All India Management Association (AIMA) 2007 M.B.A Marketing Management Central Banking

3. There is nothing fair, just, or even honest in a monetary system which steals people's savings, or rewards those lucky enough to go heavily into debt at the right time. There can be little doubt that a few of those who today are wealthy became wealthy as much through having the real! value of their borrowings evaporate before their eyes as through their own efforts and initiative. And this sends absolutely the wrong message to everyone making saving, spending and investment decisions.
Because in most societies interest rates are used as a way to try to compensate savers for the erosion of the principal value of their savings through inflation, there is an additional issue which often makes it particularly difficult for those with low incomes or few other assets to borrow at a time of high inflation. The issue arises from the fact that, when inflation is high and nominal interest rates are similarly high, the cash-flow issue of servicing a loan is quite difficult in the 1st few years of the loan, but very easy in the last few years of the loan. Putting it in a different way, using interest rates to compensate savers for the effects of inflation on their savings has the effect of front-loading the real burden of debt service. This may effectively deny those on low incomes any access to borrowing facilities in times of high inflation, even though the real interest rate on the loan is at a moderate level. < TOP >

4. The 1st step towards liquidity management is to put in place an effective liquidity management policy, which, inter alia, should spell out the funding strategies, liquidity planning under option scenarios, prudential limits, liquidity reporting/ reviewing, etc.
Liquidity measurement is quite a difficult task and can be measured through stock or cash flow approaches. The key ratios, adopted across the banking system are:
Loans to Total Assets
Loans to Core Deposits
Large Liabilities (minus) Temporary Investments to Earning Assets (minus) Temporary Investments, where large liabilities represent wholesale deposits which are market sensitive and temporary investments are those which mature within 1 year and temporary investments are held in the trading book and are readily sold in the market;
Purchased Funds to Total Assets, where purchased funds include the entire inter-bank and other money market borrowings, including Certificate of Deposits and institutional deposits; and
Loan Losses/Net Loans.
While the liquidity ratios are the ideal indicator of liquidity of banks operating in developed financial markets, the ratios do not reveal the intrinsic liquidity profile of Indian banks, which operate generally in an illiquid market. Experience indicates that assets commonly considered as liquid like Government securities, other money market instruments, etc. have limited liquidity as the market and players are unidirectional. Thus, analysis of liquidity involves tracking of cash flow mismatches. For measuring and managing net funding requirements, the use of maturity ladder and computation of cumulative surplus or deficit of funds at opted maturity dates is recommended as a standard tool. The format prescribed by RBI in this regard under ALM System should be adopted to measure cash flow mismatches at various time bands. The cash flows should be placed in various time bands based on future behavior of assets, liabilities and off-balance-sheet items. In other words, banks should have to analyze the behavioral maturity profile of different components of on/off-balance sheet items on the basis of assumptions and pattern analysis supported by the time series analysis. Banks should also undertake variance analysis, at least, once in 6 months to validate the assumptions. The assumptions should be fine-tuned over a period, which facilitates near reality predictions about future behavior of on/off-balance sheet items. Apart from the above cash flows, banks should also track the impact of prepayments of loans, premature closure of deposits and exercise of choices built in certain instruments which offer put/call choices after specified times. Thus, cash outflows can be ranked by the date on which liabilities fall due, the earliest date a liability holder could exercise an early repayment choice or the earliest date contingencies could be crystallized. < TOP >

Earning:   Approval pending.