ASSET-LIABILITY

MANAGEMENT SYSTEM

Presented by
c.s.balakrishnan

WHY ALM?
Globalisation of financial markets.
Deregulation of Interest Rates.
Multi-currency Balance Sheet.
Prevalance of Basis Risk and Embedded Option
Risk.
Integration of Markets Money Market,
Forex Market, Government Securities Market.
Narrowing NII / NIM.

ALM
ALM is the process involving decision
making about the composition of assets and
liabilities including off balance sheet items of
the bank / FI and conducting the risk
assessment.

ASSET LIABILITY
MANAGEMENT
Various risks affecting banks / FIs
Credit, Market, Operational
Deregulation & competition

Need to manage risk to protect NIM

Need for proper risk mgt policy
Liquidity planning, interest rate risk management
ALM guidelines issued for banks in Feb 1999 and for
FIs in Dec 1999

Concept of ALM
ALM is concerned with strategic
management of Balance Sheet by giving due
weightage to market risks viz. Liquidity Risk,
Interest Rate Risk & Currency Risk.
ALM function involves planning, directing,
controlling the flow, level, mix, cost and yield
of funds of the bank
ALM builds up Assets and Liabilities of the
bank based on the concept of Net Interest
Income (NII) or Net Interest Margin (NIM).

WHAT IS ALM
ALM is concerned with strategic Balance
Sheet management involving all market risks
It involves in managing both sides of balance
sheet to minimise market risk

ALM Objectives
Liquidity Risk Management.
Interest Rate Risk Management.
Currency Risks Management.
Profit Planning and Growth
Projection.

LIQUIDITY RISK
What is liquidity risk?
Liquidity risk refers to the risk that the institution might not be
able to generate sufficient cash flow to meet its financial
obligations

EFFECTS OF LIQUIDITY CRUNCH

Risk to banks earnings
Reputational risk
Contagion effect
Liquidity crisis can lead to runs on institutions
Bank / FI failures affect economy

LIQUIDITY RISK
Factors affecting liquidity risk

Over extension of credit

High level of NPAs
Poor asset quality
Mismanagement
Non recognition of embedded option risk
Reliance on a few wholesale depositors
Large undrawn loan commitments
Lack of appropriate liquidity policy & contingent plan

LIQUIDITY RISK
Tackling the liquidity problem

A sound liquidity policy

Funding strategies
Contingency funding strategies
Liquidity planning under alternate scenarios
Measurement of mismatches through gap
statements

LIQUIDITY RISK
METHODOLOGIES FOR MEASUREMENT

Liquidity index
Peer group comparison
Gap between sources and uses
Maturity ladder construction

LIQUIDITY RISK
RBI GUIDELINES
Structural liquidity statement
Dynamic liquidity statement
Board / ALCO
ALM Information System
ALM organisation
ALM process (Risk Mgt process)

Mismatch limits in the gap statement

Assumptions / Behavioural study

ALM SYSTEM
Liquidity Gap report fortnightly
1-14 d & 15 28 d tolerance limit
Fix cumulative gap limits

IRS statements monthly

Fix prudential limits

To compile currency wise liquidity and IRS

reports

MATURITY PROFILE-LIQUIDITY
Outflows

Capital, Reserves & Surplus

Deposits
Borrowings and bonds
Other liabilities

MATURITY PROFILE-LIQUIDITY
Inflows

Cash
Balance with RBI
Balance with other banks
Investments
Advances

IRR - Relevance in India

Deregulation of interest rates brought:

Volatility in rates - call, PLR, Govt. securities

Yield Curve

Competition - free pricing of assets and liabilities

Pressure on NII / NIM, MVE

RSA, RSL
RSA (Rate Sensitive Assets) Assets whose
value is dependent on current interest rate
RSL (Rate Sensitive Liabilities) Liabilities
whose value is dependent on current interest
rate

Gap/Mismatch Risk
It arises on account of holding rate sensitive
assets and liabilities with different principal
amounts, maturity/repricing rates
Even though maturity dates are same, if there
is a mismatch between amount of assets and
liabilities it causes interest rate risk and
affects NII

IMPACT ON NII
Gap

Interest rate
Change

Impact on NII

Positive

Increases

Positive

Positive

Decreases

Negative

Negative

Increases

Negative

Negative

Decreases

Positive

ALM
ORGANISATION
Three-tier organizational set-up for ALM
Implementation :
1. Management Committee of the Board
(MC)
Oversees the ALM implementation by ALCO
Reviews the ALM implementation periodically
Funding strategies for correcting
mismatches in ALM Statements.

the

ASSET-LIABILITY
MANAGEMENT
COMMITTEE
- ALCO headed by E.D.
(ALCO)
- GM (T) (Nodal

Officer).
- GMs : Central
Accounts,
P&D,
Credit, Risk
Management International
Division
are the
members.
- GM (IT) & AGM (Economist)
are the
invitees for
ALCO meetings.

FUNCTIONS OF
ALCO
Implementation of ALM System
- Monitor the risk levels of the Bank.
- Articulate the Interest Rate Position &
fix interest rate on Deposits &
Advances.
- Fix differential rate of interest rate
on Bulk Deposits.
- Facilitating and coordinating to put in
place the ALM System in the Bank.

1.

ALM STATEMENTS TO
BE SUBMITTED TO
Statement of Structural Liquidity
RBI
(Annexure - I) [DSB Statement No.8] - Rupee

2. Statement of Interest Rate Sensitivity

(Annexure - II) [DSB Statement No. 9] - Rupee
3. Statement of Dynamic Liquidity (Annexure - III)
4. Statement of Maturity and Position (MAP)
(Annexure - IV) [DSB Statement No.10 ] - Forex
5. Statement of Sensitivity to Interest Rate (SIR)
(Annexure - V)[DSB Statement No.11] - Forex

Tools for ALM System

Gap Analysis
Modified Gap Analysis
Duration Gap Analysis
Value at Risk (VaR)
Simulation

LIQUIDITY RISKS
Broadly of three types:
Funding Risk: Due to withdrawal/non-renewal of
deposits
Time Risk: Non-receipt of inflows on account of
assets(loan installments)
Call Risk: contingent liabilities & new demand for
loans
Dynamic liquidity is done to measure the liquidity
risks

STATEMENT OF
STRUCTURAL LIQUIDITY
Placed all cash inflows and outflows in the
maturity ladder as per residual maturity
Maturing Liability: cash outflow
Maturing Assets : Cash Inflow
Classified in to 8 time buckets
Mismatches in the first two buckets not to exceed
20% of outflows
Banks can fix higher tolerance level for other
maturity buckets.

ADDRESSING TO
MISMATCHES
Mismatches can be positive or negative
Positive Mismatch: M.A.>M.L. and vice-versa for
Negative Mismatch
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.

DYNAMIC LIQUIDITY
Prepared every fortnight for ALCO
Projection is given for the next three months
Tools for assessing the day to day liquidity
needs of the bank

STATEMENT OF INTEREST
RATE SENSITIVITY
Generated by grouping RSA,RSL & OFFBalance sheet items in to various (8)time
buckets.
Positive gap : Beneficial in case of rising
interest rate
Negative gap: Beneficial in case of declining
interest rate

CALCULATION OF NII/NIM
NII: INT.EARNED-INT. EXPENDED
INT. EARNED: ADV+INVEST+BALANCE
WITH RBI
INT. EXPENDED:DEPOSITS+INT. ON RBI
BORROWINGS
NIM= (NII/TOT.EARNING ASSET)X100

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.

THANK YOU