RBI Tightens ALM Norms for Urban Co-op Banks: New Buckets & Limits

RBI/2008-09/176 UBD.PCB.Cir.No. 3/12.05.001/08-09 September 17, 2008 The Chief Executive Officer of all Scheduled Primary (Urban) Co-operative Banks. Dear Sir/Madam Guidelines on Asset-Liability Management (ALM) System – Amendments-Scheduled UCBs As you are aware, Reserve Bank had issued guidelines on ALM system vide circular dated April 15, 2002 which covered, among others, interest rate risk and liquidity risk measurement/reporting framework and prudential limits. Further vide circular UBD.CO.BPD.SPCB.No.8/12.05.001/06-07 dated June1, 2007 banks were advised to submit the Structural Liquidity statement and Interest Rate Sensitivity statement through the ALM Module provided in the OSS software. As a measure of liquidity management, banks are required to monitor their cumulative mismatches across all time buckets in their Statement of Structural Liquidity by establishing internal prudential limits with the approval of the Board / ALCO. As per the guidelines, the mismatches (negative gap) during the time buckets of 1-14 days and 15-28 days in the normal course, are not to exceed 20 per cent of the cash outflows in the respective time buckets. 2. In this regard, it is advised that a need is felt to have a sharper assessment of the efficacy of liquidity management. The guidelines have therefore, been reviewed and it has been decided that: (a) the banks may adopt a more granular approach to measurement of liquidity risk by splitting the first time bucket (1-14 days at present) in the Statement of Structural Liquidity into three time buckets viz. Next day, 2-7 days and 8-14 days. (b) the Statement of Structural Liquidity may be compiled on best available data coverage, in due consideration of non-availability of a fully networked environment. Banks may, however, make concerted and requisite efforts to ensure coverage of 100 per cent data in a timely manner. (c) the net cumulative negative mismatches during the Next day, 2-7 days, 8-14 days and 15-28 days buckets should not exceed 5 % ,10%, 15 % and 20 % of the cumulative cash outflows in the respective time buckets in order to recognize the cumulative impact on liquidity. (d) banks may undertake dynamic liquidity management and should prepare the Statement of Structural Liquidity on  daily basis to Top Management / ALCO. The Statement of Structural Liquidity, may, however, be reported to RBI as hitherto, ie.,  at fortnightly intervals within 10 days  of the last reporting Friday. 3. The format of Statement of Structural Liquidity has been revised suitably and is furnished at Annex I . The guidance for slotting the future cash flows of banks in the revised time buckets has also been suitably modified and is furnished at Annex II. The format of the Statement of Short-term Dynamic Liquidity may also be amended on the above lines . This statement of Short-term Dynamic Liquidity should also  be prepared on a daily basis and put up to the ALCO / Top Management within 2 / 3 days from the close of the reporting Friday. 4. To enable the banks to fine tune their existing MIS as per the modified guidelines, the revised norms as well as the supervisory reporting as per the revised format would commence with effect from the period beginning January 1, 2009. 5. It may be noted that there has been no change in the Interest Rate Sensitivity statement which may continue to  be prepared on a monthly basis as on the last reporting Friday of the month and  submitted to RBI within 3 weeks from the end of the reporting period. 6. Please acknowledge receipt to the regional office concerned. Yours faithfully,  (A.K Khound) Chief General Manager-in-Charge Annex – II Guidance for Slotting the Future Cash Flows of Banks in the Revised Time Buckets Heads of Accounts

Reproduced for reference with acknowledgment — Source: Reserve Bank of India · RBI/2008-09/176 · issued 17 Sep 2008. The plain-English explanation above is BankPulse’s own independent summary.

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