ASSET LIABILITY

MANAGEMENT SYSTEM
Presented By SARAS Group
S Shrikant Popat 35
A Amit Pandey 31
R Rohan Sawant 38
A Ashwin Surve 43
S Sahil Wason 49
 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 and NII.
 Significance of ALM
• Volatility
• Product Innovations & Complexities
• Regulatory Environment
• Management Recognition
 Purpose & Objective of ALM
• 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 risk/reward ration.
• It is aimed to stabilize short-term profits, long-term
earnings and long-term substance of the bank. The
parameters for stabilizing ALM system are:
1. Net Interest Income (NII)
2. Net Interest Margin (NIM)
3. Economic Equity Ratio
 RBI DIRECTIVES
• Issued draft guidelines on 10th Sept’98.

• Final guidelines issued on 10th Feb’99 for

implementation of ALM w.e.f. 01.04.99.

• To begin with 60% of asset & liabilities will be

covered; 100% from 01.04.2000.

• Initially Gap Analysis to be applied in the first stage of

implementation.

• Disclosure to Balance Sheet on maturity pattern of

Deposits, Borrowings, Investment & Advances w.e.f.
31.03.01
 Liquidity Management
Bank’s liquidity management is the process of
generating funds to meet contractual or
relationship obligations at reasonable prices at
all times.
New loan demands, existing commitments,
and deposit withdrawals are the basic
contractual or relationship obligations that a
bank must meet.
 Adequacy of liquidity position for
a bank
Analysis of following factors throw light on a
bank’s adequacy of liquidity position:
a. Historical Funding requirement
b. Current liquidity position
c. Anticipated future funding needs
d. Sources of funds
e. Options for reducing funding needs
f. Present and anticipated asset quality
g. Present and future earning capacity and
h. Present and planned capital position
 Funding Avenues
To satisfy funding needs, a bank must
perform one or a combination of the
following:

a. Dispose off liquid assets

b. Increase short term borrowings
c. Decrease holding of liquid assets
d. Increase liability of a term nature
e. Increase Capital funds
 Types of Liquidity Risk
• Liquidity Exposure can stem internally and
externally.
• External liquidity risks can be geographic,
systemic or instrument specific.
• Internal liquidity risk relates largely to
perceptions of an institution in its various
markets: local, regional, national or
international
Other categories of liquidity risk
• Funding Risk
- Need to replace net outflows due to
unanticipated withdrawals/non-renewal
• Time Risk
- Need to compensate for non-receipt of
expected inflows of funds
• Call Risk
- Crystallization of contingent liability
Statement of Structural Liquidity
All Assets & Liabilities to be reported as per
their maturity profile into 10 maturity Buckets:
i. Next day
ii. 2 to 7 days
iii. 8 to 14 days
iv. 15 to 28 days
v. 29 days and up to 3 months
vi. Over 3 months and up to 6 months
vii. Over 6 months and up to 1 year
viii. Over 1 year and up to 3 years
ix. Over 3 years and up to 5 years
x. Over 5 years
 STATEMENT OF
STRUCTURAL LIQUIDITY
• Places all cash inflows and outflows in the maturity
ladder as per residual maturity
• Maturing Liability: cash outflow
• Maturing Assets : Cash Inflow
• Classified in to 10 time buckets
• Mismatches in the first two buckets not to exceed 20%
of outflows
• Shows the structure as of a particular date
• Banks can fix higher tolerance level for other maturity
buckets.
An Example of Structural Liquidity Statement
15-28 30 Days- 3 Mths - 6 Mths - 1Year - 3 3 Years - Over 5
1-14Days Days 3 Month 6 Mths 1Year Years 5 Years Years Total

Capital 200 200

Liab-fixed Int 300 200 200 600 600 300 200 200 2600
Liab-floating Int 350 400 350 450 500 450 450 450 3400
Others 50 50 0 200 300
Total outflow 700 650 550 1050 1100 750 650 1050 6500
Investments 200 150 250 250 300 100 350 900 2500
Loans-fixed Int 50 50 0 100 150 50 100 100 600
Loans - floating 200 150 200 150 150 150 50 50 1100
Loans BPLR Linked 100 150 200 500 350 500 100 100 2000
Others 50 50 0 0 0 0 0 200 300
Total Inflow 600 550 650 1000 950 800 600 1350 6500
Gap -100 -100 100 -50 -150 50 -50 300 0
Cumulative Gap -100 -200 -100 -150 -300 -250 -300 0 0
Gap % to Total Outflow
-14.29 -15.38 18.18 -4.76 -13.64 6.67 -7.69 28.57
 ADDRESSING THE MISMATCHES
• Mismatches can be positive or negative

• Positive Mismatch: M.A.>M.L. and Negative Mismatch

M.L.>M.A.

• In case of +ve mismatch, excess liquidity can be

deployed in money market instruments, creating new
assets & investment swaps etc.

• For –ve mismatch,it can be financed from market

borrowings (Call/Term), Bills rediscounting, Repos &
deployment of foreign currency converted into rupee.
 STRATEGIES…
• To meet the mismatch in any maturity
bucket, the bank has to look into taking
deposit and invest it suitably so as to mature
in time bucket with negative mismatch.
• The bank can raise fresh deposits of Rs 300
crore over 5 years maturities and invest it in
securities of 1-29 days of Rs 200 crores and
rest matching with other out flows.
Maturity Pattern of Select Assets & Liabilities of A Bank
Liability/Assets Rupees In Percentage
(In Cr)

I. Deposits 15200 100

a. Up to 1 year 8000 52.63
b. Over 1 yr to 3 yrs 6700 44.08
c. Over 3 yrs to 5 yrs 230 1.51
d. Over 5 years 270 1.78
II. Borrowings 450 100
a. Up to 1 year 180 40.00
b. Over 1 yr to 3 yrs 00 0.00
c. Over 3 yrs to 5 yrs 150 33.33
d. Over 5 years 120 26.67
III. Loans & Advances 8800 100
a. Up to 1 year 3400 38.64
b. Over 1 yr to 3 yrs 3000 34.09
c. Over 3 yrs to 5 yrs 400 4.55
d. Over 5 years 2000 22.72
Iv. Investment 5800 100
a. Up to 1 year 1300 22.41
b. Over 1 yr to 3 yrs 300 5.17
c. Over 3 yrs to 5 yrs 900 15.52
d. Over 5 years 3300 56.90
 STATEMENT OF
INTEREST RATE SENSITIVITY
• Generated by grouping RSA,RSL & OFF-Balance
sheet items in to various (8)time buckets.
RSA:
• MONEY AT CALL
• ADVANCES ( BPLR LINKED )
• INVESTMENT
RSL
• DEPOSITS EXCLUDING CD
• BORROWINGS
 MATURITY GAP METHOD
(IRS)
• THREE OPTIONS:
• A) RSA>RSL= Positive Gap
• B) RSL>RSA= Negative Gap
• C) RSL=RSA= Zero Gap
 SUCCESS OF ALM IN BANKS :
PRE - CONDITIONS
1. Awareness for ALM in the Bank staff at all levels–
supportive Management & dedicated Teams.
2. Method of reporting data from Branches/ other
Departments. (Strong MIS).
3. Computerization-Full computerization, networking.
4. Insight into the banking operations, economic
forecasting, computerization, investment, credit.
5. Linking up ALM to future Risk Management
Strategies.
Interest Rate Risk Management
• Interest Rate risk is the exposure of a bank’s
financial conditions to adverse movements
of interest rates.
• Though this is normal part of banking
business, excessive interest rate risk can
pose a significant threat to a bank’s earnings
and capital base.
• Changes in interest rates also affect the
underlying value of the bank’s assets,
liabilities and off-balance-sheet item.
 Interest Rate Risk

• Interest rate risk refers to volatility in Net

Interest Income (NII) or variations in Net
Interest Margin(NIM).
• Therefore, an effective risk management
process that maintains interest rate risk
within prudent levels is essential to safety
and soundness of the bank.
 Sources of Interest Rate Risk
• Interest rate risk mainly arises from:
– Gap Risk
– Basis Risk
– Net Interest Position Risk
– Embedded Option Risk
– Yield Curve Risk
– Price Risk
– Reinvestment Risk
Measurement of Interest Rate Risk
• Gap Analysis- Simple maturity/re-pricing
Schedules can be used to generate simple
indicators of interest rate risk sensitivity of both
earnings and economic value to changing interest
rates.
- If a negative gap occurs (RSA<RSL) in given time
band, an increase in market interest rates could
cause a decline in NII.
- conversely, a positive gap (RSA>RSL) in a given
time band, an decrease in market interest rates
could cause a decline in NII.
Measurement of Interest Rate
Risk
• Duration Analysis: Duration is a measure of
the percentage change in the economic
value of a position that occur given a small
change in level of interest rate.
 ALM Strategies
There are three ALM techniques
a) Asset Management Strategy (AMS) – this is a strategy
concerns with control of incoming funds through the
determination of loans/credits allocation and their
interest rates.
b) Liability Management Strategy (LMS)– deals with
controlling of sources of funds and monitoring of the mix
and cost of deposit and nondeposit liabilities – by
controlling price, interest rate.
c) Fund Management Strategy (FMS) – this a a more
balanced approach of ALM that incorporates both AMS
and LMS. The basic objectives of FMS are:
 ALM Strategies
• The control of volume, mix, and return or cost of
both assets and liabilities for the purpose of
achieving a bank’s goals.
• The coordination of asset and liability management
as a means of achieving internal consistence and
maximizing the spread between revenue and costs,
and minimization of risk exposure.
• Maximization of returns and minimization of costs
from supplying services.
THANK YOU