Asset-liability mismatch norms tightened

Last updated: 06 September 2007

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MUMBAI: In a bid to instill more discipline among banks in managing their liquidity, the Reserve Bank of India (RBI) has asked banks not to have a negative gap in their fund outflows for the next day.

Negative gap refers to a mismatch in which interest-sensitive liabilities exceed interest-sensitive assets. Earlier, banks had a comfort of 14 days in terms of informing the central bank about a negative outflow that has now been brought down to a single day.

This is indicated by RBI in its new draft guidelines issued on Wednesday evening on asset-liability management. According to a treasury head from a public sector bank, “The new norms are more stringent but, at the same time, banks’ liquidity management will improve.”

As per the new draft norms, the current liquidity risk bucket of 1-14 days has been divided into three parts: next day (single day), 2-7 days and 8-14 days. RBI has said the net cumulative mismatch in liquidity in the first three buckets should not exceed 5%, 10% and 15% respectively. In the case of 15-28 day bucket, the mismatch should not exceed 20%.

The basic idea is that in a short duration, a bank’s outflow should not be more than inflow. This means, for instance, in the first bucket, or next day, the outflow should not be more than 5% of the expected inflow. If the outflow breaches the 5% mark, the bank has to inform its asset-liability committee (Alco) as well as the RBI.

Besides, RBI has said the banks will be required to report the data to it on a fortnightly basis. At present, banks report the data to RBI on a monthly basis. From April 1, 2008, banks will have to move towards fortnightly reporting of data.

RBI has given banks time till January 1, 2008, to implement the new norm. This will give banks time to fine-tune their existing management information systems. Treasury heads that several small banks were seen borrowing in the overnight call money market to finance 30-90 day loans.

The mismatch in the asset-liability management sometimes led to wide fluctuations in the call money market. For instance, during the end of February to early March 2007, the call rates moved in the band of 6-80%. RBI has said if negative mismatches during the first four buckets, day 1, 2-7 days, 8-14 days and 15-28 days, exceed the prudential limit, the bank should disclose this as a footnote and also indicate how it proposes to finance the gap to bring the mismatch within the prescribed limits.

RBI has said the gap can be financed from the call money market, bills rediscounting, repos and deployment of foreign currency resources after conversion into rupees (unswapped foreign currency funds).

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