Professional Documents
Culture Documents
On
Declaration i
Certificate ii
Acknowledgement iii
II INTRODUCTION 7-19
2.1 Introduction 8
2.2 Review of literature 9-17
2.3 Objective of the Study 18-19
2.4 Research Methodology
2.5 Chapter Plan
V FINDINGS 55-57
5.1 Introduction 55
5.2 Findings 55-57
VI CONCLUSION 58-59
BIBLIOGRAPHY
CHAPTER-1
INTRODUCTION
2.1 Introduction
Asset Liability Management (ALM) plays a critical role in weaving together the
different business lines in a financial institution. Managing liquidity and the bal-
ance sheet are crucial to the existence of a financial institution and sustenance of
its operations. It is also essential for seamless growth of the balance sheet in a
profitable way
Asset Liability Management (ALM) defines management of all assets and lia-
bilities (both off and on balance sheet items) of a bank. It requires assessment of
various types of risks and altering the asset liability portfolio to manage risk. Till
the early 1990s, the RBI did the real banking business and commercial banks
were mere executors of what RBI decided. But now, Bureau of Indian Standards
(BIS) is standardizing the practices of banks across the globe and India is part of
this process. The concept of asset liability management is of recent origin in In-
dia. It has been introduced in Indian Banking industry with effect from. 1st
April, 1999. Asset liability management is concerned with risk management and
provides a comprehensive and dynamic framework for measuring, monitoring
and managing liquidity, interest rate, foreign exchange and equity and commodi-
ty price risks of a bank that needs to be closely integrated with the banks’ busi-
ness strategy.
In recent times, even large multinational financial institutions were in a deep li-
quidity crisis and in dire need of external intervention for survival. The practical
importance of ALM and Liquidity Management had been somewhat underesti-
mated. Even managements of large institutions, regulators, and observers saw
how well-reputed firms and trusted institutions folded up and were not able to
find a way out of the deep liquidity crisis. This resulted in regulators attaching
high importance to new measures needed to ensure a sound liquidity manage-
ment system. Consequently, regulators have enhanced and in some geographies,
thoroughly revamped, regulatory oversight on ALM and liquidity management.
ALM has gained significance in the financial services sector in recent years due
to the dramatic changes that have occurred in the post-liberalization period.
There has been a vast shift in the borrowers’ profile, the industry profile and the
exposure limits for the same, interest rate structure for deposits and advances,
and so on. This has been accompanied by increased volatility of markets, diver-
sification of bank product profiles, and intensified competition between banks on
a global scale, all adding to the risk exposure of banks.
Thus, banks increasingly need to match the maturities of the assets and liabili-
ties, balancing the objectives of profitability, liquidity, and risk. To this end, the
Bank of International Settlements (BIS) has suggested a framework for the banks
to tackle the market risks that may arise due to rate fluctuations and excessive
credit risk. The Reserve Bank of India (RBI) has implemented the Basel II
norms for the regulation of Indian banks, providing a framework for banks to
develop ALM policies.
An effective ALM technique aims to manage the volume, mix, maturity, rate
sensitivity, quality and liquidity of the assets and liabilities as a whole so as to
attain a predetermined acceptable risk/reward ratio. The purpose of ALM is to
enhance the asset quality, quantify the risks associated with the assets and liabili-
ties and further manage them, in order to stabilize the short-term profits, the
long-term earnings and the long-run sustenance of the bank.
Banks are always aiming at maximizing profitability at the same time trying to
ensure sufficient liquidity to repose confidence in the minds of the depositors on
their ability in servicing the deposits by making timely payment of inter-
est/returning them on due dates and meeting all other liability commitments as
agreed upon. To achieve these objectives, it is essential that banks have to moni-
tor, maintain and manage their assets and liabilities portfolios in a systematic
manner taking into account the various risks involved in these areas. This con-
cept has gained importance in Indian conditions in the wake of the ongoing fi-
nancial sector reforms, particularly reforms relating to interest rate deregu
2.2 Review of literature
The amount of literature available about the asset liability management in banks is con-
siderably high. Various researchers have made significant contribution in the field of as-
set liability management by studying it in different contexts.
1. HESTER AND ZOELLNER (1996)Had employed statistical cost accounting
(SCA) method on US banks and through their research they found statistically
significant coefficient for most of the categories of assets and liability and reject-
ed the null hypothesis that there is no relationship between them.
2. BERGER AND HUMPHREY (1997)through their study states that the whole
idea of measuring bank performance is to separate banks that are performing
well from those states which are doing poorly.
3. GARDNER AND MILLS(1991) discussed the principle of assets- liability man-
agement as a part of banks strategic planning and as a response to the changing
environment in prudential supervision, e-commerce and new taxation treaties.
Their text provided the foundation of subsequent discussion on assets-liability
management.
4. ACCORDING TO VAIDYANATHAN (1999) the most important thing which
banks require to manage now days is interest risk. He analyzed various types of
risks and found that earlier banks were liquidity managed but now we can identi-
fy them as liability managed.
5. HASLEM ET AL(1999) found that the least profitable very large banks have the
largest proportions of foreign loans, yet they emphasize domestic balance sheet
(asset/liability) matching strategies. Conversely, the most profitable very large
banks have the smallest proportions of foreign loans, but they also emphasize
foreign balance sheet matching strategies.
6. VAIDYA AND SHAHI (2001) concluded that interest rate risk and liquidity risk
are two key inputs in business planning process of banks.
7. ACCORDING TO BIKRAM DE (2003) ownership does not seem to have any
effect on the return on assets but, public sector banks do seem to have higher net
interest margin and operating cost ratio.
8. RANJAN AND NALLARI(2004) used canonical analysis to examine asset- lia-
bility management in Indian banks in the period 1992-2004. They found that SBI
and associates had the best asset- liability management in the period 1992-2004.
They found that, other than foreign banks, all other banks could be said to be a
liability managed
9. TARAWNEH (2006) Study measured the performance of commercial banks us-
ing financial ratios and accordingly ranked the banks on their performance.
10. CHARUMATHI (2008) in her study on interest rate risk management finally
concluded that balance sheet risks include interest rate and liquidity risks.
11. DASH AND PATHAK(2011) proposed a linear model for asset-liability assess-
ment. They found public sector banks are having the best asset-liability man-
agement position. In turn, they found that the public sector bank has the strong
short-term liquidity position. While private sector banks had a comfortable short-
term liquidity position, balancing profitability
12. PRATHAP (2013) ownership and structure of the banks do have a major bearing
in the ALM procedure. It is further observed that SBI and its associate have the
best correlation, there by indicating the best asset-liability maturity pattern. Most
of the Indian banks, unlike foreign banks, are liability-managed banks because
they all borrow money market to meettheir maturing liability. The private banks
are highly aggressive for profit generation and use the short-term funds for long-
term investment
13. AMITKUMARMEENA, JOYDIPDHAR (2014) Overall the liquidity structure
of banks in India is stable but the amount of cash they maintain with them can
create problem in long run as it is deteriorating their profits.
14. NARAYAN BASER(2014) study indicates that asset- liability management was
a comprehensive and dynamic framework for measuring, monitoring and manag-
ing the market risk of a bank. The study attempted to evaluate the changing per-
spective of the banks in identifying and facing the risks and maintaining asset
quality so as to ensure profitability with the help of ALM techniques.
2.3 Objectives of the study
To study the management of assets and liabilities with reference to the interest rate
sensitivity in banks.
To examine the probable Risk factor related to ALM
Reserve bank of India issued detailed asset liability management guidelines vi-
de their circular dated 10th February 1999. A comprehensive single policy doc-
ument for the bank as a whole had been prepared incorporated the latest
amendment which had been approved by board of director. Due to globaliza-
tion of our markets, changes in interest rates in leading markets tend to have an
impact in our country also.
UCO bank head office is located in Kolkata. The Bank has 34 Regional Offices
spread all over India. The bank has international presence with four overseas
branches in two important financial centers in Singapore and Hong Kong and
representative offices at Kuala Lumpur, Malaysia and Guangzhou in China. The
bank also has a NRI corner to offer specialized services to its international cus-
tomers. UCO Bank was incorporated in the year 1943 as The United Commer-
cial Bank Limited. In July 1969, the Bank was nationalized and 100 per cent
ownership was taken over by the Government of India. Thereafter the Bank ex-
panded rapidly. In December 30, 1985 the name of the Bank was changed to
UCO Bank. During the year 2001-02, the Bank opened 1 new branch in Pune,
and 5 new extension counters.
During the year 2004-05, the Bank opened 4 new branches and upgraded 7 ex-
tension counters into full-fledged branches. They also opened 6 new extension
counters. During the year, one branch was merged and one extension counter
was closed. The company also introduced Gold Card Scheme for exporters to
facilitate easy availability of export credit at remuneration terms.
During the year 2005-06, the Bank opened 9 new branches and upgraded 8 ex-
tension counters into full-fledged branches. They opened 2 new extension coun-
ters and closed 5 extension counters. The Bank also opened one representative
office in Kuala Lumpur in Malaysia. During the year, in terms of the Govern-
ment directive the Bank had effected merger of three Regional Rural Banks in
Bihar on September 9, 2005, two Regional Rural Banks in Orissa on January 2,
2006 and two Regional Rural Banks in Rajasthan on January 27, 2006.
During the year 2006-07, the Bank opened 57 new branches, upgraded 53 exten-
sion counters into full-fledged branches and merged the 15 extension counters
with the base branches. They also started 4 flagship corporate branches and 9
mid corporate branches. In February 26, 2007, three Regional Rural Banks in the
state of West Bengal were amalgamated and form a single entity named as
Paschim BangaGramin Bank.
During the year 2007-08, the Bank opened 95 branches in which 66 branches
were opened on January 6, 2008 to commemorate the 65th Foundation Day of
the Bank. The Bank opened 40 new branches, 12 mid corporate branches, up-
graded 55 extension counters into full-fledged branches and merged the 13 ex-
tension counters with the base branches.
During the year, the company converted two of their existing branches at Kolka-
ta and New Delhi exclusively for catering to needs of senior citizens and named
these branches as 'Senior Citizen branches'. In April 4, 2007, the Bank opened
one representative office at Guangzhou in China. As at March 31, 2008 the
Bank has 1957 branches, two representative offices, 21 mid corporate branches
and 19 extension counters.
With a view to cater to the needs of different customer groups the Bank intro-
ducedseveral innovative deposit schemes viz. Lakhpati Scheme, Money Multipli-
er Schemes,Money Back Recurring Deposit Scheme and Two-Way Deposit
Scheme.
Duringthe year, the Bank implemented an innovative scheme, namely
Planning for Development of Villages (PDV) through 22 selected branchesofthe-
Bank.
During the year, the Bank made suitable modifications in its Agricultural Credit
Cardnamely UCO Kishan Patra to make it more popular among the farmers.
The Bank also participated in the development of women and children in rural
areasunderthe DWCRA scheme.
The Guntur branch in Andhra Pradesh was upgraded to an ''A'' category branch
with a view to capture the business of tobacco exports.
56 branches across the country were upgraded to ''B'' category foreign exchange
branches.
Teller system was introduced in 16 more branches taking the total number of
brancheswith teller facility to 84.
At the branch level 130 ALPMs have been installed in 35 branches of which 116
havebeen operationalized.
The Union Finance Minister honoured the Bank for its contribution to the first Al-
lIndia Bank Official Language Conference and the Union Minister of State for-
Textiles awarded a Certificate of Merit to the Bank for the exhibition arranged on-
the occasion of the third All India Bank Official Language Conference.
Shri K Margabanthu joined the Bank as Chairman & Managing Director on
11thSeptember, 1991.
Shri G K Udeshi, the RBI nominee on the Board ceased to be a Director from
1stSeptember, 1991
1994 - A new scheme under the name of FCNR (Banks) Scheme was intro-
ducedwith theexchange risk being borne by the banks.
The Bank has taken several steps towards improving recovery and reduction in
NPA, lowering of the cost of funds, boosting non-interest income, containment
ofoperating expenses etc. in order to improve the financial position.
Five new branches were opened during the year, of which two were urban
branches,two semi- urban and one rural.
The Bank was nominated as the principal financing agency in six districts name-
ly, Howrah, Hooghly, Burdwan, Birbhum, Jaipur and Jalandhar.
During the year a new forum namely State Level Export Promotion Committee
(SLEPC)was constituted in each state under the aegis of the SLBC.
During the year a compressive booklet was published incorporating all the
salient features of the various non-resident deposit schemes.
During the year inter-cadre promotion for workmen staff and inter-scale / grade
promotions for officers were effected, thereby enhancing the level of motiva-
tionof the staff.
Shri Dipak Rudra, l.A.S. joined the Bank on 23rd July, 1993 as Chairman &
Managing Director.
1995 - During the year, the Bank opened 14 new branches comprising
six at semi urban centres, two in urban areas and six in metropolitan cities.
During the year, the Bank opened several specialised branches viz. 6 recovery
branches and 6 SSI branches, the later being created by converting 6 existing
branches into SSI branches.
During the year the Bank merged 17 non viable branches with other branches.
The Bank opened three new extension countres and closed down four exten-
sioncounters during the year bringing the total No. of extension counters to 138.
The Bank was nominated as the principal financing agency in six districts
namely, Howrah, Hooghly, Burdwan, Birbhum, Jaipur and Jalandhar.
The Development Assistance Plan (DAP) which was introduced by the GOI in
theyear 1994-95 made a selection of 49 RRBs out of 196 RRBs based on their
financialviability which included 5 RRBs sponsored by the Bank.
The Bank opened four more currency chests during the year and now 59 chests
are in operation throughout the country.
The Customer Service Committees have been set up at 1724 branches out of
total 1786 branches as at 31.3.1995.
The Bank was awarded Rajbhasha Shield which was given away by the
Governor of Himachal Pradesh. The employees of the Bank won several
prizes a the Town Official Language Implementation Committee level.
ALPMs have been installed in 55 branches at the end of March 1995. The
Bankproposes to install ALPMs in about 40 more branches in the current year.
1996 - During the year, the Bank opened ten new branches comprising nine in
semi-urban centres and one in a metropolitan Centre. The Bank also opened
one extension counter during the year, taking the total number of extension
counters to 137 as at end March.
The Bank closed the Liecester branch in UK and the total number of
branches at overseas centres came down to six comprising one branch
in UK, two in Hongkong and three in Singapore..
During the year the Bank launched a new deposit scheme ''UCO LAKSMI
YOJANA'' which provides for variable instalments in a recurring deposit
scheme.
The Bank has undertaken the implementation of the Planning for Development
of Villages (PDV) programme in the Cuttack PDV region of Orissa and
Dharamsala PDV region of Himachal Pradesh.
The Bank has also implemented the programme of Linking Self Help Groups
(SHGs) with the Bank as per the directives of the Reserve Bank.
The Bank is also the Convenor of the State Level Bankers'' Committee in Oris-
saand Himachal Pradesh.
The Bank has identified Colaba and Andheri West Branches in Mumbai
for installation of ATMs under the Shared Payment Network System of
the IBA.
2000 - UCO Bank has introduced a `Special Settlement'' scheme for negotiat-
ingsettlement of the bank’s dues classified as non-performing assets.
UCO Bank''s executive director VP Shetty, has been appointed as the chairman
and managing director of the bank, with effect from 6th October.
V Sridhar has been appointed the new Executive Director of UCO Bank with ef-
fectfrom December 15.
UCO Bank has launched a new scheme for the trading community, Christened
UCO Trader Scheme.
2003
Comes out with Initial Public Offering (IPO) of 20-cr equity shares of Rs 10
each for cash at a premium Rs 2 per share aggregating Rs 240 crore
UCO Bank along with Central Bank of India (CBI) , Indian Overseas Bank
(IOB), Canara Bank and Union Bank of India (UBI) have formed an alliance to
launch `Cash Online'' ATM network
2004
Raised Rs.300 crore from the capital market in its private placement issue of
unsecured redeemable non-convertible subordinated bonds.
UCO Bank has launched a new scheme to enable rural poor avail easy loans for
receiving LPG connections on World Environment Day.
2005
Western Union forges alliance with UCO Bank
Crisil signs agreement with Uco Bank for providing ratings for SSIs
UCO unveils new deposit scheme
UCO Bank adopts H-P for core banking solution
2006
UCO Bank Ltd has appointed Shri. P L Mittal, Chartered Accountant, Chandi-
garh as part time non-official Director in the Board of the Bank under Char-
tered Accountant Category with effect from January 02, 2007.
UCO Bank Ltd has appointed Shri. N P Sinha as Director in the Board of the
Bank with effect from February 27, 2007.
UCO Bank Ltd has appointed Shri. S A Bhat Executive Director as Chairman
& Managing Director of Indian Overseas Bank.
2008
UCO Bank has informed that Shri. Samir Kumar Sinha, Deputy Secretary, De-
partment of Financial Services, Government of India has been appointed as a
Director of the Bank vide Notification dated June 10, 2008.
UCO Bank has appointed Shri. Jai Dev Gupta as part-time non-official Direc-
tor on the Board of Directors of the Bank w.e.f. July 04, 2008 vide notification
dated July 04, 2008.
2009
UCO Bank has informed BSE that as per notification of Government of India,
Ministry of Finance dated February 24, 2009 Shri. Nirmal Khatri has been ap-
pointed as part-time Non-Official Director on the Board for a period of three
years from February 25, 2009.
2010
UCO Bank has announced the launch of a ''Festival Bonanza Offer'' for bor-
rowers.
Toyota Kirloskar Motor Pvt. Ltd (TKM) has signed an agreement with the
UCO Bank to extend auto retail finance to its prospective customers.
UCO Bank, Kolkata zone, set up two new ATMs at its Jodhpur Park and Kasba
branches to ensure a better cash delivery system to the customers.
2011
UCO Bank has collaborated with Religare Securities for offering online trading
to its customers,which is a part expansion of the product bouquet.
UCO Bank launched its small and medium enterprises (SME) loan hub in Ban-
galore to increase lending to sector.
2012
UCO Bankhas recommended dividend of Rs. 3/- per share on the face value of
Rs. 10/- each for the year.
UCO TOWER, Bank''s internal magazine has been awarded the Certificate of
Merit at ''ICE Awards'' (In-House Communication Excellence), 2012 initiated
by Shailaja Nair Foundation, Mumbai.
2013
Ministry of MSME, Govt. of India awarded National Award to UCO Bank for
implementation of PMEGP scheme in the North-East Zone for the year 2012-
13.
UCO Bank received SKOCH RENAISSANCE AWARD 2013 for Develop-
ment.
Ministry of Rural Development, Govt. of India awarded UCO Bank as 3rd Best
Bank for nurturing the RSETI movement in the country for the year 2012-13.
UCO Bank received Global Sustainability Award from World CSR Congress
under the category "Outstanding Social Impact".
2014
UCO Bank has been awarded 1st Prize in the category of Best Bank for opera-
tional performance for 2014.
UCO Bank received prestigious SKOCH AWARD for Excellence in Banking
in Financial Inclusion and Deeping 2014.
UCO Bank had been awarded First Prize for Highest average loan to SHGs in
West Bengal State during the year 2013-14 under Commercial Bank category.
2016
UCO Bank has raised Rs 270.59 crore by issuing over 7 crore shares to LIC on
preferential basis, reported PTI.
In spite of being a public sector bank, this bank has got all kinds of products and services,
which one can get in a modern bank. With their firm adherence to the policy of caution and
prudence, they have been one of the leaders in introducing different kinds of innovative
banking services and solutions. Following are the different services offered by UCO Bank
in India:
1. Deposit Schemes
Following deposit schemes are offered by UCO Bank:
No-frills Savings Bank Account
Money Back Recurring Deposits
Friend-in-Need Scheme
Two-way Deposit Scheme
Lakshmi Yojana
Kuber Yojana
Flexible Fixed Deposit Scheme
Special Deposit Scheme for Senior Citizens
Current Account in Foreign Currency at Indian Branches
Fixed Deposits in Foreign Currency at Overseas Branches
Revised Minimum Balance Schedule
UCO Tax Saver deposit Scheme - 2006
UCO Premium Plus
2. NRI Corner
UCO Bank offers a range of services for the NRIs. Following are the services that NRIs
can choose from:
Deposit Schemes
Foreign Currency Non Resident (FCNR-B) Deposits
Resident Foreign Currency (RFC) Deposits
Non Resident External (NRE) Deposits
Non Resident Ordinary (NRO) Deposits
Remittance to India
Loans to NRIs
Against Deposits
NRI Home Loans
3. International Banking
Following international banking services are offered;
Products & Services
NRI Banking
Foreign Currency Loans
Finance/Services to Exporters
Finance/Services to Importers
Remittances
Forex & Treasury Services
Resident Foreign Currency (Domestic) Deposits
Correspondent Banking Services
General Banking Services
Foreign Currency Loans
Finance/Services to Exporters
Finance/Services to Importer
Remittances
Forex & Treasury Services
Forex Inter Bank Placements/Borrowings
Sale & Purchase of currency on behalf of customers
Forward Cover Bookings
Cross Currency Swaps
Interest Rate Swaps (IRS)
Forward Rate Arrangements (FRAs)
Forex Money Market Operations
Resident Foreign Currency (Domestic) A/Cs
Correspondent Banking Services
Apart from repair, renovation and extension of existent structures, the bank also provides
finance for purchasing old accommodation. However these structures need not be more
than 30 years old and ought to be constructed as per regulations. These buildings also need
to be free of tenants.
UCO Bank Car Loans
UCO Car is the car financing scheme from UCO Bank. The bank offers car finance for
new as well as used cars. However, the second hand vehicles for which finance is being
provided by the bank should not be more than five years old. Second hand vehicles require
fitness certificate and valuation certificate for availing UCO bank car financing.
For new cars the loan extended is intended to cover 85% of the vehicle's cost or maximum
of `7.50 lacs, which one is lower. Businessmen and professionals are eligible for this UCO
bank car loan subject to the fulfillment of set conditions.
The loan sanctioned depends upon the repayment capacity of the applicant. The upper
loan ceiling for study in India is `7.50 Lac. The comparable figure for study abroad is `15
Lac.
Chapter-3
Conceptual study
3.1 INTRODUCTION
Asset Liability Management (ALM) is a process of planning, organiz-
ing,controlling and managing the various risk of the bank. ALM is consists of
combinations of portfolio management techniques into a synchronized process.
ALM is the coordinated management of a bank’s entire balance sheet. It helps
the banks to focus on minimizing the risk and gainingmaximum profit. Banks
faces many risks which includes market risks, liquidity risk, credit risk etc. ALM
is a tool to manage the risk properly. ALM plays a crucial role for managing the
liquidity needs of the banks. ALCO (Asset Liability committee) is a decision
making unit of the banks, which includes the top most employees of the bank
such as CEO, Board of Directors etc. it is the responsibility of members of AL-
CO for the smooth running of ALM tools.
When analysis of banks performance is done they only concerned about various
types of the ratios or the NPA levels of the banks. Also the approach to the asset
liability management is not clear. One of the methods to analyze the financial
strength of a bank is financial ratio analysis. Liquidity ratios are calculated and
analyzed to determine the liquidity strength of a bank. Every financial institute
irrespective of its size is generally exposed to market liquidity and interest rate
risks.
Failure to identify the risk may affectthe financial position of the financial insti-
tute. One of the strategies for risk management is Asset Liability Management
(ALM). ALM is an attempt to analyze the gap between assets and liabilities in
terms of their maturities and interest rate sensitivities so that banks can minimize
the risk arising from such gap mainly—interest rate risk and liquidity risk. As far
as ALM in Indian banking system is concerned, it is still in an early stage. At
present ALM has become an essential tool in the banking sector. It is a part of
overall risk management system in banks. ALM is basically a response to the
various risks and challenges which any bank is facing or may face in near future.
It provides a degree of protection from such risks and prepares the management
to accept such risks. The ALM approach can help management to see their
bank’s currentmarket risk profiles and future risk profiles and evaluate the im-
pact of alternative decisions for these risk profiles. By evaluating these risk pro-
files bank management will be in a position to decide a suitable course of action
which suit therisk taking ability of the bank.
In its normal course, banks are exposed to credit and market risks in view of the
asset-liability transformation. There has been a wide range of changes at a fast
pace in the Indian financial markets due to its liberalisation over the last few
years and growing integration of domestic markets with external markets. There-
fore, the risks associated with bank’s operations have become complex and
large, thus requiring strategic management. Banks are now operating in a fairly
deregulated environment and are required to determine on their own, interest
rates on deposits and advance, in both domestic and foreign currencies on a dy-
namic basis.
The interest rates on bank’s investments in government and other securities are
now market related. Also, intense competition for business involving both the
assets and liabilities together with increasing volatility in the domestic interest
rates as well as foreign exchange rates, has brought pressure on the management
of banks to maintain a good balance among spreads, profitability and long-term
viability. Handling these pressures requires structured and comprehensive
measures and not just ad hoc action.
The Management of banks has to base their business decisions on a dynamic and
integrated risk management system and process, driven by corporate strategy.
Banks are exposed to several major risks in the course of their business including
credit risk, interest rate risk, foreign exchange risk, equity/commodity price risk,
liquidity risk and operational risks. Banks need to address these risks in a struc-
tured manner by upgrading their risk management and adopting a more compre-
hensive Asset-Liability Management (ALM) practices than has been done before
by other procedures.
ALM, among other functions, is also concerned with risk management and pro-
vides a comprehensive and dynamic framework for measuring, monitoring and
managing liquidity, interest rate, foreign exchange and equity and commodity
price risks of a bank that needs to be closely integrated with the bank’s business
strategy. It involves assessment of various types of risks and altering the asset-
liability portfolio in a dynamic way in order to manage risks.
For this very reason, in the year 1998, the Reserve Bank of India (RBI) forward-
ed guidelines for implementing ALM systems in banks. Based on the feedback
received from various banks, the final guidelines were revised by the RBI, and
implemented from the year 1999.
The objective of ALM is to manage risk and not eliminate it. Risks and rewards
go hand in hand. One cannot expect to make huge profits without taking a huge
amount of risk. The objectives do not limit the scope of the ALM functionality to
mere risk assessment, but expanded the process to the taking on of risks that
might conceivably result in an increase in economic value of the balance sheet.
Apart from managing the risks ALM should enhance the net worth of the institu-
tion through opportunistic positioning of the balance sheet. The more leveraged
an institution, the more critical is the ALM function with enterprise.
1. Over the last few years the Indian financial markets have witnessed wide ranging
changes at fast pace. Intense competition for business involving both the assets
and liabilities, together withincreasing volatility in the domestic interest rates as
well as foreign exchange rates, has broughtpressure on the management of banks
to maintain a good balance among spreads, profitability andlong-term viability.
These pressures call for structured and comprehensive measures and not justad
hoc action. The Management of banks has to base their business decisions on a
dynamic andintegrated risk management system and process, driven by corporate
strategy. Banks are exposedto several major risks in the course of their business -
credit risk, interest rate risk, foreignexchange risk, equity / commodity price risk,
liquidity risk and operational risks.
2. This note lays down broad guidelines in respect of interest rate and liquidity
risksmanagement systems in banks which form part of the Asset-Liability Man-
agement (ALM)function. The initial focus of the ALM function would be to en-
force the risk managementdiscipline viz. managing business after assessing the
risks involved. The objective of good risk management programsshould be that
these programs will evolve into a strategic tool forbank management.
Time Buckets:
RBI was divided future cash flows into different time buckets. While preparing structur-
al liquidity statement and interest rate sensitivity statement cash flows were placed in
different time buckets based on their maturity period or re-pricingperiod.
i) 1 to 14 days
ii) 15 to 28 days
iii) 29 days and upto 3 months
iv) Over 3 months and upto 6 months
v) Over 6 months and Up to 12 months
vi) Over 1 year and upto 2 years
vii) Over 2 years and upto 5 years
viii) Over 5 years
The first time bucket (1-14 days at present) is further divided into three time buckets
for more granular approach to measurement of risk.
I. Next day
ii. 2-7 day
iii. 8-14 days
3.4 GUIDANCE FOR SLOTTING THE FUTURE CASH FLOWS
OF BANKS IN THE REVISED TIME BUCKETS
A. Outflow
1. Capital, reserves and surplus: over 5 year bucket.
2. Demand deposit (current and savings bank deposit): saving bank current deposit
may be classified into volatile and core portions. Savings bank (10%) and current(15%)
deposits are generally withdrawn able on demand. This portion may be treated as vola-
tile. While volatile portion can be placed in the day 1, 2-7 days and 8-14 days’ time
buckets, depending upon the experience and estimates of banks and the core portion
may be placed in over 1-3 years bucket. Saving bank and current deposits is only
benchmark, banks are better equipped to estimate the behavioral pattern, roll- in and
roll- out, embedded option, etc. on the basis of past data/ empirical studies could classify
them in the appropriate bucket, i.e. behavioral maturity instead of contractual maturity,
subject to the approval of the board/ ALCO
3. Term deposits:respective maturity buckets. Banks which are better equipped to esti-
mate the behavioral pattern, roll- in and roll- out, embedded option, etc. on the basis of
past data/ empirical studies could classify retail deposits in the appropriate bucket on the
basis of behavioral maturity rather than residual maturity. However the wholesale de-
posits should be shown under respective maturity buckets( wholesale deposits for the
purpose of this statement may be Rs. 15 lakhs or any such higher threshold approved by
the bank’s board)
4. Certificates of deposit, borrowings and bonds (including sub- ordinate debt): re-
spective maturity buckets. Where call/ put options are built into the issue structure of
any instrument, the call/ put date should be reckoned as the maturity date and the
amount should be shown in the respective time buckets
B. Inflow:
1. Cash: day 1 bucket
2. Balance with RBI:while the excess balance over the required CRR/SLR may be
shown under day 1 bucket, the statutory balances may be distributed amongst various
time buckets corresponding to the maturity profile of DTL with a time lag of 14 days
3. Balances with other banks:
A. current account: non-withdraw able portion on account of stipulations of minimum
balances may be shown under ‘over 1-3 years’ bucket and the remaining balances may
be shown under day 1 bucket.
B. money at call and short notice, term deposits and other placements: respective
maturity buckets
4. Investments(net of provision)
A. approved securities: respective maturity buckets, excluding the amount required to
be reinvested to maintain SLR corresponding to the DTL profit in various time buckets.
B. corporate debentures and bonds, PSU bonds, CDs and CPs, redeemable prefer-
ence shares, units of mutual funds (close ended), etc: respective maturity buckets. In-
vestments classified as NPIs should be shown under over 3-5 years bucket(sub-standard)
or over 5years bucket(doubtful)
C. shares: listed shares (except strategic investments) in 2-7 days bucket, with a haircut
of 50%. Other shares in over 5 years bucket.
D. units of mutual funds(open ended): day 1 bucket
E.investments in subsidiaries/ joint ventures: over 5 years bucket
F. securities in the trading book: day 1, 2-7 days, 8-14 days, 15-28 days and 29-90
days according to defeasance periods.
5. Advances(performing)
a. bills purchased and discounted(including bills under DUPN): respective maturity
buckets.
B. cash credit/ overdraft(including TOD and demand loan component of working
capital: bank should undertake a behavioral and seasonal pattern of availments based on
outstanding and the core and volatile portion should be identified. While the volatile
portion should be shown in the near time maturity bucket, the core portion may be
shown under over 1-3 years bucket.
c. term loans: interim cash flows should be under respective maturity buckets.
The changes in the financial markets in recent years as foreign players have gained ac-
cess to the domestic market, and risks associated with the operations of the banks have
become complex. Now the management requires strategic management to operate banks
successfully. Competition after the entry of foreign increased. The volatile interest rates
and exchange rate have put the pressure on the banks to design their asset liability port-
folio in such a way that the risk in the portfolio is minimized. Banks management needs
to maintain a good balance between the gap, profitability and stability. The most im-
portant thing for bank management is to managemarket risk, liquidity risk and inter-
est rate risk, credit risk, capital risk. Hence banks need a framework which enables
them to combat these risks and helps them to optimize the performance of the banks. In
this scenario ALM is very useful and helpful tool to analyze the liquidity and interest
rate risk
Credit risk: it is the failure of counter party in meeting the payment obligation on the
specific date. Its management is very crucial for financial institution failing which may
lead to failure of banks. The other vital issue in contract enforcement in countries like
India. Legalreforms are very critical in order to have timely contract enforcement. De-
lays and loopholes in the legal system significally affect the ability of the lender to en-
force the contract. Many cases are pending in the courts. The require rate of return due
to weak contract enforcement mechanism becomes larger in countries like India. It is al-
so linked to market risk variables. Therefore it is important for the banks that they focus
more on lending practices and credit processing in the changed scenario. In case of part-
nership firm and proprietorship firmthe task of credit risk assessment is more complicat-
ed due to lack of reliable and continuous financial information.
Capital risk: the maintenance of adequate capital on continues basis is one of the im-
portant parts of banking practice. To bring commonality and standardization in interna-
tional practices attempts are being made globally. Capital adequacy also focuses on
weighted average risk of lending banks are in position to realign their portfolio between
more risky and less risky portfolios.
Market risk: it is related to financial condition, which consequences in adverse move-
ment in market price. When there is a significant increase in the term structure of inter-
est rates or violent fluctuation in the rate structure, one finds considerable erosion of the
value of securities held
Liquidity risk:itis potential in ability to generate adequate cash to cope up with decline
in deposits or increase in assets. It is due to mismatch in the maturity pattern of assets
and liability.
Interest rate risk: thechange in prices of bonds due to change in interest rate is termed
as interest rate risk. Earlier it was not consider as serious but as rates of interest become
volatile they felt need for explicit means of monitoring and controlling interest gap.
3.6 Element of assets and liability management
There are nine elements related to ALM and they are as follows:
1. Strategic framework: The Board of Directors are responsible for setting the limits for
risk at global as well as domestic levels. They have to decide how much risk they are
willing to take in quantifiable terms. Also it is necessary to determine who is in chare of
controlling risk in the organization and their responsibilities.
2. Organizational framework: All elements of the organization like the ALM Commit-
tee, sub–committees, etc., should have clearly defined roles and responsibilities. ALM
activities should be supported by the top management with proper resource allocation
and personnel committee.
3. Operational framework: There should be a proper direction for risk management
with detailed guidelines on all aspects of ALM. The policy statement should be well ar-
ticulated providing a clear direction for ALM function.
4. Analytical framework:Analytical methods in ALM require consistency, which in-
cludes periodic review of the models used to measure risk to avoid miscalculation and
verifying their accuracy. Various analytical components like Gap, Duration, Stimulation
and Value-at-Risk should be used to obtainappropriate insights.
5. Technology framework: An integrated technological framework is required to ensure
all potential risks are captured and measured on a timely basis. It would be worthwhile
to ensure that automatic information feeds into the ALM systems and he latest software
is utilized to enable management perform extensive analysis, planning and measurement
of all facets of the ALM function.
6. Information reporting framework: The information – reporting framework decides
who receives information, how timely, how often and in how much detail and whether
the amount and type of information received is appropriate and necessary for the recipi-
ent’s task.
6. Performance reporting framework: The performance of the traders and business
units can easily be measured using valid risk measurement measures. The perfor-
mance measurement considers approaches and ways to adjust performance meas-
urement for the risks taken. The profitability of an institution comes from three
sources: Asset, Liabilities and their efficient management.
7. Regulatory compliance framework: The objective of regulatory compliance element
is to ensure that there is compliance with the requirements, expectations and guide-
lines for risk – based capital and liquidity ratios.
8. Control framework: The control framework covers the control over all processes and
systems. The emphasis should be on setting up a system of checks and balances to
ensure the integrity of data, analysis and reporting. This can be ensured through regu-
lar internal / external reviews of the function
2. ALM organization
Structure and responsibilities
Level of top management involvement.
3. ALM process
Risk parameters
Risk identification
Risk measurement
Risk management
Risk policies and tolerance levels.
3.8 ASSETLIABILITYCOMMITTEE – ALCO
Committee composition
Permanent members:
Chairman
Managing Director/CEO
Financial Director
Risk Manager
Treasury Manager
ALCO officer
Divisional Managers
By invitation:
Economist
Risk Consultants
Purposes and Tasks of ALCO:
Formation of an optimal structure of the Bank’s balance sheet to provide the maximum
profitability, limiting the possible risk level;
Control over the capital adequacy and risk diversification;
Execution of the uniform interest policy;
Determination of the Bank’s liquidity management policy;
Control over the state of the current liquidity ratio and resources of the Bank;
Formation of the Bank’s capital markets policy;
Control over dynamics of size and yield of trading transactions (purchase/sale
of currency, state and corporate securities, shares, derivatives for such instruments)
as well as extent of diversification thereof;
Control over dynamics of the basic performance indicators (ROE, ROA, etc.)
as prescribed in the Bank's policy.
3.9 PROCESS OF ALCO
meet monthly/weekly,
determine if current set measurable targets communicate targets to
strategy is appropriate appropriate managers
Board of directors
Management committee
Analysis of data
4.1 INTRODUCTION
Gap Analysis:-
The Gap or mismatch risk can be measured by calculating Gaps over different time
buckets as at a given date. Gap analysis measures mismatches between rate sensitive li-
abilities and rate sensitive assets including off-balance sheet position.
They can implement ALM policies for the better identification of the mismatch, risk and
for the implementation of various remedial measures.
GAP= Inflow- Outflow,
Value of GAP < 0 is called negative gap
Mismatch = (Negative gap / Outflow) * 100
Structural liquidity statement
The Statement of Structural Liquidity may be prepared by placing all cash inflows
and outflows in the maturity ladder according to the expected timing of cash flows. A ma-
turing liability will be a cash outflow while a maturing asset will be a cash inflow. Mis-
matches and cumulative mismatches will be calculated across all time buckets.
In case the net cumulative negative mismatches during the Day 1, 2-7 days,
814 days and 15- 28 days buckets exceed the prudential limit of 5 % ,10%, 15 % and 20%
of the cumulative cash outflows in the respective time buckets, the bank may show by way
of a foot note as to how it proposes to finance the gap to bring the mismatch within the
prescribed limits.
STRUCTURAL LIQUIDITY STATEMENT OF UCO BANK
INTERPRETATION;
In above case mismatch in the time buckets 1days, 2-7 days, 8-10 days greater
than 5%, 10%, and 20% implies liquidity risk is higher. Mismatch in any time buck-
ets is greater than bank’s internal tolerance limit in the corresponding time buckets
implies existence of liquidity risk in those time buckets,
Trend Analysis
An analysis is drawn through rise and fall in various deposit such as demand de-
posit, saving deposit, term deposits and various advances in UCO bank. When
money is deposited with “tenure” it cannot be withdrawn before its maturity
fixed at a particular time. Such deposits are called “Time deposits” or “Term de-
posits. If the funds deposited can be withdrawn by the customer (depositor / ac-
count holder) at any time without any advanced notice to banks; it is called de-
mand deposit. Savings deposits are subject to restrictions on the number of with-
drawals as well as on the amounts of withdrawals during any specified period.
Further, minimum balances may be prescribed in order to offset the cost of main-
taining and servicing such deposits. Savings deposits are deposits that accrue in-
terest at a fixed rate set by the commercial banks.
Bill discounting is a major activity with some of the smaller Banks. Under this
type of lending, Bank takes the bill drawn by borrower on his (borrower's) cus-
tomer and pays him immediately deducting some amount as dis-
count/commission. The Bank then presents the Bill to the borrower's customer
on the due date of the Bill and collects the total amount. If the bill is delayed, the
borrower or his customer pays the Bank a pre-determined interest depending up-
on the terms of transaction.
Cash Credit (CC) and Overdraft (OD) are types of short-term debt a company
can rely on to take the burden off their finance department. They give a chance
to companies to meet unexpected expenses and have enough liquidity.CC and
OD are facilities which allow companies or individuals to borrow some amount
from the bank and use it for financing the day to day operations. The amount
withdrawn has a predetermined limit
% change in 18-
Item % change in 15-16 % change in 16-17 % change in 17-18 19
INTERPRETATION;
4.3 LINE CHART SHOWING DEPOSITS OF UCO
Chart Title
120
100
80
60
40
20
0
% change in 15-16 % change in 16-17 % change in 17-18 % change in 18-19
-20
-40
-60
Cash Credit,Overdraft&
Loans -4.05 -1.88 9.58 15.20
Chart Title
40
30
20
10
0
% change in 15-16 % change in 16-17 % change in 17-18 % change in 18-19
-10
-20
Bills Purchased & Discounted Cash Credit, Overdraft& Loans Term Loans
4.6 CHANGE IN ADVANCES AND DEPOSIT
5,000,000,000.00
4,500,000,000.00
4,000,000,000.00
3,500,000,000.00
3,000,000,000.00
2,500,000,000.00
2,000,000,000.00
1,500,000,000.00
1,000,000,000.00
500,000,000.00
0.00
2015 2016 2017 2018 2019
Advances Deposits
4.7 CHANGES IN MCLR RATE
Chart Title
8.80%
8.60%
8.40%
8.20%
8.00%
7.80%
7.60%
Overnight MCLR 1 Month MCLR 3 Months MCLR 6 Months MCLR 1 Year MCLR
1 2 3 4 5
Rate effective from 10.06.17 Rate effective from 10.06.18 Rate effective from 10.06.19
4.9 TABLE SHOWING CHANGE IN INTEREST RATE
31 days to 45 days 5 5 5
1 year and above but less than 2 years 6.5 6.5 6.5
2 years and above but less than 3 years 6.4 6.4 6.5
1 year and above but less than 2 years 6.75 4.75 5.5
2 years and above but less than 3 years 6.5 4.75 4.75
Maturity 10/6/2019
07 days to 14 days 5.5
15 days to 30 days 5.5
31 days to 45 days 5.5
46 days to 90 days 5.25
91 days to 180 days 5.25
181 days to 210 days 5.25
211 days to 270 days 5.25
271 days to 1 year 5.25
>1 year to 18 months 5.50
>18 months to 2 yrs 5.50
>2 years to 3 years 4.75
>3years to 5 years 4.75
Above to 5 years 4.75
Maturity 2/6/2018
07 days to 14 days 5.5
15 days to 30 days 5.5
31 days to 45 days 5.5
46 days to 90 days 5.25
91 days to 179 days 5.25
180 days to 269 days 5.25
270 days to less than 1 years 5.26
1 year and above less than years 5.5
Chapter-5
FINDINGS
5.1 INTRODUCTION
Most people imagine banking to be the safekeeping of money and the provision of bank-
ing services we need such as electronic payment systems, ATMs, changing money and
converting currency and "traditional" deposit banking fits that description pretty well.
Originally bank deposits were bailments and the banks were simply money warehouses.
They were paid to look after their customers' money and to provide useful services. The
bank had absolutely no claim. Generally when people save they want to put some of
those savings to work and make them grow. Most people want to save for retirement or
a holiday or a new car or their children's future; they are not gamblers or entrepreneurs.
Risking all their money on one venture is out of the question. What most people want is
a nice steady return on their money with only a little risk. Loan banking provided that by
being the middle man and, to some extent a safety net, between borrowers and lenders.
5.2FINDINGS
In table 4.2 demand deposit falling as deposit is also known as current deposit.
Business man generally keep current deposit account and business depend upon
market condition. Banks give 0% interest in current deposit so banks have profit
in current deposit.
In table 4.2 saving deposit is increasing because interest rate and increase in
salary account.
In table 4.2 term deposit is decreasing and then rising because bank interest rate
is falling and then eventually rising.
In table 4.3 changes in advance is invariable due to market demand as interest
rate fall demand for loan rises. Demand side of market condition are downgraded
due to impact of GST, new policies, GDP is not growing as it is still 7.7 so mar-
ket is not driven out. Demand from the market side is not well but bank decreas-
es the interest rate to attract the customer.
In table 4.5 there is a wide range between advances and deposits. Advances are
falling because there is down fall in interest rate as saving deposit interest rate
fall from 9.25 to 6.25. There is no larger variation in advance side of graph it is
steady but deposit slope is very slow 40-degree slope.
In the table 4.7 MCLR rate is increasing then it will increase the rate of interest
on advances and deposits, which may attract the customer for more deposit.
In table 4.9 for deposit of 1cr and above but less than 10cr generally institutional
deposit like government deposit, private company also keep certain deposit ac-
cording to their norms.
Chapter-6
CONCLUSION
Conclusion
Pricing of bank product is dependant on this novel concept of ALM. ALM is one of the
importanttools of any financial organization like banks, who always want to maintain a
parallel line between asset side and liability side to match both the itemsi.e assets and
liabilities. Formonitoring, measuring and managing the various risk involved such as in-
terest rate risk, liquidity risk, and foreign currency risk . With the deregulation of inter-
est regime in India, the banking industry has been exposed to above mentioned risks,
particularly interest rate risk/market risk. Hence to manage such risk, ALM needs to be
used prudently so that the management is able to assess the risks and cover some of
these by taking appropriate steps.
BIBLIOGRAPHY
1. https://www.rbi.org.in/scripts/SearchResults.aspx?sea
rch=ALM%20of%20uco
2. http://www.moneycontrol.com/stocks/cptmarket/com
psearch-
new.php?search_data=&cid=&mbsearch_str=&topse
arch_type=1&search_str=ALM
3. http://www.ucobank.com