Asset Liability Management

(ALM)
N.Gopal
Deputy General Manager & MoF
Jan 10, 2022 RBI, CAB Pune 1
 WHY ALM ?
• Profitability
• Liquidity
• Income - Spread
• Impact on Economic Value
• Managing mismatch in maturities

Monday, January 10, 2022 2

 ALM- What is It
• Risks in banking- Credit risk, Market risk, Liquidity,
Interest rate risk, Operational risk……….
• Process of managing risks that arise due to Mismatches
between Assets and Liabilities
• ALM focuses on Managing liquidity risk and Interest rate
risk
• A technique/tool to keep the mismatches at manageable
levels, increase earnings, mitigate interest rate risks,
maintain comfortable level of liquidity

Jan 10, 2022 RBI, CAB Pune 3

 Why ALM
• Banks are in the business of Maturity and
Asset Transformation
Capital
1 year deposits Cash
at I year corporate
6.25% Composite loan at 8% bullet.
6 months Liabilities 3 year short loan
deposits at 9% fixed
5.75% Cash Credit 11%
floating
90 day deposit 10 year term loan
at 3.75% Rs. 800 crore floating at 10%
G-Sec 7.15% 2020
Short term T bills
Borrowings at Retail loans at
Composite 12%
4.25%
Assets Building
Long term
deposits 5 yrs Motor Vehicles
9.50%
Jan 10, 2022 RBI, CAB Pune 4
3 year loan at
 Importance of ALM
• Globalization- i.e. integration of Indian banking to the World
banking system,
• Alternative avenues to the investors, savers, etc
• Market Risk- interest rate risk, basis risk,
• Narrowing Spreads In the present day
• Need to increase NII banking, ALM is
essential for the very
• Volatility survival of a bank. It
• Product Innovations & Complexities should be no longer
looked upon as a
• Regulatory Environment regulatory compulsion
– Basel committee on Banking supervision-
– The First Capital Accord, The second capital accord
Till the early 1990s RBI did the actual commercial banking
business and commercial banks were mere executors of what RBI
decided. The need for ALM was not felt by the banks.
Jan 10, 2022 RBI, CAB Pune 5
 Phases in ALM
 1940-1950- Abundance of low cost funds with the
banks-
 ALM was mostly Asset management- finding
avenues to deploy funds efficiently
 1960-1980- Availability of low cost funds declined
– ALM shifted focus to Liability management
 1980 onwards- Volatility in interest rates, alternative
avenues to bank deposits etc
– ALM focus on Asset and Liability management
– The present day form of ALM started

Jan 10, 2022 RBI, CAB Pune 6

 How does it work
• Banks manage the risk of Asset liability mismatch by matching the
assets and liabilities according to the maturity pattern or matching the
duration,
– Asset Liability Mismatch?- When the financial terms and
conditions of Assets and Liabilities are different
• Maturity Mismatch- tenure, duration
ALM does not eliminate
• Quantum Mismatch- volume risk, but provides
• Currency Mismatch- different currencies approaches, strategies
• Interest rate- floating vs Fixed which makes such risk
acceptable
– Challenges
• Choosing the right mix of assets to match the liabilities
• Perfect match impossible in reality
– Achievable
• “Controlled Mismatch”- mix of short term and long term
liabilities- mix of short term assets and long term assets-
through efficient - ALM
Jan 10, 2022 RBI, CAB Pune 7
 Asset Liability
• E.g. XYZ Co-operative bank Ltd:
Liabilities Rs. in Cr. Assets Rs. in Cr.
Deposits (1 year) 100.00 Long term 100.00
FD, interest on loan- 5 years-
maturity 3.00% Rating of
Borrower AAA
@ 3.20%
• Can the bank be happy ?- it has earned a spread of 0.20% ?
• At the end of the first year let us say the interest rates go up to
6.00%- What happens?
• The two risks here:
– Mismatch of Assets and Liabilities
– Erosion in the market value of the asset- interest rate risk
– Look at this
• 100(1.032)5 = Rs.92.72 crore
• (1.060)4

Jan 10, 2022 RBI, CAB Pune 8

 Asset-Liability impact on capital
• The problem is not merely related to value of falling assets
or rising liabilities
• It is depletion of capital due to narrowing of margin
( spread)
• Asset liability risk is a highly leveraged form of risk in a
bank’s balance sheet
• A small change in the composition of assets and liabilities
translates into a large change in the capital.

ALM is a continuous rearrangement of both assets and liabilities to

provide adequate liquidity, reasonable profitability and minimize
Jan 10, 2022 RBI, CAB Pune 9
interest rate risk
 Absence of ALM
 Liquidity Mismatch  Liquidity Risk
 Liquidity Risk  May lead to liquidation
 Pricing Mismatch  Interest Rate Risk
 Interest Rate Risk  Affect profitability
 Decline in profitability  Erosion of Capital
 Erosion of Capital  Down grading/closure

• ALM Strategies help to

 Manage Liquidity
 Minimize Interest Rate Risk
 Increase the NII and NIM
Jan 10, 2022 RBI, CAB Pune 10
 Ultimate Objective of ALM
1. Net Interest Income (NII)– Major Objective
2. Net Interest Margin (NIM)-Major Objective
3. Mitigating Liquidity Risk- Major objective
4. Maintaining Net-worth-Major objective
5. Effective Asset Liability Management
 volume, mix, maturity, rate sensitivity, quality and
liquidity of assets and liabilities-Other Objective

Jan 10, 2022 RBI, CAB Pune 11

Jan 10, 2022 RBI, CAB Pune 12
 ALM on Financial performance

Jan 10, 2022 RBI, CAB Pune 13

 ALM and associated risks

• Market Risk: Adverse impact on the asset

portfolio due movement in market interest rates
• Liquidity Risk- Inability to honour liabilities,
inability to take on additional assets, inability to
exploit opportunities.
• Interest rate Risk:- Adverse impact on the
earnings and assets due interest rate movements.

Jan 10, 2022 RBI, CAB Pune 14

 What do we do
• You know there is a mismatch –What next ?
• Measure it, understand it, and manage it.
• How will you measure this mismatch and manage it
• Stock Approach- Static approach
• Decide on certain important Ratios
• Flow approach- dynamic approach- reference to a time
horizon….. (dissect assets and liabilities as per
maturity over a time horizon)
– Arrange all the inflows and outflows into some time
buckets over a period of time
– Compute the gap between outflows and inflows

Jan 10, 2022 RBI, CAB Pune 15

 Stock Approach
• Using some threshold or benchmark ratios
• Monitoring these ratios continuously
• Disposing of assets or acquiring assets
• Retiring liabilities or acquiring fresh
liabilities

Jan 10, 2022 RBI, CAB Pune 16

 Liquid Assets to Total Deposits
• Liquid Assets to Total Deposits
– This ratio indicates extent of liquidity
maintained by a bank for meeting the demand
made by the depositors-Sometimes taken as a
measure of bank liquidity-20-22%
• Liquid Assets to Short Term liabilities
– Determines the ability of the bank to meet its
immediate liquidity needs
• Core Assets to Core Liabilities
– Determines the long term liquidity of the bank
• Interbank borrowings to total loans
01/10/22 RBI CAB Pune 17
 Loans to Deposits- Assets
• Loans to Deposits
– Loans to deposits ratio indicates the degree to
which the bank has already used up its available
resources to accommodate the credit needs of
the customers
– A high loan deposit ratio indicates that a bank
will have comparatively low liquidity
• Loans to Assets
– This ratio indicates the percentage of illiquid
assets to total assets
– A rise in this ratio would indicate lower
01/10/22
liquidity RBI CAB Pune 18
 Flow Approach
• Profiling all the liabilities and Assets into
time horizons
• Working out the inflows and outflows in the
given time horizon
• Comparing the Gaps between inflow and
outflow

Jan 10, 2022 RBI, CAB Pune 19

 Time bands- buckets
Further granularity introduced for Scheduled
Banks (Commercial and UCBs)
Short term bucket divided into Next day, 2-7
days and 8 to 28 days

Far term or
Long term
buckets
Medium Term buckets
Short term buckets

Over 1 Over 3Y Beyond 5

Over
15- 29-3M 3M-6M Y-3 Y -5 Y Years
1-14D 6M-1 Y
28D

Jan 10, 2022 RBI, CAB Pune 20

 Structural set up for ALM
• ALM Policy
• ALM hierarchy- ALCO, ALM support dept
• Measurement
• Managing.

Jan 10, 2022 RBI, CAB Pune 21

 ALM Pillars
• Three Pillars
– ALM Information System
• MIS- comprehensive, analytical
• Information-Accuracy, Availability, Adequacy, Integrity
– ALM Organization
• Structure and Responsibility
• Top management oversight and involvement
– ALM Process
• Setting up Risk Parameters
• Risk Identification
• Risk Measurement
• Risk Management
• Policies, procedures, prudential limits, audit, reporting
and review
Jan 10, 2022 RBI, CAB Pune 22
 Pillar I
– ALM Information System
MIS- comprehensive, analytical
Information-Accuracy, Availability, Adequacy, Integrity
Robust back up and archiving of information
Efficient use of available information in decision process
Information is the key- quick gathering, analyzing,
adopting, fine tuning
Emphasis on
 ALM framework built on sound methodology with necessary
information system back-up
 ALM to be supported by management philosophy and clearly
states risk policies and procedures / prudential limits
 Important to have availability of timely, adequate and accurate
information
Jan 10, 2022 RBI, CAB Pune 23
 ALM Information cont…
 UCBs that do not have the requisite database or information
system could start by
– Analyzing behavior of asset and liability products in sample
branches that account for significant business (60-70 per cent)
– Based on this make rational assumption for the other
branches
 Challenge ahead
• Profile of UCBs,
• Customer profile- adopting a uniform ALM system difficult
• Level of automation,
• Skill sets

UCBs have limited area of operations and hence it would be easier

Jan 10, 2022 for them to make such assumptions
RBI, CAB Pune and better access to data 24
 Pillar II

Balance
sheet
planning,
liquidity risk
management
Implementation of
policies, strategic
planning,
reviewing reports,
setting interest
SLS, DLS, IRS, rates etc
Simulations, Risk monitoring,
Forecasts, reports, pricing, deciding on
reviews
Jan 10, 2022 RBI, CAB Pune mix of assets25
and
 ALM Organization
 ALCO
• Size and composition dependent on size and business of UCB
• CEO or Secretary to be head of the ALCO
• Chief of Investment/Treasury, Credit, Planning, Head of IT etc to
be in the committee
• Sub-committees if required for better focus.
• It is the backbone of efficient Liquidity and Interest rate risk
Management
• Top management to demonstrate its commitment in managing
liquidity risk, interest rate risk, optimizing resources, maximizing
profits, increasing spread etc through its involvement in ALCO.

The short point here is that Top Management

involvement, commitment, oversight etc is
absolutely essential for a sound ALM
Jan 10, 2022 RBI, CAB Pune 26
 Pillar 3 and Scope of ALM

In each of these areas setting Generally the Prime Focus

up risk parameter, risk of ALM would be in the key
identification, risk areas of Liquidity Risk
measurement and risk Management, Interest Rate
management would be the Risk Management and
ALM process involved Pricing

Jan 10, 2022

UCBs, generally, are not exposed to forex risk
RBI, CAB Pune 27
 ALM Process- Approach
• Fundamental Approach
– Long Term Liquidity
• Technical Approach
– Short Term Liquidity
• One supplements the other

Jan 10, 2022 RBI, CAB Pune 28

 FUNDAMENTAL APPROACH

• Eliminate long-term liquidity risk

– Adjusting maturities of long term assets/ liabilities
– Asset Management
– Liability Management
• Asset Management (Application of Funds)
– Maintain cash or near-cash balances
• Primary Reserves
– Cash balance with RBI and other banks
• Secondary Reserves
– Near-cash balances

Jan 10, 2022 RBI, CAB Pune 29

 FUNDAMENTAL APPROACH ...2
• Asset Management (Deployment of Funds)
– Liabilities are not volatile
– Liabilities are inflexible
– Flexible Assets
• Liability Management (Sources of Funds)
– Borrow when you need
– Asset are long term
– Inflexible Assets
– Flexible liabilities

Jan 10, 2022 RBI, CAB Pune 30

 TECHNICAL APPROACH
• Basically targets short run liquidity
• Working Funds Approach
– Recall features of working funds
• Cash Flows Approach
– Cash flows arising from operational
transactions.
– Monitor cash flow position continuously
– Bank should know its cash flow position

Jan 10, 2022 RBI, CAB Pune 31

 TECHNICAL APPROACH
 Working Funds
– Funds with which the bank operates
• Owned Funds
• Deposits
• Float Funds

– Based on maturity- Tracking cash flows

• Volatile [100% liquidity maintenance]
– Current A/c deposits, ST deposits from corporate high net
worth clients, float funds, deposits maturing in 30 days
• Vulnerable [Less than 100% liquidity maintenance]
– Deposits likely to be withdrawn
• Stable [zero to very low level of liquidity]

Jan 10, 2022 RBI, CAB Pune 32

 TECHNICAL APPROACH …
 Cash Flows Approach
– Cash flows over the planning horizon
– Actual (Structural) cash flows
– Projected (Dynamic) cash flows
• Cash flow forecasts
• Forecasting costs money
– A bank having large branch network
• Decide periodicity of forecasts

Jan 10, 2022 RBI, CAB Pune 33

 TECHNICAL APPROACH
Example
• Working Funds Approach

Amt. Rs. Liquidity Liquid Asset

WF Category
crore Level level
Volatile 1500 100% 1500
Vulnerable 2000 60% 1200
Stable 3500 5% 175
Total 6000 2875

Jan 10, 2022 RBI, CAB Pune 34

 TECHNICAL APPROACH …
Month Period Inflows Outflo Gap Cum.
mn. w Gap
April 1 81 62 +19 +19
May 2 74 78 -4 +15
June 3 88 80 +8 +23
July 4 76 88 -12 +11
August 5 65 72 -7 +4
September 6 79 70 +9 +13

Jan 10, 2022 RBI, CAB Pune 35

 RBI Guidelines
On ALM
ALCO- ALM Policy

Jan 10, 2022 RBI, CAB Pune 37

 RBI guidelines on ALM- Sch.UCBs
 Working Group to frame ALM guidelines for UCBs
 Senior executives of Urban Co-operative banks
 Senior executives Reserve Bank
 Rationale and the intricacies explained in a two day workshop
in Feb and March 2002.
 First guideline issued on April 15, 2002 Scheduled UCBs
required to put in place an effective ALM System, by 30 June
2002.
 Banks to set up ALCO to implement ALM
 Initially coverage of at least 60% of their liabilities and assets.
 Remaining 40% may be based on estimates.
 Target to cover 100 per cent of business by April 1, 2003.
 On gaining experience, banks to switch over to more
sophisticated techniques like Duration Gap Analysis,
Simulation and Value at Risk for interest rate risk
management.
Jan 10, 2022 RBI, CAB Pune 38
 RBI guidelines on ALM- Sch.UCBs cont..
• Guidelines on ALM amendments September
17, 2008
– Scheduled UCBs SLS brought on par with
Commercial banks
– Granular time buckets next day, 2-7 days etc
– Negative mismatches in the three time buckets
not to exceed 5%, 15% and 20%
– Effective from January 1, 2009.

Jan 10, 2022 RBI, CAB Pune 39

 RBI guidelines on ALM cont..
 All Tier II UCBs other than Scheduled
Considering the level of Mechanization and
improved MIS
 ALM guidelines issued on September 17, 2008
 Initially coverage of Assets and Liabilities 60%
 Remaining 40% based on estimates
 100% coverage of Assets by April 1, 2010.

Jan 10, 2022 RBI, CAB Pune 40

 RBI guidelines Tier I UCBs-non scheduled
 All Tier I UCBs – considering the level MIS and automation
 Guidelines on Basic Liquidity Risk Management issued on
September 17, 2008.
 Banks advised to put up returns on liquidity as on last reporting
Friday of March /June/September/December within one month to
the Board.
 First such statement as on the last reporting Friday of December
2008.
 Banks to designate and authorize one or two senior official/s who
would be responsible for the correct compilation and timely
submission of these returns and who would be fully responsible for
the information furnished therein.
 Difference between Tier II and Tier I bank guidelines
Tier I banks only basic Liquidity Risk Management guidelines
Tier II banks ALM guidelines- i.e. Tier II banks to prepare IRS also

Jan 10, 2022 RBI, CAB Pune 41

 RBI guidelines- Returns to RBI-OSS
 Returns to be submitted in paper form
 Guideline on reporting dated December 30, 2009
• Non Scheduled UCBs -Tier II
– Statement of Structural Liquidity and Interest Rate
Sensitivity as at the end of March / June / September /
December and submit to the Regional Office of RBI
within a month from the end of the quarter.
• Non Scheduled UCBs - Tier I
– Statement of Structural Liquidity as at the end of
March / June / September / December and submit to
the Regional Office of RBI within a month from the end
of the quarter

Jan 10, 2022 RBI, CAB Pune 42

 Implications of RBI guidelines
• UCBs to have necessary structure in place for ALM
• Manage liquidity Risk and Interest Rate risk dynamically
• Capture data on Assets and Liabilities
• Have robust MIS in place
• Prepare periodical statements to manage liquidity and
interest rate risks and submit to RBI
• Structural Liquidity Statement (SLS)(fortnightly)
• Interest Rate Sensitivity Statement (IRS)(n.a. to Tier I
banks) (last reporting Friday of each month)
• Dynamic Liquidity Statement (DLS) (weekly-
reporting Friday)
• Reports to be placed before the Board and ALCO as
per directions (Tier I banks to the Board)
Jan 10, 2022 RBI, CAB Pune 43
 ALM-RBI GUIDELINES

• Certain Terms
– Residual Maturity

– Time buckets/Maturity Ladder

Jan 10, 2022 RBI, CAB Pune 44

 ALM-RBI GUIDELINES
Above 5 y
Maturity Ladder
1y–3y 3y–5y

3 m – 6m 6m–1y

28 D – 3 m
15 D – 28 D

1-14 D

Jan 10, 2022 RBI, CAB Pune 45

 ALM-RBI GUIDELINES …
 How to fix the ladders?
 General Principle:
 Based on residual maturity
 Where there is a possibility that a liability will lead to a
cash outflow before residual maturity and the bank has
a reasonably accurate system of determining the likely
time of such cash flow based on past behavior, then
bucket corresponding to such timing.
 First two buckets not to have more than 20% negative
gap (1-14 days & 15-28 days) (outflows should not be
more than inflows by 20%)
 20% is the regulatory tolerance limit.

Jan 10, 2022 RBI, CAB Pune 46

 Prudential Limits
• The Gap/Outflow ratio should not exceed
20% in 1-14 and 14-28 day band
• Higher limit with RBI sanction
• Structural liquidity statement/IRS Statement
– Quarterly to ALCO/Top Management
– Monthly w.e.f. 1.4.2003
• Dynamic Liquidity
– Weekly submission to ALCO/Board

Jan 10, 2022 RBI, CAB Pune 47

 Maturity profile of Liabilities
Heads of Account
A. Outflows
1.Capital, Reserves and
Surplus
2. Demand Deposits
(Current & Savings)
3. Term Deposits
4. CDs
5. Other Liabilities & Prov.
i. Bills payable
ii. Branch Adjustments
iii. Provisions other than for
loan loss and dep. On INV.
iv. Other liabilities
6. Export Refinance –
Jan 10, 2022
Availed
(Contd.)
Classification into time bands
Over 5 year band
Volatile and Core Deposits. Savings (10%) and Current (15%) are
withdrawable on demand generally and hence volatile. Volatile portion in 1-
14 days and rest in over 1-3 years time band.
It is only a benchmark if the system is better developed can classify based
on behavioral instead of contractual maturity
Respective residual time bands (remaining period to maturity from the date
Appropriate time bands can be given based on behavioral instead of
contractual maturity. However, wholesale deposits (Deposits over Rs.
15 lakh should be shown in respective residual time band)
Respective Residual Time Bands
1-14 days time band (because its outflow is highly uncertain (volatile)
Net credit balance in 1-14 days time band (volatile)
Respective time bands depending on purpose
Items not representing cash payables (Guarantees fees received in advance
etc.) may be placed in over 5 years time band
Respective Time bands of underlying assets
RBI, CAB Pune 48
 Maturity Profile of Assets (Contd.)

Heads of Account Classification into time bands

B. Inflows

1. Cash 1-14days time band (Any time it may flow in)

2. Balance with RBI / PSU Excess balance over required CRR / SLR under 1-14 days band.
banks / SCBs and DCCBs etc. The statutory balances distributed in different time bands
corresponding to the maturity profile of DTL with 28 days time lag
3.Balances with other banks

i. Current Account Non-withdrawable portion on stipulation of minimum balance in 1-

3 years band and remaining balance in 1-14 days band.
ii. Money at Call & Short Notice Generally in 1-14 days bucket
iii. Term Deposits, Tier II Bonds
and other placements Respective residual maturity bands

4. Investments (net of provisions

Approved Securities Respective Residual time bands except amount required to be

reinvested for maintaining SLR (SLR in time buckets- DTL)
PSU Bonds, CDs and CPs, Units of UTI Residual maturity. Investment classified as NPAs in 3-5 years band
(Close ended) etc. (substandard) and over 5 years (doubtful)

Equities of All India FIs etc. MFs Listed 1-14 days (with 50% haircut) Others Over 5years. MF 1-14

Securities in trading books 1-14, 15-28 and 29-90 days time bands corresponding to
defeasance period
Jan 10, 2022 RBI, CAB Pune 49
 Maturity Profile of Assets (Contd.)

5. Advances Standard
i. Bills purchased/discount. Respective Residual Maturity time bands
ii. Cash Credit, OD/TOD DL/WC Behavioral Study, seasonality, availments. Core portion 1-3 years
Volatile portion in 1-14 days time band.
iii. Term Loans Based on receipt of installments respective time bands
6. NPAs
i. Substandard 3-5 years band
ii. Doubtful and Loss Over 5 years band
7. Fixed Assets Over 5 years band
8. Other Assets
i. Branch Adjustments Net debit balance in 1-14 days band. Intangible assets and assets
not representing cash receivables in 5 years time band
ii. Leased Assets Interim cash flows under residual maturity time bands

9.Contingent liabilities - Under residual maturity time bands within 12 months based on
i. Unavailed portion of Cash behavioral and seasonal patterns. Banks have to undertake a study
of availments based on past trends and extrapolate the drawings.
Credit / Overdraft / Demand
Loan component of working
capital
ii. Export Refinance – Unavailed
(inflow) 1-14 days band

LC devolvement/Guarantee Outflow Based on past history

Repo etc. Based on respective residual time bands
Interest
Jan 10,Payable
2022 Respective Time
RBI, CAB Band
Pune 50
 Maturity Profile of Assets and
Liabilities Cont….

Notes:
i. Liability on account event cash flows
 Shortfall in CRR/SLR balance on reporting Fridays
 Wage Settlements, Capital Expenditure, Compensations etc to
shown under respective time buckets based on known facts.
ii. All overdue liabilities to be placed in 1-14 days bucket
iii. Overdue interest and installments on advances &
investments
 Overdue for less than 1 month 3-6 months bucket
 More than one month but not NPA or NPI 6-12 months

Jan 10, 2022 RBI, CAB Pune 51

 Maturity Profile Cont…
• Financing the Gap:
• RBI stipulation: Negative mismatch not to exceed
20% in the 1-14 and 14-28 day time buckets
• What to do ?
– The bank needs indicate as to how it proposes to
bring the mismatch within tolerance level with a
definite time frame
• How to do it?
– Gap can be financed from market borrowings,
(call/term) Sale of some investments, Repos
and, liquidating of some term deposits placed
with other banks.
Jan 10, 2022 RBI, CAB Pune 52
 Trading Book
• Maintained distinctly from those required for
complying with Statutory Reserve
Requirements
• Subject to preconditions
– Composition and volume clearly defined
– Maximum maturity / Duration of the portfolio
restricted
– Holding period not exceeding 90 days
– Cut Loss prescribed
– Marked to market on a weekly basis

Jan 10, 2022 RBI, CAB Pune 53

 Dynamic Liquidity Gap Analysis
• Tracking cash flow on a short term time
horizon- changes on account of fresh
business are interpolated in the projections

• RBI has asked banks to monitor short term

liquidity on a dynamic basis over time
horizon spanning from 1-90 days

Jan 10, 2022 RBI, CAB Pune 54

 Short-Term Dynamic Liquidity
Statement
• Main focus on short term mismatches
– 1-14days
– 15-28 days
– 29-90 days

Jan 10, 2022 RBI, CAB Pune 55

 Dynamic Liquidity Analysis
(Amount Rs. Crore)

OUTFLOWS 1-90 days

Net increase in loans and advances 950

Net increase in investments 275

TOTAL OUTFLOWS 1225

INFLOWS

Net cash position 50

Net increase in deposits(less CRR) 619

Refinance 60

Total Inflows 729

Mismatch(Inflows-Outflows) (-)496

Mismatch as a % of Total Outflows (-)40.49%

Jan 10, 2022 RBI, CAB Pune 56

 ALM Policy
• Starting point
 A well documented policy based on sound
principles and reasoning
 Cogent, dynamic and contemporary
• Dependent on level of sophistication,
banking products and services offered
– Banks offering only basic intermediation –
consideration sufficient liquidity day to day-
resources for short term liquidity
– Banks offering market savvy products to have
well documented and dynamic ALM policy
Jan 10, 2022 RBI, CAB Pune 58
 Typical ALM policy
1. Goal
– Maximize shareholder value, enhance
profitability, augment capital, serve
customer/member needs, protect against
liquidity and interest rate risk
– These goals within the framework of
documented loan, investment and risk
management policies.

Jan 10, 2022 RBI, CAB Pune 59

 ALM policy cont..
2. Responsibility-Organization
 Who would formulate and take overall
responsibility
 Who would implement, analyze and report
 How frequently the policy would be reviewed
 How frequently the ALCO/Board etc meet and
review the liquidity position
 What reports would be generated
 How would they be interpreted

Jan 10, 2022 RBI, CAB Pune 60

 ALM policy cont…
3. Monitoring
 Threshold ratios
 Flow analysis
 Triggers
 Review and Reporting
 Contingency funding plans

Jan 10, 2022 RBI, CAB Pune 61

 ALM Policy cont…
4. Specific guidelines
 Define minimum achievable goals such as
 Will never land in a liquidity shortage situation
 Will always meet the regulatory liquidity mandates
 Will never have negative liquidity mismatch in the
short term
 Will never have negative net interest spread for more
than 3 months
 Will constantly monitor critical ratios such as Core
Deposit Ratio, Liquid Assets to Total Assets Ratio etc

Jan 10, 2022 RBI, CAB Pune 62

 ALM Policy
5. Managing Liquidity Gaps
 Resources to bridge gaps
 Time frame to narrow gaps
 Alternative avenues in a crisis

Jan 10, 2022 RBI, CAB Pune 63

 Thank You

Jan 10, 2022 RBI, CAB Pune 76