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ASSET LIABILITY

MANAGEMENT

INTRODUCTI
ON
Asset and liability management(often abbreviated ALM) is the
practice of managingrisksthat arise due to mismatches between
theassetsandliabilities.
Initially pioneered by Anglo-Saxon financial institutions during
the 1970s
In India it was introduced on 1st April 1999

EVOLUTI
ON
Demand
and
Savings
Deposits

1940s

1980s
Volatility in
Interest
rates

Focus on
both sides
of Balance
sheet

2000s

SCOPE OF
ALM
Liquidity Risk
Interest rates Risk
Currency risk management
Funding and Capital Management
Profit Planning and growth

The

parameters

for

stabilizing

system are:
1. Net Interest Income (NII)
2. Net Interest Margin (NIM)
3. Economic Equity Ratio

ALM

ALM Information Systems


Usage of Real Time information system to gather the
information about the maturity and behavior of loans and
advances made by all other branches of a bank
ABC Approach :
analysing the behaviour of asset and liability products in
the top branches as they account for significant business
then making rational assumptions about the way in which
assets and liabilities would behave in other branches
The data and assumptions can then be refined over time
as the bank management gain experience
The spread of computerisation will also help banks in
accessing data.

ALM Organization
The board should have overall responsibilities and should set
the limit for liquidity, interest rate, foreign exchange and equity
price risk
The Asset - Liability Committee (ALCO)
ALCO, consisting of the bank's senior management (including
CEO) should be responsible for ensuring adherence to the
limits set by the Board
Is responsible for balance sheet planning from risk - return
perspective including the strategic management of interest
rate and liquidity risks
The role of ALCO includes product pricing for both deposits
and advances, desired maturity profile of the incremental
assets and liabilities,
It will have to develop a view on future direction of interest
rate movements and decide on a funding mix between fixed
vs floating rate funds, wholesale vs retail deposits, money
market vs capital market funding, domestic vs foreign

ALM PROCESS
Liquidity Risk Management
Liquidity Tracking
Banks liquidity management is the process of generating funds
to meet contractual or relationship obligations at reasonable
prices at all times
Liquidity Management is the ability of bank to ensure that its
liabilities are met as they become due
Liquidity positions of bank should be measured on an ongoing
basis
A standard tool for measuring and managing net funding
requirements, is the use of maturity ladder and calculation of
cumulative surplus or deficit of funds as selected maturity dates
is adopted

Time Buckets
i.

1 to 14 days

ii. 15 to 28 days
iii. 29 days and up to 3 months
iv. Over 3 months and up to 6 months
v. Over 6 months and up to 1 year
vi. Over 1 year and up to 3 years
vii. Over 3 years and up to 5 years
viii. Over 5 years

CRR/SLR Requirement
Every financial institute is required to maintain a
Cash Reserve Ratio (CRR) and Statutory Liquidity
reserve (SLR)
Banks are given freedom to place the mandatory
securities in any time buckets as suitable for them.
Time Bucket Mismatch
the main focus should be on the short-term
mismatches viz., 1-90 days.
The cumulative mismatches (running total) across
all time buckets shall be monitored in accordance
with internal prudential limits set by ALCO from
time to time.
The mismatches during 1-90 days, in normal
course, should not exceed 15% of the cash
outflows in this time buckets.

Statement of Structural Liquidity


Is prepared by placing all cash inflows and
outflows in the maturity ladder according to the
expected timing of cashflows.
A maturing liability will be a cash outflow while
a maturing asset will be a cash inflow.
The ALCO must ensure that the tolerance levels
are determined keeping all necessary factors in
view like asset-liability base, nature of
business, future strategies, etc

Gap Analysis
Difference between Rate-sensitive
Assets (RSA) and Rate-sensitive
Liabilities (RSL) for each timebucket.
RSA > RSL indicates a Positive Gap.
RSA < RSL indicates a Negative Gap.
RSA = RSL indicates Zero Gap

Gap Analysis
Indicates whether the company is in
a position to benefit from rising
interest rates by having a positive
gap or from declining interest rates
by having a negative gap.
Thus, the Gap Report can be used as
a measure of Interest-rate Sensitivity.

Duration Gap Analysis


Measures the sensitivity of a banks
current year net worth to changes in
interest rates.
Requires determining the duration for
assets and liabilities, items whose
market value will change as interest
rates change.
% Change = - Duration x change in
int. rates
( 1 + int. rate)

Duration Gap Analysis


Lets assume the Duration is 2.7,
Interest rates rise from 10% to 11%.
Therefore,
% change in asset value = -2.7 x .01
(1+.01)
= -2.5%

Duration Gap Analysis


Assume duration for Liabilities is 1.03
% change in liability = -1.03 x .01
=0.9%
(1+.01)
Net Worth:
% change in NW = % change in assets - %
change
in liabilities
= -2.5% - (-0.9%)
= -1.6%

THANK
YOU

Components of a Bank Balance


Sheet
Liabilities

Assets

1.
2.
3.
4.
5.

1. Cash & Balances


with RBI
2. Bal. With Banks &
Money at Call and
Short Notices
3. Investments
4. Advances
5. Fixed Assets
6.
Other Assets

Capital
Reserve & Surplus
Deposits
Borrowings
Other Liabilities