ALM and Fund Management

Jyoti Kumar Pandey Deputy General Manager & Member of Faculty College of Agricultural Banking, Pune

11/28/2013

College of Agricultural Banking, RBI, PUNE

What is Banking
• Section 5(b) defines banking ‘Accepting for the purpose of lending or investment of deposits or money repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwise’

Risk taking is an inherent function of banking - Allan Greenspan
11/28/2013 College of Agricultural Banking, RBI, PUNE

Banks get affected by
• • • • Actions of Central Banks Actions of the Government Domestic and International Disturbances Inflation

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College of Agricultural Banking, RBI, PUNE

RBI. PUNE . interest rates on deposits and advances • Intense competition for business involving both the assets and liabilities together with increasing volatility in the interest rates has brought pressure on the management of banks to maintain a good balance among spreads 11/28/2013 College of Agricultural Banking.Deregulation • Banks are now operating in a fairly deregulated environment and are required to determine on their own.

RBI. PUNE .Risks Faced by Banks • Credit Risk • Market Risk  Liquidity Risk  Interest Rate Risk • Operational Risk 11/28/2013 College of Agricultural Banking.

PUNE .Effects of Risk Factors • Loss of Market Value • Loss of Reserves • Loss of stakeholders confidence 11/28/2013 College of Agricultural Banking. RBI.

PUNE .ALM • The ALM guidelines issued by RBI has been formulated to serve as a benchmark for banks which lack a formal ALM system • Those who already have their existing system may fine tune their information and reporting system 11/28/2013 College of Agricultural Banking. RBI.

11/28/2013 College of Agricultural Banking.Purpose of ALM • Capture the maturity structure of the cash flows (inflows and outflows) in the Statement of Structural Liquidity • Tolerance levels for various maturities may be fixed by the bank keeping in view bank’s ALM profile. PUNE . RBI. extent of stable deposit base. nature of cash flows etc.

PUNE . interest rate risk 11/28/2013 College of Agricultural Banking. RBI.ALM • ALM is about managing market risk and liquidity risk together • Capital market exposure of banks is small • Exchange risk is highly specialized • Hence ALM is an integrated risk management approach for managing liquidity risk.

The problem of mismatch • • • • • • Mismatches in maturity Mismatches in interest rate How does bank makes the spread? Borrow short and lend long and keep the spread Maturity mismatch is the basis of profitability Risk management does not eliminate mismatch – merely manages them 11/28/2013 College of Agricultural Banking. RBI. PUNE .

The problem of mismatch • Interest Rate Risk  Affects profitability • Liquidity Risk  May lead to liquidation • General Strategy  Eliminate Liquidity Risk (not the mismatch)  Manage Interest Rate Risk  Consciously create gaps 11/28/2013 College of Agricultural Banking. RBI. PUNE .

banks’ operations have become complex and large . PUNE .Asset Liability Transformation • Banks are exposed to credit and market risks in view of the asset-liability transformation • With liberalisation. requiring strategic management 11/28/2013 College of Agricultural Banking. RBI.

ALM Pillars • ALM Information Systems • ALM Organisation • ALM Process Applicable to Scheduled UCBs and Tier II UCBs For Tier II UCBs – effective date is December 2008 11/28/2013 College of Agricultural Banking. RBI. PUNE .

RBI.ALM Pillars • ALM Information systems  MIS  Information availability  Accuracy  Adequacy  Expediency (Contd.) 11/28/2013 College of Agricultural Banking. PUNE .

) 11/28/2013 College of Agricultural Banking. RBI.ALM Pillars • ALM Organisation  Structure and responsibilities  Level of top management involvement (Contd. PUNE .

PUNE .ALM Pillars • • • • • • ALM Process Risk Parameters Risk Identification Risk Measurement Risk Management Risk Policies and Procedures. reporting and review (Contd. prudential limits and auditing.) 11/28/2013 College of Agricultural Banking. RBI.

adequate and accurate information 11/28/2013 College of Agricultural Banking. RBI. PUNE .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.

in case UCBs do not have requisite information  Analyse behaviour 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 (Contd.ALM Information Systems • ALM Data could be developed by following approach. RBI. PUNE .) UCBs have limited area of operations and hence it would be easier for them to make such assumptions and better access to data 11/28/2013 College of Agricultural Banking.

RBI.ALM Organisation • Board should have overall responsibility for management of risk  Board should decide risk management policy and procedure. interest rate and forex risk • ALCO  Consisiting of bank’s 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 bank’s business and risk objectives • ALM Support Group  Consisting of operating staff  Responsible for analysing. reporting and review mechanism in respect of liquidity. PUNE . 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 bank’s internal limits 11/28/2013 College of Agricultural Banking. auditing. set prudential limits.

interest rate and forex risks  Pricing of deposits and advances. RBI. retails deposits. wholesale vs.)  Balance Sheet planning from risk-return perspective which includes management of liquidity. 11/28/2013 College of Agricultural Banking.  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 bank’s 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. short term vs. desired maturity profile etc.ALM Organisation • ALCO decision making unit responsible for (Contd. PUNE . 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.  Head of IT if a separate division exists • UCBs may at their discretion may have Subcommittees and Support Groups 11/28/2013 College of Agricultural Banking. PUNE . credit. RBI. planning etc.

RBI. PUNE . generally.ALM Process • Scope is  Liquidity Risk Management  Interest Rate Risk Management  Trading (Price) risk Management  Funding and Capital Management  Profit Planning and business Projections UCBs. are not exposed to forex risk 11/28/2013 College of Agricultural Banking.

RBI.ALM •Liquidity Risk •Interest Rate Risk 11/28/2013 College of Agricultural Banking. PUNE .

PUNE .Liquidity Risk • Arising due to  Over extension of credit  High level of NPAs  Poor asset quality  Mismanagement  Hot Money  Non recognition of embedded option risk  Reliance on few wholesale depositors  Large undrawn loan commitments  Lack of appropriate liquidity policy and contingent plan 11/28/2013 College of Agricultural Banking. RBI.

Liquidity vs. Earnings • Bank must be in a position to: Balance their need for liquidity with their need for earnings  More liquid assets tend to provide lower return than do less liquid assets 11/28/2013 College of Agricultural Banking. PUNE . RBI.

RBI. PUNE .Assessing Liquidity Position • Assessing a bank’s liquidity position can be challenging • An adequate position for one bank may not be sufficient for another • A position considered adequate for a bank in one time period may not be so in another • BANK SPECIFIC & DYNAMIC 11/28/2013 College of Agricultural Banking.

PUNE . RBI.Liquidity risk-Manifestation • Funding risk  Need to replace net outflows due to unanticipated withdrawal/non-renewal of deposits • Time Risk  Need to compensate for non-receipt of expected inflows of funds-performing assets turning into non-performing assets 11/28/2013 College of Agricultural Banking.

Liquidity Risk .Time bucket analysis 11/28/2013 College of Agricultural Banking. RBI. PUNE .Employing ratios  Flow approach .Measurement • Two methods are employed:  Stock approach .

Measurement • Liquidity Ratios  Volatile Liability Dependence Ratio  Volatile Liabilities minus Temporary Investments to Earning Assets net of Temporary Investments  Shows the extent to which bank’s reliance on volatile funds to support Long Term assets – where volatile liabilities represent wholesale deposits which are market sensitive and temporary investments are those maturing within one year and those investments which are held in the trading book and are readily sold in the market  Growth in Core Deposits to growth in assets  Higher the ratio the better 11/28/2013 College of Agricultural Banking. PUNE .Liquidity Risk . RBI.

PUNE . including Certificate of Deposits and institutional deposits • Loan Losses to Net Loans • Loans to core deposits 11/28/2013 College of Agricultural Banking. RBI.)  where purchased funds include the entire inter-bank and other money market borrowings.Liquidity Risk – Measurement • Purchased Funds to Total Assets (Contd.

) 11/28/2013 College of Agricultural Banking.Liquidity Risk – Measurement • Does not lead to proper assessment of liquidity gaps due to:  Illiquidity of liquid assets  Their ready marketability  Difficulty to convert easily into liquid cash with least loss of value from the previously quoted market rates (Contd. PUNE . RBI.

PUNE .Liquid Assets to Total Assets • Liquid Assets to Total Assets  Show the percentage of liquid assets in the asset structure of the bank .18-20% • Liquid assets generally are cash balances with RBI + balances with other banks + investments available for sale + money market instruments 11/28/2013 College of Agricultural Banking. RBI.

Liquid Assets to Total Deposits • Liquid Assets to Total Deposits  This ratio indicates extent of liquidity maintained by a bank for meeting the demand made by the depositorsSometimes taken as a measure of bank liquidity-2022% 11/28/2013 College of Agricultural Banking. PUNE . RBI.

RBI.Loans to Deposits • Loans to Deposits  Loans to deposits ratio indicates the degree to which the bank has already used up its available resources to accommodate the credit needs of the customers  A high loan deposit ratio indicates that a bank will have comparatively low liquidity 11/28/2013 College of Agricultural Banking. PUNE .

Loans to Assets • Loans to Assets  This ratio indicates the percentage of illiquid assets to total assets  A rise in this ratio would indicate lower liquidity 11/28/2013 College of Agricultural Banking. RBI. PUNE .

Loans to Core Deposits • Loans to Core Deposits  Those deposits which are not subject to any large volatility  Average level of previous years deposit is generally taken as core deposits  This ratio helps in assessing level of deployment of core portion of deposits 11/28/2013 College of Agricultural Banking. PUNE . RBI.

Loans to Investments • Loans to Investments  While loans provide higher returns compared to investments. RBI. PUNE . these suffer from credit risk and are more illiquid than investments  A proper mix of loans and investments keeping in view liquidity and yield considerations need to be fixed 11/28/2013 College of Agricultural Banking.

The need could be controlled by  prudential limits  as also by regulating the basis of business structure/financial flexibility of banks • Regulatory Limit of 20% on outflows in first two time buckets 11/28/2013 College of Agricultural Banking. RBI. PUNE .Cash Flow Approach • Preparing a structural liquidity by taking into account balance sheet on particular date and place in maturity ladder according to time buckets • Identify the liquidity needs .to evolve methods to meet it • Negative gaps in individual time buckets indicate the need.

PUNE .RBI Guidelines on Liquidity Risk • Methodology prescribed in ALM System.Behavioural maturity analysis • Variance Analysis at least once in six months and assumptions fine-tuned • Track the impact of exercise of options & potential liquidity needs • Cap on inter-bank borrowings & Call money 11/28/2013 College of Agricultural Banking.Structural Liquidity Statement & Dynamic Liquidity Ladder are simple • Need to make assumptions and trend analysis. RBI.

2008 for Scheduled UCBs More granular approach adopted – by splitting first bucket of 1 – 14 days in SSL into Next Day. 10%. 2 – 7 days. 15% and 20% of the cumulative cash outflows in the respective buckets Banks may undertake dynamic liquidity management and should prepare the SSL on daily basis to Top Management / ALCO SSL may be reported to RBI at fortnightly intervals within 10 days of the reporting Friday Revised format would be applicable from January 01. 2-7 days and 8 – 14 days Net cumulative negative mismatches during the Next Day. RBI. UCBs Circular Sept. PUNE .• SSL Layout Structural Liquidity Statement – Sch. 17. 8 – 14 days and 15 – 28 days bucket should not exceed 5%. 2009 UCBs in Tier II are also covered Scheduled UCBs to report structural liquidity position and interest rate sensitivity to RBI as part of OSS data 11/28/2013 College of Agricultural Banking.

RBI. UCBs (Contd.) Heads of Account A.) may be placed in over 5 years time band Respective Time bands of underlying assets iii. Bills payable Core component which could be estimated on the basis of past data and behavioral pattern in ‘over 1 – 3 years’ time bucket. Provisions other than for loan loss and dep. Export Refinance – Availed College of Agricultural Banking. Balance in Day 1. Reserves and Surplus 2. CDs 5.Capital. Demand Deposits (Current & Savings) Over 5 year band Volatile and Core Deposits. depending upon the experience and estimates of the banks and rest (core portion) in over 1-3 years time band. 15 lakh should be shown in respective residual time band) Respective maturity buckets 3. It is only a benchmark if the system is better developed can classify based on behavioral instead of contractual maturity Respective maturity buckets Appropriate time bands can be given based on behavioral instead of contractual maturity. On investments 6. wholesale deposits (Deposits over Rs. However. Term Deposits 4. Outflows Classification into time bands 1. Items not representing cash payables (Guarantees fees received in advance etc. PUNE . Other Liabilities i.Structural Liquidity Statement – Sch. 2 – 7 days and 8 – 14 days time band Respective time bands. 2 – 7 days and 8 – 14 days. Volatile portion in 1 day. Savings (10%) and Current (15%) are withdrawable on demand generally and hence volatile.

) 2. Respective residual maturity bands 4. 3. i. The statutory balances distributed in different time bands corresponding to the maturity profile of DTL with 14 days time lag Classification into time bands (Contd. 2-7days. Balance with RBI / PSU banks / SCBs and DCCBs etc. ii. Equities of All India FIs etc. CDs and CPs. ii.Balances with other banks i. 15-28 days and 29 – 90 days according to defeasance period Over 5 years bucket College of Agricultural Banking. UCBs Heads of Account B. iii. Units of UTI (Close ended) etc. PUNE . 8-14 days. Units of mutual funds Securities in trading books Investment in subsidiaries Respective Residual time bands except amount required to be reinvested for maintaining SLR / CRR Residual maturity. Current Account Money at Call & Short Notice Non-withdrawable portion on stipulation of minimum balance in 1-3 years band and remaining balance in Day 1 bucket band. Investment classified as NPAs in 3-5 years band (substandard) and over 5 years (doubtful) Listed shares in 2 – 7 days bucket with haircut of 50 %. iv. Approved Securities PSU Bonds. Other shares in over 5 years bucket Day 1 bucket Day 1 bucket. Investments i. Inflows 1. RBI. Cash Day 1 bucket Excess balance over required CRR / SLR under Day 1 bucket. v.Structural Liquidity Statement – Sch.

Lines of credit committed i. NPAs i. UCBs 3-5 years band Over 5 years band Over 5 years band (Contd. Contingent liabilities LCs / Guarantees (outflows) 10. Interest Payable Day 1 bucket Based on behavioral pattern and seasonal pattern arrive at potential availments and put under relevant maturity bucket up to 12 months Based on respective residual time bands Respective Time Band 11/28/2013 College of Agricultural Banking. Intangible assets Intangible assets and assets not representing cash flows may be shown in over 5 years bucket Assets created out of developments may be shown under respective maturity bucket on the basis of probable date of recovery 9. Other Assets i. PUNE . Fixed Assets 8.) 7.6. Unavailed portion of cash credit / overdraft etc. RBI. Substandard Doubtful and Loss Structural Liquidity Statement – Sch. Lines of credit committed to / from institutions and Export Refinance ii. Repo etc. ii.

2-7 days and 8 – 14 days based on behavioral pattern.Structural Liquidity Statement – Sch. interest and installments due (before classification as NPAs may be placed in 29 days – 3 months bucket if the earlier receivables remain uncollected 11/28/2013 College of Agricultural Banking. 2 – 7 days and 8 – 14 days bucket based on behavioral estimates • Interest and installments from advances and investments which are due for less than one month – 1-6 months time band • Interest and installments from advances and investments which are over due for less than one month may be placed in Day 1. wage settlement and any other contingency under respective maturity bands • All overdue liabilities in Day 1. RBI. Further. PUNE (Contd.) . UCBs • Liability on account of event cash flows – CRR / SLR shortfall.

Liquidity Risk Management for Tier 1 UCBs • Basic guidelines for liquidity management issued on September 17. RBI. PUNE . 2008 • Banks advised to prepare  Statement of Structural Liquidity and  Statement of Short Term Dynamic Liquidity • To be prepared as on the last reporting Friday of March / June / September / December and submit to the Board within one month from the last reporting Friday • First such submission to be made to the Board as on last reporting Friday of December 2008 11/28/2013 College of Agricultural Banking.

) • Maturity profile of SSL into 8 buckets i. RBI. Over 6 months and up to 1 year vi. 29 and up to 3 months iv. Over 3 years and up to 5 years viii. Over 1 year and up to 3 years vii. PUNE 11/28/2013 . Over 3months and up to 6 months v.Over 5 years • Mismatches (negative gaps) during 1-14 and 1528 days time bands in normal course should not exceed 20 % of the cash flows in each time band College of Agricultural Banking.Liquidity Risk Management for Tier 1 UCBs (contd. 15-28 days iii. 1-14 days ii.

29-90 days • • STDL required for securities in the trading book SLR investments / securities are generally not very liquid and lack depth and are therefore shown in the residual maturity bands corresponding to residual maturity 11/28/2013 College of Agricultural Banking. PUNE . 1-14 days ii.Liquidity Risk Management for Tier 1 UCBs (contd. RBI.) • Short Term Dynamic Liquidity Statement i. 15-28 days iii.

) • • • • Holding period not to exceed 90 days Cut loss limit is prescribed Defeasance periods are prescribed – Time taken to liquidate the position on the basis of liquidity in the secondary market are prescribed Marking to market on a weekly basis 11/28/2013 College of Agricultural Banking. RBI. PUNE .Liquidity Risk Management for Tier 1 UCBs (contd.

PUNE .Trading Book • Maintained distinctly from those required for complying with Statutory Reserve Requirements • Subject to preconditions  Composition and volume clearly defined  Maximum maturity / Duration of the portfolio restricted  Holding period not exceeding 90 days  Cut Loss prescribed  Marked to market on a weekly basis 11/28/2013 College of Agricultural Banking. RBI.

15 lakh should be shown in respective residual time band) Respective Residual Time Bands Classification into time bands 1.Capital. Demand Deposits (Current & Savings) 3. Volatile portion in 1-14 days and rest in over 1-3 years time band. Other Liabilities i. RBI.Maturity Profile Liquidity for Tier 1 UCBs Heads of Account A. Term Deposits 4. CDs 5. Bills payable ii. However. Provisions other than for loan loss and dep.) may be placed in over 5 years time band 6. Branch Adjustments iii. Savings (10%) and Current (15%) are withdrawable on demand generally and hence volatile. Outflows Over 5 year band Volatile and Core Deposits. Export Refinance – Availed Respective Time bands of underlying assets College of Agricultural Banking. Reserves and Surplus 2. Items not representing cash payables (Guarantees fees received in advance etc. PUNE . It is only a benchmark if the system is better developed can classify based on behavioral instead of contractual maturity Respective residual time bands Appropriate time bands can be given based on behavioral instead of contractual maturity. wholesale deposits (Deposits over Rs. On investments 1-14 days time band Net credit balance in 1-14 days time band Respective time bands.

CDs and CPs. 3. Securities in trading books Respective Residual time bands except amount required to be reinvested for maintaining SLR / CRR Residual maturity. Units of UTI (Close ended) etc. i. Cash 1-14days time band Excess balance over required CRR / SLR under 1-14 days band. Respective residual maturity bands 4.Balances with other banks i. 15-28 and 29-90 days time bands ii. PUNE . Investments i. Approved Securities PSU Bonds. iii. Inflows 1. Investment classified as NPAs in 3-5 years band (substandard) and over 5 years (doubtful) Over 5 year band 1-14. Balance with RBI / PSU banks / SCBs and DCCBs etc. College of Agricultural Banking. The statutory balances distributed in different time bands corresponding to the maturity profile of DTL with 28 days time lag Classification into time bands 2.Maturity Profile Liquidity for Tier 1 UCBs (contd. RBI. Equities of All India FIs etc. ii. Current Account Money at Call & Short Notice Non-withdrawable portion on stipulation of minimum balance in 14-3 year band and remaining balance in 1-14 days band.) Heads of Account B.

Other Assets i. Interest Payable Based on past history Based on respective residual time bands Respective Time Band 11/28/2013 College of Agricultural Banking. Substandard Doubtful and Loss 3-5 years band Over 5 years band Over 5 years band 7.Maturity Profile Liquidity for Tier 1 UCBs (contd. ii. NPAs i.) 6. Branch Adjustments Leased Assets Net debit balance in 1-14 days band. ii. Export Refinance – Unavailed (inflow) 1-14 days band LC Repo etc. Unavailed portion of Cash Credit / Overdraft / Demand Loan component of working capital ii. RBI. Fixed Assets 8. Intangible assets and assets not representing cash receivables in 5 years time band Interim cash flows under residual maturity time bands Under residual maturity time bands within 12 months based on behavioral and seasonal patterns Contingent liabilities i. PUNE .

ALM for Tier II UCBs • • • • Similar to what prescribed to Scheduled UCBs Initially at least 60% of assets and liabilities to be covered and remaining 40% on assessment basis only 100% coverage by April 01. PUNE . RBI. 2010 Statements required to be prepared  Statement of Structural Liquidity  Statement of Interest Rate Sensitivity  Short-Term Dynamic Liquidity Statement 11/28/2013 College of Agricultural Banking.

ALM for Tier II UCBs – SSL • • • • To be prepared. PUNE . 15-28 days iii. 1-14 days ii. Over 6 months and up to 1 year vi. to start with. Over 3 years and up to 5 years viii. Over 3months and up to 6 months v. RBI. Over 1 year and up to 3 years vii.Over 5 years 11/28/2013 College of Agricultural Banking. as on last reporting Friday of March / June / September / December To be put up to the ALCO / Top Management within a month from the close of the last reporting Friday Reporting on a fortnightly basis from December 2008 (intended) Maturity profile of SSL into 8 buckets i. 29 and up to 3 months iv.

it could be done with approval of the Board / Management Objective of RBI is to enforce tolerance level strictly with effect from April 01. 2010 11/28/2013 College of Agricultural Banking.) • Mismatches in cash flows to be kept at minimum Initially for 1-14 and 15-28 days it may not exceed 20% normally In case banks wishes to operate on a higher limit. PUNE . RBI.ALM for Tier II UCBs – SSL • • • (contd.

ALM for Tier II UCBs – SIRS • • Only rupee assets. liabilities and off-balance sheet positions to be reported Statement to be prepared as on last Friday of March / June / September / December To be submitted to ALCO / Top Management within one month of reporting Friday To be placed before the Board in its next meeting Banks expected to move over to monthly reporting system from April 01. 2010 • • • 11/28/2013 College of Agricultural Banking. PUNE . RBI.

Non-sensitive (contd. Over 3 years and up to 5 years vi.ALM for Tier II UCBs – SIRS • Maturity profile of SIRS into 7 time bands i. PUNE .) • • • Gap is the difference between Rate Sensitive Assets (RSA) and Rate Sensitive Liabilities (RSL) If RSA > RSL = +ve Gap – Bank benefits if interest rate goes up If RSA < RSL or RSL > RSA = -ve Gap – Bank benefits if interest rate goes down 11/28/2013 College of Agricultural Banking. Over 6 months and up to 1 year iv. Over 1 year and up to 3 years v. Over 5 years vii. Over 3months and up to 6 months iii. Up to 3 months ii. RBI.

e.ALM for Tier II UCBs – SIRS • • (contd. RBI may consider introduce capital adequacy for market risk College of Agricultural Banking.) • • Banks to set prudential limits on individual gaps with the approval of the Board The prudential limits should have a bearing on the Total Assets. RBI. PUNE 11/28/2013 . Earning Assets or Equity Banks need to work out Earnings at Risk (EaR) i. 20 – 30% of the last years NII or Net Interest Margin – based on their views of interest rate movements After sufficient experience is gained by the UCB in ALM.

PUNE .ALM for Tier II UCBs – STDS • • To be prepared as on each reporting Friday To be put up to the ALCO / Top Management within 2-3 days from the close of the reporting Friday 11/28/2013 College of Agricultural Banking. RBI.

PUNE .ALM for Tier II UCBs – Other Issues • • SSL and SIRS could be reported through OSS  Communication to be issued All the three ALM Statements may be put up to the ALCO as on last Friday of December 2008 11/28/2013 College of Agricultural Banking. RBI.

PUNE . RBI.Some points • Break the beyond 5 year bucket into financial and non-financial • The sum of all the gaps in the structural liquidity may or may not be zero • The cumulative gaps – also called forward payment structure • Why is the forward payment structure significant? • Stress testing 11/28/2013 College of Agricultural Banking.

Cumulative Gaps 0d-14d 14d-28d 28d.63% -7.47% -53.00% -9.00% -32.02% • Forward Payment Structure indicates future liquidity position • Long term strategic approach needed to correct an increasingly negative FPS 11/28/2013 College of Agricultural Banking.5y Above 5y 430 480 -50 -228 525 560 -35 -6.15% -18.14% -20.69% -14.40% -36.48% -14.69% 210 240 -30 -15 230 261 -31 -46 250 285 -35 -81 6m-1y 295 322 -27 -108 1y .10% 7.61% -47.3m 3m-6m Cash Inflow Cash Outflow Gap Gap % Cumulative Gap Cum Gap % 195 180 15 15 7.67% -263 -50. PUNE .29% -13.67% -11. RBI.3y 375 445 -70 -178 3y .

Dynamic Liquidity Gap Analysis • Tracking cash flow on a short term time horizonchanges on account of fresh business are interpolated in the projections • RBI has asked banks to monitor short term liquidity on a dynamic basis over time horizon spanning from 1-90 days 11/28/2013 College of Agricultural Banking. RBI. PUNE .

RBI.Short-Term Dynamic Liquidity Statement • Main focus on short term mismatches  1-14days  15-28 days  29-90 days 11/28/2013 College of Agricultural Banking. PUNE .

Dynamic Liquidity Analysis
(Amount Rs. Crore)
OUTFLOWS Net increase in loans and advances Net increase in investments TOTAL OUTFLOWS INFLOWS Net cash position Net increase in deposits(less CRR) Refinance Total Inflows Mismatch(Inflows-Outflows) Mismatch as a % of Total Outflows 50 619 60 729 (-)496 (-)40.49% 1-90 days 950 275 1225

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College of Agricultural Banking, RBI, PUNE

Reasons for Interest Rate Risk
• On account of asset transformation
 Many deposits are used for one big loan

• Periodical review of assets and liabilities • Due to mismatches between maturity / repricing dates as well as maturity amounts between assets and liabilities • Depositors and borrowers may pre-close their accounts

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College of Agricultural Banking, RBI, PUNE

RSA and RSL
• Rate Sensitive Assets (RSA) – Assets whose value is dependent on current interest rate • Risk Sensitive Liabilities (RSL) – Liabilities whose value is dependent on current interest rate

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College of Agricultural Banking, RBI, PUNE

maturity / repricing rates • Even though maturity dates are same. RBI. if there is a mismatch between amount of assets and liabilities it causes interest rate risk and affects NIM 11/28/2013 College of Agricultural Banking. PUNE .Gap / Mismatch Risk • Arises on account of holding RSA and RSL with different principal amounts.

11/28/2013 College of Agricultural Banking. CRR balance etc. RBI.Interest Rate Risk • Assessed by Gap Report – Gaps between RSA and RSL • Asset / Liabilities are rate sensitive if:  Within the time interval under consideration there is a Cash Flow  Repayment of term loans  Interest rate resets / reprices  Change in interest rate in CC account. Term Loans before maturity  RBI changes interest rates  Interest on Savings Bank Deposits. PUNE .

PUNE . RBI.Interest Rate Risk • Assessed by Gap Report – Gaps between RSA and RSL • Gaps may be identified in the following time bands:  Upto 3 months  Over 3 months and upto 6 months  Over 6 months and upto 1 year  Over 1 year and upto 3 years  Over 3 years and upto 5 years  Over 5 years  Non-sensitive (contd.) 11/28/2013 College of Agricultural Banking.

Interest Rate Risk (contd. PUNE . RBI.) • Immediate impact of changes is on bank’s profit by change in its spread – NII  NII gives the earning perspective • Long term impact is change in its MVE or Net Worth  As marked to market value of bank’s asset – liabilities. off-balance sheet positions get affected  Gives the economic value perspective 11/28/2013 College of Agricultural Banking.

Interest Rate Risk (contd.) • Each bank to set its prudential limits on individual gaps with approval of Board • Prudential limits set with respect to bearing on Total Assets. Earning Assets or Equity • Bank’s may work out their Earnings at Risk – 2030% of last year’s NII or NIM 11/28/2013 College of Agricultural Banking. RBI. PUNE .

Refinance from other Agencies Sensitive to the extent of interest paying (core) portion. RBI. Branch Adjustments. In different time bands based on respective maturity band Upto 3 months time band Fixed Rate – As per maturity Floating Rate – Reprices when interest rate is reset Non-Sensitive 10.Interest Rate Sensitivity Heads of Account A. Borrowings from RBI 9. Other Liabilities & Provision Bills payable. Savings Bank Deposits 4. Borrowings – Zero Coupon 8. Provisions. In different time bands based on residual term of maturity Sensitive. Borrowings – Fixed 6. Borrowings – Floating 7. PUNE . Reserves and Surplus 2. Current Deposits 3. Include in 3-6 months time band. Repos / Bill Rediscounted Sensitive. Liabilities Non Sensitive Non Sensitive Classification into time bands (Contd. Reprices on maturity and should be distributed to respective maturity bands College of Agricultural Banking. Non interest part in non-sensitive band Sensitive. In different time bands based on residual term of maturity Sensitive. Others 11.Capital. Distributed to appropriate time bands that refers to resetting dates Sensitive.) 1. Term Deposits and CDs 5.

Cash 2. ii. Current Accounts ii. Share of All India FIs.Interest Rate Sensitivity Heads of Account B. ii. Amount distributed in different time bands i. Floating Rate 5. Cash Credits / Overdrafts / Loans repayable on demand and Term Loans Non Sensitive Interest portion in 3-6 months time band. PUNE . Balance is non sensitive Classification into time bands (Contd. Term Deposits and other placements 4. ii. RBI. Fixed Rate / Zero Coupon ii. Advancers (performing) i. Sensitive on maturity Sensitive may be shown in 3+6 months band College of Agricultural Banking. Balance with other banks i. Non sensitive Sensitive on maturity. Investments (performing) i. Money at Call and Short Notice. other cooperatives / Units of UTI 6.) i. Balance with RBI 3. Assets 1. Bills purchased and discounted ii. Sensitive on maturity Sensitive at next repricing date Non Sensitive i.

Leased Assets iii. iii. Fixed Assets 9. Bills Rediscounted 11. Should be distributed under different bands with reference to maturity Should be suitably classified as and when introduced College of Agricultural Banking. RBI. Swaps ii. Other Assets i. ii. Non Sensitive Sensitive on cash flows. Sensitive. Others Classification into time bands (Contd. Other products (Interest Rate) i. NPAs (Advances & Investments) i.) i. Distributed in respective maturity bands corresponding to cash flow dates Non Sensitive 10. Substandard ii. Doubtful and Loss 8. ii. Swaps. ii. PUNE .Interest Rate Sensitivity Heads of Account 7. Inter-Office Adjustments ii. Other Sensitive on maturity i. Over 3-5 years time band Over 5 year time band Non Sensitive i. Reverse Repos.

2010  SSL to be fortnightly basis from December 2008 11/28/2013 College of Agricultural Banking. RBI.Gist • Scheduled UCBS and Tier II UCBs  Have 3 pillars I n place  ALM Information Systems  ALM Organisation  ALM Process  Prepare 3 statements  Statement of Structural Liquidity (quarterly)  Short Term Dynamic Liquidity Statement (fortnightly)  Statement of Interest Rate Sensitivity (quarterly)  Review of Statements by ALCO / Top Management  To report from last reporting Friday of December 2008  SIRS to be moved to monthly reporting by April 01. PUNE .

PUNE . RBI.Gist  Scheduled UCBs already reporting SSL and SIRS through OSS  For Tier II UCBs separate communication to follow (contd.) 11/28/2013 College of Agricultural Banking.

Gist • Tier I UCBs  Prepare 2 Statements  Statement of Structural Liquidity (quarterly)  Statement of Short Term Dynamic Liquidity (quarterly) (contd. PUNE . RBI.)  To be put up to the Board as on last Friday of December 2008  For reporting through OSS separate communication to follow 11/28/2013 College of Agricultural Banking.

Thank You 11/28/2013 College of Agricultural Banking. PUNE . RBI.