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________________ INDEX SL.N O PAGE NO 1. INTRODUCTION OF ALM 3 2. REVIEW OF LITERATURE 9 3. COMPANY PROFILE 36 4. ALM IN BAJAJ 56 5.

CHAPTER DATA ANALYSIS & INTERPRETATION 58 6. CONCLUSIONS & FINDINGS 70 7. SUGGESTIONS 71 8. GLOSSARY 72 9. BIBLIOGRAPHY 73 ________________ ________________ INTRODUCTION ________________ ________________ Introduction of ALM The Crux The Scope of ALM In Sight View The Objectives of the Study Need of the Study Methodology Limitations of the Study ________________ ________________ INTRODUCTION The composition of assets and liabilities largely decide the solvency, liquidity and profitability of a corporate entity, more so that of a financial institution. The components of the liabilities determine the cost of funds. The mix of the assets influences the return on investment. Therefore the asset liability management assumes great importance; also, it is absolutely necessary to prevent the Asset - liability mismatch, both in term of maturity (tenure) and relative costs (minimum or interest differential) particularly in the control of increasing pressure on margins. In the case of state financial corporation, the instrumentality of Business Plan and Resources Forecast (BPRF), and effective treasury management techniques can be, gainfully utilized to make correction in the existing imbalances in the resource mix and the avoidable misalignments between the profile or liabilities and the portfolio of assets. While BPRF is introduced at the instance of IDBI & SIDBI. ________________ ________________ THE CRUX : The Asset - Liability management broadly deals with both sides of the balance sheet. It is primarily concerned

with the market risk that arises from a institutions structural position. These liquidity risks. The interest rate risk possibility of change in profits caused interest rank. The delay in recoveries, liquidity risk, leads to possibility. ________________ ________________

financial are interest rate and arises from the by fluctuations in a principle cause of

Opportunities and damage due to honoring payment commitments. Both these risks are obviously the result of mismatch between the Financial Institutions / Banks as Assets and Liabilities. In case of banks of Financial Institutions, the ALM positions are relatively liquid. Usually the banking institutions hold the assets and liabilities until they mature. This practice of course is changing of late. It is increasingly becoming to bundle banking products such as loans into marketable securities and then sell them or trade them with other banks as well as other traditional and new players in the financial markets. This is especially true of asset-based securities i.e., mortgage loans, securitization is a new phenomenon in the Indian context. But it has a vast scope. It can make or mm the future of a financial institution. The stability, profitability, growth and image of Financial Institutions largely depend upon the ability and skill with which it can conduct its ALM. ________________ ________________ THE SCOPE : ALM in relation of SFCs covers a wide amount of both sources and applications of funds. The drying up of some of the conventional sources, the choice of the basket, rising cost of funds available and the associated stringent conditions, growing competition for the access to the sources and the need for arresting the erosion of net worth are the main challenges in managing the liabilities. On the assets side, the key issues are the resource allocation, the assets portfolio-mix, the yields, the recoveries, NPA management, writes off policies and above all the market and credit risk management. ________________ ________________ INSIGHT (Capacity of Understanding Hidden Truth) It is true in all cases, simply based on common sense, no profound wisdom is necessary to know and appreciate this fundamental principle of financial science. However, wisdom lies in understanding the inter-relationship between categories of assets and their interface with liabilities. It is desirable to synchronize the profiles of assets with the counterparts among liabilities. True balancing involves intelligence matching risk in mapping and contingency arrangements. ________________ ________________ OBECTIVES OF THE STUDY: 1. To know how ALM is done at APSFC.

2. To study the procedure adopted for managing ALM in APSFC. 3. To understand the problems involved in maintaining and managing ALM. 4. To learn the liquidity risk management and analysis. 5. To learn the-interest rate risk analysis and management. 6. To get know various schemes and activities of APSFC. ________________ ________________ NEED FOR THE STUDY: In the event of highly volatile interest rates and liquidity crisis, Financial Institutions/banks face the problem of real valuation of their assets and liabilities. This Mismatch of assets and liabilities may produced an effect on calculation of real worth of the business. There are some methods adopted by banks/financial institutions in order to cover the problems of liquidity mismatch and interest rate risk. The present study focused such ________________ ________________ measures taken by APSFC for its Asset - Liability management. ________________ ________________ METHODOLOGY OF THE STUDY: The study of liquidity risk analysis and interest rate risk analysis and management is based on: 1. Primary Data Collection 2. Secondary Data Collection PRIMARY DATA COLLECTION The sources of primary data collection has been gathered by interacting with • Chief Manager of ALM Cell • Resource Person, of ALM Cell • Chief Manager of Finance & Accounting Department SECONDARY DATA COLLECTION It was collected from books regarding journals, banking, and magazines containing relevant information about ALM. The secondary data collected was to understand how effectively APSFC carries out ALM ________________ ________________ management. The other main sources of Secondary Data: • Annual reports of APSFC • Brochures of APSFC • RBI guidelines for ALM management • Indian Financial System By 'M. Y.KHAN' • Asset Liabilities management by different authors LIMITATIONS OFTHE STUDY

In spite of utmost care taken for the smooth conduct of study while preparing this project. 1. They are intended to form the basis for initiating collection. This is the study conducted with in short period. 1999. While guidelines on management of credit risk. ________________ ________________ REVIEW OF LITERATURE ________________ ________________ Review of Literature ALM ALM Pillars ALM Process ALM Information System Composition of ALCo Committee of Directors Definition of Risk Identification of Risk Risk Analysis Components of Risk Management Control Risk Risk in Financial Institutions Management of Liquidity Risk Management of Interest Risk Analysis ________________ ________________ Gap Analysis Duration Analysis Trend Analysis Ratio Analysis Limitations of Analysis REVIEW OF LITERATURE ASSETS LIABILITY MANAGEMENT (ALM) Asset . market risk and operational risk will be issued later on.liability management (ALM) as a part of the risk management and control system in banks.The study has made an attempt for evaluating the ________________ ________________ performance of APSFC in managing liquidity risk management and interest rate risk management.liability management practices which effect from April I. The RBI has issued guidelines for the introduction of Asset . this report suffers from certain setbacks. ________________ ________________ .Due to limitations of the sources the data collection could not be adequate. compilations and analysis of dates required tu support the ALM System. 2. 3. so it may not be covering all the aspects in detail.

managing offer assessing the risk involved. The interest rates on investments of 1:1 –in government and other securities are also now market related. Financial Institutions are now operating in a fairly deregulate 1. equity/commodity price risk. The banks are exposed to several major risks in the course of the business credit risk. interest rate risk. Intense competition for business involving both the assets and liabilities together with increasing volatility in the domestic interest rates as well as foreign exchange rates. Imprudent liquidity management can put Financial Institutions earnings and reputation at great risk. The objective of good risk Management programs should be that their programs evolve into a strategy tool for bank management. environment and are required to determine interest rates on deposits. liquidity risk and operational risk. Intense competition for business involving both assets and liabilities has brought pressure on the management of Financial Institutions to maintain a good balance among spreads. important that Financial Institutions introduce effective risk measure management systems that address the issues relating to interest rate and liquidity risks. The initial thrust of the ALM function would be to enforce the risk management discipline that is. In the normal course. Financial Institutions are exposed to credit and market ________________ ________________ risks in view of the asset liability transformation. over the last four years and growing integration of domestic markets and the entry of MNC's for meeting the credit needs of not only the corporate but also the retail segments. the risks associated with Financial Institutions operations have become complex and large. The bank management has to base their business decision on a dynamic and integrated risk management system and process. driven by corporate strategy. Financial institutions need to address these risks in a . Financial Institutions are exposed to several major risks in the course of their business. profitability and long-term liability. they can also offer deposits prescribe by the R 131: they can also offer advances on dynamic basis. the Indian Financial System markets have witnessed vide ranging changes at a fast pace. requiring ________________ ________________ strategic management. therefore. and equity/commodity price risk. It is against this background that the RBI guidelines relating to AL:!v1 focus on interest rate and liquidity risk-management system in banks. has brought pressure on the management of banks to maintain a good balance among measures. It is. credit risk. foreign exchange risk. interest rate risk. The management of Financial Institutions have to base their business decisions on a dynamic and integrated risk management system and process driven by' corporate strategy. With liberalization in Indian Financial markets. which form part: of the ALM function. Liquidity and Operational risks.Over the last few years.

. recognized that varied business profiles of Financial Institutions in the public and private sectors do not make the adoption on a uniform ALM system for all Financial Institutions feasible. The initial focus of the ALM function would be to enforce the risk management discipline that is managing business after assessing the risks involved.Risk Measurement D. ALM. Thus information is the key to the ALM process. which needs to be closely integrated with the Financial Institutions business strategy. It however.Structure and Responsibilities B. ________________ ________________ The ALM Process rests in these pillars 1.________________ ________________ structural manner by upgrading their risk management and adopting more comprehensive asset-liability management (ALM) practices than has been done hitherto. The objective of good risk management systems should be that these systems would evolve into a strategic tool for financial institution management. which form parts of the Asset -liability management (ALM) function. It involves assessment of various types of risks and altering the asset-liability portfolio in a dynamic order to manage risks. ________________ ________________ These are various method prevalent worldwide for measuring risks.Risk Management E. Risk identification C. These range from the simple gap statement to extremely sophisticated and dam intensive risk adjusted profitability measurement methods. Risk Parameters B. Management Information Systems B. ALM Information System A. This framework needs to be built on sound technology with the necessary information system as backup. monitoring and managing liquidity and interest rates and equity and commodity price risks of major operators in the financial system. among other functions. adequacy and expediency 2. Risk policies and tolerance levels.Information availability. Level of top Management involvement 3. ALM Organization A. ALM INFORMATION SYSTEM ALM has to support by a management philosophy that ________________ ________________ clearly specifies the risk policies and tolerance limits. is also concerned with risk management and provides a comprehensive and dynamic framework for measuring. ALM Process A. The RBI guidelines relate to interest rate and liquidity risks management system in Financial Institutions. accuracy.

prevailing interest rates offered by other peer NBFCs for similar services/products and so on. desired maturity profile and mix of the incremental assets and liabilities. foreign currency funding. The ALCO should also articulate the current interest rate view of the Frs and base its decision for future business strategy on this view. Collecting accurate data in a timely manner would be the biggest challenge before the NBFC's particularly those lacking fullscale computerization. should include product pricing for both deposits and advances. in view of the centralized nature of the functions. risk measurement and monitoring has to be addressed urgently. retail deposits. though the central element for die entire ALM exercise. With respect to investment portfolio and funds management. for instance. floating rate funds. the ALCO should review the result of and progress in implementation of the decision made in the previous meeting. it would take time for Financial Institutions in the present state. money markets vs. capital markets. its responsibility would be to decide on the source and mix of liabilities or sale of ________________ ________________ assets. Which analysis information on the basis of residual maturity and reprising pattern of liabilities and assets. it would refined overtime as the Financial Institutions management gains experience of conduction business within an ALM framework the spread of computerization will also help Financial Institutions in accessing data. Towards this end. Considering the large number of branches and the lack of adequate support system to collect information requires ________________ ________________ for the ALM. is. Individual Financial Institutions should decide the frequency of holding their ALCO meetings. business mix and organizational complexity. Financial Institutions have heterogeneous organization structures. To ensure commitment of the Top management and timely response to market: dynamics the CEO/CMD/President/Director should head . inter. The business issues than ALCO would consider.However. In addition to monitoring the risk levels. business activities and geographical spread. capital base. wholesale vs.the availability of adequate and accurate information with expedience and the systems existing some of the major Financial Institutions do not generate information in the manner required for ALM. to get the requisite information. the introduction of a base information system of risk management. COMPOSITION OF ALCO The size (number of members) of ALCO would depend on the size of the each institution. where as some have unitary offices. asset size. it should develop a view regarding the future direction of interest rate movements and decide on funding mixes between fixes vs. Some of them have a large number of branches and agents/brokers. With respect tothe funding policy. and so on. management profiles. funding domestic vs. However.

The appropriateness of risk management parameters depends ________________ ________________ upon the degree of volatility in the operating environment. credit resources management/planning funds management/treasury. which banks/Financial Institutions all over the world employ to measure their balance sheet risks viz. In addition. Large FI may even have sub-committee and support groups. Forecasting and analyzing 'what if scenario' and preparation of contingency plans. These two parameters together attend to MEASURING THE RISK Due to difficulty in measuring interest rate risk and also the complexes the present in the understanding of the concept measurement of interest rate risk assumes greater importance in the ALM function.the committee. It has observed that banks risk exposure depends upon the volatility of interest rates and asset prices in the financial market. Management of market risks 3. ________________ ________________ The scope of the ALM functions can be described as follows: 1. the head of the technology division should also be an invitee building up of MIS and related computerization. availability of supporting data and expertise within bank/Financial Institutions and the expected market and business developments. the Financial Institutions maturity/gaps. these are two major parameters. Generally. Profit planning and growth projection and 5. the latter measures the risk arising out of the maturity mismatches in its assets and liabilities over the future years. Liquidity risk management 2. the duration to . Funding and capital planning 4. The chief of investment. International Business and Economics research can be members of the committee. DEFINITION OF RISK Risk is the potential loss of an asset due to different factors. ________________ ________________ COMMITTEE OF DIRECTORS The management committee or any other specific committee constituted by the board of directors should oversee the implementation of the system and review its function periodically. risk to the net interest income and market value portfolio equity.. IDENTIFICATION OF RISK ALM in a commercial bank of Financial Institutions is to decide what should be the risk measurement parameters that the management would need to focus on. While the former seeks to measure the risk to the immediate profits that emanate from cash flow mismatches occurring in the accounting years.

(Gap is the difference between rate sensitive assets minus rate sensitive liabilities) ________________ ________________ COMPONENTS OF RISK MANAGEMENT Risk management may be defined as the process of identifying and controlling risk. RISK ANALYSIS Interest rate risk can be analyzed in the following four methods. CONTROL RISK After identification and assessment of risk factor.Reduce the impact by deducing frequency of severity 3. 1. Simulation Gap analysis is the most important basic technique used in analyzing interest rate risk.Employ risk management instruments to cover the risks ________________ ________________ RISK IN FINANCIAL INSTITUTIONS Risks in financial institutions are many and a broadly classifies into three categories They are as follows: 1.________________ ________________ measure and interest rate elasticity of its assets and liabilities and the liability of the management to measure and control the exposure. viz. Duration Analysis 3. The process of risk management has three clearly identifiable steps. risk measurement and risk control. monitor and control various items of risk associated with Financial Institutions position and transaction. Value at risk 4. Avoid the exposure 2. Avoid concentration in risky area 4. interest risk management lays the foundation for a good ALM. It is also described at times as the responsibility of the management to identify measure. It measures the difference between financial institution assets and liabilities and off balance sheet position which will be re priced or will mature within a predetermine period.. Gap Analysis 2. Transaction risks 3. In the management of Financial Institutions assets and liabilities. risk identification. Transfer the risk to another party 5. Operating and liquidity risk ________________ ________________ . the next step involved is risk control. the major alternatives available in risk control are 1. Balance sheet risks 2.

3. INSTRUMENT RISK The nature of instrument creates risks for the investor. BALANCE SHEET RISK The balance sheet generally arise out of the mismatch between currency. It rises when Financial Institutions are unable to generate cash to cope with the declines in deposits or increase in loans. Foreign exchange risk 1. But interest rate on deposits can be changed only when they fall due or pre closed by the depositor. Liquidity risk 3. ________________ ________________ 2. LIQUIDITY RISK Liquidity is the potential inability to meet the banks/Financial Institutions as they become due. Price Risk l. 3. Credit risk 2. For example.FOREIGN EXCHANGE RISK The risk that a long (over bought) or short (over sold) position in the foreign II. It originates the mismatches in the maturity of assets and liabilities as well as uncertainty of future cash flows. exchange rate and Commodity prices. They are 1. With many hybrid instruments in the market and with . MARKET RISK Market risk may be defined as the possibility of the loss to financial institution caused by changes in market variables. (b) A bonds (investments asset of the bank) price falls down as interest rate rise. 2. any download revision of interest rate on advances will result in the reduction of income stream for the bank Financial Institutions. The risk involved with the instruments issued by corporate bodies would be an ideal example. INTEREST RATE MISMATCH RISK It is the impact of the change in interest rate on the net interest income of the bank and value of the assets and liabilities. TRANSACTIONS RISKS The transaction risk essentially involves two types of risks.I. The financial institution defines market risk as the risk that the value on and off balance sheet position ________________ ________________ will be adversely affected by movements in the equity and interest rate of markets. ISSUER-RISK The financial strength and standing of the institute/sovereign that has issued the instrument can affect price as well as reliability. Interest rate mismatch risk 2. maturity and interest rate structure of assets and liabilities resulting in 1. (a) When fixed deposits are accepted on the fixed rate basis and the amount is lent on floating rate basis. currency.

as detailed in an earlier section. all the investment and in GISC. 1934. In case of Financial Institutions not holding public deposits. ________________ ________________ MANAGEMENT OF LIQUIDITY RISK AND INTEREST RATE RISK LIQUIDITY RISK Measuring and managing liquidity needs are vital for the effective operations of financial institution. . securities that could be broadly classifiable as 'mandatory securities' (under obligation of law) and' non-mandate securities'. like government securities and other money market instrument. as liquidity shortfall in one institution can have repercussion on the entire system.Fi' required to invest up to 80 percent of their deposit in the manner prescribed in the RB 1 directors issued under the act. Experience show that assets commonly considered as liquid. The institution of liquidity transcends individual institutions. There is no such requirement for Financial Institutions that are not holding public deposit~.fluctuations in market conditions. The Financial Institutions management should measure not only the liquidity position of Financial Institutions 011 an ongoing basis but also examine how liquidity requirements are likely to evolve under different assumptions. Financial Institutions . the use of the maturity or cash flow mismatches. By ensuring a Financial Institutions ability to meet its liabilities as then become due liquidity management can reduce the probability of an adverse situation developing. Therefore. The time buckets are distributed as under: Less than one month Over 1 month to 3 months Over 3 months to 6 months Over 6 months to 12 months Less than or equal to 1 year More than 1 year and up to 3 years More than 3 years and up to 5 years More than 5 years and up to 7 years More than 7 years and up to 10 years ________________ ________________ Financial Institution holding public deposits are required to invest up to a prescribed percentage (15 % as on date) of their public deposits in approval securities. liquidity has to tracked through. in terms of the liquid asset requirements of sections 45-IB of the RBI Act. Thus various Financial Institutions including SFCs would be holding in their investment portfolio. the prices of various instruments ma react differently form one another. the use 01' maturity ladder and calculation ________________ ________________ of cumulative surplus or deficit of funds at selected maturity dates are adopted as a standard tool. could also become liquid when the market and players are unidirectional. For measuring and managing net funding requirements.

The statements of structural liquidity may be prepared by placing all cash inflows and outflows in the maturity ladder according to the expected timing of cash flows. . over 1 month to 3 months. c) Call Risk: It represents sudden demand for money owing to contingent become due. Where borrowers fails to meet their commitments besides irregularly in advances which present delay in fulfilling commitments by borrowers the growth of non-performing assets also leads to immediate liquidity problem.Financial Institutions holding public deposits. equity shares. Financial Institutions holding public deposits may place mandatory securities in any time – bucket suitable to them. as per residual maturity.. b) Time Risk: Non-receipt of expected inflow of funds e. The listed non-mandatory securities may be placed ________________ ________________ in any of the less than one month. d) Opportunity Risk: A Financial Institution can only grow if its customers are also prospering (succeeding) request for funds from important and valuable clients can only be profitably serviced if adequate liquidity is available. "Over 3 months to 6 months" and "over () months to 12 months" buckets. Nonperforming assets cut into profitability as well. Unlisted securities may be valued as per RBIs prudential norms directions. depending upon the defeasance period proposed b Financial Institutions. 2.g. A maturity liability is cash outflows while a maturity asset is a cash inflow while Liquidity Problems may be created due to any of the fallowing reasons: a) Funding Risk: Failure to replace net outflow of funds weather due to withdrawal of retail deposits on non-renewal of wholesale ________________ ________________ deposits. ________________ ________________ Approaches to control Liquidity 1. Maintenance of adequate liquidity remains sinquonon for banks are other financial institutions. where as unlisted non-mandatory securities having a fixed term of maturity may be placed in the relevant time bucket. The mandatory securities and listed securities may be marked to market for the purpose of the ALM System. the surplus securities would fall in the category of non mandatory securities. securities without a fixed term of maturity and so on) may be placed in the "more than 10 years" buckets. Unlisted non-mandatory securities (e.g. ALM process if it fails to take NPA problems cannot succeed. If contingent liabilities start developing the may create huge drain on liquidity.

by changing its net interest income (NIT). liabilities and off balance sheet positions yet affected due to various variations in market interest rates. while determining the tolerance levels. reported profits).Once maturity of assets exceeds those of liabilities there is inevitable liquidity risk.e. A long term impact of changing interest rates is in Financial Institutions market the of Equity (MVE) or net worth. The interest rare risk when viewed form thee tow perspectives is known as the "earning . given to financial institution in pricing most of the assets and liabilities imply the need for the financial system to hedge the interest rate risk. This confidence may be found to be misplaced when liquidity prevails as existing clients at that stage may be in the grip of liquidity crisis. mobilize or. roll over the deposits from existing clients. The increased capital flows across free economics. The immediate impact of changes in interest rates is on Financial Institutions earnings (i. adding a new dimension to the risk profile of Financial Institutions balance sheets having foreign assets and liabilities. ________________ ________________ Currency Risk: Floating exchange rate arrangement has brought in its wake pronounced volatility. Financial Institutions should make a number of assumptions according to their Asset -liability profiles. ________________ ________________ as the economic value of Financial Institutions assets. have contributed to increase in the volume of transactions large cross border flows together with volatility has rendered Financial Institutions balance sheet unable to exchange rates. Interest Rate Risk: Deregulation of interest rates and the operational flexibility. following deregulation. 3. To avail of Export Refinance Facility (ERF) and Collateralized Lending Facility (CLF) and the Additional Collateralized Lending Facility (ACLF). 4. 5. 6. Financial Institutions may take into accounts all relevant factors based on their asset-liability base. Minimum criteria to remain liquid is the ability both to meet commitments when due and to undertake new transactions when desirable.. The change in interest rates affects Financial Institutions in a larger way. defined as the risk where changes in market interest rates might adversely affects on Financial Institutions financial condition. nature of ________________ ________________ business future strategy and so on. The tolerance levels should be determines keeping all necessary factors in view and further refined with experience gained in liquidity management. Confidence to rise.

Financial Institutions should make a number if assumptions according to their asset liability profiles. future strategy and so on The tolerance levels should be determined keeping all necessary factors in view and further refined with experience ________________ ________________ In order to enable Financial Institutions to monitor their short-term liquidity on a dynamic basic over tine horizon spanning from less than one month.perspective" and "economic value perspective" respectively. 2.The gap is the difference between the rate sensitive . It is the intention of the RBI to move over to modem techniques. to begin with the traditional gap analysis is considered as a suitable method to measure the interest rate risk. Interest rate risk gaps in time buckets: Over 1 month to 3 months Over 3 months to 6 months Over 6 months to 12 months Less than or equal to 1 year More than 1 year and up to 3 years More than 3 years and up to 5 years More than 5 years and up to 7 years More than 7 years and up to 10 years More than 10 years ________________ ________________ The gaps or mismatch risk can be measured by calculation gaps over different time interval. 3. Grouping rate sensitive assets and liabilities and of the-balance sheet positions into time bucket according to residual maturity or next pricing period should regenerate the gap report. 4. 5. While determining the tolerance levels. there is a cash flow.With in the time interval under considerations. Dependent on the RBI changes in interest rate/bank rates. Financial Institutions may take into account all factors based on their asset liability base nature of business. 6. Gap analysis measures mismatch between interest rate sensitive liabilities and rate sensitive assets (including off-balance sheet position).The interest rate resets/reprises contractually during the interval. The risk from the earnings perspective can be measured as changes in the net interest income (NIT) or net interest margin (NIM).It is contractually pre payable or withdrawn before the state maturities. over 1 to 3 months Financial Institutions should estimate their Short term liquidity profiles on the basis of business projects and other commitments for planning purpose. These are many analytical techniques for measurement and management or interest rate risk. ________________ ________________ Asset and Liabilities is normally classified as interest sensitive if: 1. as on a given data.

even if the position is hedged against parallel movements in the yield curve.bucket for preparation of gap reports (liquidity and interest rate sensitive) Financial Institutions that are better equipped to reasonably estimated the . The positive gap indicates that is has more RS than RSL where as the negative gap indicates that I has more RSL than RSA. The gap a therefore be used as a measure of interest rate sensitive. but not the obligation. there by creating exposure to unexpected changes in the interest rates. c) Basis Risk: Another important source of interest rate ________________ ________________ risk (commonly referred as basis risk) arises from imperfect correlation in the adjustment of the rates and paid on different instruments with otherwise similar repricing characteristics. financial institutions encounter interest rate risk in several ways. to buy or sell in some manner after the cash flow of an instrument of financial contract. Formally. Yield curve risk arises when unanticipated shifts of the yield curve adverse effects on a banks income or underlying economic value. thee differences can give risk to unexpected changes in the cash flows arid earnings spread between assets and liabilities. d) Option Risk: An additional and increasingly important source of interest rate risk arises from the option embedded in many Financial Institutions assets and liabilities.assets (RSA) and rate sensitive liabilities (RSL) for each time bucket. the underlying economic value of a long position in 10 years government bonds hedged by a short position in 5 years government notes could declare sharply if the yield curve steepens. For instance. ________________ ________________ GENERAL The classification of various assets and liabilities into different time . These can be described as follows: a) Re-Pricing Risk: This risk arises from holding assets and liabilities with different principal amounts. When interest rates change. an option provides the holder that right. b) Yield Curve Risk: Re-pricing mismatches can also expose a bank to changes in the slope and shape of the yield curve. ________________ ________________ Sources of Interest Rate Risk: As financial intermediaries. The gap reports indicate the whether the institution is in a position 'LO benefit rising interest rates by having ________________ ________________ a position gap (rs3>rsl) or weather it is in position to benefit from declining interest rates by negative gap (rsl>rsa). 7. maturity or re-pricing dates.

Financial Institution should therefore evolve a suitable mechanism supported by empirical studies and behavioral analysis to estimate ________________ ________________ the further behavioral of assets. The magnitude of premature withdrawal of deposits at times of volatility in market interest rate is quite substantial. that is lending or credit spread. When this approach is used to asses the interest rate risk of current earnings. liabilities and off-balance sheet items to changes in market variable and estimate the probabilities of the options. The present framework does not capture the impact of premature closures of deposits and prepayments of loans and advances on the liquidity and interest rate risk profile on Financial Institutions. It also helps centralizing interest rate risk at one place.behavioral pattern of various components of assets and liabilities. Gap analysis was one of the first methods developed to measure Financial Institutions interest rate risk exposure and continues to be widely used by Financial Institutions. The funding or liability spread and mismatch spread. Which facilities effective control and management of interest rate risk. ________________ ________________ There are four different types of analysis: 1. GAP ANALYSIS: Maturity/pre-pricing schedules can be used to generate simple indicators of the interest rate risk sensitivity of both earnings and economic value to changing interest rates. A scientifically evolved internal transfer pricing model of assigning values on the basis of current markets rates to funds provided and funds used is an important component for effective implementation of the ALM system. interest rate sensitive liabilities in each time band are sub traced from the corresponding interest rate sensitive asset to produce are pricing gap for that time band. on the basis of the past data/empirical studies could classify them in the appropriate time-buckets. It is typically referred to as gap analysis. These notes may contain 'what if scenario' analysis wider various assumed conditions and the contingency plans to face various adverse developments. Gap Analysis" 2. Trend Analysis 4. This gap can be multiplied by as assume change in interest rate to yield an approximation of the change in the interest rate income . A copy of the note approved by the ALCO may be sent to the registered office of the company is located. The transfer price mechanism can enhance the management of margin. Ratio Analysis l. To evaluate earnings. Duration Analysis 3. subject to approval from the ALCO board of directors. A well defined transfer pricing system also provides a nominal framework for pricing of assets and liabilities.

In addition. it has a number of shortcomings. duration measures changes in economic . The size of the interest rate movement used in the analysis can be used on a variety of factors. relative to the current price of the security. A negative or liability sensitive gap occurs when liabilities exceeds assets (including off-balance sheet positions) in a given time band. a positive or assets-sensitive. Thus. Conversely. Finally gap analysis fail to capture variability in non interest revenues and expenses. In its simples form. it does not take into account any changes in the timing of payments that might occur as a result of changes in the interest rate environment. moreover gap analysis ignore differences in spreads between interest rates that could arise as the level of the market interest rates changes. Typically. it fails to account for differences in the sensitivity of income that may arise form option-related positions. CURRENT ANALYSIS A maturity/re-pricing schedule can also used to evaluate the effects of changing interest rates on Financial Institutions economic value by applying sensitivity weights to each time band. Simulation of potential future interest rate movements and the judgment of bank management. First. This means that an increase in market interest rates could cause a decline in net interest income. for these reasons gap analysis provides only a rough approximation to the actual change in net interest income would result from the chosen change in the pattern of interest rates. Duration may also be defined as the weighted average of the time until expected cash flows from a security will be receive. Gap implies that the Financial Institutions net interest rate income could decline as a result of decrease in the levels of the interest rates. gap analysis does not take it account of variation in the characteristics of different position with a time band. The weights are the present values of each cash flow divided by the current price. 2. potentiality important sources of risk of the current ________________ ________________ income.________________ ________________ that would result from such as interest rate movement. In particulars all positions with in a given time band are assumed to mature or reprise simultaneously a simplification that is likely to have greater impact on the precision of the estimates as the degree of aggregation with in a time band increases. including historical experience. such weights are based on estimates of the duration of the assets and liabilities that fall into each time and duration give a small change in the level of interest rates. ________________ ________________ LIMITATIONS OF GAP ANALYSIS: Although gap analysis is a very commonly used approach to assessing interest rate risk exposure.

Because with the ratios we can analyze "the liquidity positions for the company by taking the past data and we can interpreter the findings. and this is used to analyze the gaps in between . Financial Institutions . by this. Modified duration is standard duration divided by 1+r.can avoid risks and can earn more profits. which is used in the ALM process to manage the liquidity risk. where the level of market interest rate is is elasticity. Liquidity and Interest rate analysis: This is the only tool. TREND ANALYSIS This is a statistical tool with his we can find out the position of anything in financial institution. we should also given by the RBI on the bank. as with simple duration. by observing the limits and of findings we can analyze as Financial Institutions is with in the limits or not. by doing the gap analysis. which helps to find out liquidity position of all financial institution. modified duration = Macaulay duration/Cl +r). it assumes a linear relationship between percentages changes in value and percentage changes in interest rates / in other words. which are used in financial institutions. The ratios. are ________________ ________________ Current assets/current liabilities Total loans/ total assets Total assets/ total liabilities Total advances/total liabilities Quick ratio The ratios. As such. 3. 4. it ref1ects the percentage change in the economic value of the instrument for a given percentage change in the economic value of the instrument for a given percentage change in 1+r.value resulting from a percentage change of interest rates under the simplifying assumptions that changes in value are proportional to changes in the level ________________ ________________ of interest rates and that the timing of payments is fixed. I did the trend ________________ ________________ analysis of "cumulative mismatch of last one year as percentage to working funds". it is possible to know that how that fluctuation in funds take place in the one year mismatches. where Macaulay duration = cft(t)/(l+r) /cft/(l+r) to the power t left = rupee value of cash flow at time t T = number of periods of time until the cash flow payment Y = periodic yield to maturity of the security generating cash flow and K = the number of cash flows. RATIO ANALYSIS The liquidity ratios are very useful in the liquidity risk management analysis. Here in financial institution.

The maturity profile is used to measure the future cash flows of banks different buckets . These buckets are mainly divided in to three types short . Statements preparation data should also be considered. Based on maturity date and the starting date of the item time period is calculated. ________________ ________________ Value At Risk (VOR). Various items are covered in the statement under the inflow and out flows. medium . For measuring and managing net funding requirements the use of maturity ladder and calculation of cumulative surplus / deficit of funds at selected maturity data is suggested for adoption by FI. VOR is defined as an estimate of potential loss in position or asset/liability or portfolio of assets liabilities over a given holding period at a given level of certainty or unexpected happening the probability of suffering a loss. This gap raised due to the changes in the values of the assets ________________ ________________ and liabilities and changes in their interest rates. Residual Maturity: This is the type where the item due date is taken as a base to bucket. analysis the Financial Institutions can know about in which bucket the risk. ________________ ________________ Methods to bucket: The nature of the each item is different with others. By doing the gap.the inflows and outflows of the statement for every fortnight. Behaviourlization: . BUCKETING: The time columns used in the below statement. Allocating the items of inflows and outflows in this column is called as bucketing. are called as the time buckets. So few models are used to find out under which bucket it will come like residual maturity. Over 1 month to 3 months Over 3 months to 6 months Over 6 months to 12 months Less than or equal to 1 year More than 1 year and up to 3 years More than 3 years and up to 5 years More than 5 years and up to 7 years More than 7 years and up to 10 years ________________ ________________ More than 10 years To analyze the statement a person should have to get grip on the various items or liquidity statement. behaviouralization.term.term and long term.

2008. 2000. shareholders of CBoP r eceived 1 share of HDFC Bank for every 29 shares of CBoP. 1. On May 23. As per the scheme of amalgamation approved by the shareholders of both banks and the Re serve Bank of India. and c ustomer base. behaviorlizaiton is used to various item in them cash credit is in item. the amalgamation of Centurion Bank of Punjab with HDFC Bank was formally approved by Reserve Bank of India to complete the statutory and regula tory approval process. The Bank at present has an enviable networ k of over 1416 branches spread over 550 cities across India. Coleman & Co. This was the first merger of two private banks in the New Generation Private Sector Banks.75 shares of Times Bank. The Bank also has a network of about over 3382 n etworked ATMs across these cities. As per the scheme of amalgamation.000 crore a nd net advances of around Rs. HDFC Bank offers a wide range of commercial and transactional banking services a nd treasury products to wholesale and retail customers. Times Bank Limited (a nother new private sector bank promoted by Bennett. The merged entity now holds a strong deposit base of around Rs. 1. India. geographic reach. and a bigger pool of skilled manpower. moving averages. HDFC has developed significant expertise in retail mortgage loans to different market segments and also has a large corporate client base f or its housing related credit facilities.000 crore. as par t of the RBI's liberalization of the Indian Banking Industry in 1994.. HDFC was ideally positioned to promote a bank in the Indian environmen t. For this. 89. The Housing Development Finance Co rporation (HDFC) was amongst the first to receive an 'in principle' approval fro m the Reserve Bank of India (RBI) to set up a bank in the private sector. 000 crore. In financial institution. In a milestone transaction in the Indian banking industry. All branches are li nked on an online real-time basis. with its registered office in Mumbai. statistical tools should be used like regression analysis methods. trend analysis and various methods are used. behaviourlizaiton means finding out the behavior in the future based in the past data. shareholders of Times Bank received 1 share of HDFC Bank fo r every 5. ________________ ________________ COMPANY PROFILE ________________ ________________ The HDFC Bank was incorporated on August 1994 by the name of 'HDFC Bank Limited' . The amalgamation added significant value to HDFC Bank in terms of increased branch network. HDFC Bank is headquartered in Mumbai. a strong market reputation. With its experience in the financial m arkets. The Bank's ________________ ________________ American Depository Shares ( ADS ) are listed on the New York Stock Exchange (NY SE) under the symbol 'HDB' and the Bank's Global Depository Receipts (GDRs) are listed on Luxembourg Stock Exchange.22. effective February 26.This is the another model which also used for the statement preparation. Customers in over 500 locations are also serv iced through Telephone Banking. / Times Group) was merged with HDFC Bank Ltd. large shareholder base and unique consumer f ranchise. The bank has three key b . HDFC Bank commenced operations as a Scheduled Commercial Bank in January 1995. The promoter of the company HDFC was incepted in 1977 is India's premier housing finance company and enjoys an impeccable track record in India as well as in in ternational markets.63. The shares are listed on the Bombay Stock Exchange Limited and The National Stoc k Exchange of India Limited. The balance sheet size of the combin ed entity would be over Rs.

usiness segments: ________________ ________________ Wholesale Banking Services . Retail Banking Services . for outstanding finance professional • Dun & Bradstreet Banking Awards 2011 . blue-ch ip manufacturing companies in the Indian corporate to small & mid-sized corporat e and agri-based businesses. the bank has three main product areas . and Eq uities. Treasury .The Bank's target market ranges from large.The objective of the Retail Bank is to provide its tar get market customers a full range of financial products and banking services.Within this business.SME Financing • .Best private sector bank .Best in Strength and Soundness and 2nd Best in the Private Sector • CNBC TV18's Best Bank & Financial Institution Awards . 2011 • Financial Express Best Bank Survey 2010-11 . HDFC Securities (HSL) and HDB Financial Services (HDBFSL) are its subsidiaries.Foreign Exchange and Derivatives. The Treasury business is responsible for managing the returns and market risk on this investment portfolio. Aditya Puri. gi ving the customer a one-stop window for all his/her banking requirements. Services offered by the company: Personal Banking • Accounts & Deposits • Loans • Cards • Forex • Investments & Insurance NRI Banking • Accounts & Deposits • Remittances ________________ ________________ Investments • & Insurance Loans Payment Services Wholesale Banking • Corporate • Small & Medium Enterprises • Financial Institutions & Trusts • Government Sector Achievements/ recognition:HDFC Bank was the first bank in India to launch an International Debit Card in a ssociation with VISA (VISA Electron) and issues the MasterCard Maestro debit car d as well.Best Bank and Mr. Local Currency Money Market & Debt Securities.

Aditya Puri • Forbes Asia .Best bank. Aditya Puri among ‘Asian Captains of Finance 2010’ ________________ ________________ IDRBT • Technology 2009 Awards .Overall best bank.BEST BOTTOM-LINE I.000 Banks • MIS Asia IT Excellence Award 2010 .Strongest bank in Asia Pacific • Bloomberg UTV's Financial Leadership Awards 2011 .Best Private Bank in Ind ia • Economic Times Awards for Corporate Excellence 2010 .Best performer in the banking category • . Best private sector bank in SME Financing • Institutional Investor Magazine Poll .Security in bank • FINANCE ASIA Country Awards 2011: India . Aditya Puri • The Banker and PWM 2010 Global Private Banking Awards . best cash management bank a nd best trade finance bank ________________ ________________ Asian • Banker .Highly Commended .Best Bank • Business world Best Bank Awards 2010 .Business Leader of the Yea r . best customer initiative. best use of business intelligence.Best bank • IBA Banking Technology Awards 2010 .Technology bank of the year.best financial inclusion • IDC FIIA Awards 2011 . best online ba nk. best risk manag ement system and runners up . Mr.Best practices in IT Governance and IT Secu rity • IBA Productivity Excellence Awards 2011 .Asia Pacific HDFC Bank • FE-EVI Green Business Leadership Award .T.Fab 50 Companies .Best Bank (Large) • Teacher's Achievement Awards 2010 (Business) .IT Infrastructure.5th year in a row • NDTV Business Leadership Awards 2010 . Category • Dun & Bradstreet Banking Awards 2010 .Excellence in customer experience 2010 • Outlook Money 2010 Awards .Best private sector bank • The Banker Magazine . Use of IT within the Bank and Runner s-up .Mr.IT Governance (Large Banks) • ACI Excellence Awards 2010 .HDFC Bank MD.ISACA 2011 award for IT Governance . Best private sector ba nk.Mr.World's Top 1.New Channel Adopter (Private Sector) • DSCI (Data Security Council of India) Excellence Awards 2011 .

Adity a Puri .HDFC Bank at 632nd position and among 130 global hig h performers • Financial Express . MD. Aditya Puri.Second Best Private Bank in India .Best risk management initiative and Best use of business intelligence • SPJIMR Marketing Impact Awards (SMIA) 2010 ________________ ________________ Business • Today Best Employer Survey . Best M&A integration and technology implementation • The Asset Triple A Awards . 2 last year) • Financial Insights Innovation Awards 2010 .Banking & Financial Services category • Forbes Top 2000 Companies .Model bank Award • Avaya Global Connect 2010 .Mr.Runner Up • Asia Money 2009 Awards .Best cash management bank in India • Euro money Private Banking and Wealth Management Poll 2010 . Best private banking services overall (moved up fr om No.Best in Strength and Soundness Awar d • Euro money Awards 2009 .'Best Bank in India' • Economic Times Brand Equity & Nielsen Research annual survey 2009 . Best in growth and Best in strength • Asian Banker Excellence Awards 2010 .Innovation in branch operations .Best trade finance provider in India for 2010 • 2 Banking Technology Awards 2009 .Celent's 2010 Banking Innovation Award . Excellence in a utomobile lending.'Best Trade Finance Bank in India for 2009 • IDRBT Banking Technology Excellence Award 2008 .'Asian Banker Best Retail Bank in India Award 2009 ' 2008 • .Best Innovator of the year award for its MD Mr.Runner up' • Global Finance Award .Best local bank in India (second year in a row).Listed in top 10 best employers in the country 2009 • Business Standard Best Banker Award .Best new private sector bank.Customer Responsiveness Award .Best retail bank in India.'Best IT Governance and Value D elivery' • Asian Banker Excellence in Retail Financial Services .'Best Domestic Bank in India' • IBA Banking Technology Awards 2009 .Most Trusted Brand . HDFC Bank • Fe Best Bank Awards 2009 .Ernst & Young Survey 2009-10 .'Best IT Governance Award .se rver consolidation project • Global Finance Award .

Best Bank Award in the Private Sector ca tegory • Global HR Excellence Awards .Security Strategist Award 2008 • World Trade Center Award of honour .First Runner up.'Best IT Adoption in the Banking Sector' • Business India .Finance Asia Country Awards for Achievement 2008 .Best Bank Award in the Private sector category.Best Retail Ba nk in India • Asian Banker .'Indian of the Year (Business)' • Nasscom IT User Award 2008 .Its Managing Director Aditya Puri wins the Leadership Achievement Award for India ________________ ________________ ________________ ________________ CHAPTER-4 ________________ ________________ DATA ANALYSIS AND INTERPRETATION SELECTED AMC S -BRIEF INTRODUCTION ________________ .For outstanding contribution to internation al trade services. • Business Today-Monitor Group survey .'Best Bank 2008' • Forbes Asia .Fab 50 companies in Asia Pacific ________________ ________________ Asian • Banker Excellence in Retail Financial Services . & many more • Business Today .Asia Pacific HRM Congress: .'Corporate Be st Bank' Award • The Bombay Stock Exchange and Nasscom Foundation's Business for Social Responsib ility Awards 2007 .'Best Corporate Social Responsibility Practice' Award • Outlook Money & NDTV Profit .'Best Bank and Best Cash Mana gement Bank' • CNN-IBN . • The Asian Banker Excellence in Retail Financial Services Awards .Best Retail Bank 2008 • Asiamoney .Best local Cash Management Bank Award voted by Corporates • Microsoft & Indian Express Group .'Employer Brand of th e Year 2007 -2008' Award .One of India's 'Most Innovative Companies' • Financial Express-Ernst & Young Award .'Best Bank' Award 2007 • Dun & Bradstreet – American Express Corporate Best Bank Award 2007 .

Karla Complex.: Jan 14. The UTI Asset Management Company has its registered office at : UTI Tower. UTI AMC is a registered portfolio manager under the SEBI (Portfolio Managers) Regulations. 1993 on February 3 2004. Reliance Mutual Fund was formed to launch various schemes under which units are issued to the Public with a view to contribute to the capital market and to provide investors the opportunities to make investments in diversified securities. 1995. UTI Mutual Fund is managed by UTI Asset Management Company Private Limited (Est. The name of Reliance Capital Mutual Fund has been changed to Reliance Mutual Fund effective 11th. registered in Guernsey. ________________ ________________ To • deploy Funds thus raised so as to help the Unit holders earn reasonable returns on their savings and • To take such steps as may be necessary from time to time to realize the effects Key Personnel Mr. Mr. State-of-the-art systems and communications are in place to ensure a seamless flow across the various activities undertaken by UTI AMC. March 2004 vide SEBI's letter no. the SEBI (Mutual Funds) ________________ ________________ Regulations and the objectives of the schemes. 1882 with Reliance Capital Limited (RCL).D). RMF has been registered with the Securities & Exchange Board of India (SEBI) vide registration number MF/022/95/1 dated June 30.400 051 will provide professionally managed back office support for all business services of UTI Mutual Fund (excluding fund management) in accordance with the provisions of the Investment Management Agreement. UTI International Limited. Bandar (East).astheTrustee. as the Settler/Sponsor and Reliance Capital Trustee Co.________________ Reliance Mutual Fund Reliance Mutual Fund (RMF) has been established as a trust under the Indian Trusts Act. Aintab jhunjhunwala (MD) Ms sushi methane (Joint M. 2003) who has been appointed by the UTI Trustee Company Private Limited for managing the schemes of UTI Mutual Fund and the schemes transferred / migrated from UTI Mutual Fund. UTI Asset Management Company presently manages a . Limited (RCTCL). Bandar . Kana dashy (Chairman). Gnu Block. the Trust Deed. UTI Mutual Fund has come into existence with effect from 1st February 2003. IMD/PSP/4958/2004 date 11th. March 2004. The main objectives of the Trust are: • To carry on the activity of a Mutual Fund as may be permitted at law and formulate and devise various collective Schemes of savings and investments for people in India and abroad and also ensure liquidity of investments for the Unit holders. UTI MUTUAL FUND. Channel Islands. Mumbai . for undertaking portfolio management services and also acts as the manager and marketer to offshore funds through its 100 % subsidiary.

D). UTI Mutual Fund has a track record of managing a variety of schemes catering to the needs of every class of citizenry. ________________ ________________ The registered office of the AMC is situated at Ramon House.. is a wholly owned subsidiary of Templeton Worldwide Inc. Mr. . responsive. 1999. 1956. TEMPLETON ASSET MANAGEMENT (INDIA) PVT.400 020. a risk management department is also in operation. Mar Connolly (Executive Director). LTD HDFC Asset Management Company Ltd (AMC) was incorporated under the Companies Act.K Sinhala (Chairman& M. Parekh Margi. professional fund management team. U. 1956. LTD. restructured. 169. Mr. H. All these have evolved UTI Mutual Fund to position as a dynamic. 2000. All the branches. who has been highly empowered to manage funds with greater efficiency and accountability in the sole interest of unit holders.20000 Core. is a part of the Franklin Templeton Group. It has over 50 years of . Back bay Reclamation. efficient. ________________ ________________ It has reset and upgraded transparency standards for the mutual funds industry. the AMC will conduct the operations of the Mutual Fund and manage assets of the schemes.S R Murthy (Executive Director). Mumbai .NET Stench ( C E O) Mr. Intaiyazul Bahaman (Chief Finance Officer). It has a well-qualified. The Franklin Templeton Group is one of the world s largest Investment Management Companies. Mr. including the schemes launched from time to time Key Personnel Mr. It has a nationwide network consisting 56 UTI Financial Centers (Fuss) and representative offices in Dubai and London. Church gate. Deepak Parikh (Chairman). To ensure better management of funds. 11 satellite offices have also been opened in select towns and districts. The sponsor of the Fund Templeton International Inc. which in turn is a wholly owned subsidiary of Franklin Resources Inc.T. and transparent and SEBI compliant entity Key Personnel Mr. and was approved to act as an Asset Management Company for the HDFC Mutual Fund by SEBI on June 30. ________________ ________________ Templeton Asset Management Company.. on December 10. In terms of the Investment Management Agreement. The fund managers are also ably supported with a strong in-house equity research department. the Trustee has appointed the AMC to manage the Mutual Fund.corpus of over Rs. With a view to reach to common investors at district level. HDFC ASSET MANAGEMENTCOMPANYPVT. 3rd Floor. a company incorporated under the Companies Act. UFCs and registrar offices are connected on a robust IT network to ensure cost-effective quick and efficient service. D. As per the terms of the Investment Management Agreement.

United Sates. Through years of commitment to service and national development.experience in International Investment Management with 34 offices in over 23 countries. Pune. and Asia. Templeton has eleven offices including Mumbai. Mr. which service over 10 million unit holders. corporate clients and institutional investors a wide range of investment products. it has 9. Key Personnel Ravi Amphora (Chairman). has management done better through its selective baying and selling of securities than would have been achieved through merely “buying the market” ––picking a large number of . managing over 250 billion Euros in assets Key Personnel Mr. which offers retail investors. Set up on July 1. Bangalore.O). Murthy ( Fund Manager). Templeton started operations in Mumbai. of schemes including options 59 59 27 56 95 Equity Schemes 20 15 10 16 33 Debt Schemes 06 26 07 08 13 Short term debt Schemes 07 02 03 05 11 Equity & Debt 02 04 02 03 07 Gilt Fund 09 02 06 04 10 ________________ ________________ PORTFOLIO MEASUREMENT METHODS: We are interested in discovering if the management of a mutual fund is performing well. 1955. Didier Turpin (C.039 branches in India (excluding 4599 branches of banking subsidiaries) and 54 offices in 28 countries spread over all time zones. that is. Today. B. India in January 1996. ________________ ________________ PARTICULARS OF AMCS: PARTICULARS RELIANCE UTI HDFC SBI F&T No. the State Bank of India. Cochin and Hyderabad. ________________ ________________ SBI MUTUAL FUND. Deepak Catwalk (MD . SBI entered into a Memorandum of Understanding with Society General Asset Management (SGAM). Calcutta. SGAM is a dominant player in Global Mutual Fund arena with presence in over 20 countries spanning Europe. Mr. SBI Mutual Fund draws strength from India's premier and largest bank. the State Bank of India is the largest banking operation in the country.E.Templeton in India has 8 different funds. Deepak Chula (M. Chennai. Gants N. Delhi. SBI has grown into an instrument of social change. of schemes 31 15 13 25 56 No.D).Asia). Swami Nathan (Director & COO).

This mean. So. a low and negative trainers index is indication of unfavorable performance. Jensen’s Performance Measure Sharpe’s Performance Measure (Sharpe ratio or Reward to variability ratio) William Sharpe has attempted to get a summary measure of portfolio performance. His measure properly adjusts performance for risk. if any unsystematic risk is left. The Sharpe Index is given by: S i = r ib – r* σ I where S i = Sharpe Index r ib = average return on portfolio t r* = riskless rate of interest σ I = standard deviation (risk) of the returns of portfolio ________________ ________________ While a high and positive Sharpe ratio shows a superior risk adjusted performance of a fund. Risk premium r ap – f ro T P = = Portfolio β β per on  with disability All risk averse investors would like to maximize this value while a high and positive trainers index shows a superior risk adjusted performance of a fund. ________________ ________________ . Assumption: Portfolio is itself only as part of the total investments portfolio. It is concerned with systematic risk (β) . this cannot be eliminated Trey nor performance measure (Jack Trey nor): This ratio also called neither Trey nor ratio-reward to volatility ratio. It is relationship between rewards of risk premium to the volatility of return as measured by the portfolio risk. eliminate any unsystematic risk as his portfolio is well diversified. Assumption: Sharpe assumes that the portfolio under the consideration is whole or substantially the whole of investor’  total portfolio. A low and negative Sharpe ratio is an indication of unfavorable performance. Sharpe’s Performance Measure 2.securities randomly and holding them throughout the period? The most popular ways of measuring management’s performance are 1. Tenor’s Performance Measure 3.

CAPM r ap = f ro + β(r am – f ro ) Differential return is calculated as follows: α p = r ap . CAPM – is used to calculate the expected return.The composition of assets and liabilities largely decides the solvency. 2. liquidity and profitability of a corporate entity. The difference between the expected return and act retain can be said the return earned out of the mandatory of systematic risk.r ap α p = positive ––> Superior returns α p = Negative ––> Unskilled management (worse portfolio) α p = 0 ––> Neutral performance Higher alpha represents superior performance of a fund and vice versa. ALM is a strategic approach or managing of managing the balance sheet dynamics in such a way that the net earnings are maximized and it ensure the level and risk less with the risk return objectives of banks/FIs. The reduction of liquidity risk by lengthens the maturity of liabilities less profitability because long term . the components of liabilities determines the cost of funds and it broadly with both sides of balance sheet.Jensen’  Performance Measure (Michael): It refers the actual return earned in portfolio and return expected out of portfolio given its level of risk. 3. This excess return referees the manager’  predictive ability and managerial skills. ________________ ________________ ________________ ________________ 9 2 ________________ ________________ FINDINGS 1.

funds to be more expansive than short term funds. The appropriate balance between liquidity and profitability is determined by Top Managers. ALM is the process. 3. 11. The banks & financial institutions should utilize the readily available software package for ALM and for easy and speedy preparation of data for ALM meetings. which is used to manage liquidity risk and interest rate risk. To deal with the market risk ALM works. SUGGESTIONS 1. 8. 6. 7. 9 2 ________________ ________________ GLOSSARY ALM ASSET LIABILITIES MANAGEMENT ALCO ASSET LIABILITIES COMMITTEE IRR & ERF EXPORT REFINANCE FACILITY IRR INTEREST RATE RISK CLF COLLATERALISED LENDING FACILITY ACLF ADDITIONAL COLLATERALISED LENDING FACILITY NIT NET INTEREST INCOME MVE MARKET VALUE OF EQUITY NIM NET INTEREST MARGIN RSA RATE SENSITIVE ASSETS RSL RATE SENSITIVE LIABILITIES VAR VALUE AT RISK RBI RESERVE BANK OF INDIA SFC STATE FINANCIAL CORPORATION IDB I INDUSTRIAL DEVELOPMENT BANK OF INDIA 9 2 ________________ ________________ SIDBI SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA APSFC ANDHRA PRADESH STATE FINANCIAL .The methods of date acquisition for managing the liquidity risk management and interest rate risk management should improve. It shall be mandatory for all state financial institutions to introduce ALM concept for better management of risk. 4. changes in the interest rate always have a effect in the risk management. Interest rate risk can influence more the business than the liquidity risk in market. 2.It also implies fewer earnings opportunities from negative gapping. Dealing with liquidity risk is earlier than dealing with the interest rate risk. 9 2 ________________ ________________ The 9.It is found that in APSFC is strictly practicing ALM concept. 10. 5.

almis.apsfc.com M.CORPORATION 9 2 ________________ ________________ BIBLIOGRAPHY INDIAN FINANCIAL SYSTEM ASSET LIABILITY MANAGEMENT RBI GUIDELINES APSFC ANNUAL REPORTS www.KHAN S.Y.KHURANA 9 2 .com www.K.