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Project submitted in partial fulfillment for the award of the Degree of
MASTER OF BUSINESS ADMINISTRATION
PATHAN AYUB KHAN
AVANTHI P.G COLLEGE (Osmania University) Dilsukhnagar,Hyderabad.
I here by declare that the Project Report titled “ASSETLIABILITY MANAGEMENT” submitted by me to the Department of Business Management, Avanthi P.G College is a bonafide work undertaken by me and it is not submitted to any other University of Institution for the award of any degree or diploma/certificate or published any time before.
PATHAN AYUB KHAN (19-05-121)
All the banks and financial institutions have adopted the concept of asset-liability management in their streams. The main objective of asset – liability management is to manage the assets and liabilities in such a way that net earnings are maximized and it deals with both sides of the balance sheet. To solve the problems of asset – liability management generally banks adopt: gap analysis, duration analysis, trend analysis and ration analysis. But APSFC has adopted the method of gap analysis to solve the problems created in their assets and liabilities. By doing gap analysis FIs can avoid risk and can earn more profits, it is used to benefit from rising interest rate by having a positive gap or whether it is in a position to benefit from declining interest rates by negative gap. It should do generated by grouping rate sensitive assets, liabilities and offbalance sheet position into time buckets according to residual maturity or next pricing period.
who taken keen interest in guiding me to undertake the project work.SRAVANI.YADAGIRI (Chief General Manager) of APSFC. Hyderabad. A.ACKNOWLEDGEMENT I wish to express my deep sense of gratitude to all those who have encouraged me by giving their valuable suggestions during the project period and motivated me towards my goal. (PATHAN AYUB KHAN) 4 . I wish to express thank to my project guide Ms. My inexpressible gratitude to my parents and friends who have provided me with all the facilities and are always has supportive to me in completing my project work successfully.AJEYA KALLAM (Managing Director) and Mr. Words alone can not express my deep regards and gratitude to Mr. I wish to express my sincere thanks to Mr. Faculty member of the college for her valuable suggestions and guidance during the course of my project work. S. SRINIVAS MANI CSD of APSFC. Hyderabad.
Introduction 2. Suggestions and Recommendations 8. Summary and Conclusions 6. Annexure 9. Findings 7. Company Profile 4. Data Presentation and Analysis 4. Glossary 10.1 Data Presentation 4. Bibliography PAGE i ii 1-8 9-23 24-35 36-46 36-46 47-76 77 78 79 80 81 82 5 .TABLE OF CONTENTS CHAPTER TITLE NOUMBER List of Tables List of Graphs 1.2 Analysis and Interpretation 5. Review Of Literature 3.
LIST OF TABLES TABLES PAGE NUMBERS Liquidity risk maturity pattern of Rupee assets and liabilities Liquidity risk maturity pattern of Rupee/foreign currency assets and Liabilities Maturity Pattern of Interest rate risk Sensitive rupee assets and Liabilities Maturity Pattern of Interest rate risk Sensitive Interpretation on Liquidity Statement 61 62 63 64 65 Relationship between interest rate Changes and net interest income 75 6 .
LIST OF GRAPHS GRAPHS TOTAL ASSETS PAGENUMBERS 67 7 .
TOTAL LIABILITIES 68 MISMATCH OF ASSETS AND LIABILITIES 69 PERCENTAGE OF LIQUIDITY GAP 70 TOTAL LIABILITIES 71 TOTAL ASSETS 72 MISMATCH OF INTEREST RATE RISK 73 PERCENTAGE OF INTEREST GAP 74 8 .
INTRODUCTION 9 .
INTRODUCTION The composition of assets and liabilities largely decide the solvency. THE CRUX The Asset .liability mismatch. leads to possibility of lost 10 . liquidity and profitability of a corporate entity. While BPRF is introduced at the instance of IDBI/SIDBI. These are interest rate and liquidity risks. the treasury management through complex. is an evolving art. Therefore the asset liability management assumes great importance.liability management broadly deals with both sides of the balance sheet. it is absolutely necessary to prevent the Asset . The mix of the assets influences the return on investment. more so that of a financial institution. The interest rate risk arises from the possibility of change in profits caused by fluctuations in interest rates. a principle cause of liquidity risk. both in term of maturity (tenure) and relative costs (minimum or interest differential) particularly in the control of increasing pressure on margins. The components of the liabilities determine the cost of funds. It is primarily concerned with the market risk that arises from a financial institutions structural position. In the case of state financial corporation. the instrumentality of Business Plan and Resources Forecast (BPRF) and effective treasury management techniques cab be gainfully utilized to make correction in the existing imbalances in the resource mix and the avoidable misalignments between the profile of liabilities and the portfolio of assets. The delay in recoveries. also.
On the assets side. This practice of course is changing of late. In case of banks of FIs . It can make or mar the future of a financial institution. the choice of the basket.. profitability. The stability.e. the asset portfolio-mix.opportunities and damage due to honoring payment commitments. the yields. This is especially true of asset-based securities i. growing competition for the access to the sources and the need for arresting the erosion of net worth are the main challenges in managing the liabilities. THE SCOPE ALM in relation of SFCs covers a wide gamut of both sources and applications of funds. write off policies and above all the market and credit risk management 11 . mortgage loans. The drying up of some of the conventional sources. securitization is a new phenomenon in the Indian context. growth and image of a financial institutions largely depend upon the ability and skill with which it can conduct its ALM. the ALM positions are relatively liquid. Usually the banking institutions hold the assets and liabilities until they mature. It is increasingly becoming to bundle banking products such as loans into marketable securities and then sell them or trade them with other banks as well as other traditional and new players in the financial markets. Both these risks are obviously the result of mismatch between the FIs / Banks Assets and Liabilities. the recoveries. rising cost of funds available and the associated stringent conditions. But it has a vast scope. NPA management. the key issues are the resource allocation.
It is desirable to synchronize the profiles of assets with the counterparts among liabilities. simply based on common sense. This is pure logic and no magic is involved. However. no profound wisdom is necessary to know and appreciate this fundamental principle of financial science. It is true in all cases.INSIGHT (Capacity of Understanding Hidden Truth) The aggregates of either side of any balance sheet will automatically balance. True balancing involves intelligence matching risk mapping and contingency arrangements. wisdom lies in understanding the inter-relationship between categories of assets and their interface with liabilities. 12 . perhaps we may cal them their shadows.
4. To understand the problems involved in maintaining and managing ALM. 5. 13 . To learn the interest rate risk analysis and management. 3. To study the procedure adopted for managing ALM in APSFC.OJECTIVE OF THE STUDY 1. To get better schemes and activities of APSFC. To learn the liquidity risk management and analysis. 6. 2. To know how ALM is done at APSFC.
the present study focused such measures taken mismatch and interest rate risk. 14 .NEED FOR THE STUDY In the event of highly violated interest rates and liquidity crisis.liability management. this mismatch of assets and liabilities may produced an effect on calculation of real worth of the business there are some methods adopted by banks/financial institutions in order to cover the problems of liquidity mismatch and interest rate risk. the present study focused such measures taken by APSFC for such Asset . financial institutions/banks face the problem of real valuation of their assets and liabilities.
METHODOLOGY OF THE STUDY
The study of liquidity risk analysis and interest rate risk analysis and management is bases on 1. 2. Primary Data Collection Secondary Data Collection
PRIMARY DATA COLLECTION
The sources of primary data collection were done by Chief Manager of ALM Cell Resource Person of ALM Cell Chief Manager of Finance and Accounting Department Primary data has been gathered by training programming, interviewing the
managers and other officials of the bank.
SECONDARY DATA COLLECTION
It was collected from books regarding journals, banking, magazines containing relevant information about ALM. The secondary data collected was to understand how effectively APSFC carries out ALM management.
The other main sources of Secondary Data: Annual reports of APSFC Brochures of APSFC RBI guidelines for ALM management Indian Financial System By ‘M.Y.KHAN’ Asset liabilities management by different authors.
LIMITATIONS OF THE STUDY
In spite of utmost care taken for the smooth conduct of study while preparing this project, this report suffers from certain setbacks.
1. This is the study conducted with in short period, so it may not be covering all the aspects in detail.
2. The study has made an attempt for evaluating the performance of APSFC in managing liquidity risk management and interest rate risk management.
3. Due to limitations of the sources the data collection could not be adequate.
REVIEW OF LITERATUE 18 .
They are intended to form the basis for initiating collection. driven by corporate strategy.REVIEW OF LITERATURE ASSETS LIABILITY MANAGEMENT (ALM) Asset . The bank management has to base their business decision on a dynamic and integrated risk management system and process. While guidelines on management of credit risk. The objective of good risk 19 . It is against this background that the RBI guidelines relating to ALM focus on interest rate and liquidity risk management system in banks. compilations and analysis of dates required to support the ALM System. foreign exchange risk. The initial thrust of the ALM function would be to enforce the risk management discipline that is. Over the last few years. 1999.liability management (ALM) as a part of the risk management and control system in banks.liability management practices which effect from April 1. market risk and operational risk will be issued later on. has brought pressure on the management of banks to maintain a good balance among measures. and equity/commodity price risk. which form part of the ALM function. The banks are exposed to several major risks in the course of the business credit risk. Liquidity and Operational risks. The RBI has issued guidelines for the introduction of Asset . the Indian Financial System markets have witnessed wideranging changes at a fast pace. managing offer assessing the risk involved. Intense competition for business involving both the assets and liabilities together with increasing volatility in the domestic interest rates as well as foreign exchange rates. interest rate risk.
they can also offer advances on dynamic basis. credit risk. FIs are exposed to credit and market risks in view of the asset liability transformation. Imprudent liquidity management can put FIs earnings and reputation at great risk. The management of FIs have to base their business decisions on a dynamic and integrated risk management system and process driven by corporate stratey. It is. The interest rates on investments of FI in government and other securities are also now market related.management programs should be that their programs evolve into a strategy tool for bank management. interest rate risk. Intense competition for business involving both assets and liabilities has brought pressure on the management of FIs to maintain a good balance among spreads. over the last few years and growing integration of domestic markets and the entry of MNCs for meeting the credit needs of not only the corporates but also the retail segments. therefore. equity/commodity price risk. requiring strategic management. 20 . profitability and long-term liability. important that FIs introduce effective risk measure management systems that address the issues relating to interest rate and liquidity risks . they can also offer deposits prescribe by the RBI. In the normal course. liquidity risk and operational risk. With liberalization in Indian Financial markets. FIs are now operating in a fairly deregulated environment and are required to determine interest rates on deposits. the risks associated with FIs operations have become complex and large. FIs are exposed to several major risks in the course of their business.
Financial institutions need to address these risks in a structural manner by upgrading their risk management and adopting more comprehensive asset-liability management (ALM) practices than has been done hitherto. The RBI guidelines relate to interest rate and liquidity risks management system in FIs . among other functions. which needs to be closely integrated with the FIs business strategy. which form parts of the Asset . 21 . The initial focus of the ALM function would be to enforce the risk management discipline that is managing business after assessing the risks involved. It involves assessment of various types of risks and altering the asset-liability portfolio in a dynamic order to manage risks. is also concerned with risk management and provides a comprehensive and dynamic framework for measuring.liability management (ALM) function. monitoring and managing liquidity and interest rates and equity and commodity price risks of major operators in the financial system. The objective of good risk management systems should be that these systems would evolve into a strategic tool for financial institution management. ALM.
It however. These range from the 22 . recognized that varied business profiles of FIs in the public and private sectors do not make the adoption on a uniform ALM system for all FIs feasible. B. A. B. Thus information is the key to the ALM process. E. A. D. accuracy. 3.The ALM Process rests in these pillars 1. These are various method prevalent worldwide for measuring risks. ALM INFORMATION SYSTEM ALM has to supported by a management philosophy that clearly specifies the risk policies and tolerance limits. B. ALM Information System Management Information Systems Information availability. C. This framework needs to be built on sound technology with the necessary information system as backup. adequacy and expediency ALM Organization Structure and Responsibilities Level of top Management involvement ALM Process Risk Parameters Risk identification Risk Measurement Risk Management Risk policies and tolerance levels. A. 2.
Some of them have a large number of branches and agents/brokers. business activities and geographical spread. management profiles. in view of the centralized nature of the functions.simple gap statement to extremely sophisticated and data intensive risk adjusted profitability measurement methods. it would take time for FIs in the present state. However. asset size. 23 . the introduction of a base information system of risk management. where as some have unitary offices. capital base. FIs have heterogeneous organization structures. Considering the large number of branches and the lack of adequate support system to collect information requires for the ALM. However. though the central element for the entire ALM exercise is the availability of adequate and accurate information with expedience and the systems existing some of the major FIs do not generate information in the manner required for ALM. Which analysis information on the basis of residual maturity and repricing pattern of liabilities and assets. Collecting accurate data in a timely manner would be the biggest challenge before the NBFC’s particularly those lacking full-scale computerization. it would refined overtime as the FIs management gains experience of conduction business within an ALM framework the spread of computerization will also help FIs in accessing data. risk measurement and monitoring has to be addressed urgnetly. to get the requisite information. With respect to investment portfolio and funds management.
Each FIs should decide on the role of it ALCO. including the strategic management of interest rate and liquidity risks. including the Chief Executive Officer (CEO). interest rate and equity/price risks. its responsibility as also the decisions to be taken by it. The 24 . should be responsible for ensuring adherence to the limits set by the board of directors as well as for deciding the business strategy of the FIs ( on the assets and liabilities sides) in line with the FIs budgets and decide risk management objectives. Th board of directors of FIs should have overall responsibility for management of risks and should decide its risk management policy and set limits for liquidity. c) The ALM supports groups consisting of operating staff should be responsible for analyzing monitoring and reporting risk profiles to the ALCO. b) The Asset – Liability Committee (ALCO) consisting of the FIs senior management. 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 FI internal limits. The business and risk management strategy should ensure that the FIs operate with in the limits parameters set by its board of directors. The ALCO is a decision-making unit responsible for balance sheet planning from the risk-return perspective.ALM ORGANIZATION a) Successful implement of the risk management process would required strong commitment in the part of the senior management in the FIs to integrate basic operations and strategic decision making with risk management.
International Business and Economics research can be members of the committee. inter. In addition to monitoring the risk levels. The chief of investment. In addition. wholesale vs. the CEO/CMD/President/Director should head the committee. 25 . credit resources management/planning funds management/treasury. the ALCO should review the result of and progress in implementation of the decision made in the previous meeting. To ensure commitment of the top management and timely response to market dynamics. Towards this end. With respect to the funding policy. desired maturity profile and mix of the incremental assets and liabilities.business issues than ALCO would consider. COMPOSITION OF ALCO The size (number of members) of ALCO would depend on the size of the each institution. money markets vs. Individual FIs should decide the frequency of holding their ALCO meetings. Large FI may even have sub-committee and support groups. prevailing interest rates offered by other peer NBFCs for similar services/products and so on. it should develop a view regarding the future direction of interest rate movements and decide on funding mixes between fixes vs. business mix and organizational complexity. for instance. capital markets. retail deposits. its responsibility would be to decide on the source and mix of liabilities or sale of assets. should include product pricing for both deposits and advances. floating rate funds. the head of the technology division should also be an invitee building up of MIS and related computerization. and so on. The ALCO should also articulate the current interest rate view of the FIs and base its decision for future business strategy on this view. funding domestic vs. foreign currency funding.
COMMITTEE OF DIRECTORES The management committee or any other specific committee constituted by the board of directors should oversee the implementation of the system and review its function periodically. 4. identifying the risk. monitoring the risk and managing the rik. plans. 2. measuring the risk. 5. DEFINITION OF RISK Risk is the potential loss of an asset due to different factors. which includes defining the risk. 26 . Liquidity risk management Management of market risks Funding and capital planning Profit planning and growth projection and Forecasting and analyzing ‘what if scenario’ and preparation of contingency PROCESS OF ALM As ALM mainly focuses on risk management. 3. The scope of the ALM function cab be described as follows: 1.
These two parameters together attend to the short term and long-term balance sheet risk.IDENTIFICATION OF RISK ALM in a commercial bank of FIs is to decide what should be the risk measurement parameters that the management would need to focus on.. availability of supporting data and expertise within the bank/FIs and the expected market and business developments. While the former seeks to measure the risk to the immediate profits that emanate from cash flow mismatches occurring in the accounting years. The appropriateness of risk management parameters depends upon the degree of volatility in the operating environment. Generally. these are two major parameters. which banks/FIs all over the world employ to measure their balance sheet risks viz. MEASURING THE RISK 27 . the latter measures the risk arising out of the maturity mismatches in its assets and liabilities over the future years. risk to the net interest income and market value portfolio equity.
the duration to measure and interest rate elasticity of its assets and liabilities and the liability of the management to measure and control the exposure. Simulation Gap analysis is the most important basic technique used in analyzing interest rate risk. the FIs maturity/gaps. It has observed that banks risk exposure depends upon the volatility of interest rates and asset prices in the financial market. 1. RISK ANALYSIS Interest rate risk can be analyzed in the following four methods. interest risk management lays the foundation for a good ALM.(Gap is the difference between rate sensitive assets minus rate sensitive liabilities) COMPONENTS OF RISK MANAGEMENT 28 . Value at risk 4. In the management of FIs assets and liabilities. Gap analysis 2.It measures the difference between financial institution assets and liabilities and off balance sheet position which will be re priced or will mature within a predetermine period. Duration analysis 3.Due to difficulty in measuring interest rate risk and also the controversies the present in the understanding of the concept measurement of interest rate risk assumes greater importance in the ALM function.
risk identification. the major alternatives available in risk control are 1. Transfer the risk to another party 5. Avoid the exposure 2. Avoid concentration in risky area 4. risk measurement and risk control. It is also described at times as the responsibility of the management to identify measure. The process of risk management has three clearly identifiable steps. viz. monitor and control various items of risk associated with FIs position and transaction. the next step involved is risk control.. Employ risk management instruments to cover the risks RISK IN FINANCIAL INSTITUTIONS 29 .Risk management may be defined as the process of identifying and controlling risk. Reduce the impact by deducing frequency of severity 3. CONTROL RISK After identification and assessment of risk factor.
But interest rate on deposits cab be changed only when they fall due or pre closed by the depositor. 30 . INTEREST RATE MISMATCH It is the impact of the change in interest rate on the net interest income of the bank and value of the assets and liabilities. Interest rate mismatch risk 2. Foreign exchange risk II.Risk in financial institutions are many and are broadly classifies into three categories They are as follows: 1. Balance sheet risks 2. For example. (a) When fixed deposits are accepted on the fixed rate basis and the amount is lent on floating rate basis.Operating and liquidity risk I.Transaction risks 3. any download revision of interest rate on advances will result in the reduction of income stream for the bank FIs . Liquidity risk 3. maturity and interest rate structure of assets and liabilities resulting in 1.BALANCE SHEET RISK The balance sheet generally arise out of the mismatch between currency.
II. CREDIT RISK Credit risk is the risk resulting from uncertainty in a counter in a counter parties 31 . 2. Price Risk 1.(b) A bonds (investments asset of the bank) price falls down as interest rate rise.LIQUIDITY RISK Liquidity is the potential inability to meet the banks/FIs as they become due.FOREIGN EXCHANGE RISK The risk that a long (over bought) or short (over sold) position in the foreign currency might have to be closed out at a loss duet to an adverse movement in exchange rates. Credit risk 2. It rises when FI are unable to generate cash to cope with the declines in deposits or increase in loans. It originates the mismatches in the maturity of assets and liabilities as well as uncertainity of future cash flows. They are 1.TRANSACTIONS RISKS The transaction risk essentially involves two types of risks. 3.
But credit risk in some guise exists throughout banking activities. from credit cards to corporate loans.PRICE RISK Price risk. Lending. Market risk 2. 2. inter bank transaction. is the largest and most obvious source of credit risk. Issuer risk 3. For ex. foreign exchange. from credit cards to corporate loans. which include the risks of loss due to change in values of assets and liabilities. trade financing. Instrument risk 1.MARKET RISK 32 . “ A bank or financial institutions makes a loan to a client because it is possible that the client will fail to make timely Principle or interest payments. The factors contributing price risks are 1. That bank or financial institutions faces credit risks”. both on and off the balance sheet form acceptances. Traditionally the credit risk refers to the risk that a borrower or counter party will fail to meet its obligations.ability or willingness to meet its contractual obligations. guarantees and settlements.
With many hybrid instruments in the market and with fluctuations in market conditions. exchange rate and commodity prices. The financial institution defines market risk as the risk that the value on and off balance sheet position will be adversely affected by movements in the equity and interest rate of markets.ISSUER RISK The financial strength and standing of the institute/sovereign that has issued the instrument can affect price as well as reliability. 3. the prices of various instruments ma react differently form one another.Market risk may be defined as the possibility of the loss to financial institution caused by changes in market variables. The risk involved with the instruments issued by corporate bodies would be an ideal example. 2. 33 . currency.INSTRUMENT RISK The nature of instrument creates risks for the investor.
COMPANY PROFILE 34 .
1951 with the amalgamation of erstwhile state financial corporation of Hyderabad and Andhra States. APSFC is also considered as the top financial corporation in the country.ANDHRA PRADESH STAT FINANCIAL CORPORATION which is considered to be the premier financial institution providing financial assistance. to various industrial projects located in different part of the state. 35 . Andhra Pradesh State Financial Corporation (APSFC) was established in 1956 under State Financial Corporation Act.
working capital term loans for existing units and seed capital assistance to smaller projects.APSFC main objective of extending financial assistance for setting up industrial units in Tiny. APSFC offers financial assistance up to Rs. 1956. The term loan assistance from the corporation is available up to Rs. small scale and medium scale sectors and service enterprises. The corporation is also proposing to extend financial assistance in joint financing with SIDBI for bigger projects. For extremely deserving units.500 lakhs per project and if offered through various schemes of assistance to suit to the requirements of the individual enterpreneur. 1st November. 2000 lakhs on case to case basis. The Andhra Pradesh legislative assembly and the Andhra Pradesh high court were also constituted on the same day. APSFC is jointly promoted by IDBI and Government of Andhra Pradesh. APSFC. the Andhra Pradesh State Financial Corporation come into existence with the amalgamation of the rest while Andhra State financial corporation and Hyderabad state financial corporation with the mandate to promote and develop small and medium industries. A GOLD LETTER DAY FOR APSFC Andhra Pradesh State was formed on 1st November. an ISO 9001-2000 Organization. 1956 is thus a gold letter day for Andhra Pradesh State Financial Corporation. offers liberal financial assistance for acquiring fixes assets like Land. 36 . Building and Machinery.
37 . Tourism-hotels. All the projects satisfying the definition of SME sector are eligible for loans irrespective of project cost.4% and IDBI 31. residual complexes etc. 500 Crores. Line of credit for existing SFC assisted units. LENDING NORMS 1.22 crores against an authorized capital of Rs. Financing for industrial activities which include Manufacturing/Processing industries Service sector-information technology. nursing homes. which now stands at Rs. Loan repayment period normally ranges up to 8 years and the moratorium period ranges up to 2 years. 3.92. Financial assistance to industrial and service sector units. 2. The Government of Andhra Pradesh hods 68.CAPITAL STRUCTURE OF APSFC APSFC started with paid up equity capital of Rs. transport of goods and passengers on road etc. Working capital term loans to existing good working units. Commercial complexes.13% equity while the remaining share of 0. restaurants and tourist resorts.29% is held by LIC and individual shareholders.150 Crores in 1956.
Tourism related activities 12. Service oriented activities 10. Agro based industries 5. Export oriented industries 11. Infrastructure development projects 8. GDI relief bonds fixed deposits. Insurance products 15. 38 . Information technology/IT related activities/services 3. 9. Hospitals.THRUST AREAS FOR 2006-2007 1. Pharmaceuticals 6. Apparels/textiles industries 14. Automobile components 7.Bio-technology oriented projects 4.Food Processing industries 2. assistance to practicing doctors. Non-fund based activities viz. nursing homes. Construction activities 13.
To supply promotion and development of tiny. 4. 9. small and medium scale industries and service sector units by extending need bases credit to them. 8. Nurtures enterpreneurship and encourages fast generation credit to them. Channeled a significant share of assistance aroudn 70% to tine. 3.OBJECTIVES OF APSFC 1. To act as a catalyst for generation of employment. Industriliazed backward areas by extending of assistance around 70% of its assistance to industries coming up in noticed backward areas. So far sanctioned 6098 crores for 86384 units in Andhra Pradesh as on 31/3/2006. 7.4895 crores to including interest since inception till 31/3/2006. 2. 4. 6. Generated direct and indirect employment to about 8. 3. Has consistent record of earning operating profit throughout its history. 10. Establish unblemished repayment track record since inception. MILESTONE ACHIEVEMENT OF APSF 1. Recovered Rs. 5.To industrialize the state through balanced regional development and dispersal of industries.57 lakh persons. 39 . Disbursed 4150 crores to 66516 units 70% to tiny/SSS sector as on 31/3/2006. small scale industries. Enjoying 60% of market share in term lending business in Andhra Pradesh. 2. Created total investment of around 14219 crores.
Marketing assistance scheme 11. Scheme for ex service man (SEMFEX) 14. Assistance to tourism related activities 3. Assistance to hotels/motels/restaurants 4. Assistance for setting up industrial estates 6. Working capital scheme for good enterpreneurs/enterprises. 15. Single window scheme of professionals 8.SCHEMES OF APSFC The corporation is operating different schemes of financial assistance. Assistance to civil contractors. 40 . Scheme for assistance to self help groups of women under DWACRA. Scheme for construction of commercial/residential complexes 9. Assistance to hospitals/nursing homes/electro-medical equipments 5. 10. Schemes for textile industry under technology up-gradation fund for SSSI units. Good enterpreneur scheme 2. Seed capital assistance under National Equity Fund Scheme(NEF) 13. Seed capital assistance under Mahila Udam Nidhi scheme(MUN) 12. 16. Scheme for qualified professionals 7. Some of the important schemes are:1.
Line of credit scheme for good enterpreneurs 19. which are in operation atleast for 5 years are eligible for finance on machinery. Corporation is coming out with a strategic alliance with SIDBI for extending joint finance for the loans over Rs. SME infrastructure units. Mere replacements of machinery of solely for expansion are not covered under this scheme. existing tiny. 20. 18. the machinery should have been in use in the recent for a period of at least 5 years. In case of replacement/renovation. tourism. MODERNIZATION SCHEME Under modernization scheme. construciton of roads and bridges under BOT scheme. pharma. units means of tie up with SIDBI and other financial institutions.17. Assistance to practicing doctors. small and medium scale units. Details of some of the important schemes are as under: JOINT FINANCING WITH SIDBI APSFC is actively considering venturing into joint financing to assist the medium and large-scale enterprises for both new and existing. Financial assistance to export oriented industrial service enterprises. service sector units. 500 crores for SSI. 41 . Credit linked capital subsidy scheme for technology up-gradation of SSI units.
the unit should have paid at least 25% of original term loan availed from the corporation. WORKING CAPITAL TERM LOANS Existing profit making units. 42 .e.Financial Assistance for modernization can be considered in the following aspects: Up-gradation of the technical/manufacturing process Export orientation Import substitution Energy saving in the process Anti pollution measures Conservation/substitution of scare raw materials For acquiring DG sets of Standard make. The main proposal is to meet additional working capital requirements / execute specific orders. are eligible for finance under this scheme. banks. The turnover of the unit should be around 400% of the working capital term loan applied by the unit. The unit has to offer collateral property . The unit should have been earning net profit for the last 2 years and cash profit for one year. The overall DER should not be more than 2:1 for working capital term loans of above Rs 500 lakhs. The unit should be regular in making payments to the corporation and other institutions i. which are in operation for a minimum period of 2/3 years. There should not be any accumulated losses in the unit for considering working capital term loans. The net worth should be 100% to 125% of the working capital term loan applied to the corporation.
any tiny. NEF scheme. SSES. Mer replacement of machinery without expansion of capacity is not covered under this scheme. ERS and scheme for export oriented. GES a++. Financial assistance can be considered for expansion of any existing industry under special scheme like MUN scheme. small and medium scale industry. 43 . SES scheme.ASSISTANCE FOR PURCHASE OF EXISTING ASSETS Corporation is extending financial assistance for purchase of existing assets. EXPANSION SCHEME Under expansion scheme program. The Government of India has allotted special fund under SME fund and the Corporation is extending financial assistance under SME fund. The corporation is also extending financial assistance for setting up cinema theaters/acquiring new equipment by the existing cinema theaters at selected centers. Corporation will provide financial assistance for purchase of existing assets with residual life for carrying out permitted industrial activities except for electronic/electro medical equipment/computer unit and other allied units where obsolescence rate is very high. Financial assistance provided under this scheme is for purchase of existing asset and not for change of management of company/concern for carrying out the permitted industrial activity. Units service enterprise in addition to under general loan scheme. which is in operation of at least for 5 years are eligible for finance.
water. SCHEME FOR TOURISM RELATED FACILITIES ASSISTANCE FOR ACQUIRING ELECTRO-MEDICL EQUIPMENT Loan eligiblity @75% on cost of eligible electro medical equipment. Cost of project: Maximum of Rs.. for development of infrastructural facility such as approach roads. For setting up of: -Development of amusement parks -Cultural centers/conventional centers -Travel. cost of stamp duty etc. For acquiring electro-medical and other related equipment REMARKS Loan is considered @ 75% on eligible assets . buildings. drainage. central effluent industrial sheds/multistoried industrial buildings etc. supply system.12 crores. 44 . transport and -Tourism service agencies ASSISTANCE FOR SETTING UP OF INDUSTRIAL ESTATE For such of land. Cost of project not exceeding Rs. cost of land development. 20 crores -Approvals from tourism development agencies. plant and machinery and other fixed assets.FINANCIAL ACTIVITIES/SCHEMES OF APSFC ACTIVITY GENERAL LOANS PURPOSE To meet part of cost of land. power distribution lines.
45 . MAHILA UDYAM New NIDHI SCHEME unit/expansion/modernization/ technology up-gradation. -Loan eligibility 85% -Total DER 2:1 WORKING To meet additional working For working capital term loans CAPITAL TERM capital requirements to execute of above Rs 5 lakhs. diversification. gas tankers.5 lakhs. tippers and payloads for which seed capital assistance is availabel. SCHEME modernization /expansion. not be less than 35% -Collateral security requirement as per norms.15 lakhs Minimum promoter’s contribution is 10% of the project cost. overall LOANS specific orders. modernization. Project cost shall not exceed Rs. Project cost not exceeding Rs 10 lakhs SIDBI seed capital up to 25% of project cost with 1% service charge SUPER ENTERPRENEURS SCHEME For acquiring fixes assets required for expansion. DER not more than 2:1 SEMFEX SCHEME For setting up industries. hotels.SINGLE WINDOW For acquiring fixed assets and -Overall DER not to exceed 2:1 SCHEME to meet short term working -Promoters contribution shall capital requirements. -Minimum limit for sanction in Rs. tourism related activities. Promoters Contribution: Minimum of 10 % of fixed assets and 100% of WC margin. NATIONAL For new units and for existing Project cost: EQUITY FUND projects including outlay on Not exeeding Rs 50 lakhs. part of equipment/other business needs/takeover of loans.
Now it has a network of 25 branches in overall covering all the 23 districts of Andhra Pradesh and one extra branch in Rangareddy and Medak district. the corporation opened 6 one man offices in 6 districts. North block was constructed during 1976 and South block constructed during 1978 in Chirag ali lane. It as ample parking place. Our spanking new head office building i. During 1972-1973. the corporation opened two branches at Vishakapatnam and in Tirupathi. Abids. the location and scope for further expansion will enable the corporation to undertake new activities for the development SME sector.BRANCHES REACH AND OUTREACH The corporation with its head office at Hyderabad in 1956 had only one branch at Vijayawada..e. 46 . In 1975-1976.
DATA PRESENTATION 47 .
the use of the maturity or cash flow mismatches. Therefore. could also become liquid when the market and players are unidirectional. By ensuring a FIs ability to meet its liabilities as then become due. the use of maturity ladder and calculation of cammulative surplus or deficit of funds at selected maturity dates are adopted as a standard tool. as liquidity shortfall in one institution can have repercussion on the entire system. like government securities and other money market instrument. The FIs management should measure not only the liquidity position of FIs on an ongoing basis but also examine how liquidity requirements are likely to evolve under different assumptions. For measuring and managing net funding requirements. The institution of liquidity tanscends individual institutions.MANAGEMENT OF LIQUIDITY RISK AND INTEREST RATE RISK LIQUIDITY RISK Measuring and managing liquidity needs are vital for the effective operations of financial institution. liquidity has to tracked through. liquidity management can reduce the probability of an adverse situation developing. 48 . Experience show that assets commonly considered as liquid.
In case of FIs not holding public deposits. 1934. securities that could be broadly classifiable as ‘mandatory securities’ (under obligation of law) and ‘ non-mandatory securities’. all the investment and in case of 49 .The time buckets are distributed as under: Less than one month Over 1 month to 3 months Over 3 months to 6 months Over 6 months to 12 months Less than or equal to 1 year More than 1 year and up to 3 years More than 3 years and up to 5 years More than 5 years and up to 7 years More than 7 years and up to 10 years More than 10 years Financial Institution holding public deposits are required to invest up to a prescribed percentage (15 % as on date) of their public deposits in approval securities. Thus various FIs including SFCs would be holding in their investment portfolio. There is no such requirement for FIs that are not holding public deposits. FIs are required to invest up to 80 percent of their deposit in the manner prescribed in the RBI directors issued under the act. in terms of the liquid asset requirements of sections 45-IB of the RBI Act. as detailed in an earlier section.
over 1 month to 3 months. “Over 3 months to 6 months” and “over 6 months to 12 months” buckets.. as per residual maturity. Unlisted securities may be valued as per RBIs prudential norms directions. The mandatory securities and listed securities may be marked to market for the purpose of the ALM System. securities without a fixed term of maturity and so on) may be placed in the “more than 10 years” buckets. where as unlisted non-mandatory securities having a fixed term of maturity may be placed in the relevant time bucket. depending upon the defeasance period proposed b Fis. the surplus securities would fall in the category of nonmandatory securities. Unlisted non-mandatory securities (e.g. FIs holding public deposits may place mandatory securities in any time – bucket suitable to them. 50 . equity shares.FIs holding public deposits. A maturity liability is cash outflows while a maturity asset is a cash inflow while determining the likely cash inflows/outflows. The statements 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 listed non-mandatory securities may be placed in any of the “lesss than one month” .
d) Opportunity Risk: A FI can only grow if its customers are also prospering (succeeding) request for funds from important and valuable clients can only be profitably serviced if adequate liquidity is available. where borrowers fails to meet their commitments. besides irregularly in advances which present delay in fulfilling commitments by borrowers. b) Time Risk: Non-receipt of expected inflow of funds eg.Liquidity Problems may be created due to any of the following reasons: a) Funding Risk: Failure to replace net outflow of funds weather due to withdrawal of retail deposits on non-renewal of wholesale deposits. Non-performing assets cut into profitability as well. c) Call Risk: It represents sudden demand for money owing to contingent L become due. the may create huge drain on liquidity. 51 . ALM process if it fails to take NPA problems can not succeed. the growth of non-performing assets also leads to immediate liquidity problem. If contingent liabilities start developing.
Maintenance of adequate liquidity remains sinquonon for banks and other financial institutions. This confidence may be found to be misplaced when liquidity prevails as existing clients at that stage may be in the grip of liquidity cirsis.Confidence to rise. 6.Minimum criteria to remain liquid is the ability both to meet commitments when due and to undertake new transactions when desirable. adding a new dimension to the risk profile of FIs balance sheets having foreign assets and liabilities.Once maturity of assets exceeds those of liabilities there is inevitable liquidity risk. following deregulation. 2. have contributed to increase in the volume of transactions Large cross border flows together with volatility has rendered FIs balance sheet unable to exchange rates 52 . The tolerance levels should be determines keeping all necessary factors in view and further refined with experience gained in liquidity management. FIs may take into accounts all relevant factors based on their asset-liability base. 4. The increased capital flows across free economics. 3. mobilize or roll over the deposits from existing clients.Approaches to control Liquidity 1. To avail of export refinance facility(ERF) and collateralized lending facility(CLF) and the additional collateralized lending facility(ACLF). nature of business future strategy and so on. 5. Currency Risk: Floating exchange rate arrangement has brought in its wake pronounced volatility. FIs should make a number of assumptions according to their Asset – liability profiles. while determining the tolerance levels.
to begin with the traditional gap analysis is considered as a suitable method to measure the interest rate risk. The change in interest reates affects FIs in a larger way. It is the intention of the RBI to move over to modern techniques. The risk from the earnings perspective can be measured as changes in the net interest income (NIT) or net interest margin(NIM). FIs should make a number if assumptions according to their asset liability profiles. The interest rare risk when viewed form thee tow perspectives is known as the “earning perspective” and “economic value perspective” respectively.. by changing its net interest income (NIT). defined as the risk where changes in market interest rates might adversely affects on FIs financial condition. as the economic value of FIs assets. A long term impact of changing interest rates is in FIs market value of Equity (MVE) or net worth.e. These are many analytical techniques for measurement and management of interest rate risk.Interest Rate Risk: Deregulation of interest rates and the operational flexibility given to financial institution in pricing most of the assets and liabilities imply the need for the financial system to hedge the interest rate risk. While determining the tolerance levels. reported profits). The immediate impact of changes in interest rates is on FIs earnings (i. future strategy and son on. 53 . The tolerance levels should be determined keeping all necessary factors in view and furthur refined with experience gained in liquidity management. FIs may take into account all relevant factors based on their asset liability base nature of business. liabilities and off balance sheet positions yet affected due to various variations in market interest rates.
Gap analysis measures mismatch between interest rate sensitive liabilities and rate sensitive assets (including off-balance sheet position) 54 . Interest rate risk gaps in time buckets: Over 1 month to 3 months Over 3 months to 6 months Over 6 months to 12 months Less than or equal to 1 year More than 1 year and up to 3 years More than 3 years and up to 5 years More than 5 years and up to 7 years More than 7 years and up to 10 years More than 10 years The gaps or mismatch risk can be measured by calculation gaps over different time interval. as on a given data. over 1 to 3 months FIs should estimate their short term liquidity profiles on the basis of business projects and other commitments for planning purpose.In order to enable FIs to monitor their shoret-term liquidity on a dynamic basic over tine horizon spanning from less than one month.
The gap a therefore be used as a measure of interest rate sensitive. The gap reports indicate the weather the institution is in a position to benefit from rising interest rates by having a position gap (rsa>rsl) or weather it is in position to benefit from declining interest rates by negative gap (rsl>rsa). 55 . 4. 5. Grouping rate sensitive assets and liabilities and off-balance sheet positions into time bucket according to residual maturity or nest pricing period should regnerate the gap report. 3. The positive gap indicates that is has more RS than RSL where as the negative gap indicates that I has more RSL than RSA. The gap is the difference between the rate sensitive assets (RSA) and rate sensitive liabilities (RSL) for each time bucket. 6. It is contractually pre payable or withdrawn before the state maturities. there is a cash flow. 7. 2. With in the time interval under considerations. Dependent on the RBI changes in interest rate/bank rates. The interest rate resets/reprises contractually during the interval.Asset and Liabilities is normally classified as interest sensitive if:1.
to buy or sell in some manner after the cash flow of an instrument of financial contract. there by creating exposure to unexpected changes in the interest rates. the underlying economic value of a long position in 10 years government bonds hedged by a short position in 5 years government notes could declare sharply if the yield curve steepens. an options provides the holder the right. b) Yield Curve Risk: Re-pricing mismatches can also expose a bank to changes in the slope and shape of 4the yield curve. but not the obligation. financial institutions encounter interest rate risk in several ways. When interest rates change.Sources of Interest Rate Risk: As financial intermediaries. d) Option Risk: An additional and increasingly important source of interest rate risk arises from the option embedded in may FIs assets and liabilities. For instance. c) Basis Risk: Another important source of interest rate risk (commonly referred as basis risk) arises from imperfect correlation in the adjustment of the rates and paid on different instruments with otherwise similar re-pricing characterstics. These can be described as follows: a) Re-Pricing Risk: This risk arises from holding assets and liabilities with different principal amounts. maturity or re-pricing dates. Yield curve risk arises when unanticipated shifts of the yield curve adverse effects on a banks income or underlying economic value. Formally. thee differences can give risk to unexpected changes in the cash flows and earnings spread between assets and liabilities. 56 . even if the position is hedged against parallel movements in the yield curve.
The present framework does not capture the impact of premature closures of deposits and prepayments of loans and advances on the liquidity and interest rate risk profile on Fis. subject to approval from the ALCO borad of directors. A copy of the note approved by the ALCO may be sent to the registered office of the company is located. Which facilities effective control and management of interest 57 . It also helps centralizing interest rate risk at one place. liabilities and off-balance sheet items to changes in market variable and estimate the probabilities of the options. These notes may contain ‘what if scenario’ analysis under various assumed conditions and the contingency plans to face various adverse developments. A scientifically evolved internal transfer pricing model of assigning values on the basis of current markets rates to funds provided and funds used is an important component for effective implementation of the ALM system. that is lending or credit spread.GENERAL The classification of various assets and liabilities into different time – bucket for preparation of gap reports (liquidity and interest rate sensitive) FIs that are better equipped to reasonably estimated the behavioral pattern of various components of assets and liabilities. Fi should therefore evolve a suitable mechanism supported by empirical studies and behavioral analysis to estimate the further behavioral of assets. on the basis of the past data/empirical studies could classify them in the appropriate time-buckets. The magnitude of premature withdrawal of deposits at times of volatility in market interest rate is quite substantial. The transfer price mechanism can enhance the management of margin. The funding or liability spread and mismatch spread.
Interest Rates: APSFC provides competitive rates of interest on its loans and the rate of interest ranges from 10 to13. A well defined transfer pricing system also provides a rational framework for pricing of assets and liabilities. 58 . sector and schemes full particulars may be noted from the printed interest rates sheet.5 % depending upon quantum of loan.rate risk.
ANALYSIS AND INTERPRETATION 59 .
Gap analysis was one of the first methods developed to measure FIs interest rate risk exposure and continues to be widely used by Fis.ANALYSIS AND INTERPRETATION There are four different types of analysis: 1. To evaluate earnings exposure. When this approach is used to asses the interest rate risk of current earnings. Trend Analysis 4. including historical experience. A negative or liability sensitive gap occurs when liabilities exceeds assets (including off-balance sheet positions) in a given time band. It is typically referred to as gap analysis. Ration Analysis 1. This gap can be multiplied by as assume change in interest rate to yield an approximation of the change in the interest rate income that would result from such as interest rate movement.GAP ANALYSIS: Maturity/pre-pricing schedules can be used to generate simple indicators of the interest rate risk sensitivity of both earnings and economic value to changing interest rates. The size of the interest rate movement used in the analysis can be used on a variety of factors. Duration Analysis 3. This 60 . Simulation of potential future interest rate movements and the judgement of bank management. interest rate sensitive liabilities in each time band are subtraced from the corresponding interst rate sensitive asset to produce a repricing gap for that time band. Gap Analysis 2.
gap analysis does not take it account of variation in the characterstics of different position with a time band. it does not take into account any changes in the timing of payments that might occur as a result of changes in the interest rate environment. it has a number of shortcomings. Thus. a positive or assets–sensitive. Gap implies that the FIs net interest rate income could decline as a result of decrease in the levels of the interest rates. potentiality important sources of risk of the current income. for these reasons gap analysis provides only a rough approximation to the actual change in net interest income would result from the chosen change in the pattern of interest rates. In addition. 61 .means that an increase in market interest rates could cause a decline in net interest income. First. it fails to account for differences in the sensitivity of income that may arise form option-related positions. most gap analysis fail to capture variability in non interest revenues and expenses. In particulars all positions with in a given time band are assumed to mature or reprice simultaneously a simplification that is likely to have greater impact on the precision of the estimates as the degree of aggregation with in a time band increases. moreover gap analysis ignore differences in spreads between interest rates that could arise as the level of the market interest rates changes. Conversely. LIMITATIONS OF GAP ANALYSIS: Although gap analysis is a very commonly used approach to assessing interest rate risk exposure. Finally.
relative to the current price of the security.2. modified duration = Macaulay duration/ (1+r). The weights are the present values of each cash flow divided by the current price. 62 . Modified duration is standard duration divided by 1+r. it assumes a linear relationship between percentages changes in value and percentage changes in interest rates / in other words.CURRENT ANALYSIS A maturity/re-pricing schedule can also used to evaluate the effects of changing interest rates on FIs economic value by applying sensitivity weights to each time band. Duration may also be defined as the weighted average of the time until expected cash flows from a security will be receive. In its simples form. Duration give a small change in the level of interest rates. where is the level of market interest rate is elasticity. As such. Typically. such weights are based on estimates of the duration of the assets and liabilities that fall into each time band. as with simple duration. duration measures changes in economic value resulting from a percentage change of interest rates under the simplifying assumptions that changes in value are proportional to changes in the level of interest rates and that the timing of payments is fixed. it reflects the percentage change in the economic value of the instrument for a given percentage change in the economic value of the instrument for a given percentage change in 1+r. where Macaulay duration = cft(t)/(1+r) /cft/(1+r) to the power t Cft = rupee value of cash flow at time t T = number of periods of time until the cash flow payment Y = periodic yield to maturity of the security generating cash flow and K = the number of cash flows.
are • • • • • Current assets/current liabilities Total loans/ total assets Total assets/ total liabilities Total advances/total liabilities Quick ratio. by this. Here in financial institution. The ratios. Because with the ratios we can analyze the liquidity positions of the company by taking the past data and we can interprete the findings.TREND ANALYSIS This is a statistical tool with his we can find out the position of anything in financial institution. The ratios.RATIO ANALYSIS The liquidity ratios are very useful in the liquidity risk management analysis.3. 4. which helps to find out liquidity position of all financial institution. we should also given by the RBI on the bank. by observing the limits and of findings we can analyze as FIs is with in the limits or not. it is possible to know that how that fluctuations in working funds take place in the one year mismatches. 63 . which are used in financial institutions. I did the trend analysis of “cumulative mismatch of last one year as percentage to working funds”.
These buckets are mainly divided in to three types short – term. and this is used to analyze the gaps in between the inflows and outflows of the statement for every fortnight. Value At Risk (VOR): VOR is defined as an estimate of potential loss in position or asset/liability or portfolio of assets/liabilities over a given holding period at a given level of certainity or unexpected happening the probability of suffering a loss. are called as the time buckets. 64 .which bucket the risk. FIs can avoid risks and can earn more profits. BUCKTING: The time columns used in the below statement. The maturity profile is used to measure the future cash flows of banks different buckets. For measuring and managing net funding requirements the use of maturity ladder and calculation of cumulative surplus / deficit of funds at selected maturity data is suggested for adoption by FI. which is used in the ALM process to manage the liquidity risk. This gap raised due to the changes in the values of the assets and liabilities and changes in their interest rates. Allocating the items of inflows and outflows in these column is called as bucketing. by doing the gap analysis.Liquidity and Interest rate analysis: This is the only tool. medium – term and long term. By doing the gap analysis the FIs can know about in .
Over 1 month to 3 months Over 3 months to 6 months Over 6 months to 12 months Less than or equal to 1 year More than 1 year and up to 3 years More than 3 years and up to 5 years More than 5 years and up to 7 years More than 7 years and up to 10 years More than 10 years To analyze the statement a person should have to get grip on the various items of liquidity statement. Various items are covered in the statement under the inflow and outflows. 65 .
Behaviourlization: This is the another model which also used for the statement preparation. For this. 66 . In financial institution. So few models are used to find out under which bucket it will come. moving averages. Behaviorlizaiton means finding out the behavior in the future based in the past data. behaviorlizaiton is used to various item in them cash credit is in item. Based on maturity date and the strting date of the item time period is calculated. Like residua maturity. Residual Maturity: This is the type where the item due date is taken as a base to bucket. statistical tools should be used like regression analysis methods. trend analysis and various methods are used.Methods to bucket: The nature of the each item is different with others. Statements preparation data should also be considered. behaviouralization.
should be slotted as per their residual maturity b) Inter-corporate deposits 67 . reserves. However. non-redeemable or perceptual preference capital. grants. etc Aretiedto specifications.OUTFLOWS 1. Slotted in the time bucket as per 3. As per the residual maturity of the In the ‘over 10 years’ time bucket 4. a)Bonds/debentures with embedded call /put options (including zero-coupon/deep discount bonds) As per the residual period for the earliest exercise date for the embedded option purpose / end use specified. if such gifts.Notes. funds and surplus. b) Preference capital – redeemable / nonperceptual share 2. donations and beneficiations. In the over 10 years time bucket. bonds and debentures. Gifts.A MATURITY PROFILE – LIQUIDITY Head of Accounts Time Bucket Category A.Deposits a) Term deposits from public As per the residual maturity These. grants.Capital Funds a) Equity capital. being institutional/wholesale Deposits.
a these do not involve any cash outflows B.Advances (performing): (a) Bills of exchange and promissory notes discounted As per the residual usance of the underlying In the ‘over 5 year’ time bucket As per the residual maturity “over 5 years” As suitable to the bank As per the residual maturity In 1to 30/31 days time-bucket In 1 to 30/31 days time bucket 68 .Borrowings (a) Term money borrowing (b) From the RBI the government and others 6.(c) Certificates of deposits 5.Remittance in transit 3. receipts from borrowers pending adjustment In the ‘over 8yerrs’ time bucket. shares.Inventments (net of provisions) (a) Mandatory investments (b) Non-mandatory unisted securities (e.INFLOWS 1. etc) (c) Non-mandatory unisted securities having a fixed Term maturity (e) Venture capital units 5.Cash 2.Current liabilities and provisions: (a) Sundry creditors As per the residual maturity As per the residual maturity As per the residual maturity As per the due date or likely timing of cash outflow (b)Expenses payable (other than interest) As per the likely time of cash outflow (c) Advance income received.Balances with banks (in India only) (b) Deposit accounts 4.g.
(b) Loan commitments pending disbursal (outflow) In the respective time buckets as peer the sanctioned disbursement schedule 69 . Other assets (a) Intangible assets and items not representing cash inflows. as per the timing of the cash flows C. (c) Corporate loans/short term loans 6. other receivable. 7. the outstanding amount of guarantees.etc) In the ‘over 5 years’ time-bucket In the ‘over 5 years’ time bucket In respective maturity buckets. as per the timing of the cash flows. the likely developments shouldbe estimated and this amount could be distributed in various time buckets on a judgmental. as stipulated in the original/revised repayment schedule.And rediscounted (b) Term loans (rupee loans only) bills The cash inflows on account of the interest and principal of the loan may be slotted in respective time buckets. Fixed assets (excluding leased assets) 8.CONTINGENT LIABILITIES (a) Letters of credit\guarantees (outflow through development) Based on the past trend analysis of the developments vis-à-vis. Assets on lease As per the residual maturity cashflows from lease transaction may be slotted in respective time buckets as per the timing of the cashflow. Staff loans . (b) Other item (such as accrued income.
bonds and debentures: (a) Floating rate sensitive. repricing in maturity.e. the measure proposed for bringing the gaps within the limit should be shown by a footnote in the relative statement.(c) Lines of credit committed to\by other As per usance of the bills to be received under the lines of credit institutions. reserves and surplus 2. In case these limits are exceeded. Capital.gifts. where outflows exceed inflows) in the 1 to 30/31 days time bucket should not exceed the prudential limit of 15 percent of outflows of each time bucket and the cumulative gap.Note.. grants and beneficiations 3. Interest Rate Sensitivity _____________________________________________________________ Head of Accounts Rate Sensitivity of Time Bucket Liabilities 1. To be placed in respective time buckets. lines of credit committed to/by other institutions (outflow/inflow) D.FINANCING OF GAPS The negative gap (i. up to the one year period. as per the residual maturity of such instruments non-sensitive non-sensitive 70 . should not exceed 15 percent of the cumulative cash out flows of the one year period. as per repricing dates. (b) Fixed rate. reprice on the roll-over/repricing date should be slotted in respect time buckets. including zero coupons sensitive.
5. (ii) Floating rate sensitive. (b)Borrowings from others (i) Fixed rate sensitive.Borrowings: (a) Term-money borrowings sensitive. 4.cash 2. To be slotted as per residual maturity in the relative time bucket. Remittance 3. reprice on the contractual roll-over date be slotted in the respective time buckets. To be placed as per residual maturity. reprice on maturity to be slotted as per the residual maturity. in the respective time buckets. (b) ICDs(Inter-Corporate Deposits) sensitive. in the relative time bucket. reprice on maturity.Deposits (a) Deposits/borrowings (i) Fixed rate sensetive. reprice on maturity.(c) Instruments with embedded options sensitive. in respective buckets ASSETS 1. could reprice on the exercise date of the option. could reprise on maturity or in case of premature withdrawal being permitted (ii) Floating rate sensitive. reprices on maturity. as per the next repricing date.Balances with other banks in India a) In current A/C Non – sensitive Non – sensitive Non – sensitive 71 . To be replaced in the respective time buckets. to the repricing date. particularly in rising interest rate scenario. 6. To be placed as per residual period. reprice on the roll over/repricing date. To be slotted as per residual maturity in the relative time bucket. as per the next exercise date.Repos/bills rediscounted/forex swaps (sell/buy) sensitive.
net of provision made. convertible. promissory discounted and rediscounted Sensitive on maturity. Non . shares of subsidiaries / joint ventures. 72 . To be slotted as per the residual usance of the underlying bills. To be slotted as pre residual maturity. re-price on the next re-pricing date. b) Floating rate securities Sensitive. 5) Advances (performing) a) Bills of exchange. reprices on maturity. venture capital untis. money at call and short notice and other placements Sensitive. the bonds/ debentures valued by applying NPA norms due to non servicing of interest. However. preference shares. c) Equity shares. should be shown.Investmetns a) Fixed income securities Sensitive on maturity.b)In deposits accounts. To be places as residual maturity in respective time buckets. 4.sensitive b)Term loans/corporate loans/short term loans/(rupee loans only) i) Fixed rate i) Floating rate Sensitive on cash flow/maturity Sensitivity only when PLR or risk premium is changed by the banks.To slotted as per residual time to the repricing date.
Assets on lease Cash flows on lease assets are sensitive to change interest rates.Fixed assets (excluding assets on lease) Non sensitive 9. b) Other items (e. accured income.6. staff loans etc.Other assets a) Intangible assets and items not representing cash flows.) Non sensitive Non sensitive 73 . The leased asset cash flows to be slotted in time buckets as per of the cash flows. 8.Non performing loans: a) Sub-standard b) Doubtful and loss To be slotted as indicated at item B-7 7.g.
100.500.246.Short term deposits 6.00 3.47 16190.00 9.Balances with other banks 5.13 1.00 - 15.04 4.00 26.00 242.500.Cash & cheques on hand 2.000.59 5.00 1.00 779.26 11.02 16190.500.00 3.000.595.153.59 22.70 3.42 8801.00 17.82 3.00 4.05 -3358.000.00 242.00 2.102.00 Over 1 to 3 months Over 3 to 6 months Over 6 to 12 months Total Rupee assets 1.Investments 7.746.828.878.00 8.00 13.695.13 9.Andhra Pradesh State Financial Corporation.000.00 Andhra Pradesh State Financial Corporation.00 7.000.220.00 18.104.22.168 8801.44 2.63 -5405.70 3.621.997.09 6.86 .500.Remittances in transit 3.13 49.45 1.92 1.881.00 60.795.94 16153.036.595.55 6.89 2.13 3.39 4.619. Hyderabad Liquidity Risk – Maturity Pattern of Rupee Assets and liabilities Items Less Than 1 month 2006-2007 2.927.594.44 30.255.08 18.500.520.26 11.96 5.000.84 45.00 16.96 5.820.736.41 715.963.00 779.09 10.30.220.63 1.00 2. Hyderabad 74 .00 120.Loans & Advances a)Standard assets b)Substandard assets c)Doubtfull 8)Fixed assets 9)Other assets 10)Interest on std assets Foreign Currency assets Total Assets Rupee Liabilities Share capital Reserves Long term liabilities I)Bonds II)STL III)Refinance-SIDBI/IDBI Interest on borrowings Fixed Deposits Current Liabilities Disbursements Provision for int on CFD Provision for retirement benefits Total Liabilities SURPLUS/DEFICIT Cumulative surplues/deficit 10.47 715.89 53.82 7.00 11.000.298.63 37.52 1.63 1.86 36.935.00 4.00 20.Balances with RBI 4.000.05 5443.530.86 61.
75 2.52 17998.149.00 1.932.436.12 22820.63 1.74 22.214.171.124 7.70 3.74 0 74.60 13.746.00 180.96 5.759.44 5.045.00 0 22.86 More than More than More than 7 More than Toal 3 yeas and 5 yrs and yrs and upto 10 years up up to 5 years to 7 years 10 years 2009-2011 2.187.00 115.95 341.084.244.56 -3945.23 75.04 215 715.47 26766.212.605.67 8563.986.448.09 110.637.163.94 42.927.10 32.67 0 5.600.844.50 12.952.47 10576.96 5.Balances with otherbanks 5.17 9.00 165.15 95.742.25 54.04 4.1 Rupee assets 1.595.220.60 2084.0 3.55 75 .38 212.795.286.000.659.08 9.34 0 106.555.00 1050 22.Loans & Advances a)Standard assets b)Substandard assets c)Doubtfull 8)Fixed assets 9)Other assets 10)Interest on std assets Foreign Currency assets Total Assets Rupee Liabilities Share capital Reserves Long term liabilities I)Bonds II)STL III)Refinance-SIDBI/IDBI Interest on borrowings Fixed Deposits Current Liabilities Disbursements Provision for int on CFD Provision for retirement benefits Total Liabilities SURPLUS/DEFICIT Cumulative surplues/deficit 120.01 16190.00 36.Remittances in transit 3.01 15555.01 36.209.25 108.75 212.00 4.685.10) -8212.153.52 16190.00 54.00 0 7.014.Short term deposits 6.00 4.85 19.00 1.Balances with RBI 4.746.59 22.563.075.000.268.180.00 61.736.82 287.55 1.40 2.565.120.26 11.00 52.882.00 9.62 (8.00 1.689.00 0 18.03 6244.138.244.5 172.63 1.518.Liquidity Risk – Maturity Pattern of Rupee/Foreign Currency Assets and liabilities Items Less than More than 1 or equal to year & upto 1 year 3 years 2006-2007 2007-09 2.11 14456.41 715.38 4.471.75 3541.Cash & cheques on hand 2.43 11.46 0.70 3.59 0 22.74 18.00 110.12 180.52 4.00 2.45 2.316.180.89 -14257.00 4.00 180.09 - 45.78 24.99 15.595.139.00 0 34.974.13 7.26 11.99 2014.258.497.50 40.00 242.10 21.78 -2319.00 242.Investments 7.45 180.485.00 256.00 10.651.08 7.72 356.997.228.58 6.00 4.971.
00 17.96 52.92 3791.795.86 - 3791.70 3.84 -3358.86 58.39 2.26 11.180.00 16.86 715.878.795.82 7.000.000.500.935.59 242.13 1.4 4 5.55 0 16190.86 120.05 18.Remittances in transit 3.09 45.963.736.00 30.86 12.100.500.220.09 45.59 242.00 52.86 30.89 1.94 - 6.00 - 0 0 0 0 0 11.500.13 2.00 16.00 6.Loans & Advances a)Standard assets b)Substandard assets c)Doubtfull 9)Other assets 10)Interest on std assets Foreign Currency assets Total Assets Rupee Liabilities Share capital Reserves Borrowings I)Bonds II)STL III)Refinance SIDBI/IDBI IV)Interest on borrowings Undisbursed liabilities Fixed Deposits Current Liabilities Provision for int on CFD Total Liabilities SURPLUS/DEFICIT Cumulative surplues/deficit 5.96 2.00 11.Investments 7.Balances with RBI 4.000.47 Maturity Pattern on Interest Rast Risk Sensitive Rupee Assets and liabilities 76 .298.00 20.153.00 10.26 11.00 3.000.44 4.00 1.746.882.00 - Insensitiv Grand Total e asset/ liability 00 2180.102.997.619.153.59 - 4.Balances with other banks 5.695.595.00 4.58 5009.997.63 1.89 53.746.255.00 26.520.882.00 22.000.000.00 4.500.92 12398.00 3.44 5.00 1.00 13.246.Cash & cheques on hand 2.00 4.00 36.736.00 9.000.63 10.530.000.135.63 1595.00 49.82 1.1 16153.820.500.42 5009.00 779.000.220.82 7.00 4.00 30.Maturity Pattern of Interest Rate risk sensitive Rupee Assets and liabilities Items Less than Over 1 to over 3 to 6 months Over 6 to 12 months Total one month 3 months 1 year 2006-2007 Rupee assets 1.828.00 8.Short term deposits 6.61 7.04 3.220.00 242.00 22.594.53 -5405.05 1651.036.135.00 58.92 3.830.63 -3754.09 6.05 12398.55 0 0 0 715 0 0 0 0 0 0 0 0 715.00 36.000.58 - - 2.7 3.9 4 779.00 - 9.
78 >6months&upto12month 16153.00 > 1 month&upto 3months -3358.Impact of 1 % interest rate on mid April 2006 Less than 1 month 5009.98 >3months&upto 6months 5405.63 X 7.01 33.58 X 11.01 -27.01 40.18 Interpretation on liquidity statement: - 77 .02 X 3 months/12 X 0.5 months/12 X 0.01 48.38 TOTAL 94.05 X 10 months/12 X 0.5months/12 X 0.
10 The total outflows over 1 year period = 45736.45 16190.67 8563.55 61927.47 35634.05 Cumulative inflows 15621.82 176698.92 209685.15 208709. The total outflows over 10 years period = 180371.08 37.17 231144.92 234686.88 133741.10 45736.42 Cumulative mismatch 8801.55 6244.15 204146.94 lakhs The total inflows over 1 year period = 58135.77 228900.47 16190.47 26766.11 lakhsl The total inflows over 10 years period = 172759.13 5443.10 35671.52 8212.41 123854.55 22141.56 22820.01 Bucket Periods Less than one month Over 1 month to 3 months Over 3 months to 6 months Over 6 months to 12 months Less than or equal to 1 year More than 1 year & up to 3 years More than 3 years & up to 5 years More than 5 years & up to 7 years More than 7years & up to 10 years More than 10 years Cumulative outflows 6820.93 226708.88 91473.42 16698.89 170674.Using the gap analysis method is prepared the liquidity statement under the guidance of manager and is found the following information.86 lakhs 78 .
47 45736.53 -3754.47 35634.927.42 16698.01 32.00 13.Bucket period Cumulative outflows Cumulative inflows 11830.530.94 Less than or equal to 1 year 91473.93 LESS THAN ONE MONTH OVER 1 TO 3 MONTHS OVER 3 TO 6 MONTHS OVER 6 TO 12 MONTHS LESS THAN OR EQUAL TO 1 YEAR MORE THAN 1 YEAR AND UPTO 3 YEARS MORE THAN 3 YEARS AND UPTO 5 YEARS MORE THAN 5 YEARS AND UPTO 7 YEARS 15621.41 52.72 24797.520.00 58135.85 19.00 18350.40 79 .844.55 6.255.58 1651.214.00 26.00 31880.86 Cumulative mismatch 5009.88 116271.986.86 61.01 Less than 1 month Over 1 to 3 months Over 3 to 5 months Over 6 to 12 months 6820.10 12399.
63 10.42 9.102. LESS THAN ONE MONTH OVER 1 TO 3 MONTHS OVER 3 TO 6 MONTHS OVER 6 TO 12 MONTHS LESS THAN OR EQUAL TO 1 YEAR MORE THAN 1 YEAR AND UPTO 3 YEARS MORE THAN 3 YEARS AND UPTO 5 YEARS MORE THAN 5 YEARS AND UPTO 7 YEARS 6820.94 42.244.471.878.268.736.MORE THAN 7 YEARS AND UPTO 10 YEARS MORE THAN 10 YEARS 2.932.01 36.74 33.75 3.541.52 80 .05 18.935.50 TOTAL ASSETS 2% 1% 8% 14% 7%3% 6% 11% 23% 25% 1 2 3 4 5 6 7 8 9 10 INTERPRETATION: From the above graph it is clear that the percentage of total assets is more in less than or equal to one year period.84 45.
998.170.405.MORE THAN 7 YEARS AND UPTO 10 YEARS MORE THAN 10 YEARS 4.09 (3.78 17.563.576.358.02 16.89) (14.00) 16.945.47 10.12 TOTAL LIABILITIES 8% 2% 15% 3%4% 8% 4% 21% 19% 1 2 3 4 5 6 7 8 9 10 16% INTERPRETATION: From the above graph it was depicted that total liabilities are less between more than seven years and up to ten years. LESS THAN ONE MONTH OVER 1 TO 3 MONTHS OVER 3 TO 6 MONTHS OVER 6 TO 12 MONTHS LESS THAN OR EQUAL TO 1 YEAR MORE THAN 1 YEAR AND UPTO 3 YEARS MORE THAN 3 YEARS AND UPTO 5 YEARS MORE THAN 5 YEARS AND UPTO 7 8801.153.13 (3.257.05) (5.10) 81 .
YEARS MORE THAN 7 YEARS AND UPTO 10 YEARS MORE THAN 10 YEARS (2.00) (28. LESS THAN ONE MONTH OVER 1 TO 3 MONTHS OVER 3 TO 6 MONTHS OVER 6 TO 12 MONTHS LESS THAN OR EQUAL TO 1 YEAR MORE THAN 1 YEAR AND UPTO 3 YEARS MORE THAN 3 YEARS AND UPTO 5 YEARS 129 (33.00 35.456.00) 159.319.00 25.00) 82 .03) (14.60) MISMATCH OF ASSETS AND LIABILITIES 9% 15% 2% 15% 4% 11% 1 2 3 4 5 6 17% 7 8 9 10 4% 6% 17% INTERPRETATION: From the above graph liquidity risk statement analysis is mismatch of assets and liabilities are same in period between over six months to twelve months and less than or equals to one year.00 (10.
878.935.102.00 9.94 83 .05 18.84 45.736.820.MORE THAN 5 YEARS AND UPTO 7 YEARS MORE THAN 7 YEARS AND UPTO 10 YEARS MORE THAN 10 YEARS (43.00) (50.00) PERCENTAGE OF LIQUIDIT GAP 14% 8% 7% 2% 4% 6% 1 2 3 4 5 6 22% 6% 5% 26% 7 8 9 10 INTERPRETATION: From the above graph it is clear that percentage of liquidity gap is more in over six months to twelve months and less in the period of more than 3 years and up to 5 years. LESS THAN ONE MONTH OVER 1 TO 3 MONTHS OVER 3 TO 6 MONTHS OVER 6 TO 12 MONTHS LESS THAN OR EQUAL TO 1 YEAR 6.00) (80.63 10.
LESS THAN ONE MONTH OVER 1 TO 3 MONTHS OVER 3 TO 6 MONTHS OVER 6 TO 12 MONTHS LESS THAN OR EQUAL TO 1 YEAR 11.830.520.530.42 lakhs.86 58.00 26.86 84 .00 6.00 13.135.255.TOTAL LIABILITIES 0%7% 11% 50% 21% 11% 1 2 3 4 5 6 7 8 9 10 INTERPRETATION: From the above graph it was depicted that the interest rate risk sensitive of total liabilities less in the Lavendar region with amount of 6820.
0% 10% 6% 49% 12%
INTERPRETATION: From the above graph it is clear that interest risk sensitive of total assets are more in less than or equal to 10 years with amount of 58135.86 lakhs.
LESS THAN ONE MONTH OVER 1 TO 3 MONTHS OVER 3 TO 6 MONTHS OVER 6 TO 12 MONTHS LESS THAN OR EQUAL TO 1 YEAR
5,009.58 (3,358.05) (5,405.63) 16,153.02 12,398.92
INTEREST RATE MISMATCH
0% 12% 29% 8% 13%
38% 1 2 3 4 5 6 7 8 9 10
INTERPRETATION: he above graph is indicating the mismatch of interest rate risk is negative in over 1 to 3 months period and over 3 to 6 months period.
LESS THAN ONE MONTH OVER 1 TO 3 MONTHS OVER 3 TO 6 MONTHS OVER 6 TO 12 MONTHS LESS THAN OR EQUAL TO 1 YEAR
73.00 (33.00) (28.00) 159.00 27.00
PERCENTAGE OF INTEREST GAP
10% 50% 9%
INTERPRETATION: From the above graph it is clear that the percentage of interest gap is more in over 6 to 12 months and less negative in over 3 to 6 months period.
Relationships between interest rate changes and net interest income: -
Interest rate change
Impact on nii
which are affected by future economic. - Limits should be established for each currency in which financial institutions has transaction.duration gap method: Seeks to measure the adverse impact of interest rate changes in Market value of the equity or 88 . political and regulatory developments. A total limit for the aggregate of all currencies should be set. Then risks to earnings increase as gaps lengthen in maturity because of uncertain interest rate risk levels.POSITIVE Increases Positive POSITIVE Decreases Negative NEGATIVE Increases Negative NEGATIVE Decreases Positive - To set limits on the maximum cumulative outflows and inflows. The limit of inflows is needed to control positive gapping. Measuring the interest rate risk . - Sub limits should be imposed on long term gaps (over 1 year).
The table given shows the relationships: Nature of duration gap Positive duration gap Direction of interest rate movement Rise Fall Impact on FIs net worth Decrease Increase Increase Decrease No change Negative duration gap Rise Fall Zero duration gap Rise or fall The resultant or positive duration gap is managed with the help of derivatives products like forward tare agreements. 89 .- The economic value of portfolio equity The economic the gap in the duration between assets and liabilities. interest rate. Duration gaps in the difference between duration of assets and effective duration of liabilities - Effective duration of liabilities is raised by duration of liabilities multiplied by owns to assets ratio. swaps etc.
ALM is a strategic approach of managing the balance sheet dynamics in such a way that the net earnings are maximized and it ensure the level and risk ness with the risk return objectives of banks/Fls.SUMMARY AND CONCLUSIONS SUMMARY AND CONCLUSIONS 1. 90 .
2. The compositions of assets and liabilities largely decides the solvency. 5. The reduction of liquidity risk by lengthen the maturity of liabilities implies less profitability because ling tern funds to be more expansive than short term funds. The appropriate balance between liquidity and profitability is determined by top managers assessment of the banks capacity to bear these risk. 4. 3. liquidity and profitability of a corporate entity. It also implies fewer earnings opportunities from negative gapping. the components of liabilities determines the cost of funds and it broadly with both sides of balance sheet. 91 ..
FINDINGS FINDINGS RISKS 92 .
The statistical tools. 5. 93 . 4.1. 2. The information comes from the head office regarding forex risk. 8. After the deregulation only this risk analysis came into the main picture. ALM is the process. The changes in the interest rate always has a effect in the risk management. Interest rate risk can influence more the business than the liquidity risk in market. 3. 9. which discussed in ALCO. Dealing with liquidity risk is easier than dealing with the interest rate risk. which used for the liquidity risk are easier than the interest rate risk tools. It is found that in APSFC the liquidity risk will not arise as far as RBI chest having with it. To deal with the market risk ALM works. which is using manly to liquidity risk and interest rate risk. 7. 6.
SUGGESTIONS AND RECOMMENDATIONS SUGGESTIONS AND RECOMMENDATIONS 1. There are no RBI Stipulations regarding off balance sheet items 94 .
Maturity patterns stipulations by RBI are not framed properly. 4. To renewal or unveiled loans. The methods of date acquisition for managing the liquidity risk management and interest rate risk management should improved.2. 6. The F1 should have package which is required to organized the bucket format which can be directly sent to zonal office. Better analysis required day by day date of the branches and more methods should be applied. 5. 95 . premature closured these should be done on each branch basis. 3.
ANNEXURE ALM STRUCTURE 96 .
ALM GENERAL ASSET/LIABILITY MANAGEMENT SPECIFIC LIABILITY MANAGEMENT ASSET MANAGEMENT FINANCIAL BALANCE SHEET MANAGEMENT INCOME AND EXPENDITURE MANAGEMENT 97 .
GLOSSARY GLOSSARY 98 .
ALM ALCO IRR ERF CLF ACLF NIT MVE NIM RSA RSL VAR RBI SFC IDB SIDBI APSFC ASSET LIABILITIES MANAGEMENT ASSET LIABILITIES MOMMITTEE INTEREST RATE RISK EXPORT RERINANCE FACILITY COLLATERALISED LENDING FACILITY ADDITIONAL COLLATERALISED LENDING FACILITY NET INTEREST INCOME MARKET VALUE OF EQUITY NET INTEREST MARGIN RATE DENSITIVE ASSETS RATE SENSITIVE LIABILITIES VALUE AT RISK RESERVE BANK OF INDIA STATE FINANCIAL CORPORATION INDUSTRIAL DEVELOPMENT BANK OF INDIA SMALL INDUSTRIES DEVELOPMENT BAMD OF INDIA ANDHRA PRADESH STATE FINANCIAL CORPORATION 99 .
BIBLIOGRAPHY 100 .
KHURANA RBI GUIDELINES APSFC ANNUAL REPORTS WWW.APSFC.K.COM WWW.KHAN ASSET LIABILITY MANAGEMENT S.ALMIS.BIBLIOGRAPHY INDIAN FINANCIAL SYSTEM M.COM 101 .Y.
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