One of the most important activities conducted by banks is liquidity management. Regulators all over the world feel that banks should have adequate liquidity in their operations. The basic step towards liquidity management is to put in place an effective liquidity management policy. Arrangement of back-up liquidity surpluses in the form of lines of credit and liquidity support from the Reserve Bank could help banks from shortage of liquidity.

Liquidity management is among the most important activities conducted by banks in India. Liquidity is the ability of a bank to meet its obligations as they become due. Sound liquidity management can reduce the probability of a default. Importance of liquidity transcends the individual bank, since liquidity shortfall in one institution can have system-wide repercussions. Liquidity defaults are contagious in nature. We have seen near holocausts when South Asian economies melted down.

Banks in India are flushed with liquidity. The abundant liquidity in the system averted a major financial crisis when cooperative banks in some states collapsed. Even liquidity storms in some private sector banks withered away. The excess liquidity provided the lifeline to the banking system. Such a sweet story may not last long.

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