The Liability Management Theory

The liability Management Theory By: Prabhat

 It

emerged in the year 1960.  This is one of the important liquidity management theory.  Says that there is no need to follow old liquidity norms like maintaining liquid assets , liquid investments etc.

Praposes many alternatives Certificate of deposits  Is a negotiable instrument.  Maturity date. Limitations  Interest rates.  Commercial banks compete with each other for it.

Borrowing from other banks  Short term  Sensitive to market condition Limitation  Every bank mostly faces shortage

Borrowing from the central bank  Available in the form of discounting and day to day and seasonal liquidity needs. Limitations  Costlier  Restrictions

Raising of capital funds  By issue of shares  Depends on public response , dividend and growth rate. using profit

Potentiality of liability management theory in India  Inter bank participation certificate 1.with risk sharing 2.without risk sharing  RBI may not be a dependable source.  Raising capital funds is not easy.

Conclusion  This theory makes a limited contribution.

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