Updated Final Ppt

April 17, 2023 MCB Presentation - Group 7 1

Management of Investment Portfolio &

Liquidity in Commercial Banks

Presented By Group 7:-Sandeep Sayal – 421 (M)-Shruti Dasgupta – 508 (S)-Arpit Vagrecha – 328 (S)-Mohini Singh – 326 (S)


Contents

IntroductionInvestment Policy of BanksSLR & Non- SLR InvestmentsStatutory PrescriptionsBanks’ Investment Classification & Valuation NormsSBI’s Investment PortfolioManagement of Liquidity in BanksCRR & SLRLAF & Handling Liquidity by Advances & DepositsConclusion


Investment Portfolio & Policy of Banks

Sandeep SayalRoll No: 421 (M)


INTRODUCTIONBanks primary business – Loans & Advances

Investments – Important source of Overall Income

Investments Type :Government SecuritiesOther approved securitiesOther securities (commercial papers, shares,

bonds/debentures)

Norms – RBI Guidelines, SLR requirement under BR Act-1949


INVESTMENT PORTFOLIO

Bank Investments

SLR Investments

Government Securities

Other Approved Securities

Non- SLR Investments

Commercial Papers Shares Bonds/

Debentures


INVESTMENT POLICY Every Bank – Unique internal investment policy guidelines ALCO – Asset Liability Committee plays crucial role General Parameters –

ReturnDurationLiquidity ConsiderationRisk

Determined separately for SLR & non-SLR Guidelines –

Maturity mix of investment portfolioExposure ceilingsValuation & rating of securitiesProvisions for Non-Performing Investments (NPI)


Banking Sector Scenario - Investments

2006-07 2007-08 2008-09 2009-2010 2010-111 SBI & 6 Associates 211875 263823 357624 387473 3856972 Nationalised Banks 452981 536018 655042 828125 9428373 Public Sector Banks (1+2) 664856 799841 1012666 1215598 13285344 Old Pvt Sector Banks 43647 54080 72393 83499 926175 New Pvt Sector Banks 171008 224498 234139 270618 3294036 Pvt Sector Banks (4+5) 214655 278578 306532 354117 4220207 Foreign Banks 71471 98910 130354 159291 1654998 All Scheduled Commercial Banks (3+6+7) 950982 1177329 1449552 1729006 1916053

YearType of Commercial BankSr. No.

(Amount in Rs. Crore)


SLR INVESTMENTS

Calculated as a % of NDTLSLR Requirement - 38.5% (early 90’s), 25% (1997),

24% (Currently)Includes:

Treasury Bills of the Government of India;Issued State Development Loans (SDLs) of the State

Governments Issued Dated securities of the Government of IndiaRBI notified dated securitiesAny other RBI notified instrument


SLR InvestmentsSLR – Majority part of Banks Investment

Penalty – Per day basis checkingPenal Interest = 3% p.a. above the bank rate on the

shortfall for 1st day and 5% for the subsequent days.


NON-SLR INVESTMENTS

Includes –Corporate Investments Strategic InvestmentsPSU BondsBonds/debentures issued by

Reconstruction Companies (RCs) & Securitisation Companies (SCs)

Investments in Subsidiaries or Associates or RRB’s

VC InvestmentsMutual Funds

Guidelines –Dedicated Equity Research

TeamTransparent Policy and

ProceduresDecision making power with

Investment Committee of BanksInvestment Objective must be

clearExtensive Risk AnalysisAvoidance of Risk

concentration by Diversification


Investments Disclosed in Balance Sheet

As per RBI guidelines, investments must be disclosed in the following 6 categoriesSharesGovernment securities,Investment in subsidiaries/ joint ventures in the

form of shares, debentures, bonds, etc,Other approved securities,Debentures and BondsOthers (Commercial Paper, Mutual Fund Units,

etc.).


STATUTORY PRESCRIPTIONS

Shruti DasguptaRoll No 508 (S)


STATUTORY PRESCRIPTIONS

Overview:Banks should not invest in non-SLR securities having

an original maturity of less than 1 year.Bank's investment in unlisted non-SLR securities

should be less than 10 % of its total non-SLR investments as on March 31 of the previous year.

Additional quantitative ceilings may be put on aggregate non-SLR investments by banks.

This ceiling is in terms of percentage of the bank's net worth (equity plus reserves)


Rating Requirements

Banks must not invest in unrated non-SLR securities but can invest in unrated bonds of companies that engage in infrastructure activities.

These investments fall within the 10% ceiling for unlisted non-SLR securities.

The debt securities invested in should have a credit rating higher than the minimum investment grade of a credit rating agency.


Limits on Banks' Exposure to Capital MarketsThe overall ceiling of the bank's direct investment in

Shares, Convertible bonds/ Debentures, Mutual funds and Venture capital funds should be less than 20% of its net worth.

Restrictions on Investments in a Single Company

None of the banks can hold shares more than 30 % of the company’s paid up share capital or 30% of the banks own paid-up share capital and reserves, whichever is less.


Banks’ Investment Classification & Valuation Norms

Introduction:The Banks classify their entire investment portfolio into the following three categories:

Held to Maturity (HTM)Held for Trading (HFT)Available for Sale (AFS)


Held to Maturity (HTM)

HTM investments are the securities that are acquired with the intention of being held up to maturity period.

Shifting of investments to HTM can be done only on approval of the Board of Directors once a year.

HTM securities are carried at the acquisition or amortised cost if acquired at a premium to the face value and are not marked to market.


Held for Trading (HFT)HFT investments are the securities that are acquired with

the intention of being traded in order to take advantage of the short-term interest rate/price movements.

The profit or loss achieved on the sale of both HFT and AFS investments will be accounted in the income statement.

HFT securities are valued at the fair or market value as at the balance sheet date.


Available for Sale (AFS)

AFS are those investments that are neither HFT nor HTM.

AFS investments can be shifted to HFT with the approval of the Asset Liability committee, Board of Directors and the Investment Committee.

The 'market value' for the AFS and HFT refers to the scrip’s market price as available in the RBI’s price list & stock exchanges.


INVESTMENT BY STATE BANK OF INDIA

21

INVESTMENTS [Rs. In Crores]S.No. Particulars As on 31.3.2011 As on 31.3.2010

I. Investments in India inGovernment Securities 2,30,741.45 2,26,706.01Other Approved Securities 423.71 1,035.12Shares 8,864.65 7,199.37Debentures & Bonds 15,134.11 16,127.43Subsidiaries &/or JV including associates 4,855.43 4,285.61Others [Units of Mutual Funds, Commercial Paper, Priority Sector Deposits etc.]

25,567.66 32,210.04

Total 2,85,587 2,87,563.60

II. Investments outside India inGovernment Securities[ including local authorities] 2,239.08 2,009.52

Subsidiaries &/or JV abroad 1,603.03 1,403.69Other Investments[ Shares, Debentures, etc] 6,171.46 4,808.40

Total 10,013.57 8,221.61

Grand Total [I+II] 2,95,600.57 2,95,785.20

III. Investments in India Gross Value of Investments 2,86,732.72 2,88,076.73Less : Aggregate of Provisions /Depreciation 1,145.72 513.14Net Investments[ vide I above] 2,85,587 2,87,563.59

IV. Investments outside India Gross Value of Investments 10,221.32 8,409.19Less : Aggregate of Provisions /Depreciation 207.75 187.58Net Investments[ vide II above] 10,013.57 8,221.61

Grand Total [ III+IV] 2,95,600.57 2,95,785.20


Liquidity In Banking Parlance

Arpit VagrechaRoll No 328(S)


Liquidity In Banking Parlance

Meeting the financial obligations as they arise.

Capability for the banks to meet the obligations.

Can be required anytime in a short notice.

Any increase in the creation of assets by lending is another major reason to have adequate liquidity.


Liquidity Contd….

Banks have to keep funds ready, depositors can ask for their money any time.

Daily Process.There should be an adequate balance between short

term assets and short term liabilities.Liabilities are the funds deposited by customers in

the Bank.Assets in general are the credits issued by the Banks

to the Borrowers.


Liquidity Contd…

Investment portfolio of the Banks which are generally the smaller portion of the asset acts as primary source of liquidity when required.

Deposits and Lending have to be managed every day for liquidity management.

In case of shortage of funds, RBI lends but to a certain extent.


Demand LiabilityDeposits in current and savings account,Margins against letters of credit, Fixed deposits which are overdue, Certificates representing cash or deposits which are

recurring, Telegraphic and Mail Transfers (TTs) which are

outstanding, Demand Drafts (DDs), Deposits unclaimed, Balances in the Cash Credit account Deposits in the form of Collateral


Time LiabilityThe Liabilities which are to be paid otherwise on demand by a

bank are Time Liabilities◦Fixed deposits ◦Certificates of cash ◦Recurring deposits ◦Deposits at savings bank ◦Deposits by staff as security ◦Margin from customers against letters of credit ◦Security deposits against advances that are not payable if

demanded and ◦Deposits in Gold form


Cash Reserve RatioIntroduced in 1950Purpose is to ensure safety and liquidity of the Bank’s

Requirement.Reserve requirement set by RBIThese are minimum reserves in the form of Cash.Mandatory reserve to be kept with the RBICRR is used by the central Bank as the monetary control tool.Influences country’s BorrowingsImpacts the interest rate at which the consumers borrow from

the bank.It changes the amount of loan available for disbursement.


CRR Contd…

Controls the lending power of the banks.

CRR increases Banks have to deposit more to RBI and Vice Versa.

This increases the consumer interest rates on loans.

As on 25th October 2011, CRR is 6%

RBI can vary this rate from 3%-15%


Some Statistics on Advances and Deposits

(Figure in Cr.)


Statutory Liquidity RatioMohini Singh

Roll No 326(S)


Statutory Liquidity RatioThese are Demand and time maturities.These are in the following combinations

Cash, Gold at a price which generally never exceeds the

current market price, Unencumbered govt. securities valued at a price

always brought forward by RBI from time to timeMinimum Limit prescribed by RBI is 24% and

Maximum Limit is 40%


SLR Contd….SLR’s main motive is to restrict banks leverage in

more money into economy.Other words, it is total deposits that banks have to

invest in government owned securities.Main difference is CRR has to be in the form of cash

only where as SLR can be in gold or government securities.

SLR helps in maintaining solvency of the bank.RBI regulates SLR for priority sector funding.


Repo and Reverse Rate A repo or repurchase agreement is an instrument of money market.

Repo is a collateralized lending i.e. the bank which borrow money from

Reserve Bank to meet short term needs have to sell, usually bonds to

Reserve Bank with an agreement to repurchase the same at a predetermined

rate and date.

Reserve bank charges some interest rate on the cash borrowed by banks .

This rate is usually less than the interest rate on the bonds as borrowing is

collateral. This interest rate is called as “repo rate”.

In a reverse repo Reserve Bank borrows from bank by lending securities.

The interest rate paid by RBI in this case is called “reverse repo rate”.


Liquidity Adjustment Facility (LAF) The RBI introduced the Interim Liquidity Adjustment Facility (ILAF) in

April 1999, under which liquidity injection was done at the Bank Rate and

liquidity absorption was through fixed reverse repo rate.

The ILAF gradually transited into a full-fledged liquidity adjustment

facility (LAF) with periodic modifications based on experience and

development of financial markets and the payment system. The LAF was

operated through overnight fixed rate repo and reverse repo from

November 2004.

The LAF helped to develop interest rate as an instrument of monetary

transmission.


New operating procedure The weighted average overnight call money rate was explicitly recognised

as the operating target of monetary policy.

The repo rate was made the only one independently varying policy rate.

A new Marginal Standing Facility (MSF) was instituted under which

scheduled commercial banks (SCBs) could borrow overnight at their

discretion up to one per cent of their respective NDTL at 100 basis points

above the repo rate.

the revised corridor was defined with a fixed width of 200 basis points. The

repo rate was placed in the middle of the corridor, with the reverse repo rate

100 basis points below it and the MSF rate 100 basis points above it.


Revised LAF Framework


How effective is the new operating framework?The new operating framework with the modified LAF

presupposes the dominance of the interest rate channel of monetary transmission.

This means that once the RBI changes policy repo rate, it should immediately impact the overnight interest rate which is the operational rate and then transmit through the term structure of interest rates as well as bank lending rates.

However, there are challenges. The strength of transmission through the interest rate channel depends on several factors, particularly on liquidity conditions.


Current Ratio of Banks

MAR’ 11 MAR’10 MAR’09 MAR’08 MAR’07

SBI 0.41 0.43 0.34 0.53 0.42

CBI 1.18 0.93 0.49 0.59 0.68

ICICI1.73 1.94 0.78 0.72 0.61

IDBI0.62 0.55 0.79 0.40 0.61

PNB0.66 0.61 0.27 0.29 0.39


ConclusionBesides their primary business of giving Loans & Advances, banks

invest in various instruments in order to get good returns. These investments can be either in government securities or other approved securities or also in other securities such as commercial papers, shares, bond/debentures. These investments are categorised as SLR & Non-SLR investments.

As per RBI guidelines and various other regulations under the Banking Regulation Act of 1949, banks have to hold a minimum 24% of their Net Demand & Time Liabilities in the form of SLR investments. While investing, banks look at the return on investments, duration of investments, the risk associated with it and the liquidity requirement of the investment. Strategy papers are made by the Asset Liability Committee and others in order to have a fully planned investment.


Conclusion All these investments (both SLR & Non-SLR) are categorised in the Balance

Sheet in the sub categories of Shares, Government securities, Investment in subsidiaries/ joint ventures in the form of shares, debentures, bonds, etc, Other approved securities, Debentures and Bonds and Others (Commercial Paper, Mutual Fund Units, etc.).

Liquidity management is quite important in banks. Most of the times situation arises that banks fall short of lending because of less liquidity, this is an opportunity missed if the customer is genuine and lending might result in creation of a good asset. To put the terms in simple words liquidity is any situation to meet the current needs whether it comes in the obligation form or required for lending to genuine customers.

Hence proper management of the investment portfolio and liquidity by the banks leads to its smooth operations and makes the business to grow profitably.


THANK YOU

Documents

Updated Final Ppt