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Source: E-mail dt. 26 August 2011
A Study on Asset and Liability Management in Salem Co-operative
Bank

Mrs. S.Sreekala
Research Scholar PSG College of Technology, Coimbatore - 641 004.
Dr. V. Santhi
Professor, Department of Humanities, PSG College of Technology,
Coimbatore - 641 004.

INTRODUCTION

ASSET AND LIABILITY MANAGEMENT

The Asset and liability management includes all deposits and advances, maturity of deposits
and incremental assets and liabilities, etc. It is a decision making responsible for balance
sheet planning from risk and return standpoint including the strategic management of
liquidity, interest rate risks. The business and risk management strategy of the bank should
ensure that the bank operates within the limited parameters set by the Board. Besides
monitoring the risk levels of the bank, there should proper review the results and progress in
realization of the decisions made. In future business strategy decisions should be based on the
banks current rate of interest. In respect of the funding policy, for instance, its responsibility
would be to decide on source and liabilities mix or the assets sale. There should be efficient
management of short term deposits, medium term deposits and long term deposits, loans and
advances, borrowings and investments etc.

NEED OF ALM

 ALM units create a properly aligned risk and return management process. The right
mix between skills and risk appetite must be identified, expected outcomes of
activities known and appropriate metrics established. The approach adopted needs to
be aligned to the realities of the market the bank.
 A bank needs to realize that the right level of asset and liability need to be committed
to support the function.
 Various techniques are used to examine the mismatch in a bank’s balance sheet and it
can be a difficult process if not supported with adequate systems. Depending on
systems and analytical support the ALM process will undertake a number of analysis
designed to identify; static and dynamic mismatch.
OBJECTIVE OF THE STUDY
1. To study about the management of Assets and liabilities of the Salem District Central Co-
operative Bank.

2. To study about the effectiveness and performance of the Bank.

3. To suggest measures for the improvement of Salem District Central Co-operative Bank.

RESEARCH METHODLOGY

RESEARCH DESIGN

The methodology used in the study is analytical and descriptive in nature where
the researcher has to use facts (or) information already and study the characteristic of a
particular group respectively and there by analyze to make a critical evaluation of the study.

TYPES OF DATA

SOURCES OF DATA

The researcher is primarily based on secondary data, with addition information

gathered from the finance department. The main sources are company’s previous year’s
annual reports and schedules.

DATA COLLECTION METHOD

SECONDARY DATA

The secondary data has been collected from the Annual Reports of the Salem District Central
Co-operative Bank.

TOOLS USED FOR ANALYSIS OF DATA

The tools used for analyzing the financial position of the company are

1. RATIO ANALYSIS

2. LEAST SQUARE ANALYSIS

3. CORRELATION

Ratio analysis is widely used tool of financial analysis. It can be used to compare the risk and
return relationship of firms of different sizes.

It is defined as the systematic use of ratio to interpret the financial statements so that the
strengths and weaknesses of a firm as well as its historical performance and current financial
condition can be determined.
The term ratio refers to the numerical or quantitative relationship between two
items/variables. This relationship can be expressed as percentage, fraction and proportion of
numbers (1:4).

TYPES OF RATIO

Profitability Ratio
 Operating profit Ratio
 Net profit Ratio

Liquidity Ratio
 Current ratio

Activity Ratio

 Net profit to Net worth Ratio

 Fixed Assets to Net worth Ratio
 Net Profit to share capital Fund Ratio
 Fixed Assets Ratio

Solvency Ratio

 Proprietary Ratio
 Cash to Current Asset Ratio
 Cash to Current Liability Ratio
 Cash to Share Holders fund Ratio
TABLE 1: Calculation of Operating Profit and Net Profit Ratio

OPERATING PROFIT RATIO NET PROFIT RATIO

Income Operating Income Ratio Year Net Income Ratio

Year expense(Rs.in (Rs.in profit (Rs.in
crore) crore) (Rs.in crore)
lakhs)
2005- 10393 10398 0.99 2005- 5.3 10398 0.05
2006 2006
2006- 9056.6 9603.2 0.94 2006- 546.67 9603.2 5.69
2007 2007
2007- 11243 12387 0.91 2007- 1143.9 12387 9.23
2008 2008
2008- 16108 17010 0.95 2008- 901.93 17010 5.3
2009 2009
2009- 14752 16228 0.91 2009- 1475.7 16228 9.09
2010 2010
Source: Annual Report

TABLE : 1.2 CALCULATION OF CURRENT & NET PROFIT TO NET WORTH

RATIO

CURRENT RATIO NET PROFIT TO NET WORTH

 RATIO

YEAR CURRENT CURRENT RATIO NET NET

ASSETS LIABILITIE PROFIT WORTH
(Rs.in S (Rs.in (Rs.in (Rs.in
crore) crore) YEAR lakhs) crore) RATIO
2005- 113509 106012 1.0707 2005-
2006 2006 5.3 118144.51 0.0044
2006- 102064 77098.4 1.323 2006-
2007 2007 546.67 125572.02 0.4353
2007- 123851 128127 0.966 2007-
2008 2008 1143.9 150666.52 0.759
2008- 175766 150664 1.166 2008-
2009 2009 901.93 179318.6 0.502
2009- 211142 179748 1.174 2009-
2010 2010 1475.67 213408.8 0.691
Source: Annual Report

TABLE1. 3 CALCULATION OF FIXED ASSETS TO NETWORTH AND NET PROFIT TO SHARE CAPITAL
FUND RATIO

FIXED ASSETS TO NET WORTH RATIO NET PROFIT TO SHARE

CAPITAL FUND RATIO
YEAR FIXED SH. RATIO Net Share
ASSETS FUND profit capital
(Rs.in (Rs.in (Rs.in (Rs.in
crore) crore) Year lakhs) crore) Ratio
2005- 4635.6 2459.98 1.88 2005-
2006 2006 5.3 2460 0.22
2006- 23507.76 5673.24 4.14 2006-
2007 2007 546.67 5673 9.64
2007- 26815.71 9046.32 2.96 2007-
2008 2008 1143.9 9046 12.64
2008- 23918.65 12483.05 1.92 2008-
2009 2009 901.93 12483 7.23
2009- 23450.87 15703.88 1.49 2009-
2010 2010 1475.7 15704 9.4
Source: Annual Report
TABLE 1.4 CALCULATIONS OF FIXED ASSETS RATIO AND PROPRIETORY
RATIO

FIXED ASSETS RATIO PROPRIETORY RATIO

YEAR FIXED LONG RATIO PROPRIE
TOTAL
ASSET TERM TOR’S
YEA ASSETS
S (Rs.in FUND FUND RATIO
R (Rs.in
crore) (Rs.in (Rs.in
crore)
crore) crore)
2005- 4635.6 2984.8 1.55 2005-
2459.98 118144.5 2.082
2006 2006
2006- 23507.7 19982.65 1.17 2006-
5673.24 125572 4.517
2007 6 2007
2007- 26815.7 20286.8 1.32 2007-
9046.32 150666.5 6.004
2008 1 2008
2008- 23918.6 20366.13 1.17 2008-
12483.05 179318.6 6.961
2009 5 2009
2009- 23450.8 21184.3 1.1 2009-
15703.88 213408.8 7.358
2010 7 2010
Source: Annual Report
TABLE 1. 6 CALCULATION OF CASH TO CURRENT ASSETS AND CURRENT
LIABILITIES RATIO

CASH TO CURRENT ASSETS CASH TO CURRENT LIABILITIES

RATIO RATIO
Year Cash & Current Ratio Year Cash & Current Ratio
bank assets bank Liability
balance (Rs.in balance (Rs.in
(Rs.in crore) (Rs.in crore)
crore) crore)
2005- 22080.97 113508.9 0.19 2005-2006 22080.97 106012 0.21
2006
2006- 24276.14 102064.26 0.23 2006-2007 24276.14 77098.38 0.31
2007
2007- 33333.76 123850.8 0.26 2007-2008 33333.76 128126.9 0.26
2008
2008- 48760.96 175766 0.27 48760.96 150664.1 0.32
2009 2008-2009
2009- 49706.22 211142.22 0.23 2009-2010 49706.22 179748.4 0.27
2010
Source: Annual Report
 TABLE1. 5 CALCULATION OF CURRENT ASSETS TO SHARE HOLDERS FUND
RATIO

CURRENT ASSETS TO
PROPRIETORS FUND RATIO
Year Current Share Ratio
assets hol.Fund
(Rs.in (Rs.in
crore) crore)
2005- 113508.9 2459.98 46.14
2006
2006- 102064.26 5673.24 17.99
2007
2007- 123850.8 9046.32 13.69
2008
2008- 175766 12483.05 14.08
2009
2009- 211142.22 15703.88 13.44
2010
Source: Annual Report

LEAST SQUARE ANALYSIS

FORMULAE:

Least square (y) = a + bx

a =  y
n

b =  XY
 X2
TABLE 2 CALCULATION OF LEAST SQUARE METHOD

YEAR NET X X2 XY
PROFIT
(Y) (Rs.in
lakhs)
2

2005-06 5.3 -2 4 -10.6

2006-06 546.67 -1 1 -546.67
2007-07 1143.9 0 0 0
2008-08 901.93 1 1 901.93
2009-9 1475.67 2 4 2951.34
 EXPANSION

a =  y
n
= 4073.47 = 814.69
5

b =  XY = 3296 = 329.6

 X2 10

FORECASTING FOR THE FUTURE NET PROFIT

NET
PROFIT
YEAR Y = a + bx (Rs.in lakhs)
814.69 + 329.6
2010-2010 (3) 1803.49
814.69 + 329.6
2011-2011 (4) 2133.09
814.69 + 329.6
2012-2012 (5) 2462.69
814.69 + 329.6
2013-2013 (6) 2792.29
814.69 + 329.6
2014-2014 (7) 3121.89

TABLE 3.1 CALCULATION OF CORRELATION BETWEEN NETPROFIT TO TOTAL

ASSETS

TOTAL
NET ASSETS
PROFIT(X) (Y) (Rs in
YEAR (Rs.in lakhs) crore) X Y XY
2005-
2006 5.30 118,144.50 28.09 13,958,122,880.25 626,165.85
2006-
2007 546.67 125,572.00 298,848.09 15,768,327,184.00 68,646,445.24
2007- 172,347,409.3
2008 1,143.90 150,666.50 1,308,507.21 22,700,394,222.25 5
2008- 161,732,824.9
2009 901.93 179,318.60 813,477.72 32,155,160,305.96 0
2009- 314,920,963.9
2010 1,475.67 213,408.80 2,177,601.95 45,543,315,917.44 0
130,125,320,509.9 718,273,809.2
4,073.47 787,110.40 4,598,463.06 0 3
r = 0.863

TABLE 3.2 CALCULATION OF CORRELATION BETWEEN NETWORTH TO TOTAL ASSETS

NET TOTAL
YEAR WORTH(X) ASSETS(Y) X2 Y2 XY
2005-
2006 118,144.51 118,144.50 13,958,125,243.14 13,958,122,880.25 13,958,124,061.70
2006-
2007 125,572.02 125,572.00 15,768,332,206.88 15,768,327,184.00 15,768,329,695.44
2007-
2008 150,666.52 150,666.50 22,700,400,248.91 22,700,394,222.25 22,700,397,235.58
2008-
2009 179,318.60 179,318.60 32,155,160,305.96 32,155,160,305.96 32,155,160,305.96
2009-
2010 213,408.80 213,408.80 45,543,315,917.44 45,543,315,917.44 45,543,315,917.44

Total 787,110.45 787,110.40 130,125,333,922.33 130,125,320,509.90 130,125,327,216.12

r = 0.999

FINDINGS:

1. Table1.1 Operating Profit shows that the ratio was fluctuating and decreasing every
year except 2008-09.

ii) Net profit is very low in the year 2005-06 The net profit has been gradually
increased in the year 2007-08. except 2008-09 it has further decreased.

2. Table 1.2 Shows that the current ratio of the firm is below the standard i.e., 2:1. There
is 1:1 ratio for the bank. It shows that there is less liquidity position as specified in the
table

ii) Net Profit to Net worth ratio is gradually increasing trend.

3. Table 1.3 Fixed to Networth ratio is fluctuating every year. Only 2006-07 showing
positive trend

ii)Net Profit to Share Capital Fund is declining except 2006-07 and 07-08

4. Table 1.4 Fixed Asset Ratio shows that declining trend except 2007-08

ii)Proprietary ratio has been increased every year, the debt equity ratio increased
which indicates reduction in risk.
 5. Table 1.5 shows that current asset have been maintained in the year 2005-06 and it
has decreased every year.

6. Table 1.6 Cash to Current asset ratio is fluctuating and also decreasing except 2007-08
and 2008-09.

Cash to Current Liability ratio shows that increasing trend except 2007-08 and
2009-10.

7. Table no 2 The Net Profit is in good position. According to the least square method
the Net Profit is expected to increase.

8. Table 3.1 Correlation between Net profit to Total Assets which shows a reasonably
strong positive correlation.

9. Table 3.2 Correlation between Networth to Total Assets shows that is a strong positive
correlation.

SUGGESTIONS:

 The current ratio of the bank does not meet the standard ratio. It would be suggested
that the bank to take necessary steps to increase the current assets of the bank.

 Operating profit ratio shows that the expenses are higher than income. It is suggested
that the bank can reduce the avoidable expenses

 It is suggested that the bank can increase the current account holders from the public.
These funds can be utilized by the bank and increase their income without any
payment of interest to the current account holders

 The Net Profit of the bank in the year 2005-06 was very low, which have been is now
increased in the year 2009-10.. It is suggested to increase the net profit of the bank
which would the risk of suffering from loss

 The Net Profit, and Total asset correlated positively they should maintain the same in
future.

 The investments are made in government securities with low revenue. The bank invest
huge amount in these securities which is suggested to reduce the level of investments

 The bank has to do their major transaction with cash, so it has to be increased
Conclusion

The bank’s performance is satisfactory. In some area they are lacking in banking position. If
they improve their customer service and technology they will come up with the standard
level. . According to the least square method the Net Profit is expected to increase next five
year. This study reveals the findings and recommendations which would be useful for the
development and improvement to the bank.

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Bangalore: Center for Capital Markets Education and Research, Indian Institute of
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