| Pub. Date | : Oct, 2018 |
|---|---|
| Product Name | : The IUP Journal of Applied Finance |
| Product Type | : Article |
| Product Code | : IJAF21810 |
| Author Name | : Amita Arora and Harpreet Kaur Kohli |
| Availability | : YES |
| Subject/Domain | : Finance |
| Download Format | : PDF Format |
| No. of Pages | : 16 |
Measuring and managing liquidity risk is one of the most crucial activities of commercial banks all over the world, as liquidity risk hovers around a bank like an invisible eternal phantom and is often accompanied by interest rate risk. RBI's first guidelines on asset-liability management in 1999, revised guidelines in 2007 and November 2012 guidelines on liquidity risk management strengthened the liquidity risk handling. In this paper, we examine and compare the status of liquidity position of selected public and private sector banks through stock and flow approaches for the period 2013-14 to 2015-16. Under stock approach, loan to deposit ratio and liquid assets to total assets ratio are used. Loan to deposit ratio exhibits the higher loans given by private sector banks as compared to selected public sector banks, and liquid assets to total assets ratio shows that public sector banks hold more liquid assets as compared to their counterparts. Under flow approach, maturity pattern of risk-sensitive assets and liabilities of public and private sector banks are assessed by calculating gap ratios for selected public and private banks, which revealed that banks are exposed to liquidity risk. Overall, public sector banks are more exposed to liquidity risk due to their negative mismatches, whereas private sector banks are managing their liquidity risk, even short-term liquidity, in a better way as compared to their counterparts.
Risk management is a major apprehension for banks and regulators all over the world. It is an imperative issue linked to financial system stability. Liquidity risk can be the foremost and biggest reason for financial turmoil. As bank deposits, generally, have a much shorter contractual maturity than loans and liquidity, the management needs to provide a cushion to cover anticipated deposit withdrawals. Liquidity is the ability to efficiently accommodate deposit as also reduction in liabilities and to fund the loan growth and possible funding of the off-balance sheet claims.
Applied Finance Journal.