CHAPTER-I

INTRODUCTION

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 INTRODUCTION

Asset Liability Management (ALM) is a strategic approach of managing the balance sheet
dynamics in such a way that the net earnings are maximized. This approach is concerned with
management of net interest margin to ensure that its level and riskiness are compatible with the
risk return objectives.

If one has to define Asset and Liability management without going into detail about its
need and utility, it can be defined as simply “management of money” which carries value and
can change its shape very quickly and has an ability to come back to its original shape with or
without an additional growth. The art of proper management of healthy money is ASSET AND
LIABILITY MANAGEMENT (ALM).

The Liberalization measures initiated in the country resulted in revolutionary changes in

the sector. There was a shift in the policy approach from the traditionally administered market
regime to a free market driven regime. This has put pressure on the earning capacity of co-
operative, which forced them to foray into new operational areas thereby exposing themselves to
new risks. As major part of funds at the disposal from outside sources, the management are
concerned about RISK arising out of shrinkage in the value of asset, and managing such risks
became critically important to them. Although co-operatives are able to mobilize deposits, major
portions of it are high cost fixed deposits. Maturities of these fixed deposits were not properly
matched with the maturities of assets created out of them. The tool called ASSET AND
LIABILITY MANAGEMENT provides a better solution for this.

ASSET LIABILITY MANAGEMENT (ALM) is a portfolio management of assets and

liability of an organization. This is a method of matching various assets with liabilities on the
basis of expected rates of return and expected maturity pattern
In the context of ALM is defined as “a process of adjusting s liability to meet loan
demands, liquidity needs and safety requirements”. This will result in optimum value of the same

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time reducing the risks faced by them and managing the different types of risks by keeping it
within acceptable levels.

RBI revises asset liability management guidelines

On February 2013
In the era of changing interest rates, Reserve Bank of India (RBI) has now revised its Asset
Liability Management guidelines. Banks have now been asked to calculate modified duration of
assets (loans) and liabilities (deposits) and duration of equity.

This was stated by the executive director of RBI, V K Sharma, and here today. He said that this
concept gives banks a single number indicating the impact of a 1 per cent change of interest rate
on its capital, captures the interest rate risk, and can thus help them move forward towards
assessment of risk based capital. This approach will be a graduation from the earlier approach,
which led to a mismatch between the assets and liabilities.

The ED said that RBI has been laying emphasis that banks should maintain a more realistic
balance sheet by giving a true picture of their non performing assets (NPAs), and they should not
be deleted to show huge profits. Though the banking system in India has strong risk management
architecture, initiatives have to be taken at the bank specific level as well as broader systematic
level. He also emphasized on the need for sophisticated credit-scoring models for measuring the
credit risks of commercial and industrial portfolios.

Emphasizing on a need for an effective control system to manage risks, he said that the
implementation of BASEL II norms by commercial banks should not be delayed. He said that the
banks should have a robust stress testing process for assessment of capital adequacy in wake of
economic downturns, industrial downturns, market risk events and sudden shifts in liquidity
conditions. Stress tests should enable the banks to assess risks more accurately and facilitate
planning for appropriate capital requirements.

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 NEED OF THE STUDY:

The need of the study is to concentrates on the growth and performance of Icici Bank and to
calculate the growth and performance by using asset and liability management and to know the
management of nonperforming assets.

 To know financial position of Icici Bank

 To analyze existing situation of Icici Bank
 To improve the performance of Icici Bank
 To analyze competition between Icici Bank with other cooperatives.

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 OBJECTIVES OF THE STUDY

 To study the concept of ASSET & LIABLITY MANAGEMENT in Icici Bank

 To study process of CASH INFLOWS and OUTFLOWS in Icici Bank

 To study RISK MANAGEMENT under Icici Bank

 To study RESERVES CYCLE of ALM under Icici Bank

 To study FUNCTIONS AND OBJECTIVES of Icici Bank committee.

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 SCOPE OF THE STUDY:

In this study the analysis based on ratios to know asset and liabilities management under Icici
Bank and to analyze the growth and performance of Icici Bank by using the calculations under
asset and liability management based on ratio.

 Ratio analysis
 Comparative statement
 Common size balance sheet.

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 RESEARCH METHODOLOGY

The study of ALM Management is based on two factors.

1. Primary data collection.

2. Secondary data collection

PRIMARY DATA COLLECTION:

The sources of primary data were

 The chief manager – ALM cell

 Department Sr. manager financing & Accounting

 System manager- ALM cell

Gathering the information from other managers and other officials of the organization.

SECONDARY DATA COLLECTION:

Collected from books regarding journal, and management containing relevant information
about ALM and Other main sources were

 Annual report of the Icici Bank

 Published report of the Icici Bank
 RBI guidelines for ALM.

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 LIMITATION OF THE STUDY:

 This subject is based on past data of Icici Bank

 The analysis is based on structural liquidity statement and gap analysis.

 The study is mainly based on secondary data.

 Approximate results: The results are approximated, as no accurate data is Available.

 Study takes into consideration only LTP and issue prices and their difference for

Concluding whether an issue is overpriced or under priced leaving other.

 The study is based on the issues that are listed on NSE only.

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 CHAPTER-II

INDUSTRY PROFILE

&

COMPANY PROFILE

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A bank is a financial institution that accepts deposits and channels those deposits into lending
activities. Banks primarily provide financial services to customers while enriching investors.
Government restrictions on financial activities by banks vary over time and location. Banks are
important players in financial markets and offer services such as investment funds and loans. In
some countries such as Germany, banks have historically owned major stakes in industrial
corporations while in other countries such as the United States banks are prohibited from owning
non-financial companies. In Japan, banks are usually the nexus of a cross-share holding entity
known as the keiretsu. In France, bancassurance is prevalent, as most banks offer insurance
services (and now real estate services) to their clients.

The level of government regulation of the banking industry varies widely, with countries such as
Iceland, having relatively light regulation of the banking sector, and countries such as China
having a wide variety of regulations but no systematic process that can be followed typical of a
communist system.

The oldest bank still in existence is Monte dei Paschi di Siena, headquartered in Siena, Italy,
which has been operating continuously since 1472.

Traditional banking activities

Banks act as payment agents by conducting checking or current accounts for customers, paying
cheques drawn by customers on the bank, and collecting cheques deposited to customers' current
accounts. Banks also enable customer payments via other payment methods such as telegraphic
transfer, EFTPOS, and ATM.

Banks borrow money by accepting funds deposited on current accounts, by accepting term
deposits, and by issuing debt securities such as banknotes and bonds. Banks lend money by
making advances to customers on current accounts, by making installment loans, and by
investing in marketable debt securities and other forms of money lending.

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Banks provide almost all payment services, and a bank account is considered indispensable by
most businesses, individuals and governments. Non-banks that provide payment services such as
remittance companies are not normally considered an adequate substitute for having a bank
account.

Banks borrow most funds from households and non-financial businesses, and lend most funds to
households and non-financial businesses, but non-bank lenders provide a significant and in many
cases adequate substitute for bank loans, and money market funds, cash management trusts and
other non-bank financial institutions in many cases provide an adequate substitute to banks for
lending savings to.

Entry regulation

Currently in most jurisdictions commercial banks are regulated by government entities and
require a special bank licence to operate.

Usually the definition of the business of banking for the purposes of regulation is extended to
include acceptance of deposits, even if they are not repayable to the customer's order—although
money lending, by itself, is generally not included in the definition.

Unlike most other regulated industries, the regulator is typically also a participant in the market,
i.e. a government-owned (central) bank. Central banks also typically have a monopoly on the
business of issuing banknotes. However, in some countries this is not the case. In the UK, for
example, the Financial Services Authority licences banks, and some commercial banks (such as
the Bank of Scotland) issue their own banknotes in addition to those issued by the Bank of
England, the UK government's central bank.

Definition

The definition of a bank varies from country to country.

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Under English common law, a banker is defined as a person who carries on the business of
banking, which is specified as:

 conducting current accounts for his customers

 paying cheques drawn on him, and
 collecting cheques for his customers.

In most English common law jurisdictions there is a Bills of Exchange Act that codifies the law
in relation to negotiable instruments, including cheques, and this Act contains a statutory
definition of the term banker: banker includes a body of persons, whether incorporated or not,
who carry on the business of banking' (Section 2, Interpretation). Although this definition seems
circular, it is actually functional, because it ensures that the legal basis for bank transactions such
as cheques do not depend on how the bank is organised or regulated.

The business of banking is in many English common law countries not defined by statute but by
common law, the definition above. In other English common law jurisdictions there are statutory
definitions of the business of banking or banking business. When looking at these definitions it is
important to keep in mind that they are defining the business of banking for the purposes of the
legislation, and not necessarily in general. In particular, most of the definitions are from
legislation that has the purposes of entry regulating and supervising banks rather than regulating
the actual business of banking. However, in many cases the statutory definition closely mirrors
the common law one. Examples of statutory definitions:

 "banking business" means the business of receiving money on current or deposit account,
paying and collecting cheques drawn by or paid in by customers, the making of advances
to customers, and includes such other business as the Authority may prescribe for the
purposes of this Act; (Banking Act (Singapore), Section 2, Interpretation).

 "banking business" means the business of either or both of the following:

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 1. receiving from the general public money on current, deposit, savings or other similar
account repayable on demand or within less than [3 months] ... or with a period of call or
notice of less than that period;
2. paying or collecting cheques drawn by or paid in by customers[6]

Since the advent of EFTPOS (Electronic Funds Transfer at Point Of Sale), direct credit, direct
debit and internet banking, the cheque has lost its primacy in most banking systems as a payment
instrument. This has led legal theorists to suggest that the cheque based definition should be
broadened to include financial institutions that conduct current accounts for customers and
enable customers to pay and be paid by third parties, even if they do not pay and collect cheques.

Accounting for bank accounts

Bank statements are accounting records produced by banks under the various accounting
standards of the world. Under GAAP and IFRS there are two kinds of accounts: debit and credit.
Credit accounts are Revenue, Equity and Liabilities. Debit Accounts are Assets and Expenses.
This means you credit a credit account to increase its balance, and you debit a debit account to
decrease its balance.

This also means you debit your savings account every time you deposit money into it (and the
account is normally in deficit), while you credit your credit card account every time you spend
money from it (and the account is normally in credit).

However, if you read your bank statement, it will say the opposite—that you credit your account
when you deposit money, and you debit it when you withdraw funds. If you have cash in your
account, you have a positive (or credit) balance; if you are overdrawn, you have a negative (or
deficit) balance.

The reason for this is that the bank, and not you, has produced the bank statement. Your savings
might be your assets, but the bank's liability, so they are credit accounts (which should have a
positive balance). Conversely, your loans are your liabilities but the bank's assets, so they are
debit accounts (which should also have a positive balance).

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Where bank transactions, balances, credits and debits are discussed below, they are done so from
the viewpoint of the account holder—which is traditionally what most people are used to seeing.

Economic functions

1. issue of money, in the form of banknotes and current accounts subject to cheque or
payment at the customer's order. These claims on banks can act as money because they
are negotiable and/or repayable on demand, and hence valued at par. They are effectively
transferable by mere delivery, in the case of banknotes, or by drawing a cheque that the
payee may bank or cash.
2. netting and settlement of payments – banks act as both collection and paying agents for
customers, participating in interbank clearing and settlement systems to collect, present,
be presented with, and pay payment instruments. This enables banks to economise on
reserves held for settlement of payments, since inward and outward payments offset each
other. It also enables the offsetting of payment flows between geographical areas,
reducing the cost of settlement between them.
3. credit intermediation – banks borrow and lend back-to-back on their own account as
middle men.
4. credit quality improvement – banks lend money to ordinary commercial and personal
borrowers (ordinary credit quality), but are high quality borrowers. The improvement
comes from diversification of the bank's assets and capital which provides a buffer to
absorb losses without defaulting on its obligations. However, banknotes and deposits are
generally unsecured; if the bank gets into difficulty and pledges assets as security, to raise
the funding it needs to continue to operate, this puts the note holders and depositors in an
economically subordinated position.
5. maturity transformation – banks borrow more on demand debt and short term debt, but
provide more long term loans. In other words, they borrow short and lend long. With a
stronger credit quality than most other borrowers, banks can do this by aggregating issues
(e.g. accepting deposits and issuing banknotes) and redemptions (e.g. withdrawals and
redemptions of banknotes), maintaining reserves of cash, investing in marketable

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 securities that can be readily converted to cash if needed, and raising replacement funding
as needed from various sources (e.g. wholesale cash markets and securities markets).

Law of banking

Banking law is based on a contractual analysis of the relationship between the bank (defined
above) and the customer—defined as any entity for which the bank agrees to conduct an account.

The law implies rights and obligations into this relationship as follows:

1. The bank account balance is the financial position between the bank and the customer:
when the account is in credit, the bank owes the balance to the customer; when the
account is overdrawn, the customer owes the balance to the bank.
2. The bank agrees to pay the customer's cheques up to the amount standing to the credit of
the customer's account, plus any agreed overdraft limit.
3. The bank may not pay from the customer's account without a mandate from the customer,
e.g. a cheque drawn by the customer.
4. The bank agrees to promptly collect the cheques deposited to the customer's account as
the customer's agent, and to credit the proceeds to the customer's account.
5. The bank has a right to combine the customer's accounts, since each account is just an
aspect of the same credit relationship.
6. The bank has a lien on cheques deposited to the customer's account, to the extent that the
customer is indebted to the bank.
7. The bank must not disclose details of transactions through the customer's account—
unless the customer consents, there is a public duty to disclose, the bank's interests
require it, or the law demands it.

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 8. The bank must not close a customer's account without reasonable notice, since cheques
are outstanding in the ordinary course of business for several days.

These implied contractual terms may be modified by express agreement between the customer
and the bank. The statutes and regulations in force within a particular jurisdiction may also
modify the above terms and/or create new rights, obligations or limitations relevant to the bank-
customer relationship.

Some types of financial institution, such as building societies and credit unions, may be partly or
wholly exempt from bank licence requirements, and therefore regulated under separate rules.

The requirements for the issue of a bank licence vary between jurisdictions but typically include:

1. Minimum capital
2. Minimum capital ratio
3. 'Fit and Proper' requirements for the bank's controllers, owners, directors, and/or senior
officers
4. Approval of the bank's business plan as being sufficiently prudent and plausible.

Types of banks

Banks' activities can be divided into retail banking, dealing directly with individuals and small
businesses; business banking, providing services to mid-market business; corporate banking,
directed at large business entities; private banking, providing wealth management services to
high net worth individuals and families; and investment banking, relating to activities on the
financial markets. Most banks are profit-making, private enterprises. However, some are owned
by government, or are non-profit organizations.

Central banks are normally government-owned and charged with quasi-regulatory

responsibilities, such as supervising commercial banks, or controlling the cash interest rate. They
generally provide liquidity to the banking system and act as the lender of last resort in event of a
crisis.

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Types of retail banks

 Commercial bank: the term used for a normal bank to distinguish it from an investment
bank. After the Great Depression, the U.S. Congress required that banks only engage in
banking activities, whereas investment banks were limited to capital market activities.
Since the two no longer have to be under separate ownership, some use the term
"commercial bank" to refer to a bank or a division of a bank that mostly deals with
deposits and loans from corporations or large businesses.
 Community Banks: locally operated financial institutions that empower employees to
make local decisions to serve their customers and the partners.
 Community development banks: regulated banks that provide financial services and
credit to under-served markets or populations.
 Postal savings banks: savings banks associated with national postal systems.
 Private banks: banks that manage the assets of high net worth individuals.
 Offshore banks: banks located in jurisdictions with low taxation and regulation. Many
offshore banks are essentially private banks.
 Savings bank: in Europe, savings banks take their roots in the 19th or sometimes even
18th century. Their original objective was to provide easily accessible savings products to
all strata of the population. In some countries, savings banks were created on public
initiative; in others, socially committed individuals created foundations to put in place the
necessary infrastructure. Nowadays, European savings banks have kept their focus on
retail banking: payments, savings products, credits and insurances for individuals or
small and medium-sized enterprises. Apart from this retail focus, they also differ from
commercial banks by their broadly decentralised distribution network, providing local
and regional outreach—and by their socially responsible approach to business and
society.
 Building societies and Landesbanks: institutions that conduct retail banking.

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  Ethical banks: banks that prioritize the transparency of all operations and make only what
they consider to be socially-responsible investments.
 Islamic banks: Banks that transact according to Islamic principles.

Types of investment banks

 Investment banks "underwrite" (guarantee the sale of) stock and bond issues, trade for
their own accounts, make markets, and advise corporations on capital market activities
such as mergers and acquisitions.
 Merchant banks were traditionally banks which engaged in trade finance. The modern
definition, however, refers to banks which provide capital to firms in the form of shares
rather than loans. Unlike venture capital firms, they tend not to invest in new companies.

Both combined

 Universal banks, more commonly known as financial services companies, engage in

several of these activities. These big banks are very diversified groups that, among other
services, also distribute insurance— hence the term bancassurance, a portmanteau word
combining "banque or bank" and "assurance", signifying that both banking and insurance
are provided by the same corporate entity.

Other types of banks

 Islamic banks adhere to the concepts of Islamic law. This form of banking revolves
around several well-established principles based on Islamic canons. All banking activities
must avoid interest, a concept that is forbidden in Islam. Instead, the bank earns profit
(markup) and fees on the financing facilities that it extends to customers.

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 COMPANY PROFILE

ICICI BANK PROFILE

ICICI Bank is India’s second-largest bank with total assets of Rs. 3,446.58 billion (US$ 79
billion) at March 31, 2007 and profit after tax of Rs. 31.10 billion for fiscal 2007. ICICI Bank is
the most valuable bank in India in terms of market capitalization and is ranked third amongst all
the companies listed on the Indian stock exchanges. In terms of free float market
capitalization*. The Bank has a network of about 950 branches and 3,300 ATMs in India and
presence in 17 countries. ICICI Bank offers a wide range of banking products and financial
services to corporate and retail customer through a variety of delivery channels and through its
specialized subsidiaries and affiliates in the areas of investment banking, life and non-life
insurance, venture capital and asset management. The Bank currently has subsidiaries in the
United Kingdom, Russia and Canada, branches in Singapore, Bahrain, Hong Kong, Sri Lanka
and Dubai International Finance Center and representative offices in the United States, United
Arab Emirates, China, South Africa, Bangladesh, Thailand, Malaysia and Indonesia. UK
subsidiary has established a branch in Belgium.

19
ICICI Bank's equity shares are listed in India on Bombay Stock Exchange (BSE) and the
National Stock Exchange (NSE) of India Limited and its American Depositary Receipts
(ADRs) are listed on the New York Stock Exchange (NYSE).

HISTORY
ICICI Bank was originally promoted in 1994 by ICICI Limited, an Indian financial institution,
and was its wholly owned subsidiary. ICICI's shareholding in ICICI Bank was reduced to 46%
through a public offering of shares in India in fiscal 1998, an equity offering in the form of
ADRs listed on the NYSE in fiscal 2000, ICICI Bank's acquisition of Bank of Madura Limited in
an all-stock amalgamation in fiscal 2001, and secondary market sales by ICICI to institutional
investors in fiscal 2001 and fiscal 2002. ICICI was formed in 1955 at the initiative of the World
Bank, the Government of India and representatives of Indian industry. The principal objective
was to create a development financial institution for providing medium-term and long-term
project financing to Indian businesses. In the 1990s, ICICI transformed its business from a
development financial institution offering only project finance to a diversified financial services
group offering a wide variety of products and services, both directly and through a number of
subsidiaries and affiliates like ICICI Bank. In 1999, ICICI become the first Indian company and
the first bank or financial institution from non-Japan Asia to be listed on the NYSE.

After consideration of various corporate structuring alternatives in the context of the emerging
competitive scenario in the Indian banking industry, and the move towards universal banking,
the managements of ICICI and ICICI Bank formed the view that the merger of ICICI with ICICI
Bank would be the optimal strategic alternative for both entities, and would create the optimal
legal structure for the ICICI group's universal banking strategy. The merger would enhance value
for ICICI shareholders through the merged entity's access to low-cost deposits, greater
opportunities for earning fee-based income and the ability to participate in the payments system
and provide transaction-banking services. The merger would enhance value for ICICI Bank
shareholders through a large capital base and scale of operations, seamless access to ICICI's
strong corporate relationships built up over five decades, entry into new business segments,
higher market share in various business segments, particularly fee-based services, and access to

20
the vast talent pool of ICICI and its subsidiaries. In October 2001, the Boards of Directors of
ICICI and ICICI Bank approved the merger of ICICI and two of its wholly-owned retail finance
subsidiaries, ICICI Personal Financial Services Limited and ICICI Capital Services Limited,
with ICICI Bank. The merger was approved by shareholders of ICICI and ICICI Bank in January
2002, by the High Citst of Gujarat at Ahmedabad in March 2002, and by the High Citst of
Judicature at Mumbai and the Reserve Bank of India in April 2002. Consequent to the merger,
the ICICI group's financing and banking operations, both wholesale and retail, have been
integrated in a single entity. ICICI Bank has formulated a Code of Business Conduct and Ethics
for its directors and employees.

BOARD OF DIRECTORS
 MR. Girish Chaturvedi (CHAIRMAN)
 MR. Hari L Mundra (Independent Director)
 MR. Lalit Kumar Chandel (Government Nominee Director)
 MR. S.Madhavan (Independent Director)
 MRS. Neelam Dhawan (Independent Director)
 MR. Radhakrishnan Nair (Independent Director)
 MRS. Rama Bijapurkar (Independent Director)
 MR. B.Sriram (Independent Director)
 MR. Uday Chitale (Independent Director)
 MR. Anup Bagchi (Executive Director)

 MR.Sandeep Bakhshi (Managing Director & CEO)

 MR. Sandeep Batra ( Executive Director)
 MRS. Vishakha Mulye (Executive Director)

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22
BOARD COMMITTEES

Audit Committee Board Governance &

Remuneration Committee
Mr.Uday Chitale Mr.Neelam Dhawan
Mr. S Madhavan Mr.Girish Chandra Chaturvedi
Mr.Radhakrishnan Nair Mr.Rama Bijapurkar
Mr.B Sriram

Customer Service Committee Credit Committee

Mr.Rama Bijapurkar Mr. Sandeep Bakhshi

Mr. Hari L. Mundra Mr.Girish Chandra Chaturvedi
Mr.Anup Bagchi Mr. Hari L.Mundra
Mr.Sandeep Bakshi Mr.Vishakha Mulye

Fraud Monitoring Committee Risk Committee

Mr.S Madhavan Mr.B Sriram
Ms..Neelam Dhawan Mr.S Madhavan
Mr.Radhakrishnan Nair Mr.Sandeep Batra
Mr. Anup Bagchi
Mr. Sandeep Bakhshi

Stakeholders Relationship Information Technology

Committee Strategy Committee
Mr.Hari L.Mundra Mr. B Sriram
Mr.Uday Chitale Ms.Neelam Dhawan
Mr.Anup Bagchi Mr. Anup Bagchi
Mr.Sandeep Bakhshi

23
1.3.4 ORGANISATIONAL STRUCTURE OF ICICI BANK
ICICI Bank’s organisation structure is designed to be flexible and customer-focused, while
seeking to ensure effective control and supervision and consistency in standards across the
organisation and align all areas of operations to overall organisational objectives. The
organisation structure is divided into six principal groups – Retail Banking, Wholesale
Banking, International Banking, Rural (Micro-Banking) and Agriculture Banking,
Government Banking and Corporate Center.

RETAIL BANKING
The Retail Banking Group is responsible for products and services for retail customers and small
enterprises including various credit products, liability products, distribution of third party
investment and insurance products and transaction banking services.

WHOLESALE BANKING
The Wholesale Banking Group is responsible for products and services for large and medium-
sized corporate clients, including credit and treasury products, investment banking, project
finance, structured finance and transaction banking services.

INTERNATIONAL BANKING
The International Banking Group is responsible for its international operations, including
operations in various overseas markets as well as its products and services for non-resident
Indians and its international trade finance and correspondent banking relationships.

RURAL AND AGRICULTURAL BANKING

The Rural, Micro-Banking & Agri-Business Group is responsible for envisioning and
implementing rural banking strategy, including agricultural banking and micro-finance.

24
GOVERNMENT BANKING
The Government Banking Group is responsible for government banking initiatives.

CORPORATE CENTER
The Corporate Center comprises the internal control environment functions (including
operations, risk management, compliance, audit and legal); finance (including financial
reporting, planning and strategy, asset liability management, investor relations and corporate
communications); human resitsces management; and facilities management & administration.

BUSINESS REVIEW
During fiscal 2007, the Bank continued to grow and diversify its asset base and revenue streams
by leveraging the growth platforms created over the past few years. It maintained its leadership
position in retail credit, achieved robust growth in its fee income from both corporate and retail
customers, grew its deposit base and significantly scaled up its international operations and rural
reach.

RETAIL BANKING
ICICI is the largest provider of retail credit in India. ICICI’s total retail disbursements in fiscal
2007 were approximately Rs. 777.00 billion, compared to approximately Rs. 627.00 billion in
fiscal 2006. It’s total retail portfolio increased from Rs. 921.98 billion at March 31, 2006 to Rs.
1,277.03 billion at March 31, 2007, constituting 65% of it’s total loans at that date. It continued
its focus on retail deposits to create a stable funding base. At March 31, 2007 it had more than 25
million retail customer accounts.
During fiscal 2007, it expanded its branch network. At March 31, 2007, it had 755 branches and
extension counters compared to 614 branches and extension counters at March 31, 2006.
Pursuant to the amalgamation of The Sangli Bank Limited with it effective April 19, 2007, it
acquired over 190additional branches and extension counters. It continued to expand its
electronic channels, namely internet banking, mobile banking, call centres, point of sale
terminals and ATMs, and migrate customer transaction volumes to these channels. During fiscal
2007, over 80% of customer induced transactions took place through these electronic channels. It
increased its ATM network to 3,271 ATMs.

25
SMALL AND MEDIUM ENTERPRISES
In this segment it’s strategy has been focused around customer convenience in transaction
banking services, and working capital loans to suppliers or dealers of large corporations and
clusters of small enterprises that have a homogeneous profile. During fiscal 2007, it’s customer
base increased by more than 50% to over 900,000 transaction banking customers. These
customers are serviced by over 580 branches of the Bank, covering over 200 locations. During
fiscal 2007, the Emerging India Award entered in the Limca Book of Records as the biggest
business award in India.

CORPORATE BANKING
It’s corporate banking strategy is based on providing comprehensive and customized financial
solutions to its corporate customers. It offer a complete range of corporate banking products
including rupee and foreign currency debt, working capital credit, structured financing,
syndication and transaction banking products and services.
Fiscal 2007 saw continuing demand for credit from the corporate sector, with growth and
additional investment demand in almost all sectors. It is now a preferred partner for Indian
companies for syndication of external commercial borrowings and other fund raising in
international markets.

RURAL BANKING
It’s rural strategy is based on enhancing value at every level of the supply chain in all important
farm and non-farm sectors. Towards this end, it offer a range of financial products and services
that cater to the rural masses in all the important sectors like infrastructure, horticulture, food
processing, dairy, poultry, seeds, fertiliser and agrochemical industries. Customised financial
solutions are offered to individual customers, agri small & medium enterprises, agri corporates
and members of their supply chains. On the rural retail side, the Bank offers crop loans, farm
equipment financing, commodity-based loans, working capital loans for agri-enterprises,
microfinance loans, jewel loans as well as savings, investment and insurance products. In
addition bank is introducing products like rural housing finance to cater to the needs of rural
customers. During fiscal 2007, it introduced loans to rural educational institutions for expansion
of their facilities.

26
it have developed a hybrid distribution channel strategy, a combination of branch and non-branch
channels (credit access points). It has embarked on a “no white spaces” strategy wherein it aim to
setup an ICICI Bank touch point within 10 km of any customer. The amalgamation of Sangli
Bank would extend its outreach in rural areas. During fiscal 2007, a provision of Rs. 0.9 billion
(USS$ 22 million) was made on account of identified frauds in warehouse receipt financing
business of agricultural credit.

INTERNATIONAL BANKING
ICICI Bank has established a strong franchise among non-resident Indians (NRI). It has
established strong customer relationships by offering a comprehensive product suite, technology-
enabled access for overseas customers, a wide distribution network in India and alliances with
local banks in various markets. It has over 450,000 NRI customers.
It has undertaken significant brand-building initiatives in international markets and have
emerged as a well-recognised financial services brand for NRIs. It’s market share in inward
remittances into India has increased to over 25%. It has consolidated it’s global remittance
initiative, targeting non-Indian communities, by leveraging it’s core capabilities of technology-
based service delivery. A large number of remittance products were introduced to complement
the existing suite of products. The business focus has been on rolling out successful products
across multiple geographies and getting into high volume correspondent arrangements.

27
 CHAPTER-III

THEORTICAL FRAMEWORK

28
 ASSET LIABILITY MANAGEMENT (ALM) SYSTEM

Asset-Liability Management (ALM) can be termed as a risk management technique designed to

earn an adequate return while maintaining a comfortable surplus of assets beyond liabilities. It
takes into consideration interest rates, earning power, and degree of willingness to take on debt
and hence is also known as Surplus Management.

 But in the last decade the meaning of ALM has evolved. It is now used in many different ways
under different contexts. ALM, which was actually pioneered by financial institutions and banks,
are now widely being used in industries too. The Society of Actuaries Task Force on ALM
Principles, Canada, offers the following definition for ALM: "Asset Liability Management is the
on-going process of formulating, implementing, monitoring, and revising strategies related to
assets and liabilities in an attempt to achieve financial objectives for a given set of risk tolerances
and constraints."

29
 

Basis of Asset-Liability Management

Traditionally, banks and insurance companies used accrual system of accounting for all their
assets and liabilities. They would take on liabilities - such as deposits, life insurance policies or
annuities. They would then invest the proceeds from these liabilities in assets such as loans,
bonds or real estate. All these assets and liabilities were held at book value. Doing so disguised
possible risks arising from how the assets and liabilities were structured.

Consider a bank that borrows 1 Crore (100 Lakhs) at 6 % for a year and lends the same money at
7 % to a highly rated borrower for 5 years. The net transaction appears profitable-the bank is
earning a 100 basis point spread - but it entails considerable risk. At the end of a year, the bank
will have to find new financing for the loan, which will have 4 more years before it matures. If
interest rates have risen, the bank may have to pay a higher rate of interest on the new financing
than the fixed 7 % it is earning on its loan.

 Suppose, at the end of a year, an applicable 4-year interest rate is 8 %. The bank is in serious
trouble. It is going to earn 7 % on its loan but would have to pay 8 % on its financing. Accrual
accounting does not recognize this problem. Based upon accrual accounting, the bank would
earn Rs 100,000 in the first year although in the preceding years it is going to incur a loss.

30
 The problem in this example was caused by a mismatch between assets and liabilities. Prior to
the 1970's, such mismatches tended not to be a significant problem. Interest rates in developed
countries experienced only modest fluctuations, so losses due to asset-liability mismatches were
small or trivial. Many firms intentionally mismatched their balance sheets and as yield curves
were generally upward sloping, banks could earn a spread by borrowing short and lending long.

 Things started to change in the 1970s, which ushered in a period of volatile interest rates that
continued till the early 1980s. US regulations which had capped the interest rates so that banks
could pay depositors, was abandoned which led to a migration of dollar deposit overseas.
Managers of many firms, who were accustomed to thinking in terms of accrual accounting, were
slow to recognize this emerging risk. Some firms suffered staggering losses. Because the firms
used accrual accounting, it resulted in more of crippled balance sheets than bankruptcies. Firms
had no options but to accrue the losses over a subsequent period of 5 to 10 years.

 One example, which drew attention, was that of US mutual life insurance company "The
Equitable." During the early 1980s, as the USD yield curve was inverted with short-term interest
rates sky rocketing, the company sold a number of long-term Guaranteed Interest Contracts
(GICs) guaranteeing rates of around 16% for periods up to 10 years. Equitable then invested the
assets short-term to earn the high interest rates guaranteed on the contracts. But short-term
interest rates soon came down. When the Equitable had to reinvest, it couldn't get even close to
the interest rates it was paying on the GICs. The firm was crippled. Eventually, it had to
demutualize and was acquired by the Axa Group.

 Increasingly banks and asset management companies started to focus on Asset-Liability Risk.
The problem was not that the value of assets might fall or that the value of liabilities might rise.
It was that capital might be depleted by narrowing of the difference between assets and liabilities
and that the values of assets and liabilities might fail to move in tandem. Asset-liability risk is
predominantly a leveraged form of risk.

 The capital of most financial institutions is small relative to the firm's assets or liabilities, and so
small percentage changes in assets or liabilities can translate into large percentage changes in
capital. Accrual accounting could disguise the problem by deferring losses into the future, but it
31
could not solve the problem. Firms responded by forming asset-liability management (ALM)
departments to assess these asset-liability risk.

Techniques for assessing Asset-Liability Risk

Techniques for assessing asset-liability risk came to include Gap Analysis and Duration
Analysis. These facilitated techniques of managing gaps and matching duration of assets and
liabilities. Both approaches worked well if assets and liabilities comprised fixed cash flows. But
cases of callable debts, home loans and mortgages which included options of prepayment and
floating rates, posed problems that gap analysis could not address. Duration analysis could
address these in theory, but implementing sufficiently sophisticated duration measures was
problematic. Accordingly, banks and insurance companies started using Scenario Analysis.

 Under this technique assumptions were made on various conditions, for example: -

 Several interest rate scenarios were specified for the next 5 or 10 years. These specified
conditions like declining rates, rising rates, a gradual decrease in rates followed by a
sudden rise, etc. Ten or twenty scenarios could be specified in all.
 Assumptions were made about the performance of assets and liabilities under each
scenario. They included prepayment rates on mortgages or surrender rates on insurance
products.
 Assumptions were also made about the firm's performance-the rates at which new
business would be acquired for various products, demand for the product etc.
 Market conditions and economic factors like inflation rates and industrial cycles were
also included.

 Based upon these assumptions, the performance of the firm's balance sheet could be projected
under each scenario. If projected performance was poor under specific scenarios, the ALM
committee would adjust assets or liabilities to address the indicated exposure. Let us consider the
procedure for sanctioning a commercial loan. The borrower, who approaches the bank, has to
appraise the banks credit department on various parameters like industry prospects, operational
efficiency, financial efficiency, management qualities and other things, which would influence

32
the working of the company. On the basis of this appraisal, the banks would then prepare a
credit-grading sheet after covering all the aspects of the company and the business in which the
company is in.

 Then the borrower would then be charged a certain rate of interest, which would cover the risk
of lending.

But the main shortcoming of scenario analysis was that, it was highly dependent on the choice of
scenarios. It also required that many assumptions were to be made about how specific assets or
liabilities will perform under specific scenarios. Gradually the firms recognized a potential for
different type of risks, which was overlooked in ALM analyses. Also the deregulation of the
interest rates in US in mid 70 s compelled the banks to undertake active planning for the
structure of the balance sheet. The uncertainty of interest rate movements gave rise to Interest
Rate Risk thereby causing banks to look for processes to manage this risk.

 In the wake of interest rate risk came Liquidity Risk and Credit Risk, which became inherent
components of risk for banks. The recognition of these risks brought Asset Liability
Management to the centre-stage of financial intermediation. Today even Equity Risk, which until
a few years ago was given only honorary mention in all but a few company ALM reports, is now
an indispensable part of ALM for most companies. Some companies have gone even further to
include Counterparty Credit Risk, Sovereign Risk, as well as Product Design and Pricing Risk as
part of their overall ALM.

 Now a day's a company has different reasons for doing ALM. While some companies view
ALM as a compliance and risk mitigation exercise, others have started using ALM as strategic
framework to achieve the company's financial objectives. Some of the business reasons
companies now state for implementing an effective ALM framework include gaining
competitive advantage and increasing the value of the organization.

Asset-Liability Management Approach

33
ALM in its most apparent sense is based on funds management. Funds management represents
the core of sound bank planning and financial management. Although funding practices,
techniques, and norms have been revised substantially in recent years, it is not a new concept.
Funds management is the process of managing the spread between interest earned and interest
paid while ensuring adequate liquidity. Therefore, funds management has following three
components, which have been discussed briefly.

 A. Liquidity Management

Liquidity represents the ability to accommodate decreases in liabilities and to fund increases in
assets. An organization has adequate liquidity when it can obtain sufficient funds, either by
increasing liabilities or by converting assets, promptly and at a reasonable cost. Liquidity is
essential in all organizations to compensate for expected and unexpected balance sheet
fluctuations and to provide funds for growth. The price of liquidity is a function of market
conditions and market perception of the risks, both interest rate and credit risks, reflected in the
balance sheet and off-balance sheet activities in the case of a bank. If liquidity needs are not met
through liquid asset holdings, a bank may be forced to restructure or acquire additional liabilities
under adverse market conditions. Liquidity exposure can stem from both internally (institution-
specific) and externally generated factors. Sound liquidity risk management should address both
types of exposure. External liquidity risks can be geographic, systemic or instrument-specific.
Internal liquidity risk relates largely to the perception of an institution in its various markets:
local, regional, national or international. Determination of the adequacy of a bank's liquidity
position depends upon an analysis of its: -

 Historical funding requirements

 Current liquidity position
 Anticipated future funding needs
 Sources of funds
 Present and anticipated asset quality
 Present and future earnings capacity
 Present and planned capital position

34
 As all banks are affected by changes in the economic climate, the monitoring of economic and
money market trends is key to liquidity planning. Sound financial management can minimize the
negative effects of these trends while accentuating the positive ones. Management must also
have an effective contingency plan that identifies minimum and maximum liquidity needs and
weighs alternative courses of action designed to meet those needs. The cost of maintaining
liquidity is another important prerogative. An institution that maintains a strong liquidity position
may do so at the opportunity cost of generating higher earnings. The amount of liquid assets a
bank should hold depends on the stability of its deposit structure and the potential for rapid
expansion of its loan portfolio. If deposit accounts are composed primarily of small stable
accounts, a relatively low allowance for liquidity is necessary.

 Additionally, management must consider the current ratings by regulatory and rating agencies
when planning liquidity needs. Once liquidity needs have been determined, management must
decide how to meet them through asset management, liability management, or a combination of
both.

 B. Asset Management

Many banks (primarily the smaller ones) tend to have little influence over the size of their total
assets. Liquid assets enable a bank to provide funds to satisfy increased demand for loans. But
banks, which rely solely on asset management, concentrate on adjusting the price and availability
of credit and the level of liquid assets. However, assets that are often assumed to be liquid are
sometimes difficult to liquidate. For example, investment securities may be pledged against
public deposits or repurchase agreements, or may be heavily depreciated because of interest rate
changes. Furthermore, the holding of liquid assets for liquidity purposes is less attractive because
of thin profit spreads.

 Asset liquidity, or how "salable" the bank's assets are in terms of both time and cost, is of
primary importance in asset management. To maximize profitability, management must carefully
weigh the full return on liquid assets (yield plus liquidity value) against the higher return
associated with less liquid assets. Income derived from higher yielding assets may be offset if a
forced sale, at less than book value, is necessary because of adverse balance sheet fluctuations.
35
 Seasonal, cyclical, or other factors may cause aggregate outstanding loans and deposits to move
in opposite directions and result in loan demand, which exceeds available deposit funds. A bank
relying strictly on asset management would restrict loan growth to that which could be supported
by available deposits. The decision whether or not to use liability sources should be based on a
complete analysis of seasonal, cyclical, and other factors, and the costs involved. In addition to
supplementing asset liquidity, liability sources of liquidity may serve as an alternative even when
asset sources are available.

C. Liability Management

Liquidity needs can be met through the discretionary acquisition of funds on the basis of interest
rate competition. This does not preclude the option of selling assets to meet funding needs, and
conceptually, the availability of asset and liability options should result in a lower liquidity
maintenance cost. The alternative costs of available discretionary liabilities can be compared to
the opportunity cost of selling various assets. The major difference between liquidity in larger
banks and in smaller banks is that larger banks are better able to control the level and
composition of their liabilities and assets. When funds are required, larger banks have a wider
variety of options from which to select the least costly method of generating funds. The ability to
obtain additional liabilities represents liquidity potential. The marginal cost of liquidity and the
cost of incremental funds acquired are of paramount importance in evaluating liability sources of
liquidity. Consideration must be given to such factors as the frequency with which the banks
must regularly refinance maturing purchased liabilities, as well as an evaluation of the bank's
ongoing ability to obtain funds under normal market conditions.

 The obvious difficulty in estimating the latter is that, until the bank goes to the market to
borrow, it cannot determine with complete certainty that funds will be available and/or at a price,
which will maintain a positive yield spread. Changes in money market conditions may cause a
rapid deterioration in a bank's capacity to borrow at a favorable rate. In this context, liquidity
represents the ability to attract funds in the market when needed, at a reasonable cost vis-e-vis
asset yield. The access to discretionary funding sources for a bank is always a function of its
position and reputation in the money markets.

36
 Although the acquisition of funds at a competitive cost has enabled many banks to meet
expanding customer loan demand, misuse or improper implementation of liability management
can have severe consequences. Further, liability management is not riskless. This is because
concentrations in funding sources increase liquidity risk. For example, a bank relying heavily on
foreign interbank deposits will experience funding problems if overseas markets perceive
instability in U.S. banks or the economy. Replacing foreign source funds might be difficult and
costly because the domestic market may view the bank's sudden need for funds negatively.
Again over-reliance on liability management may cause a tendency to minimize holdings of
short-term securities, relax asset liquidity standards, and result in a large concentration of short-
term liabilities supporting assets of longer maturity. During times of tight money, this could
cause an earnings squeeze and an illiquid condition.

 Also if rate competition develops in the money market, a bank may incur a high cost of funds
and may elect to lower credit standards to book higher yielding loans and securities. If a bank is
purchasing liabilities to support assets, which are already on its books, the higher cost of
purchased funds may result in a negative yield spread.

Preoccupation with obtaining funds at the lowest possible cost, without considering maturity
distribution, greatly intensifies a bank's exposure to the risk of interest rate fluctuations. That is
why banks who particularly rely on wholesale funding sources, management must constantly be
aware of the composition, characteristics, and diversification of its funding sources.

Procedure for Examination of Asset Liability Management

In order to determine the efficacy of Asset Liability Management one has to follow a
comprehensive procedure of reviewing different aspects of internal control, funds management
and financial ratio analysis. Below a step-by-step approach of ALM examination in case of a
bank has been outlined.

 Step 1

37
The bank/ financial statements and internal management reports should be reviewed to assess the
asset/liability mix with particular emphasis on: -

 Total liquidity position (Ratio of highly liquid assets to total assets).

 Current liquidity position (Minimum ratio of highly liquid assets to demand
liabilities/deposits).
 Ratio of Non Performing Assets to Total Assets.
 Ratio of loans to deposits.
 Ratio of short-term demand deposits to total deposits.
 Ratio of long-term loans to short term demand deposits.
 Ratio of contingent liabilities for loans to total loans.
 Ratio of pledged securities to total securities.

 Step 2

It is to be determined that whether bank management adequately assesses and plans its liquidity
needs and whether the bank has short-term sources of funds. This should include: -

Review of internal management reports on liquidity needs and sources of satisfying these needs.

Assessing the bank's ability to meet liquidity needs.

Step 3

The banks future development and expansion plans, with focus on funding and liquidity
management aspects has to be looked into. This entails: -

 Determining whether bank management has effectively addressed the issue of need for
liquid assets to funding sources on a long-term basis.
 Reviewing the bank's budget projections for a certain period of time in the future.

38
  Determining whether the bank really needs to expand its activities. What are the sources
of funding for such expansion and whether there are projections of changes in the bank's
asset and liability structure?
 Assessing the bank's development plans and determining whether the bank will be able to
attract planned funds and achieve the projected asset growth.
 Determining whether the bank has included sensitivity to interest rate risk in the
development of its long term funding strategy.

 Step 4

Examining the bank's internal audit report in regards to quality and effectiveness in terms of
liquidity management.

 Step 5

Reviewing the bank's plan of satisfying unanticipated liquidity needs by: -

 Determining whether the bank's management assessed the potential expenses that the
bank will have as a result of unanticipated financial or operational problems.
 Determining the alternative sources of funding liquidity and/or assets subject to necessity.
 Determining the impact of the bank's liquidity management on net earnings position.

 Step 6

 Preparing an Asset/Liability Management Internal Control Questionnaire which should

include the following: -
 Whether the board of directors has been consistent with its duties and responsibilities and
included: -
 A line of authority for liquidity management decisions.
 A mechanism to coordinate asset and liability management decisions.
 A method to identify liquidity needs and the means to meet those needs.
 Guidelines for the level of liquid assets and other sources of funds in relationship to
needs.
39
  Does the planning and budgeting function consider liquidity requirements?
 Are the internal management reports for liquidity management adequate in terms of
effective decision making and monitoring of decisions.
 Are internal management reports concerning liquidity needs prepared regularly and
reviewed as appropriate by senior management and the board of directors.
 Whether the bank's policy of asset and liability management prohibits or defines certain
restrictions for attracting borrowed means from bank related persons (organizations) in
order to satisfy liquidity needs.
 Does the bank's policy of asset and liability management provide for an adequate control
over the position of contingent liabilities of the bank?
 Is the foregoing information considered an adequate basis for evaluating internal control
in that there are no significant deficiencies in areas not covered in this questionnaire that
impair any controls?

 Asset Liability Management in Indian Context

The post-reform banking scenario in India was marked by interest rate deregulation, entry of new
private banks, and gamut of new products along with greater use of information technology. To
cope with these pressures banks were required to evolve strategies rather than ad hoc solutions.
Recognising the need of Asset Liability management to develop a strong and sound banking
system, the RBI has come out with ALM guidelines for banks and FIs in April 1999.The Indian
ALM framework rests on three pillars: -

ALM Organisation (ALCO)

The ALCO or the Asset Liability Management Committee consisting of the banks senior
management including the CEO should be responsible for adhering to the limits set by the board
as well as for deciding the business strategy of the bank in line with the banks budget and
decided risk management objectives. ALCO is a decision-making unit responsible for balance
sheet planning from a risk return perspective including strategic management of interest and

40
liquidity risk. The banks may also authorise their Asset-Liability Management Committee
(ALCO) to fix interest rates on Deposits and Advances, subject to their reporting to the Board
immediately thereafter. The banks should also fix maximum spread over the PLR with the
approval of the ALCO/Board for all advances other than consumer credit.

 ALM Information System

The ALM Information System is required for the collection of information accurately,
adequately and expeditiously. Information is the key to the ALM process. A good information
system gives the bank management a complete picture of the bank's balance sheet.

 ALM Process

The basic ALM processes involving identification, measurement and management of risk
parameter .The RBI in its guidelines has asked Indian banks to use traditional techniques like
Gap Analysis for monitoring interest rate and liquidity risk. However RBI is expecting Indian
banks to move towards sophisticated techniques like Duration, Simulation, VaR in the future.
For the accrued portfolio, most Indian Private Sector banks use Gap analysis, but are gradually
moving towards duration analysis. Most of the foreign banks use duration analysis and are
expected to move towards advanced methods like Value at Risk for the entire balance sheet.
Some foreign banks are already using VaR for the entire balance sheet.

ALM has evolved since the early 1980's. Today, financial firms are increasingly using market
value accounting for certain business lines. This is true of universal banks that have trading
operations. Techniques of ALM have also evolved. The growth of OTC derivatives markets has
facilitated a variety of hedging strategies. A significant development has been securitization,
which allows firms to directly address asset-liability risk by removing assets or liabilities from
their balance sheets. This not only eliminates asset-liability risk; it also frees up the balance sheet
for new business.

 Thus, the scope of ALM activities has widened. Today, ALM departments are addressing (non-
trading) foreign exchange risks as well as other risks. Also, ALM has extended to non-financial

41
firms. Corporations have adopted techniques of ALM to address interest-rate exposures, liquidity
risk and foreign exchange risk. They are using related techniques to address commodities risks.
For example, airlines' hedging of fuel prices or manufacturers' hedging of steel prices are often
presented as ALM. Thus it can be safely said that Asset Liability Management will continue to
grow in future and an efficient ALM technique will go a long way in managing volume, mix,
maturity, rate sensitivity, quality and liquidity of the assets and liabilities so as to earn a
sufficient and acceptable return on the portfolio.

 ALM is a comprehensive and dynamic framework for measuring, monitoring and managing the
market risk of a bank. It is the management of structure of balance sheet (liabilities and assets) in
such a way that the net earning from interest is maximised within the overall risk-preference
(present and future) of the institutions.  The ALM functions extend to liquidly risk management,
management of market risk, trading risk management, funding and capital planning and profit
planning and growth projection.

Benefits of ALM - It is a tool that enables bank managements to take business decisions in a
more informed framework with an eye on the risks that bank is exposed to. It is an integrated
approach to financial management, requiring simultaneous decisions about the types of amounts
of financial assets and liabilities - both mix and volume - with the complexities of the financial
markets in which the institution operates

 The concept of ALM is of recent origin in India.  It has been introduced in Indian Banking
industry w.e.f. 1st April, 1999.  ALM 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 commodity price risks of a bank that needs to be
closely integrated with the banks’ business strategy.

Therefore, ALM is considered as an important tool for monitoring, measuring  and managing the
market risk of a bank.   With the deregulation of interest regime in India, the Banking industry
has been exposed to the market risks.   To manage such risks, ALM is used so that the
management is able to assess the risks and cover some of these by taking appropriate decisions.

42
 The assets and liabilities of the bank’s balance sheet are nothing but future cash inflows or
outflows. With a view to measure the liquidity and interest rate risk, banks use of maturity ladder
and then calculate cumulative surplus or deficit of funds in different time slots on the basis of
statutory reserve cycle, which  are termed as time buckets.  

As a measure of liquidity management, banks are required to monitor their cumulative

mismatches across all time buckets in their Statement of Structural Liquidity by establishing
internal prudential limits with the approval of the Board / Management Committee.

 The ALM process rests on three pillars:

i. ALM Information Systems

o Management Information Systems
o Information availability, accuracy, adequacy and expediency
ii. ALM Organization
o Structure and responsibilities
o Level of top management involvement
iii. ALM Process
o Risk parameters
o Risk identification
o Risk measurement
o Risk management
o Risk policies and tolerance levels.

As per RBI guidelines, commercial banks are  to distribute the outflows/inflows in different
residual maturity period known as time buckets.  The Assets and Liabilities were earlier 
divided  into 8 maturity buckets (1-14 days; 15-28 days; 29-90 days; 91-180 days; 181-365
days, 1-3 years and 3-5 years and above 5 years), based on the remaining period to their
maturity (also called residual maturity).  All the liability figures are outflows while the asset
figures are inflows.   In September, 2014, having regard to the international practices, the level
of sophistication of banks in India, the need for a sharper assessment of the efficacy of liquidity

43
 management and with a view to providing a stimulus for development of the term-money
market, RBI revised these guidelines and it was provided that

(a) the banks may adopt a more granular approach to measurement of liquidity risk by splitting
the first time bucket (1-14 days at present) in the Statement of Structural Liquidity into three
time buckets viz., next day , 2-7 days and 8-14 days.   Thus, now we have 10 time buckets.

After such an exercise, each bucket of assets is matched with the corresponding bucket of the
liabililty.   When in a particular maturity bucket, the amount of maturing liabilities or assets
does not match, such position is called a mismatch position, which creates liquidity surplus or
liquidity crunch position and depending upon the interest rate movement, such situation may
turnout to be risky for the bank.    Banks are required to monitor such mismatches and take
appropriate steps so that bank is not exposed to risks due to the interest rate movements during
that period.
(b) The net cumulative negative mismatches during the Next day, 2-7 days, 8-14 days and 15-
28 days buckets should not exceed 5 % ,10%, 15 % and 20 % of the cumulative cash outflows
in the respective time buckets in order to recognise the cumulative impact on liquidity.
The Board’s of the Banks have been entrusted with the overall responsibility for the
management of risks and is required to decide the risk management policy and set limits for
liquidity, interest rate, foreign exchange and equity price risks.

 Asset-Liability Committee (ALCO) is the top most committee to oversee the implementation
of ALM system and it is to be headed by CMD or ED.  ALCO considers product pricing for
both deposits and advances, the desired maturity profile of the incremental assets and liabilities
in addition to monitoring the risk levels of the bank. It will have to articulate current interest
rates view of the bank and base its decisions for future business strategy on this view. 
Rate Sensitive Assets & Liabilities : An asset or liability is termed as rate sensitive when

            (a) Within the time interval under consideration, there is a cash flow,

            (b) The interest rate resets/reprices contractually during the interval,

44
            (c) RBI changes interest rates where rates are administered and,

            (d) It is contractually pre-payable or withdrawal before the stated maturities.

Assets and liabilities which receive / pay interest that vary with a benchmark rate are re-priced at
pre-determined intervals and are rate sensitive at the time of re-pricing.

INTEREST RISK:

The phased deregulation of interest rates and the operational flexibility given to banks in pricing
most of the assets and liabilities imply the need for the banking system to hedge the Interest-Rate
Risk. Interest Rate Risk is the risk where changes in market interest rates might adversely affect
the Bank’s Net Interest Income. The gap report should be generated by grouping interest rate
sensitive liabilities, assets and off balance sheet positions into time buckets according to residual
maturity or next reprising period, whichever is earlier. Interest rates on term deposits are fixed
during their currency while the advance interest rates are floating rates. The gaps on the assets
and liabilities are to be identified on different time buckets from 1–28 days, 29 days upto 3
months and so on. The interest changes should be studied vis-a-vis the impact on profitability on
different time buckets to assess the interest rate risk.

GAP ANALYSIS:

The various items of rate sensitive assets and liabilities and off-balance sheet items are classified
into time buckets such as 1-28 days, 29 days and upto 3 months etc. and items non-sensitive to
interest based on the probable date for change in interest.The gap is the difference between Rate
Sensitive Assets (RSA) and Rate Sensitive Liabilities (RSL) in various time buckets. The
positive gap indicates that it has more RSAS  than RSLS whereas the negative gap indicates that
it has more RSLS. The gap reports indicate whether the institution is in a position to benefit from
rising interest rates by having a Positive Gap (RSA > RSL) or whether it is a position to benefit
from declining interest rate by a negative Gap (RSL > RSA).

TOTAL FINANCIAL SERVICES FIRMS RISK.

45
 Total Risk
(Responsibility of CEO)

Business Risk Financial Risk

Product Market Risk Capital Market Risk

(Responsibility of the (Responsibility of the

Chief Operating Officer) Chief Financial Officer)

Credit Interest rate

Strategic Liquidity
Regulatory currency
Operating Settlement
Human resources Basis
Legal

(I).PRODUCT MARKET RISK:

This risk decision relate to the operating revenues and expenses of the form that impact the
operating position of the profit and loss statements which include crisis, marketing, operating

46
systems, labor cost, technology, channels of distributions at strategic focus. Product Risks relate
to variations in the operating cash flows of the firm, which effect Capital Market, required Rates
Of Return :

(1) CREDIT RISK

(2) STRATEGIC RISK

(3) COMMODITY RISK

(4) OPERATIVE RISK

(5) HUMAN RESOURCES RISK

(6) LEGAL RISK

Risk in Product Market relate to the operational and strategic aspects of managing operating
revenues and expenses. The above types of Product Risks are explained as follows :
(1) CREDIT RISK:

The most basic of all Product Market Risk or other financial intermediary is the erosion of
value due to simple default or non-payment by the borrower. Credit risk has been around for
centuries and is thought by many to be the dominant financial services today’s intermediate the
risk appetite of lenders and essential risk ness of borrowers. manage this risk by ; (A) making
intelligent lending decisions so that expected risk of borrowers is both accurately assessed and
priced; (B) Diversifying across borrowers so that credit losses are not concentrated in time; (C)
purchasing third party guarantees so that default risk is entirely or partially shifted away from
lenders.

(2). STRATEGIC RISK:

47
 This is the risk that entire lines of business may succumb to competition or obsolescence. In
the language of strategic planner, commercial paper is a substitute product for large corporate
loans. Strategic risk occurs when a is not ready or able to compete in a newly developing line of
business. Early entrants enjoyed a unique advantage over newer entrants. The seemingly
conservative act of waiting for the market to develop posed a risk in itself. Business risk accrues
from jumping into lines of business but also from staying out too long.

(3). COMMODITY RISK:

Commodity prices affects and other lenders in complex and often unpredictable ways. The
macro effect of energy price increases on inflation also contributed to a rise in interest rates,
which adversely affected the value of many fixed rate financial assets. The subsequent crash in
oil prices sent the process in reverse with nearly equally devastating effects

(4). OPERATING RISK:

Machine-based system offer essential competitive advantage in reducing costs and

improving quality while expanding service and speed. No element of management process has
more potential for surprise than systems malfunctions. Complex, machine-based systems
produce what is known as the “black box effect”. The inner working of system can become
opaque to their users. Because developers do not use the system and users often have not
constitutes a significant Product Market Risk. No financial service firm can small management
challenge in the modern financial services company.

(5). HUMAN RESOURCES RISK:

Few risks are more complex and difficult to measure than those of personnel policy; they are
Recruitment, Training, Motivation and Retention. Risk to the value of the Non-Financial Assets
as represented by the work force represents a much more subtle of risk. Concurrent with the loss

48
of key personal is the risk of inadequate or misplaced motivation among management personal.
This human redundancy is conceptually equivalent to safety redundancy in operating systems. It
is not inexpensive, but it may well be cheaper than the risk of loss. The risk and rewards of
increased attention to the human resources dimension of management are immense.

(6). LEGAL RISK:

This is the risk that the legal system will expropriate value from the shareholders of financial
services firms. The legal landscape today is full of risks that were simply unimaginable even a
few years ago. More over these risks are very hard to anticipate because they are often unrelated
to prior events which are difficult and impossible to designate but the management of a financial
services firm today must have these risks at least in view. They can cost millions.

(II). CAPITAL MARKET RISK:

In the Capital Market Risk decision relate to the financing and financial support of Product
Market activities. The result of product market decisions must be compared to the required rate
of return that results from capital market decision to determine if management is creating value.
Capital market decisions affect the risk tolerance of product market decisions related to
variations in value associated with different financial instruments and required rate of return in
the economy.

1. LIQUIDITY RISK

2. INTEREST RATE RISK

3. CURRENCY RISK

49
 4. SETTLEMENT RISK

5. BASIS RISK

1. LIQUIDITY RISK:

For experienced financial services professionals, the foremost capital market risk is that of
inadequate liquidity to meet financial obligations. The obvious form is an inability to pay desired
withdrawals. Depositors react desperately to the mere prospect of this situation.

They can drive a financial intermediary to collapse by withdrawing funds at a rate that
exceeds its capacity to pay. For most of this century, individual depositors who lost faith in
ability to repay them caused failures from liquidity. Funds are deposited primarily as a financial
of rate. Such funds are called “purchased money” or “headset funds” as they are frequently
bought by employees who work on the money desk quoting rates to institutions that shop for the
highest return. To check liquidity risk, firms must keep the maturity profile of the liabilities
compatible with that of the assets. This balance must be close enough that a reasonable shift in
interest rates across the yield curve does not threaten the safety and soundness of the entire firm.

2. INTEREST RATE RISK:

In extreme conditions, Interest Rate fluctuations can create a liquidity crisis. The fluctuation
in the prices of financial assets due to changes in interest rates can be large enough to make
default risk a major threat to a financial services firm’s viability. There’s a function of both the
magnitude of change in the rate and the maturity of the asset. This inadequacy of assessment and
consequent mispricing of assets, combined with an accounting system that did not record
unrecognized gains and losses in asset values, created a financial crisis. Risk based capital rules

50
pertaining to have done little to mitigate the interest rate risk management problem. The decision
to pass it of, however is not without large cost, so the cost benefit tradeoff becomes complex.

3. CURRENCY RISK:

The risk of exchange rate volatility can be described as a form of basis risk among
currencies instead of basis risk among interest rates on different securities. Balance sheets
comprised of numerous separate currencies contain large camouflaged risks through financial
reporting systems that do not require assets to be marked to market. Exchange rate risk affects
both the Product Markets and The Capital Markets. Ways to contain currency risk have
developed in today’s derivative market through the use of swaps and forward contracts. Thus,
this risk is manageable only after the most sophisticated and modern risk management technique
is employed

4. SETTLEMENT RISK:

Settlement Risk is a particular form of default risk, which involves the competitors.
Amounts settle obligations having to do with money transfer, check clearing, loan disbursement
and repayment, and all other inter- transfers within the worldwide monetary system. A single
payment is made at the end of the day instead of multiple payments for individual transactions.

5. BASIS RISK :

Basis risk is a variation on the interest rate risk theme, yet it creates risks that are less easy to
observe and understand. To guard against interest rate risk, somewhat non comparable securities
may be used as a hedge. However, the success of this hedging depends on a steady and
predictable relationship between the two no identical securities. Basis can negate the hedge
partially or entirely, which vastly increases the Capital Market Risk exposure of the firm.

51
 CHAPTER-IV
DATA ANALYSES AND INTERPRETATION

52
 RISK MANAGEMENT SYSTEM :

Assuming and managing risk is the essence of business decision-making. Investing in a new
technology, hiring a new employee, or launching a marketing campaign is all decisions with
uncertain outcomes. As a result all the major management decisions of how much risk to take
and how to manage the risk.

The implementation of risk management varies from business to business, from one
management style to another and from one time to another. Risk management in the financial
services industry is different from others. Circumstances, Institutions and Managements are
different. On the other hand, an investment decision is no recent history of legal and political
stability, insights into the potential hazards and opportunities.

Many risks are managed quantitatively. Risk exposure is measured by some numerical
index. Risk cost tradeoff many tools are described by numerical valuation formulas.
53
 Risk management can be integrated into a risk management system. Such a system can
be utilized to manage the trading position of a small-specialized division or an entire financial
institution. The modules of the system can be implemented with different degrees of accuracy
and sophistication.

RISK MANAGEMENT SYSTEM

Dynamics of risk factors

Cash flows Arbitrage

Generator Pricing Model

Price and Risk

Profile Of Contingent Claims

54
Dynamic Risk
Target
Trading Rules Optimizer Risk Profile

1.2 RISK MANAGEMENT SYSTEM

Arbitrage pricing models range from simple equations to large scale

numerically sophisticated algorithms. Cash flow generators also vary from a single
formula to a simulator that accounts for the dependence of cash flows on the history of
the risk factors.

Financial engineers are continuously incorporating advances in econometric

techniques, asset pricing models, simulation techniques and optimization algorithms to
produce better risk management systems.

The important ingredient of the risk management approach is the treatment of risk
factors and securities as an integrated portfolio. Analyzing the correlation among the real,
financial and strategic assets of an organization leads to clear understanding of risk
exposure. Special attention is paid to risk factors, which translate to correlation among
the values of securities. Identifying the correlation among the basic risk factors leads to
more effective risk management.

CONCLUSION

55
 The burden of the Risk and its Costs are both manageable and transferable. Financial
service firms, in the addition to managing their own risk, also sell financial risk management to
others. They sell their services by bearing customers financial risks through the products they
provide. A financial firm can offer a fixed-rate loan to a borrower with the risk of interest rate
movements transferred from the borrower to the. Financial innovations have been concerned
with risk reduction than any other subject. With the possibility of managing risk near zero, the
challenge becomes not how much risk can be removed.

Financial services involve the process of intermediation between those who have financial
resources and those who need them, either as a principal or as an agent. Thus, value breaks into
several distinct functions, and it includes the intermediation of the following:
Maturity Preference mismatch, Default, Currency Preference mis-match, Size of
transaction and Market access and information.

RISK MANAGEMENT IN ICICI

Narasimham committee II , advised to address market risk in a structured manner by

adopting Asset and Liability Management practices with effect from April 1st 1989.

Asset and liability management (ALM) is “the Art and Science of choosing the best mix
of assets for the firm’s asset portfolio and the best mix of liabilities for the firm’s liability
portfolio”. It is particularly critical for Financial Institutions.

For a long time it was taken for granted that the liability portfolio of financial firms was
beyond the control of the firm and so management concentrated its efforts on choosing the asset
mix. Institutions treasury department used the funds provided by deposits to structure an asset
portfolio that was appropriate for the given liability portfolio.

56
 With the advent of Certificate of Deposits (CDs), a tool by which to manipulate the mix of
liabilities that supported their Asset portfolios, which has been one of the active management of
assets and liabilities.

Asset and liability management program evolve into a strategic tool for management, the
main elements of the ALM system are:
 ALM INFORMATION.
 ALM ORGANISATION.
 ALM FUNCTION.

ALM INFORMATION:

ALM is a risk management tool through which Market risk associated with business are
identified, measured and monitored to maintain profits by restructuring Assets and Liabilities.
The ALM framework needs to be built on sound methodology with necessary information
system as back up. Thus the information is key element to the ALM process.

There are various methods prevalent worldwide for measuring risks. These range from the
simple Gap statement to extremely sophisticate and data intensive Risk adjusted profitability
measurement (RAPM) methods. The central element for the entire ALM exercise is the
availability of adequate and accurate information.

However, the existing systems in many Indians do not generate information in manner
required for the ALM. Collecting accurate data is the biggest challenge before, the particularly
those having wide network of branches, but lacking full-scale computerization.

Therefore the introduction of these information systems for risk measurement and
monitoring has to be addressed urgently.

57
 The large network of branches and the lack of support system to collect information
required for the ALM which analysis information on the basis of residual maturity and
behavioral pattern, it would take time for s in the present state to get the requisite information.

ALM CELL

The ALM desk / cell consisting of operating staff should be responsible for analyzing,
monitoring and reporting the profiles to the ICICI. The staff should also prepare forecasts
(simulations) showing the effects of various possible changes in market conditions related to the
balance sheet and recommend the action needed to adhere to the internal limits.

COMMITTEE OF DIRECTORS

They should also constitute professional, management and supervisory committee,

consisting of three to four directors, which will oversee the implementation of the ALM system,
and review it’s functioning periodically.

ALM PROCESS

The scope of ALM function can be described as follows:

1. Liquidity Risk Management

2. Interest Rate Risk Management

3. Currency Risk Management

4. Settlement Risk Management

58
 5. Basis Risk Management

The RBI guidelines mainly address Liquidity Risk Management and Interest Rate Risk
Management.

The following are the concepts discussed for analysis of Asset-Liability Management
under above mentioned risks.

● Liquidity Risk

● Maturity profiles

● Interest rate risk

● Gap analysis

1. Liquidity Risk Management :

Measuring and managing liquidity needs are vital activities of the Risk. By assuring a
returns ability to meet its liability as they become due, liquidity management can reduce the
probability of an adverse situation development. The importance of liquidity transcends
individual institutions, as liquidity shortfall in one institution can have repercussions on the
entire system.
Liquidity risk management refers to the risk of maturing liability not finding enough
maturing assets to meet these liabilities. It is the potential inability to meet the liability as they
became due. This risk arises because borrows funds for different maturities in the form of
deposits, market operations etc. and lock them into assets of different maturities.

59
 Liquidity Gap also arises due to unpredictability of deposit withdrawals, changes in loan
demands. Hence measuring and managing liquidity needs are vital for effective and viable
operations.
Liquidity measurement is quite a difficult task and usually the stock or cash flow
approaches are used for its measurement. The stock approach used certain liquidity ratios.
The liquidity ratios are the ideal indicators of liquidity of Operating in developed
financial markets, the ratio do not reveal the real liquidity profile of s which are operating
generally in a fairly illiquid market. The assets, which are commonly considered as liquid
like Government securities, have limited liquidity when the market and players are in one
direction. Thus analysis of liquidity involves tracking of cash flow mismatches.

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.
The MATURITY PROFILE could be used for measuring the future cash flows in different
time bands.
The position of Assets and Liabilities are classified according to the maturity patterns a
maturing liability will be a cash outflow while a maturing asset will be a cash inflows. The
measuring of the future cash flows of s is done in different time buckets.
The time buckets, given the statutory Reserve cycle of 14 days may be distributed as under:
1. 1 to 14 days
2. 15 to 28 days
3. 29 days and up to 3 months
4. Over 3 months and up to 6 months
5. Over 6 months and up to 1 year
6. Over 1 year and up to 3 years
7. Over 3 years and up to 5 years
8. Over 5 years.

MATURITY PROFILE – LIQUIDITY

60
HEAD OF ACCOUNTS Classification into time buckets
A.OUTFLOWS
1.Capital, Reserves and Surplus Over 5 years bucket.
2.Demand Deposits (Current & Demand Deposits may be classified
Savings Deposits) into volatile and core portions, 25 % of
deposits are generally withdraw able
on demand. This portion may be
treated as volatile. While volatile
portion may be placed in the first time
bucket i.e., 1-14 days, the core portion
may be placed in 1-2 years, bucket.
3. Term Deposits Respective maturity buckets.

4. Borrowings Respective maturity buckets.

5. Other liabilities and provisions (i) 1-14 days bucket
(i) Bills Payable (ii) Items not representing cash
(ii) Inter-office Adjustment payable may be placed in over 5
(iii) Provisions for NAPs years bucket
a) sub-standard (iii) a) 2-5 years bucket.
b) doubtful and Loss b) Over 5 years bucket
(iv) provisions for depreciation .(iv) Over 5 years bucket.
in Investments (v) a) 2-5 years bucket.
(v) provisions for NAPs in b) Over 5 years bucket
investment (vi) Respective buckets depending on
(vi) provisions for other purposes the purpose.

61
B. INFLOWS

1. Cash 1-14 days bucket.

2. Balance with others
(i) Current Account (i) Non-withdraw able portion on
account of stipulations of
minimum balances may be shown
Less than 1-14 days bucket.
(ii) Money at call and short Notice, (ii) Respective maturity buckets.
Term Deposits and other
Placements
3. Investments
(i) Approved securities (i) Respective maturity buckets
excluding the amount required to
be reinvested to maintain SLR
(ii) Corporate (ii) Respective Maturity buckets.
Debentures and Investments classified as NPAs
bonds, CDs and CPs, Should be shown under 2-5 years
redeemable bucket (sub-standard) or over 5
preference shares, years bucket (doubtful and loss).
units of Mutual (iii) Over 5 years bucket.
Funds (close ended).
Etc. (iv) Over 5 years bucket.
(iii) Share / Units of Mutual
Funds (open ended)
(iii) Investment in
subsidiaries /
Joint Ventures.

4. Advances (performing / standard)

(i) Bills Purchased and (i) Respective Maturity buckets.

62
 Discounted (ii) they should undertake a study
(including bills under of behavioral and seasonal pattern
DUPN) of a ailments based on outstanding
(iii) Cash Credit / Overdraft and the core and volatile portion
(including TOD) and should be identified. While the
Demand Loan component of volatile portion could be shown in
Working Capital. the respective maturity bucket. The
core portion may be shown under
1-2 years bucket.
(iii) Term Loans (iii) Interim cash flows may be
shown under respective maturity
buckets.

5. NPAs
b. Sub-standard (I) 2-5 years bucket.
c. Doubtful and Loss (ii) Over 5 years bucket.
6. Fixed Assets Over 5 years bucket.
7. Other-office Adjustment
(i) Inter-office Adjustment (i) As per trend analysis,
Intangible items or items
not representing cash
receivables may be shown
in over 5 years bucket.
(ii) Others (i) Respective maturity
buckets. Intangible assets
and assets not representing
cash receivables may be
shown in over 5 years
bucket.
Terms used:

63
CDs: Certificate of Deposits.

CPs: Commercial Papers.

DTL PROFILE: Demand and Time Liabilities.
Inter office adjustment:

Outflows: Net Credit Balances

Inflows: Net Debit Balances

Other Liabilities: Cash payables, Income received in advance, Loan Loss and
Depreciation in Investments.
Other assets: Cash Receivable, Intangible Assets and Leased Assets.
2.Interest Rate Risk :
Interest Rate Risk refers to the risk of changes in interest rates subsequent to the creation
of the assets and liabilities at fixed rates. The phased deregulations of interest rates and the
operational flexibility given in pricing most of the assets and liabilities imply the need for system
to hedge the interest rate risk. This is a risk where changes in the market interest rates might
adversely affect financial conditions.

The changes in interest rates affects in large way. The immediate impact of change in
interest rates is on earnings by changing its Net Interest Income (NII). A long term impact of
changing interest rates is on Market Value of Equity (MVE) or net worth as the economic value
of assets, liabilities and off-balance sheet positions get affected due to variation in market
interest rates.

The risk from the earnings perspective can be measured as changes in the Net Interest
Income (NII) OR Net Interest Margin (NIM).

64
 There are many analytical techniques for measurement and management of interest rate
risk. In MIS of ALM, slow pace of computerization in and the absence of total deregulation, the
traditional GAP ANALYSIS is considered as a suitable method to measure the interest rate risk.

Data Interpretation
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 liabilities
and rate sensitive assets including off-balance sheet position.

An asset or liability is normally classified as rate sensitive if:

 If there is a cash flow within the time interval.

 The interest rate resets or reprocess contractually during the interval.

 RBI changes the interest rates i.e., on saving deposits, export credit, refinance, CRR
balances and so on, in case where interest rate are administered.

 It is contractually pre-payable or withdraw able before the stated maturities

The Gap is the difference between Rate Sensitive Assets (RSA) and Rate sensitive Liabilities
(RSA) for each time bucket.

The positive GAP indicates that RSAs are more than RSLs (RSA>RSL).

The negative GAP indicates that RSAs are more than RSALs (RSA<RSL).

65
 They can implement ALM policies for the better identification of the mismatch, risk and
for the implementation of various remedial measures.

GENERAL:
The classification of various components of assets and liabilities into different time
buckets for preparation of Gap reports (Liquidity and interest rate sensitivity) may be done as
indicated in Appendices I & II as a sort of bench mark, which are better equipped to reasonably
estimate the behavioral pattern, embedded options, rolls-in and rolls-out etc of various
components of assets and liabilities on the basis of past date. Empirical studies could classify
them in the appropriate time buckets, subject to approval from the ICICI / Board. A copy of the
note approved by the ALOC / Board may be sent to the Department of Supervision.

The present framework does not capture the impact of embedded options, i.e., the
customers exercising their options (premature closure of deposits and prepayment of loans and
advances) on the liquidity and interest rate risks profile. The magnitude of embedded option risk
at times of volatility in market interest rates is quite substantial should, therefore evolve suitable
mechanism, supported by empirical studies and behavioral analysis to estimate the future
behavior of assets; liabilities and off-balance sheet items to changes in market variables and
estimate the embedded options.
A scientifically evolved internal transfer pricing model by assigning values on the basis of
current market rates to funds provided and funds used is an imported component for elective
implementation of ALM systems. The transfer price mechanism can enhance the management of
margin i.e., landings or credit spread the funding or liability spread and mismatch spread. It also
helps centralizing interest rate risk at one place which facilitates effective control and
management of interest rate risk. A well defined transfer pricing system also provides a rational
framework for pricing of assets and liabilities.

66
COMPARATIVE ASSET LIABILITY SHEET AS ON 31ST MARCH 2020-19

Increase
(+) /
Decrease
(-)
Particulars Mar'20 Mar'19 (in Rs) Percentage %
12
Liabilities 12 Months Months    
Share Capital 1298.25 1294.14 4.11 0.003175854
Reserves & Surplus 121665.3 104029.4 17635.9 0.169528037
Net Worth 112702.76 108368 4334.72 0.039999985
Secured Loan 159219.09 165320 -6100.88 -0.036903467
Unsecured Loan 66234.12 652919.7 -586685.55 -0.898557015
TOTAL LIABILITIES 1,375,997.47 926607.7 449389.78 0.484983866
Assets    
Gross Block 7959.44 7931.43 28.01 0.00353152
(-) Acc. Depreciation 0 0 0 0
Net Block 7959.44 7931.43 28.01 0.00353152

Capital Work in Progress 0 0 0 0

Investments 443,472.63 207732.7 235739.95 1.134823611
Inventories 0 0 0 0
Sundry Debtors 0 0 0 0
Cash and Bank 81264.45 80296.29 968.16 0.012057344

Loans and Advances 706,246.11 668498.8 37747.36 0.056465865

Total Current Assets 787,510.56 748795 38715.52 0.051703761
Current Liabilities 47,446.81 37851.46 9595.345 0.253499997
Provisions 0 0 0 0

Total Current Liabilities 47,446.81 37851.46 9595.35 0.253500129

NET CURRENT ASSETS 740,063.75 710943.6 29120.17 0.040959889

Misc. Expenses 0 0 0 0

67
TOTAL
ASSETS(A+B+C+D+E) 1,377,292.23 929652.2 447640.03 0.481513441

Interpretation:

The total current liabilities for the year are Rs.3, 37,909.51 in the year 2019 is less than the
total current assets for the year. Therefore the assets are more than the liabilities. So there is
a positive gap of Rs.176.36 i.e 08.13%

68
COMPARATIVE ASSET LIABILITY SHEET AS ON 31ST MARCH 2019-18

Increase
(+) /
Decrease
(-)
Particulars Mar'19 Mar'18 (in Rs Percentage %
Liabilities 12 Months 12 Months    
Share Capital 1294.14 1291.38 2.76 0.002137249
Reserves & Surplus 104029.4 100864.4 3165.03 0.031379069
Net Worth 108368 105158.9 3209.1 0.030516664
Secured Loan 165320 182858.6 -17538.65 -0.09591372
Unsecured Loan 652919.7 560975.2 91944.46 0.163901111
TOTAL LIABILITIES 926607.7 848992.8 77614.92 0.091420001
Assets    
Gross Block 7931.43 7903.51 27.92 0.003532608
(-) Acc. Depreciation 0 0 0 0
Net Block 7931.43 7903.51 27.92 0.003532608

Capital Work in Progress 0 0 0 0

Investments 207732.7 202994.2 4738.5 0.023343034
Inventories 0 0 0 0
Sundry Debtors 0 0 0 0
Cash and Bank 80296.29 84169.38 -3873.09 -0.04601543
Loans and Advances 668498.8 584122.1 84376.67 0.144450403
Total Current Assets 748795 668291.5 80503.57 0.120461765
Current Liabilities 37851.46 30196.4 7655.06 0.253509028
Provisions 0 0 0 0

Total Current Liabilities 37851.46 30196.4 7655.06 0.253509028

NET CURRENT ASSETS 710943.6 638095.1 72848.51 0.114165605

Misc. Expenses 0 0 0 0
TOTAL
ASSETS(A+B+C+D+E) 929652.2 851996 77656.24 0.091146254

69
 Interpretation:

The total current liabilities for the year are Rs.277352.60 is less than the total assets for the
year are Rs.14601.08. Therefore the assets are more than the liabilities. So there is a positive
gap of Rs. 536.24 i.e 11.39%

COMPARATIVE ASSET LIABILITY SHEET AS ON 31ST MARCH 2018-17

70
 Increase (+)
/
Decrease ( -
)
Particulars Mar'18 Mar'17 (in Rs) Percentage %
Liabilities 12 Months 12 Months    
Share Capital 1291.38 1171.36 120.02 0.102462095
Reserves & Surplus 100864.4 95737.57 5126.8 0.053550555
Net Worth 105158.9 99951.07 5207.87 0.052104195
Secured Loan 182858.6 147556.2 35302.47 0.239247703
Unsecured Loan 560975.2 490039.1 70936.15 0.144756114
TOTAL LIABILITIES 848992.8 737546.3 111446.48 0.151104387
Assets    
Gross Block 7903.51 7805.21 98.3 0.012594152
(-) Acc. Depreciation 0 0 0 0
Net Block 7903.51 7805.21 98.3 0.012594152

Capital Work in Progress 0 0 0 0

Investments 202994.2 161506.6 41487.63 0.256878932
Inventories 0 0 0 0
Sundry Debtors 0 0 0 0
Cash and Bank 84169.38 75713.06 8456.32 0.111689053

Loans and Advances 584122.1 526766.6 57355.45 0.108882087

Total Current Assets 668291.5 602479.7 65811.78 0.109234852
Current Liabilities 30196.4 34245.16 -4048.76 -0.118228678
Provisions 0 0 0 0

Total Current Liabilities 30196.4 34245.16 -4048.76 -0.118228678

NET CURRENT ASSETS 638095.1 568234.5 69860.54 0.122943145

Misc. Expenses 0 0 0 0
TOTAL
ASSETS(A+B+C+D+E) 851996 740588.4 111407.53 0.150431097

71
Interpretation:

The total current liabilities for the year are Rs.222458.56 is less than the total assets for the
year are Rs.5955.15. Therefore the assets are more than the liabilities. So there is a positive
gap of Rs. 751.34 i.e 18.98 %

72
COMPARATIVE ASSET LIABILITY SHEET AS ON 31ST MARCH 2017-16

Increase
(+) /
Decrease
(-)
Particulars Mar'17 Mar'16 (in Rs) Percentage %
12
Liabilities Months 12 Months
Share Capital 1171.36 1169.87 1.49 0.127364579
Reserves & Surplus 95737.57 85748.24 9989.33 11.64960354
Net Worth 99951.07 89735.58 10215.49 11.38399061
Secured Loan 147556.2 174807.4 -27251.23 -15.58929034
Unsecured Loan 490039.1 421425.7 68613.35 16.28124445
TOTAL LIABILITIES 737546.3 685968.7 51577.62 7.518946893
Assets
Gross Block 7805.21 7576.92 228.29 3.012965691
(-) Acc. Depreciation 0 0 0 0
Net Block 7805.21 7576.92 228.29 3.012965691
Capital Work in Progress 0 0 0 0
Investments 161506.6 160411.8 1094.75 0.682462263
Inventories 0 0 0 0
Sundry Debtors 0 0 0 0
Cash and Bank 75713.06 59868.74 15844.32 26.46509681
Loans and Advances 526766.6 492837.7 33928.98 6.884413153
Total Current Assets 602479.7 552706.4 49773.3 9.005378063
Current Liabilities 34245.16 34726.43 -481.27 -1.385889652
Provisions 0 0 0 0
Total Current Liabilities 34245.16 34726.43 -481.27 -1.385889652

NET CURRENT ASSETS 568234.5 517980 50254.58 9.702031903

Misc. Expenses 0 0 0 0
TOTAL ASSETS(A+B+C+D+E) 740588.4 688786.1 51802.29 7.520808999

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Interpretation:

The total current liabilities for the year are Rs.183270.77 is less than the total assets for the
year are Rs.3956.63. Therefore the assets are more than the liabilities. So there is a positive
gap of Rs. 1569.54 i.e 65.75 %

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COMPARATIVE ASSET LIABILITY SHEET AS ON 31ST MARCH 2016-15

Increase
(+) /
Decrease ( -
)
Particulars Mar'16 Mar'15 (in Rs) Percentage %
Liabilities        
Share Capital 1169.87 1167.1 2.77 0.237340416
Reserves & Surplus 85748.24 79262.26 6485.98 8.18293599
Net Worth 89735.58 80429.36 9306.22 11.57067519
Secured Loan 174807.4 172417.4 2390.03 1.386188803
Unsecured Loan 421425.7 361562.7 59862.98 16.55673415
TOTAL LIABILITIES 685968.7 614409.4 71559.23 11.64683114
Assets 0 0
Gross Block 7576.92 4725.52 2851.4 60.34044931
(-) Acc. Depreciation 0 0 0 0
Net Block 7576.92 4725.52 2851.4 60.34044931

Capital Work in Progress 0 0 0 0

Investments 160411.8 186580 -26168.23 -14.02520409
Inventories 0 0 0 0
Sundry Debtors 0 0 0 0
Cash and Bank 59868.74 42304.62 17564.12 41.5182077

Loans and Advances 492837.7 412519.1 80318.53 19.47025631

Total Current Assets 552706.4 454823.7 97882.65 21.52100724
Current Liabilities 34726.43 31719.86 3006.57 9.478509678
Provisions 0 0 0 0

Total Current Liabilities 34726.43 31719.86 3006.57 9.478509678

NET CURRENT ASSETS 517980 423103.9 94876.07 22.42382414

Misc. Expenses 0 0 0 0
TOTAL
ASSETS(A+B+C+D+E) 688786.1 614409.4 74376.7 12.10539669

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Interpretation:

The total current liabilities for the year are Rs.1095.08 is less than the total assets for the
year are Rs.4437.49. Therefore the assets are more than the liabilities. So there is a positive
gap of Rs. 1058.25i.e 10.95%

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 Ratio Analysis
Return on Assets (ROA)
    Net Income
  Return on Assets (ROA) = ----------------------------------
    Average Total Assets
     
Year Net income Average Total Assets ROA
2020-2019 32619.76 337909.49 9.653402
2019-2018 24361.72 277352.61 8.783664
2018-2017 19983.52 222458.56 8.98303
2017-2016 19802.89 183270.78 10.80526
2016-2015 12320.38 133170.60 9.251577

Interpretation:
In the ROA the total Average Assets was increasing year by year and the net incone was also in
the increasing position

Return on Equity (ROE)

    Net Income
  Return on Equity (ROE) = --------------------------------------------
    Average Stockholders' Equity
     

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 Year Net income Average Equity ROE
2020-2019 32619.76 469.34 69.5013423
2019-2018 24361.72 465.23 52.3648948
2018-2017 19983.52 457.74 43.6569231
2017-2016 19802.89 425.38 46.5534111
2016-2015 12320.38 354.43 34.7611094

Interpretation:
The net income of the organization was in the increasing position and also the equity value for
the investors is also in the increasing stage.

Return on Common Equity (ROCE)

    Net Income
  Return on Common Equity = --------------------------------------------
    Average Common Stockholders' Equity
     

Year Net income Average Common ROCE

Stockholders' Equity
2018-2019 32619.76 469.34 69.5013423
2017-2018 24361.72 465.23 52.3648948

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 2016-2017 19983.52 457.74 43.6569231
2015-2016 19802.89 425.38 46.5534111
2014-2015 12320.38 354.43 34.7611094

Interpretation:
The net income of the organization was in the increasing position and also the equity value for
the shareholders is also in the increasing stage.

Profit Margin
    Net Income
  Profit Margin = -----------------
    Sales

Year Net income Sales Profit margin

2018-2019 32619.76 11339.21 2.87672245
2017-2018 24361.72 8456.54 2.88081414
2016-2017 19983.52 6403.34 3.12079633
2015-2016 19802.89 4818.98 4.10935302
2014-2015 12320.38 3522.15 3.49797141

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Interpretation:
The profit margin of ICICI is in the increasing stage.

CHAPTER-V
FINDINGS, SUGGESTIONS, CONCLUSION
&
BIBLIOGRAPHY
80
 FINDINGS
1. ALM technique is aimed to tackle the market risks. Its objective is to stabilize and
improve Net interest Income (NII).

2. Implementation of ALM as a Risk Management tool is done using maturity profiles and
GAP analysis.

3. ALM presents a disciplined decision making framework for s while at the same time
guarding the risk levels.

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4. There has been a small reduction in Gross Sales and with the performance of prefab Division
the Gross Profit gap has narrowed and contributing. The Gross Profit has increased
considerably from 8597.47 Cr in Last year to 6213.17 Cr in year. The interest payment has
increased by 140.79 Cr in the Current year and the Profit before Tax at 69857 when
compared to 5874568 cr in Last year.

5. Perform Division realization has increased by 8% even the Turnover has come to 641.80 Cr
from 400.09 Cr in last year.

6. The profit After Tax has came 856996 Cr to 6584548 in Current year because of slope in
Cement Industry.

7. The PAT is in an increasing trend from 2015-2016 because of increase in sale prices and
also decreases in the cost of manufacturing. In 2017 and 2018even the cost of manufacturing
has increased by 5% because of higher sales volume PAT has increased considerably, which
leads to higher EPS, which is at 98.366 in 2017.

8. The company also increased considerably which investors in coming period. The company
has taken up a plant expansion program during the year to increase the production activity
and to meet the increase in the demand

9. Because of decrease in Non-Operating expenses to the time of 65874.25 Cr the Net profit has
increased. It stood at in current year increase because of redemption of debenture and cost
reduction. A dividend of Rs.9635.22 Cr as declared during the year at 7.85% on equity.

SUGGESTIONS

1. They should strengthen its management information system (MIS) and computer
processing capabilities for accurate measurement of liquidity and interest rate Risks in
their Books.
2. In the short term the Net interest income or Net interest margins (NIM) creates economic
value of the which involves up gradation of existing systems & Application software to
attain better & improvised levels.

82
 3. It is essential that remain alert to the events that effect its operating environment & react
accordingly in order to avoid any undesirable risks.
4. ICICI requires efficient human and technological infrastructure which will future lead to
smooth integration of the risk management process with effective business strategies.

CONCLUSION

The purpose of ALM is not necessarily to eliminate or even minimize risk. The level of risk will
vary with the return requirement and entity’s objectives.

Financial objectives and risk tolerances are generally determined by senior management of an
entity and are reviewed from time to time.

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All sources of risk are identified for all assets and liabilities. Risks are broken down into their
component pieces and the underlying causes of each component are assessed.

Relationships of various risks to each other and/or to external factors are also identified.

Risk exposure can be quantified 1) relative to changes in the component pieces, 2) as a

maximum expected loss for a given confidence interval in a given set of scenarios, or 3) by the
distribution of outcomes for a given set of simulated scenarios for the component piece over
time.

Regular measurement and monitoring of the risk exposure is required. Operating within a
dynamic environment, as the entity’s risk tolerances and financial objectives change, the existing
ALM strategies may no longer be appropriate.

Hence, these strategies need to be periodically reviewed and modified. A formal, documented
communication process is particularly important in this step.

BIBLIOGRAPHY

Title of the Books Author Publications

84
Risk management Gustavson hoyt sout western, division of Thomson

learning(2001)

India financial system M.Y. Khan Mcgraw Hill 5th Edition

Management Research magazine P.M.Dileep Kumar

Web sites
www.Icici.com

www.moneycontrol.com

www.Econamictimes.com

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