A Project Report On Asset Liability Management in Andhra Bank

EXECUTIVE SUMMARY
INTRODUCTION
The Indian banking can be broadly categories into nationalized [government owned],
private Bank and specialized banking institution. The Reserve Bank of India acts a
centralized body monitoring any discrepancies and shortcoming in the system. The
nationalization of Bank in 1923, gave rise to the public sector Bank to play a
prominent role, which led to tremendous progress. The Indian banking has finally
worked up to the competitive dynamics of the ‘new’ Indian market and addressing the
relevant issues to take on the multifarious challenges of globalization.
INRODUCTION TO ANDHRA BANK

Andhra Bank is one of the premier Bank in the country, accredited with distinction.
The present statures of the Bank are due to its strong fundamental and quality
customer’s orientations. Profit making since inception, the Bank today symbolizes a
perfect blend of commercial and social banking. For the year march 2007, the bank
clocked the highest net profit [rs.1110 crore] among nationalized Bank, with
significant improvement in capital adequacy ratio [12.78%] and assets quality [net
NPA of1.88%]
Introduction to ALM
Risk Management is the strategic tool, which helps in identifying, qualifying,

monitoring and controlling risk. Risk management protects An organization from
dying due to insolvency resulting from the adverse effects of risk.
Babasabpatilfreepptmba.com Page 1
Though universally relevant it is of immense to a banking organization or financial
institution. In view of the same Risk Management is analyzed here from the banking
perspective. However with the larger corporate houses establishing their own
independent dealing rooms, risk management systems are no longer limited to
banking organizations.
A banking organization has to constantly strike a risk & reward balance. A

proposal, which ma seem very rewarding in the short term, may wipe out the bank
completely in the run due to high risk embedded in it. Risk Management systems are
not a solution, but a tool to aid decision-making.
TITLE OF THE PROJECT
“Asset Liability Management in Andhra Bank”
OBJECTIVES OF RESEARCH
1 To study the efforts of the Bank eliminate gap which difference between
amount of rate sensitivity asset and rate sensitivity liability.
2 To study risk management technique designed by the bank to Earn an adequate
return.
3 To find the overall asset liability management at Bank.
4 To give some tentative observations in the area of asset
Liability management.
PROJECT DESIGN
The project asset liability management was carried At Andhra Bank to find asset
liability management in Bank more so in Andhra Bank. The information was collected
from various sources like personal discussing with the bankers. Reference was made
to the balance sheet and profit and loss account of the Bank as at 31 march 2003,
2004, 2005, 2006 and 2007. I have also referred various materials on the subject
published by the Bank. I have also referred various books on the subject matter I have
collected information from head office of the Bank which is situated at Hyderabad
WHY ALM?
This area was chosen mainly because it is of prime concern for Most of the Bank in
the present era. In view of the intense Competition prevailing in Bank increasing
volatility interest rates there is a strain on spread and profitability. As such this is an
Interesting subject for the students to enhance their knowledge. Hence this subject
was chosen for the project.
FINDINGS
1. Almost the Andhra bank assets are matched with the liability Thereby leaving
no gap
2. Better measures of internal rate of return can also be had by Linking gap to
net interest income of the Bank
3. Bank deploy their funds to optimize their revenue while Maintaining their
liquidity
4. The bank prefer book liability and then look for deployment of Funds
5. The bank usually manages liability in time with asset already Identified thus
overcome the risk of idle liability
6. Even though proper mismatch is done the chances of Asset not been paid on
maturity may effect the bank.
RECOMMENDATION
1. It is recommended that bank should manage the liability [Deposit

collected from the customer] By proper deploy men into the asset [Loans
and advances] of equal maturity
2. Proper hedging of increase and decrease in rate of interest
3. It is recommended that bank should manage funds in such a way that
there is no hap
4. It is recommended that by proper deployment of funds Bank should earn
revenue and there should not be any Mismatch
5. Better measures of internal rate of return can also be had by linking gap
to net interest income of the bank
LIMITATION
1. The study I have conducted in Andhra Bank (Branch) at Traffic Island and
the available material in the branch says that the Information is restricted
to the above center only.
2. The project is conducted based on past performance .As the Past
performances may not be the indicator of the future Results.
3. Performance of the Bank mainly depends on the Government policies in
respect of investment and Infrastructure development
Even though proper mismatch is done the chances of Asset not been paid on maturity
may effect the bank
BRIF DESCRIPTION
Indian banking system has performed exceeding well the various economic and
political upheavals but in spite of its consistent performances and strong fundamental
one main problem continuous to plug the banking industries that is the management
of Assets and Liability with several risk that bank face on regular basis. The problem
relating to asset liability has always been a cause of all the bankers “Asset Liability
Management is concerned with risk management and provides comprehensive and
dynamic framework for measuring, monitoring and managing liquidity, interest rate,
foreign exchange and Equity and commodity prices risk of the Bank that needs to be
closely integrated with the Bank business strategy. Asset liability management
Involves assessment of various types of risk and altering Asset liability portfolio in a
dynamic way in order to manage risk” Asset liability management is all about
efficient management of balance Sheet dynamics with regards to its size, constituents
and quality. It is a process of managing Net Income Margin [NIM] within the overall
risk bearing ability of the Bank the entire asset liability process depends on
understanding of balance sheet. The availability, accuracy adequacy and expediency
of the data and management system of the Bank. One way to measure the direction
and extent of Asset Liability mismatch is by using GAP analysis. The analysis derives
its name from the gap. This is the difference between the amounts of “Rate sensitivity
Asset [RSA] and Rate sensitivity Liability [RSL. Managing this gap is large part what
asset and liability management is all about. In order to undertake this in many Bank
Asset Liability Committee [Alco] is formed to price and market loan and to deposit in
such a way to eliminate gap
INDUSTRY PROFILE
"Andhra Bank" was founded by the eminent freedom fighter and a multifaceted
genius, Dr.Bhogaraju Pattabhi Sitaramayya. The Bank was registered on 20th
November 1923 and commenced business on 28th November 1923 with a paid up
capital of Rs 1.00 lakh and an authorised capital of Rs 10.00 lakhs. The Bank crossed
many milestones and the Bank's Total Business as on 31.12.2007 stood at Rs.75,225
Crores with a Clientele base over 1.65 Crores. The Bank is rendering services through
2046 Business Delivery Channels consisting of 1343 branches, 73 Extension
Counters, 592 ATMs and 38 Satellite Offices spread over 21 States and 2 Union
Territories as at the end of December, 2007. All Branches are 100% computerized,
1186 units viz., 1101 Branches, 70 Extension Counters, 15 Service Centres
networked under Cluster Banking Solution and providing "Any Branch
Banking(ABB)". Real Time Gross Settlement (RTGS) Facility and National
Electronic Fund Transfer (NEFT) facility has been introduced in 680 Branches. To
provide value-added services to Customers, the Bank has set up its own 592 ATMs as
on 31.12.2007. Of which 03 Mobile ATMs and two with Biometric access. Besides,
ATM sharing arrangements with several Bank including SBI group, IDBI Bank, UTI
Bank, HDFC Bank, Indian Bank and others under National Financial Network
Switch covering 24856 ATMs.
The Bank opened its Representative Office in Dubai in May, 2006 and has received
permission from Reserve Bank of India for opening Representative Offices at New
Jersey (U S A).
Our Bank introduced Internet Banking Facility (AB INFI-net) to all customers of
cluster linked branches. Rail Ticket Booking Facility is made available to all debit
card holders through IRCTC Website through a separate gateway. Our
Bank's Corporate Website is available in English, Hindi and Telugu Languages
communicating our Bank's image and information. Our Bank has been given
‘BEST BANK AWARD’ a banking technology award by IDRBT, Hyderabad for
extensive use of IT in Semi Urban and Rural Areas on 02.09.2006. IBA Jointly with
TFCI has conferred the Joint Runner-up Award to the Bank in the Bet Payments
initiative in recognition of outstanding achievement of the Bank in promoting ATM
Channel.
Bank successfully conducted " Bancon 2006", a two day event at Hyderabad,
deliberating on Inclusive Growth - A New Challenge.
Andhra Bank will open its Representative Office in New Jersey City in
United States shortly. Bank feels United States would be an ideal location as Andhra
Bank has been a household name among many NRIs there. A foothold in New Jersey
is strategic for the 84 year old bank as it has a large number of non resident Indians
from Andhra Pradesh.
Thus our Bank accords utmost concern to customer satisfaction by offering innovative
and need based financial products and services using state-of -the art technology.
Founder
Dr Bhogaraju Pattabhi Sitaramayya was born on 24th November 1880 in

Gundugolanu village, West Godavari District in Andhra Pradesh. He was a renowned
Freedom Fighter and a very illustrious personality.
Corporate Identity
('Togetherness ') is the theme of the logo of Andhra Bank where the world of banking
services meets the realm of ever changing customer needs and establishes a link that
is like a chain, inseparable.
The logo also denotes a bank that's prepared to do anything, to go to any lengths, for
the customer. The blue pointer on the top represents the philosophy of a bank that's
always looking for growth and newer, and challenging, more promising directions
.The keyhole indicates safety and security. The colours red and blue represent fusion
of dynamism and solidity. At a time when the performance of the bank, the prospects
of the bank, and even the perceptions of the bank are vibrantly different, and poised as
we are at the threshold of a new millennium, this modernized logo is a tribute to the
Andhra Bankers who are the true creators of the image of the bank.
Dr. K. Ramakrishnan - Chairman & Managing Director
Shri K Ramakrishnan took charge as Chairman and Managing Director of Andhra

Bank in June,2005. Brief profile of our Chairman and Managing Director is :
Shri K Ramakrishnan, B.Com (Spl), MBA (Gold Medalist) (First Class First) has
been conferred "Doctorate of Letters" by Acharya Nagarjuna University for
contribution in the field of Banking. Dr.K. Ramakrishnan joined Bank of India in
1970. He was appointed Executive Director of Bank of Baroda in 2004 before taking
chargeat Andhra Bank as Chairman & Managing Director. During his appointment in
Bank of Baroda, he was Chairman, Bank of Baroda(Kenya) Ltd., and Chairman, BOB
Housing Fianance Ltd.,
A widely travelled man with academic bent of mind, Mr. Ramakrishnan attended
programmes at National Institute of Bank Management, Pune and Institute for
Development Policy and Management, University of Manchester, UK.
Dr. K Ramakrishnan is also Chairman, State Level Bankers' Committee, Andhra

Pradesh and a visiting faculty at Central University, Hyderabad.
Dr. Ramakrishnan will be the Chairman and Managing Director of Andhra Bank until
31st July, 2008.
Sri Kalyan Mukherjee - Executive Director
Shri Kalyan Mukherjee B.A.(Hons), MBA joined the Andhra Bank board as
Executive Director on 25.03.2006. Before assuming charge as Executive Director, he
was General Manager with UCO Bank. In his career with UCO Bank spanning 37
years, held various important assignments which included 10 years experience in
Overseas Branches of UCO Bank, namely Singapore & Hongkong. Sri Mukerjee has
wide experience in the area of HR. He was a member of Personnel Committee, Indian
Bank' Association for around 3 years.
Vision & Mission of Andhra Bank:-
Awards and Rewards
AWARDS RECEIVED, SO FAR IN THE PRESENT YEAR - 2006-07:
SAFA award
* Received Best Presented Accounts Award 2005 from SAFA's

(South Asian Federation of Accountants) Centrein Colombo, Sri Lanka on
16.01.2007.
"BEST BANK AWARD" by IDRBT, Hyderabad
* Andhra Bank has bagged the "Best Bank Award" in the category of "Use of IT for
Customer Service in Semi Urban and Rural areas" for 2005-06. Our Chairman &
Managing Director, Sri K Ramakrishnan has received the award from Sri Y V Reddy,
Governor, RBI at Institute for Development and Research in Banking Technology
(IDRBT) Hyderabad on 2.9.2006.
MILESTONES ACHIEVED AND AWARDS RECEIVED DURING 2005-06
FINTECH Asia 2006 Award For "Any Branch Banking (ABB)"
Andhra Bank has bagged the FINTECH Asia 2006 Award for its initiatives under
"Any Branch Banking (ABB)" service across the Country. Andhra Bank is the only
Bank in the Country to receive one of the six Awards announced by the Financial
Insights (USA), an IDC Company, which is a Subsidiary of IDG, the World's leading
IT Media, Research and Exposition Company.
Ranked 683rd among Top 1000 Bank in the World
The prestigious 'The Banker' - a Financial Times Business Publication, July 2005
Issue published from London has ranked Andhra Bank as the '683rd Largest Bank
Globally', out of the Top 1000 World Bank' Annual Rankings.
2nd Highest Mover in the World having climbed 277 places over previous year
Andhra Bank also happened to be the 'Second highest mover in the World and
highest mover compared to any other Bank in Asia' having climbed 277 places in the
Top 1000 Bank' Rankings based on Tier-I Capital.
Ranked as the Top Number 1 Bank in Asia under the "Return on Capital"
'The Banker' Magazine went on to Rank 'Andhra Bank as the Top Number 1 Bank
in Asia' under the "Return on Capital" among all the Asian Bank - Rankings being
based on Tier-I Capital Business Parameter.
Adjudged Best Bank by Analyst Magazine - An ICFAI Publication
Our Bank has been adjudged as the "Best Bank under Large Bank Category" by
"The Analyst" Magazine - An ICFAI Publication, in its Performance Analysis of
Select Indian Bank for 2004-05.
The Best Bank as per the Business Standard Annual Banking Survey, 2004-05
The "Best Bank" Status was conferred on our Bank by the Business Standard in its
Annual Banking Survey for 2004-05 in terms of Productivity, Profitability, Growth,
Safety and Efficiency.
Best Bank Rating from Business Today Magazine
The Business Today Survey of the Best Bank in India has Ranked Andhra Bank at
5th Place under Largest Bank Category compared to last year where the Bank was
Ranked at 15th Place in terms of Size and Strength, Operations, Productivity and
Efficiency, Quality of Earnings, Capital Adequacy and Asset Quality. The Bank has
also been Ranked No.5 under Slowest NPA Growth Category and Ranked No.2 under
Return on Capital Employed Category.
ICRA Rating for Corporate Governance
Our demonstrated commitment to vigilant Corporate Governance has been rewarded

by ICRA, which assigned us a Corporate Governance Rating of "CGR-2". This
denotes high level of assurance on the quality of Corporate Governance.
Award of Institute of Chartered Accountants of India for excellence in Financial

Reporting
The Institute of Chartered Accountants of India (ICAI) has recently awarded our
Bank the "Silver Shield" under the category of Banking, Insurance and Financial
Institutions, given for excellence in financial reporting in published accounts for the
year, 2004-05. Our Bank is the only Public Sector Bank to receive an Award from
ICAI.
IBA Technology Award
Andhra Bank has been conferred the "Runner-Up" Award under” Best Payment
Initiative" at the Indian Bank' Association (IBA) Banking Technology Awards, 2005
for having wide ATM Network and highest number of hits per day.
Awards for SLBC, as Convenor Bank in the State of AP
State Level Bankers' Committee (SLBC) of A.P. (Convenor Bank: Andhra Bank)
has been awarded for ensuring excellent performance by all Bank for Kharif 2005.
Awards for Best Performance under Kharif Loans
Andhra Bank was awarded by the Government of Andhra Pradesh for Best
Performance in exceeding Targets under disbursement of Kharif during 2005.
Best Bank in lending to Agriculture
Government of Andhra Pradesh has instituted for the first time Awards for Best
Farmers and Best Bankers at the State Level and District Level. Andhra Bank has
bagged the Best Banker Award at the State Level for its overall performance.
Best Banker in lending to Unemployed Youth under Rajiv Yuva Sakthi
Andhra Bank has been given the Best Banker Award for its performance during
the Year, 2005-06 for achieving Targets under the Rajiv Yuva Sakthi Scheme.
INTRODUCTION TO ASSET LIABILITY MANAGEMENT
On the threshold of new millennium the Indian banking sector is working up to the
concept of Asset Liability Management. Asset Liability Management as a practice has
been existence for quite Sometimes .It was introduced in the year 1970 in USA. When
deregulation of interest rates compelled the bank to undertake an active plan to
structure the balance sheet .The uncertainty of interest rates movement gave rise to
internal rate of return .Thus there by causing the bank to look for measures to manage
the risks. In the Wake of interest rate risk came liquidity risk and credit risk an
inherent component of risk for Bank .The reorganization of risk brought Asset
liability management to the centre stage of financial intermediation .The Indian
economy has witnessed a similar scenario post reform. Banking Scenario is marked
by interest rate deregulation entry of new private Bank, gamut of new product and
greater uses of information techonology.To cope with the pressure bank are required
to evolve with the strategies rather then temporary adhoc solution. These strategies
are executed in the Form of asset liability management practices. An effective Asset
Liability management technique aims to manage volume mix maturity, rate sensitivity
quality and liquidity of asset and liability. Asset liability management framework rest
on three pillars
Rate Sensitive Asset Rate Sensitive Liability
1. Balance with RBI Saving bank deposit
2. Money at call and short notice Term deposits
Term deposit with other Bank
3. Investments Borrowing -fixed, floating,
Coupon and from RBI
4. Advances Refinancing from others
5. Leased asset Repose, bills rediscounted,
Non-Rate Sensitive Asset Non-Rate Sensitive Liability

1) Cash Capital, reserves and surplus
2) Current account balance in Current deposit
Others Bank
3) Shares /units of mutual funds other liability and provision
1. Asset Liability Management Organization
2. Asset Liability Management Information
3. Asset Liability Management Process
Asset Liability Management Organization
The ALCO committee consisting of Bank senior management including Chief

Executive Officer should be responsible for adhering to the limit set by the board as
well for deciding for the business strategy of the Bank in time with Bank budget and
deciding about the risk management objectives .Thus ALCO is a decision making unit
responsible for balance sheet planning from a risk return perspective including
strategic management of interest and liquidity risk.
Asset liability management system
This is for collecting of information accurately and expeditiously. Information is the

key of Asset Liability management process. A good information system gives a bank
management a complete picture of the bank balance sheet.
Asset liability management process
The basic Asset Liability Management process involves identification, measurement

and management of risk parameters. The first step in setting up the Asset Liability
Management function in the Bank would be to decide upon the bank measurement
framework. That is what would be the risk measure parameter that the management
would need to focus on. The appropriate parameters would depend on violability in
the operatin environment, availability of supporting data, the expertise available
within the market and expected market and business development for instance the
introduction of derivate and securitization .The risk parameters chosen should be
capable of capturing risk to the immediate profitability as well as risk on the long
term viability. I.e. future spread Balance sheet value and economic capital adequacy
with changes in interest /exchange rates. Typically, in Bank the word otherwise has
two major parameters to measure the balance sheet risk is the first is the risk to the
Net Interest Income of the Bank which measures the risks to the Immediate
accounting year’s profits that occur from cash flow mismatch occurring in accounting
years. The other parameters is the market value of portfolio equity [MVPE] is the
difference between the market to the market value of the bank asset and liability. It
measures the risk that lies in the bank balance sheet due The maturity mismatch in it
Asset and Liability over the future year’s .The two parameters together capture the
short term and the long term balance sheet risk.
CLASSIFICATION OF ASSET AND LIABILITY
In India there are diverse accounting policies and practices in use, to harmonize these
on April 1, 1977 THE INSTITUTE OF CHARTERED ACCOUNTANT OF INDIA
(ICAI) constituted the Accounting standard board (ASB) which has issued guidelines
of standard since then accordingly the balance sheet of Bank and financial Institution
should consist of 12 schedules divided into two Parts
A] Asset
B] Liabilities
Asset: cash and balances with RBI, balances with Bank and money at
call and short notice, investments advances, fixed asset and other asset
Liability: capital reserves surplus, deposit borrowings other liabilities

provision and contingent liability
For asset liability management these asset liabilities are classified into
different time periods popularly called time or maturity buckets,
depending on maturity profile and interest rate sensitivity .As per RBI
norms or guidelines issued for Asset Liability Management
implementation in Bank in 1999 there are 8 times bucket from T -1 to
T-8 classified respectively as follows:
1. 1 to 14 days
2. 15 to 28days
3. over 29 days up to 3 months
4. over 3 months up to 6 months
5. over 6 months up to 1 year
6. over 1 year up to 3 years
7. over 3 years up to 5 years
8. over 5 years
THE BROAD OBJECTIVES OF ASSET LIABILITY SYSTEM
IN ANDHRA BANK
1. To control violability of Net Interest Income from changes in Interest rates

2. Optimization of profits by ensuring acceptable balance between profitability,
growth and risk.
3. Funding of bank operation through capital planning
4. Product planning and introduction of new product.
5. To control violability of market value of capital from market risk.
6. Suitable period of planning say 1,2 or 3 months ahead
7. Choosing a model that yields a stable net interest income consistently while
ensuring liquidity.
FUNCTIONS OF ALCO
1. STRATIGIC PLANNING
2. PRODUCT PLANNING
3. RISK MANAGEMENT
The functions of Alco are explained under the following detaile Structure. They are:
1. Balance sheet planning from risk return perspective

2. Desired maturity profile and a mix of incremental Asset and Liability
3. Articulating and reviewing the funding policy
4. Articulating interest rate view of the bank
5. Reviewing transfer policy of the bank
6. Approving pricing of various deposits and advance policies
7. Monitoring the implementation of policies and review of operations with in
the limits and parameters set by the board
8. Reviewing the result and progress in implementation of the decision taken in
the previous meeting
Following information is required to be furnished to ALCO
Regularly:
1. Liquidity ratio
2. Profitability ratio
3. Structural liquidity statement of the preceding report date
4. Short term liquidity statement of the preceding fortnight
5. Interest rate sensitivity statement of the preceding report date
6. Analysis of built deposit on monthly basis
7. Analysis of inflow and outflow of retail and bulk deposit on
fortnight basis
8. Sources and uses of fund on fortnight basis
9. Duration gap analysis of asset and liability in balance sheet on
monthly basis
10. Trend in net interest income on quarterly basis
11. Position of adherence of risk limit in forex operation
12. Economic and political impact in balance sheet
ANALYSIS OF ALM IN ADHRA BANK
1. Meeting of Alco is held regularly on a fortnightly and monthly basis

2. They collect asset liability management data on regular or Fortnightly basis
3. Many Bank are conducting behavioral study of saving bank deposit and
current bank deposit at a core and volatile proportion
4. Bank are measuring both mismatch risk and basic risk to measure Net interest
income
5. Bank are pricing deposit and advance using asset liability system
MARKET RISK
Market risk related to financial condition which results in adverse
Movement in market price. A significant fluctuation in asset holding
would adversely affect the balance sheet of the bank. The financial
institution acquire the bonds and hold them till maturity and when
there is significant increase in interest rate or there is violent fluctuation in rate
structure substantial reduces the value of security
held
LIQUIDITY RISK
It is inability of Bank to generate cash to cope with decline in deposit and

increase in Asset .The ability in fund increase in Asset and meet obligations as and
when due is crucial to the viability of the banking organization hence managing
liquidity is most important activity conducted by the Bank. It is the outcome of
mismatch in the maturity pattern of asset and liability .The liquidity can be classified
under the following broad category
1. The need to replace new outflow of funds whether due

To withdrawal of deposit or non renewal of whole sale
Funds
2. Need to compensate for the non receipt of the expected inflow of
funds i.e. borrowed fails to meet the commitment
3. Need to find new funds when contingent liability becomes due
4. The need to undertake new transaction when required i.e. request
for fund from important client
INTREST RATE RISK
Bank face two kinds of balance sheet risk that is credit risk and Interest rate risk
.These risk expose bank business to certain potential lossess.The losses are of three
types they are
1. Expected loss
2. Unexpected loss
3. Stress loss
Expected loss is always insurable through hedges. Unexpected loss cannot be

predicated. It is therefore defined as value at risk [VaR].The third types of loss
bank faces under extreme condition occurs rarely it is called stress loss bank
mostly use funding and maturity gap analysis model to control internal rate of
return. The financial indicator is given below
FINANCIAL SUMMARY
RS (MN) 2003 2004 2005 2006 2007

Interest 56183 63706 66577 70634 75719
income
Interest 37325 45503 44248 43246 44215
expenses
Net interest 18830 18203 22330 27388 31504
income
Total other 9187 14285 15121 20729 15438
income
Total income 28008 32488 37451 47553 46942
Total 16696 15926 17477 18966 21089
operating
Expenses
Pre provision 11312 16562 19974 28587 25853
Profit
Total 8461 9148 9785 15207 14758
provision
Profit after 2851 7414 10189 13380 11095
tax
ALL ROUND SPREAD EXPANSION
Most off the Bank in the financial Year 2007 have shown modest rise in interest on
advances with growth in interest on investment improving interest income. Andhra
Bank has also shown modest rise in interest income during the financial year .In the
event of any rise in yields the bank will further improve the interest income .The
interest on advances has improved by about 10% where as income on investment
there is marginal increase. The interest expenses has improved marginally despite the
fact that deposit have grown by 12.23% the Bank fee income shows improvement in
spite of The Fact that fee income market is heating up as the private Bank are eating
away public sector Bank business under these category of commission on guarantees,
letter of credit and demand draft Commission.
ASSET LIABILITY MANAGEMENT
1. Measuring Interest rate risk

2. Focus is on gap there are three types of gap they are
a) Dollar gap ,Fund gap, Reprising gap
b) Maturity gap
c) Duration gap
GAP
The Andhra Bank with asset and liability of different maturity
0 – 60 61 – 90 91 – 120 121 – 180

ASSET 10 0 40 20
LIABILITY 20 5 30 50
GAP(A- L) -10 -5 10 -30
GAP
(continued)
CUMULATIVE GAP = CGAP
= GAP OVER WHOLE PERIOD

CGAP = -10 -5 +10 -30
= -35
NOTE:
IF + GAP, THEN LOSE IF RATE FALLS
IF – GAP, THEN LOSE IF RATE RISE.
MATURITY GAP
BACKGROUND
CONSIDER 1-YEAR BOND WITH COUPON AT 10% AND YTM 10%
P = 100+0.10*100/1+0.10
= 110/1.10
= 100
IF RATE INCREASES AT 11%
p = 100+0.10*100/1+0.11
= 110/1.11
= 99.10
CONCLUSION
IF RATE INCREASES AND PRICE DECREASES THEN PRICE BY RATE IS

LESS THAN ZERO
MATURITY GAP
CONSIDER A 2 YEAR BOND
P = 10/1.10+ 110/ (1.10)2

= 100
P = 10/1.11+ 110/ (1.11) 2

= 98.29
PRICE FELL MORE THAN ONE YEAR BOND
CONCLUSION
The longer the maturity the greater the fall in the price for the given level increases in
interest rates
GAP ANALYSIS
The difference between Asset and Liability is called as gap. A zero gap position is the
best choice if the bank is not able to speculate interest rate or if its capacity to absorb
risk is zero. With zero gap the Bank is fully hedged against increase and decrease in
the rate of interest as Net Interest Income will not change in both the case .A summary
of gap interrelationship with net interest income is given below
SI NO TYPE OF GAP CHANGE IN INTEREST CHANGE IN NII

RATES
1 RSA = RSLS INCREASE NO CHANGE

2 RSA = RSLS DECREASE NO CHANGE
3 RSA >= RSLS INCREASE NII INCREASE
4 RSA >= RSLS DECREASE NII DECREASE
5 RSA <= RSLS INCREASE NII DECREASE
6 RSA <= RSLS DECREASE NII INCREASE
DURATION GAP ANALYSIS
The change in interest rate affects Bank in two ways the two broad Prospective of
Asset Liability Management is short term and long term prospective are given below
DETAILS SHORTTERM LONGTERM

PERSPECTIVE PERSPECTIVE
Target variable Net Interest Income Market Value of Equity
Perspective Accounting Economic
Type of mismatch Tactical Structural
Focus profit and loss Balance sheet strength
Analyticaltechnique Gap analysis Duration gap analysis
Simulation of NII Simulation of MVE
Earning of risk Value of Risk Equity
IMPLICATION OF DURATION GAP
The impact of changing market interest rates on Bank net worth is indicated below in
this way .Duration GAP figures can be used to estimate expected change in market
value of equity for the given change in interest rates.
NATURE OF CHANGEIN INTREST IMPACT ON BANK

DURATION GAP RATE NETWORTH
POSITIVE DA> K*DL RISE DECREASE
FALL INCREASE
NEGATIVE DA< K*DL RISE INCREASE
FALL DECREASE
ZERO DA= K*DL INCREASE NO CHANGE
DECREASE AND
STABLE
WHERE K = (LIABILITY - EQUITY) / TOTAL ASSET
LIMITATION OF DURATION
1. Duration basically assumes parallel shift in the yield curve.
2. Duration does not capture interest rate violability
3. Duration as per price sensitivity measure is applicable to small

Changes in interest rates
4. Duration is application only to option free bonds
VALUE AT RISK [VAR]
VaR model is one of the interest rate balance approaches where in the credit rating
given to each of the borrowers and its migration over the year from the part of
calculation of credit value at risk. This is due to credit risk which enamels not only
from counters party default but also from sleep age in credit policy .The Bank
review financial statement of borrowers once in a year and allot credit rating .Any
risk Assessment model shall only predict relative risk than absolute risk hence any
risk measurement model can be tailored to suit different time horizons on the
actual need
LIMITATION OF VAR
1. This study is useful for normal operative account to predict probability of
default when the default probability is to be Worked for the portfolio as a
whole VaR has to be separately Calculated and added to the already default
value. Rating methodology should be objective and consistent for better
results Macro level changes in the industry changes in the government policies
ect may give distorted results.
2. In the methodology if a VAR measurement is for a shorter

duration the risk assessment is accurate.
ADVANTAGES OF GAP MODEL
1. Simple to analyze
2. Easy to implement
3. Helps in future analyses in interest rate risk
4. Helps in projecting Net Interest Income for further analysis
DISADVANTAGES OF GAP MODEL
1. Ignores time value of Asset and Liability
2. Dose not considered embedded options like withdrawal Of deposit and

prepayment of loans
Securitization
Is conversion of future cash flows into marketable securities .It is the process
through which illiquid assets are packed and converted into tradable
securities and sold to third parties.
Long term asset are replaced with cash and post securitization reduces the tenure
mismatch by which liquidity and interest rate sensitivity of such gap can be
minimized
ALTERNATE SOURCE OF FUNDING
It offers effective and relatively quick funding sources to originators. It enables

Bank to diversify there funding mix
BALANCESHEET MANAGEMENT
Once the loans receivables transferred to special purpose vehicle [SPV].They are
removed from the originators balance sheet .Thus
Securitization offers an of balance sheet funding alternative.
REVELANCE OF BASEL II IN ASSET LIABILITY OF BANK
1. Basel accord on capital adequacy aims at stregentning the financial health of

the bank
2. The accord is in the direction of further strengthening of capital
3. The prime motto is “less capital for safe loans and more capital for risky
loans”.
4. It hopes to create the regulator system and promote rewarding Bank for
managing risks better
5. There is no adequate differentiation of credit risk
6. No recognitions to credit risk mitigation technique
5. Maturity structure of credit exposure did not have any relevance
6. No capital charged for operational risks
7. Economic capital allocation allows Bank to have better Understanding of
risk and better loans pricing the proposed adequacy framework contains
refined proposals for three pillar of new accord that is namely
1. Minimum capital requirements
2. Supervisory review
3. Market discipline
To strengthen the Asset Liability system in Bank the liquidity
Profile internal rate requirements namely duration VaR, Stimulation Model,
forex risk requirements ect should be sound the management information
system mechanism should be Strengthened the technology is to be introduced
to make the
information available .In such a situation as per BASEL II the
Pricing of the Bank products can be made competitive using
Asset Liability system.
ASSET LIABILITY INFORMATION SYSTEM
In the Indian context Asset Liability Management refers to management of

deposits, loans and advances, investments borrowings forex reserves and
capital, keeping in mind the capital adequacy norms lay down by the
regulators authority. It can facilitate decision on following issues.
1. Data warehousing system with the help of online analytical processing

system that is Microsoft analysis services and Microsoft SQL server which
are used in analyzing asset liability across various dimension namely
branch wise, zone wise, branch category wise, general ledger group wise,
size wise, contractual period wise,
residual period wise, interest rate wise.
2. Estimating the main source of funds namely core deposit, certificate of
deposit and call borrowings.
3. Reducing the GAP between the rate sensitivity asset and rate sensitivity
liability.
4. Reducing maturity mismatch to avoid liquidity problem.
5. Managing the fund with respect to critical factors like size
duration.
6. This system enables the top management to identify the
margin and profitability and risk associated with each of the product.
With all these precautions effective Management of Asset and liability
can be achieved very soon.
REGULATORS DIRECTIVE TO BANK
The BASEL COMMITTEE of banking supervision is a committee of banking

supervisory authority which was established by the Central Bank governors a group of
10 countries in the year, 1975. It consist of senior representative of Bank supervisory
authority and central Bank from Belgium, France, Canada, Germany, Italy,
Luxembourg, Netherlands, Sweden, Switzerland, United Kingdom and United States.
It meets at the Bank of international settlement [BIS] in Basel where the permanent
document on principles of management and supervision of interest rate risk
accordingly another four principles are added to the earlier principles of management
and supervision of interest rate risk then above principles are base for forming Asset
Liability Management guidelines for Central Bank all over the globe accordingly RBI
issued guidelines to Bank and asked them to implement the Asset Liability
Management system from 1 April 1999.As per these guidelines Bank are required to
submit the maturity pattern of Asset Liability in prescribed format. Asset liability
Management statement are drawn as under
1. Maturity structure of cash inflow and cash outflow .It is called as statement of
structure liquidity.
2. Statement of interest rate sensitivity.
3. Statement of short term dynamic liquid to monitor liquidity on dynamic basis
over a time horizons spanning from 1 to 90 days.
4. As per BASEL II norms and as per RBI guidelines Indian Bank will require to
have analytical system, model and tools in place for risk management,
measurement and control.
PROPOSED ARCHITECTURE OF ASSET LIABILITY OF BANK
Due to various emerging risk and drastic variation in factors affecting risk in
modern technology driven environment Bank and financial needs and in-depth
analysis of Asset Liability Management problems like globe financial system in
general and Bank in particular are facing increased risk from various sector both
internal and external therefore there is a need to use sophisacated analytical tool
effectively using the Consolidated data that helps in making decision to improve
the overall Growth of the Bank. The Indian Bank have large number of branches
scattered throughout the country. Earlier entire banking business including
management the control of branches used to be manual due to advent of
technology Bank are slowly getting connected to the network thus converging to a
completely connected network of all branches of the Bank. The process of asset
liability can be divided into following modules they are.
1. Data collection
2. Consolidation
3. Reporting
4. Analysis
5. Decision making
6. Reviewing
7. Feedback
8. Monitoring and control
To prepare an Asset Liability management statement maturity pattern of asset liability
as financial year ends branched maintain due date and dairy of both deposit and
advances from these dairy branches has to be complete and calculate type wise
calculation of deposit and advances and tally with grand total figure so as to arrive at
branch wise position of inflow and out flow of funds as per the Performa and send it
to the regional office/ zonal office. At head office all the regional zonal statement are
completed and consolidated. To arrive at whole picture of other Bank thus complete
process normally takes 45 days to arrive at the final figure of the balance sheet and
profit and loss statement to be presented to board of directors and shareholders
HOW ASSET LIABILITY MANAGEMENT IS IMPLEMENTED
IN ANDHRA BANK
The implementation of Asset Liability management is ensured through an exclusively

constituted Alco committee consisting of top functionaries in bank as its Member .The
committee undertakes the responsibility of identifying Bank Wise and its
quantification drafting, risk management strategy and developing alternative in
scenario selecting a right model after selecting MONTO CARLO simulation and
monetary earning spread and initiating mid course correction if any to achieve
targeted profit to make Asset Liability management more effective and big Bank have
constituted three sub committee each assigned with specific responsibility as under.
CREDIT MANAGEMENT RISK
This committee is responsible for drafting bank credit policies and exposure limit
pricing strategies estimating default risk and monitoring and managing credit policy
risk
INVESTMENT MANAGEMENT COMMITTEE
These committee drafts investments policies ensure design mix of Maturity and
yield pattern of investments portfolio and runs a bank investments portfolio
LIABILITY MANAGEMENT COMMITTEE
This committee is responsible to satisfy liquidity demand position of the Bank to

evaluate cost of various money market instruments and there fit in the Bank projected
balance sheet and to formulate management policies and review it periodically .To
stay tuned with market happening ultimately the Asset Liability Committee has to
undertake the overall responsibility for directing acquisition and allocation of funds to
maximize earnings.
ASSET LIABILITY MANAGEMENT AND ITS DEPENDENCE
ON HUMAN RESOURCES
No tools however efficient it may not function on its own .It needs people to operate
more than that it needs leaders to define mission, set goals and design a process
through which tools can be operationalised to deliver services and make profits.Bank
need transparent leadership that nurtures best possible culture where risk management
almost becomes a way of life. Effective implementation of Asset Liability therefore
ask for the right mix of leadership, loyal people to manage various functions, right
organization culture and sound knowledge of risk across the hierarchy.
Banking on Human Resources
Effective implementation of Asset Liability becomes simple if people engage in it
right from chairman to clerk to branch manager to cooperate manager Alco members
to board of manager can also internalize a well designed system of risk identification,
monitoring and its management for generating architecture profit in this context
leaders have a critical risk in articulating the corporate mission to the
staffs in making them earn it as they were personal goals to begin with Alco members
must share there perception, reservation, enthusiasm over the policies contemplated
for the implementation. to better the decision making process till the decision is
arrived as every member has the right to discuss the issue said there but once the
decision is taken they must also burry there differences and align with themselves to
the chosen policies for the effective implementation. In an dynamic and a competitive
world an open communication system across the hierarchy alone paves the way for
successful implementation of Asset liability management .Leaders should encourage
informal way of interaction with its members as it is known to provide an oppournity
to the individuals to create their own informal words in their own culture and values
in which they can find firm anchor to maintain stability while constantly adjusting
themselves with changes asset liability management demands such
cooperation amongst the staff is certain to generate team spirit which is imperative for
implementing asset liability management successfully.
The bank should attempt to sketch personality profile of the employees who are to be
assigned with the risk management of following Lines
1. Physical status
2. Life style
3. Livelihood
THE IMPACT OF INTREST RATE RISK ON BANK
BALANCE SHEET IN INDIA
Among various types of risk facing a bank on regular basis interest rate risk which
is associated with the movement in interest rate has been very much discussed and
debated by bankers in India and abroad. It is primarily due to the highly violate
nature of interest rate risk .The study is divided into following four section
SECTION – I
Explains the concept of interest rate risk and it further elaborates on the need to
hedge interest rate risk this also gives an account of the impact on interest rate
hardening on the balance sheet of Bank in India.
SECTION – II
Explains the dynamic of price yield [interest rate] relationship affixed income
securities the mathematical concept of duration modified duration convexity and price
value basic point [PVDP]
SECTION – III
It is devoted to how hedging is done to off set interest rate risk
SECTION – IV
Is the conclusion where the account of Indian experience in hedging rate is given
CATEGORISATION OF BANK BALANCE SHEET
To understand the liquidity risk in full we have to know and understand the
various Asset and Liability figuring in the balance sheet. The asset figuring in the
balance sheet are loan and advances, investments Current account balance with
RBI and other asset on liability side we have deposit, borrowing, other liability
and provision, capital reserves and surplus.
CONCEPT OF FLOW AND TIME BUCKETS
Asset bring in cash flow through repayment of interest and principle Liability results
in the funds going out of the Bank in the form payment of principles and interest.
Thus asset results in cash inflo and Liability results in cash outflow. Aggregation of
cash inflow from asset and cash outflow from liability at the bank level is needed to
assess the liquidity and interest rate risk inherent in the balance sheet for most of the
items of asset liability in the balance sheet the data is available at applex level the two
items from which information is required from branches are deposit and advances
.The future cash flow for these two heads are Estimated through there residual
maturity. Residual maturity means future installment of interest and principal due
either for payment in respect of deposit or for receipt in respect of loans. All the cash
inflow and cash outflow resulting from asset and liability are put in different time
buckets. The time buckets are prescribed by RBI and are uniformly applicable to all
Bank. The time buckets used are shown in structural liquidity statement given below.
PARTICULARS
3years
15- 29d- 3m 6m- 1 year >5
1-14d to total
28d 3m -6m 12m -3years years
5years
Term deposit 851 613 1835 1858 237 26601 3729 1172 19030
Total outflow (a) 3414 849 2806 3099 2799 8798 4092 4903 40760
Total inflow(b) 3440 752 2105 2636 2630 8036 4481 16501 40581
Net gap (b-a) 26 -97 -701 -463 -169 -10762 389 11589 -179
Cumulative gap 26 -71 -772 -1235 -1404 -12166 -11777 -179 __
Deposit (d)
Under deposit since saving bank and current account are payable on demand they are
further classified into volatile and core portion. Position represents the amount which
may be with drawn and the Core portion represents that the portion that shall explain
with the bank. RBI has prescribed 10% in case of savings bank and 15% in case of
current Account deposit likewise asset side in respect of cash credit / overdraft loans
Bank should arrive at core and volatile position based on avaliament portion. Volatile
portion is to be fitted in shorter time buckets and the core Portion in 1 to 3 years
buckets.
MISMATCH OF FLOW AND STRUCTURE LIQUID
STATEMENT
The information from residual maturity profile statement received from the branches
and the future cash inflow and outflow of other asset and liability at head office are all
consolidated and statement of structural liquidity is prepared. An excess of inflow
over outflow indicates positive mismatch and an excess of outflow over inflow
indicates negative mismatch .Cumulative positive mismatch indicate shortage of
liquidity .The above report indicates that the Bank have positive cumulative mismatch
only if the first times bucket of 1 to 14 days in the entire remaining time bucket it has
negative cumulative mismatch indicating shortage of liquidity. These statement are
prepared once in the fortnight basis and placed before Alco Committee formed at an
applex level consisting of top executive
Alco goes through the statement and suggest the way to manage liquidity if liquidity
shortage is excess they will practically focus on liquidity position within the short
term.RBI stipulates that the mismatch in the time bucket up to 28 days should not
exceed 20% of the cash outflow in the each time bucket .Andhra Bank has set a
tolerance level for each of time buckets based on expererience or occurrence of
mismatches in various time bands
LIQUIDITY MANAGEMENT
The logical step that follows after liquidity statement analysis is liquidity management
the question the Bank should ask is as follows
1. Is the liquidity mismatch positive or negative for a period under

consideration within the tolerance limit as per liquidity policy of Bank
2. If not what are the strategies to be employed to ensure the liquidity is within
the manageable limits and sometimes if mismatches are with in tolerance but
Alco may still implement strategies to take advantage of prevailing market
condition to get maximum benefits
3. Typical strategy employed in liquidity management are availing reference
from various sources securitization and asset sale obtaining time of credit from
other institutions support from parents canvassing bulk deposit and market
borrowings In case of positive mismatch indicating surplus liquidity strategy
should be involved to deploy fund judiciously for maximization the result
.Alco also analysis each one of the strategy in terms of cost and intended
benefits before employing strategy for mismatch management. Besides
managing liquidity on day to day basis. As per RBI requirements of all Bank
have to draw a contingency Funding plan to manage stress scenario and to
withstand prolonged adverse liquidity crises.
A contingent fund plan [CFP] is cash flow that projects the fund needs and
funding sources. The liquidity crises may occur without warning. Bank in
such situation should appear organize and efficient to the public. Hence
contingent fund plan [CFP] should specify how to handle administrative
matters in the crises contingent fund plan [CFP] of a bank should be
commenced at with the Bank complexity activities risk exposure products
and organizational structure.
Successful implementation of Asset Liability process calls for

setting of limits for negative mismatch for cash flow for various time bands taking
into account the experience gained over past trends .Every Bank should have asset
liability committee comprising of Bank Senior representative like chair man and
managing director that is responsible for ensuring adherence to limits set by the board
and deciding on the strategy to be adopted for managing liquidity optimally. In
addition they should set an asset liability management support group consisting of
operational staff for collection, consolidation and providing information to Alco in a
desired form.
INTREST RATE RISK MANAGEMENT
Bank mainly performs basic two functions accepting deposits and creating asset
through investments and loans. In this process they assume Liability and create Asset
which are of different maturity, size and carry different prices i.e. interest rates. That
is to say asset and liability mature or fall due for reprising at different point of time
.Here by reprising we mean application of fresh interest rates prevailing at the time of
maturity of deposit or an asset .Let we take an example of granting a loan (asset)
Repayable in 5 years by using funding rose from 1 year deposit (Liability)
.At the end of 1 year the deposit will have to be reprised at higher or lower price
prevailing then, while the loan will continue to provide fixed return from the
remaining period of four years .That is to say There is a reprise mismatch between the
loans (5 years) and the deposit (1 Year).
If the interest rate increases by the time the deposit matures, Bank will be able to
canvass fresh deposits required to funding the loans only at the higher interest rate
.This will result in the reduction in the interest spread; this in turn affects the Net
Interest Income (NII) of the Bank. Interest rate risk management is nothing but
extending the above analogy to all the interest rate sensitive items in the balance sheet
and working out the impact on net interest.
METHODS OF MANAGING INTREST RATE RISK
Interest rate risk is managed using the following methods
1) Gap analysis or traditional gap method

2) Duration gap analysis
3) Simulation method
TRADITIONAL GAP METHOD
It is most common method used in Bank at present for measuring the interest rate
risk .The bulletin will confine itself to explaining in detail the traditional gap
method .In this method the Following steps are
1. Categorization of balance sheet items into rate sensitivity

Asset and rate sensitivity liability.
2. Preparation of rate sensitive asset ( that it is fitting the rate sensitivity
asset and rate sensitivity liabilities into various times buckets)
3. Taking a stand on the future movement of interest rates in a fixed
.Time horizon usually one year.
4. Estimating the impact of assumed movement in interest rate on the
Net Interest Income.
RATE SENSITIVE ASSET AND LIABILITY
Balance sheet consists of rate sensitive and non rate sensitive Asset or Liabilities. An
Asset or Liability is classified as rate sensitive if during the time frame and
consideration
1. There is cash flow

2. Interest rate gets reset or reprised
3. RBI changes the interest rates that is in case where the
interest rates are administrated (SB, DIR, EXPORT REDIT REFINANCE,
and CRR BALANCE ECT).
CATEGORISATION OF BALANCESHEET ITEMS.
The entire balance sheet items are grouped into rate sensitive asset rate sensitivity
liabilities by applying the above rules. Those that do not fulfill the criteria are
categorized as rate non sensitive Asset and Liability. We are furnishing below how
balance sheet Asset and Liabilities are categorized based on interest rate sensitivity.
PREPARATION OF RATE SENSITITY STATEMENT
The asset and liability after categorization into rate sensitive and rate non sensitive
segments such as explained above are put under various time brackets based on cash
flow maturity pattern. We thus have under each time bracket data representing the
cash flow amount reprised both in respect of asset and liability .The summation of
items given in asset side gives total rate sensitive assets. Similarly summation of items
given in Liability side ahead gives total rate sensitive liability .The difference between
two is called reprising gap or rate mismatch gap. If rate sensitive assets exceed rate
sensitive liability it results in positive mismatch and Reverse rate sensitive liability
exceeds Rate sensitive assets results in negative mismatch .Let we take the balance
Sheet of Bank with hypothetical data and examine how the reprise gaps Impact net
interest income let us take the first time bucket of 0 to 1 month. We can see the rate
sensitive asset (A) exceeding the rate sensitive liability (B) by RS 100 cores(C). If
interest rate during the time horizons rise both for asset and liability Bank Net Interest
Income will increase to the tune of RS 100 Corers will be priced at higher interest
rates contrarily in the case of 1 Month to 3 months to 6 months time horizon risk
sensitive liability (B) exceeds risk sensitive asset (A) .In these time horizons if interest
rate rises both the asset and liability will have negative impact on Net Interest Income
since liability to the tune of 100 and 200 corers will be reprised at the higher interest
rate .Thus the Net Interest Income is determined by size of mismatch gap and extent
of adverse change in interest risk
INTREST RATE SENSITIVITY STATEMENT
ITEMS 0- 1M- >3M- >6M- >1Y NON TOTAL
1M 3M 6M 1Y SENSITIVE
ASSET
Cash 20 20
Deposit With 20 20
Bank
Investments 180 80 100 500 860
Loans 1200 100 320 400 600 2620
Premises 300 600 900
Total (A) 1400 400 400 500 1100 620 4420
LIABILITY
Current deposits 820 820
Saving deposits 800 100 900
Term deposits 100 300 500 200 200 1300
Borrowings 400 200 100 700
Other liabilities 700 700
Total (B) 1300 600 500 200 200 1620 4420
INTREST RATE +100 -200 -100 300 900 -1000

SENSITITE GAP
C (A-B)
CUMULATIVE +100 -100 -200 +100 +1000
GAP
IMPACT OF REPRICING AND INTREST RATE

CHANGE ON NET INTREST INCOME
We can calculate impact of assumed increase in interest rate (1%) on Net Interest
Income by making following assumptions
1. Reprising of asset and liability are evenly spread across time buckets
2. Midpoint in each time buckets is taken as a time for which the Interest rate
changes are effective
3. Adverse or favorable impact on Net Interest Income resulting from interest
rate continuous to be same during the remaining period of performance
horizons
The absolute amount of Net Interest Income loss based on the above assumptions
can be worked out as follows for each of the time buckets
If downward movement of interest rate is predicated in the planned

time horizon we can work out the impact of such changes on the NII
by applying the same formula as explained above for the different times buckets and
arrive at the net impact. We can also decide on shorter time horizons like quarterly or
half early based on the volatility of interest rate in the market and accordingly work
out the impact on Net Interest Income. We can thus summarize the effect reprising
gaps and interest rate change on net interest income in the form of the following table
GAP INTREST RATE CHANGE IMPACT ON NII

POSITIVE INCREASE POSITIVE
POSITIVE DECREASE NEGATIVE
NEGATIVE INCREASE NEGATIVE
NEGATIVE DECREASE POSITIVE
Hence Bank have to fix limits on both individual and cumulative reprising gaps to
effectively manage their adverse impact on Net Interest Income .Traditional gap
method involves targeting particular Net interest income for the chosen time horizons
and fixing limits on Gaps in various time band Accordingly. The policies and product
are so formulated so as to help in achieving projected NII. In addition to those money
market instruments and derivative products will also be used to bring in desired
change in the gap profiles. Gap management
Involves adjustment of gaps to achieve desired financial goals in anticipation change

in interest rates.
If rates are expected to raise the Gap can be widened to take advantage of anticipated
returns in Asset Yield. If rates are expected to fall the gap can be narrowed to take
advantage of anticipated lower liability costs. The traditional gap analysis does not
capture the impact of embedded options that is (the customers exercising the options
to close the deposit before maturity or prepay the loan and advance availed) on the
interest rate risk profile of Bank. The magnitude of embedded options risk at times of
volatility in market interest rate is substantial .Bank should therefore evolve suitable
mechanism supported by empirical studies and behavioral analysis estimates the
embedded option in the asset and liabilities.
BEST PRACTICES OF ASSETS LIABILITY MANAGEMENT
It can be diversified as a continual process of arranging and rearranging of major

items of the both side of balance sheet remain profitable provided service meet
mission and not to take undue risk. In other words it is how much we decide and how
much we have to pay for our funds how long do we commit to our member / creditor
and at what rate and what do we do with this fund or what kind of loans or other
investments do we make how much money will we use by investing in fixed asset and
how much of cushion will we maintain.
GOALS
Any Asset Liability plan to be successful we have to concentrate on the Following

items they are:
1. Keeping the advance in an profitable way
2. Anticipating liquidity needs
3. Keeping good spread
4. Gap management
5. Minding the gap that is difference between rate sensitive asset and rate
sensitive liability for a given period
WHAT RISK WE CAN MANAGE
We can manage the following risk they are
1. Credit rate risk

2. Interest rate risk
3. Market risk ( bad investment)
Good Asset Liability Management is something we need to do on an on going base .It

is just like driving a car thing constantly change around you that is our economic
environment and we need to be flexible to respond .In other words driving or
managing our advances in a perfect way So that the situation will not lead to disaster
HOW TO MANAGE THE GAP
This is easy to do once you plan it up it is easier if proper electronic spread sheet is
used that is excel the spread sheet is designed to allow you to list your asset and
liability and define them as either rate sensitive or not .If they are rate sensitive you
break out the asset and liability by its maturity or turnover rate sensitive means asset
and liability is affected by outside interest rate core share are not rate sensitive. Core
share are those savings that would stay with you even if you reduce the dividend rate
to zero. Asset and liability management is not to gamble but to hedge. Finally to take
care of asset and liability management formation of Alco is recommended it can be
made of key staff members, board members etc. committee should meet regularly and
prepare the gap spreadsheet committee should recommend to management based upon
analysis of spread sheet and other factors and evaluation
TOOLS AVALIABLE FOR ALCO
1. The gap spreadsheet

2. Offering replicable loan
3. Adjustable rate
4. Selling loans to secondary market to minimize interest rate risk and improve
liquidity
5. Promoting regular savings
6. Trend analysis
7. Ratio analysis [ratio of loans to advance]
8. Keeping a line of credit at your disposal
WHAT DO YOU MEAN BY LIQUIDITY
Liquidity is able to meet the cash needs share withdrawals making loans ect. The
important thing in asset liability management is to match the source of funds [deposit]
with uses [loans]
INFORMATION AND POLICIES
In order to achieve stable net interest margins optimal earnings and adequate liquidity
control of financial risk and the information base in the bank has to be strong and
sound. The information required is past , present and projected data on Bank asset and
liability portfolio including projected additions maturity and reprising Bank have to
take care of changes in Bank balance sheet caused by the customers’ decision to repay
the loan withdraw there deposit before maturity and Transfer there business to other
Bank that has bearing to asset liability Position.
RISK MANAGEMENT SYSTEM
Bank should accurately measure and control market risk in view of

increasing market risk. In banking operations hence recommendations of those Bank
should have in place well structured risk managing system This should include
measuring risk, controlling risk and monitoring risk this will help bank to attain
desired res Bank risk exposure depends upon volatility of interest rate and asset prices
in the financial market and the Bank maturity gap in the management of Bank asset
and liability .Interest risk management lies a good foundation asset liability
management
RISK ANALYSIS AND MANAGEMENT
Interest rate risk can be analyzed in four methods
1. Gap analysis
2. Duration analysis
3. Value at risk
4. Stimulation
POLICIES ISSUES
Strengthening of information technology in Bank would be an important Pre requisite

to implement asset liability management system in Bank every financial structure or
commitment has implication for Bank liquidity. A proper liquidity management
would help the management in formulating the business strategy in Bank with
international pressure treatment of asset liability in multiple a currency adds yet
another layer of Comp Alco is more powerful body in asset liability management
framework. Hence for taking business decisions the board of Bank depends on
recommendation of Alco
FINDIGS AND ANALYSIS
FINDINGS
1. Almost the Andhra bank assets are matched with the liability Thereby
leaving no gap
2. Better measures of internal rate of return can also be had by Linking gap
to net interest income of the Bank
3. Bank deploy their funds to optimize their revenue while Maintaining their
liquidity
4. The bank prefer book liability and then look for deployment of Funds
5. The bank usually manages liability in time with asset already Identified
thus overcome the risk of idle liability
6. Even though proper mismatch is done the chances of Asset not been
paid on maturity may effect the bank.
RECOMMENDATIONS
In liberated financial markets Bank Asset and Liability variations are influenced by
interest rates and exchange rate voliability.The Competitive environment in banking
industry due to liberisation has added pressure to the importance of financial
management Bank to manage not only credit risk but various type of financial risk
including interest rate, exchange rate, liquidity settlement and transferable risk to
maximize profit and minimize risk .In other words to put the risk management system
in place strong and dedicated risk management system is required.
1. Asset liability and off balance sheet risks

2. Information and scientific risk management technique
3. Dedicated asset liability management committee Asset liability management
has a mean of risk management technique is an important function in bank. It
focuses on how various functions of the Bank is adequately and well
coordinated essentially covering planning, directing and controlling of the
level of changes and mixes of various balance sheet account. In asset liability
management Bank is concerned with management of market risk consisting
of
1. Interest rate risk
2. Foreign exchange risk
3. Equity price risk
4. Commodity price risk
Asset liability management covers liquidity management and capital planning broadly
asset liability management objectives is to control the volatility of net interest income
and net income value of the Bank in order to achieve these results asset liability
committee must be guided by policies that addresses the overall asset liability
management goals and risk limit and by information that relates to the asset liability
position
The financial management structure consist of managing Balance sheet on one side
and income and expenditure on the other side .Banking industry to compete in free
market condition has to give priority for managing and minimization of the risk
prevailed in banking operations. It has been observed that failure of risk management
and control system very significant factors for Bank failure hence recommendation
are for the success of asset liability management depends on effective existence Of
1. Information and policies

2. Risk management system
LIMITATION
1. The study I have conducted in Andhra Bank (Branch) at Traffic Island and the
available material in the branch says That the Information is restricted to the
above center only.
2. The project is conducted based on past performance .As the Past performances
may not be the indicator of the future Results.
3. Performance of the Bank mainly depends on the Government policies in
respect of investment and Infrastructure development
4. Even though proper mismatch is done the chances of Asset not been paid on
maturity may effect the Bank.
CONCLUSION
The Andhra Bank require sophisticated analytical tool for in depth analysis of asset
Liability management which helps in managing their asset and liability. There are
number of models for doing analysis for effective results. As per Alco
recommendations, Bank have to decide which model helps them based on the
architecture of their branches .It is recommended that analysis be done based on basic
model that is gap analysis as the start up for Analyzing the position of Bank .As
expertise go one can adopt high end Models like SP models for analyzing the
uncertainty factors and validate to suit there goals. The braches which provide the
database for asset liability management should be provided with feedback for the
statement generated at the head office for better results and performance. The
Efficient performance of every branch is important for the overall asset Liability
management of the entire Bank. Avoiding the gap in literal terms may not be possible
for all the Bank. Given the constraints of the Bank that they operate at, Bank could
manage to effectively minimize the Gap.
BIBLIOGRAPHY
1. Asset liability in Andhra bank
2. risk measurement in bank
3. treasury management
4. www. Indianinfoline.com
5. Andhra bank website
6. Annual report 2006- 2007 of Andhra bank

A Project Report On Asset Liability Management in Andhra Bank

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A Project Report On Asset Liability Management in Andhra Bank

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EXECUTIVE SUMMARY

INRODUCTION TO ANDHRA BANK

Risk Management is the strategic tool, which helps in identifying, qualifying,

A banking organization has to constantly strike a risk & reward balance. A

1. It is recommended that bank should manage the liability [Deposit

Dr Bhogaraju Pattabhi Sitaramayya was born on 24th November 1880 in

Dr. K. Ramakrishnan - Chairman & Managing Director

Shri K Ramakrishnan took charge as Chairman and Managing Director of Andhra

Dr. K Ramakrishnan is also Chairman, State Level Bankers' Committee, Andhra

Sri Kalyan Mukherjee - Executive Director

Vision & Mission of Andhra Bank:-

Awards and Rewards

AWARDS RECEIVED, SO FAR IN THE PRESENT YEAR - 2006-07:

* Received Best Presented Accounts Award 2005 from SAFA's

"BEST BANK AWARD" by IDRBT, Hyderabad

MILESTONES ACHIEVED AND AWARDS RECEIVED DURING 2005-06

FINTECH Asia 2006 Award For "Any Branch Banking (ABB)"

Ranked 683rd among Top 1000 Bank in the World

Adjudged Best Bank by Analyst Magazine - An ICFAI Publication

Best Bank Rating from Business Today Magazine

ICRA Rating for Corporate Governance

Our demonstrated commitment to vigilant Corporate Governance has been rewarded

Award of Institute of Chartered Accountants of India for excellence in Financial

IBA Technology Award

Awards for SLBC, as Convenor Bank in the State of AP

Awards for Best Performance under Kharif Loans

Best Bank in lending to Agriculture

Best Banker in lending to Unemployed Youth under Rajiv Yuva Sakthi

Non-Rate Sensitive Asset Non-Rate Sensitive Liability

1. Asset Liability Management Organization

2. Asset Liability Management Information

3. Asset Liability Management Process

Asset Liability Management Organization

The ALCO committee consisting of Bank senior management including Chief

Asset liability management system

This is for collecting of information accurately and expeditiously. Information is the

Asset liability management process

The basic Asset Liability Management process involves identification, measurement

CLASSIFICATION OF ASSET AND LIABILITY

Liability: capital reserves surplus, deposit borrowings other liabilities

1. To control violability of Net Interest Income from changes in Interest rates

1. Balance sheet planning from risk return perspective

1. Meeting of Alco is held regularly on a fortnightly and monthly basis

It is inability of Bank to generate cash to cope with decline in deposit and

1. The need to replace new outflow of funds whether due

INTREST RATE RISK

Expected loss is always insurable through hedges. Unexpected loss cannot be

RS (MN) 2003 2004 2005 2006 2007

1. Measuring Interest rate risk

The Andhra Bank with asset and liability of different maturity

0 – 60 61 – 90 91 – 120 121 – 180

CUMULATIVE GAP = CGAP

= GAP OVER WHOLE PERIOD

CONSIDER 1-YEAR BOND WITH COUPON AT 10% AND YTM 10%

IF RATE INCREASES AT 11%

IF RATE INCREASES AND PRICE DECREASES THEN PRICE BY RATE IS

CONSIDER A 2 YEAR BOND

P = 10/1.10+ 110/ (1.10)2

P = 10/1.11+ 110/ (1.11) 2

PRICE FELL MORE THAN ONE YEAR BOND

SI NO TYPE OF GAP CHANGE IN INTEREST CHANGE IN NII

1 RSA = RSLS INCREASE NO CHANGE

DETAILS SHORTTERM LONGTERM