DBOD. No. BP. 256 / 21.04.098/ 2007-08

September 5, 2007

To

Chairmen / Chief Executive Officers
All Commercial Banks
(excluding RRBs)

Guidelines on Asset-Liability Management (ALM) System – Draft Amendments

Reserve Bank had issued guidelines on ALM system vide Circular No. DBOD. BP. BC. 8 / 21.04.098/ 99 dated February 10, 1999, which covered, among others, interest rate risk and liquidity risk measurement / reporting framework and prudential limits. 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 / Management Committee. 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. Having regard to the international practices, the level of sophistication of banks in India, the need for a sharper assessment of the efficacy of liquidity management and with a view to providing a stimulus for development of the term-money market, these guidelines have 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 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 recognise the cumulative impact on liquidity.

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.

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, 2008 and the reporting frequency would continue to be monthly for the present. However, the frequency of supervisory reporting of the Structural Liquidity position shall be fortnightly, with effect from the fortnight beginning April 1, 2008.

Department of Banking Operations and Development
Reserve Bank of India
12^th floor, Central Office Building
Shahid Bhagat Singh Marg
Mumbai – 400 001

Yours faithfully,

(Prashant Saran)
Chief General Manager-in-Charge