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Asset Liability Management


Submitted towards the partial fulfilment of two year, full time Post Graduate Diploma in Management 2011-13 Jagan Institute of Management Studies




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This is to certify that the project work done on (Asset Liability Management) is an original work carried out by Ms. Alisha Sidana under my supervision and guidance. The project report is submitted towards the partial fulfillment of two year, full time Post Graduate Diploma in Management.

Her performance, during the project was Satisfactory / Excellent.

Ms. Anju Thakur DGM (Finance) Date:

Dr. SudhanshuVerma

Alisha Sidana Roll No. FC11123


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This is to express my earnest gratitude and extreme joy at being bestowed with an Opportunity to get an interesting and informative project. It is impossible to thank all the people who have helped me in completion of project, but I would avail this opportunity to express my profound gratitude and indebtness to the following people. I am extremely grateful to my project guide and mentor Dr.SudhanshuVerma who has given me an opportunity to work on such an interesting project. He proved to be a constant source of inspiration to me and provided constructive comments on how to make this report better. I would also like to thank my Industry Guide Ms.Anju Thakur, Ms.ShefaliSarin, Dr.Vivek Gupta, Mr.Godwin Dan Toppoand Mr.VedPrakashwhose constant encouragement kept me in good stead. Lastly without fail, I would thank all my faculties for providing all explicit and implicit support to me during the course of my project.

Alisha Sidana FC11123 PGDMC


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S No. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16.

Particulars Preface
Executive Summary Introduction HUDCO at Glance Objectives of Study Literature Review ALM Introduction Risk Managed in ALM ALCO Research Methodology Analysis of data Findings Recommendations Limitations Conclusion Bibliography

Page No.
5 6 7 16 29 30 34 38 47 52 53 62 64 66 67 68


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MBA is a stepping-stone to the management carrier and to develop good management skills, it is necessary that the theoretical knowledge must b e s u p p l e m e n t e d w i t h exposure to the real environment. T h e o r e t i c a l k n o w l e d g e j u s t p r o v i d e s t h e b a s e a n d i t s n o t s u f f i c i e n t t o produce a good manager thats why practical knowledge is needed. Therefore, the internship project is an essential requirement for the student of M B A . T h i s p r o j e c t r e p o r t n o t o n l y h e l p s t h e s t u d e n t t o u t i l i z e h i s / h e r s k i l l s properly, learn field realities but also provides a chance to the organization to find out talent among the budding managers in the very beginning. In accordance with the requirement of MBA course, I have taken the topic Asset Liability Management as my summer training project at HUDCO. We have elaborated and analyze thoroughly about strategic articulation and implementation of assets and liabilities to avoid liquidity and interest rate risk. During the working of project report, I have learnt about the business strategies and policies implementation in a company. The information regarding the project is secondary in nature and collected from the company, books, journals and internet. W o r k i n g o n this project report helped me understand the concepts of the subject more clearly and properly.


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Executive Summary

ALM as a concept is gradually gaining importance in the Indian scenario. The Asset Liability Management (ALM) process in a Financial Institutions is multidimensional in nature. It is the art of ensuring that the maturity profiles of assets match that of liabilities and combines the techniques of asset management, liability management and spread management into a cohesive process leading to an integrated management of the total balance sheet. The process of ALM will differ from FI to FI and the success of the technique depends upon how effectively banks are able to forecast and manage the risks they carry and are exposed to. Efficient liquidity and interest rate management are the two important activities of the banks and financial institutions in maximizing their income while controlling the risk exposure. The deregulated interest rate environment has brought pressure on the management of banks to maintain a good balance among spreads, profitability and long-term viability. Over the last few years, there has been an intense competition and banks have been required to take up strategic planning as an exercise for asset-liability management in order to survive and grow in the ever increasingly competitive and risky environment. The Reserve Bank of India (RBI) has implemented the Basel II norms for the regulation of Indian banks, providing a framework for banks to develop ALM policies. The present study analyses asset-liability management in banks operating in India using the asset-liability guidelines provided by the Reserve Bank of India. The primary objective of the study was to compare the maturity gaps in public, private and foreign banks in the Indian banking industry & How Asset Liability Management can be used as an important tool for managing liquidity risk and interest rate risk? ALM is based on three pillars and they are ALM Information System, ALM Organization and ALM Process. ALM brings to bear a holistic and futuristic perspective to the balance sheet management. Banks provide services that exposes them to various risks like credit risk, liquidity risk, interest rate risk to name a few. It is therefore appropriate for banks to focus on ALM when they face different types of risks.


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There are different techniques used by banks for Asset Liability Management and they are GAP analysis Model, Duration Gap analysis Model, Simulation Model and Value at Risk. In this project, Liquidity risk and Interest rate risk management of HUDCO is brought in to light. The techniques that are used by HUDCO are discussed at length. These techniques are applied and a comparison of reports of two quarters are shown in this project.


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Housing is a very large component of the financial sector, of the construction sector, central to growth of consumer durables and all the related multiplier effects of this process. It has implications for the healthy growth of the family, their optimism and investment in their children and creates an environment conducive to a positive outlook in society. A property owning democracy provides a stable platform for future growth with huge implications for society at large. Unfortunately, as a nation, India seems to have only paid lip service to this concept.


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Housing finance connotes finance (or loans) for meeting the various needs relating to housing, namely: a) b) c) d) e) f) Purchase of a flat or house. Acquisition of a plot, and construction of the house. Construction of a house. Extension of a house. Repairs, renovation and construction of a house/flat. Taking over house loans from other banks/housing finance companies.


Engine of equitable economic growth

Reduce poverty

Prevent slum proliferation

Take part in financial sector liberalization

Create and meet a growing housing demand

According to the estimates of the 11th Plan Working Group on Housing, at the beginning of the 11th Five Year Plan (2007), the aggregate housing shortage was 24.71 million dwelling units around has hovered around this mark for the past two decades. The same group has concluded that even by the end of 11th Plan (in year 2012) the housing shortage would be, up to 26.53 million dwelling units. The shortage of housing is so acute that we will have to add our entire present housing stock in the next decade to our present housing stock. In order to help meet the financial resources necessary, institutions like Housing and Urban Development Corporation (HUDCO) and Housing Finance and Development Corporation (HDFC) have been established (both in the 1970s). The former concentrating on the supply side of the market through the public sector (by lending to State Government agencies for house building initiatives for the poor) and the latter on the demand side of the market by developing the retail housing mortgage market and thus making the demand for housing effective.

Both these institutions have expanded manifold in the past decades. And albeit, combined these efforts have had an impact, they are clearly insufficient to address the present
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problems. The problem of adequate housing especially for the lower middle classes and the poor remains as frightful as ever. The current path hasnt delivered acceptable results; the initiatives need to be reconsidered, present strengths need to be used in a more concerted manner and new partnerships have to be built in order to make a significant impact on the housing problem over the next decade.







Early stage stage

Growth stage

Maturity stage


Simple segmentation + Small product range random customer segmentation

Substantial National Advertising +Measurement of sales success by key figures Less examination of Customer satisfaction

Credit process compatible to segmentation + Regular customer calls increasing defaults


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Upto late 1990s

Specialised lenders/Housing Finance companies Banks/Insurance Companies sponsored HFCS Builder promoted HFCS Company promoted HFCS


Aggressive entry of banks HFCs loose share Irrational Competition Rapid Disbursement Credit Quality Issues

2003 Onwards

Oligopolistic market share Top 3 three players have over 80% of incremental share More rational market Sustained mortgage growth at 25%


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Commercial Banks

Housing Finance Companies

Cooperative Institutions



Bank Sponsored

Insurance Companies Sponsored

Private Sector Companies

Apex Cooperative Housing Federations

State Cooperative Banks

Urban Cooperative Banks

State Coop Agri& rural bank


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Housing finance is a relatively new concept in India comparing to other financial services that are widely available in the country since a long year back. However, the speedy development in housing and various housing activities have understandably led to the growth of Indian housing finance market. As a result, a number of players have barged into the market. Here, find the list of top 10 housing finance companies in India. It was in the year 1970 when Housing and Urban Development Corporation (HUDCO) was established to finance various housing and urban infrastructure activities. However, the Housing Development Finance Corporation (HDFC) was the India's first private sector housing finance company came into existence in 1977. Since then, the housing finance in India has been flying high. It is expected to grow at a rate of 36% in coming years. As the commercial banks started expanding housing-related disbursements, the market share also started growing up. In 2000, the Indian housing finance companies accounted for 70 per cent of the disbursements, while their collective share decreased to 36 per cent within 5 years. In 2005, banks accounted for 64 per cent of the disbursements. List of Top Housing Finance Companies in India

Find below a list of some of the top housing finance companies of India:

Housing Development Finance Corporation Ltd (HDFC) Housing Development Finance Corporation Ltd (HDFC) is one of the leaders in the Indian housing finance market with almost 17% market share as on March 2010. Serving more than 38 lakh Indian customers as on March 2011, HDFC also offers customized solutions that fit to the need of the customer. In the FY 2010-11, it registered a net profit of `4528.41 crore. It also registered a net profit of ` 971 crore in the quarter ended September 30, 2011.

State Bank of India Home Finance (SBI) State Bank of India is another major player in the Indian housing finance market with 17% of the market share, same as HDFC's share as on March 2010. The SBI Housing Loan schemes are specifically designed to meet the varied requirements of the customers. It offers home loan for various purposes including new house/flat, purchase of land, renovation/alteration/extension of existing house/flat etc. SBI Home Finance registered a net profit of ` 24.63 crore in the year ended March 31, 2009.


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Housing and Urban Development Corporation (HUDCO) Through its Niwas scheme, HUDCO offers housing loans for the buying/constructing house/flat. Loans are also offered for renovation/extension/alteration of existing house/flat. In the financial year 2009-10 (ended on March 31, 2010), HUDCO registered a net profit of ` 495.31 crore, comparing to ` 400.99 crore of the previous year.

LIC Housing Finance LIC Housing Finance is another major player in housing finance sector in India with about 8% of market share. Promoted by Life Insurance Corporation of India, LICHFL has an extensive distribution network with a strong brand presence. Recently, the company has been awarded Consumer Superbrand 2009/10 Status by Superbrands Council. In the last financial year (ended on March 31, 2011), LICHFL earned a net profit of ` 974.49 crore, comparing to ` 662.18 in the previous FY. It also registered a net profit of ` 256.50 crore in April- June quarter of 2011.

ICICI Home Finance Company Limited ICICI is the third largest housing finance company in India with almost 13% market share. It offers various types of home loans for its customers which may have tenure up to 20 years. The home loan interest rate is connected to the ICICI Bank Floating Reference Rate (FRR/PLR). Here it can be added here that, the PLR has been increased to 17.5% from its previous rate of 17% since February 23, 2011. As on March 31, 2010, ICICI HFC has 2009 branches with an asset of ` 363400 crore. The net profit of the company rose 45.19% to Rs 233.29 crore in the year ended March 2011 compared to Rs160.68 croreprofit it earned during the previous year.

IDBI Home finance Limited Founded in January 10, 2000, IDBI Homefinance Limited has become one of the major players in the Indian housing finance market with about 4% market share as on March 2010. It offers a range of housing financial solutions to its customers including Individual Home Loans, Home Improvement Loan, Home Extension Loan, Home Loans for NRIs, Plot Loans, and Loan Against Home etc. The home loan advances of IHFL as of March 2010 were Rs 3,537 crore compared to Rs 3,089 crore in the previous year. In the financial year 2010-11, IDBI Bank registered a profit of ` 1650 crore, comparing to a net profit of ` 1031 crore in the previous financial year.


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PNB Housing Finance Limited PNB Housing Finance Limited offers a wide range of loans for purchase/construction of property to resident Indians as well as NRIs. It also offers housing finance for renovations, repairs and enhancement of immovable properties. In the last financial year (ended on March 31, 2011), PNB Housing Finance Limited registered a net profit of ` 69.37 crore, which is 3.93% more than the net profit of its previous financial year of ` 66.75 crore.

Dewan Housing Finance Corporation Limited (DHFL) Dewan Housing Finance Corporation Limited is one of the largest housing finance solution providers in India with an extensive network of 74 branches, 78 service centers and 35 camps spread across the nation. For the year ended March 31, 2011, DHFL registered a net profit of Rs 265.13 crore which is a growth of 75.9% over net profit of Rs 150.69 crore in the previous fiscal. In the quarter ended on September 30, 2011, DHFL earned a profit (after tax) of ` 71.89 crore.

GIC Housing Finance Limited GIC Housing Finance Limited, one of the leading housing finance companies in India, was initially established as GIC GrihVitta Limited on December 12, 1989. Promoted by General Insurance Corporation of India, GIC Housing Finance Limited offers extensive range of housing finance solutions to its customers through its wide network of 24 Business Centers and 3 Collection Centers across the nation. In the financial year 2010-11, GIC Housing Finance Limited registered a profit (after tax) of ` 113.76 crore. Furthermore, in the quarter ended June 30, 2011, it registered a profit of ` 1756 lakhs.

Can Fin Homes Limited (CFHL) Can Fin Homes Limited is another big player in the Indian housing finance market with an extensive network of 40 branches. It is also the first and one of the biggest bank-sponsored (sponsored by Canara Bank) housing finance companies in India. In the financial year 2010-11, Can Fin Homes Limited registered a net profit of ` 4201.6 lakhs. It also registered a net profit of ` 814 lakh in the quarter ended on September 30, 2011.


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Environment Factors affecting Housing Finance Industry


Reserve Bank of India Requirements National Housing Board Requirements


Inflation Rate Fiscal Concessions Interest Rates


Hardware & Software improvement Econometric modelling

Socio - Cultural

Increasing Population Lifestyle Changes Increasing work force


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SWOT Analysis of Industry

STRENGTH An active mainstream sector Effective regulatory framework is Extensive network of regional banKs, microfinance institutions, Co-op eratives, credit unions and regional banks.

WEAKNESS . Interest rate war persistent . Dilution in diligence on part of lenders Often seen . Increase in default rates

Increasing Urbanization sector

. Lower transaction level in realty

Housing microfinance has potential. High Switching cost involved Tax rebate on housing loan . NHBs finance assistance mainly Directed towards developed players Lower SLR and CRR leads to liquidi. Higher cost of home ownership is ty, so more loans can be offered dampening the demand.


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I.1HUDCO at Glance Housing & Urban Development Corporation Ltd. (HUDCO) is a public sector company fully owned by Govt. of India for financing of housing and urban infrastructure activities in India. HUDCO was incorporated on April 25, 1970 under the Companies Act 1956. The cardinal objective of HUDCO is to undertake housing and urban infrastructure development programmes in the country, provide long-term finance for construction of houses for residential purposes in urban & rural areas and finance or undertake, the setting up of the new or satellite towns and industrial enterprise for building material. a)Aim & Establishment of HUDCO

Towards the close of the 1960s, it was realized the need of a setting up a housing organization in the country as the availability and cost of bank credit were the prime constraints in this development. Since the banking industry, until then, was in the hands of a few industrial houses, the first major step taken to initiate change in favour of the poor was the nationalization of the banks in June 1969. However, when the then Honble prime Minister Smt. Indira Gandhi looked for ways to improve the living conditions of slumdwellers and economically less fortunate peoples, she found that while we had a host of All India Term Lending Institution such as IDBI, IFCI, ICICI etc; catering to the diverse credit and related needs of the Indian industry, there was no institution to provide housing finance to the rural and urban poor or the even to meet the credit needs of housing boards, development authorities and other urban bodies which were being setup by the State Government during the fourth Plan period. It was in this context that a decision was taken at the highest level to set a Housing and Urban Development Corporation (HUDCO) which could take a comprehensive look at the need of the sector and find workable and effective solutions. This experiment of establishing a unique techno-financial institution and the fascinating journey it undertook during the last four decades would certainly qualify as one of the key developments in this sector in the whole world. The establishment of HUDCO in 1970 as a sectoral institution for comprehensively dealing with the problems of growing housing shortages, rising number of slums and for fulfilling the pressing needs of the economically weaker section of the society was one of the significant steps in the series of initiatives taken by Government. Thus the setting up of HUDCO was aimed at accelerating the pace of construction and elimination of housing shortages and for orderly development of urban centres. The Housing and Urban Development Corporation Ltd. (HUDCO) was incorporated on April 25, 1970 under the Companies Act 1956, as a fully owned enterprise of the Government of India.
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The Article of Memorandum of HUDCO stripulates the Major Objective of HUDCO as under: 1. To provide long term finance for construction of houses for residential purposes or finance or undertake housing and urban development programmes in the country. 2. To finance or undertake, wholly or partly, the setting up of new or satellite town. 3. To subscribe to the debentures and bonds to be issued by the State Housing (and or Urban Development) Boards, Improvement Trusts, Development Authorities etc., specifically for the purpose of financing housing and urban development programmes. 4. To finance or undertake the setting up of industrial enterprises of building material. 5. To administer the moneys received, from time to time, from the Government of India and other sources as grants or otherwise for the purposes of financing or undertaking housing and urban development programmes in the country. 6. To promote, establish, assist, collaborate and provide consultancy services for the projects of designing and planning of works relating to Housing and Urban Development programmes in India and abroad.


"TO PROMOTE SUSTAINABLE HABITAT DEVELOPMENT TO ENHANCE THE QUALITY OF LIFE" HUDCO would continue to explore opportunities in related sectors for sustainable profits, which in turn will help it to further support its social objectives. Towards expanding its role in the sectors, HUDCO plans to integrate itself along the complete project finance value chain and position itself as sector expert in the identified areas. HUDCO would leverage its expertise and experience gained over the years towards augmenting its Interest based activities. HUDCO's IT strategy is also focused on the right technology solutions to meet its business objectives, including setting up an industry benchmarked integrated solution spanning HUDCO's business processes. HUDCO is poised to take upto a much more significant role in the sector by supporting the growing needs of housing and infrastructure in the coming years with the continued growth of economy. HUDCO is also committed to play its unique social role with a special focus on the needs for the economically weaker sections and lower groups.

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Position/Stage in life cycle

HUDCO was established with an equity base of Rs. 2 crore. Over the years, the Government has expanded the equity base. The present authorized capital base of HUDCO is Rs.2500 crore and paid up capital is Rs.2001.90 crore (as on 31.03.2011). HUDCO has created reserves of Rs.3519.07 crore (as on 31.03.2011). The net worth of HUDCO,as on 31.03.2011, is Rs.5520.97 crore. HUDCO has further been able to mobilize resources from institutional sources like LlC, GIC and Banking sector; International Assistance (KfW, JBIC, ADB, USAID, etc.) and market borrowings through Debentures, Taxable & Tax-free Bonds as well as through Public Deposits, taking the overall borrowings to Rs.15,778.66 crore (as on 31.03.2011). With this, the cumulative resource base of HUDCO is Rs.21,299.63crore (as on 31.03.2011)
Resource Base (As on 31.03.2011) CAPITAL BASE (AUTHORISED) Rs. 2,500.00 Cr. Paid Up Equity Capital (as on 31.03.2011) Rs. 2,001.90 Cr. Reserves (Provisional as on 31.03.2011) Rs. 3,519.07 Cr. Net Worth (Provisional as on 31.03.2011) Rs. 5,520.97 Cr. BORROWINGS (as on 31.03.2011) Rs.15,778.66 Cr.

Based on the sustained outstanding performance and profitability of HUDCO, the Government of India has conferred the status of Mini Ratna to HUDCO in 2004-05. The grant of Mini Ratna status provides for larger autonomy for HUDCO with powers to invest in equities as well as to form SPVs, Joint Ventures and subsidiaries. The major milestones in the evolutionary history of HUDCO are as follows: Year 1970 1974 1976 1977 1979 1980 1983 1985 Milestone HUDCO was established under the Companies Act 1956 with an equity of Rs..20 million Introduction of ceiling costs, revised financing pattern and cooperative housing Started Design & Development activities Funding for Rural Housing Schemes Funding for water supply /urban infrastructure schemes Funding for Shelter Upgradation Scheme Decentralization to Regional Offices Started consultancy management services, establishment of HSMI


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1988 1989 1990 1994 1995 1997 1998 1999 2002 2004 2005 2006 2006-07 2009-10 2011-12 Introduced Financing for Village Abadi Environmental Improvement Scheme Creation of Urban Infrastructure Window Started paying taxes and dividends Started financing Private Sector for Commercial & Housing Schemes Started Providing housing finance through NGOs Staff Rental Housing Program and 2 Million Housing Program Started retail financing lending HUDCO NIWAS Initiation of securitization initiatives Major increase in authorized capital to Rs. 25 billion. Accorded Schedule A status Awarded the MINI RATNA status Initiated Joint ventures Creation of Urban and Regional Planning Major Role in JnNURM Major role in Interest Subsidy Scheme for Housing for the Urban Poor (ISHUP)Affordable Housing in Partnership Scheme Substantial reduction in net NPAs, Profit after tax crossed Rs. 500 Crores.

Types of services/products given/produced

HUDCO services & product portfolio can be classified into following five categories: 1. Housing. 2. Urban Infrastructure. 3. Building Technology Promotion. 4. Research and Training. 5. Consultancy. Geographical Coverage of HUDCO HUDCO's operations have been growing consistently since its inception across the length & breath of the country. HUDCO has provided its techno financial assistance in 33 States & union territories and 1800 cities/ towns.

Loan Sanctions & Releases Cumulatively, HUDCO has sanctioned 16402 schemes involving a total project cost of Rs. 5,67,967Crores with loan component of Rs. 1,17,906 Crores. A loan amount of Rs. 37,464 Crores was sanctioned for housing schemes and Rs. 84,906 Crores for Urban Infrastructure projects. The total loan amount released is Rs. 76,526 Crores.


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HUDCO's assistance has helped in the construction of 150 Lacs residential units, about 67 Lacs sanitation units and in undertaking 1631 urban infrastructure schemes effectively improving the living conditions in the urban and rural areas. The urban infrastructure window of HUDCO, opened in 1989, has sanctioned a total of 1600 projects (Excludes sanitation schemes), contributing to the improvement in the physical quality of life of the citizens at large in the urban areas.


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Housing HUDCO has been working towards achieving the goal of housing for all. A total number 1,50,35,435 of dwelling units have been constructed across the country with financial & technical assistance from HUDCO as on date. This is the single largest contribution of any institution across the world. Loan Assistance to Individuals through HUDCO Niwas In order to reach out to the beneficiaries directly, HUDCO launched its Individual Housing Loan Window-HUDCO NIWAS in March, 1999. Cumulatively till 31st Dec 2011, loan assistance of Rs.4,464Crores has been sanctioned for over 3,83,399 beneficiaries and Rs. 3,944 Crores has also been released. However, presently HUDCO Niwas exposure is limited to bulk lending. Sanitation HUDCO has played a pioneer role in improving the sanitation conditions of the people across the country with viable & low cost sanitation options. As on 31st Dec 2011, a total number of 6687469 units were constructed or upgraded with tehno-financial assistance from HUDCO. Along with it HUDCO has implemented various action plan schemes of the Government of India such as shelter up-gradation, night shelter and integrated low cost sanitation etc. Model Village & Model Basti Schemes In commemorating the Golden jubilee of Independence, HUDCO has embarked upon the Adarsh Gram /AdarshBastiYojana through grant assistance to create model villages and slums in each State. Through Model Villages(Adarsh Gram) and Model Improved Slums (AdarshBasti) Programmes, HUDCO has provided integrated inputs of physical planning, architectural design, efficient utilization of land and appropriate technologies ensuring user participation, use of innovative /renewable sources of energy etc., with a convergence mode in all the States and Union Territories. Technology Transfer through Building Centres HUDCO has been promoting the use of alternative building materials and appropriate technologies to ensure cost-effective, environment friendly, ecologically appropriate, energy saving and yet aesthetically pleasing and affordable housing. HUDCO has supported establishment of 655 Building Centres in urban areas of which 442 are fully functional, and others are in various stages of establishment. So far (till 31st Dec 2011), total grant of Rs. 2,216.10 Lacs has been sanctioned for Urban Building Centre out of which Rs.1,679.44 Lacs have been released. During the years, these Building Centres have trained 258270 artisans in various cost effective technologies, executed works worth Rs. 1,453.07 Lacs and manufactured products of Rs. 366.69 Lacs. Capacity Building & Training HSMI is operating as Research and Training Division of HUDCO and its activities are supported by a core group of qualified and experienced professionalism from various disciplines. HSMIs efforts are directed towards capacity building for the professionals engaged in the Housing and Urban Development Sectors, including HUDCO borrowing
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agencies, local bodies, NGOs, private sector Housing Finance Institutions etc. Since inception, HSMI has conducted 1,332 programmes, which have had 33858 participants and 23 international training programmes in which 446 professionals were trained from 60 countries. HSMI is the nodal institute on behalf of Ministry of Housing & Urban Poverty Alleviation, to coordinate various training and documentation activities under Information, Education and Communication (IEC)component of SwarnaJayantiRojgarYojna. Global Networking HUDCO has developed strong strategic linkages and networks with various agencies across the world in housing & infrastructure development sectors. HUDCO has established links with International Networks such as CITYNET, SAARCNET, HABINET, and TRISHNET etc. Disaster Mitigation HUDCO has actively participated in national level rehabilitation programmes in almost all major natural calamities in the country caused by cyclones, floods or earthquakes in the nearest past through providing support to victims in reconstructing houses. Continuing on its course of extending substantial techno-financial assistance for rehabilitation and reconstruction in the aftermath of natural calamities like earthquakes, landslides, floods and cyclones, the people affected by the earthquake in Gujarat, the super cyclone in Orissa and the floods in West Bengal were benefited by HUDCO's benevolence. Design & Development Consultancy Services HUDCO has attained a high proficiency in its design and development efforts through which a large number of projects in the area of cost effective housing, environmental improvement, new town development, landscape and urban conservation including feasibility cum demand assessment studies have been undertaken. Some of the prestigious and on going projects are as follows:1. Gujarat Rehabilitation works Construction of Community Asset Buildings under MPLAD LokSabha/RajyaSabha. 2. Urban Design Study for a plot near Birla Mandir for NDMC. 3. Urban Design Study and Redevelopment plan for AIIMS Campus, New Delhi. 4. Detailed architectural, engineering design for residential and hostel components of the AIIMS Campus. 5. Pilgrimage Centre Solophok at Sikkim. 6. Plot Project for Construction and Reconstruction of facilities at Manikaran,Varanasi. 7. ICCR Campus at Africa Avenue, New Delhi. 8. Office Building for National Commission for Women, New Delhi. 9. Preparation for nomination Dossier for Red Fort, New Delhi. 10. Preparation of development plan with the focus on Tourism and Conservation for Bodhgaya, Mahabalipuram, Kanyakumari, Thiruvanmalai, Hampi, Haridwar and Rishikesh. Resource Mobilization HUDCO was established with an equity base of Rs 2 crore. Over the years, the Government has expanded the equity base. The present authorized capital base of

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HUDCO is Rs 2500 crore and paid-up capital is Rs 2001.9 crore (as on March 31, 2011). HUDCO has created a reserve of Rs 5,520.97 crore as on 31st March 2011. The net worth of HUDCO is Rs. 5,520.97 crore. Over the years, HUDCO has further been able to mobilise resource from institutional agencies like LIC, GIC, UTI Banking Sector, International Assistance (Kfw, JBIC, ODA, ADB, USAID etc.) and market borrowings through debentures, taxable and tax-free bonds as well as through public deposits taking the overall borrowing to Rs. 15,778.66 crore. JAWAHARLAL NEHRU NATIONAL URBAN RENEWAL MISSION (JNNURM)

The JNNURM was launched by Government of India in December 2005 which aims to encourage cities to initiate steps to bring about improvement in the existing service levels in a financially sustainable manner. The Mission was launched in order to alleviate the problem and to facilitate balanced and equitable development of cities and a fully inclusive model for development.The objective of the Mission is to give focused attention to integrate development of infrastructure services, establishment of linkages between asset-creation and asset-management through reforms, ensuring adequate funds to meet the deficiencies in urban infrastructural services, planned development of identified cities including peri-urban areas, outgrowths and urban corridors leading to dispersed urbanization, provision of basic services to the urban poor including security of tenure at affordable prices, improved housing, water supply and sanitation, and ensuring delivery of other existing universal services of the Govt. for education, health and social security.


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The Mission covers both components from core infrastructure as well as last mile services to the urban poor, ensuring convergence with the sectors of human development as well supported through a series of reforms undertaken both at the city as well as at State level. Urban Challenges are being addressed by two pronged strategies by the Govt. of India by identification of sub-missions and sister schemes for implementation of the programme throughout the Country. The two sub-missions for 65 identified cities are: (i) Urban Infrastructure and Governance (UIG) (ii) Basic Services to the Urban Poor (BSUP) The two sister schemes for 5097 cities are: (i) Urban Infrastructure Development Scheme in Small and Medium Towns (UIDSSMT) (ii) Integrated Housing and Slum Development Programme (IHSDP). Urban Infrastructure and Governance (UIG) and Urban Infrastructure Development Scheme in Small and Medium Towns (UIDSSMT) are being dealt by the Ministry of Urban Development. BSUP & IHSDP are being dealt by the Ministry of Housing and Urban Poverty Alleviation. HUDCO has been appointed/assigned the key role of formulation and appraising of BSUP and IHSDP projects through its network of Regional and Development Offices. Financing pattern The Central and State share is in the ratio of 50:50 for the cities having population more than one million. In case of other cities (except North Eastern States and Jammu and Kashmir) the ratio is 80:20 and for North Eastern States and Jammu and Kashmir the ratio is 90:10. Under BSUP, there is no cost ceiling prescribed for the dwelling units of beneficiaries residing in slums. Under IHSDP, the ceiling cost for a dwelling unit is Rs 1,00,000 per unit. For special category / hilly States and difficult / far flung areas, 12.5% additional cost is permissible over and above the prescribed ceiling cost per dwelling unit. The beneficiary contribution for housing component is minimum 12% for general category and 10% for SC/ST/OBC/PH. Eligible components Provision of shelter including upgradation and construction of new house.Provision of community toilets. Provision of physical amenities and infrastructure facilities for the slum dwellers. In case of integrated housing project for North Eastern and Hilly States viz Himachal Pradesh, Uttaranchal and J&K, the acquisition of private land is also part of project funding. Role of HUDCO in JNNURM in BSUP HUDCO is one of the appraising agencies for appraisal of Detailed Project Reports (DPR) received under BSUP. HUDCO is also assisting the State Governments/ implementing agencies in preparation of DPRs as per guidelines. Role of HUDCO in JNNURM in IHSDP


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HUDCO is the only appraising agency for appraisal of Detailed Project Reports (DPR) received under IHSDP, keeping in view the large quantum of projects and HUDCOs extensive network of Regional Offices. HUDCO is assisting the State Governments/ implementing agencies in preparation of DPRs as per guidelines. HUDCO is organizing Training / workshops at various places to familiarize the agencies with the programme guidelines. Till date, HUDCO has appraised 1236 BSUP & IHSDP Projects with Project Cost of Rs.27,515.34Crores and central shares of Rs.15,323,39 crores for construction/upgradation of 11.08 lac dwelling units.

UNCHS Habitat Scroll of Honour UNCHS Habitat Scroll of Honour is awarded every as a part of the World Habitat Day Celebrations to the countries, institutions, individuals of outstanding contribution in the field of human settlements. The Habitat Council of Honour has been awarded to HUDCO for the year 1991 in recognition of innovation, development and promotion of building materials, design & construction of affordable housing for the poor and training in construction skills. Prime Ministers MoU Award HUDCO received the Prime Ministers MoU Award for Excellence in Performance 199899 from the Honourable Prime Minister for being among the Top Ten Public Sector Institutions in Performance ISO 9001: 2008 Certification for Quality Management For its sustained focus on total quality management in its operation and providing value added services to its clients, HUDCO has obtained ISO 9001: 2008 certification. Miniratna Status Recognizing the great performance & contribution made by HUDCO in the field of human settlements Govt. of India ,has conferred the HUDCO with Miniratna Status which would further strengthen the HUDCO role in the field of human settlements. HUDCO VISION FOR THE FUTURE The corporate plan of HUDCO envisages the organisation to sustain its dominant position in the field of Housing and Urban Development while continuing to play a significant role in supporting social housing and utility infrastructure. HUDCO would continue to explore opportunities in related sectors for sustainable profits, which in turn will help it to further support its social objectives. Towards expanding its role in the sectors, HUDCO plans to integrate itself along the complete project finance value chain and position itself as sector expert in the identified areas. HUDCO would leverage its expertise and experience gained over the years towards augmenting its Interest based activities through specific focus on Fee-based activities and Equity based activities. HUDCOs IT strategy is also focused on the right technology solutions to meet its business objectives, including setting up an industry benchmarked integrated solution spanning HUDCOs business processes. HUDCO is poised to take up a much more significant role in the sector by supporting the growing needs of housing and infrastructure in the coming years with the continued growth of economy. HUDCO is also committed to play its unique social role with a
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special focus on the needs for the economically weaker sections and lower income groups.

Swot Analysis of HUDCO

Strengths Over 40 years of experience and expertise in providing techno-financial assistance to housing and infratructure projects Nationwide network with a wide coverage of all stakeholders Appreciated for quality management with ISO 9001:2008 certification Comfortable liquidity position and financial flexibility Govenment ownership providing implicit sovereign support

Weaknesses Other financial institutions like banks, etc are able to access and lend funds at cheaper rates than HUDCO Challenges in terms of resource mobilization and scarcity of cheap financing options Lack of equity support from government post 'Miniratna' status Difiiculties in managing growth in new sectors under private sector portfolio with limited track record

Opportunities Rapid urbanization and economic growth with enabling policy framework Rising population providing demand side impetus Preliminary assessments show huge gaps in housing and infrastructure sector with estimated large scale investments requirements in the future

Threats Intense Competition High inherent risk of real estate and infrastructure projects Huge investments with long gestation periods Characterized by irrational exuberance and prone to bubble formations


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b) Departments of the Company


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1.2 Objective of the study

To study the importance of ALM and its applications in the Indian housing finance industry. To study risk management policies followed by HUDCO. To study the management of assets and liabilities with reference to the interest rate sensitivity in Housing finance companies. To analyse the liquidity, solvency and profitability Housing and Urban Development Corporation (HUDCO). To Compare the level of risk faced by HUDCO in different quarters. Too apply techniques like Gap analysis, Sensitivity analysis on statements of Asset Liability Management.


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ASCI JOURNAL OF MANAGEMENT 29(1). 39-48 Copyright 1999 - Administrative Staff College of India.


Asset-liability management: Issues and trends in Indian context This paper discusses issues in asset-liability management and elaborates on various categories of risk that require to be managed. It examines strategies for asset-liability management from the asset side as well as the liability side, particularly in the Indian context. It also discusses the specificity of financial institutions in India and the new information technology initiatives that beneficially affect asset-liability management. The emerging contours of conglomerate financial services and their implications for asset-liability management are also described.
Asset-liability management basically refers to the process by which an institution manages its balance sheet in order to allow for alternative interest rate and liquidity scenarios. Banks and other financial institutions provide services whichexpose them to various kinds of risks like credit risk, interest risk, and liquidity risk. Asset-liability management is a first step in the long-term strategic planning process. Therefore, it can be considered as a planning function for an intermediate term. In a sense, the various aspects of balance sheet management deal with planning as well as direction and control of the levels, changes and mixes of assets, liabilities, and capital.

Earlier phase In the 1940s and the 1950s, there was an abundance of funds in banks in the form of demand and savings deposits. Because of the low cost of deposits, banks had to develop mechanisms by which they could make efficient use of these funds. Hence, the focus then was mainly on asset management. But as the availability of low cost funds started to decline, liability management became the focus of bank. Emerging issues in the Indian context With the onset of liberalization, Indian banks are now more exposed to uncertainty and to global competition. This makes it imperative to have proper asset-liability management systems in place. The following points bring out the reasons as to why asset-liability management is necessary in the Indian context.

Asset-liability management refers to the process of managing the net interest margin (NIM) within a given level of risk. NIM = Net Interest Income/Average Earning Assets = NII/AEA
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Since NIl equals interest income minus interest expenses, Sinkey (1992) suggests that NIM can be viewed as the spread on earning assets and uses the term spread management. As the basic objective of banks is to maximize income while reducing their exposure to risk, efficient management of net interest margin becomes essential.

. Several banks have inadequate and inefficient management systems that have to be altered so as to ensure that the banks are sufficiently liquid. . Indian banks are now more exposed to the
vagaries of the international markets, than ever before because of the removal of restrictions, especially with respect to forex transactions. Asset-liability management becomes essential as it enables the bank to maintain its exposure to foreign currency fluctuations given the level of risk it can handle.

An increasing proportion of investments by banks is being recorded on a marked-to-market

basis and as such large portion of the investment portfolio is exposed to market risks. Countering the adverse impact of these changes is possible only through efficient asset-liability management techniques.

As the focus on net interest margin has increased over the years, there is an increasing

possibility that the risk arising out of exposure to interest rate volatility will be built into the capital adequacy norms specified by the regulatory authorities. This, in turn will require efficient asset-liability management practices.

Information technology and asset-liability management in the Indian context Many of the new private sector banks and some of the non-banking financial companies have gone in for complete computerization of their branch network and have also integrated their treasury, forex, and lending segments. The information technology initiatives of these institutions provide significant advantage to them in asset-liability management since it facilitates faster flow of information, which is accurate and reliable. It also helps in terms of quicker decision-making from the central office since branches are networked and accounts are considered as belonging to the bank rather than a branch.
The electronic fund transfer system as well as demat holding of securities also significantly alters mechanisms of implementing asset-liability management because trading, transaction, and holding costs get reduced. Simulation models are relatively easier to consider in the context of networking and also computing powers. The open architecture, which is evolving in the financial system, facilitates cross-bank initiatives in asset-liability management to reduce aggregate unit cost. This would prove as a reliable risk reduction mechanism.

In other words, the boundaries of asset-liability management architecture itself is changing because of substantial changes brought about by information technology, and to that extent the operations managers are provided with multiple possibilities which were not earlier available in the context of large numbers of branch networks and associated problems of information collection, storage, and retrieval.

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In the Indian context, asset-liability management refers to the management of deposits, credit, investments, borrowing, forex reserves and capital, keeping in mind the capital adequacy norms laid down by the regulatory authorities. Information technology can facilitate decisions on the following issues:

. .

Estimating the main sources of funds like core deposits, certificates of deposits, and call

borrowings. Reducing the gap between rate sensitive assets and rate sensitive liabilities, given a certain

level of risk.

. Reducing the maturity mismatch so as to avoid liquidity problems. . Managing funds with respect to crucial factors like size and duration.
Conclusion It is important to note that the conglomerate approach to financial institutions, which is increasingly becoming popular in the developed markets, could also get replicated in Indian situations. This implies that the distinction between commercial banks and term lending institutions could become blurred. It is also possible that the same institution involves itself in short-term and long-term lending-borrowing activities, as well as other activities like mutual funds, insurance and pension funds. In such a situation, the strategy for asset-liability management becomes more challenging because one has to adopt a modular approach in terms of meeting asset liability management requirements of different divisions and product lines. But it also provides opportunities for diversification across activities that could facilitate risk management on an enhanced footing. In other words, in the Indian context, the challenge could arise from say the merger of SBI, IDBI, and LIC. Such a scenario need not be considered extremely hypothetical because combined and stronger balance sheets provide much greater access to global funds. It also enhances the capability of institutions to significantly alter their risk profiles at short notice because of the flexibility afforded by the characteristics of products of different divisions. This also requires significant managerial competence in order to have a conglomerate view of such organizations and prepare it for the challenges of the coming decade. As long as the artificial barriers between different financial institutions exist, asset liability management is narrowly focussed and many a time not in a position to achieve the desired objectives. This is because of the fact that the institutional arrangements are mainly due to historical reasons of convenience and a perceived static picture of the operating world. The integration of different financial markets, instruments and institutions provide greater opportunities for emerging markets like India to aim for higher return in the context of minimizing risk. Hence, it maybe appropriate to think in terms of reorienting our institutional structures (removing the distinctions between commercial banks, non-banking financial companies, and term lending institutions to start with) and having a conglomerate regulatory framework for monitoring capital
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adequacy, liquidity. solvency, marketability, etc. This will go a long way in ironing out the mismatches between the assets and the liabilities, rather than narrowly focussed asset-liability management techniques for individual banks.


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Asset Liability Management (ALM) is an ongoing process formulating, implementing, monitoring and revising strategies related to assets and liabilities in an attempt to achieve financial objectivesfor a given set of risk tolerances and constraints. It involves planning, directing and controlling the flow, level, mix and rates of the assets and liabilities of an organisation in a dynamic way in order to manage risks. It has short-term objective of maximizing the Net Interest Margin (NIM) and a longer term objective of maximizing the shareholders wealth.

Objectives Of Asset Liability Management Asset Liability Management is aimed to balance various conflicting objectives like profitability, risk, growth in assets & liabilities and stability of earnings in a coherent manner by laying down a transparent framework for governance of ALM function. Broadly, the Asset liability Management Policy of HUDCO aims to achieve the following objectives: Ensure Compliance with international best practices on Asset-Liability Management. Maintain maturity mismatches between assets and liabilities in various buckets within the manageable levels. Facilitate Liquidity Management by ensuring that the demand for funds is supported by cash and liquidity assets in various alternative scenarios. Maximize net interest margin and manage interest rate risk. Facilitate asset and liability repricing on dynamic basid depending on market conditions. Aid the institutions strategic planning process whilst focussing around profitability and liquidity factors. Ensure clear assignment of roles and responsibilities for the management of various activities associated with the ALM function.

Scope The ALM Policy is applicable to both Indian Rupee (INR) and non INR assets liabilities held by HUDCO. This guidelines and principles of ALM are laid down in various documents of Basel Committee including Principles of Management of Interest rate risk and Principles of Management of Liquidity.


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Elements of Asset Liability Management

There are nine elements related to ALM and they are as follows: 1. Strategic framework: The Board of Directors are responsible for setting the limits for risk at global as well as domestic levels. They have to decide how much risk they are willing to take in quantifiable terms. Also it is necessary to determine who is in chare of controlling risk in the organization and their responsibilities. 2. Organizational framework: All elements of the organization like the ALM Committee, subcommittees, etc., should have clearly defined roles and responsibilities. ALM activities should be supported by the top management with proper resource allocation and personnel committee. 3. Operational framework: There should be a proper direction for risk management with detailed guidelines on all aspects of ALM. The policy statement should be well articulated providing a clear direction for ALM function. 4. Analytical framework: Analytical methods in ALM require consistency, which includes periodic review of the models used to measure risk to avoid miscalculation and verifying their accuracy. Various analytical components like Gap, Duration, Stimulation and Valueat-Risk should be used to obtain appropriate insights. 5. Technology framework: An integrated technological framework is required to ensure all potential risks are captured and measured on a timely basis. It would be worthwhile to ensure that automatic information feeds into the ALM systems and he latest software is utilized to enable management perform extensive analysis, planning and measurement of all facets of the ALM function. 6. Information reporting framework: The information reporting framework decides who receives information, how timely, how often and in how much detail and whether the amount and type of information received is appropriate and necessary for the recipients task. 7. Performance reporting framework: The performance of the traders and business units can easily be measured using valid risk measurement measures. The performance measurement considers approaches and ways to adjust performance measurement for the risks taken. The profitability of an institution comes from three sources: Asset, Liabilities and their efficient management.
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8. Regulatory compliance framework: The objective of regulatory compliance element is to ensure that there is compliance with the requirements, expectations and guidelines for risk based capital and liquidity ratios. 9. Control framework: The control framework covers the control over all processes and systems. The emphasis should be on setting up a system of checks and balances to ensure the integrity of data, analysis and reporting. This can be ensured through regular internal / external reviews of the function.

The Board of Directors (BOD) alongwith the Asset Liability Management Committee (ALCO) l ensures that the policy of ALM is updated to take into account any change in product structure as well as overall balance sheet structure impacting the risk appetite. The BoD has assigned the responsibility of updation and review of this policy to the Risk Management Unit.

The ALM process rests on three pillars:

1. ALM information systems Management Information System Information availability, accuracy, adequacy and expediency

2. ALM organization Structure and responsibilities Level of top management involvement

3. ALM process Risk parameters Risk identification Risk measurement Risk management Risk policies and tolerance levels.


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A broad scope of how of Management of Balance Sheet helps management of FIs/ Banks

Risk Managed in ALM

When we use the term Risk, we all mean financial risk or uncertainty of financial loss. If we consider risk in terms of probability of occurrence frequently, we measure risk on a scale, with certainty of occurrence at one end and certainty of non-occurrence at the other end. Risk is the greatest where the probability of occurrence or non-occurrence is equal. As per the Reserve Bank of India guidelines issued in Oct. 1999, there are three major types of risks encountered by the banks and these are Credit Risk, Market Risk & Operational Risk. Asset Liability Management essentially consists of managing the above referred to risks in an effective and efficient manner. The ALM function normally derives its charter from the Asset Liability Committee (ALCO) framework, which sets out the scope of the ALM function, the risk types that come under its purview and the acceptable levels of risk appetite. Though the primary focus of ALM is managing balance sheet risks, the ALM function increasingly tends to focus on balancing profitability while managing risks, and in the process pro-actively seeks to guard the bottom line and even maximize profitability.


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The different types of risk encompassed in ALM and Liquidity Risk Management.

A). Market Risk

Market Risk may be defined as the possibility of loss to bank caused by the changes in the market variables. It is the risk that the value of on-/off-balance sheet positions will be adversely affected by movements in equity and interest rate markets, currency exchange rates and commodity prices. Market risk is the risk to the banks earnings and capital due to changes in the market level of interest rates or prices of securities, foreign exchange and equities, as well as the volatilities, of those prices. Market Risk Management provides a comprehensive and dynamic frame work for measuring, monitoring and managing liquidity, interest rate, foreign exchange and equity as well as commodity price risk of a bank that needs to be closely integrated with the banks business strategy. Scenario analysis and stress testing is yet another tool used to assess areas of potential problems in a given portfolio. Identification of future changes in economic conditions like economic/industry overturns, market risk events, liquidity conditions etc that could have unfavourable effect on banks portfolio is a condition precedent for carrying out stress testing. As the underlying assumption keep changing from time to time, output of the test should be reviewed periodically as market risk management system should be responsive and sensitive to the happenings in the market.

1.Interest Rate Risk

Financial institutions borrow and lend for different terms and maturity tenors. Apart from equity and retained earnings, the average maturity of borrowings and liabilities tend to be on the short to medium term buckets. On the asset side, the maturity tends to be across a broad range from overnight to as long as a home mortgage could run. A financial institution is normally required to participate in lending short, medium and long-terms depending on the nature of financial products on offer and what segment of the market the bank operates within.


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Types of Interest Rate Risk Re-pricing Risk: The assets and liabilities could re-price at different dates and might be of a different tenor. For example, a loan on the asset side could re-price at three-monthly intervals whereas the deposit could be at a fixed interest rate or a variable rate, but re-pricing halfyearly. Even if the loan and deposit re-price similarly, the re-pricing dates do not synchronize. Basis Risk: The assets could be based on LIBOR rates whereas the liabilities could be based on Treasury rates or a Swap market rate. Yield Curve Risk: The yield curve has the potential to change at different points for differing terms. In other words, the changes are not always parallel but it could be a twist around a particular tenor and thereby affect different tenors differently. Option Risk: The borrowers sometimes (or many times) have the ability to prepay their borrowings based on contractual terms and conditions. Loan contracts might have caps, floors, teaser rates, prepayment options and so on. Exercise of options impacts the financial institutions by giving rise to premature release of funds that have to be deployed in unfavourable market conditions and loss of profit on account of foreclosure of loans that earned a good spread.

2. Credit Risk
Credit Risk is the potential that a bank borrower/counter party fails to meet the obligations on agreed terms. There is always scope for the borrower to default from his commitments for one or the other reason resulting in crystallisation of credit risk to the bank. These losses could take the form outright default or alternatively, losses from changes in portfolio value arising from actual or perceived deterioration in credit quality that is short of default. Credit
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risk is inherent to the business of lending funds to the operations linked closely to market risk variables. The objective of credit risk management is to minimize the risk and maximize banks risk adjusted rate of return by assuming and maintaining credit exposure within the acceptable parameters. Credit risk consists of primarily two components, viz Quantity of risk, which is nothing but the outstanding loan balance as on the date of default and the quality of risk, viz, the severity of loss defined by both Probability of default as reduced by the recoveries that could be made in the event of default. Thus credit risk is a combined outcome of Default Risk and Exposure Risk. The element of Credit Risk is Portfolio risk comprising Concentration Risk as well as Intrinsic Risk and Transaction Risk comprising migration/down gradation risk as well as Default Risk. At the transaction level, credit ratings are useful measures of evaluating credit risk that is prevalent across the entire organization where treasury and credit functions are handled. Portfolio analysis help in identifying concentration of credit risk, default/migration statistics, recovery data, etc. In general, Default is not an abrupt process to happen suddenly and past experience dictates that, more often than not, borrowers credit worthiness and asset quality declines gradually, which is otherwise known as migration. Default is an extreme event of credit migration. Off balance sheet exposures such as foreign exchange forward can tracks, swaps options etc are classified in to three broad categories such as full Risk, Medium Risk and Low risk and then translated into risk Neighed assets through a conversion factor and summed up. The management of credit risk includes a) measurement through credit rating/ scoring, b) Quantification through estimate of expected loan losses, c) Pricing on a scientific basis and d) Controlling through effective Loan Review Mechanism and Portfolio Management.

A. Tools of Credit Risk Management.

The instruments and tools, through which credit risk management is carried out, are detailed below: a) Exposure Ceilings: Prudential Limit is linked to Capital Funds say 15% for individual borrower entity, 40% for a group with additional 10% for infrastructure projects undertaken by the group, Threshold limit is fixed at a level lower than Prudential Exposure; Substantial Exposure, which is the sum total of the exposures beyond threshold limit should not exceed 600% to 800% of the Capital Funds of the bank (i.e. six to eight times). b) Review/Renewal: Multi-tier Credit Approving Authority, constitution wise delegation of powers, Higher delegated powers for better-rated customers; discriminatory time schedule for review/renewal, Hurdle rates and Bench marks for fresh exposures and periodicity for renewal based on risk rating, etc are formulated. c) Risk Rating Model: Set up comprehensive risk scoring system on a six to nine point scale. Clearly define rating thresholds and review the ratings periodically preferably at half yearly intervals. Rating migration is to be mapped to estimate the expected loss.
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d) Risk based scientific pricing: Link loan pricing to expected loss. High-risk category borrowers are to be priced high. Build historical data on default losses. Allocate capital to absorb the unexpected loss. Adopt the RAROC framework. e) Portfolio Management: The need for credit portfolio management emanates from the necessity to optimize the benefits associated with diversification and to reduce the potential adverse impact of concentration of exposures to a particular borrower, sector or industry. Stipulate quantitative ceiling on aggregate exposure on specific rating categories, distribution of borrowers in various industry, business group and conduct rapid portfolio reviews. The existing framework of tracking the non-performing loans around the balance sheet date does not signal the quality of the entire loan book. There should be a proper & regular on-going system for identification of credit weaknesses well in advance. Initiate steps to preserve the desired portfolio quality and integrate portfolio reviews with credit decision-making process. f) Loan Review Mechanism: This should be done independent of credit operations. It is also referred as Credit Audit covering review of sanction process, compliance status, review of risk rating, and pick up of warning signals and recommendation of corrective action with the objective of improving credit quality. It should target all loans above certain cut-off limit ensuring that at least 30% to 40% of the portfolio is subjected to LRM in a year so as to ensure that all major credit risks embedded in the balance sheet have been tracked. This is done to bring about qualitative improvement in credit administration. Identify loans with credit weakness. Determine adequacy of loan loss provisions. Ensure adherence to lending policies and procedures. The focus of the credit audit needs to be broadened from account level to overall portfolio level. Regular, proper & prompt reporting to Top Management should be ensured.

B. Risk Rating Model

Credit Audit is conducted on site, i.e. at the branch that has appraised the advance and where the main operative limits are made available. However, it is not required to risk borrowers factory/office premises. As observed by RBI, Credit Risk is the major component of risk management system and this should receive special attention of the Top Management of the bank. The process of credit risk management needs analysis of uncertainty and analysis of the risks inherent in a credit proposal.

3. Liquidity Risk
Bank Deposits generally have a much shorter contractual maturity than loans and liquidity management needs to provide a cushion to cover anticipated deposit withdrawals. Liquidity is the ability to efficiently accommodate deposit as also reduction in liabilities and to fund the loan growth and possible funding of the off-balance sheet claims. The cash flows are placed in different time buckets based on future likely behaviour of assets, liabilities and off-balance sheet items. Liquidity risk consists of Funding Risk, Time Risk & Call Risk.
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Funding Risk: It is the need to replace net out flows due to unanticipated withdrawal/nonrenewal of deposit Time risk: It is the need to compensate for nonreceipt of expected inflows of funds, i.e. performing assets turning into nonperforming assets. Call risk: It happens on account of crystalisation of contingent liabilities and inability to undertake profitable business opportunities when desired. The Asset Liability Management (ALM) is a part of the overall risk management system in the banks. It implies examination of all the assets and liabilities simultaneously on a continuous basis with a view to ensuring a proper balance between funds mobilization and their deployment with respect to their a) maturity profiles, b) cost, c) yield, d) risk exposure, etc. It includes product pricing for deposits as well as advances, and the desired maturity profile of assets and liabilities.

4. Forex Risk
Foreign exchange risk is the risk that a bank may suffer loss as a result of adverse exchange rate movement during a period in which it has an open position, either spot or forward or both in same foreign currency. Even in case where spot or forward positions in individual currencies are balanced the maturity pattern of forward transactions may produce mismatches. There is also a settlement risk arising out of default of the counter party and out of time lag in settlement of one currency in one center and the settlement of another currency in another time zone. Banks are also exposed to interest rate risk, which arises from the maturity mismatch of foreign currency position. The Value at Risk (VaR) indicates the risk that the bank is exposed due to uncovered position of mismatch and these gap positions are to be valued on daily basis at the prevalent forward market rates announced by FEDAI for the remaining maturities. Currency Risk is the possibility that exchange rate changes will alter the expected amount of principal and return of the lending or investment. At times, banks may try to cope with this specific risk on the lending side by shifting the risk associated with exchange rate fluctuations to the borrowers. However the risk does not get extinguished, but only gets converted in to credit risk.

5. Country Risk
This is the risk that arises due to cross border transactions that are growing dramatically in the recent years owing to economic liberalization and globalization. It is the possibility that a country will be unable to service or repay debts to foreign lenders in time. It comprises of Transfer Risk arising on account of possibility of losses due to restrictions on external remittances; Sovereign Risk associated with lending to government of a sovereign nation or taking government guarantees; Political Risk when political environment or legislative process of country leads to government taking over the assets of the financial entity (like

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nationalization, etc) and preventing discharge of liabilities in a manner that had been agreed to earlier; Cross border risk arising on account of the borrower being a resident of a country other than the country where the cross border asset is booked; Currency Risk, a possibility that exchange rate change, will alter the expected amount of principal and return on the lending or investment. In the process there can be a situation in which seller (exporter) may deliver the goods, but may not be paid or the buyer (importer) might have paid the money in advance but was not delivered the goods for one or the other reasons.

B). Operational Risk

Operational Risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or external factors. In order to control this, the Bank primarily relies on its Internal Audit system. Furthermore, to monitor operational risk on an ongoing basis, the Bank has set up an Operational Risk Management Committee under the supervision of SubCommittee of Board on ALM and Risk Management. The Bank collects and analyses loss and near miss data on operational risk based on different parameters on a half yearly basis and takes corrective actions, wherever necessary.

C).Regulatory Risk
When owned funds alone are managed by an entity, it is natural that very few regulators operate and supervise them. However, as banks accept deposit from public obviously better governance is expected of them. This entails multiplicity of regulatory controls. Many Banks, having already gone for public issue, have a greater responsibility and accountability. As banks deal with public funds and money, they are subject to various regulations. The very many regulators include Reserve Bank of India (RBI), Securities Exchange Board of India (SEBI), Department of Company Affairs (DCA), etc. Moreover, banks should ensure compliance of the applicable provisions of The Banking Regulation Act, The Companies Act, etc. Thus all the banks run the risk of multiple regulatory- risk which inhibits free growth of business as focus on compliance of too many regulations leave little energy and time for developing new business. Banks should learn the art of playing their business activities within the regulatory controls.

D).Environmental Risk
As the years roll by and technological advancement takes place, expectation of the customers change and enlarge. With the economic liberalization and globalization, more national and international players are operating the financial markets, particularly in the banking field. This provides the platform for environmental change and exposes the bank to the environmental risk. Thus, unless the banks improve their delivery channels, reach customers, innovate their products that are service oriented, they are exposed to the environmental risk resulting in loss in business share with consequential profit.

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Asset Liability Management

ALM Core Functions - Managing Interest Rate Risk, Structural Gaps & Liquidity
The ALM core function consists of managing maturity gaps and mismatches while managing interest rate risk within the overall mandate prescribed by ALCO. The key responsibilities and some typical actions initiated by the ALM team are dealt with in the following paragraphs: 1. Managing Structural Gaps In a financial institution with a mature ALM function, this is arguably the most critically and continuously monitored aspect, since the ALM Managers seek to manage the structural gaps in the Balance Sheet. While liquidity management focuses typically on short-term time ladders, the structural gap management shifts the focus on time ladders more than a year. This aspect of ALM stresses the importance of balancing maturities as well as cash flows on either side of balance sheet. It strategizes dynamically on balancing the gaps, issuing timely guidelines to adjust focus on right product types and tenors, and actively involve ALCO in this process. a. Static Gap: The ALM function takes into consideration assets maturing in short, medium and long time ladders and seeks to balance it vis--vis liabilities maturing across short, medium and long term ladders. The gaps reports typically point to funding gaps and excess funds at different points in time. The challenge with the ALM function is that the gaps are dynamically evolving and need continuous monitoring as the balance sheet changes every day. b. Duration: Duration is considered as a measure of interest rate sensitivity. However, for our immediate purpose, let us set aside interest rate sensitivity. Macaulays duration is traditionally accepted as a good measure of length of portfolio or a measure of centre of gravity of discounted cash-flows over life of an asset (or liability). Its common practice to measure duration of portfolio for different product types as well as on an overall portfolio level. Its useful to simulate how duration of portfolio will be affected by future events. c. Dynamic Gap: It is normal practice to rely on dynamic gap reports to simulate future gap positions for assumed business volumes and exercise of options (e.g., prepayments). In addition to proposed new volumes, prepayment transactions and assumed deposit roll-overs, the ALM manager would like to include a proposed hedge transaction. Let us assume that an international bank ABC averagely accumulates home loans to the tune of $50 MN in a month and the loans are predominantly linked to variable Swap Offer Rates (SOR). The bank likes to hedge its risk by entering into a swap transaction in order that it is less prone to vulnerable interest rates.
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The bank will enter into a $50 MN swap with another financial institution, so by design it receives SOR linked cash-flows and pays fixed as part of the swap transaction. In this case, our international bank ABC would like to visualize what its forecast gap positions and interest rate sensitive positions will look like assuming that it would enter into a swap transaction say, one month from now, by using a good ALM solution. d. Long-Term Assets / Long-Term Liabilities Ratio: ALM practitioners prefer to focus on the ratio of assets and liabilities exceeding one year and often want to set acceptable limits around this. Where there are operative limits, the ALCO meetings will usually monitor the ratio, and the institution constantly endeavours to stay within a comfortable level around this limit. This along with liquidity gaps help to bring in any imbalances and help maintain a structurally sound balance sheet. 2. Managing Interest Rate Sensitivity A financial institution typically relies on certain measures to evaluate and manage interest rate sensitivities. We deal with them below: a. Interest Rate Sensitivity Gap Reports: The ALM function seeks to monitor interest rate sensitivity by generating so-called interest rate sensitive gap reports, which provide a cash flow laddering based on re-pricing profile and frequency of interest rate sensitive assets and liabilities. b. Duration Measures: Modified duration seeks to measure net present value of a loan portfolio (or simply bond price) under different interest rate conditions. For example, one seeks to analyze by how much percentage the bond price will be affected by a basis point up and down move in interest rates. The resulting outputs help us determine the modified duration or simply interest rate sensitivity of the net present value or bond price. c. DV01 or PVBP: This one is arguably the most popular measure among ALM practitioners. DV01 seeks to calculate the dollar value by which the market value is affected by a basis point expected movement in the interest rates. Its common to find leading banks setting internal limits around this measure to manage interest rate risk in the balance sheet. d. Net Interest Income (NII) Sensitivity: Financial institutions attach much importance to assessing the impact of interest rate changes, new business, change in product-mix and rollover of deposits on net interest income. Income statements that allow for comparison of net interest income under different scenarios are immensely helpful in understanding the impact of mild market movements and shocks on the income statement as well as balance sheet. 3. Managing Liquidity Typically, the ALM function seeks to generate daily gaps on short-term ladders and ensures that cumulative gaps operate within pre-set limits. Of course, managing liquidity gaps alone
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is not adequate. A well managed liquidity function will include liquidity contingency plan, liquid asset buffers and setting liquidity policies and limits in tune with level of risk that the management believes is acceptable and manageable.

Asset Liability Committee ALCO

The Asset-Liability Committee (ALCO) consisting of the bank/financial institutions senior management should be responsible for ensuring adherence to the limits set by the Board as well as for deciding the business strategy of the institution (on the assets and liabilities sides) in line with the FI's budget and decided risk management objectives. The ALM desk consisting of operating staff should be responsible for analyzing, monitoring and reporting the risk profiles to the ALCO. The staff should also prepare forecasts (simulations) showing the effects of various possible changes in market conditions related to the balance sheet and recommend the action needed to adhere to FI's internal limits. Purposes and Tasks of ALCO:

Formation of an optimal structure of the Banks balance sheet to provide the maximum profitability, limiting the possible risk level;

Control over the capital adequacy and risk diversification; Execution of the uniform interest policy; Determination of the Banks liquidity management policy; Control over the state of the current liquidity ratio and resources of the Bank; Formation of the Banks capital markets policy; Control over dynamics of size and yield of trading transactions (purchase/sale of currency, state and corporate securities, shares, derivatives for such instruments) as well as extent of diversification thereof;

Control over dynamics of the basic performance indicators (ROE, ROA, etc.) as prescribed in the Bank's policy.


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Asset Liability Management

Asset and Liability Committee Structure

Permanent members:

Chairman Managing Director/CEO Financial Director Risk Manager Treasury Manager ALCO officer Divisional Managers

By invitation:

Economist Risk Consultants


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ALM Governance Structure at HUDCO

Boardof Directors

Internal Audit


ALCO Support Group



Risk Management




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Asset Liability Management

Process of ALCO


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Organization Structure of ALCO


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Research Methodology

Type of research: The research methodology is descriptive in nature as it involves fact-finding enquiries and reporting of what has happened or what is happening. Data: Secondary data has being used for the analysis. Source of the secondary data: The source for the data is mainly the NHB guidelines and the guidelines of CRISIL for Asset Liability Management. Other sources include RBI publications, Books, websites and, Newspaper articles.

Statistical Tools: The statistical tools used for the study and the analysis; include graphS, tables and ratios.


Analysis of Data

Tools and Techniques used for Asset Liability Management

Gap analysis model

Measures the direction and extent of asset-liability mismatch through either funding or maturity gap. It is computed for assets and liabilities of differing maturities and is calculated for a set time horizon. This model looks at the re pricing gap that exists between the interest revenue earned on the FI's assets and the interest paid on its liabilities over a particular period of time (Saunders, 1997). It highlights the net interest income exposure of the bank, to changes in interest rates in different maturity buckets.

Re pricing gaps are calculated for assets and liabilities of differing maturities. A positive gap indicates that assets get re priced before liabilities, whereas, a negative gap indicates that liabilities get re priced before assets. The FIs looks at the rate sensitivity (the time the Financial Institution Manager will have to wait in order to change the posted rates on any asset or liability) of each asset and liability on the balance sheet. The general formula that is used is as follows:

NIIi= R i (GAPi)


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Asset Liability Management

While NII is the net interest income, R refers to the interest rates impacting assets and liabilities in the relevant maturity bucket and GAP refers to the differences between the book value of the rate sensitive assets and the rate sensitive liabilities. Thus when there is a change in the interest rate, one can easily identify the impact of the change on the net interest income of the bank.

Interest rate changes have a market value effect.

Limitation The basic weakness with this model is that this method takes into account only the book value of assets and liabilities and hence ignores their market value. This method therefore is only a partial measure of the true interest rate exposure of a bank.

Duration model
Duration is an important measure of the interest rate sensitivity of assets and liabilities as it takes into account the time of arrival of cash flows and the maturity of assets and liabilities. It is the weighted average time to maturity of all the preset values of cash flows. Duration basic -ally refers to the average life of the asset or the liability.

DP p = D (d R /1+R) The above equation describes the percentage fall in price of the bond for a given increase in the required interest rates or yields. The larger the value of the duration, the more sensitive is the price of that asset or liability to changes in interest rates. As per the above equation, the bank will be immunized from interest rate risk if the duration gap between assets and the liabilities is zero. The duration model has one important benefit. It uses the market value of assets and liabilities.

Value at Risk
Refers to the maximum expected loss that a bank can suffer over a target horizon, given a certain confidence interval. It enables the calculation of market risk of a portfolio for which no historical data exists. It enables one to calculate the net worth of the organization at any particular point of time so that it is possible to focus on long-term risk implications of


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decisions that have already been taken or that are going to be taken. It is used extensively for measuring the market risk of a portfolio of assets and/or liabilities.

Simulation models help to introduce a dynamic element in the analysis of interest rate risk. Gap analysis and duration analysis as stand-alone too1 for asset-liability management suffer from their inability to move beyond the static analysis of current interest rate risk exposures. Basically simulation models utilize computer power to provide what if scenarios, for example: What if:

The absolute level of interest rates shift. There are nonparallel yield curve changes. Marketing plans are under-or-over achieved. Margins achieved in the past are not sustained/ improved. Bad debt and prepayment levels change in different interest rate scenarios. There are changes in the funding mix e.g.: an increasing reliance on short term funds for balance sheet growth.

This dynamic capability adds value to the traditional methods and improves the information available to management in terms of: Accurate evaluation of current exposure of asset and liability portfolios to interest rate risk. Changes in multiple target variables such as net interest income, capital adequacy, & liquidity. Future gaps.

Limitation It is possible that the simulation model due to the nature of massive paper outputs may prevent us from seeing wood for the tree. In such a situation, it is extremely important to combine technical expertise with an understanding of issues in the organization. There are certain requirements for a simulation model to succeed. These pertain to accuracy of data and reliability of the assumptions made. In other words,
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one should be in a position to look at alternatives pertaining to prices, growth rates, reinvestments, etc., under various interest rate scenarios. This could be difficult and sometimes contentious.

It is also to be noted that managers may not want to document their assumptions and data is not easily available for differential impacts of interest rates on several variables. Hence, simulation models need to be used with caution particularly in the Indian situation. Last but not the least the use of simulation models calls for commitment of substantial amount of time and resources. If we cannot afford the cost or, more importantly the time involved in simulation modeling, it makes sense to stick to simpler types of analysis.

Computation of performance measures

The Net Interest Income (NII), Net Interest Margin (NIM), Net Income (NI) and gap are the measures used to gauge the performance of Bank with relation to the asset liability management. Net interest income = (Interest rate of RSA Volume of RSA) + (Interest rate of FRA volume of FRA) (Interest rate of RSL Volume of RSL) (Interest rate of FRL Volume of FRL) Net interest income -------------------------------Total Performing Assets

Net interest margin =

Net Income = Net Interest Income Provisions and contingencies


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Comparative analysis of Asset Liability Management of two quarters at HUDCO with special reference to Liquidity risk and Interest Rate risk
As per the CRISIL Guidelines issued to HUDCO for Asset Liability Management, Following three statements are prepared and submitted to NHB Department.

1. Statutory Liquidity Report: Wherein all the cash inflows & outflows are placed in the maturity ladder ( from 1 day to over 10 years) according to expected timing of the cash flows. This statement depicts Principal as well as interest maturity of assets and liabilities.

2. Interest Rate Sensitivity Report: It measures the mismatches between the rate sensitive liabilities and rate sensitive assets over a period ranging from 1 day to over 10 years. This Statement depicts only the Principal maturity of the assets & liabilities and excludes the interest components. 3. Short Term Dynamic Liquidity Report: It estimate the short term liquidity profile spanning from 1 day to 6 months on the basis of business projections and other commitments for planning purposes.

Techniques used on these statements

Traditional Static GAP Analysis Technique



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RSAt : Rate Sensitive Assets Those assets that will mature or reprice in a given time period (t) RSLt: Rate Sensitive Liabilities Those liabilities that will mature or reprice in a given time period (t)

Steps in GAP Analysis Develop an interest rate forecast Select a series of time buckets or intervals for determining when assets and liabilities will reprice Group assets and liabilities into these buckets Calculate the GAP for each bucket Forecast the change in net interest income given an assumed change in interest rates.

What Determines Rate Sensitivity

An asset or liability is considered rate sensitivity if during the time interval: 1. It matures 2. It represents and interim, or partial, principal payment 3. It can be repriced The interest rate applied to the outstanding principal changes contractually during the interval The outstanding principal can be repriced when some base rate of index changes and management expects the base rate / index to change during the interval

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Assets and Liabilities are considered as risk sensitive on the basis of following assumptions:

1. The Current Assets have been assumed in general to mature within a period of one
year. Under the following general assumption, following assumptions are made: i) ii) iii) iv) Sundry Debtors:- To mature in 6 months 1 Year time bucket. Cash & Bank Balances:- To mature in 0-1 months time bucket . IBCS: To mature in 3-5 year time bucket. Other Current Assets: Work in progress:- To mature equally in buckets of 3-5 years,5-7 years, 7-10 years and > 10 years. Work Completed:- To mature in 1-3 year time bucket. Loans & Advances: Loan against PDS To mature in 6-12 months time Bucket. Vi) Current Liabilities:- For specific category of liabilities, following assumptions have been made:Sundry Creditors:- To mature within an overall period of 1 year Security and other deposits:- To mature in 6 months 1 year time bucket. Amount received in advance:- To mature in 6 months 1 year time bucket.



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GAP as on 31.3.2012 S N o. Parti cular s/Ti me Buc kets Tota l Outf lows (Lia biliti es) Tota l Inflo ws (Ass ets) Mis matc h (21) 1D Over 1M to 14 14 to days days 2M to 1 mon th 1125 353 1086 2M to 3 M 3M to 6M 6M to 1Y 1Y to 3 Y 3 Y to 5Y 5Y to 7 Y 7 Y to 10 Y 10 Y & above Tot als




2631 4867 3236




27 45 3


1191 690

1643 937

1598 3594 1046 7631 4




38 83 5








3645 3202




37 68


Cum ulati ve Outf lows Cum ulati ve Mis matc h Mis matc h (%)

1248 1668 2888 3382 4272 8099 1491 19347 9








1079 1786 1553 5198 8400






63.8 7

34.7 4

89.4 4

79.4 8


53.4 4



154.8 8



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Asset Liability Management


Cum Mis matc h (%)


12.7 5

22.0 4

31.8 9

41.8 1

19.1 8

34.8 4





GAP as on 31.12.2011 S No. Parti cular s/Ti me Buck ets Total Outfl ows (Liab ilitie s) Total Inflo ws (Ass ets) Mis matc h (21) 1D to 14 days Over 14 days to 1 mont h 254 1M to 2M 2M to 3 M 3M to 6M 6M to 1Y 1Y to 3 Y 3Y to 5 Y 5Y to 7 Y 7 Y 10 Y to & 10 Y abov e Total s












2339 0











1266 788

2339 0











2286 1054


Cum 104 ulati ve Outfl ows Cum ulati ve Mis matc h 67






1226 4

1503 4

1565 2

1586 1607 2 5










5220 6274


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Asset Liability Management


Mis matc h (%)










1092 496



Cum Mis matc h (%)











Findings: 1. .In the reports of the quarter 1.1.2012 to 31.3.2012, there is a negative gap i.e. -4.52% in the maturity bucket of 1 day to 14 days. It shows a significant increase in the liquidity risk of HUDCO as in the last quarter this bucket it was positive. According to HUDCO, it was negative because cash and bank balance were considered insensitive in this quarter. 2. In other time buckets, this mismatch has improved significantly from -18 to 12.75 in over 14 days to 1 month time bucket, -8 to 41.81% in 3 Months to 6 Months time bucket. There is a positive mismatch or gap in other time buckets as well. 3. In the falling interest rate scenario, HUDCOs borrowings carrying higher interest liability would get replaced with loans at lower interest rate. On the negative side, HUDCO carries a high pre-payment risk in respect of its assets if over all interest remains depressed. Thus, gains made by HUDCO are neutralized by the liabilities side.


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1. With reduction in repo and reverse repo rate by RBI, HUDCO may consider in reducing the cost of borrowings by prepaying the high interest rate borrowings and further HUDCO may borrow at reduced interest rates.

2. HUDCO should make fresh borrowings targeted to mature in the 1-3 years, 3-5 years, 5-7 years, 7-10 years buckets so that excess liquidity in these buckets gets neutralized and the assets and liabilities also get re priced hereby reducing the interest rate risk. 3. Efforts should be made to minimize the overall NPAs at the current levels, as it would further help in improvement of ALM position. 4. Early resolution of NPAs would reduce the excess liquidity from these buckets exceeding 3 years and advance it to buckets where HUDCO is facing liquidity and interest rate risk.


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1. Report has been prepared based on the information provided by the respective departments. 2. It has been assumed that there will not be any prepayments and recovery of NPAs, over dues and staff loans in further six months in respect of the loan assets. 3. In respect of HUDCOs borrowings from banks & institutions based on floating rates i.e. Libor, Mibor, G-Sec, PLR, etc., the benchmark rates have been assumed to remain constant while calculating maturity profile of interest on borrowings in respect of loans governed by these benchmarks. 4.The maturity of loan against HUDCO PDS (outstanding amount) has been taken as NIL.


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ALM was developed in the 1980s to help financial institutions control a sharp increase in interest rate risk. Subsequently, it evolved into a set of techniques that enable financial institutions to manage a much broader set of risks. ALM is likely to play a growing role in financial institutions going forward.

In the future, the management of interest rate risk will be more important to the performance of financial institutions. The removal of regulatory barriers, combined with a trend toward consolidation, has created larger and more complex institutions in need of more sophisticated risk management tools. Regulators and rating agencies are focusing increasingly on the risk management practices of the institutions they monitor. Finally, impressive technological progress in the capture, transfer, and processing of data has made sophisticated risk management techniques available to financial institutions.

The more bank managers will take advantage of these new developments to improve the transparency and flexibility of their business. In large part because they have adopted more systematic ALM, banks in developed markets offer more diverse and complex products than their emerging-market counterparts. An extension of that logic suggests that, even within developed markets, ALM could be an important determinant of bank product strategy.


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Books 1. Risk Management in Banking by Joel Bessis. 2. Asset Liability Management in Banks by MooradChaudhary Magazines/ Journals
1. ASCII Journal of Management, Volume 29 (1) by R.V aidyanathan 2. Annual Report of HUDCO for the year 2010-11

3. Basel committee on banking supervision (2001). Principles for the management and supervision of interest rates risk, bank for international Settlements.

Internet 1. 2.

3. 4.


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