Liquidity in banking

The term liquidity has a special significance in banking business. Liquidity is the word the banker used to describe his ability to satisfy demand for cash in exchange for deposits.

Assets are liquid if they can be quickly converted into immediate available funds with limited price depreciation.

The quality that renders an asset convertible into cash on short notice, by sale on the open market or by rediscount, usually at a minimum of loss.

Necessary ways or steps of maintaining liquidity

Cash in hand

Public habits of transaction

Local business condition

Types of account

Size of deposit and number of account

Condition of neighbor bank

Facilities of clearing house

Credit on demand or short notice

Discounted bill

Purchase of bonds and securities

Theories for maintaining liquidity of assets

Self- liquidating or real bills doctrine

Shiftability theory

Anticipated income theory

Money at call and short notice

Money at call and short notice is the second most liquid asset of a banker and is called the second line of defence.

It often happens that on a particular day some banks have surplus funds while others are in need of funds for overnight or a very short period because of adverse clearing and similar other short term factors.

The interbank call money market provides a means of making the surpluses of some banks available to other banks which are in deficit. The system of inter bank call loans enables banks with excess liquidity to lend to those who are in need of funds. Such loans are repayable on call or at a short notice.

The rate of interest on call money is naturally high & it varies from time to time according to the liquidity positions of banks.