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Liquidity Management of Standard Bank Limited: A Study on CDA Avenue Branch, Chittagong

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This presentation is on liquidity management Policies and liquidity position of Standard Bank Ltd., Bangladesh.

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Liquidity Management of Standard Bank Limited: A Study on CDA Avenue Branch, Chittagong

  1. 1. Liquidity Management of Standard Bank Limited: A Study on CDA Avenue Branch, Chittagong Prepared by: Md. Erfanul Hoque Matric ID: B-131478 Program: BBA Semester: Autumn 2016
  2. 2. Introduction Liquidity is about how long & what cost it take to convert assets or investments into cash. Liquidity is essential in all banks for its well functioning. A bank is considered to be liquid if it has ready access to immediately spendable funds at reasonable cost precisely by borrowing or selling assets at the time those funds are needed. One of the most important task of the management of any bank is ensuring adequate liquidity at all times. Liquidity management can reduce the probability of an adverse situation. It is the basis of successful cash management. There are risk involved in having too much or too little liquidity. Approximately 90% of the bankruptcies occur due to liquidity crisis. Efficient liquidity management ensures having the appropriate amount of liquidity.
  3. 3. Objective of the Study 01 To examine the liquidity products and Services of Standard Bank Limited. 02 03 04 05 To highlight the liquidity markets of Standard Bank Limited. To identify risk involved in liquidity management of Standard Bank Limited. To examine the liquidity position and management of Standard Bank Limited. To suggest some measures for improving the liquidity problems of the Standard Bank Limited.
  4. 4. Methodology of the Study Primary Sources ►Practical desk work. ►Face to face conversation with the officers. ►Direct question and observation. ►Group discussion. Secondary sources ►Annual reports of Standard Bank Limited. ►Audited Financial Statement for the year ended 31.12.2016. ►Published documents of Standard Bank Limited. ►Periodicals Published by Bangladesh Bank. ►Different publications regarding Banking functions and liquidity management policies. ►Internet was also used as a theoretical source of information. ►Websites and Newsletters were also major sources. Data Analysis As the research is based on liquidity management, the relevant data are represented through: (1)Pie Chart, (2)Bar Chart, (3)Line Chart, (4)Table, (5)Ratios & (6)Percentage; which will help use to understand the data visually.
  5. 5. CRR Requirement Followed by SBL 4,644.86 5,972.23 6,085.13 6,845.50 4,769.57 5,993.45 6,117.35 7,079.10 124.71 21.22 32.22 233.60 0.00 2,000.00 4,000.00 6,000.00 8,000.00 2013 2014 2015 2016 Cash Reserve Ratio (Amount in Million) Surplus/Deficit (S/D) Actual Reserve Maintained (ARM) Required Reserve (RR) Year Required Reserve (RR) Actual Reserve Maintained (ARM) Surplus/Deficit (S/D) 2013 4,644.86 4,769.57 124.71 2014 5,972.23 5,993.45 21.22 2015 6,085.13 6,117.35 32.22 2016 6,845.50 7,079.10 233.60 Amount in Million CRR Requirement Prescribed by Bangladesh Bank: 6.5%
  6. 6. SLR Requirement Followed by SBL 16,018.3 11,944.5 12,170.3 13,691.0 22,084.9 18,078.4 17,170.6 23,704.4 6,066.6 6,133.9 5,000.4 10,013.4 0.0 10,000.0 20,000.0 30,000.0 2013 2014 2015 2016 Statutory Liquidity Reserve (Amount in Million) Surplus/ Deficit (S/D) Actual Reserve Maintained (ARM) Required Reserve (RR) Year Required Reserve (RR) Actual Reserve Maintained (ARM) Surplus/ Deficit (S/D) 2013 16,018.3 22,084.9 6,066.6 2014 11,944.5 18,078.4 6,133.9 2015 12,170.3 17,170.6 5,000.4 2016 13,691.0 23,704.4 10,013.4 Amount in Million SLR Requirement Prescribed by Bangladesh Bank: 19.5% (CRR 6/5% included)
  7. 7. Investment Portfolio Mix- 2016 Investment Portfolio Mix- 2016 Bangladesh Bank Bill (6943.73 Million BDT) Quoted Shares (168.11 Million BDT) Government Bond (14,589.34 Million BDT) Govt. Islamic Bonds (17 Million BDT) Treasury Bill (1089.66 Million BDT) Subordinated Bonds (279.48 Million BDT) Preference Share (203.33 Million BDT) 56.33% 26.81 % .016 % .065 % .8% 10.05% 1.08% 4.21% .65% Prize Bonds (4.06 Million BDT) Unquoted Shares (2602.54 Million BDT)
  8. 8. Net Liquidity Gap 0.00 2,000.00 4,000.00 6,000.00 8,000.00 10,000.00 12,000.00 14,000.00 2013 2014 2015 2016 Average Short Term Liquidity Gap Long Term Liquidity Gap Total Net Liquidity Gap Year Short Term Liquidity Gap Long Term Liquidity Gap Total Net Liquidity Gap 2013 4,164.79 4,059.60 8,224,39 2014 2,671.65 7,056.07 9,727.72 2015 4,870.01 6,467.84 11,337.85 2016 8,123.44 4,402.27 12,525.71 Average 4,792.98 5,496.44 10,453.92 Amount in Million Maturity Buckets Upto 1 Month Short- Term Liquidity 1-3 Months 3-12 Months 1-5 Years Long- Term Liquidity More than 5 Years 18.28% 16.55% 10.48% 0.00% 5.00% 10.00% 15.00% 20.00% 2014 2015 2016 Growth Rate in Net Liquidity Gap
  9. 9. Cash and Due from Balances Held at Other Depository Institution to Total Assets Ratio 6.3 7.3 7.3 7.8 0 1 2 3 4 5 6 7 8 9 2013 2014 2015 2016 Year-wise Cash & Due from Balances Held at Other Depository Institution to Total Assets Ratio Year Ratio 2013 6.3 2014 7.3 2015 7.3 2016 7.8
  10. 10. Cash Assets and Government Securities to Total Assets Ratio 21.16 20.51 16.44 15.81 0 5 10 15 20 25 2013 2014 2015 2016 Year-wise Cash assets and government securities to total assets ratio Year Ratio 2013 21.16 2014 20.51 2015 16.44 2016 15.81
  11. 11. Cash-Deposit Ratio 6.91 6.74 7.53 7.44 6.2 6.4 6.6 6.8 7 7.2 7.4 7.6 2013 2014 2015 2016 Year-wise Cash-Deposit Ratio Year Ratio 2013 6.91 2014 6.74 2015 7.53 2016 7.44
  12. 12. Capacity Ratio 0.679 0.671 0.691 0.687 0.660 0.665 0.670 0.675 0.680 0.685 0.690 0.695 2013 2014 2015 2016 Year-wise Capacity ratio Year Ratio 2013 0.679 2014 0.671 2015 0.691 2016 0.687
  13. 13. Advance-Deposit Ratio 84.33% 82.68% 85.56% 85.71% 81.00% 81.50% 82.00% 82.50% 83.00% 83.50% 84.00% 84.50% 85.00% 85.50% 86.00% 2013 2014 2015 2016 Year-wise Advance-Deposit Ratio Year Ratio 2013 84.33% 2014 82.68% 2015 85.56% 2016 85.71%
  14. 14. Current Ratio 2.27 2.07 2.07 1.75 0 0.5 1 1.5 2 2.5 2013 2014 2015 2016 Year-wise Current Ratio Year Ratio 2013 2.27 2014 2.07 2015 2.07 2016 1.75
  15. 15. Summary of Findings The bank needs to reserve huge amount of money with the Bangladesh Bank as it is mandatory for them to maintain the CRR and SLR. BB has recently increased the rate of CRR and SLR (6.5% & 19.5% respectively) as a result the problem of liquidity crisis has been aggravated recently for Standard Bank Ltd. From 2013-2016, on average Standard Bank Ltd.’s short term liquidity gap was 4,792.977 million BDT and long term liquidity gap was 5,496.439 million BDT. Therefore, the bank is facing some short-term liquidity gap. In the recent years, our country has experienced a decline in the value of Tk. against US currency which has created huge liquidity crisis in the banking sector leading to failure of Financial Institutions like Standard Bank Ltd. to collect maximum amount of US dollar required to open letter of credit (LC) for local businessmen to import essential commodities. As the percentage of CRR and SLR increased (6.5% & 19.5%), the commercial bank is facing liquidity problem and for this reason to get rid of the problem the bank is concentrated to generate more deposits. Net Liquidity Gap for Standard Bank Ltd increased each year from 2013-2016, but rate of growth decreased in a steady way. It indicates that during the study, Standard Bank got sufficient assets to satisfy the liabilities, but yet the rate of growth in Net Liquidity Gap is decreasing. If the bank does not abide by the norms of the central bank and lend out money injudiciously, there arises the problem with liquidity and abnormal long-term finance and unsatisfactory recovery positions of short-medium-and long-term loans will adversely affect the liquidity situation of the bank.
  16. 16. Summary of Findings Standard Bank Ltd. had 17,098.39 million BDT investment in Government securities in 2014, which dropped to 14,541.005 million BDT in 2015. Although the Bank again increased the portion of Government securities to 15,700.06 million BDT in its Investment Portfolio. The reason of liquidity crisis, if any persisting in Standard Bank Ltd. may be the non- recovery of loans. The non-performing loans of the Bank stood at Tk. 3,799 million at the end of 2016 compared to Tk. 2,959 million in 2015 i.e. 3.64% increase from previous year. Government credit from banking sector that would create extra burden to the country’s banking sector and it creates more liquidity crisis in that sector. The government has already borrowed Tk. 2787.3 crore during July-January of FY’17 from the country’s banking and non-banking sector. In the recent future the commercial banks like Standard Bank Ltd. will be unable to provide loan to the private sector. The liquidity crisis of the banking sector has been accelerated by the increased amount of inflation (5.4% at present); thus increasing the price of overall commodities for the general people. To keep pace with this inflationary effect, people withdraw their savings from the banks and use this funds for their transaction expenditure. 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 Standard Bank Ltd., is not sufficient for maintaining its goodwill in the market.
  17. 17. Recommendations Standard Bank Ltd. is maintaining a good reserve (CRR= 7079.104 million BDT & SLR= 23,704.41 million BDT in 2016) with the Bangladesh Bank. They should keep it up. The bank is facing some short-term liquidity gap so they have to have clear cut idea to face the problem and should take proper actions on that. The bank should increase its level of foreign currency reserve to collect maximum amount of foreign currency especially US dollar required by local businessmen to import essential commodities for the country. The Standard Bank Limited have to launch fund collection campaigns by offering new savings schemes with higher interest rates in bid to tackle the prevailing liquidity crisis. The bank should possess well diversified funding sources including customers current accounts credit balances, savings and retail deposits and inter-bank deposits. The bank should lend out more short term & medium term loans after properly examining underlying securities and in reliable industries and companies to be able to hold a good liquidity position. Standard Bank Ltd. Should maintain higher liquidity position in Government Securities, as they are issued by the Bangladesh Government & Bangladesh Bank, they are safer than investment in private sectors.
  18. 18. Recommendations In 2016, Standard Bank Ltd. maintained the highest amount investment in assets other than Government Securities between 2013-2016 equal to 10,197.19 million BDT (Greater than 5045.33 mil, 3545.013 mil, 3281.35 mil BDT respectively in 2015, 2014, 2013). The Bank should keep increasing investment in such assets to keep hold of its good liquidity position. The bank has to maintain a broad portfolio of highly liquid or marketable assets that can be easily used to obtain cash in order to diversify liquidity risk. These assets can provide liquidity through repurchase agreement or through sale. Standard Bank Ltd. Should Set up well designed strategies, policies and clear crisis organization structure, tasted and up to date contingency funding plan: the contingency plans should address temporary and long term liquidity disruptions caused by a crisis The branch needs to create new marketing strategy which will attract more clients including priority customer.
  19. 19. Conclusion Liquidity management is undoubtedly one of the most crucial task of a bank. Though the Standard Bank Ltd. showed comparatively lower volatility in short-term liquidity management but in long-term liquidity management the Standard Bank Ltd. showed better performance. To this end, the Bank have to maintain diversified and stable funding comprising of core retail and corporate deposits and institution balances & Government Securities and also have to ensure that Asset Liability Committee (ALCO) monitors the liquidity management on a regular basis.
  20. 20. References • Standard Bank Website: www.standardbankbd.com • Bangladesh Bank Website: www.bb.org.bd • Annual Report, Standard Bank Limited, 2013-2016 • “Recent Monetary Policy Statement of Bangladesh Bank: An Analytical Commentary”, July 2011, page 9-10 • Bangladesh Bank Monetary Policy Review, Vol VI, No. 1, October 2011 • Bangladesh Bank, “Monetary Policy Statement”, January-June 2017 • Managing Core Risks of Financial Institutions. Asset Liability Management, Industry Best Practices. Bangladesh Bank 2005: page-6 • Chowdhury A.H. & Islam M.M. “A Comparative Study of Liquidity Management of an Islamic Bank and a Conventional Bank: The Evidence from Bangladesh”, page-2 • Financial Institution Supervision, “Bank of Thailand Audit Manual for Liquidity Risk Assessment and Information and Technology System Department”, December 2003, page-6 • Nikolaou Kleopetra, “Liquidity (risk) Concepts definitions and interactions”, Working Paper Series no 1008/ February 2012, page 12-50. • Liquidity Risk Analysis: Canadian Banks, June 27,2010, page-5 • Zealand Bulletin Articles, “Evaluation of the Reserve Bank’s liquidity facilities”. Vol-71, no 4, December 2011, page 7-9 • Palombini, E. “Monetary and Liquidity in the Italian Money Market”, Working Paper No 6, Marzo, 2010 • Arzu Tekats A. and Gokhan Gunnay “Asset and liabilities management in financial crisis”. The Journal of Risk Finance, (2005), Vol-6, No.2 PP 135-149 • Rose S Peter, Hudgins, C Sylvia: Bank Management & Financial Service
  21. 21. Thank You