Management of Assets & Liabilities of a Commercial Bank


Presented By: Pratik Rawat Nandkumar Khengate Anish Prabhu Pratheesh Kumaran Pranav Joshi

c) Credit Creation & d) Agency Functions ‡ These banks collect money from those who have it to spare or who are saving it out of their incomes. . and it lends this money to those who require it for the purpose of making profit. b) Advancing Loans.About Commercial Banks ‡ Commercial Banks are those banks which performs all kinds of banking functions such as: a) Accepting Deposits.

Balance Sheet of a Commercial Bank Capital and Liabilities 1) Capital i) Authorized Capital ii) Issued Capital iii) Subscribed Capital iv) Called-up Capital v) Paid-up Capital 2) Reserve Fund and other reserves 3) Deposits and other accounts 4) Borrowing from other banks 5) Bills for collection being bills receivables 6) Acceptances. endorsements and other obligations as per contra 9) Fixed Assets . endorsements and other obligations as per contra Property and Assets 1) Cash in hand and with Central Bank 2) Balance with other banks 3) Money at call and short notice 4) Bills Discounted 5) Investments 6) Advances 7) Bills for collection being bills receivables as per contra 8) Acceptances.

Therefore. implementing.Asset ² Liability Management (ALM) ‡ Asset Liability Management is the ongoing process of formulating. . it can be considered as a planning function for an intermediate term. monitoring and revising strategies related to assets and liabilities in an attempt to achieve financial objectives for a given set of risk tolerances and constraints. ‡ ALM is the 1st Step in the long term strategic planning process.

. 3) Determine and attribute interest-related profits to individual assets and liabilities.Need of ALM ALM focuses on following 4 challenges: 1) Understanding the risk that a bank is exposed to due to the composition of its assets and liabilities. 2) Forecast the future composition of the bank s balance sheet and its risk exposure. 4) Forecast capital requirements and manage the balance sheet in a way to maximize shareholder value. business units or activities through Funds Transfer Pricing.

mgmt reports 2) Assessing the bank s ability to meet liquidity needs . with focus on funding and liquidity management aspects has to be looked into. Step 2: It is to be determined that whether bank management adequately assesses and plans its liquidity needs and whether the bank has short-term sources of funds. Step 3: The banks future development and expansion plans.Procedure of ALM Step 1: The bank/financial statements and internal management reports should be reviewed to assess the asset/liability mix. Total liq ty Position Current liq ty Position Ratio of NPA to TA Ratio of loans to deposits 5) Ratio of short term demand deposits to total deposits 1) 2) 3) 4) 1) Review of int.

Procedure of ALM Step 4: Examining the bank s internal audit report in regards to quality and effectiveness in terms of liquidity management. Step 6: Preparing an Asset/Liability Management Internal Control Questionnaire. Step 5: Reviewing the bank s plans of satisfying unanticipated liquidity needs. .

Sound liquidity risk mgmt. to compensate for expected & unexpected balance sheet fluctuations and to provide funds for growth. Liability Management ‡ ‡ Liquidity is essential in all org. should address both internal and external factors.Asset²Liability Management Approach 1) Liquidity Management: Liquidity Management ‡1) An organisation has sufficient liquidity when it 2) can obtain sufficient funds either by increasing Asset Management liabilities or by converting assets promptly & at a 3) reasonable cost. .

‡ The importance of asset management is to determine how saleable the banks assets are in terms of both time & cost. management must carefully weigh the full return on liquid assets against the higher return associated with less liquid assets. ‡ To maximize profitability. .Asset²Liability Management Approach 2) Asset Management: ‡ Liquid Assets enable a bank to provide funds to satisfy increased demand for loans.

Asset²Liability Management Approach 3) Liability Management: ‡ Liability needs can be met through the discretionary acquisition of funds on the basis of interest rate competition. . ‡ Marginal cost of liquidity & the cost of incremental funds acquired are of paramount importance in evaluating liability sources of liquidity.

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