COMMERCIAL BANKS

– LIABILITY
MANAGEMENT
Commercial banks
 Financial Intermediary
 Business banking
 Investment banking
 Retail banking
Functions

 i) Primary functions:
a) accepting deposits and
b) granting loans and advances
 ii) Secondary functions:
a) Issuing letters of credit, travellers cheques,
b) safe custody of valuables,
c) facilities of foreign exchange,
d) Issuing demand drafts,
e) Transferring money from one place to another
List of commercial banks

 Axis Bank
 State Bank of India
 Bank of Rajasthan
 Catholic Syrian Bank
 City Union Bank
 Development Credit Bank
 Dhanalakshmi Bank
 Federal Bank
 HDFC Bank
 ICICI Bank
 IndusInd Bank
 Dena Bank
 IDBI Bank Ltd.
Liability management
 Depositors money
 Funds secured from other institutions

When Banks manage these above mentioned points,

it is called liability management of bank.
Components of a
Bank Balance sheet

Liabilities Assets
1. Capital 1. Cash & Balances with
2. Reserve & Surplus RBI
3. Deposits 2. Bal. With Banks &
4. Borrowings Money at Call and Short
Notices
5. Other Liabilities
3. Investments
4. Advances
5. Fixed Assets
6. Other Assets
 Components of Liabilities
1. Capital:

Capital represents owner’s

contribution/stake in the bank.
 It serves as a cushion for depositors and
creditors.
 It is considered to be a long term sources for the
bank.
Components of Liabilities

2. Reserves & Surplus

Components under this head includes:
I. Statutory Reserves
II. Capital Reserves
III. Investment Fluctuation Reserve
IV. Revenue and Other Reserves
V. Balance in Profit and Loss Account
Components of Liabilities
3. Deposits
This is the main source of bank’s funds. The
deposits are classified as deposits payable on
‘demand’ and ‘time’. They are reflected in balance
sheet as under:
I. Demand Deposits
II. Savings Bank Deposits
III. Term Deposits
Components of Liabilities
4. Borrowings
(Borrowings include Refinance / Borrowings
from RBI, Inter-bank & other institutions)
I. Borrowings in India
i) Reserve Bank of India
ii) Other Banks
iii) Other Institutions & Agencies
II. Borrowings outside India
Components of Liabilities
5. Other Liabilities & Provisions
It is grouped as under:

I. Bills Payable
II. Inter Office Adjustments (Net)
III. Interest Accrued
IV. Unsecured Redeemable Bonds
(Subordinated Debt for Tier-II Capital)
V. Others(including provisions)
How Commercial Banks
Create Credit or Money
Deposits
 The liability owed by the bank to its depositor.

 How commercial banks deal with deposits?

Capital

How commercial banks

acquire capital ?
Success of ALM in banks:
Pre - conditions

 Awareness for ALM in the Bank staff at all levels–

supportive Management & dedicated Teams.
 Method of reporting data from Branches/ other
Departments. (Strong MIS).
 Computerization-Full computerization, networking.
 Insight into the banking operations, economic
forecasting, computerization, investment, credit.
 Linking up ALM to future Risk Management
Strategies.
Interest Rate Risk Management
 Interest Rate risk is the exposure of a bank’s
financial conditions to adverse movements of
interest rates.
 Though this is normal part of banking business,
excessive interest rate risk can pose a significant
threat to a bank’s earnings and capital base.
 Changes in interest rates also affect the underlying
value of the bank’s assets, liabilities and off-
balance-sheet item.
Interest Rate Risk
 Interest rate risk refers to volatility in Net Interest
Income (NII) or variations in Net Interest
Margin(NIM).
 Therefore, an effective risk management process
that maintains interest rate risk within prudent
levels is essential to safety and soundness of the
bank.
Sources of Interest Rate Risk
Interest rate risk mainly arises from:
 Gap Risk
 Basis Risk
 Net Interest Position Risk
 Embedded Option Risk
 Yield Curve Risk
 Price Risk
 Reinvestment Risk
Measurement of Interest Rate Risk
 Gap Analysis- Simple maturity/re-pricing
Schedules can be used to generate simple indicators
of interest rate risk sensitivity of both earnings and
economic value to changing interest rates.
- If a negative gap occurs (RSA<RSL) in given time
band, an increase in market interest rates could
cause a decline in NIM.
- conversely, a positive gap (RSA>RSL) in a given
time band, an decrease in market interest rates could
cause a decline in NIM.
Measurement of Interest Rate Risk
 Duration Analysis: Duration is a measure of the
percentage change in the economic value of a
position that occur given a small change in level of
interest rate.
 Thank you
 Vatsal Jariwala, 31
 Shailesh Kalantry, 35
 Nitin Sarawagi, 53
 Nikhil Adesara, 1
 Punit Kamdar, 36
 Apar Rustagi, 52
 Sujit Daga, 10