The draft guidelines, put in place by the RBI, stipulates that an asset liablity committee should be set up consisting of the FIs' senior management including the CEO. This committee will be responsible for ensuring adherence to the limits set by the board as well as the business strategy of indiviual FIs.

The RBI has also asked FIs to put in place maturity buckets for investments from 1-14 days to over 10 years. The apex bank has said that while the mismatches up to one year would be relevant--since these provide early warning signals of impending liquidity problems-- the main focus should be on the short-term mismatches viz 1-14 days and15-28 days.

"The mismatches (negative gap) during 1-14 days and 15-28 days in normal course may not exceed 5 per cent of the cash flows in each time bucket. If an FI in view of its current asset liablity profile and the consequential structural mismatches needs higher tolerance level, it could operate with higher limit sanctioned by its board. The discretion to allow a higher tolernce level is intended till March 31, 2000," the RBI draft guidelines said.

The central bank has told the FIs to prepare a statement of structural liquidity by placing all cash inflows and cash flows. A maturing liablity will be a cash outlow while a maturing asset will be a cash inflow.

"While determining likely cash inflows/outflows, FIs have to make a number of assumptions according to their asset-liablity profiles. While determining the tolerence levels the FIs may take into account all releveant factors based on their asset liablity base, nature of business, future strategy. The RBI is interested in ensuring that thetolerence levels are determined keeping all necessary factors in view and further refined with experience gained in liquidity management," the RBI draft guidelines said.

The apex bank has also directed FIs to switch over to modern techniques like duration gap analysis, simulation and value at risk over a period of time for measurement of interest rate risk. The gap of mismatch risk can be measured by calculting gaps over different time intervals.

According to the RBI, the gaps can be identified in one-day to over ten-year time buckets. The gap is the difference between the rate sensitive asset and the rate sensitive liablities. The central bank has said that all investment, advances, deposits, borrowing, purchased funds that mature/reprice within a specified timeframe or interest are rate sensitive.

Similarly, any principal repayment of loans is also rate-sensitive if the FI expects to receove it within a time horizon. "This includes final principal payment and interim instalments," the draftguidelines said.

"While the interest rates on term deposits are fixed during their currency, the tranches of advances is basically floating. The interest rates on advances could be repriced any number of occasion, corresponding to the changes in PLR," the draft guidelines pointed out.