Question

You are the asset liability committee executive of a commercial bank. The bank
face both liquidity surplus and deficit due to cyclical trend in the industry. How will
you manage these challenges and increase profitability of the bank. You have to
be specific about your suggestions.

Answer 1

Managing the challenges of liquidity surplus and deficit due can be done as following-

A. The bank need to to match the duration of its Assets and liabilities in a proper manner so that there is no risk related to duration gap

B. The bank should be proactive in judging with its payables and receivables in the short run and its should try to increase the the liquidity by collecting quick and paying later.

C. There has to be an optimum focus upon improvement of the Asset quality of the bank because asset quality will be most important for the bank in order to maintain the Liquidity in the long run as these good quality assets will be helping in maintenance of better Liquidity in hands.

D. The bank should also try to keep a match between the interest rate which is charged from its borrowers and interest rate which is being paid to its depositors in the short run so there will be an optimum match between the payments and the receipt and that would be generating liquidity for the bank.

E. There has to be optimum forecasting of cyclical events because this cyclical events are affecting the performance of the bank to a large extent and they should be judged proactively in advance and bank should be trying to put additional Liquidity upon its hands in order to deal with the volatility in its reserves and surplus

F. Bank should always be trying to maintain higher Reserve of long term loans because that will provide the bank with more chances with getting its liquidity in its hands

G. The bank should also be trying to sell its bad assets quickly through asset restructuring company because these restructuring companies will be providing with the optimum liquidity

H . All the statutory dues of the bank should also be proactively paid in order to avoid any kind of adverse situation in case of such cyclical conditions.