Liability management in Banks focus on Deposits


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Details about liability management through deposits in the context of present comeptition by innovations.

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Liability management in Banks focus on Deposits

  1. 1. Liability Management in BanksFocus on Public Deposits – Product Innovation & Competition Dr. D V Srinivasa Rao, Faculty Dr. D V S RaoINDIANBANK MANAGEMENT ACADEMY FOR GROWTH AND EXCELLENCE
  2. 2.  Session Management  Evolution  Asset Liability Management  Structure of bank Liabilities  Liability Management  Measuring Liquidity exposures  Structural Liquidity  Addressing the mismatches  Market players  Transformation of competition  5 Star Liability Management Strategy  Three dimensions of Innovation Dr. D V S Rao
  3. 3. Evolution In the 1940s and the 1950s, there was an abundance of funds in banks in the form of demand and savings deposits. Hence, the focus then was mainly on asset management But as the availability of low cost funds started to decline, liability management became the focus of bank management efforts Active management of liability side began in the early 1960s, when commercial banks began issuing negotiable certificate of deposits, which can be sold to others prior to maturity to solicit funds from other institutions in money market In the 1980s, volatility of interest rates in USA and Europe caused the focus to broaden to include the issue of interest rate risk. ALM began to extend beyond the bank treasury to cover the loan and deposit functions Banks started to concentrate more on the management of both sides of the balance sheet Dr. D V S Rao
  4. 4. Asset Liability Management? The process by which an institution manages its balance sheet in order to allow for alternative interest rate and liquidity scenarios Banks and other financial institutions provide services which expose them to various kinds of risks like credit risk, interest risk, liquidity risk, market risk, operational risk etc., Asset-liability management models enable institutions to measure and monitor risk, and provide suitable strategies for their management. Dr. D V S Rao
  5. 5.  An effective Asset Liability Management Technique aims to manage the volume, mix, maturity, rate sensitivity, quality and liquidity of assets and liabilities as a whole so as to attain a predetermined acceptable risk/reward ratioIt is aimed to stabilize short-term profits, long-term earnings and long-term substance of the bank. The parameters for stabilizing ALM system are: Net Interest Income (NII) Net Interest Margin (NIM) Economic Equity Ratio Achieve balanced growth in earning and bank assets Controlling the gap between maturities of assets and liabilities Hedging against changes in interest rates Dr. D V S Rao
  6. 6. Structure of Liability ManagementLiability management gained momentum because of Increased lending activities Long term Funding Deregulation of interest rates Competition Government restrictions on mobilisation of bulk deposits- PDs / CDs Restrictions on borrowings Dr. D V S Rao
  7. 7. Dr. D V S Rao
  8. 8. Advances grew by 16.30 % - 51260 BillionDeposits grew by 12.7 % - 65610 billionCD Ratio was 78.12 % Dr. D V S Rao
  9. 9. Structure of bank liabilities Deposit sources of funds  Core deposits of regular bank customers.  Purchased deposits are acquired on a nonpersonal basis from the financial market at competitive interest rates.  Categories of deposits accounts: demand deposits, savings deposits, Time deposits and large time deposits (negotiable certificates of deposit & non negotiable preferential deposits).  Liability management is based on purchased deposits like Preferential Deposits and Certificate of Deposits Dr. D V S Rao
  10. 10. Structure of bank liabilities Non deposit sources of funds  Liquidity Adjustment Facility  Marginal Standing Facility  Refinance facilities from other financial institutions  Call money market  Money market  Borrowings from other financial institutions Dr. D V S Rao
  11. 11. Liabilities of Banks1 Capital 0.51%2 Reserves & Surplus 6.93%3 Deposits 79.74% Current Deposits (3.80 % to Total Deposits) 3.03% Savings Bank Deposits (24.80 % to Total Deposits) 19.62% Term Deposits (62.90 % to Total Deposits) 50.64% Certificates of Deposits (8.50 % to Total Deposits) 6.45%4 Borrowings 1.75%5 Other Liabilities & Provisions 2.18%6 Unavailed portion 1.55%7 LC/Guarantee likely to be invoked 0.16%8 Swaps (Buy/sell Maturing forwards) 6.21%9 Interest Payable 0.26%10 Others (Profit) 0.72% TOTAL Dr. D V S Rao 100.00%
  12. 12. Balance sheet structure of bank liabilities As bank size decreases (increases), greater emphasis is placed on retail deposits (managed liabilities). Sweep programs increased in popularity i.e., funds are moved from savings accounts to high yielding time deposits Banks are finding it difficult retaining core deposits due to the low interest rates. Depositors sought higher yields in money and capital markets. Banks increased mutual fund offerings to customers, which offer higher yield. Dr. D V S Rao
  13. 13. Liability Management – Liquidity, Maturity, Profitability 1. Borrowing from the call money or repo market. 2. Issuing additional deposits or selling bonds.  Focus on the volume of stable, long-term, core deposits and net deposit drains (deposit outflows less new deposit and other inflows each day).  Need to predict the distribution of net deposit drains. 1. Behavioral analysis of premature withdrawal, especially for high-value deposits. 2. Analysis of renewal patterns of maturing term deposits. 3. Behavioral study of demand deposits – highly volatile2011-12-Garnered 16 Lac Crore deposits 1-3 year, disubursed loans of 18 Lac crores Garnered 5 Lac Crore deposits 3 – 5 year, disubursed loans of 6 Lac crores Dr. D V S Rao
  14. 14. Measuring Liquidity Exposure The difference between expected cash inflows and outflows (gap) in each bucket captures the excess or deficit of liquidity within a specific future interval. Depending on balance sheet structures and strategies, one bank can have negative gaps while another has positive gaps Banks reliant on short-term funding will actively monitor the first few buckets. Monitoring longer-term gaps allows the bank to frame strategies which alter product maturities. Dr. D V S Rao
  15. 15. Statement of Structural LiquidityAll Assets & Liabilities to be reported as per theirmaturity profile into 10 maturity Buckets:i. 1 dayii. 2 to 7 daysiii. 8 to 14 daysiv. 15 to 28 daysv. 29 days and up to 3 monthsvi. Over 3 months and up to 6 monthsvii. Over 6 months and up to 1 yearviii.Over 1 year and up to 3 yearsix. Over 3 years and up to 5 yearsx. Over 5 years Dr. D V S Rao
  16. 16. STATEMENT OFSTRUCTURAL LIQUIDITY Places all cash inflows and outflows in the maturity ladder as per residual maturity Maturing Liability: cash outflow Maturing Assets : Cash Inflow Classified in to 10 time buckets Shows the structure as of a particular date Banks can fix higher tolerance level for other maturity buckets. Tolerance levels of maturity mismatches Next day 2 – 7 days 8 – 14 days 15 -28 days 5% 10 % 15% 20%•Long term resources should not fall below 70% of long term assets•Long and medium term resources together should not fall below 80% of thelong and medium term assets Dr. D V S Rao
  17. 17. An Example of Structural Liquidity Statement 15-28 30 Days- 3 Mths - 6 Mths - 1Year - 3 3 Years - Over 5 1-14Days Days 3 Month 6 Mths 1Year Years 5 Years Years TotalCapital 200 200Liab-fixed Int 300 200 200 600 600 300 200 200 2600Liab-floating Int 350 400 350 450 500 450 450 450 3400Others 50 50 0 200 300Total outflow 700 650 550 1050 1100 750 650 1050 6500Investments 200 150 250 250 300 100 350 900 2500Loans-fixed Int 50 50 0 100 150 50 100 100 600Loans - floating 200 150 200 150 150 150 50 50 1100Loans BPLR Linked 100 150 200 500 350 500 100 100 2000Others 50 50 0 0 0 0 0 200 300Total Inflow 600 550 650 1000 950 800 600 1350 6500Gap -100 -100 100 -50 -150 50 -50 300 0Cumulative Gap -100 -200 -100 -150 -300 -250 -300 0 0Gap % to Total Outflow -15.38 -14.29 18.18 -4.76 -13.64 6.67 Dr. D V S Rao -7.69 28.57
  18. 18. ADDRESSING THE MISMATCHES Mismatches can be positive or negative Positive Mismatch: M.A.>M.L. and Negative Mismatch M.L.>M.A. In case of +ve mismatch, excess liquidity can be deployed in money market instruments, creating new assets & investment swaps etc. For –ve mismatch,it can be financed from market borrowings (Call/Term), Bills rediscounting, Repos & deployment of foreign currency converted into rupee. Dr. D V S Rao
  19. 19. STRATEGIES… To meet the mismatch in any maturity bucket, the bank has to look into taking deposit and invest it suitably so as to mature in time bucket with negative mismatch. The bank can raise fresh deposits of Rs 300 crore over 5 years maturities and invest it in securities of 1-29 days of Rs 200 crores and rest matching with other out flows. Dr. D V S Rao
  20. 20. Players in the MarketBanks Mutual Funds Insurance Cos Bond Market Money market MoneyNBFCs Corporate Lenders Dr. D V S Rao
  21. 21. Competition Transformation Opening of new generation private sector Banks,Deregulation Competition Entry of Foreign Banks Interest rate deregulation Healthy Cutthroat Autonomy to Banks Unhealthy Dr. D V S Rao Unethical
  22. 22. 5 Liability Management StrategyBeating the competition Wining the Customer PricingRegistering healthy growth Protecting NIM Innovate LIQUIDITY MANAGEMENT Product STRATEGY CRM Service Dr. D V S Rao
  23. 23. Managing bank liabilities - Pricing Operational cost of maintaining the services and minimum balance requirements,Pricing deposits costs and volumes, credit availability and compensating balance requirements, customer relationship pricing,Policy promotional pricing of new products, and other marketing elements such as product differentiation Explicit (interest) and implicitDeposit (noninterest) pricing of deposits.pricing Deregulation of interest rates on deposits shifted banks to morematrix explicit and less implicit pricing. Dr. D V S Rao
  24. 24. Managing bank liabilities - PricingComponents of Profitability andPricing decision deposit pricing Cost of funds Cost/revenue analysis Pricing strategy of Minimize total costs competitors Maximize total Interest elasticity of revenues consumer demand Set marginal costs Past deposit flows for equal to marginal various kinds of revenues consumer accounts Breakeven points Maturity structure of define the range of Dr. D profitable output levels V S Rao deposits
  25. 25. Managing bank liabilities - Innovations “Innovations in the past " Time Deposits Demand DepositsFixed Deposits Sops for maintaining higherCumulative Deposits balances in current accountsUnfixed fixed deposit Free Insurance policiesRecurring Deposit Free remittance facilitiesVariable Recurring Deposit Sweep depositsFacility deposits Locker facilities Distributory channels New ProductsATM Insurance policiesNet Banking Demat accountsMobile banking Online trading a/cRTGS/NEFTWithdrawal in any ATM Gold coinsBusiness Correspondents Gift CardsUltra modern branches Bill paymentDebit Cards / Pos Cross sellingDoorstep services Dr. D V S Rao
  26. 26. Managing bank liabilities – CRM way Customer satisfaction to Customer Delight Personal contacts Contacting through telephone SMS contact E-mail contact Greetings on occasionsDoor to door campaign Dr. D V S Rao
  27. 27. "Innovating to unlock the next decade" Changed age profile of customers Significant shifts in consumer behavior Technology disruptions Emergence of new opportunities Divergent growth / Granularity of Growth Constraints on capital and new regulatory structures Dr. D V S Rao
  28. 28. Three Dimensions of Innovation Product design Essentials of Innovation•Evolve new products •Appreciate new ideas•Modifications in products •Reward innovations / creativity •Regulatory & Compliance supt•Gold bonds •Training on innovation / creativity•Inflation linked deposit schemes •Target new customers•Group accounts / Corporate •Develop new connections Innovative ways of attracting customers Paying higher interest for higher balances Interest linked to average balances Felicitate old / regular customers / Loyal customers Prize for school children keeping high balances Social net working Find new ways of doing things Dr. D V S Rao