ASSETS LIABILTY MANAGEMENT

Components of a Bank Balance sheet

LIABILITIES
1. Capital

2. Reserve & Surplus

3. Deposits

4. Borrowings
4. Other Liabilities

ASSETS
1. Cash & Balances with RBI 2. Bal. With Banks & Money at Call and Short Notices 3. Investments 4. Advances 5. Fixed Assets 6. Other Assets

CONTINGENT LIABILITY
Banks obligations under LCs, Guarantees, Acceptances on behalf of constituents and Bills accepted by the bank are reflected under this heads.

Assets Liability Management

It is a dynamic process of Planning, Organizing & Controlling of Assets & Liabilities- their volumes, mixes, maturities, yields and costs in order to maintain liquidity. One of the most important risk-management functions in bank is Asset Liability Management. Asset Liability Management is concerned with strategic balance sheet management involving risks. ALM is about management of Net Interest Margin(NIM) to ensure that its level and riskiness are compatible with risk/return objectives of the bank.

REASONS FOR ALM

Volatility

Product Innovations & Complexities

Regulatory Environment Management Recognition

OBJECTIVE
Review the interest rate structure. Examine the loan and investment portfolios in the light of the foreign exchange risk. Examine the credit risk and contingency risk that may originate . Review, the actual performance against the projections made. Aim is to stabilize the short-term profits, long-term earnings and long-term substance of the bank. The parameters that are selected for the purpose of stabilizing asset liability management of banks are: 1. Net Interest Income (NII) 2. Net Interest Margin (NIM) 3. Economic Equity Ratio

ALM RBI GUIDELINES (1999)

Issued on Feb 10, 1999 which covered Interest Rate and Liquidity Risk Management. Defines initial focus of the Asset Liability Management for every concern. Mandatory for banks to cover atleast 60% of their assets and liabilities. Encourage usage of such a MIS which improves efficiency and experience of the banks. Preparation of Statement of Structural Liquidity.

ALM RBI GUIDELINES (1999)

Mismatches (negative gap) with respect to 1-14 days and 15-28 days should not exceed 20% each of the cash flows during these time periods. Preparation of Statement of Short-term Dynamic Liquidity. Preparation of Statement of Interest Rate Sensitivity. Adherence to a proper ALM process including ALM organization and ALM information system.

ALM REVISED RBI GUIDELINES (2007)

Split up of the first time bucket (1-14 days at present) in the Statement of Structural Liquidity into three time buckets i.e. Day 1, 2-7 days and 8-14 days. Compilation of the Statement of Structural Liquidity on best available data coverage, in due consideration of non-availability of a fully networked environment. Net cumulative negative mismatches during the Next day, 2-7 days, 8-14 days and 15-28 days buckets should not exceed 5 % ,10%, 15 % and 20 % of the cumulative cash outflows in the respective time buckets.

ALM REVISED RBI GUIDELINES (2007)

Mandatory for all the banks to undertake Dynamic Liquidity Management. Revision of the format of Statement of Structural Liquidity and Statement of Short-term Dynamic Liquidity. Frequency of supervisory reporting of the Structural Liquidity position to be fortnightly, with effect from the fortnight beginning April 1, 2008.

ALM Information Systems

ALM framework built on sound methodology with necessary information system back-up ALM to be supported by management philosophy and clearly states risk policies and procedures / prudential limits Banks may utlilise Gap Analysis or Simulation Important to have availability of timely, adequate and accurate information

ALM Information Systems

(Contd.)

ALM Data could be developed by following approach, in case UCBs do not have requisite information
Analyze behavior of asset and liability products in sample branches that account for significant business (60-70 per cent) Based on this make rational assumption for the other branches
UCBs have limited area of operations and hence it would be Easier for them to make such assumptions and better access to data.

ALM Organisation
Board should have overall responsibility for management of risk Board should decide risk management policy and procedure, set prudential limits, auditing, reporting and review mechanism in respect of liquidity, interest rate and Forex risk
ALCO

Consisting of banks senior management including CEO Responsible for adherence to the polices and limits set by Board Responsible for deciding business strategies (on asset liability side) in line with banks business and risk objectives
ALM Support Group

Consisting of operating staff Responsible for analyzing, monitoring and reporting risk profiles to ALCO Prepare forecasts showing effects of various possible changes in market conditions affecting balance sheet and suggesting action to adhere to banks internal limits

ALM Organisation
ALCO decision making unit responsible for

(Contd.)

Balance Sheet planning from risk-return perspective which includes management of liquidity, interest rate and forex risks Pricing of deposits and advances, desired maturity profile etc. Monitoring the risk levels of the bank Review of the results and progress of implementation of decisions made in previous meeting Future business strategies based on banks current view on interest rates To decide on source and mix of liabilities or sale of assets To develop future direction of interest rate movements To decide on funding mix between fixed and floating rate funds, wholesale vs. retails deposits, short term vs. long term deposits etc.

ALM Organisation

(Contd.)

ALCO size would be dependent on the size of the UCB May comprise of
CEO or Secretary Chief of Investment / Treasury including those of forex, credit, planning etc. Head of IT if a separate division exists

UCBs may at their discretion may have Subcommittees and Support Groups

ALM Process
Risk Parameters Risk Identification Risk Measurement Risk Management Risk Policies & Tolerance Levels.

Risks in ALM
Liquidity Risk Currency Risk Interest Rate Risk

Liquidity Risk
Safe and capable of repaying its borrowing. To meet its prior loan obligations. Ease of accessing funds at a lower rate pertaining to the credit worthiness.

 Managing liquidity Risk

Develop a structure Set tolerance levels and limits Measure and Manage

Interest Rate Risk

Sources of Interest Rate Risk
Gap Risk
Net Interest Position Risk Embedded Option Risk Reinvestment Risk

 Effects of Interest Rate Risk

Earnings Perspective Economic Perspective Embedded Losses

THANK YOU..!!!