10.1 Introduction

In Chapter 9, we discussed management of banking assets such as bank loans and investments. Broad considerations on profitability, solvency and liquidity guide overall strategic decisions on the volume and type of bank lending and pricing of loans. Operational decisions related to items on the liabilities side of a bank's balance sheet are equally important and are covered in this chapter.

During the post-reform period, banks assumed adequate operational autonomy as regards deposit mobilisation and fixing of interest rates on deposits as well as exploration of several sources of borrowings. This has created a highly competitive environment for mobilising deposits by attracting customers through aggressive marketing and pricing strategies. Banks are heavily reliant on borrowings not only for day-to-day liquidity management but also to raise capital from the market for meeting tier-2 capital requirements under the Basel norms.

OBS items such as bank guarantees, LCs, acceptances and endorsements have been offered by banks in India to facilitate trade and business. Contingent upon failure of the counterparty to honour the underlying transaction, any OBS item can become an effective liability. Hence, such items are popularly referred to as contingent liabilities. These items are not real bank liabilities as long as they are not crystalised. During the post-reform period, not only has the volume of transactions in traditional OBS items like bank guarantees and LCs significantly multiplied, new financial derivatives mainly pertaining to foreign exchange (forex) contracts have also become very popular. Given the importance of OBS items in the banking business in recent times, this chapter also briefly discusses management of these items.