Asset liability management:

ALM: ALM is the management of Assets & Liabilities in the balance sheet in such a way
that the net earning from the interest is maximized and Liquidity Risk and Interest rate
risk are minimized. It is mandatory now for banks since 1st April 1999.
RBI has issued guidelines on ALM to banks. Banks have to use the Flow Approach and
construct maturity ladders to identify and manage the mismatch and gaps.

Maturity Buckets: There are two different maturity ladders constructed for the purpose
of Liquidity and interest rate management.

Liquidity Buckets: 1) Next day 2) 2-7 days 3) 8-14 days 4) 15-28 days 5) 29-90 days
6) 91-180 days 7) 181-365 days 8) 1-3 years 9) 3-5 years 10) above 5 years.
Interest rate sensitivity: 8 time buckets 1) 1-28 days 2) 8-14 days 3) 29-90 days 4) 91-
180 days 5) 181-365 days 6) 1-3 years 7) 3-5 years 8) above 5 years and 9) Non-
sensitive.

Mismatch Position: When a particular maturity bucket, the amount of maturity

liabilities or assets does not match, such position is called mismatched position, which
create surplus or liquidity crunch position and depending upon the interest rate
movement, such situation may turnout to be risky for the bank.
Ceiling on Mismatch position (RBI Guidelines): For liquidity, mismatches for cash
flows for the first four buckets not to exceed 5%, 10%, 15% and 20% respectively of
cash outflows for those buckets. For Interest Sensitivity mismatches for cash flows for
1-14 days and 15-28 days buckets to be kept to minimum (not exceed 20% each of
cash outflows for those buckets.

ADR, GDR and IDR:

American and global depository receipts: American Depository Receipts (ADR) and
Global Depository Receipts (GDR) are instruments in the nature of depository receipt or
certificate. These are negotiable and issued by non-US Company, representing publicly
traded, local currency equity shares. For Indian corporates, it is preferred source of
raising capital in foreign markets. Non-resident Indians (NRIs) prefer to invest in these
instruments. ADR are listed on American Stock Exchange whereas GDRs are listed in a
Stock Exchange other than American Stock Exchange say Luxemburg or London.

Indian Depository Receipts: Companies incorporated outside the country raise

resources from the Indian capital market with issue of Indian Depository receipts (IDRs).
IDR means any instrument in the form of depository receipt created by the domestic
depository in India against the underlying equity shares of the issuing company.

Annual information returns: AIR is annual return to be furnished by Banks to

Commissioner of income tax (Central Information Bureau) in form number 65 on before
31st August each year. Not furnishing AIR will attract penalty at Rs. 100/- per day.

Financial transaction to be reported in AIR includes:

 a) Cash Deposits of Rs. 10 lacs or more in a year.
b) Aggregate credit payments in excess of Rs. 2 lacs or more in year.
c) Cash deposits aggregating to 10 lacs rupees or more in a year in SB with the
bank.
d) Payments made by any person against bills raised in respect of a credit card
issued to that person, aggregating to 2 lacs rupees or more in the year.
e) Receipt from any person of an amount of 5 lacs rupees or more for acquiring
bonds or debentures issued by the bank. Receipt from any person of an amount
of 1 lac rupee or more for acquiring shares issued by the bank.
f) Receipt from any person of an amount aggregating to 5 lacs rupees or more in a
year for RBI’s saving bonds issued by authorized branches.

Summary of penalties:
a) If person fails to ensure payment of FDR of Rs. 20,000/- or above, not in cash:
penalty equals to sum of the payment (Sec. 271E of IT Act.)
b) If a bank fails to furnish Annual Information Return: Penalty of Rs. 100/- for each
day during which the failure continues (Sec. 271FA of IT Act.)
c) If a person fails to furnish return of income: Penalty of Rs. 5000/- (Sec.271F, IT
Act.)
d) Penalty for Non-Deduction of tax at source on interest on deposit, by a bank is
simple interest at 12 % pa on amount of tax. Imprisonment under section 276-B:
3 months to 7 years.

Benchmark PLR: To enhance transparency in banks pricing of the loan product and
also to ensure that the PLR truly reflects the actual costs, RBI has advised banks to
announce a benchmark PLR with the approval of their boards, taking into consideration:
a) Actual cost of funds, b) Operating Expenses c) A minimum margin to cover
regulatory requirements of provisioning and capital charge, and profit margin.

CAMELS Rating for Banks:

As per the recommendation of Shri S. Padmanabhan Committee, that bank were
placed in the following two categories for the purpose of examination, depending on the
known and reported condition of the banks in financial, operational, management and
compliance terms. For evaluation and ratings of Indian banks, the committee has
suggested CAMELS ratings model on lines of rating model (CAMEL) employed by the
supervisory authorities in the USA.

Six key parameters – rating criteria

C - Capital adequacy.
A - Asset quality.
M – Management.
E – Earning Performance.
L – Liquidity.
S – Systems & Controls.
Capital Fund:
Tier I Capital:
1) Paid up capital
2) Statutory reserves.
3) Capital reserves representing surplus arising out of sale proceeds of assets.
4) Investment fluctuation reserve.
5) Innovative perpetual debt instruments.
Less: equity investment in subsidiaries and intangible assets.

Tier II capital:
1) Un-disclosed reserves and cumulative perpetual preference shares.
2) Revaluation Reserves ( at a discount of 55% while determining their value for
inclusion in Tier II Capital)
3) General Provisions & Loss Reserves (Up to maxi. 1.25% of weighted risk assets)
4) Hybrid debt capital instruments.
5) Subordinated Debt (Long term unsecured loans)
6) Redeemable Cumulative Preference Shares.

Capital Adequacy Ratio (CAR):

Capital adequacy ratio reflects the adequacy of the capital funds (that is Share capital,
free reserves and other capital funds) in relation to the risk-weighted assets. It is
calculated as…

CAR = Capital funds / Risk Weighted Assets * 100 = 9%

Capital Funds: RBI Guidelines envisaged (decided in near future) a two Tier capital
structure namely Tier I and Tier II.
a) Tier I capital is also known as Core Capital. It provides the most permanent and
readily available support to a bank against unexpected losses.
b) Tier II capital contains elements that are less permanent in nature or are less
readily available.

Important Risk weights:

Cash balance with RBI. 0%

Balance with other banks. 20%
Govt./Approved Securities. 2.5%
Secured loans to staff members. 20%
Housing finance to individuals secured by mortgage upto 20 lacs. 50%
Housing finance to individuals secured by mortgage over 20 lacs. 75%
Mortgage deed securitization of assets. 77.5
%
Forex and gold open position. 100%
Loans upto Rs. 1 lac against gold and sliver ornaments. 50%
Central / State Govt. guaranteed advances. 0%
Loans to public sector units. 100%
Other loans. 100%
Loans guaranteed by DICGC/ECGC. 50%
SSI Advances upto CGFT Guarantee. 0%
Advances against Term Deposits, LIC Policies, NSCs with adequate margin. 0%
Consumer credit/ Credit cards. 125%
Venture capital funds, SEZ Developers, Commercial Real Estates, and Capital 150%
market.

Revised guidelines:
Educational loans will be hence forth be classified as Non-consumer credit for capital
adequacy norms. The risk weight applicable to educational loans would be as:

a) Under Basel I: the risk weight would be 100% as against 125% at present.
b) Under Basel II : the Educational loans, now no longer being a part of Consumer
Credit would be treated as a component of the regulatory retail portfolio and
attract a risk weight of 75% as against 125% at present.

CIBIL:
CIBIL is the India’s first credit information bureau, which is a repository of factual
information on the credit history and repayment records of commercial and consumer
borrowers. CIBIL will provide this specific information to its members in the form of
credit information reports. CIBIL is promoted by several market players including SBI
and has a corpus of Rs. 25 crores. To start with, CIBIL is maintaining a database on
suit-filed accounts of Rs. 1 crore and above and suit-filed accounts [willful defaulters] of
Rs. 25 lacs and above. This information is based on a application developed to enable
the users to access date through a parameterized search process across banks and
companies at various geographical locations. Suit-filed accounts of lower value are
proposed to be covered in a phased manner.

Capital market exposure:

1) Aggregate capital market exposure: Restricted to 40% (Both direct and

indirect) of net worth of the bank as on 31st march of previous year both on
solo and consolidated basis. Within the overall limit of 40%, direct
exposure by investment in shares, debentures/ bonds not to exceed 20%
of net worth.
2) Advance against shares: To individuals limited to Rs. 10 lacs against
shares held in physical for and Rs. 20 lacs in demat accounts from
Banking Sector. Margin – 50% including cash margin with at least 25%
margin as cash margin (within 50%).
3) IPO finance: Restricted to Rs. 10 lacs/ individual from the banking sector
with 50% margin with at least 25% margin as cash margin (With in 50%).
4) Statutory Restriction: Banks cannot allow loan to their employees/ others
for purchase of their own shares. This is as per sec. 20 of banking
regulation act.
5) Statutory ceiling: As per sec. 19 of Banking regulation act, the banks can
not hold more than 30% of their own paid up capital + reserves or 30% of
paid up capital of the company (Which ever is lower), as pledge, mortgage
or absolute owner.