflow or inflow, the core portion may shown under the one or two bucket time.
On asset side, it said that excess balance over the required CRR and SLR be shown under one to 14 days bucket, the statutory CRR balance may be distributed amounts the various time buckets corresponding to the DTL placed in those buckets with a time lag of 14 days.
For cash credit, overdrafts, loan repayable on demand and term, repricing is needs when the PLR is changed. RBI said that due to frequent changes in PLR, banks should foresee the direction of interest rate movements and capture the amount in the time bucket by which time PLR would be revised.
On liability side, RBI said that the saving banks deposits is sensitive about the interest payment portion and repricing is possible only when RBI changes the rates while announcing the monetary policy, which is April and October every year till RBI fully deregulates the interest rates. Accordingly the time buckets should be co-terminus with the timing of the announcement of credit policy. For time deposits and certificates of deposits, the amount should be distributed to different buckets on the basis of remaining maturity.
For borrowing on floating rate, RBI said that the amount should be distributed to the appropriate bucket which refers to the repricing date, while for the zero coupon, it should be distributed to the respective remaining maturity buckets. For the borrowing from the RBI, it should be distributed to the maturing buckets relating to the month of April and October since the reprice in done only when RBI changes rates.
