ANDHRA BANK

EXECUTIVE SUMMARY INTRODUCTION The Indian banking can be broadly categories into nationalized [government owned], private Bank and specialized banking institution. The Reserve Bank o India acts a centralized body monitoring any discrepancies and shortcoming in the system. The nationalization o Bank in !"#$, gave rise to the public sector Bank to play a prominent role, which led to tremendous progress. The Indian banking has inally worked up to the competitive dynamics o the %new& Indian market and addressing the relevant issues to take on the multi arious challenges o globalization.

INRODUCTION TO ANDHRA BANK 'ndhra Bank is one o the premier Bank in the country, accredited with distinction. The present statures o the Bank are due to its strong undamental and (uality customer&s orientations. )ro it making since inception, the Bank today symbolizes a per ect blend o commercial and social banking. *or the year march #++,, the bank clocked the highest net pro it [rs.!!!+ crore] among nationalized Bank, with signi icant improvement in capital ade(uacy ratio [!#.,-.] and assets (uality [net /)' o !.--.]

Introduction to ALM Risk 0anagement is the strategic tool, which helps in identi ying, (uali ying, monitoring and controlling risk. Risk management protects 'n organization rom dying due to insolvency resulting rom the adverse e ects o risk.

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Though universally relevant it is o immense to a banking organization or inancial institution. In view o the same Risk 0anagement is analyzed here rom the banking perspective. 1owever with the larger corporate houses establishing their own independent dealing rooms, risk management systems are no longer limited to banking organizations. ' banking organization has to constantly strike a risk 2 reward balance. ' proposal, which ma seem very rewarding in the short term, may wipe out the bank completely in the run due to high risk embedded in it. Risk 0anagement systems are not a solution, but a tool to aid decision3making.

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TITLE O" THE #RO$ECT
%Ass&t Li' i!it( M'n')&*&nt in And+r' B'n,-

OB$ECTIVES O" RESEARCH

! # $ 5 To study the e orts o the Bank eliminate gap which di erence amount o rate sensitivity asset and rate sensitivity liability. To study risk management techni(ue designed by the bank to 4arn an ade(uate return. To ind the overall asset liability management at Bank. To give some tentative observations in the area o asset 6iability management. between

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#RO$ECT DESI.N The pro7ect asset liability management was carried 't 'ndhra Bank to ind asset liability management in Bank more so in 'ndhra Bank. The in ormation was collected rom various sources like personal discussing with the bankers. Re erence was made to the balance sheet and pro it and loss account o the Bank as at $! march #++$, #++5, #++8, #++9 and #++,. I have also re erred various materials on the sub7ect published by the Bank. I have also re erred various books on the sub7ect matter I have collected in ormation rom head o ice o the Bank which is situated at 1yderabad

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/HY ALM0 This area was chosen mainly because it is o prime concern or 0ost o the Bank in the present era. In view o the intense :ompetition prevailing in Bank increasing volatility interest rates there is a strain on spread and pro itability. 's such this is an Interesting sub7ect or the students to enhance their knowledge. 1ence this sub7ect was chosen or the pro7ect.

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"INDIN.S !. 'lmost the 'ndhra bank assets are matched with the liability Thereby leaving no gap #. Better measures o internal rate o return can also be had by 6inking gap to net interest income o the Bank $. Bank deploy their unds to optimize their revenue while 0aintaining their li(uidity 5. The bank pre er book liability and then look or deployment o *unds 8. The bank usually manages liability in time with asset already Identi ied thus overcome the risk o idle liability 9. 4ven though proper mismatch is done the chances o 'sset not maturity may e ect the bank. been paid on

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RECOMMENDATION !. It is recommended that bank should manage the liability [;eposit collected rom the customer] By proper deploy men into the asset [6oans and advances] o e(ual maturity #. )roper hedging o increase and decrease in rate o interest $. It is recommended that bank should manage unds in such a way that there is no hap 5. It is recommended that by proper deployment o unds Bank should earn revenue and there should not be any 0ismatch 8. Better measures o internal rate o return can also be had by linking gap to net interest income o the bank

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LIMITATION !. The study I have conducted in 'ndhra Bank <Branch= at Tra ic Island and the available material in the branch says that the In ormation is restricted to the above center only. #. The pro7ect is conducted based on past per ormance .'s the )ast per ormances may not be the indicator o the uture Results. $. )er ormance o the Bank mainly depends on the >overnment policies in respect o investment and In rastructure development 4ven though proper mismatch is done the chances o 'sset not been paid on maturity may e ect the bank

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BRI" DESCRI#TION Indian banking system has per ormed e?ceeding well the various economic and political upheavals but in spite o its consistent per ormances and strong undamental one main problem continuous to plug the banking industries that is the management o 'ssets and 6iability with several risk that bank ace on regular basis. The problem relating to asset liability has always been a cause o all the bankers @'sset 6iability 0anagement is concerned with risk management and provides comprehensive and dynamic ramework or measuring, monitoring and managing li(uidity, interest rate, oreign e?change and 4(uity and commodity prices risk o the Bank that needs to be closely integrated with the Bank business strategy. 'sset liability management Involves assessment o various types o risk and altering 'sset liability port olio in a dynamic way in order to manage riskA 'sset liability management is all about e icient management o balance Bheet dynamics with regards to its size, constituents and (uality. It is a process o managing /et Income 0argin [/I0] within the overall risk bearing ability o the Bank the entire asset liability process depends on understanding o balance sheet. The availability, accuracy ade(uacy and e?pediency o the data and management system o the Bank. Cne way to measure the direction and e?tent o 'sset 6iability mismatch is by using >') analysis. The analysis derives its name rom the gap. This is the di erence between the amounts o @Rate sensitivity 'sset [RB'] and Rate sensitivity 6iability [RB6. 0anaging this gap is large part what asset and liability management is all about. In order to undertake this in many Bank 'sset 6iability :ommittee ['lco] is ormed to price and market loan and to deposit in such a way to eliminate gap

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INDUSTRY

#RO"ILE

D'ndhra BankD was ounded by the eminent reedom ighter and a multi aceted genius, ;r.Bhogara7u )attabhi Bitaramayya. The Bank was registered on #+th /ovember !"#$ and commenced business on #-th /ovember !"#$ with a paid up capital o Rs !.++ lakh and an authorised capital o Rs !+.++ lakhs. The Bank crossed many milestones and the BankEs Total Business as on $!.!#.#++, stood at Rs.,8,##8 :rores with a :lientele base over !.98 :rores. The Bank is rendering services through #+59 Business ;elivery :hannels consisting o !$5$ branches, ,$ 4?tension :ounters, 8"# 'T0s and $- Batellite C ices spread over #! Btates and # Fnion Territories as at the end o ;ecember, #++,. 'll Branches are !++. computerized, !!-9 units viz., !!+! Branches, ,+ 4?tension :ounters, !8 Bervice :entres networked under :luster Banking Bolution and providing D'ny Branch Banking<'BB=D. Real Time >ross Bettlement <RT>B= *acility and /ational 4lectronic *und Trans er </4*T= acility has been introduced in 9-+ Branches. To provide value3added services to :ustomers, the Bank has set up its own 8"# 'T0s as on $!.!#.#++,. C which +$ 0obile 'T0s and two with Biometric access. Besides, 'T0 sharing arrangements with several Bank including BBI group, I;BI Bank, FTI Bank, 1;*: Bank, Indian Bank and others under /ational *inancial /etwork Bwitch covering #5-89 'T0s. The Bank opened its Representative C ice in ;ubai in 0ay, #++9 and has received permission rom Reserve Bank o India or opening Representative C ices at /ew Gersey <F B '=. Cur Bank introduced Internet Banking *acility <'B I/*I3net= to all customers o cluster linked branches. Rail Ticket Booking *acility is made available to all debit card holders through IR:T: Hebsite through a separate gateway. Cur BankEs :orporate Hebsite is available in 4nglish, 1indi and Telugu 6anguages communicating our BankEs image and in ormation. Cur Bank has been given

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%B4BT B'/I 'H'R;& a banking technology award by I;RBT, 1yderabad or e?tensive use o IT in Bemi Frban and Rural 'reas on +#.+".#++9. IB' Gointly with T*:I has con erred the Goint Runner3up 'ward to the Bank in the Bet )ayments initiative in recognition o outstanding achievement o the Bank in promoting 'T0 :hannel. Bank success ully conducted D Bancon #++9D, a two day event at 1yderabad, deliberating on Inclusive >rowth 3 ' /ew :hallenge. 'ndhra Bank will open its Representative C ice in /ew Gersey :ity in Fnited Btates shortly. Bank eels Fnited Btates would be an ideal location as 'ndhra Bank has been a household name among many /RIs there. ' oothold in /ew Gersey is strategic or the -5 year old bank as it has a large number o non resident Indians rom 'ndhra )radesh. Thus our Bank accords utmost concern to customer satis action by o ering innovative and need based inancial products and services using state3o 3the art technology. "ound&r

;r Bhogara7u )attabhi Bitaramayya was born on #5th /ovember !--+ in >undugolanu village, Hest >odavari ;istrict in 'ndhra )radesh. 1e was a renowned *reedom *ighter and a very illustrious personality.

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Cor1or't& Id&ntit( <ETogetherness E= is the theme o the logo o 'ndhra Bank where the world o banking services meets the realm o ever changing customer needs and establishes a link that is like a chain, inseparable. The logo also denotes a bank thatEs prepared to do anything, to go to any lengths, or the customer. The blue pointer on the top represents the philosophy o a bank thatEs always looking or growth and newer, and challenging, more promising directions .The keyhole indicates sa ety and security. The colours red and blue represent usion o dynamism and solidity. 't a time when the per ormance o the bank, the prospects o the bank, and even the perceptions o the bank are vibrantly di erent, and poised as we are at the threshold o a new millennium, this modernized logo is a tribute to the 'ndhra Bankers who are the true creators o the image o the bank. Dr. K. R'*',ris+n'n 2 C+'ir*'n 3 M'n')in) Dir&ctor

Bhri I Ramakrishnan

took charge as :hairman and 0anaging ;irector o 'ndhra

Bank in Gune,#++8. Brie pro ile o our :hairman and 0anaging ;irector is J Bhri I Ramakrishnan, B.:om <Bpl=, 0B' <>old 0edalist= <*irst :lass *irst= has been con erred D;octorate o 6ettersD by 'charya /agar7una Fniversity or contribution in the ield o Banking. ;r.I. Ramakrishnan 7oined Bank o India in

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!",+. 1e was appointed 4?ecutive ;irector o Bank o Baroda in #++5 be ore taking chargeat 'ndhra Bank as :hairman 2 0anaging ;irector. ;uring his appointment in Bank o Baroda, he was :hairman, Bank o Baroda<Ienya= 6td., and :hairman, BCB 1ousing *ianance 6td., ' widely travelled man with academic bent o mind, 0r. Ramakrishnan attended programmes at /ational Institute o Bank 0anagement, )une and Institute or ;evelopment )olicy and 0anagement, Fniversity o 0anchester, FI. ;r. I Ramakrishnan is also :hairman, Btate 6evel BankersE :ommittee, 'ndhra )radesh and a visiting aculty at :entral Fniversity, 1yderabad. ;r. Ramakrishnan will be the :hairman and 0anaging ;irector o 'ndhra Bank until $!st Guly, #++-. Sri K'!('n Mu,+&r4&& 2 E5&cuti6& Dir&ctor

Bhri Ialyan 0ukher7ee B.'.<1ons=, 0B' 7oined the 'ndhra Bank board as 4?ecutive ;irector on #8.+$.#++9. Be ore assuming charge as 4?ecutive ;irector, he was >eneral 0anager with F:C Bank. In his career with F:C Bank spanning $, years, held various important assignments which included !+ years e?perience in

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Cverseas Branches o F:C Bank, namely Bingapore 2 1ongkong. Bri 0uker7ee has wide e?perience in the area o 1R. 1e was a member o )ersonnel :ommittee, Indian BankE 'ssociation or around $ years. Vision 3 Mission o7 And+r' B'n,82

A9'rds 'nd R&9'rds A/ARDS RECEIVED: SO "AR IN THE #RESENT YEAR 2 ;<<=2<>8 SA"A '9'rd K Received !9.+!.#++,. Best )resented 'ccounts 'ward #++8 rom B'*'Es

<Bouth 'sian *ederation o

'ccountants= :entrein :olombo, Bri 6anka on

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DBEST BANK A/ARD? ( IDRBT: H(d&r' 'd K 'ndhra Bank has bagged the DBest Bank 'wardD in the category o DFse o IT or :ustomer Bervice in Bemi Frban and Rural areasD or #++83+9. Cur :hairman 2 0anaging ;irector, Bri I Ramakrishnan has received the award rom Bri L M Reddy, >overnor, RBI at Institute or ;evelopment and Research in Banking Technology <I;RBT= 1yderabad on #.".#++9. MILESTONES ACHIEVED AND A/ARDS RECEIVED DURIN. ;<<@2<= "INTECH Asi' ;<<= A9'rd "or ?An( Br'nc+ B'n,in) AABBB? 'ndhra Bank has bagged the *I/T4:1 'sia #++9 'ward or its initiatives under D'ny Branch Banking <'BB=D service across the :ountry. 'ndhra Bank is the only Bank in the :ountry to receive one o the si? 'wards announced by the *inancial Insights <FB'=, an I;: :ompany, which is a Bubsidiary o I;>, the HorldEs leading IT 0edia, Research and 4?position :ompany. R'n,&d =CDrd '*on) To1 E<<< B'n, in t+& /or!d The prestigious EThe BankerE 3 a *inancial Times Business )ublication, Guly #++8 Issue published rom 6ondon has ranked 'ndhra Bank as the E9-$rd 6argest Bank >loballyE, out o the Top !+++ Horld BankE 'nnual Rankings. ;nd Hi)+&st Mo6&r in t+& /or!d +'6in) c!i* &d ;>> 1!'c&s o6&r 1r&6ious (&'r 'ndhra Bank also happened to be the EBecond highest mover in the Horld and highest mover compared to any other Bank in 'siaE having climbed #,, places in the Top !+++ BankE Rankings based on Tier3I :apital.

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R'n,&d 's t+& To1 Nu* &r E B'n, in Asi' und&r t+& ?R&turn on C'1it'!? EThe BankerE 0agazine went on to Rank E'ndhra Bank as the Top /umber ! Bank in 'siaE under the DReturn on :apitalD among all the 'sian Bank 3 Rankings being based on Tier3I :apital Business )arameter. Ad4ud)&d B&st B'n, ( An'!(st M')'Fin& 2 An IC"AI #u !ic'tion Cur Bank has been ad7udged as the DBest Bank under 6arge Bank :ategoryD by DThe 'nalystD 0agazine 3 'n I:*'I )ublication, in its )er ormance 'nalysis o Belect Indian Bank or #++53+8. T+& B&st B'n, 's 1&r t+& Busin&ss St'nd'rd Annu'! B'n,in) Sur6&(: ;<<G2<@ The DBest BankD Btatus was con erred on our Bank by the Business Btandard in its 'nnual Banking Burvey or #++53+8 in terms o )roductivity, )ro itability, >rowth, Ba ety and 4 iciency. B&st B'n, R'tin) 7ro* Busin&ss Tod'( M')'Fin& The Business Today Burvey o the Best Bank in India has Ranked 'ndhra Bank at 8th )lace under 6argest Bank :ategory compared to last year where the Bank was Ranked at !8th )lace in terms o Bize and Btrength, Cperations, )roductivity and 4 iciency, Nuality o 4arnings, :apital 'de(uacy and 'sset Nuality. The Bank has also been Ranked /o.8 under Blowest /)' >rowth :ategory and Ranked /o.# under Return on :apital 4mployed :ategory.

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ICRA R'tin) 7or Cor1or't& .o6&rn'nc& Cur demonstrated commitment to vigilant :orporate >overnance has been rewarded by I:R', which assigned us a :orporate >overnance Rating o ?C.R2;?. This denotes high level o assurance on the (uality o :orporate >overnance. A9'rd o7 Institut& o7 C+'rt&r&d Account'nts o7 Indi' 7or &5c&!!&nc& in "in'nci'! R&1ortin) The Institute o :hartered 'ccountants o India <I:'I= has recently awarded our Bank the DBilver BhieldD under the category o Banking, Insurance and *inancial Institutions, given or e?cellence in inancial reporting in published accounts or the year, #++53+8. Cur Bank is the only )ublic Bector Bank to receive an 'ward rom I:'I. IBA T&c+no!o)( A9'rd 'ndhra Bank has been con erred the DRunner3FpD 'ward underA Best )ayment InitiativeD at the Indian BankE 'ssociation <IB'= Banking Technology 'wards, #++8 or having wide 'T0 /etwork and highest number o hits per day. A9'rds 7or SLBC: 's Con6&nor B'n, in t+& St't& o7 A# Btate 6evel BankersE :ommittee <B6B:= o '.). <:onvenor BankJ 'ndhra Bank= has been awarded or ensuring e?cellent per ormance by all Bank or Ihari #++8. A9'rds 7or B&st #&r7or*'nc& und&r K+'ri7 Lo'ns 'ndhra Bank was awarded by the >overnment o 'ndhra )radesh or Best )er ormance in e?ceeding Targets under disbursement o Ihari during #++8.

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B&st B'n, in !&ndin) to A)ricu!tur& >overnment o 'ndhra )radesh has instituted or the irst time 'wards or Best *armers and Best Bankers at the Btate 6evel and ;istrict 6evel. 'ndhra Bank has bagged the Best Banker 'ward at the Btate 6evel or its overall per ormance. B&st B'n,&r in !&ndin) to Un&*1!o(&d Yout+ und&r R'4i6 Yu6' S',t+i 'ndhra Bank has been given the B&st B'n,&r A9'rd 7or its 1&r7or*'nc& durin) t+& Y&'r: ;<<@2<= or achieving Targets under the Ra7iv Luva Bakthi Bcheme.

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ANDHRA BANK
INTRODUCTION TO ASSET LIABILITY MANA.EMENT

Cn the threshold o new millennium the Indian banking sector is working up to the concept o 'sset 6iability 0anagement. 'sset 6iability 0anagement as a practice has been e?istence or (uite Bometimes .It was introduced in the year !",+ in FB'. Hhen deregulation o interest rates compelled the bank to undertake an active plan to structure the balance sheet .The uncertainty o interest rates movement gave rise to internal rate o return .Thus there by causing the bank to look or measures to manage the risks. In the Hake o interest rate risk came li(uidity risk and credit risk an inherent component o risk or Bank .The reorganization o risk brought 'sset liability management to the centre stage o inancial intermediation .The Indian economy has witnessed a similar scenario post re orm. Banking Bcenario is marked by interest rate deregulation entry o new private Bank, gamut o new product and greater uses o in ormation techonology.To cope with the pressure bank are re(uired to evolve with the strategies rather then temporary adhoc solution. These strategies are e?ecuted in the *orm o asset liability management practices. 'n e ective 'sset 6iability management techni(ue aims to manage volume mi? maturity, rate sensitivity (uality and li(uidity o asset and liability. 'sset liability management ramework rest on three pillars

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Rate Bensitive 'sset Balance with RBI 0oney at call and short notice Term deposit with other Bank Investments 'dvances 6eased asset Rate Bensitive 6iability Baving bank deposit Term deposits Borrowing 3 i?ed, loating,

!. #. $. 5. 8.

:oupon and rom RBI Re inancing rom others Repose, bills rediscounted,

!= #= $=

/on3Rate Bensitive 'sset :ash :urrent account balance in Cthers Bank Bhares Ounits o mutual unds

/on3Rate Bensitive 6iability :apital, reserves and surplus :urrent deposit other liability and provision

!. 'sset 6iability 0anagement Crganization #. 'sset 6iability 0anagement In ormation $. 'sset 6iability 0anagement )rocess Ass&t Li' i!it( M'n')&*&nt Or)'niF'tion The '6:C committee consisting o Bank senior management including :hie 4?ecutive C icer should be responsible or adhering to the limit set by the board as well or deciding or the business strategy o the Bank in time with Bank budget and deciding about the risk management ob7ectives .Thus '6:C is a decision making unit responsible or balance sheet planning rom a risk return perspective including strategic management o interest and li(uidity risk.

Ass&t !i' i!it( *'n')&*&nt s(st&*

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This is or collecting o in ormation accurately and e?peditiously. In ormation is the key o 'sset 6iability management process. ' good in ormation system gives a bank management a complete picture o the bank balance sheet. Ass&t !i' i!it( *'n')&*&nt 1roc&ss The basic 'sset 6iability 0anagement process involves identi ication, measurement and management o risk parameters. The irst step in setting up the 'sset 6iability 0anagement unction in the Bank would be to decide upon the bank measurement ramework. That is what would be the risk measure parameter that the management would need to ocus on. The appropriate parameters would depend on violability in the operatin environment, availability o supporting data, the e?pertise available within the market and e?pected market and business development or instance the introduction o derivate and securitization .The risk parameters chosen should be capable o capturing risk to the immediate pro itability as well as risk on the long term viability. I.e. uture spread Balance sheet value and economic capital ade(uacy with changes in interest Oe?change rates. Typically, in Bank the word otherwise has two ma7or parameters to measure the balance sheet risk is the irst is the risk to the /et Interest Income o the Bank which measures the risks to the Immediate accounting year&s pro its that occur rom cash low mismatch occurring in accounting years. The other parameters is the market value o port olio e(uity [0M)4] is the di erence between the market to the market value o the bank asset and liability. It measures the risk that lies in the bank balance sheet due The maturity mismatch in it 'sset and 6iability over the uture year&s .The two parameters together capture the short term and the long term balance sheet risk.

CLASSI"ICATION O" ASSET AND LIABILITY

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In India there are diverse accounting policies and practices in use, to harmonize these on 'pril !, !",, T14 I/BTITFT4 C* :1'RT4R4; '::CF/T'/T C* I/;I' <I:'I= constituted the 'ccounting standard board <'BB= which has issued guidelines o standard since then accordingly the balance sheet o Bank and inancial Institution should consist o !# schedules divided into two )arts '] 'sset B] 6iabilities Ass&tJ cash and balances with RBI, balances with Bank and money at call and short notice, investments advances, i?ed asset and other asset Li' i!it(8 capital reserves surplus, deposit borrowings other liabilities provision and contingent liability *or asset liability management these asset liabilities are classi ied into di erent time periods popularly called time or maturity buckets, depending on maturity pro ile and interest rate sensitivity .'s per RBI norms or guidelines issued or 'sset 6iability 0anagement implementation in Bank in !""" there are - times bucket rom T 3! to T3- classi ied respectively as ollowsJ

!. ! to !5 days

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#. !8 to #-days $. over #" days up to $ months 5. over $ months up to 9 months 8. over 9 months up to ! year 9. over ! year up to $ years ,. over $ years up to 8 years -. over 8 years

THE BROAD OB$ECTIVES O" ASSET LIABILITY SYSTEM IN ANDHRA BANK

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!. To control violability o /et Interest Income rom changes in Interest rates #. Cptimization o pro its by ensuring acceptable balance between pro itability, growth and risk. $. *unding o bank operation through capital planning 5. )roduct planning and introduction o new product. 8. To control violability o market value o capital rom market risk. 9. Buitable period o planning say !,# or $ months ahead ,. :hoosing a model that yields a stable net interest income consistently while ensuring li(uidity.

"UNCTIONS O" ALCO

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ANDHRA BANK
!. BTR'TI>I: )6'//I/> #. )RC;F:T )6'//I/> $. RIBI 0'/'>404/T

The unctions o 'lco are e?plained under the ollowing detaile Btructure. They areJ !. Balance sheet planning rom risk return perspective #. ;esired maturity pro ile and a mi? o incremental 'sset and 6iability $. 'rticulating and reviewing the unding policy 5. 'rticulating interest rate view o the bank 8. Reviewing trans er policy o the bank 9. 'pproving pricing o various deposits and advance policies ,. 0onitoring the implementation o policies and review o operations with in the limits and parameters set by the board -. Reviewing the result and progress in implementation o the decision taken in the previous meeting

*ollowing in ormation is re(uired to be urnished to '6:C RegularlyJ

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!. 6i(uidity ratio #. )ro itability ratio $. Btructural li(uidity statement o the preceding report date 5. Bhort term li(uidity statement o the preceding ortnight 8. Interest rate sensitivity statement o the preceding report date 9. 'nalysis o built deposit on monthly basis ,. 'nalysis o in low and out low o retail and bulk deposit on ortnight basis -. Bources and uses o und on ortnight basis ". ;uration gap analysis o asset and liability in balance sheet on monthly basis !+. Trend in net interest income on (uarterly basis !!. )osition o adherence o risk limit in ore? operation !#. 4conomic and political impact in balance sheet

ANALYSIS O" ALM IN ADHRA BANK

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!. 0eeting o 'lco is held regularly on a ortnightly and monthly basis #. They collect asset liability management data on regular or *ortnightly current bank deposit at a core and volatile proportion 5. Bank are measuring both mismatch risk and basic risk to measure /et interest income 8. Bank are pricing deposit and advance using asset liability system basis $. 0any Bank are conducting behavioral study o saving bank deposit and

MARKET

RISK

0arket risk related to inancial condition which results in adverse

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ANDHRA BANK
0ovement in market price. ' signi icant luctuation in asset holding would adversely a ect the balance sheet o the bank. The inancial institution ac(uire the bonds and hold them till maturity and when there is signi icant increase in interest rate or there is violent luctuation in rate structure substantial reduces the value o security held LIHUIDITY RISK It is inability o Bank to generate cash to cope with decline in deposit and increase in 'sset .The ability in und increase in 'sset and meet obligations as and when due is crucial to the viability o the banking organization hence managing li(uidity is most important activity conducted by the Bank. It is the outcome o mismatch in the maturity pattern o asset and liability .The li(uidity can be classi ied under the ollowing broad category !. The need to replace new out low o unds whether due To withdrawal o deposit or non renewal o whole sale *unds #. /eed to compensate or the non receipt o the e?pected in low o unds i.e. borrowed ails to meet the commitment $. /eed to ind new unds when contingent liability becomes due 5. The need to undertake new transaction when re(uired i.e. re(uest or und rom important client

INTREST RATE RISK

K.L.E.Ss I.M.S.R Hu !i

#-

ANDHRA BANK
Bank ace two kinds o balance sheet risk that is credit risk and Interest rate risk .These risk e?pose bank business to certain potential lossess.The losses are o three types they are !. 4?pected loss #. Fne?pected loss $. Btress loss 4?pected loss is always insurable through hedges. Fne?pected loss cannot be predicated. It is there ore de ined as value at risk [MaR].The third types o loss bank aces under e?treme condition occurs rarely it is called stress loss bank mostly use unding and maturity gap analysis model to control internal rate o return. The inancial indicator is given below

"INANCIAL

SUMMARY

K.L.E.Ss I.M.S.R Hu !i

#"

ANDHRA BANK
RB <0/= Interest income Interest #++$ 89!-$ $,$#8 #++5 9$,+9 588+$ !-#+$ !5#-8 $#5-!8"#9 #++8 998,, 55#5##$$+ !8!#! $,58! !,5,, #++9 ,+9$5 5$#59 #,$-#+,#" 5,88$ !-"99 #++, ,8,!" 55#!8 $!8+5 !85$59"5# #!+-"

e?penses /et interest !--$+ income Total other "!-, income Total income #-++Total !99"9 operating 4?penses )re provision !!$!# )ro it Total -59!

!989# "!5,5!5

!"",5 ",-8 !+!-"

#-8-, !8#+, !$$-+

#8-8$ !5,8!!+"8

provision )ro it a ter #-8! ta?

ALL ROUND S#READ EX#ANSION 0ost o the Bank in the inancial Lear #++, have shown modest rise in interest on

advances with growth in interest on investment improving interest income. 'ndhra Bank has also shown modest rise in interest income during the inancial year .In the

K.L.E.Ss I.M.S.R Hu !i

$+

ANDHRA BANK
event o any rise in yields the bank will urther improve the interest income .The interest on advances has improved by about !+. where as income on investment there is marginal increase. The interest e?penses has improved marginally despite the act that deposit have grown by !#.#$. the Bank ee income shows improvement in spite o The *act that ee income market is heating up as the private Bank are eating away public sector Bank business under these category o commission on guarantees, letter o credit and demand dra t :ommission.

ASSET LIABILITY MANA.EMENT

!. 0easuring Interest rate risk #. *ocus is on gap there are three types o gap they are

K.L.E.Ss I.M.S.R Hu !i

$!

ANDHRA BANK
a= ;ollar gap ,*und gap, Reprising gap b= 0aturity gap c= ;uration gap

.A#

The 'ndhra Bank with asset and liability o di erent maturity

K.L.E.Ss I.M.S.R Hu !i

$#

ANDHRA BANK
+ P 9+ 'BB4T !+ 6I'BI6ITL #+ >')<'3 6= 3!+ 9! P "+ + 8 38 "! P !#+ 5+ $+ !+ !#! P !-+ #+ 8+ 3$+

>') <continued= :F0F6'TIM4 >') Q Q Q :>')

>') CM4R H1C64 )4RIC; Q 3!+ 38 R!+ 3$+ 3$8

:>')

/CT4J I* R >'), T14/ 6CB4 I* R'T4 *'66B I* P >'), T14/ 6CB4 I* R'T4 RIB4.

MATURITY .A# B':I>RCF/; :C/BI;4R !3L4'R BC/; HIT1 :CF)C/ 'T !+. '/; LT0 !+.

K.L.E.Ss I.M.S.R Hu !i

$$

ANDHRA BANK
) Q Q Q !++R+.!+K!++O!R+.!+ !!+O!.!+ !++

I* R'T4 I/:R4'B4B 'T !!. p Q !++R+.!+K!++O!R+.!! Q Q !!+O!.!! "".!+

:C/:6FBIC/ I* R'T4 I/:R4'B4B '/; )RI:4 ;4:R4'B4B T14/ )RI:4 BL R'T4 IB 64BB T1'/ S4RC

MATURITY .A# :C/BI;4R ' # L4'R BC/; ) Q !+O!.!+R !!+O <!.!+=#

Q !++

K.L.E.Ss I.M.S.R Hu !i

$5

ANDHRA BANK
) Q !+O!.!!R !!+O <!.!!= #

Q "-.#" )RI:4 *466 0CR4 T1'/ C/4 L4'R BC/;

:C/:6FBIC/ The longer the maturity the greater the all in the price or the given level increases in interest rates

.A# ANALYSIS The di erence between 'sset and 6iability is called as gap. ' zero gap position is the best choice i the bank is not able to speculate interest rate or i its capacity to absorb risk is zero. Hith zero gap the Bank is ully hedged against increase and decrease in

K.L.E.Ss I.M.S.R Hu !i

$8

ANDHRA BANK
the rate o interest as /et Interest Income will not change in both the case .' summary o gap interrelationship with net interest income is given below

BI /C

TL)4 C* >')

:1'/>4 I/ I/T4R4BT :1'/>4 I/ /II R'T4B

! # $ 5 8 9

RB' Q RB6B RB' Q RB6B RB' TQ RB6B RB' TQ RB6B RB' UQ RB6B RB' UQ RB6B

I/:R4'B4 ;4:R4'B4 I/:R4'B4 ;4:R4'B4 I/:R4'B4 ;4:R4'B4

/C :1'/>4 /C :1'/>4 /II I/:R4'B4 /II ;4:R4'B4 /II ;4:R4'B4 /II I/:R4'B4

DURATION .A# ANALYSIS The change in interest rate a ects Bank in two ways the two broad )rospective o 'sset 6iability 0anagement is short term and long term prospective are given below

;4T'I6B

B1CRTT4R0

6C/>T4R0

K.L.E.Ss I.M.S.R Hu !i

$9

ANDHRA BANK
Target variable )erspective Type o mismatch *ocus 'nalyticaltechni(ue )4RB)4:TIM4 /et Interest Income 'ccounting Tactical pro it and loss >ap analysis Bimulation o /II 4arning o risk )4RB)4:TIM4 0arket Malue o 4(uity 4conomic Btructural Balance sheet strength ;uration gap analysis Bimulation o 0M4 Malue o Risk 4(uity

IM#LICATION O" DURATION .A# The impact o changing market interest rates on Bank net worth is indicated below in this way .;uration >') igures can be used to estimate e?pected change in market value o e(uity or the given change in interest rates. /'TFR4 C* ;FR'TIC/ >') )CBITIM4 ;'T IK;6 /4>'TIM4 ;'U IK;6 :1'/>4I/ R'T4 RIB4 *'66 RIB4 I/TR4BT I0)':T C/ B'/I /4THCRT1 ;4:R4'B4 I/:R4'B4 I/:R4'B4

K.L.E.Ss I.M.S.R Hu !i

$,

ANDHRA BANK
S4RC ;'Q IK;6 *'66 I/:R4'B4 ;4:R4'B4 BT'B64 '/; ;4:R4'B4 /C :1'/>4

H14R4 I Q <6I'BI6ITL 3 4NFITL= O TCT'6 'BB4T

LIMITATION O" DURATION !. ;uration basically assumes parallel shi t in the yield curve. #. ;uration does not capture interest rate violability $. ;uration as per price sensitivity measure is applicable to small :hanges in interest rates 5. ;uration is application only to option ree bonds

K.L.E.Ss I.M.S.R Hu !i

$-

ANDHRA BANK

VALUE

AT

RISK IVARJ

MaR model is one o the interest rate balance approaches where in the credit rating given to each o the borrowers and its migration over the year rom the part o calculation o credit value at risk. This is due to credit risk which enamels not only rom counters party de ault but also rom sleep age in credit policy .The Bank review inancial statement o borrowers once in a year and allot credit rating .'ny risk 'ssessment model shall only predict relative risk than absolute risk hence any risk measurement model can be tailored to suit di erent time horizons on the actual need

K.L.E.Ss I.M.S.R Hu !i

$"

ANDHRA BANK

LIMITATION O" VAR !. This study is use ul or normal operative account to predict whole MaR has to be separately probability o

de ault when the de ault probability is to be Horked or the port olio as a :alculated and added to the already de ault value. Rating methodology should be ob7ective and consistent or better results 0acro level changes in the industry changes in the government policies ect may give distorted results. #. In the methodology i a M'R measurement is or a shorter duration the risk assessment is accurate.

K.L.E.Ss I.M.S.R Hu !i

5+

ANDHRA BANK

ADVANTA.ES O" .A# MODEL !. Bimple to analyze #. 4asy to implement $. 1elps in uture analyses in interest rate risk 5. 1elps in pro7ecting /et Interest Income or urther analysis

DISADVANTA.ES O" .A# MODEL !. Ignores time value o 'sset and 6iability

K.L.E.Ss I.M.S.R Hu !i

5!

ANDHRA BANK
#. ;ose not considered embedded options like withdrawal C deposit and prepayment o loans

S&curitiF'tion Is conversion o uture cash lows into marketable securities .It is the process

through which illi(uid assets are packed and converted into tradable securities and sold to third parties. ASSET LIABILITY MANA.EMENT 6ong term asset are replaced with cash and post securitization reduces the tenure mismatch by which li(uidity and interest rate sensitivity o such gap can be minimized

K.L.E.Ss I.M.S.R Hu !i

5#

ANDHRA BANK
ALTERNATE SOURCE O" "UNDIN. It o ers e ective and relatively (uick unding sources to originators. It enables Bank to diversi y there unding mi?

K.L.E.Ss I.M.S.R Hu !i

5$

ANDHRA BANK
BALANCESHEET MANA.EMENT

Cnce the loans receivables trans erred to special purpose vehicle [B)M].They are removed rom the originators balance sheet .Thus Becuritization o ers an o balance sheet unding alternative.

REVELANCE

O" BASEL II

IN ASSET LIABILITY O" BANK

!. Basel accord on capital ade(uacy aims at stregentning the inancial health o the bank #. The accord is in the direction o urther strengthening o capital $. The prime motto is @less capital or sa e loans and more capital or risky loansA. 5. It hopes to create the regulator system and promote rewarding Bank or managing risks better 8. There is no ade(uate di erentiation o credit risk 9. /o recognitions to credit risk mitigation techni(ue 8. 0aturity structure o credit e?posure did not have any relevance 9. /o capital charged or operational risks ,. 4conomic capital allocation allows Bank to have better risk and better loans pricing the proposed Fnderstanding o ade(uacy ramework contains

re ined proposals or three pillar o new accord that is namely !. 0inimum capital re(uirements #. Bupervisory review $. 0arket discipline

K.L.E.Ss I.M.S.R Hu !i

55

ANDHRA BANK
To strengthen the 'sset 6iability system in Bank the li(uidity )ro ile internal rate re(uirements namely duration MaR, Btimulation 0odel, ore? risk re(uirements ect should be sound the management in ormation system mechanism should be Btrengthened the technology is to be introduced to make the in ormation available .In such a situation as per B'B46 II the )ricing o the Bank products can be made competitive using 'sset 6iability system.

K.L.E.Ss I.M.S.R Hu !i

58

ANDHRA BANK
ASSET LIABILITY IN"ORMATION SYSTEM In the Indian conte?t 'sset 6iability 0anagement re ers to deposits, loans and advances, investments regulators management o

borrowings ore? reserves and

capital, keeping in mind the capital ade(uacy norms lay down by the authority. It can acilitate decision on ollowing issues.

!. ;ata warehousing system with the help o online analytical processing system that is 0icroso t analysis services and 0icroso t BN6 server which are used in analyzing asset liability across various dimension namely branch wise, zone wise, branch category wise, general ledger group wise, size wise, contractual period wise, residual period wise, interest rate wise. #. 4stimating the main source o unds namely core deposit, certi icate o deposit and call borrowings. $. Reducing the >') between the rate sensitivity asset and rate sensitivity liability. 5. Reducing maturity mismatch to avoid li(uidity problem. 8. 0anaging the und with respect to critical actors like size duration. 9. This system enables the top management to identi y margin and pro itability and risk associated with each o Hith all these precautions e ective can be achieved very soon. the the product.

0anagement o 'sset and liability

K.L.E.Ss I.M.S.R Hu !i

59

ANDHRA BANK
RE.ULATORS DIRECTIVE TO BANK The B'B46 :C00ITT44 o banking supervision is a committee o banking supervisory authority which was established by the :entral Bank governors a group o !+ countries in the year, !",8. It consist o senior representative o Bank supervisory authority and central Bank rom Belgium, *rance, :anada, >ermany, Italy, 6u?embourg, /etherlands, Bweden, Bwitzerland, Fnited Iingdom and Fnited Btates. It meets at the Bank o international settlement [BIB] in Basel where the permanent document on principles o management and supervision o interest rate risk accordingly another our principles are added to the earlier principles o management and supervision o interest rate risk then above principles are base or orming 'sset 6iability 0anagement guidelines or :entral Bank all over the globe accordingly RBI issued guidelines to Bank and asked them to implement the 'sset 6iability 0anagement system rom ! 'pril !""".'s per these guidelines Bank are re(uired to submit the maturity pattern o 'sset 6iability in prescribed ormat. 'sset liability 0anagement statement are drawn as under !. 0aturity structure o cash in low and cash out low .It is called as statement o structure li(uidity. #. Btatement o interest rate sensitivity. $. Btatement o short term dynamic li(uid to monitor li(uidity on dynamic basis over a time horizons spanning rom ! to "+ days. 5. 's per B'B46 II norms and as per RBI guidelines Indian Bank will re(uire to have analytical system, model and tools in place or risk management, measurement and control.

K.L.E.Ss I.M.S.R Hu !i

5,

ANDHRA BANK
#RO#OSED ARCHITECTURE O" ASSET LIABILITY O" BANK ;ue to various emerging risk and drastic variation in actors a ecting risk in modern technology driven environment Bank and inancial needs and in3depth analysis o 'sset 6iability 0anagement problems like globe inancial system in general and Bank in particular are acing increased risk rom various sector both internal and e?ternal there ore there is a need to use sophisacated analytical tool e ectively using the :onsolidated data that helps in making decision to improve the overall >rowth o the Bank. The Indian Bank have large number o branches scattered throughout the country. 4arlier entire banking business including management the control o branches used to be manual due to advent o technology Bank are slowly getting connected to the network thus converging to a completely connected network o all branches o the Bank. The process o asset liability can be divided into ollowing modules they are. !. ;ata collection #. :onsolidation $. Reporting 5. 'nalysis 8. ;ecision making 9. Reviewing ,. *eedback -. 0onitoring and control

K.L.E.Ss I.M.S.R Hu !i

5-

ANDHRA BANK
To prepare an 'sset 6iability management statement maturity pattern o asset liability as inancial year ends branched maintain due date and dairy o both deposit and advances rom these dairy branches has to be complete and calculate type wise calculation o deposit and advances and tally with grand total igure so as to arrive at branch wise position o in low and out low o unds as per the )er orma and send it to the regional o iceO zonal o ice. 't head o ice all the regional zonal statement are completed and consolidated. To arrive at whole picture o other Bank thus complete process normally takes 58 days to arrive at the inal igure o the balance sheet and pro it and loss statement to be presented to board o directors and shareholders

K.L.E.Ss I.M.S.R Hu !i

5"

ANDHRA BANK
HO/ ASSET LIABILITY MANA.EMENT IS IM#LEMENTED IN ANDHRA BANK The implementation o 'sset 6iability management is ensured through an e?clusively constituted 'lco committee consisting o top unctionaries in bank as its 0ember .The committee undertakes the responsibility o identi ying Bank Hise and its (uanti ication dra ting, risk management strategy and developing alternative in scenario selecting a right model a ter selecting 0C/TC :'R6C simulation and monetary earning spread and initiating mid course correction i any to achieve targeted pro it to make 'sset 6iability management more e ective and big Bank have constituted three sub committee each assigned with speci ic responsibility as under.

K.L.E.Ss I.M.S.R Hu !i

8+

ANDHRA BANK
CREDIT MANA.EMENT RISK This committee is responsible or dra ting bank credit policies and e?posure limit pricing strategies estimating de ault risk and monitoring and managing credit policy risk

INVESTMENT MANA.EMENT COMMITTEE These committee dra ts investments policies ensure design mi? o 0aturity and yield pattern o investments port olio and runs a bank investments port olio

K.L.E.Ss I.M.S.R Hu !i

8!

ANDHRA BANK
LIABILITY MANA.EMENT COMMITTEE This committee is responsible to satis y li(uidity demand position o the Bank to evaluate cost o various money market instruments and there it in the Bank pro7ected balance sheet and to ormulate management policies and review it periodically .To stay tuned with market happening ultimately the 'sset 6iability :ommittee has to undertake the overall responsibility or directing ac(uisition and allocation o unds to ma?imize earnings.

K.L.E.Ss I.M.S.R Hu !i

8#

ANDHRA BANK
ASSET LIABILITY MANA.EMENT AND ITS DE#ENDENCE ON HUMAN RESOURCES /o tools however e icient it may not unction on its own .It needs people to operate more than that it needs leaders to de ine mission, set goals and design a process through which tools can be operationalised to deliver services and make pro its.Bank need transparent leadership that nurtures best possible culture where risk management almost becomes a way o li e. 4 ective implementation o 'sset 6iability there ore ask or the right mi? o leadership, loyal people to manage various unctions, right organization culture and sound knowledge o risk across the hierarchy.

K.L.E.Ss I.M.S.R Hu !i

8$

ANDHRA BANK B'n,in) on Hu*'n R&sourc&s

4 ective implementation o 'sset 6iability becomes simple i people engage in it right rom chairman to clerk to branch manager to cooperate manager 'lco members to board o manager can also internalize a well designed system o risk identi ication, monitoring and its management or generating architecture pro it in this conte?t leaders have a critical risk in articulating the corporate mission to the sta s in making them earn it as they were personal goals to begin with 'lco members must share there perception, reservation, enthusiasm over the policies contemplated or the implementation. to better the decision making process till the decision is arrived as every member has the right to discuss the issue said there but once the decision is taken they must also burry there di erences and align with themselves to the chosen policies or the e ective implementation. In an dynamic and a competitive world an open communication system across the hierarchy alone paves the way or success ul implementation o 'sset liability management .6eaders should encourage in ormal way o interaction with its members as it is known to provide an oppournity to the individuals to create their own in ormal words in their own culture and values in which they can ind irm anchor to maintain stability while constantly ad7usting themselves with changes asset liability management demands such cooperation amongst the sta is certain to generate team spirit which is imperative or implementing asset liability management success ully.

K.L.E.Ss I.M.S.R Hu !i

85

ANDHRA BANK

The bank should attempt to sketch personality pro ile o the employees who are to be assigned with the risk management o ollowing 6ines

!. )hysical status #. 6i e style $. 6ivelihood

K.L.E.Ss I.M.S.R Hu !i

88

ANDHRA BANK
THE IM#ACT O" INTREST RATE RISK ON BANK BALANCE SHEET IN INDIA 'mong various types o risk acing a bank on regular basis interest rate risk which is associated with the movement in interest rate has been very much discussed and debated by bankers in India and abroad. It is primarily due to the highly violate nature o interest rate risk .The study is divided into ollowing our section

K.L.E.Ss I.M.S.R Hu !i

89

ANDHRA BANK
SECTION K I 4?plains the concept o interest rate risk and it urther elaborates hardening on the balance sheet o Bank in India. on the need to

hedge interest rate risk this also gives an account o the impact on interest rate

SECTION K II 4?plains the dynamic o price yield [interest rate] relationship a i?ed income securities the mathematical concept o duration modi ied duration conve?ity and price value basic point [)M;)]

SECTION K III It is devoted to how hedging is done to o set interest rate risk

SECTION K IV Is the conclusion where the account o Indian e?perience in hedging rate is given

K.L.E.Ss I.M.S.R Hu !i

8,

ANDHRA BANK
CATE.ORISATION O" BANK BALANCE SHEET

To understand the li(uidity risk in ull we have to know and understand the various 'sset and 6iability iguring in the balance sheet. The asset iguring in the balance sheet are loan and advances, investments :urrent account balance with RBI and other asset on liability side we have deposit, borrowing, other liability and provision, capital reserves and surplus.

K.L.E.Ss I.M.S.R Hu !i

8-

ANDHRA BANK
CONCE#T O" "LO/ AND TIME BUCKETS 'sset bring in cash low through repayment o interest and principle 6iability results in the unds going out o the Bank in the orm payment o principles and interest. Thus asset results in cash in lo and 6iability results in cash out low. 'ggregation o cash in low rom asset and cash out low rom liability at the bank level is needed to assess the li(uidity and interest rate risk inherent in the balance sheet or most o the items o asset liability in the balance sheet the data is available at apple? level the two items rom which in ormation is re(uired rom branches are deposit and advances .The uture cash low or these two heads are 4stimated through there residual maturity. Residual maturity means uture installment o interest and principal due either or payment in respect o deposit or or receipt in respect o loans. 'll the cash in low and cash out low resulting rom asset and liability are put in di erent time buckets. The time buckets are prescribed by RBI and are uni ormly applicable to all Bank. The time buckets used are shown in structural li(uidity statement given below.

K.L.E.Ss I.M.S.R Hu !i

8"

ANDHRA BANK

)'RTI:F6'RB E2EGd E@2 ;Cd 9!$ -5" ,8# 3", 3,! ;Ld2 D* !-$8 #-+9 #!+8 3,+! 3,,# D* 2=* !-8$+"" #9$9 359$ 3!#$8 =*2 E;* #$, #,"" #9$+ 3!9" 3!5+5 E (&'r 2D(&'rs #99+! -,"-+$9 3!+,9# 3!#!99

D(&'rs to @(&'rs $,#" 5+"# 55-! $-" 3!!,,,

M@ (&'rs !!,# 5"+$ !98+! !!8-" 3!,"

tot'!

Term deposit Total out low <a= Total in low<b= /et gap <b3a= :umulative gap ;eposit <d=

-8! $5!5 $55+ #9 #9

!"+$+ 5+,9+ 5+8-! 3!," VV

K.L.E.Ss I.M.S.R Hu !i

9+

ANDHRA BANK

Fnder deposit since saving bank and current account are payable on demand they are urther classi ied into volatile and core portion. )osition represents the amount which may be with drawn and the :ore portion represents that the portion that shall e?plain with the bank. RBI has prescribed !+. in case o savings bank and !8. in case o current 'ccount deposit likewise asset side in respect o cash credit O overdra t loans Bank should arrive at core and volatile position based on avaliament portion. Molatile portion is to be itted in shorter time buckets and the core )ortion in ! to $ years buckets.

K.L.E.Ss I.M.S.R Hu !i

9!

ANDHRA BANK

MISMATCH O" "LO/ AND STRUCTURE LIHUID STATEMENT The in ormation rom residual maturity pro ile statement received rom the branches and the uture cash in low and out low o other asset and liability at head o ice are all consolidated and statement o structural li(uidity is prepared. 'n e?cess o in low over out low indicates positive mismatch and an e?cess o out low over in low indicates negative mismatch .:umulative positive mismatch indicate shortage o li(uidity .The above report indicates that the Bank have positive cumulative mismatch only i the irst times bucket o ! to !5 days in the entire remaining time bucket it has negative cumulative mismatch indicating shortage o li(uidity. These statement are prepared once in the ortnight basis and placed be ore 'lco :ommittee ormed at an apple? level consisting o top e?ecutive 'lco goes through the statement and suggest the way to manage li(uidity i li(uidity shortage is e?cess they will practically ocus on li(uidity position within the short term.RBI stipulates that the mismatch in the time bucket up to #- days should not e?ceed #+. o the cash out low in the each time bucket .'ndhra Bank has set a

K.L.E.Ss I.M.S.R Hu !i

9#

ANDHRA BANK
tolerance level or each o time buckets based on e?pererience or occurrence o mismatches in various time bands

LIHUIDITY MANA.EMENT The logical step that ollows a ter li(uidity statement analysis is li(uidity management the (uestion the Bank should ask is as ollows

!. Is the li(uidity mismatch

positive or negative

or a period under Bank

consideration within the tolerance limit as per li(uidity policy o

#. I not what are the strategies to be employed to ensure the li(uidity is within the manageable limits and sometimes i mismatches are with in tolerance but 'lco may still implement strategies to take advantage o prevailing market condition to get ma?imum bene its $. Typical strategy employed in li(uidity management are availing re erence rom various sources securitization and asset sale obtaining time o credit rom other institutions support rom parents canvassing bulk deposit and market borrowings In case o positive mismatch indicating surplus li(uidity strategy should be involved to deploy und 7udiciously or ma?imization the result .'lco also analysis each one o the strategy in terms o cost and intended

K.L.E.Ss I.M.S.R Hu !i

9$

ANDHRA BANK
bene its be ore employing strategy or mismatch management. Besides managing li(uidity on day to day basis. 's per RBI re(uirements o all Bank have to draw a contingency *unding plan to manage stress scenario and to withstand prolonged adverse li(uidity crises.

' contingent und plan [:*)] is cash low that pro7ects the und needs and unding sources. The li(uidity crises may occur without warning. Bank in such situation should appear organize and e icient to the public. 1ence contingent und plan [:*)] should speci y how to handle administrative matters in the crises contingent und plan [:*)] o a bank should be commenced at with the Bank comple?ity activities risk e?posure products and organizational structure.

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95

ANDHRA BANK

ASSET LIABILITY MANA.EMENT Buccess ul implementation o 'sset 6iability process calls or

setting o limits or negative mismatch or cash low or various time bands taking into account the e?perience gained over past trends .4very Bank should have asset liability committee comprising o Bank Benior representative like chair man and managing director that is responsible or ensuring adherence to limits set by the board and deciding on the strategy to be adopted or managing li(uidity optimally. In addition they should set an asset liability management support group consisting o operational sta desired orm. INTREST RATE RISK MANA.EMENT Bank mainly per orms basic two unctions accepting deposits and creating asset through investments and loans. In this process they assume 6iability and create 'sset which are o di erent maturity, size and carry di erent prices i.e. interest rates. That is to say asset and liability mature or all due or reprising at di erent point o time or collection, consolidation and providing in ormation to 'lco in a

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ANDHRA BANK
.1ere by reprising we mean application o resh interest rates prevailing at the time o maturity o deposit or an asset .6et we take an e?ample o granting a loan <asset= Repayable in 8 years by using unding rose rom ! year deposit <6iability= .'t the end o ! year the deposit will have to be reprised at higher or lower price prevailing then, while the loan will continue to provide loans <8 years= and the deposit <! Lear=. I the interest rate increases by the time the deposit matures, Bank will be able to canvass resh deposits re(uired to unding the loans only at the higher interest rate .This will result in the reduction in the interest spreadW this in turn a ects the /et Interest Income </II= o the Bank. Interest rate risk management is nothing but e?tending the above analogy to all the interest rate sensitive items in the balance sheet and working out the impact on net interest. i?ed return rom the remaining period o our years .That is to say There is a reprise mismatch between the

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METHODS O" MANA.IN. INTREST RATE RISK Interest rate risk is managed using the ollowing methods != $= >ap analysis or traditional gap method Bimulation method

#= ;uration gap analysis

TR';ITIC/'6 >') 04T1C; It is most common method used in Bank at present or measuring the interest rate risk .The bulletin will con ine itsel to e?plaining in detail the traditional gap method .In this method the *ollowing steps are

!. :ategorization o balance sheet items into rate sensitivity 'sset and rate sensitivity liability. #. )reparation o rate sensitive asset < that it is itting the rate sensitivity asset and rate sensitivity liabilities into various times buckets= $. Taking a stand on the uture movement o interest rates in a i?ed .Time horizon usually one year. 5. 4stimating the impact o assumed movement in interest rate on the /et Interest Income.

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RATE SENSITIVE ASSET AND LIABILITY Balance sheet consists o rate sensitive and non rate sensitive 'sset or 6iabilities. 'n 'sset or 6iability is classi ied as rate sensitive i during the time rame and consideration !. There is cash low #. Interest rate gets reset or reprised $. RBI changes the interest rates that is in case where the interest rates are administrated <BB, ;IR, 4X)CRT R4;IT and :RR B'6'/:4 4:T=. R4*I/'/:4,

CATE.ORISATION O" BALANCESHEET ITEMS. The entire balance sheet items are grouped into rate sensitive asset rate sensitivity liabilities by applying the above rules. Those that do not ul ill the criteria are categorized as rate non sensitive 'sset and 6iability. He are urnishing below how balance sheet 'sset and 6iabilities are categorized based on interest rate sensitivity.

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#RE#ARATION O" RATE SENSITITY STATEMENT The asset and liability a ter categorization into rate sensitive and rate non sensitive segments such as e?plained above are put under various time brackets based on cash low maturity pattern. He thus have under each time bracket data representing the cash low amount reprised both in respect o asset and liability .The summation o items given in asset side gives total rate sensitive assets. Bimilarly summation o items given in 6iability side ahead gives total rate sensitive liability .The di erence between two is called reprising gap or rate mismatch gap. I rate sensitive assets e?ceed rate sensitive liability it results in positive mismatch and Reverse rate sensitive liability e?ceeds Rate sensitive assets results in negative mismatch .6et we take the balance Bheet o Bank with hypothetical data and e?amine how the reprise gaps Impact net interest income let us take the irst time bucket o + to ! month. He can see the rate sensitive asset <'= e?ceeding the rate sensitive liability <B= by RB !++ cores<:=. I interest rate during the time horizons rise both or asset and liability Bank /et Interest Income will increase to the tune o RB !++ :orers will be priced at higher interest rates contrarily in the case o ! 0onth to $ months to 9 months time horizon risk sensitive liability <B= e?ceeds risk sensitive asset <'= .In these time horizons i interest rate rises both the asset and liability will have negative impact on /et Interest Income since liability to the tune o !++ and #++ corers will be reprised at the higher interest rate .Thus the /et Interest Income is determined by size o mismatch gap and e?tent o adverse change in interest risk

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INTREST RATE SENSITIVITY STATEMENT IT40B ASSET :ash ;eposit Bank Investments 6oans )remises Total <'= LIABILITY :urrent deposits Baving deposits Term deposits Borrowings Cther liabilities Total <B= +3 !0 Hith #+ !-+ !#++ !++ $++ !5++ 5++ -+ $#+ 5++ !++ 5++ 8++ 8++ 9++ !!++ 9++ 9#+ -#+ -++ !++ 5++ !++ $++ #++ 8++ 8++ 3!++ #++ #++ $++ #++ #++ "++ !++ ,++ !9#+ 3!+++ !03 $0 T$03 90 T903 !L T!L /C/ B4/BITIM4 #+ #+ #+ -9+ #9#+ "++ 55#+ -#+ "++ !$++ ,++ ,++ 55#+ TCT'6

!$++ 9++

I/TR4BT R'T4 R!++ 3#++ B4/BITIT4 >') : <'3B= :F0F6'TIM4 >') R!++ 3!++

3#++

R!++

R!+++

IM#ACT O" RE#RICIN. AND INTREST RATE CHAN.E ON NET INTREST INCOME He can calculate impact o assumed increase in interest rate <!.= Income by making ollowing assumptions on /et Interest

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!. Reprising o asset and liability are evenly spread across time buckets #. 0idpoint in each time buckets is taken as a time or which the Interest rate changes are e ective $. 'dverse or avorable impact on /et Interest Income resulting rom interest rate continuous to be same during the remaining period o horizons The absolute amount o /et Interest Income loss based on the above assumptions can be worked out as ollows or each o the time buckets per ormance

I downward movement o interest rate is predicated in the planned time horizon we can work out the impact o such changes on the /II by applying the same ormula as e?plained above or the di erent times buckets and arrive at the net impact. He can also decide on shorter time horizons like (uarterly or hal early based on the volatility o interest rate in the market and accordingly work

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out the impact on /et Interest Income. He can thus summarize the e ect reprising gaps and interest rate change on net interest income in the orm o the ollowing table

>') )CBITIM4 )CBITIM4 /4>'TIM4 /4>'TIM4

I/TR4BT R'T4 :1'/>4 I/:R4'B4 ;4:R4'B4 I/:R4'B4 ;4:R4'B4

I0)':T C/ /II )CBITIM4 /4>'TIM4 /4>'TIM4 )CBITIM4

1ence Bank have to i? limits on both individual and cumulative reprising gaps to e ectively manage their adverse impact on /et Interest Income .Traditional gap method involves targeting particular /et interest income or the chosen time horizons and i?ing limits on >aps in various time band 'ccordingly. The policies and product are so ormulated so as to help in achieving pro7ected /II. In addition to those money market instruments and derivative products will also be used to bring in desired change in the gap pro iles. >ap management

Involves ad7ustment o gaps to achieve desired inancial goals in anticipation change in interest rates. I rates are e?pected to raise the >ap can be widened to take advantage o anticipated returns in 'sset Lield. I rates are e?pected to all the gap can be narrowed to take advantage o anticipated lower liability costs. The traditional gap analysis does not capture the impact o embedded options that is <the customers e?ercising the options

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to close the deposit be ore maturity or prepay the loan and advance availed= on the interest rate risk pro ile o Bank. The magnitude o embedded options risk at times o volatility in market interest rate is substantial .Bank should there ore evolve suitable mechanism supported by empirical studies and behavioral analysis estimates the embedded option in the asset and liabilities.

BEST #RACTICES O" ASSETS LIABILITY MANA.EMENT It can be diversi ied as a continual process o arranging and rearranging o ma7or items o the both side o balance sheet remain pro itable provided service meet mission and not to take undue risk. In other words it is how much we decide and how much we have to pay or our unds how long do we commit to our member O creditor and at what rate and what do we do with this und or what kind o loans or other

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investments do we make how much money will we use by investing in i?ed asset and how much o cushion will we maintain.

.OALS 'ny 'sset 6iability plan to be success ul we have to concentrate on the *ollowing items they areJ !. Ieeping the advance in an pro itable way #. 'nticipating li(uidity needs

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$. Ieeping good spread 5. >ap management 8. 0inding the gap that is di erence between rate sensitive asset and rate sensitive liability or a given period

/HAT RISK /E CAN MANA.E He can manage the ollowing risk they are !. :redit rate risk #. Interest rate risk $. 0arket risk < bad investment=

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>ood 'sset 6iability 0anagement is something we need to do on an on going base .It is 7ust like driving a car thing constantly change around you that is our economic environment and we need to be le?ible to respond .In other words driving or managing our advances in a per ect way Bo that the situation will not lead to disaster

HO/ TO MANA.E THE .A# This is easy to do once you plan it up it is easier i proper electronic spread sheet is used that is e?cel the spread sheet is designed to allow you to list your asset and liability and de ine them as either rate sensitive or not .I they are rate sensitive you break out the asset and liability by its maturity or turnover rate sensitive means asset and liability is a ected by outside interest rate core share are not rate sensitive. :ore

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share are those savings that would stay with you even i you reduce the dividend rate to zero. 'sset and liability management is not to gamble but to hedge. *inally to take care o asset and liability management ormation o 'lco is recommended it can be made o key sta members, board members etc. committee should meet regularly and prepare the gap spreadsheet committee should recommend to management based upon analysis o spread sheet and other actors and evaluation

TOOLS AVALIABLE "OR ALCO

!. The gap spreadsheet #. C ering replicable loan $. 'd7ustable rate

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5. Belling loans to secondary market to minimize interest rate risk and improve li(uidity 8. )romoting regular savings 9. Trend analysis ,. Ratio analysis [ratio o loans to advance] -. Ieeping a line o credit at your disposal

/HAT DO YOU MEAN BY LIHUIDITY 6i(uidity is able to meet the cash needs share withdrawals making loans ect. The important thing in asset liability management is to match the source o unds [deposit] with uses [loans]

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IN"ORMATION AND #OLICIES In order to achieve stable net interest margins optimal earnings and ade(uate li(uidity control o inancial risk and the in ormation base in the bank has to be strong and sound. The in ormation re(uired is past , present and pro7ected data on Bank asset and liability port olio including pro7ected additions maturity and reprising Bank have to

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take care o changes in Bank balance sheet caused by the customers& decision to repay the loan withdraw there deposit be ore maturity and Trans er there business to other Bank that has bearing to asset liability )osition.

RISK MANA.EMENT SYSTEM Bank should accurately measure and control market risk in view o increasing market risk. In banking operations hence recommendations o those Bank should have in place well structured risk managing system This should include measuring risk, controlling risk and monitoring risk this will help bank to attain desired res Bank risk e?posure depends upon volatility o interest rate and asset prices in the inancial market and the Bank maturity gap in the management o Bank asset and liability .Interest risk management lies a good management oundation asset liability

RISK ANALYSIS AND MANA.EMENT Interest rate risk can be analyzed in our methods !. >ap analysis #. ;uration analysis

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$. Malue at risk 5. Btimulation

#OLICIES ISSUES Btrengthening o in ormation technology in Bank would be an important )re re(uisite to implement asset liability management system in Bank every inancial structure or commitment has implication or Bank li(uidity. ' proper li(uidity management would help the management in ormulating the business strategy in Bank with international pressure treatment o asset liability in multiple a currency adds yet another layer o :omp 'lco is more power ul body in asset liability management ramework. 1ence or taking business decisions the board o Bank depends on recommendation o 'lco

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"INDI.S AND ANALYSIS

"INDIN.S !. 'lmost the 'ndhra bank assets are matched with the liability Thereby leaving no gap #. Better measures o internal rate o return can also be had by 6inking gap to net interest income o the Bank

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$. Bank deploy their unds to optimize their revenue while 0aintaining their li(uidity 5. The bank pre er book liability and then look or deployment o *unds 8. The bank usually manages liability in time with asset already Identi ied thus overcome the risk o idle liability 9. 4ven though proper mismatch is done the chances o 'sset not paid on maturity may e ect the bank. been

RECOMMENDATIONS In liberated inancial markets Bank 'sset and 6iability variations are in luenced by interest rates and e?change rate voliability.The :ompetitive environment in banking industry due to liberisation has added pressure to the importance o management Bank to manage not only credit risk but various type o inancial inancial risk

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including interest rate, e?change rate, li(uidity settlement and trans erable risk to ma?imize pro it and minimize risk .In other words to put the risk management system in place strong and dedicated risk management system is re(uired. !. 'sset liability and o balance sheet risks #. In ormation and scienti ic risk management techni(ue $. ;edicated asset liability management committee 'sset liability management has a mean o risk management techni(ue is an important unction in bank. It ocuses on how various unctions o the Bank is ade(uately and well coordinated essentially covering planning, directing and controlling o the level o changes and mi?es o various balance sheet account. In asset liability management Bank is concerned with management o market risk consisting o !. Interest rate risk #. *oreign e?change risk $. 4(uity price risk 5. :ommodity price risk

'sset liability management covers li(uidity management and capital planning broadly asset liability management ob7ectives is to control the volatility o net interest income and net income value o the Bank in order to achieve these results asset liability committee must be guided by policies that addresses the overall asset liability management goals and risk limit and by in ormation that relates to the asset liability position

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The inancial management structure consist o managing Balance sheet on one side and income and e?penditure on the other side .Banking industry to compete in ree market condition has to give priority or managing and minimization o the risk prevailed in banking operations. It has been observed that ailure o risk management and control system very signi icant actors or Bank ailure hence recommendation are or the success o asset liability management depends on e ective e?istence C !. In ormation and policies #. Risk management system

LIMITATION !. The study I have conducted in 'ndhra Bank <Branch= at Tra ic Island and the available material in the branch says That the In ormation is restricted to the above center only.

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#. The pro7ect is conducted based on past per ormance .'s the )ast per ormances may not be the indicator o the uture Results. $. )er ormance o the Bank mainly depends on the >overnment policies in respect o investment and In rastructure development 5. 4ven though proper mismatch is done the chances o 'sset not been paid on maturity may e ect the Bank.

CONCLUSION
The 'ndhra Bank re(uire sophisticated analytical tool or in depth analysis o asset 6iability management which helps in managing their asset and liability. There are number o models or doing analysis or e ective results. 's per 'lco

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recommendations, Bank have to decide which model helps them based on the architecture o their branches .It is recommended that analysis be done based on basic model that is gap analysis as the start up or 'nalyzing the position o Bank .'s e?pertise go one can adopt high end 0odels like B) models or analyzing the uncertainty actors and validate to suit there goals. The braches which provide the database or asset liability management should be provided with eedback or the statement generated at the head o ice or better results and per ormance. The 4 icient per ormance o every branch is important or the overall asset 6iability management o the entire Bank. 'voiding the gap in literal terms may not be possible or all the Bank. >iven the constraints o the Bank that they operate at, Bank could manage to e ectively minimize the >ap.

BIBLIO.RA#HY

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!. 'sset liability in 'ndhra bank #. risk measurement in bank $. treasury management 5. www. Indianin oline.com 8. 'ndhra bank website 9. 'nnual report #++93 #++, o 'ndhra bank

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