If they are short of funds. Otherwise also banks seek short term funds to meet the needs of the depositors on certain days. The interest rate paid on call money is known as the call money rate. It is a highly volatile rate and varies from day to day and sometimes even from hour to hour. This rate goes up when the demand for call money is high as compared to the supply of surplus funds by their banks and via versa.
Cash Reserve Ratio
Scheduled Commercial Banks are required to maintain with RBI, an average cash balance, the amount of which shall not be less than a specific percentage of their total Net Demand and Time Liabilities (NDTL) in India.
Demand Liabilities include all liabilities which are payable on demand and they include current deposits, demand liabilities portion of savings bank deposits, margins held against letters of credit/guarantees, balances in overdue fixed deposits, cash certificates and cumulative/recurring deposits, outstanding Telegraphic Transfers (TTS), Mail Transfer (MTs), Demand Drafts (DDS), unclaimed deposits, credit balances in the Cash Credit account and deposits held as security for advances which are payable on demand.
Time Liabilities are those which are payable otherwise than on demand and they include fixed deposits, cash certificates, cumulative and recurring deposits, time liabilities portion of savings bank deposits, staff security deposits, margin held against letters of credit if not payable on demand, deposits held as securities for advances which are not payable on demand, India Millennium Deposits and Gold Deposits.
Cash Reserve Ratio (CRR) is 4% (15 Jan 2015). CRR affects the availablity of Cash with the banks. If CRR is laised. Banks shall have to park larger amount with RBI and this cash available for lending is reduce.
Liquidity Management: Banks collect money from saving deposits/fixed deposits, recurring deposits from their customers which constitutes the liability for the Bank. Banks lends this money to their customers which represent their assets. Any idle cash represent opportunity loss to the bank whereas in case of shortage of cash, bank needs to borrow at higher rate which result in higher cost to the bank. If this Banks borrow short and lend long it makes the Bank vulnerable to liquidity risk and can even fad the risk of "BANK RUN" as depositors can withdraw their funds/seek cash in their financial claims and thus impacting current and future cash-flow and collateral needs of the bank This management of money is known as Asset Liability Management/Liquidity Management. Asset Liability management is proactively managed on a day to day basis by the banks.
Asset Liability Management (ALM): Asset-Liability Management Committee (ALCO) is a strategic decision making body, formulating and overseeing the function of asset liability management (ALM) of a bank. It is concerned with strategic balance sheet management involving all market risks. It also deals with liquidity management, funds management, trading and capital planning. ALCO manages various kinds of risks like credit risk, interest risk, and liquidity risk.
An effective Asset Liability Management Technique aims to manage the volume, mix, maturity, rate sensitivity, quality and liquidity of assets and liabilities as a whole so as to attain a predetermined acceptable
