Liquidity is availability of cash at the time needed at reasonable cost.
When a bank/Financial institution has no sufficient cash/liquid assets to meet up its current obligation, the bank faces many problems. This situation is called liquidity crisis. Liquidity management in an important problem of commercial banks of here are may possible reasons which may cause such problem. Some of the reasons of liquidity crisis are :
a) using short term funds in long investment
b) In balances between maturity dates of assets and liability.
c) High proportion of liabilities subject to immediately payment
d) Over sensitiveness to the rates of interest
e) Inaccessibility to the money market
f) In efficient frontline counter service
What would you suggest to solve the crisis ?
Ans. Steps to be taken to avoid liquidity crisis : To avoid liquidity crisis a bank should be taken to the following necessary steps :
i) Mobilization of deposit by offering prime rate.
ii) Discourage sanction of new loans in less priority sector
iii) Crust program to be taken for recovery of bad loans
iv) Borrowing from call money market
v) Repo with Bangladesh Bank.
vi) Repo with other bank.