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

1. Liability Management
in Banks
Focus on Public Deposits – Product Innovation & Competition
Dr. D V Srinivasa Rao, Faculty
Dr. D V S Rao
INDIANBANK MANAGEMENT ACADEMY FOR GROWTH AND EXCELLENCE

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. 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. 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.  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 ratio
It 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. Structure of Liability Management
Liability 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. Dr. D V S Rao

8. Advances grew by 16.30 % - 51260 Billion
Deposits grew by 12.7 % - 65610 billion
CD Ratio was 78.12 %
Dr. D V S Rao

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. 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. Liabilities of Banks
1 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. 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. 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 volatile
2011-12-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. 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. Statement of Structural Liquidity
All Assets & Liabilities to be reported as per their
maturity profile into 10 maturity Buckets:
i. 1 day
ii. 2 to 7 days
iii. 8 to 14 days
iv. 15 to 28 days
v. 29 days and up to 3 months
vi. Over 3 months and up to 6 months
vii. Over 6 months and up to 1 year
viii.Over 1 year and up to 3 years
ix. Over 3 years and up to 5 years
x. Over 5 years
Dr. D V S Rao

16. STATEMENT OF
STRUCTURAL 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 the
long and medium term assets Dr. D V S Rao

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 Total
Capital 200 200
Liab-fixed Int 300 200 200 600 600 300 200 200 2600
Liab-floating Int 350 400 350 450 500 450 450 450 3400
Others 50 50 0 200 300
Total outflow 700 650 550 1050 1100 750 650 1050 6500
Investments 200 150 250 250 300 100 350 900 2500
Loans-fixed Int 50 50 0 100 150 50 100 100 600
Loans - floating 200 150 200 150 150 150 50 50 1100
Loans BPLR Linked 100 150 200 500 350 500 100 100 2000
Others 50 50 0 0 0 0 0 200 300
Total Inflow 600 550 650 1000 950 800 600 1350 6500
Gap -100 -100 100 -50 -150 50 -50 300 0
Cumulative Gap -100 -200 -100 -150 -300 -250 -300 0 0
Gap % 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. 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. 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. Players in the Market
Banks Mutual Funds Insurance Cos
Bond Market Money market
Money
NBFCs Corporate
Lenders
Dr. D V S Rao

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. 5 Liability Management Strategy
Beating the competition Wining the Customer
Pricing
Registering healthy growth Protecting NIM
Innovate LIQUIDITY
MANAGEMENT
Product
STRATEGY
CRM Service
Dr. D V S Rao

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 implicit
Deposit (noninterest) pricing of deposits.
pricing Deregulation of interest rates on
deposits shifted banks to more
matrix explicit and less implicit pricing.
Dr. D V S Rao

24. Managing bank liabilities - Pricing
Components of Profitability and
Pricing 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. Managing bank liabilities - Innovations
“Innovations in the past "
Time Deposits Demand Deposits
Fixed Deposits Sops for maintaining higher
Cumulative Deposits balances in current accounts
Unfixed fixed deposit Free Insurance policies
Recurring Deposit Free remittance facilities
Variable Recurring Deposit Sweep deposits
Facility deposits Locker facilities
Distributory channels New Products
ATM Insurance policies
Net Banking Demat accounts
Mobile banking Online trading a/c
RTGS/NEFT
Withdrawal in any ATM Gold coins
Business Correspondents Gift Cards
Ultra modern branches Bill payment
Debit Cards / Pos
Cross selling
Doorstep services Dr. D V S Rao

26. Managing bank liabilities – CRM way
Customer satisfaction to Customer Delight
Personal contacts
Contacting through telephone
SMS contact
E-mail contact
Greetings on occasions
Door to door campaign Dr. D V S Rao

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. 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

29. Thank
You…
Dr. D V Srinivasa Rao, Faculty
INDIANBANK MANAGEMENT ACADEMY FORD V S Rao
Dr. GROWTH AND EXCELLENCE