MBA Intership Report on Liquidity Management Process of the City Bank Ltd-libre

Liquidity management Of “ The The City Bank Limited” 

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Internship Report On

“Liquidity management of  The City Bank Limited” 

Submitted To Md. Amdadul Hoque Assistant Professor, Department of Finance Bangladesh University of Business and Technology (BUBT)

Submitted By Zahiduzzaman th MBA Program, 16  Intake ID # 08093201020 Major in Finance Bangladesh University of Business and Technology (BUBT)

th

Date of Submission: 13  September, 2011

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Internship Report On

“Liquidity management of  The City Bank Limited” 

Submitted To Md. Amdadul Hoque Assistant Professor, Department of Finance Bangladesh University of Business and Technology (BUBT)

Submitted By Zahiduzzaman th MBA Program, 16  Intake ID # 08093201020 Major in Finance Bangladesh University of Business and Technology (BUBT)

th

Date of Submission: 13  September, 2011

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LETTER OF TRANSMITTAL th

13  September, 2011 Md. Amdadul Hoque Assistant Professor, Department of Finance Bangladesh University of Business & Technology Mirpur-2, Dhaka-1216.

Subject: Submission of Internship Report.

Dear Sir, I am truly pleased to submit my internship report on the “Liquidity management process of The City

Bank Ltd.” I have gathered what I consider to be the most complete information available. This report gave me the prospect to have a brief knowledge about the liquidity management management process of The City C ity Bank Limited. It is a great achievement to work under your active supervision, care and guidance.

I tried my best to incorporate all the information that I have collected during the internship period. I wish the report would fulfill your expectation and standard. I must mention here that, I am extremely grateful to you for your valuable supervision, tireless effort and continuous attention in preparing this report.

I, sincerely hope that you will will be satisfied with this report. If you have any query, I will be be pleased to answer that. I hope a nd pray that you would be gracious enough to accord approval to this report.

With best regards

Sincerely

Zahiduzzaman MBA Program, 16th Intake ID # 08093201020 Major in Finance Bangladesh University of Business and Technology (BUBT)

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Acknowledgement Internship program is one of the important requirements for the completion of two years MBA program. I have completed my internship from The City Bank Limited. In this regard I would like to express my heartiest appreciation to my honorable supervisor Md. Amdadul Hoque, Assistant professor, Department of Finance, for his care, guidance and valuable suggestions to prepare this report. I also would like to pay my gratitude to all of my faculty members for their constant guidance and cooperation.

I also express my heartiest gratitude to honorable MBA Program Director, Professor M.A Hakim to Hakim to give me permission for Internship and help me to provide various guidelines about the report.

I would like to express my sincere gratitude to my organizational supervisor Mr. Shafiqur Rahman, Manger, Human Resource division, of The City Bank Ltd, for his guidance and cooperation which helped me in building confidence to face practical situation.

I also like to express my sincere thank to all the employees of HR & finance department of The City Bank Limited for providing me required information about the Liquidity management process which helped me to prepare such a significant report.

At last I feel very pleased to thank all my fellow friends for their cordial cooperation in preparing this report.

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Executive summary Banking is a business, which runs on the confidence and trust of people. This confidence enables the bank to mobilize funds from various sources. The main function of bank may broadly be divided into two categories. Firstly, borrowing money from public by accepting deposits and secondly, lending the money to public for development of trade, commerce, agriculture and industry. The profitability of a bank always depends on the efficient management of fund and exploring the genuine avenues in which its resources are invested to produce the maximum income. To ensure, that these activities will run properly, a bank must effectively manage its liquid assets & liabilities. . I am going to describe particularly the liquidity management process of The City Bank Ltd. So, in whole through this report I concentrated on the liquidity management & its correspondent issues. I divided my report in several chapters according to the necessity & similarity of the topics. To understand a particular management process of a bank, it is required to have a basic idea about that I basically described the background & necessity of preparing this report, the methods I used to prepare it & the scope & limitation I faced during preparing this reports etc. other then these, I also stated some introductory speech to introduce my bank & the topic I‟ve chosen. It contains the description & analysis of different department & activities of CBL. I tried my best to highlight each & every department, the divisions-subdivisions, the achievement of CBl, their recent financial position, recent performance & all basic ideas about it. What is liquidity? As my main focus is on the liquidity management process, so it is very much important to know the basic ideas & definitions of the fundamental issues regarding liquidity management process. So I thoroughly illustrated the theoretical descriptions & ideas about the liquid assets & liability of a bank, which type of assets & liabilities we should name liquid assets & liquid liability, types of liquid assets & many other issues. It also contains the description of the liquidity management requirements of centr al bank & central bank‟s liquidity management process. I have collected all possible information to thoroughly describe the liquidity management of CBL. Also I analyzed different financial ratios such as current ratio, cash position indicator, capacity rat io, loan to deposit ratio etc & I‟ve also done the trend analysis of both loans & deposits. To present the liquidity position of the bank, I collected the information about the SLR & CRR positions of CBL & also I made a graph of the liquidity gap & many other financial calculations of this bank. Organizations fail if they do not have access to sufficient cash to meet their short-term liabilities as they fall due. As long as short-term assets exceed short-term liabilities, companies face minimal liquidity problems. Fluctuations in margining requirements from lenders and trading counterparties can cause short-term liabilities to rise sharply, precisely when assets fall, leading to costly and sudden liquidations. Collateral haircuts, discretionary interest rates, and material adverse change clauses exacerbate liquidity risk. Ironically, lenders make “bank runs” on liquidity-stressed funds and corporations, each lender securing its own interest while collectively

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destroying value. Financial institution bankruptcies and restructurings in 2008 were accelerated by the inability or failure to manage liquidity risk. Corporations must manage these risks through  better contracting and pre committed contingency plans. The “liquidity management” of a central bank is defined as the framework, set of instruments and especially the rules the central bank follows in steering the amount of bank reserves in order to control their price (i.e. short term interest rates) consistently with its ultimate goals (e.g. price stability). The note presents a basic theory of liquidity management in a framework of substantial reserve requirements and averaging, focusing on the relationship between quantities (central bank balance sheet items) and overnight rates and the involved signal extraction problems. Maintaining the liquidity risks mostly depends on how the credit is being handled. The City Bank Ltd. ensures that the loan or credit they lend is given to the right person. For this, CBL follows a strict rules and regulation. Lending operation starts from selection of borrower from field level and ends with disbursing sanctioned amount after proper credit analysis and documentation. CBL also follows other procedure like early warning signals, credit risk analysis and handling of non-performance loan to make sure that the borrower repay the interest and repay the loan amount. For all these CBL follows strict regulation which is approved by the Bangladesh Bank. However, I‟ve done lots of financial calculations, observed their financial reports & from my working experience I also gathered knowledge about their administrative process of managing different issues. After preparing the whole report, I had some findings regarding the liquidity management & some other aspects of the banks activities. As an inexperienced person I may have made many mistakes in those findings, but whatever I felt from my point of view, I only pointed out those. Based on those findings, I recommended some points which may help the bank to remove their many shortcomings. The City Bank Ltd was in a horrible position in the years 2007-2008 regarding their management of liquidity crisis, but they are overcoming with some strict steps & strategy & if they will develop their management policy & other related processes, th en it‟ll be one of the best commercial banks of Bangladesh.

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Table of contents: Content

Page No.

Chapter One (Introduction part)

12

1.1) Introduction

13

1.2) Origin of the Report

14

1.3) Background of the report

14

1.4) Objectives of the Report

14

1.5) Methodology

15-17

1.6) Scope of the study.

17

1.7) Limitations of the Report

17

Chapter Two (Organization Preview)

12

2.1 THE CITY BANK LIMITED

19-21

2.2 The City Bank Activities

22-26

2.3 Recent Performances of The City Bank

27

CHAPTER THREE (Theoretical part)

29

3.1 Basic definitions of liquidity

30-31

3.2 What is liquidity management

31-32

3.3.) Liquidity of a Bank 

32

3.3.a) Liquid Assets of a bank

33

3.3.b) Characteristics of liquid asset

34-36

3.3.c) Liquidity crisis 3.1.f ) Types of Liquidity

36 37

3.1.g) The demand and supply of liquidity

39

3.1.h) Liquidity Risk

39-41

CHAPTER FOUR (Liquidity Management-Requirements of central bank)

42

4.1 Central Bank‟s Liquidity management

43

4.1.a) Asset Liability Management Policy

44

4.1..a.a) Liquidity Risk

45

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4.1..a.b) Action Points

45

4.1..a.c) Key Management Indicators

45-47

4.1.a.d) Maturity Profile Mismatch

47

CHAPTER FIVE (Liquidity Management of CBL)

48

5.1 Current Assets of CBL

49

5.2 Current liabilities of CBL

49

5.3 CBL‟s liquidity Risk Management Framework

49-50

5.3.a) Treasury Desks

51-52

5.3.b) Liquidity Statement of The City Bank Limited

52-54

5.3.c) CRR and SLR of CBL

54-56

5.3.d) Estimating CBL‟s liquidity needs 

56-58

5.3.e) Trend Analysis:

58

5.3.f) Ratio Analysis (Liquidity Ratios)

59-64

5.3.g) Handling CBL‟s liquidity crisis  

64-65

CHAPTER SIX (Comparative Analysis with IFIC Bank Ltd.)

66

6.1 IFIC Profile

67

6.2 Bank‟s Mission

67

6.3 Background of the IFIC bank.

68-69

6.4 Comparative Analysis with CBL

70-72

6.5 Analyzing  L Liquidity

73

CHAPTER SEVEN (Findings, Conclusion & Recommendation)

74

7.1)Major findings

75-76

7.2) Conclusion

77

7.3) Recommendation

77-78

Glossary

79

References

80

Appendix

81-83

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List of tables: Content

Page No.

a. Recent Performances of The City Bank

26

b. Last few years SLR & CRR rate

44

c. Liquidity Statement

53

d. CRR and SLR of CBL

55

e. The sources and uses of fund approach

57

f. Assets based liquidity ratios

57

g. Liability based liquidity ratio

58

h. Current Ratio

60

i. Cash position indicator

60

 j. Capacity ratio

61

k. Total Deposit Ratio

62

l. loan to deposit ratio

63

m. reserve ratio

63

n. Liquidity statement (IFIC)

69

o. Comparative Analysis with IFIC Bank Limited

70

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List of charts & graphs: Content

Page No.

a. Award and Honor

21

d. Liquid Assets of a Bank

34

e. Characteristics of Liquid Assets

35

f. Types of Liquidity

38

g. Liquidity Risk

40

h. Liquidity requirements of commercial banks

45

I. Liquidity Statement Analysis

43

 j. CRR and SLR of CBL

56

Ratio Analysis

60

k. Comparative Analysis with Standard Bank Limited

72

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CHAPTER ONE (Introduction part)

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1.1 Introduction: Banks are not ordinary intermediaries. Like non-banks, they also borrow, but they do not lend the deposits they acquire. They lend by crediting the borrower's account with a new deposit, and then if necessary borrowing the funds needed to meet the reserve ratio requirement. The accounts of other depositors remain intact and their deposits fully available for withdrawal. Thus a bank loan increases the total of bank deposits, which means an increase in the money supply. When the loan is paid off, the money supply decreases. A net increase in bank lending results in a shortage of reserves needed by the banking system, which only the Fed can supply. In order to maintain control of the Fed funds rate, i.e. the interest rate on overnight loans between banks, the Fed must provide the funds as required. It does so by purchasing Treasury securities from the public. Bank lending has no effect on a bank's own capital. But bank lending is limited by the capital ratio requirement set by the Fed. If a bank has sufficient capital, it can expand its balance sheet by issuing more loans. However if it is not holding excess reserves, it will have to acquire more in order to meet the reserve ratio requirement. Banks therefore actively seek new deposits. Of course they prefer deposits on which they pay no interest, like ordinary checking accounts. They also borrow from savers who open savings accounts and investors who buy their CDs. Liquidity is essential in all banks to compensate for expected and unexpected Balance Sheet fluctuations and to provide funds for growth. The recent liquidity crises faced by banks and financial institutions have brought to the fore the need to review their existing Liquidity Management Policies, Practices and Procedures. One of the most important tasks the management of any bank or financial service provider faces is ensuring adequate liquidity at all times, no matter what emergencies may suddenly appear. A financial institution is considered to be liquid if it has ready access to immediately spendable funds at reasonable cost at precisely the time those funds are needed. This suggests that a liquid bank or other financial-firm either has the right amount of immediately spendable funds on hand when they are required or can rise liquid funds in a timely fashion by borrowing or by selling assets. Indeed, lack of adequate liquidity can be one of the first signs that a bank or other financial institution is in real trouble. The cash shortages that banks and other financial service providers in trouble often experience make clear that liquidity needs cannot be ignored. A Bank closes if it cannot raise sufficient liquidity even though technically, it may still be solvent. Moreover, the competence of liquidity managers is an important barometer of management‟s overall effectiveness in achieving any financial institution‟s goals. So let‟s begin our journey and see how really important quality liquidity management is to be success in The City Bank Limited (CBL).

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1.2) Origin of the Report: Master of Business Administration (MBA) course requires 90 days attachment with a bank (The City Bank Limited) followed by a report assigned by the supervisor in the organization and endorsed by the faculty advisor. I took the opportunity to do my internship in The City Bank Limited (CBL). My topic of internship is authorized from the head office of CBL .My faculty supervisor Md. Amdadul Hoque, Assistant Professor, Department Of Finance, Faculty of Business Studies, Bangladesh University of Business & Technology, also approved the topic and authorized me to prepare this report as part of the fulfillment of internship requirement. The report thus was titled as „Liquidity management of The Cit y Bank Limited.‟

1.3) Background of the Report: The business world is getting dynamic and competitive. It is hard for an organization to run & even survive in a fast paced, growing and uncertain world if it cannot keep tracks with the go of business dynamism. Business plays and links important roles in developing the economy of a country. So, as a business graduate, I think I need to be attached with any organization to get a handy & versatile experience about the business world before starting our career. Internship is the arrangement, which makes a bridge between our academic knowledge and practical world to have an acquaintance with the real business world as well as to gear me up to lead the future competitive business. I have worked in Different divisions of CBL, head office, Gulshan-2, Dhaka. In this report, I will try to make a overall analysis on liquidity management of CBL.

1.4) Objectives of the Report: 1. General objective:  To analyze the liquidity management process of “The City Bank Ltd.”

2. Specific objective: To know about liquid assets of the commercial banks in our country. To get enough knowledge about liquidity management. Central bank requirements for the commercial banks on liquidity management. Estimating liquidity need of The City Bank Ltd. Analyzing the Liquidity statement of CBL by using some statistical measures. Finding out the internal system & actual liquidity management process of CBL. Pointing out the major findings of the report & provide some valuable recommendations based on them.

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1.5) Methodology: Methodology refers to the essential part of the study and the process of collecting information and arranging it in terms of the relevant issues of the study. It is designed in a way so that it correspondent to achieve the objectives of the study.  Type: As I am going to find out the internal process of The City Bank Ltd” to manage it‟s

liquidity needs, so I have to describe it‟s whole management process of liquidity risk by analyzing some statistical data. So, from my point of view, it is a descriptive report.

Sources of data: For preparing a report, someone can use basically two sources for collecting data & necessary information. Those are, 3.2 Primary source: A primary source (also called original source or evidence ) is an artifact, a document, a recording, or other source of information that was created at the time under study. 3.2 Secondary source: A secondary source is a document or recording that relates or discusses information originally presented elsewhere. Secondary sources involve generalization, analysis, synthesis, interpretation, or evaluation of the original information. I had collected data from both the primary source and secondary source.

Primary source: I have collected data from the employees of different department of The City Bank Limited by communicate & working with them. I also collected information form observing their financial status, their organizational culture, from different group discussion, observing the process of managing the liquid money & assets of the bank.

Secondary source: Analyzing all the annual reports from 2005 to 2009, I tried to identify all the elements of liquidity and prepared the report. Annual Reports of The City Bank Ltd of the year 2006, 2007, 2008, 2009. The basic idea about The City Bank Ltd was taken from it‟s website (www.thecitybank.com)

Papers & journals about the Central bank liquidity management & reservation requirements.

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Theoretical ideas about liquid assets & liabilities of banks were collected from a book (Dr. A. R. Khan, Bank Management-A Fund Emphasis)

Liquidity management solution of The City Bank Limited . Analyzing all the annual reports from 2005 to 2009, I tried to identify all the elements of liquidity and prepared the report.

 Data Collection process:

Mainly, the purpose of data collection is to obtain information to keep on record, to make decisions about important issues, to pass information on to others. Primarily, data is collected to provide information regarding a specific topic. A formal data collection process is necessary as it ensures that data gathered is both defined and accurate and that subsequent decisions based on arguments embodied in the findings are valid. However, I‟ve collected both primary & secondary data by different processes. Those are described below: 

Primary data:

Primary data are collected by different group discussions, personal observation of the organizational culture, their internal process of managing liquidity & from different statistical measures & analysis that I‟ve shown later on in this report. 

Secondary data:

From working in this organization, I‟ve got the facility to go through maximum of the record file related to the liquidity issue. So many important data were been collected from there. Some other data I‟ve collected from the website. Other then that, it was easy for me to make a positive relation with the manager of finance department & to collect all annual report from him. However, the annual report of 2006 was not available there.



Data analysis & reporting:

Analysis of data is a process of inspecting, cleaning, transforming, and modeling   data with the goal of highlighting useful  information, suggesting conclusions, and supporting decision making.

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 Techniques:

Data-collection techniques allow us to systematically collect information about our objects of study (people, objects, phenomena) and about the settings in which they occur. In the collection of data we have to be systematic. If data are collected haphazardly, it will be difficult to answer our research questions in a conclusive wa y. However, I‟ve used some statistical techniques to analyze the data. Those are,  Trends Analysis.  Ratio Analysis.  Tools:

The tool those I‟ve used to implicate the techniques for   analyzing data, are simple MS Word & MS Excel.

1.6) Scopes of the Study: This report has prepared to gain a clear view of the liquidity management of the CBL. Using of all my whole experience I try to include all of the criteria of the liquidity management. I focus on what are the liquid assets, what is the liquidity, what is the liquidity management, the Bangladesh Bank‟s requirement on liquidity management for all  the commercials banks. I also try to show how the City Bank Limited handles all the liquidity requires activities, how to manage fund in urgent situations and how to use access money in profitable sectors. Purpose of the report would be to focus on how The City Bank Limited maintains liquidity requirements and fulfills the central bank‟s requirements on liquidity management of the commercial banks.  And finally I draw the conclusion on the liquidity management of The City Bank Limited.

1.7) Limitations of the Report: There were some limitations faced to prepare this report that are: There were not huge guidelines about liquidity management of the bank. Employees of the CBL were not interested to share enough information about liquidity management of this bank. That was a big problem for me. I did not get sufficient information about liquidity management of The City Bank Limited from CBL website. Couldn‟t collect annual report of 2005 (Lack of availability).

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CHAPTER TWO

(Organizational Profile of “ The City Bank Limited” )

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2.1 THE CITY BANK LIMITED--- Making Sense of Money: The City Bank Limited is the first private sector Bank in Bangladesh. The Bank has been operating since 1983 with an authorized capital of Tk. 1.75 Billion under the entrepreneu rship of twelve prominent & leading businessman of the country. The noble intention behind starting this Bank was to bring about qualitative changes in the sphere of Banking and Financial management. Today The City Bank serves it's customers at home & abroad with 84 branches spread over the country & about three hundred oversea correspondences covering all the major cities and business center of the world. The services encompass wide diversified areas of trade, commerce & industry, which tailored to the specific, needs of the customers and are distinguished by an exceptional level of prompt and personal attention. Over the years the Bank has expanded the spectrums of Its Services. The extensive and ever growing domestic network provides and carries various products and services to the doorsteps of millions. City Bank is one of the oldest private Commercial Banks operating in Bangladesh. It is a top bank among the oldest five Commercial Banks in the country which started their operations in 1983. The Bank started its journey on 27th March 1983 through opening its first branch at B. B. Avenue Branch in the capital, Dhaka city. It was the visionary entrepreneurship of around 13 local businessmen who braved the immense uncertainties and risks with courage and zeal that made the establishment & forward march of the bank possible. Those sponsor directors commenced the journey with only Taka 3.4 crore worth of Capital, which now is a respectable Taka 330.77 crore as capital & reserve. City Bank is among the very few local banks which do not follow the traditional, decentralized, geographically managed, branch based business or profit model. Instead the bank manages its business and operation vertically from the head office through 4 distinct business divisions namely I. II. III. IV.

Corporate & Investment Banking; Retail Banking (including Cards); SME Banking; & Treasury & Market Risks.

Under a real-time online banking platform, these 4 business divisions are supported at the back by a robust service delivery or operations setup and also a smart IT Backbone. Such centralized business segment based business & operating model ensure specialized treatment and services to the bank's different customer segments. The bank currently has 87 online branches and 10 SME service centers spread across the length & breadth of the country that include a full fledged Islami Banking branch. Besides these traditional delivery points, the bank is also very active in the alternative delivery area. It currently has 46 ATMs of its own; and ATM sharing arrangement with a partner bank that has more than 550 ATMs in place; SMS Banking; Interest Banking and so on. It already started its Customer Call Center operation. The bank has a plan to end the current year with 100 own ATMs. City Bank is the first bank in Bangladesh to have issued Dual Currency Credit Card. The bank is a principal member of VISA international and it issues both Local Currency (Taka) & Foreign Currency (US Dollar) card limits in a single plastic. VISA

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Debit Card is another popular product which the bank is pushing hard in order to ease out the queues at the branch created by its astounding base of some 400,000 retail customers. The launch of VISA Prepaid Card for the travel sector is currently underway. City Bank has launched American Express Credit Card and American Express Gold Credit card in November 2009. City Bank is the local caretaker of the brand and is responsible for all operations supporting the issuing of the new credit cards, including billing and accounting, customer service, credit management and charge authorizations, as well as marketing the cards in Bangladesh. Both cards are international cards and accepted by the millions of merchants operating on the American Express global merchant network in over 200 countries and territories including Bangladesh. City Bank also introduced exclusive privileges for the card members under the American Express Selects program in Bangladesh. This will entitled any American Express card members to enjoy fantastic savings on retail and dining at some of the finest establishment in Bangladesh. It also provides incredible privileges all over the globe with more than 13,000 offers at over 10,000 merchants in 75 countries. City Bank prides itself in offering a very personalized and friendly customer service. It has in place a customized service excellence model called CRP that focuses on ensuring happy customers through setting benchmarks for the bank's employees' attitude, behavior, readiness level, accuracy and timelines of service quality. City Bank is one of the largest corporate banks in the country with a current business model that heavily encourages and supports the growth of the bank in Retail and SME Banking. The bank is very much on its way to opening many independent SME centers across the country within a short time. The bank is also very active in the workers' foreign remittance business. It has strong tie-ups with major exchange companies in the Middle East, Europe, Far East & USA, from where thousands of individual remittances come to the country every month for disbursements through the bank's large network of 97 online branches and SME service centers. No money, no bank. We all know how important money can be for any of us. Money is a need all by itself. It is the most precious thing. Money is the port key to any destination. It is everything between a person and his / her dreams & hopes. So, the money which is almost synonymous to life must make sense. And for your money to make sense, it must be handled by an expert. That is where we come in. We say, we make sense of your money. Because, at City, we are wise men of banking. With 25 years of experience, we know how to make your money more meaningful for you, how to lend you money in times of your needs or how to grow your money safely for you.

2.1.a) Strategic Task Analysis: 2.1.a.a) Vision: To be the leading bank in the country with best practice and highest social commitment.

2.1.a.b) Mission:  To attain highest level of customer satisfaction through extension of services by

dedicated and motivated team professionals.

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 To maintain continuous growth of market share ensuring quality.  To maximize bank‟s profit ensuring its steady growth.  To maintain the high moral and ethical standards.  To ensure participative management system and empowerment of human resources.

2.1.b) Award and Honor: For significant performance, The Bank has earned national & international recognition. The City Bank Limited was one of the 12 Banks Of Bangladesh among the 500 Banks in Asia for it's asset, deposit & profit as evaluated by "ASIA WEEK" In The Year 2000. Other than that, The City Bank Limited received the "Top Ten Company" award from the Prime Minister of the People's Republic Of Bangladesh. City Bank wins The Asian Banker "Strongest Bank in Bangladesh  –   2010" Award City Bank MD & CEO K Mahmood Sattar wins The Asian Banker "Leadership Achievement Award 2010" Sunday April 18th, 2010, 7pm. Resorts World Convention Center, Singapore.

a. Award and Honor

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2.2 The City Bank Activities:

The City Bank Limited serves its customers at home with 83 branches spread over the country with total manpower of around two thousand. The Bank has expanded its services over the years, which covers wide diversified areas of trade, commerce & industry. They have always tried to provide different products and services to the customers through their wide and ever growing domestic network. Major types of financing  Working Capital Finance  Short Term Financing  Mid Term Financing  Project Finance  Lease and Long Term Loans  Structured Finance  Islamic Finance  Payment Service

The City Bank Limited has already introduced some new Banking products like duel currency Credit Cards, ATM and Online services which has created attraction among the clients. The Bank is going to introduce real time Internet, SMS and Phone Banking systems with all modern delivery channels at an early date.

CBL‟s credit can be divided into three broad classes:

Retail Financing

CBL‟s credit

SME Financing

Corporate Credit

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2.2.a) Corporate banking: City Bank is a major player in Bangladesh wholesale banking industry to offer the full scope of innovative, customized solutions and services. They offer service at the highest level. Their focus is not on short-term profit, but on building long-term relationships and standing by their clients whenever they need us. They have a unique business focus on enabling project financing, trade, investment and supply chain financing for clients. They aim to be a one-stop gateway for corporate and financial institutions looking to extend their business. And they are committed to using our country wide network to facilitate their clients‟ growing trade and investment flows and supply chain financing needs across their business footprint. They make easy the complex financial world for you and help you maximize every opportunity        

Working capital: Trade finance: Short/mid-term finance: Project finance: Islamic finance: Structured finance: Cash management: Investment banking:

2.2.b) City Retail: One of the most remarkable success stories of last 50 years‟ banking industry globally has been the conceptualization and innovative execution of banking with individual customers, their friends & families. The industry has termed it as Retail Banking or Personal Banking or Consumer Banking; and it has now - at a very rapid pace  –   become the major revenue line for most of the top banks in the world. City Bank, too, recently has started its journey in Retail Banking. “City Retail - add a little city to your life” is the new brand-mantra, the pay-off line for City Retail.

2.2. b.a) Deposit: Savings account: It is a sound savings for retail customer. We give the major facilities and services to our customer through 84 branches allover in Bangladesh with our skilled manpower.  Interest Rate : 4.00

Current account: Our current account meets the needs of individual and commercial customers through our schedule benefit.  Interest Rate : Nil

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City Onayash: City Onayash - earn easy on your savings account, earn profit every month! City Onayash is a unique kind of savings account which calculates interest on your daily balance and pays interest to you every month.

City Shomridhdhi: City Shomridhdhi - A unique offer from City Bank. City Shomridhdhi is an exceptional DPS product that is distinctly more attractive than the prevalent DPS products in the market. You receive a hefty sum at the end of the term against your monthly deposit of small installments.

City Projonmo: City Projonmo  –   financial safety for your future generations backed by complete immense protection! City Projonmo is a unique monthly deposit scheme that you open for your kids to safeguard their future against all uncertainties and risks.

City Ichchapurun: City Ichchapurun  –   great opportunity to earn against your savings every month! This product allows you to earn interest and enjoy interest every month that accrues in your fixed deposit account, no matter what the term of the deposit is.

Fixed Deposit: If you believe in long-term investments and wish to earn higher interests on your savings, NOW is the time to invest your money in our Fixed Deposit.

2.2.b.b) Loan: City drive: Owning a car is no longer a luxury. Car for your family is now a matter of fulfilling a necessity. Appreciating that basic need, City Bank introduces City Drive, a tailor-made auto loan scheme for individuals.

City solution: Dream Vacation? Son's admission to a foreign university? Medical treatment? Daughter's wedding? House renovation? Whatever the occasion or requirement may be, City Solution - any personal loan from City Bank - is there to solve all your problems and to fulfill all your dreams. You can access this facility from our selected branches across the country.

Loan Takeover Plan: An exclusive offer for other bank's credit worthy customers who can now transfer their personal loan outstanding to City Solution with a preferential interest rate and waiver on processing fee.

City express: City Express Cash is a fully secured and revolving facility for any legitimate purpose. The security for the loan should be ideally CBL FDR. Bank would finance against clients CBL FDR or other banks/NBFIs security. City Express Loan is a fully secured and terminating (EMI

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Based) loan facility for any legitimate purpose. Bank would finance against clients CBL FDR or other bank FDR/NBFIs security. This is an any purpose secured loan for any legitimate purpose.

2.2.b.c) City foreign remittance: The city Bank's Foreign Remittance unit meets growing customer needs for fast, sucure & easy money transfers to an extensive range of destinations. Being a committed bank to its customers, we go all the lengths to remit your hard earned money safely to your loved ones. With them, apart from a range of high-class modem remittance solutions, you will get peace of mind which we believe counts to most.

2.2.b.d) Credit card: City Bank is the first bank to issue Dual Currency Credit Card in Bangladesh. This card enables you simultaneous usage of your card both in home and in abroad. You do not need to carry two different cards for the same purpose.

2.2.b.e) Debit card: CITY Visa Electron Debit Card - By your side, round the clock: Now comes the Visa Debit Card from City Bank. Your life, therefore, becomes hassle-free and safe; and it is Visa Electron branded, which makes you the proud owner of a meaningful plastic.

2.2.c) SME Banking: SME Banking of City Bank is assuming a new and modern dimension. It is entering in to a wider horizon. The philosophy of extending banking services to SME's of the country is to meaningfully push every one of them up to the next level of respective business operations. The upward push would be meaningful as they would be business wise competitive for a sustainable future. It is therefore would be turning in to an abode of SME's to grow to the next level. Hence, the bank has named it City Business - for taking SME's to the next level. For the first time in the history of CityBank, SME Banking business processes are going to be driven thru a centralized platform model. This is a fundamental move away from a 25 years legacy system of decentralized geography based branch banking model. We all know this transformation process and momentum is already in place. This would be completed by 2008.

2.2.d) Treasury City Bank Treasury & Market Risk Division : City Bank Ltd. has a dedicated Treasury team who is capable of providing all treasury Solutions. Through our foreign correspondent business partners CBL is providing a wide range of Treasury products. In CBL Treasury, there are four teams who are specialized in their own area to ensure

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the best possible solution to our customer requirement. CBL has following teams in the Treasury: 01.Foreign Exchange 02.Money Market 03.Corporate Sales 04.Asset Liability Management & Market Research Each team is dedicated to provide best solutions to their respective areas. Through their four dedicated team they provide a lot of different services:

2.2.e) City i-Bank: Single Click Banking: View Account Summary View Account Details Print Statement Cheque Book Inquiry View Standing Instruction

The Benefits of Internet Banking: Security and privacy of Internet Banking. We strongly advise our customers to be on the alert for phishing attempts. As a matter of security, The City Bank Limited will never send you an email asking you to update sensitive personal information. Safe and Secure Tips for Internet Banking What should you know about phishing? Click here for more information.

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2.3 Recent Performances of The City Bank: The City Bank Limited, functioning as a conventional bank in the country, has been able to consolidate its position in this sector; the bank has been able to establish a solid presence with the customers and general public, through its improved services, value addition in the economy and increasing shareholders value. (Million TK.) Income Statement Interest income Interest expenses Non interes income Non interest expenses Profit before provision Profit before tax Profit after tax Balance Sheet Authorized capital Paid up capital Reserve fund and surplus Total shareholders equity Deposits Loans and advances Investments Fixed assets Total assets Off balance sheet exposures Foreign Exchange Business Export Import Remittance Total Capital Adequacy Ratio Credit Quality Provision For Unclassified Loan Provision For Classified Loan Percentage Of NPL Over Total Loans And Deposits SHARE INFORMATION No Of Share Outstanding (In Million) EPS Stock Dividend Market Value Per Share PRICE EARNINGS RATIO Net Assets Value Per Share Operating Performance Ratio Credit Deposit Ratio Cost Of Funds

2009 5742.82 3671.99 2297.05 2112.24 2255.64 1388.06 818.72 1750 1571.13 4293.10 5864.23 62384.28 43486.42 10586.45 2788.07 76466.80 10446.56 13815.40 28717.80 17932.50 11.29% 799.21 708.47 4.87% 15.71 52.11 25% 729.55 14 373.25 69.71% 6.08%

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Yield On Loans & Advances Return On Assets Return On Equity Other Information Number of Branches Number of SME Centres Number of Employees Number of foreign Correspondents a. Recent Performances of The City Bank

13.07% 1.23% 16.24% 87 10 2424 513 Source: Annual report-2009

Operating Income: Operating income for the year 2009 stood at tk.4367.88 million compared to that of tk. 3380.27 million in 2008. Operating income increased by tk.987.61 million (29.22%) from 2008 primarily due to decreased cost of deposit . Deposit: Total deposit of the bank as on December 31, 2009 stood tk. 62384.28 million against tk. 45034.33 million of the previous year. Loans and Advances: The loans and advances portfolio of the bank at the end of the year 2009 stood at tk. 43486.42 million with loans diversified in both conventional credit and finance based on islami shariah. Export: The amount of export business including local bills was tk. 13815.40 million in the year under review compared to tk.14765.80 million in the previous year. Import: The volume of import business including local L/Cs of the bank stood at tk. 28717.80 million in the year 2009 compared to tk.30894.10 million in the year 2008. They have also delivered a number of growth initiatives that are crore parts of their master strategy and these will surely well position us for the future. In 2009,we have:  Launched American Express Cards in Bangladesh which is the number 1 financial

    

institution brand in the globe. We are American Express‟s sole franchisee for Bangladesh. Opened 5 new branches, 5 SME service centers and 11 SME business centers. Increased their number of ATM from 24 to 47  –   providing their customer with greater access to their money. Relocated Head office from Motijheel to Gulshan Avenue. Launched brokerage business. Appointed 290 additional talented staff to their bank during the year mainly to support the newly formed departments.

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CHAPTER THREE (Theoretical Part) (Liquidity Management)

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3.1. What is liquidity? The degree to which an asset or security can be bought or sold in the market without affecting the asset's price. Liquidity is characterized by a high level of trading activity. Assets that can by easily bought or sold, are known as liquid assets. 3.1.a Core liquidity:

Cash and other financial assets that banks possess that can easily be liquidated and paid out as part of operational cash flows. Examples of core liquidity assets would be cash, government bonds and money market funds. Banks typically use forecasts to anticipate the amount of cash that account holders will need to withdraw, but it is important that banks do not overestimate the amount of cash and cash equivalents required for core liquidity because unused cash left in core liquidity cannot be used by the bank to earn increased returns. 3.1.b Liquid Asset:

An asset that can be converted into cash quickly and with minimal impact to the price received. Liquid assets are generally regarded in the same light as cash because their prices are relatively stable when they are sold on the open market. 3.1.c Cash Position: The amount of cash that a company, investment fund or bank has on its books at a specific point in time. The cash position is a sign of financial strength and liquidity. In addition to cash itself, it will often take into consideration highly liquid assets such as certificates of deposit, short-term government debt and other cash equivalents. 3.1.d Money market: The money market is better known as a place for large institutions and government to manage their short-term cash needs. However, individual investors have access to the market through a variety of different securities. 3.1.e Liquidity cushion: A reserve fund for a company or person containing money market and highly liquid investments. This is a cushion used by large and small investors. By maintaining cash reserves in money market instruments, unexpected demands on cash don't require the immediate sale of securities 3.1.f Current asset A balance sheet account that represents the value of all assets that are reasonably expected to be converted into cash within one year in the normal course of business. Current assets include cash, accounts receivable, inventory, marketable securities, prepaid expenses and other liquid assets that can be readily converted to cash. In personal finance, current assets are all

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assets that a person can readily convert to cash to pay outstanding debts and cover liabilities without having to sell fixed assets. 3.1.g Current liability: A company's debts or obligations that are due within one year. Current liabilities appear on the company's balance sheet and include short term debt, accounts payable, accrued liabilities and other debts. 3.1.h Maturity mismatch: The tendency of a business to mismatch its balance sheet by possessing more short-term liabilities than short-term assets and having more assets than liabilities for medium- and longterm obligations. How a company organizes the maturity of its assets and liabilities can give details into the liquidity of its position.

3.2 What is liquidity Management? Cash and liquidity management is about forecasting the company‟s cash needs to run its businesses and then managing the group wide cash flows, short-term borrowings and cash in the most efficient manner to ensure that those cash needs can be met. With the help of IT and communications systems, cash can be pooled internationally and used to best advantage. Funding and liquidity needs are intimately connected with understanding and managing working capital and the payments and cash reporting systems to best advantage. Some ratios can be used to analyze the liquidity position of a bank.

3.2.a Liquidity ratios: A class of financial metrics that is used to determine a company's ability to pay off its shortterms debts obligations. Generally, the higher the value of the ratio, the larger the margin of safety that the company possesses to cover short-term debts.

3.2. a.a Current Ratio:

A liquidity ratio that measures a company's ability to pay short-term obligations. This ratio is mainly used to give an idea of the company's ability to pay back its short-term liabilities (debt and payables) with its short-term assets (cash, inventory, receivables). The higher the current ratio, the more capable the company is of paying its obligations. The Current Ratio formula is:

Also known as "liquidity ratio", "cash asset ratio" and "cash ratio".

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3.2.a.b Total debt-to-asset:

A metric used to measure a company's financial risk by determining how much of the company's assets have been financed by debt. Calculated by adding short-term and long-term debt and then dividing by the company's total assets.

3.2.b Trend Analysis: An aspect of technical analysis that tries to predict the future movement of a stock based on past data. Trend analysis is based on the idea that what has happened in the past gives traders an idea of what will happen in the future. There are three main types of trends: short-, intermediate- and long-term.

3.3 Liquidity of a Bank: Liquidity refers to how quickly and cheaply an asset can be converted into cash. Money (in the form of cash) is the most liquid asset. Assets that generally can only be sold after a long exhaustive search for a buyer are known as illiquid. The degree to which an asset or security can be bought or sold in the market without affecting the asset's price. Liquidity is characterized by a high level of trading activity. Assets that can be easily bought or sold, are known as liquid assets. The ability to convert an asset to cash quickly. Also known as "marketability". The ability of an asset to be converted into cash quickly and without any price discount. There is no specific liquidity formula; however liquidity is often calculated by using liquidity ratios. It is safer to invest in liquid assets than illiquid ones because it is easier for an investor to get his/her money out of the investment. Examples of assets that are easily converted into cash include blue chip and money market securities. For banks and large corporates, liquidity management is about getting a fine return on cash which they may need at short notice. They do this by borrowing and lending between each other - using either money market securities or deposits and loans - in what is called the interbank market. Just as the interbank market allows commercial banks to engage in liquidity management,  Central Banks too use money markets to manage their reserves, and in doing so can affect prevailing money market rates. This is commonly achieved by manipulating the one market segment over which they have direct control, the Treasury bill market. High liquidity means there is a lot of money because interest rates are low, and so capital is easily available. However, a liquidity glut can develop if there is really too much money looking for too few investments. This is usually a precursor to a recession,  as more of this capital becomes invested in bad ventures. As the ventures go defunct and don't pay out their promised

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return, investors are left holding worthless assets. Often a panic can ensue, resulting in a withdrawal of investment money. This is what happened during the 2007 Banking Liquidity Crisis. Liquidity for a bank means the ability to meet its financial obligations as they come due. Bank lending finances investments in relatively illiquid assets, but it fund its loans with mostly short term liabilities. Thus one of the main challenges to a bank is ensuring its own liquidity under all reasonable conditions.

3.3.a Liquid Assets of a Bank: An asset that can be converted into cash quickly and with minimal impact to the price received. Liquid assets are generally regarded in the same light as cash because their prices are relatively stable when they are sold on the open market. For an asset to be liquid it needs an established market with enough participants to absorb the selling without materially impacting the price of the asset. There also needs to be a relative ease in the transfer of ownership and the movement of the asset. Liquid assets include most stocks, money market instruments and government bonds. The foreign exchange market is deemed to be the most liquid market in the world because trillions of dollars exchange hands each day, making it impossible for any one individual to influence the exchange rate. Cash and other financial assets that banks possess that can easily be liquidated and paid out as part of operational cash flows. Examples of core liquidity assets would be cash, government bonds and money market funds. Banks typically use forecasts to anticipate the amount of cash that account holders will need to withdraw, but it is important that banks do not over-estimate the amount of cash and cash equivalents required for core liquidity because unused cash left in core liquidity cannot be used by the bank to earn increased returns. Cash in hand: Amount of money of a bank, which stay in hand of that bank to meet recent needs. Generally, bank keeps enough money in hand. As a result liquidity risk is minimized. Items in the process of collection: Some amount of money which keeps in the process of making cash. Reserve in Bangladesh Bank: Every schedule bank has reserve requirement where every bank keeps 5% money on his total capital to the Bangladesh Bank. If a bank needs of money, he can withdraw money from BB‟s reserve amount. Balance with other banks: Every commercial bank has an account in other commercial banks such as customer. If a bank needs of money, he can withdraw money from his account. As a result liquidity risk is minimized.

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d. Liquid Assets of a Bank

3.3.b) Characteristics of Liquid Assets: There are three characteristics involved in liquid assets, which are ready market, stable price and reversible.

e. Characteristics of Liquid Assets

a) Ready Market: A liquid asset must have a ready market so that it can be converted into cash without delay.

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b) Stable Market: Liquid asset must have a reasonable stable price so that no matter how quickly the asset must be sold or how large the sale is the market is deep enough to absorb the sale without a significant decline in price. c) Reversible: The seller can recover his or her original investment with little risk of loss.

Asset Management Banking Commercial banks differ widely in how they manage liquidity. A small bank derives its funds primarily from customer deposits, normally a fairly stable source in the aggregate. Its assets are mostly loans to small firms and households, and it usually has more deposits than it can find creditworthy borrowers for. Excess funds are typically invested in assets that will provide it with liquidity. The holding of assets that can readily be turned into cash when needed, is known as asset management banking.

Liability Management Banking In contrast, large banks generally lack sufficient deposits to fund their main business -- dealing with large companies, governments, other financial institutions, and wealthy individuals. Most borrow the funds they need from other major lenders in the form of short term liabilities which must be continually rolled over. This is known as liability management, a much riskier method than asset management. A small bank will lose potential income if gets its asset management wrong. A large bank that gets its liability management wrong may fail.

Key to Liability Management The key to liability management is always being able to borrow. Therefore a bank's most vital asset is its creditworthiness. If there is any doubt about its credit, lenders can easily switch to another bank. The rate a bank must pay to borrow will go up rapidly with the slightest suspicion of trouble. If there is serious doubt, it will be unable to borrow at any rate, and will go under. In recent years, large banks have been making increasing use of asset management in order to enhance liquidity, holding a larger part of their assets as securities as well as securitizing their loans to recycle borrowed funds.

3.3.c) Liquidity Cushion: A reserve fund for a company or person containing money market and highly liquid investments. This is a cushion used by large and small investors. By maintaining cash reserves in money market instruments, unexpected demands on cash don't require the immediate sale of securities.

3.3.d) Liquidity crisis: A negative financial situation characterized by a lack of cash flow. For a single business, a liquidity crisis occurs when the otherwise solvent business does not have the liquid assets (i.e., cash) necessary to meet its short-term obligations, such as repaying its loans, paying its bills and paying its employees. If the liquidity crisis is not solved, the company must declare bankruptcy.

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An insolvent business can also have a liquidity crisis, but in this case, restoring cash flow will not prevent the business's ultimate bankruptcy. For the economy as a whole, a liquidity crisis means that the two main sources of liquidity in the economy, banks and the commercial paper market, severely reduce the number of loans they make or stop making loans altogether. Because so many companies rely on these loans to meet their short-term obligations, this lack of lending has a ripple effect throughout the economy, causing liquidity crises at a plethora of individual companies, which in turn affects individuals.

3.3.e) Open market operations and liquidity management: Commercial banks are required to hold a sufficient proportion of their assets in the form of relatively riskless instruments for monetary control purposes. Historically, Central Banks‟ changed the level of minimum reserve requirements to directly affect levels of liquidity and the price of short-term funds. But such legislative intervention has largely been replaced by open market operations - a process of manipulating the level of liquidity available to commercial banks by buying and selling short-term instruments. If the Central Bank is buying Treasury bills the increased demand in the market will cause bill yields to fall. This fall in bill yields makes other instruments relatively more attractive and encourages substitution into those assets, thus causing a general fall in money market yields.

The purchase of bills by the Central Bank also increases commercial banks operational reserves. This increase in liquidity - an increase in the supply of money - causes the interbank rate to fall and leads to a general increase in loans extended and in securities purchased. This is because the availability of funds has increased and their cost has decreased. This supply effect accentuates

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the reduction in yields on all securities caused by the Central Bank‟s initial increase in demand for bills. By selling Treasury Bills the Central Bank stimulates the reverse price effect. The increased supply of bills in the market will cause bill yields to rise. This rise in bill yields makes other instruments relatively less attractive and leads to substitution out of these instruments and into bills, thus causing a general rise in money market yields. This in turn curtails loans and reduces demand for other instruments thus accentuating the general rise in yields in the money market. The process of substitution stimulated by Central Bank open market operations spreads to capital markets as borrowers and lenders reevaluate the relative attractiveness of longer term instruments. This is a fundamental mechanism through which the fine tuning of domestic interest rates - which affects all borrowing and investment decisions - is achieved in domestic money markets.

3.3.f) Types of Liquidity: There are several types of liquidity in banking sectors in our country which are immediate liquidity, short-term liquidity, long-term liquidity, contingent liquidity, economic cyclical liquidity.

f. Types of Liquidity

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a) Immediate liquidity: When cash money is needed to pay in cheques to demandable customers, it is called immediate liquidity. b) Short-term liquidity: Short-term liquidity is used to meet the monthly liquidity requirements. Based on the types of clients and on the seasonal variability, the necessity of these types of liquidity can vary. c) Long-term liquidity: Long-term liquidity is required to meet the cash demand for replacement of fixed assets, retirement of the redeemable preferred shares or debentures and to acquire new fixed assets and technical know-how. d) Contingent liquidity: It arises depending on the happening of some unexpected events. It is difficult to guess this unexpected situation but not impossible though the amount cannot be exactly predicted. Contingent liquidity is also required to face the adverse situations created by big bank robbery, fraud, arson or other accidents. e) Economic cyclical liquidity: Based on good or bad economic situation, the supply of bank deposit and the demand for loan varies. Due to this variation, the liquidity demand also varies. But it is very difficult to identify the extent of such variation. Generally, difficult national and international events such as political instability, war, the pressure created by the different interest groups relating to the banking activities are the causes of economic cyclical liquidity needs.

3.3.g) The demand and supply of liquidity: Banks need liquid assets to meet the immediate demand of the customers and banks collect funds to meets or equalize customer‟s demand. For most banks , the most pressing demands for spend able funds come from two sources generally such as customers withdrawing money from deposits and credit requests from customers the bank wishes to keep , either in the in the form of new loan requests, renewals of expiring loan agreements or drawings upon existing credit lines. Other sources of liquidity demand include paying off previous borrowings such as loans the bank may have received from other banks or from the central bank. Similarly payment of income taxes or cash dividend to the stockholders periodically gives rise to a demand for immediately spend able cash. The most important source for a depository institution normally is receipt of new customer deposits, both from newly opened accounts and from new deposits placed in existing accounts. These deposit inflows are heavy the first of each month as business payrolls are dispensed and they may reach a secondary peak toward the middle of each month as bills are paid and other payrolls are met. Another important element in the supply of liquidity comes from customers repaying their loans which provide fresh funds for meeting new liquidity needs, as do sales of assets, especially marketable securities, from the investment portfolio. Liquidity also flows in from revenues generated by selling non deposit services and from borrowing in the money market.

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3.3.h) Liquidity Risk: Liquidity risk is the current and prospective risk to earnings or capital arising from a bank‟s inability to meet its obligations when they come due without incurring unacceptable losses. Liquidity risk includes the inability to manage unplanned decreases or changes in funding sources. Liquidity risk also arises from the failure to recognize or address changes in market conditions that affect the ability to liquidate assets quickly and with minimal loss in value.

Quality of Liquidity Risk Management: The following indicators, as appropriate, should be used when assessing the quality of liquidity risk management.

g. Liquidity Risk Management

Strong : Board approved policies effectively communicate guidelines for liquidity risk management and designate responsibility. The liquidity risk management process is effective in identifying, measuring, monitoring, and controlling liquidity risk. Reflects a sound culture that has proven effective over time. Management fully understands all aspects of liquidity risk. Management anticipates and responds well to changing market conditions. The contingency funding plan is well-developed, effective and useful. The plan incorporates reasonable assumptions, scenarios, and crisis management planning, and is tailored to the needs of the institution. Management information systems focus on significant issues and produce timely, accurate, complete, and meaningful information to enable effective management of liquidity. Internal audit coverage is comprehensive and effective. The scope and frequency are reasonable.

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Satisfactory: Board approved policies adequately communicate guidance for liquidity risk management and assign responsibility. Minor weaknesses may be present. The liquidity risk management process is generally effective in identifying, measuring, monitoring, and controlling liquidity. There may be minor weaknesses given the complexity of the risks undertaken, but these are easily corrected. Management reasonably understands the key aspects of liquidity risk. Management adequately responds to changes in market conditions. The contingency funding plan is adequate. The plan is current, reasonably addresses most relevant issues, and contains an ade quate level of detail including multiple scenario analysis. The plan may require minor refinement. Management information systems adequately capture concentrations and rollover risk, and are timely, accurate, and complete. Recommendations are minor and do not impact effectiveness. Internal audit is satisfactory. Any weaknesses are minor and do not impair effectiveness or reliance on audit findings. Weak : Board approved policies are inadequate or incomplete. Policy is deficient in one or more material respects. The liquidity risk management process is ineffective in identifying, measuring, monitoring, and controlling liquidity risk. This may be true in one or more material respects, given the complexity of the risks undertaken. Management does not fully understand, or chooses to ignore, key aspects of liquidity risk. Management does not anticipate or take timely or appropriate actions in response to changes in market conditions. The contingency funding plan is inadequate or nonexistent. Plan may exist, but is not tailored to the institution, is not realistic, or is not properly implemented. The plan may not consider costeffectiveness or availability of funds in a non- investment grade or CAMEL “3” environment. Management information systems are deficient. Material information may be lacking or inaccurate, and reports are not meaningful. Internal audit coverage is nonexistent or ineffective due to one or more material deficiencies.

Sources of liquidity risk:  Incorrect judgment and complacency.  Unanticipated change in cost of capital.  Abnormal behavior of financial markets.  Range of assumptions used.  Risk activation by secondary sources.  Break down of payments system.  Macroeconomic imbalances.

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CHAPTER FOUR (Liquidity Management-Central bank’s requirements)

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4.1 Central Bank‟s Liquidity Management: The “liquidity management” of a central bank is defined as the framework, set of instruments and especially the rules the central bank follows in steering the amount of bank reserves in order to control their price (i.e. short term interest rates) consistently with its ultimate goals (e.g. price stability). The note presents a basic theory of liquidity management in a framework of substantial reserve requirements and averaging, focusing on the relationship between quantities (central bank balance sheet items) and overnight rates and the involved signal extraction problems. Some elements of a “normative” theory of liquidity management are suggested. The purchase, sale and rediscount of bill of exchange and promissory notes drawn on and payable in Bangladesh are also included in the activity of the bank. The bank acts as the lender of last resort for the government as well as for the country's scheduled banks. All scheduled banks are required to maintain a minimum reserve with the Bangladesh Bank. The present statutory liquidity reserve (SLR) requirement is 18.5% of total demand and time liabilities, 5.5% of which is to be maintained as cash reserve ratio (CRR), and the rest 13% as approved securities. The SLR requirement for Islamic banks is 10% and they are to keep 5.5% of this reserve as CRR and the rest 5.5% in approved securities.

h. Liquidity requirements of commercial banks Bangladesh Bank runs a Deposit Insurance Scheme established under the Deposit Insurance Ordinance 1984. The objective of the scheme is to safeguard the deposits of the customers with both local and foreign deposit money banks doing business in Bangladesh. The deposits amounting up to Tk. 100,000 of all customers in a scheduled bank are insured under the scheme. All scheduled banks in Bangladesh are required to be members of the scheme and pay premium on their deposits at a rate determined by the Bangladesh Bank from time to time. Bangladesh Bank accumulates the premiums in the Deposit Insurance Fund.

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Year

SLR

CRR

2005 2006 2007 2008

16 18 18 18

4.5 5 5 5

2009

18

5

2010

18.5

5.5

b. Last few years SLR & CRR rate (Source: www.banglaseh-bank.org)

In the above table SLR and CRR are shown which was increased in 2006 from 2005 but after that year it was stable to 2009. As a result of worldwide recession and our country‟s inflation rate, BB decided to amplify the SLR and CRR to secure and develop our country‟s economy. The global financial crisis that began in mid-2007 has renewed concerns about financial instability and focused attention on the fundamental role of central banks in preventing and managing systemic crises. In response to the turmoil, central banks have made extensive use of both new and existing tools for supplying central bank money to financial institutions and markets. In the face of the widespread financial market dislocations that began in August 2007, central banks have expanded liquidity operations, actively deploying their balance sheets to address all three types of liquidity shortages. While the inherent cause of the current crisis may be rooted in coordination failures and informational asymmetries and so is not new the scale and scope of the problem have necessitated measures in some countries that are clearly unprecedented. In particular, because institutions have come to depend on market-based sources of liabilities, replacing lost funding liquidity now requires interventions on a scale that is large relative to the size of the central bank‟s balance sheet in normal times.

4.1.a) Asset Liability Management Policy: Asset Liability Management (ALM) is an integral part of Bank Management; and so, it is essential to have a structured and systematic process for manage the Balance Sheet. Banks must have a committee comprising of the senior management of the bank to make important decisions related to the Balance Sheet of the Bank. The committee, typically called the Asset Liability Committee (ALCO), should meet at least once every month to analysis, review and formulate strategy to manage the balance sheet. In every ALCO meeting, the key points of the discussion should be minuted and the action points should be hig hlighted to better position the bank‟s balance sheet. In every ALCO meeting, action points taken in the past ALCO meeting should be reviewed to ensure implementation. Changes in market liquidity and or interest rates exposes banks/ business to the risk of loss, which may, in extreme cases, threaten the survival of institution. As such, it is important that senior management as well as the Board of Directors must understand the existence of such risk on the balance sheet and they should ensure that the structure of the institutions‟ business and the level of balance sheet risk it assumes are effectively managed, that appropriate policies and procedures are established to control and limit these risks, and that resources are available for evaluating and controlling interest rate risk.

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Increasingly Asset Liability Management has become an integral part of Bank Management. Banks‟ are exposed to Balance Sheet Risk, where it is absolutely necessary for   the management of the bank to understand the existence of such risk and best manage the exposure to the risk. The Asset Liability Committee (ALCO), comprising of the senior management of a bank, is primarily responsible for Balance Sheet Management or more specifically Balance Sheet Risk Management.

4.1..a.a) Liquidity Risk: The risk that bank or business will be unable to meet it‟s commitment as they fall due leading to bankruptcy or rise in funding cost. It is the solvency of business and which has special reference to the degree of readiness in which assets can be converted into cash with out loss. Banks traditionally use the statutory liquidity reserve and their borrowing capacity in the volatile interbank money market as the source of liquidity. But a conscious approach to measure and monitor the liquidity is somewhat lacking in our market. We can learn and draw immense benefit by sharing the best practices, tools and techniques of liquidity management.

4.1..a.b) Action Points The ALCO takes decisions for implementation of any/all of the following issues: Need for appropriate Deposit mobilization or Asset growth in right buckets to optimize asset-liability mismatch. Cash flow (long/short) plan based on market interest rates and liquidity. Need for change in Fund Transfer Pricing (FTP) &/or customer rates in line with strategy adapted. Address to the limits that are in breach (if any) or are in line of breach and provide detailed plan to bring all limits under control. Address to all regulatory issues that are under threat to non-compliance.

4.1..a.c) Key Management Indicators: The management of every bank sets different limits in managing risk and exposures. The current limit of all indicators along with recent utilization is included for management review. Also trend for last few months are also included for better understanding of the behavior of the indicators. Some of the key management Indicators are as follows:

Wholesale Borrowing Guidelines: A key control in the management of liquidity risk is a set of guidelines placed on each bank‟s need to raise funds from the wholesale market. This is a bank‟s standard source of marginal

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funding. Typically, defined as the ability of a bank to raise funds from the wholesale market (or interbank market), it is also the most vulnerable given the large size of individual deposits and the relatively small number of potential counterparties. To reduce the bank‟s dependency on funds from the wholesale market (or the interbank market), it should examine the funding products presently offered and consider whether other funding  products may diversify/expand the bank‟s funding base. Separate amounts may be established for local currency and foreign currency balance sheets. A bank‟s capacity to borrow from the external wholesale market depends on a number of factors: - The size and turnover of the local market; our share of that market - The credit limits imposed by our counterparties, etc. - Stability of liquidity in the market. Commitments: A bank‟s liquidity is very much vulnerable to undrawn commitments by customers. Undrawn commitments may be unutilized by not drawing an overdraft limit of customers or any loan commitments, which has not been drawn by customers. Customers have the right to ask for these funds at any point in time and the bank is obligated to pay the customer. Thus a ceiling should be set on a bank‟s commitments to customers. Loan Deposit Ratio: Loan deposit ratio, typically calculated as the ratio of loans against deposits, is the most common way to see a bank‟s liquidity position. In an ideal scenario, loan deposit ratio should not exceed 80% (as 20% of DTL is required for statutory requirements). However, a bank may decide to lend out its capital or raise funds from the inter bank with a view that market interest rates would be low. But excessive lending (a high Loan Deposit Ratio) may expose a bank in serious liquidity and interest rate risk as the market liquidity may tighten any time. Medium Term Funding Ratio: Banks typically make money by running mismatches, that is, by borrowing short term and lending long term. However, short term deposits may go out of the bank upon maturity, whereas a bank cannot call back long term landings. Thus a bank has to find the right combination for longer term mismatch. Medium term funding ratio is calculated as the ratio of liabilities with a contractual maturity of more than one year to assets with a contractual maturity of more than one year. This ratio is intended to highlight the extent to which we are dependent on being able to roll over short term deposits in order to fund medium term assets. Maximum Cumulative Outflow (MCO): Under normal conditions, the day-to-day management of liquidity relies on the effective control of cash flow. Maximum cumulative outflow (MCO) guidelines control the net outflow (inflow from asset maturity minus outflow from liability maturity) over the following periods: overnight, one week and one month. The Treasury operation of a bank will review its funding capabilities

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and recommend the guidelines to senior management. These guidelines will be based on the estimated wholesale funding shortfall after calculating the forecast/contractual cash flow of the entity under normal business conditions. The basis of cash flow measurement is to assume that funds are repaid on their contractual maturity date. For wholesale funds, this is sufficient. However, it is not realistic to assume that retail business will behave in this manner. In practice, current accounts and savings deposits are not withdrawn the next day and overdrafts are not repaid on demand. Retail business can be expected to follow more or less predictable patterns being influenced by seasonal factors and other trends. In monitoring liquidity, an estimate should be made of the expected change in such assets/liabilities with the resulting need for higher/lower funding from the wholesale market. Whilst systems constraints will often impede frequent and timely updating of cash flow data relating to retail business, it is nevertheless important to include realistic estimates within t he MCO data which Treasury use to manage the bank‟s aggregate cash requirements.

4.1.a.d) Maturity Profile Mismatch: A key issue that banks need to focus on is the maturity of its assets and liabilities in different tenors. A typical strategy of a bank to generate revenue is to run mismatch, i.e. borrow short term and lend longer term. However, mismatch is accompanied by liquidity risk and excessive longer tenor lending against shorter- term borrowing would put a bank‟s balance sheet in a very critical and risky position. To address this risk and to make sure a bank does not expose itself in excessive mismatch, a bucket-wise (e.g. next day, 2-7 days, 7 days-1 month, 1-3 months, 3-6 months, 6 months-1 year, 1-2 year, 2-3 years, 3-4 years, 4-5 years, over 5 year) maturity profile of the assets and liabilities is prepared to understand mismatch in every bucket. However, as most deposits and loans of a bank matures next day (call, savings, current, overdraft etc.), bucket-wise assets and liabilities based on actual maturity reflects huge mismatch; although we know that all of the shorter tenor assets and liabilities will not come in or go out of the bank‟s balance sheet. As a result, banks prepare a forecasted balance sheet where the assets and liabilities of the nature of current, overdraft etc. are divided into „core and non-core‟ balances, where core is defined as the portion that is expected to be stable and will stay with the bank; and non-core to be less stable. The distribution of core and non-core is determined through historical trend, customer behavior, statistical forecasts and managerial judgment; the core balance can be put into over 1 year bucket whereas non-core can be in 2-7 days or 3 months bucket.

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CHAPTER FIVE (Liquidity Management of CBL)

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5.1 Current Assets of CBL: Current assets are all assets that a person can convert readily to cash to pay outstanding debts and cover liabilities without having to sell fixed assets. It include cash on hand, bank accounts, and marketable securities that are not tied up in long-term investments. Current assets are important to businesses because they are the assets that are used to fund day-to-day operations and pay ongoing expenses. The current assts of CBl are: i. ii. iii. iv. v.

Cash in hand Balance with other banks and financial institutions Money at call and short notice Investments Loans and advances

5.2 Current liabilities of CBL: Current liabilities are a bank‟s debts or obligations payable within one year. Current liabilities liabilities appear on the bank‟s balance sheet and include short-term short-term debt, accounts payable, accrued liabilities, and other debts. Essentially, these are bills that are due to creditors and suppliers within a short time. Normally, baks withdraw cash or liquidate current assets to pay their current liabilities. The current liabilities of CBL are: i. ii. iii. iv.

Borrowing from other banks, financial institutions and agents Deposits Other accounts Provision and other liabilities

5.3 CBL’s liquidity Risk Management Framework: Our Treasury function is responsible for the management of liquidity risk. Our liquidity risk management framework is designed to identify measure and manage the liquidity risk position of the Group. The underlying  policy, including the bank‟s risk tolerance, is reviewed and approved regularly by the Management Board. The policy defines the liquidity risk limits which are applied to the Group. Our liquidity risk management approach starts at the intraday level (operational liquidity) managing the daily payments queue, forecasting cash flows and factoring in our access to Central Banks. It then covers tactical liquidity risk management dealing with the access to secure and unsecured funding sources. Finally, the strategic perspective comprises the maturity profile of all assets and liabilities (Funding Matrix) on our balance sheet and our issuance strategy. Our cash flow based reporting system provides daily liquidity risk information to global and regional management. Stress testing and scenario analysis plays a central role in our liquidity risk management framework. This also incorporates an assessment of asset liquidity, i.e. the characteristics of our asset inventory, under various stress scenarios.

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Short-Term Liquidity Our reporting system tracks cash flows on a daily basis over an 18-month horizon. This system allows management to assess our short-term liquidity position in each location, region and globally on a by-currency, by-product and by-division basis. The system captures all of our cash flows from transactions on our balance sheet, as well as liquidity risks resulting from off-balance sheet transactions. We model products that have no specific contractual maturities using statistical methods to reflect the behavioral characteristics of their cash flows. Liquidity outflow limits (Maximum Cash Outflow Limits), which have been set to limit cumulative global and local cash outflows, are monitored on a daily basis to safeguard our access to liquidity. As of year-end 2009 we have implemented a new reporting system which focuses on contractual cash flows from wholesale funding sources on a daily basis over a 12-month horizon. The system captures all cash flows from unsecured as well as from secured funding transactions. Wholesale funding limits, which are calibrated against our stress testing results and approved by the Management Board; describe our maximum tolerance for liquidity risk. These limits apply to the cumulative global cash outflows and are monitored on a daily basis.

Unsecured Funding Unsecured funding is a finite resource. Total unsecured funding represents the amount of external liabilities which we take from the market irrespective of instrument, currency or tenor. Unsecured funding is measured on a regional basis by currency and aggregated to a global utilization report. The management board approves limits to protect our access to unsecured funding at attractive levels.

Asset Liquidity The asset liquidity analysis forms an integral piece of stress testing and tracks the volume and booking location within our consolidated inventory of unencumbered, liquid assets which we can use to raise liquidity via secured funding transactions. Securities inventories include a wide variety of different securities. As a first step, we segregate illiquid and liquid securities in each inventory. Subsequently we assign liquidity values to different classes of liquid securities. The liquidity of these assets is an important element in protecting us against short-term liquidity squeezes. In addition, we keep a dedicated strategic liquidity reserve containing highly liquid and central bank eligible securities in major currencies around the world to support our liquidity profile in case of potential deteriorating market conditions. The strategic liquidity reserve amounts to EUR 54.9 billion as of December 31, 2009. This reserve is held in addition t o the bank‟s cash balance and the collateral the bank needs to support its clearing activities in euro, U.S. dollars and other currencies which are held in separate portfolios around the globe.

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5.3.a) Treasury Desks: CBL has a dedicated Treasury team which is capable of providing all treasury solutions through wide range of Treasury products. CBL Treasury has five different desks to prove superior service with respect to pricing, best possible solution for customer requirement and market information. The different Treasury Desks are as follows:

5.3.a.a) The Money Market Desk: The CBL money market desk is one of the most active and efficient desk in the inter-bank market of the country. Dealers exercise all the existing MM products like call money, term money, swap, Repo & Reverse- Repo & securities swap etc.

5.3.a.b) Fixed Income & Investment Desk: Banks need to maintain liquidity in form of CRR (Cash Reserve Ratio) & SLR (Statutory Liquidity Ratio) as per Banking Company Act. Investment in various Govt. securities like Treasury bills and Bonds in different tenors, debentures qualify for SLR. CBL actively participates in Govt. Securities auctions for investment in SLR maintenance and also generation of risk free fixed return on Securities Investment. CBL Fixed Income & Investment Desk also participates in secondary market trading of Govt. Securities though CBL is not a Primary Dealer.

5.3.a.c) Asset Liability Management (ALM) Desk: CBL has a highly efficient ALM desk. The ALM Desk provides analysis, instruction and guidance in the area of asset liability management in order to promote the financial well being of a financial institution. Asset liability management is the process of ensuring an FI remains financially viable through adequate capital, stable earnings, and sufficient liquidity.

5.3.a.d) Foreign Exchange Desk: CBL-Forex desk offers full range of vanilla and derivative products in forex. These include spot, forward (USD/BDT, Major cross currency), swaps in addition to high yield structured deposits linked to currencies, interest rates. CBL- forex desk is one of the leading market maker in USD/BDT spot, swaps, forward transactions in inter-bank market. CBL has good sources of forex through its own export customers, Non-residence Remittances and local & multinational corporate houses remittances / exports. CBL is also well equipped to price world major currency spot & forward prices. CBL treasury is connected to the international market through on-line Dealing Platforms of different international banks enables CBL to quote very competitive prices on world major currency spot & forwards.

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5.3.a.e) Corporate Sales Desk: CBL Corporate Sales Desk assists clients in managing their risk exposures so as to minimize the impact of market volatility on the company. This includes analyzing the business/balance sheet structure of the company and quantifying the net exposures in terms of interest rates, foreign exchange, mismatch in cash flows, etc. Based on the risk appetite of a client, hedging strategies are then tailor-made to suit the client's needs. Up-to-date market information and research, a wide range of hedging products and a team of qualified treasury specialists are some of the main features of the corporate sales desk.

5.3.a.f) Other miscellaneous activities: CBL Treasury brings out a daily & quarterly financial news update for the corporate houses and Non Residence Business houses. It contains a detail commentary on the money & forex market movement. One can avail the copies from the download section of our website.

5.3.b) Liquidity Statement of The City Bank Limited: The liquidity statement of assets and liabilities as on the reporting date has been prepared on the following basis:  Balance with other banks and financial institutions, money at call and short notice etc are      

on the basis of their maturity term. Investments are on the basis of their respective maturity. Loans and advances are on the basis of their repayment maturity. Fixed assets are on the basis of their useful life. Other assets are on the basis of their realization or amortization. Borrowing from other banks. Financial institutions and agents are as per their maturity or repayments. Deposit and other accounts are on the basis of their repayment or adjustments schedule.

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The City Bank Limited Liquidity Statement (Analysis of the maturity of assets and liabilities) As at 31 December, 2009.

Particulars

(000 Taka)

2009

2008

2007

Cash in hand

5142660.56

3120173.30

3477567.05

Balance with other banks and financial institutions

9850784.09

4573690.31

4782474.42

Money at call and short notice Investments

299779.17 10586452.61

220000.00 9031698.88

1830000.00 7550606.49

Loans and advances

43486421.80

34420944.98

26788466.14

Fixed assets including premises, furniture and fixtures

2788065.87

2514383.97

1390732.20

Other assets

4312637.46

3233684.61

2935556.72

Non banking assets Total Assets (a)

76466801.56

57114576.06

48755403.01

Borrowing from other banks, financial institutions and agents

992651.50

2104480.29

850000.00

Deposits Other accounts

59866593.87 2517686.13

43239466.44 1794868.07

38916353.90 1623280.13

Provision and other liabilities

7225635.78

5758284.74

4491401.99

Total liabilities(b)

70602567.29

52897099.52

45881036.03

Net Liquidity Gap (a-b)

5864234.28

4217476.53

2874366.99

Assets

Liabilities:

Deposit

Cash 6000000

60000000

5000000

50000000

4000000

40000000

3000000

30000000 Cash

2000000 1000000

10000000

0

0 2 009

2 00 8

20 07

The cash in hand has increased in 2009. It was worse in the year of 2008.

Deposit

20000000

        9         0         0         2

        8         0         0         2

        7         0         0         2

Deposit level is increasing year by year. It must be a good sign for an bank .

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L oans & Advances 45000000 40000000 35000000 30000000 25000000 20000000 15000000 10000000 5000000 0

BFB 2500000 2000000 1500000

Loans & Advances

1000000

BFB

500000 0         9         0         0         2

        8         0         0         2

2009

        7         0         0         2

As the deposit is increasing, amount of load & advances is also increasing year by year

2008

2007

Borrowing from other banks was in a highest position in 2008, but it is decreasing.

L iquidity G ap 8000000 6000000 4000000 2000000 0 Liquidity Gap

2009

2008

2007

5864234.28

4217476.53

2874366.99

i. Liquidity Statement Analysis: If I think about cash in hand then I can say that cash amount is increasing day by day. So that it can be easily understood that bank carries huge amount of money in hand. In the deposits site, it is easily understood that deposit amount increases in very high level. As a result of huge amount of deposit, cash and credit increase in high level. If we see in the graph of deposit and cash then it will be easily visible to us. Lastly, I am going to tell about liquidity gap graph that liquidity gap was increasing year to year.

5.3.c) CRR and SLR of CBL: The minimum Cash Reserve R equirement on the Bank‟s time and demand liabilities at the rate of 5% has been calculated and maintained with Bangladesh Bank in current account and 18% Statutory Liquidity Ratio, including CRR, on the same liabilities has also been maintained in the

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form of treasury bills, bonds and debentures including FC balance with Bangladesh Bank. Both the reserves maintained by the bank are in excess of the statutory requirements, as shown below:

CRR

2009

2008

2007

2006

Required Reserve

2688313.00

2284419.00

2171060.00

1945317.00

Actual reserve maintained

2849674.00

2321252.00

2201544.23

1957657.00

Surplus/(deficit)

161361.00

36833.00

30484.23

12340.00

Required Reserve (including CRR)

9664246.00

8210229.00

7821976.00

7008262.00

Actual reserve maintained (including CRR)

13050517.00

10312595.00

10696769.00

8370218.33

Surplus/(deficit)

3386271.00

2102366.00

2874793.00

1361956.33

SLR

d. CRR and SLR of CBL (Source: Annual reports 2006, 2007, 2008, and 2009)

CRR 3000000 2000000 1000000 0

2009

2008

RR

2007

AR M

2006

S /D

All the four years, CBL has maintained a surplus in CRR. Although it was in a near to steady position, but a good management of this reserve ratio indicate a good liquidity management framework of CBL.

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SLR 15000000 10000000 5000000 0

2009

2008

RR

2007

AR M

2006

S /D

All the four years, CBL has maintained a surplus in SLR. However, it was also in a steady amount.  j. CRR and SLR of CBL

From the above graphs it is easily imagine that CRR was increasing and SLR was also increasing last 2006 year to 2009.

5.3.d) Estimating CBL’s liquidity needs: Varies kinds of experiments were made in estimating the quantum of liquidity for a particular period. For that reason, bank fund managers estimate liquidity demand based on their past experiences and knowledge. Among all these methods, the following two methods are mostly useda) b)

The sources and uses of fund approach. Liquidity indicator approach.

5.3.d.a) The sources and uses of fund approach: The more the deposits are, the more the liquidity will be. In other words, deposits will increase if loans decrease. The less the deposits are, the less the liquidity will be. In the other words, liquidity decreases with the increase in loans. The following table shows the imaginary sources and uses of fund:

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(000Tk.)

Period

Deposit level

Changes in deposit

2009 2008 2007 2006

59866593.87

16627127

43239466.44 38916353.90

4323113

Period

Loan level

Changes in loan

2009 2008 2007 2006

43486421.80 34420944.98 26788466.14

9065477 7632479 -4000556

Period

-1370874

40287228

30789021.98

Changes in deposit

Changes in loan

Liquidity surplus/deficit

2008 2007

16627127

9065477

7561650

4323113

7632479

-3309366

2006

-1370874

-4000556

-5371430

2009

e. The sources and uses of fund approach (Source: Annual Reports)

Except the estimation in 2009, all the remaining years have negative liquidity balance. Thus the manager is required to employ 2009 year‟s balances in profitable investments. On the other hand, the manager would manage the cheapest source to fulfill the deficit liquidity in years 2008 and 2007.

5.3.d.b) Liquidity indicator approach: Most of the banks estimate liquidity based on the ratios on specific periods. There are two types of liquidity indicatorsI.

Assets based liquidity ratios: (1.1) All the ratios are calculated based on total amount of required items.

S.N. 1 2 3 4 5

Name of Ratios Ratios Cash position indicators 0.84329: 1 Liquid securities indicators 0.1592915: 1 Risk less assets position 1.0025817: 1 Liquidity assets ratio 0.273666: 1 Capacity ratio 0.574189: 1 f. Assets based liquidity ratios

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Here, cash and deposit generate 84% of total assets which is sufficient; investment in government securities is 16%. Cash, deposit and governments securities generate 100% of total assets so that we can say; cash, deposit and government securities are main sources of total assets. Cash, government securities and reserve are 27% on total assets. If we can say about capacity ratio then we see that net loan is 57% of total assets. II

Liability based liquidity ratios: (1.2)

All the ratios are calculated based on total amount of required items. S.N. 1 2

Name of Ratios Core deposit ratio Deposit composition ratio

Ratios 0.7789016: 1. 0.2110333:1.

g. Liability based liquidity ratios

Here, current deposits are 21% of term deposit so that we can say that term deposit is greater than current deposits. Core deposits are 78% of total assets which means 78% assets generated from core deposits.

5.3.e) Trend Analysis: a. Trend Analysis of Deposit of The City Bank Limited:

T rend Analys is o f Depos its

40287 2006

 

38916 2007

 

43239 2008 F . D epos its

 

59866 2009

2010

2011

A . D epos its

From this graph I find that by increasing 1 year the company Deposits is increasing day by day. During the year 2009 there is a positive growth of the deposit. This betterment in deposit was the result of strategic plan. So overall the deposit growth rate shows a satisfactory performance of the company.

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b. Trend Analysis of Loans of The City Bank Limited:

T rend Analys is of L oans

30789

 

2006

26788 2007

 

34420

 

2008

F . L oans

43486 2009

2010

2011

A . L oans

From this graph I find that by increasing 1 year the company Loans is increasing day by day. During the year 2009 there is a positive growth of the loans and advances. This betterment in loans and advances was the result of strategic plan. So overall the deposit growth rate shows a satisfactory performance of the company.

5.3.f) Ratio Analysis (Liquidity Ratios): In balance sheet measures, we can express ratio between certain assets and liabilities, can have many useful applications for a bank. Many banks use ratios in addition to detailed cash flow projections as a tool for high level planning and for formulating simple operating rules. External analysts, regulatory agencies and investors find them practical, because a ratio can give a quick indication of the overall liquidity position. Ratios make it easy to compare liquidity between different institutions or to calculate average liquidity for an entire sector of the financial industry. Ratios are also popular because of their limited data pre-requisites. It takes systematic planning and inputs from all parts of the banking organization to draw up a credible cash-flow chart, but all you need to calculate a ratio is the last balance sheet. However, the real information value of a ratio lies not in its absolute number at a certain balance sheet date. Rather than looking at such a single snapshot, management should be concerned with the trends of the ratios over time. While ratios can seldom provide answers about changes in the bank's liquidity or operational efficiency, marked trends in their development can point to questions that merit further investigation.

6.5Current Ratio: Probably the best-known liquidity ratio is the Current Ratio, the quotient of current assets and current liabilities. Current assets and current liabilities are commonly defined as falling due within a year from the balance sheet date.

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Current Ratio = (Current assets / Current liabilities) Year 2006 2007 2008 2009

Ratios 1.318364 1.102125 1.17803 1.311393

CR 1.4 1.2

1.318364

1

1.102125   1.17803

  1.311393

0.8 2006

2007

2008

2009

One of the most important issues in liquidity management is to determine which proportion of the assets should be held as a liquidity reserve and how much can be loaned out. The current ratio is of no help in this regard. In fact, an institution that has loaned all its funds and has zero liquidity would have the same current ratio as a bank that has not made a single loan and holds all its current assets as vault cash. Despite its limited information value, a bank might still need to track and publish the current ratio, simply because it is used so widely by donors and propagated in many comparative studies of the banking sector. From this above graph we see that in 2006, current ratio was highest but after that year it reduced and in 2008, 2009 it increased.

2. Cash Position Indicator: The cash position indicator compares vault cash and demand deposits at other banks including the central bank to the total asset base of the institution: Cash Position Indicator = (Cash and deposits due from banks/Total assets) Year 2006 2007 2008 2009

Ratios 0.9212 0.9028 0.843121 0.883085

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C PI 0.95 0.9 0.85

0.9212

0.9028 0.843121

0.883085

CPI

0.8 2006

2007

2008

2009

This ratio obviously ranges between 0 and 1, where a larger proportion of cash implies that the institution is in a stronger position to handle immediate cash needs. The City Bank Limited was stronger in 2006 but that time it reduced to 2008 and in 2009 it increased.

3. Capacity Ratio: The mirror image to the cash position is captured by the capacity ratio, which should be understood as a negative liquidity indicator: Capacity Ratio = (loans/ Total assets) Year 2006 2007 2008 2009

Ratios 0.648927 0.549441 0.602654 0.568697

CR 0.65 0.6 0.55

0.648927 0.549441

0.5

0.602654

0.568697

CR

0.45 2006

2007

2008

2009

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The higher the capacity ratio, the lower the institution's liquidity. Even at zero liquidity, the capacity ratio will be less than 1, because of the necessary investment in fixed assets. In 2007 city bank had highest liquidity position and in 2006 it was lowest liquidity position.

4. Total Deposit Ratio: A large base of retail deposits would be evidenced by a high total deposit ratio. Total Deposit Ratio: Total Deposit Ratio = (Total customer deposits/Total assets) Year 2006 2007 2008 2009

Ratios 0.861632 0.831484 0.788493 0.81584

T DR 0.9 0.85

0.861632 0.8

0.831484

0.788493

 

0.81584

TD R

0.75 2006

2007

2008

2009

The higher the total deposit ratio, the lower is the perceived liquidity risk because contrary to purchased funds, retail deposits are less sensitive to a change in interest rates or a minor deterioration in business performance. In 2006 city bank had lower liquidity risk but in 2008 it was highest liquidity risk and in 2009 it was moderately stronger position.

5. Loan-to-Deposit Ratio: Many banks and bank analysts monitor loan-to-deposit ratios as a general measure of liquidity: Loan - to -Deposit Ratio = (Net loans/Total deposits)

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Year 2006 2007 2008 2009

Ratios 0.753137 0.660796 0.764311 0.69707

LTDR 0.8 0.7

0.764311

0.753137 0.660796

0.69707

LTDR

0.6 2006

2007

2008

2009

Loans are presumably the least liquid of assets, while deposits are understood as the primary source of funds. A high ratio indicates illiquidity, because in this case a bank is fully loaned-up relative to its stable funding. Implicitly, it is assumed that new loans must be financed with large purchased liabilities. A low ratio suggests that a bank has additional liquidity, since it can grant new loans financed with stable deposits. In 2008 bank had higher loan amount so it was higher illiquid but in 2007 city bank had lower ratio which suggested that it had additional liquidity.

6. Reserve Ratio: Although there is no shortage of different liquidity indicators in the commercial banking literature, surprisingly there is rarely mention of a ratio that compares cash assets to customer deposits. Reserve Ratio = (Cash assets/Customer deposits)

Year 2006 2007 2008 2009

Ratios 0.069127 0.085769 0.069281 0.082425

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RR 0.1 0.05

0.069127

 

0.085769

0.069281

 

0.082425

RR

0 2006

2007

2008

2009

One could debate whether the numerator of the ratio should be cash assets or liquid assets. The idea of a liquidity reserve would obviously be best captured by including all liquid assets in the calculation. However, the analogy to a minimum reserve requirement imposed by the central bank is most obvious when limiting the numerator to vault cash and demand deposits with other banks. In 2007 city bank had higher in cash position and in 2006 had lower cash position but in 2009 it was moderately well position.

5.3.g) Handling CBL’s liquidity crisis: Liquidity management is an important problem of commercial banks. There are many possible reasons which may cause such problem. Some of the reasons of liquidity crisis are: 







Short-term investment should be made out of short-term funds and long term investment should be made from long term funds. Arrangements can be made to make repayments of liabilities not in bulk but in installments. It lowers the bank‟s risk in liability repayment and need to make a large single repayment will not arise at a time. Indifference and or lack of cautious and close observation to deposits and loan behavior of the large prime customers. If counter service is provided by efficient, skilled and well-behaved persons, then the clients mainly depositors and installment takers of borrowers, will patiently wait without any objection and do not complain to the higher authority about the unavailability of money. Thus, no bad impression about the service of the bank spreads among the public.

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





If bank maintains regular linkage building rapport with these institutions, they may get regular and complete data and information from the bank with detail clarifications regarding liquidity and other operational trends of banks. With the help of such information and advice, understanding and reporting about bank‟s liquidity will be easier with clarifications. To overcome crisis, banks should take develop connections and accessibility to the money market players and can take advance steps to manage inter bank loans or sell short term securities in the money market, whenever required. Thus, if liquidity crisis arises, bank can overcome the situation by collecting necessary funds. The bank, which sells securities with more reliability, credibility and stability, has the ability to avoid liquidity crisis timely or even can avoid the same in more efficient way. Management of bank by professionally skilled and experienced personnel of both deposits and loan if done properly can avoid many problems not to speak the liquidity. Liquidity crisis must occur if loan cannot be recovered in the right time and right amount. On the other hand, the loan portion can be converted into debenture can be sold in the market for cash and thereby liquidity is managed by managerial maneuvering. By efficient and planned loan recovery and by ensuring loan conversion opportunity, liquidity crisis can be avoided and or minimized by the experienced and professionally trained bank personnel.

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CHAPTER SIX

(Comparative Analysis with IFIC Bank Ltd.)

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6.1 IFIC Profile International Finance Investment and Commerce Bank Limited (IFIC Bank) is banking company incorporated in the People‟s Republic of Bangladesh with limited liability. It was set up at the instance of the Government in 1976 as a joint venture between the Government of Bangladesh and sponsors in the private sector with the objective of working as a finance c company within the country and setting up joint venture banks/financial institutions aboard. In 1983 when the Government allowed banks in the private sector, IFIC was converted into a full fledged commercial bank. Initially, the bank's authorized capital was Tk 100 million divided into 1 million ordinary shares of Tk 100 each. The paid up capital was Tk 71.5 million, which rose to Tk 80 million in 1986. 60% of the shares of the company were A-class ordinary shares owned by its sponsors and members of the general public. The remaining 40%, grouped as B-class ordinary shares, were held by the government of Bangladesh. On 31 December 2000, the authorised and paid up capital, after being enhanced several times, stood at Tk 500 million and 279.35 million respectively. On that date, total shareholders equity of the bank was Tk 1,120.48 million and its reserve funds totaled Tk 648.20 million, which comprised statutory reserves (Tk 378.48 million) and general reserve and retained surplus (Tk 269.72 million). The bank is listed with Dhaka and Chittagong stock exchanges. The Government of the People‟s Republic of Bangladesh now holds 32.75% of the share capital of the Bank. The Government of the People‟s Republic of Bangladesh now holds 32.75% of the share capital of the Bank. Directors and Sponsors having vast experience in the field of trade and commerce own 11.42% of the share capital and the rest is held by the general public.

6.2 Bank's Mission The IFIC Bank‟s Mission is to provide service to their clients with the help of a skilled and dedicated workforce whose creative talents, innovative actions and competitive edge make their position unique in giving quality service to all institutions and individuals that we care for. They are committed to the welfare and economic prosperity of the people and the community, for they drive from them our inspiration and drive for onward progress to prosperity. They want to be the leader among banks in Bangladesh and make our indelible mark as an active partner in regional banking operating beyond the national boundary. In an intensely competitive and complex financial and business environment, they particularly focus on growth and profitability of all concerned.

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6.3 Background of the IFIC bank. When the Government decided to open up banking in the privet sector in 1983 the above finance company was converted a full- fledged commercial Bank. Along with this, the Government also allowed four other commercial banks in the private sector. Subsequently, the Gove rnment denationalized two banks, which were, then fully Government-owned. While in all these Banks Government is holding nominal 5 percent shares, an exception was made in the case of the Bank. It retained 40 percent shares of the Bank. The decision by the Government to retain 40 percent shares in IFIC Bank was in pursuance of the original objectives, namely, promotion of the participation of Government and private sponsors to establish joint venture Banks, financial companies, branches and affiliates abroad. 

Ownership Structure

The sponsors hold ownership of the Bank in the private sector and Government of the People‟s Republic of Bangladesh. Sponsors and individuals now own about 62 percent of the share capital and the Government owns a little more than 38 percent of the shares. 

Capital and Reserves

The Bank started with an Authorized capital of Tk. 100 million in 1983. Paid up capital at that time stood at Tk. 71.50 million only. Over the last 19 years, the authorized and paid-up capital has increased substantially. The paid capital stood at Tk. 406.39 million as on December 31, 2001 The Bank has built up a strong reserve base over the years. In last 19 years its Reserves and Surplus have increased overly. As against Tk. 21.20 million only in 1983 Reserve and surplus increased to Tk.622.53 million in 2001. This consistent policy of building up Reserves has enabled the Bank to maintain a better adequacy ratio as compared to others. With the active support and guidance from the Government, the bank has been showing a steady and improved performance. In its fifteen years operation, the bank has earned the status of leading in terms of both business and goodwill. 

Distribution of Branches

The Bank covers by its activities all the important trading and commercial centers of the country. As on December 22, 2002 it had 55 branches within Bangladesh.

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The IFIC Bank Limited Liquidity Statement (Analysis of the maturity of assets and liabilities) As at 31 December, 2009.

Particulars

(in million Taka)

2009

2008

Cash in hand

3153.61

1202.26

Balance with other banks and financial institutions

2205

2130

Investments

1058.64

903.16

Loans and advances

4348.64

3442.09

Fixed assets including premises, furniture and fixtures

2788.06

2514.38

Other assets

431.26

323.36

9646.80

5711.45

Borrowing from other banks, financial institutions and agents Deposits

3926.51

2104.48

5986.65

4323.94

Other accounts

2517.68

1794.86

Provision and other liabilities

722.56

575.82

Total liabilities(b)

7060.25

5289.70

Net Liquidity Gap (a-b)

1664234

4217476.53

Assets

Non banking assets Total Assets (a) Liabilities:

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6.4 Comparative Analysis with IFIC Bank Limited:

Comparative position of CBL and SBL, here cash, deposits and government securities are considered as liquid assets of two required banks. All the amounts is shown in million. CBL Year 2006

Cash (in million Tk.) 2826.39

Deposit (in million Tk.) 40881.41

Govt. securities (in million Tk.) 5873.02

2007

3477.57 

40539.63

7094.71

2008

3120.17

45034.34

7608.21

2009

5142.66

62384.28

8468.75

g. Comparative Analysis with IFIC Bank Limited

IFIC Year

Cash

Deposit

Govt. securities

(in million Tk.)

(in million Tk.)

(in million Tk.)

2006

2413.29

35612.42

3522.27

2007

2530.75

28731

6943

2008

1230.53

22043.39

3272

2009

3153.61

44220

5623.35

h. Comparative Analysis with IFIC Bank Limited

From these tables we can easily understand that The City Bank Limited (CBL) is in better position than IFIC bank ltd.. Here cash, deposit and government securities position are considered as a comparative tools from 2006 to 2009 years.

Now, I am going to present the last liquidity position of CBL and IFIC in graphs.

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C ash in 2009

6000 4000

5142.66

Cash

3153.61

2000 0 CBL

IF IC

Cash is the most liquid asset of any organization. So, when the question arises on liquidity, at first the cash should be considered. Here the cash in hand position of two selected bank has been considered. In case of cash, The City Bank Limited is higher position than Standard Bank Limited.

Deposit in 2009

80000 60000 40000

62384.28

20000

Deposit in 2009

44220

0 CBL

IF IC

Deposit is one of the most important sources of income for any bank. Also it is the source of liquid asset of a bank. So, higher the deposit rate of a bank, better it can mange it‟s liquidity. Here, from the graph, we can observe that, CBL has a better deposit rate then IFIC bank. So it is expected that it will be able to manage it‟s liquidity more effectively then IFIC bank.

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G ovt. S ecu rities

10000 8000 6000

8468.75 5623.35

4000

G ovt. S ec urities

2000 0 CBL

IF IC

k. Comparative Analysis with IFIC Bank Limited

Here, only the short term securities have been considered. Short tern Govt. securities are almost similar to any current asset as it can be liquidated very quickly & can be converted in liquid cash. As CBL is again in a better position, so the CBL is also in a favorable position compared to IFIC bank to meet any kind of liquidity crisis.

6.5 Ratio analysis:

Ratios Current ratio Cash position indicator Capacity ratio Total deposit ratio

IFIC Bank 1.085 0.698 .618 0.686

CBL 1.311 0.883 0.568 0.815

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Year 2009

1.5 1 Current ratio 0.5 0 IFIC

CBL

The current ratio of IFIC & CBL is almost closed to each other. However, the city bank was in a better position in year 2009 regarding its current ratio.

Cash position indicator

1 0.5 0

year 2009 IFIC

CBL

Cash position indicator basically indicates the total amount of cash & deposit among the total asset. As we have seen before, CBL has a greater liquid cash amount then of IFIC. So here CBL is somehow in a better position regarding liquidity then IFIC.

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Capacity Ratio

0.62 0.6 0.58

Capacity Ratio

0.56 0.54 IFIC

CBL

Year 2009 The liquidity surplus or deficit basically depends on the amount of deposit & loan. If the loan amount increases more fluently then the deposit level, a deficit on liquidity may arise. The situation above seems like this. IFIC is loosing their deposits year by year, but their loan amount is increasing. So again CBL is a nearby constant situation in this regard.

Total deposit ratio

0.85 0.8 0.75 0.7 0.65 0.6

IFIC CBL

IFIC

CBL

Year 2009 So, the loan to deposit level among the total asset is presented here. CBL is in a good situation & it is maintaining the balance of its deposit & loans. IFIC‟s loan level is increasing year by year, but the deposit level is decreasing. It is alarming for them.

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6.5 ANALYZING LIQUIDITY

Net Working Capital: IFIC 2008

2009

Current asset

220,555,925

316,512,305

Less: Current Liability

625,436,987

999,906,522

Net working capital

(404,881,062)

(683,394,217)

CBL

Current asset

284,005,632

214,854,300

Less: Current Liability

367,620,005

456,906,522

Net working capital

(83,614,373)

(205,598,693)

Net Working Capital is a measure of liquidity of a firm. It is not a ratio, it measure a minimum level of net working capital that the firm should maintain. The net working capital of both the banks (IFIC, CBL) in both the years are negative. That means, they are suffering from liquid asset (cash) to meet the current liabilities. The net working capital have been decreased in 2009 than in both the companies, IFIC and CBL. The reason is that the increased of current liabilities much than increased of current assets. In comparison, CBL is better position of net working capital than IFIC in both the years.

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CHAPTER SEVEN

(Findings, Conclusion & Recommendation)

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7.1

Major findings:

First of all, this is to be remembered that it is not a research report. So, the report covers an existing banking system that has been observed in the last twelve weeks. The findings of this report describe the tasks that take place in the Credit division of CBL. Here I mainly focused on the problems of the credit division of the bank these findings are completely from my personal point of view. Those are given below:

1. From my personal working experience, I‟ve observed that CBL doesn‟t have any full bodied liquidity management framework that ensures the maintenance of its liquidity. The situation was worse in previous years, which can be easily understood by seeing the charts of different ratio analysis. However, they recovered their lacking by taking different steps, but steel they are avoiding this problem. I think this is a major problem of the bank & again they are going to face same kind of sit uation if they don‟t take necessary steps immediately.

2. There is no developed strategy, policies & practices to manage liquidity risk in accordance with the risk tolerance & to ensure that the bank maintains sufficient liquidity. The policy, which is now somehow followed by CBL, is not sufficient for maintaining its goodwill in the market.

3. There is no sound process for identifying, measuring, monitoring & controlling liquidity risk. The treasury department gives more emphasis on foreign exchange, Money market activities, corporate sales & Market research. As they are handling many activities in a single department, so it is tough for them to manage every issue very strictly.

4. Supervisors are busy with the expansion plan of the bank, rather then development of it. They doesn‟t regularly perform any assessment of bank‟s overall liquidity risk management framework & liquidity position to determine whether they deliver an adequate level of flexibility to liquidity stress or not.

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5. Bank doesn‟t have any funding strategy which will provide an effective diversification in the source & tenor of funding. It doesn‟t maintain any ongoing presence in its chosen funding markets & strong relationships with fund providers. So it may cause a liquidity crisis & shortage of funding to maintain its liquidity position. 6. From the comparison part of net working capital, it can be observed that the CBL might be is in a better position then IFIC, but its own current asset has decreased in 2009 compared to 2008. 7. CBL has a lot of cash in hand-which might be proved a loss of profitability for the bank in future. 8. Another major problem of The City Bank Limited is using highly subjective judgment in lending decision-making. Due to lack of forward looking structuring policy banks resort to subject to judgment based on current situation. 9. As the process of sanctioning loan takes a long time to process a loan. It some times creates bad impact in market. Many clients are switching to other banks to reduce this processing hour. 10. Sometimes the employee to unlawfully help the client deliberately overvalues the securities taken against the loan. As a result if he fails to repay the loan, the Bank authority cannot collect even the principal money invested by the selling those assets. It is also a very important factor that leads to loan default.

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7.2) Conclusion: From the above analysis of The City Bank L imited‟s liquidity management, it is easily imagined or predicted that the liquidity position will be stronger than now because liquidity position is increasing day by day to support profitable loans and investments. Liquidity risk was a footnote in many treatments of risk management until the credit crisis of 2008. While the crisis may have been triggered by bad mortgage debt, it was accelerated and brought to a head by unanticipated cash demands that caused bankruptcies, fund dissolutions, bank reorganizations (too many to list), forced sales, distress aversion, asset sales, and equity infusions. Liquidity risk comes from fluctuations in the prices of either short-term assets or short-term liabilities, or both. It is typically manifest in margin lending, futures contracts, and OTC derivative contracts. Non price risk factors include lender-determined haircuts, subjective interest rates, material adverse credit quality changes, “me first” credit terms, herd behavior, and market panic. As such, quantitative liquidity modeling is both critically necessary and extremely difficult. Best practice liquidity risk management takes place at the point of contracting. In the absence of contractual protections, firms need to provide recommitted solutions to solve liquidity problems. If they wait for a liquidity shortfall to occur, it is already too late to undo the damage.

7.3) Recommendation: A negative financial situation characterized by a lack of cash flow. For a single business, a liquidity crisis occurs when the otherwise solvent business does not have the liquid assets (i.e., cash) necessary to meet its short-term obligations, such as repaying its loans, paying its bills and paying its employees. If the liquidity crisis is not solved, the company must declare bankruptcy. An insolvent business can also have a liquidity crisis, but in this case, restoring cash flow will not prevent the business's ultimate bankruptcy. For the economy as a whole, a liquidity crisis means that the two main sources of liquidity in the economy, banks and the commercial paper market, severely reduce the number of loans they make or stop making loans altogether. Because so many companies rely on these loans to meet their short-term obligations, this lack of lending has a current effect throughout the economy, causing liquidity crises at a excess of individual companies, which in turn affects individuals. For the more betterment in liquidity position or liquid assets and sound liquidity risk management and supervision, the city bank can take some perfect principles which are as follow:  A bank is responsible for the sound management of liquidity risk. So the city bank should

establish a full-bodied liquidity risk management framework that ensures it maintains sufficient liquidity, including a cushion of unencumbered, high quality liquid assets, to survive a range of stress events, including those involving the loss or impairment of both unsecured and secured funding sources. Supervisors should assess the adequacy of both a

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bank's liquidity risk management framework and its liquidity position and should take prompt action if a bank is deficient in either area in order to protect depositors and to limit potential damage to the financial system.  Bank should clearly be coherent a liquidity risk tolerance that is appropriate for its

business strategy and its role in the financial system.  Senior management should develop a strategy, policies and practices to manage liquidity

risk in accordance with the risk tolerance and to ensure that the bank maintains sufficient liquidity. Senior management should continuously review information on the bank‟s liquidity developments and report to the board of directors on a regular basis. A bank‟s board of directors should review and approve the strategy, policies and practices related to the management of liquidity at least annually and ensure that senior management manages liquidity risk effectively.  Bank should incorporate liquidity costs, benefits and risks in the internal pricing,

performance measurement and new product approval process for all significant business activities.  Bank should have a sound process for identifying, measuring, monitoring and controlling

liquidity risk. This process should include a healthy framework for comprehensively projecting cash flows arising from assets, liabilities and off-balance sheet items over an appropriate set of time horizons.  Bank should actively monitor and control liquidity risk exposures and funding needs

within and across legal entities, business lines and currencies, taking into account legal, regulatory and operational limitations to the transferability of liquidity.  Bank should establish a funding strategy that provides effective diversification in the

sources and tenor of funding. It should maintain an ongoing presence in its chosen funding markets and strong relationships with funds providers. Bank should regularly measure its capacity to raise funds quickly from each source. It should identify the main factors that affect its ability to raise funds and monitor those factors closely to ensure that estimates of fund raising capacity remain valid.  CBL should wisely utilize its liquid cash in han d, that may increase it‟s profitability in

future.  Bank should actively manage its intraday liquidity positions and risks to meet payment

and settlement obligations on a timely basis under both normal and stressed conditions and thus contribute to the smooth functioning of payment and settlement systems.

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 Bank should actively manage its collateral positions. Bank should monitor the legal entity

and physical location where collateral is held and how it may be mobilized in a timely manner.  Bank should conduct stress tests on a regular basis for a variety of short-term and

protracted institution-specific and market-wide stress scenarios (individually and in combination) to identify sources of potential liquidity damage and to ensure that current exposures remain in accordance with a bank‟s established liquidity risk tolerance. A bank should use stress test outcomes to adjust its liquidity risk management strategies, policies, and positions and to develop effective contingency plans.  Bank should maintain a cushion of unencumbered, high quality liquid assets to be held as

insurance against a range of liquidity stress scenarios, including those that involve the loss or impairment of unsecured and typically available secured funding sources. There should be no legal, regulatory or operational impediment to using these assets to obtain funding.  Bank should publicly disclose information on a regular basis that enables market

participants to make an informed judgment about the soundness of its liquidity risk management framework and liquidity position.  Supervisors should regularly perform a comprehensive assessment of a  bank‟s overall

liquidity risk management framework and liquidity position to determine whether they deliver an adequate level of flexibility to liq uidity stress given the bank‟s  role in the financial system.  Supervisors should supplement their regular assessments of a bank‟s  liquidity risk

management framework and liquidity position by monitoring a combination of internal reports, prudential reports and market information.  Supervisors should occur to require effective and timely corrective action by a bank to

address deficiencies in its liquidity risk management processes or liquidity position.  Supervisors should communicate with other supervisors and public authorities, such as

central banks, both within and across national borders, to facilitate effective cooperation regarding the supervision and oversight of liquidity risk management. Communication should occur regularly during normal times, with the nature and frequency of the information sharing increasing as appropriate during times of stress.

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Glossary

 BB

Bangladesh Bank

 CBL

The City Bank Limited

 SBL

Standard Bank Limited

 CRR

Cash Reserve Ratio

 SLR

Statutory Liquidity Reserve

 ALM

Asset Liability Management

 C&I

Corporate & Investment



Capital, Asset, Management, Earning, Liquidity and Sensitivity

CAMEL

 DRS

Disaster Recovery Site

 SMA

Special Mention Account

 SME

Small & Medium Enterprise

 ATM

Automated Teller Machine

 BFOBFI

Borrowing From Other Banks & Financial Institutions

 BWOBFI

Balance With Other Banks & Financial Institutions

 L/C

Letter of Credit

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References:

Annual Report, The City Bank Limited, 2006-2009. www.thecitybank.com. Bangladesh Bank: http://www.bangladesh-bank.org/mediar oom/corerisks/albsr isks.pdf  Dr. A. R.Khan, Bank Management-A Fund Emphasis (june,2009),chapter 8. Liquidityforbanks ;http://www.google.com.bd/#q=liquidity+management+in+banks+in+ bangladesh&hl=en&ei=tndnTI3oPJO4cYbZ3Y8F&start=40&sa=N&fp=1&cad=b GTZ(LiquidityManagement:Basiccourse), http://www.rur alfinance.org/servlet/BinaryDo wnloaderServlet?filename=1151660203478_LM_lesson3.pdf(2010) Practical participation with The City Bank Ltd. Informal face to face conversation with the employee of CBL.

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Liquidity indicator approach:

Assets based liquidity ratios: 1. Cash position indicators = (cash + deposit)/ Total assets = (11740401+142022414)/  182336781=0.84329: 1. 2. Liquid securities indicators= Govt. securities/ Total assets. = 29044700 / 182336781= 0.1592915: 1 3. Riskless assets position = ( cash + deposit+ govt. securities) / Total assets = (11740401+142022414+29044700)/  182336781= 1.0025817: 1 4. Liquidity assets ratio= ( cash+ govt. securities+ reserve)/ Total assets (11740401+29044700+9114213.7)/ 182336781= 0.273666: 1 5. Capacity ratio= ( Net loan/ Total assets) = 104695833/ 182336781= 0.574189: 1

=

Liability based liquidity ratios: 6. Deposit composition ratio = Current deposit/ Terms deposit= 26304909/ 124648113= 0.2110333:1. 7. Core deposit ratio = Core deposit / Total assets = 142022414/ 183588.46 = 0.7789016: 1.

Ratio Analysis:

1.Current Ratio = (Current assets / Current liabilities) 2006 = (17115/ 12982) = 1.318364 2007 = (17893/ 16235) = 1.102125 2008 = (21373/ 18143) = 1.17803 2009 = (28949/ 22075) = 1.311393 2. Cash Position Indicator = (Cash and deposits due from banks/Total assets) 2006 = (43707/47446) = 0.9212 2007 = (44016/48755) = 0.9028 2008 = (48154/57114) = 0.843121 2009 = (67526/76466) = 0.883085 3. Capacity Ratio = (loans/ Total assets) 2006 = (30789/47446) = 0.648927 2007 = (26788/48755) = 0.549441

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