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Evolution of the Concept of ALM Concept of ALM, Objective of ALM Functions & process of ALM, Utility of ALM R BI guide lines
. etc. The L P G policy followed by the Indian Govt in 1990 . resulting in enhancement of risks . these rates fluctuate on demand & supply position leading to severe competition between the Banks to win the customers. market risk was near zero in view of stable interest rates . This kind of change in Economic scenario of the country was cause for Asset Liability mismatch. threw open the Indian economy to market forces. ignoring the safety & interest spread. equity price . In open economy . Fex rates . This lead to tough competition in the area of Interest Rates . commodity price etc.Evolution of the Concept of ALM In regulated economy. new products .
Concept of ALM It is essentially to matching Assets & Liabilities in terms of Interest rate & maturity to derive maximum yield on the profile. .
-To control volatility in all target accounts. -To ensure an acceptable balance profitability & growth rate .Objective of ALM The following Objectives: -To control the volatility of net Interest Income & net economic value of a bank. -To control liquidity risk .
The ALM supports the management with the information regarding competitive pressures .Functions of ALM To advise the management about the market risk profile of the Bank & the impact of other business decision would have on future risk profile . .demand & supply factors in relevant portfolios.
Consists of. -Enhancement of long term profitability for given level of risks. mix . -Identification of Risks . -Management of risks .Process of ALM Planning . yield & duration of funds for the purpose of maximising yield minimum financial risks.Directing & Controlling the flow .costs. -Measurement & determination of risks.level .
Utility of ALM To plan for risks well ahead of the time before they cause damage to the profitability . To fix prices on the products in very competitive way with maximum profit & acceptable risks. To ensure adequate liquidity in the system & managing assets &Liabilities effectively Role of ALM is vital in case of exposure in Forex to reduce the exchange risks The benefits of ALM overweigh the cost in managing the ALCO .
net of provision . should be considered as withdrawable on Demand & shown under 1. .namely core & volatile deposits. N P A . while sub standard assets be shown in 1-2 years buckets. while core be placed in 1. The Term deposits will fit in to respective maturity bracket. Volatile deposits should be classified in 1-14 days bracket .R BI guide lines 20-25% of the demand deposits including savings . should be shown under 2-5 years.2years bracket.14 days time bucket . Banks should study the behavioral patterns of deposit on the basis of historical trends &classify these in to two portions .
. the amount should be distributed to the appropriate bucket referring to the repricing date. Excess balance over required CRR /SLR should be shown under 1-14 day bracket The statutory CRR balance may be distributed under various time buckets corresponding to the D T L placed in their bucket with a time lag of 14 days. Core should be shown in 1-2 years bracket . while volatile should be shown as outflow of inflow. For borrowing on floating rate . Banks should study the behavioural & seasonal patter of drawal in credit & classify the outflow as core & volatile.
Banks can finance the gap from call money market . Banks must adopt a more granular approach to measurement of liquidity risk by splitting the first time bucket of 1-14 in to three buckets of next day .repos deployment of foreign currency resources after conversion in to rupees . Negative gap refers to mismatch in interest sensitive liabilities exceed interest sensitive assets.8-14 & 15 -28 days should not exceed 5%. 8-14 days . bill rediscounting . The net cumulative negative mismatches during the next day . 2-7 days . 15% & 20 % resp Banks are required to report these data to RBI on Fortnightly basis . 10%. 2-7 days . Banks are not permitted to have negative gap in their out flows for the next day.
Liquidity Management Management of non interest expenses. Tax Management. .Maximising Market value of bank equity Asset Management Liability Management Management of off ±balance sheet activities . Interest Rate Margin or spread Management . Credit Risk management .
Earnings L=Liquidity S= sensitivity to Market risk .CAMELS Ratings C= Capital adequacy A=Asset Quality . M= management Quality .
Expenses ratio=Total expenses / Avg Total assets Spread=Avg rate of Interest earned on Loans & advances ± Avg rate of Interest paid on deposit Non interest Income/Avg Total Assets Non Interest Expenses /Avg Total assets .Profitability Ratios ROE= Net Income / Avg Total Equity RO A =Net income /Avg Total assets.
Business Per Branch In terms of Operating Costs=Operating expenses /Total Assets In terms of Profitability : Net Profit/ Capital + deposits In terms of soundness: Capital Adequacy Asset Quality Spread .Other parameters In terms of Productivity . Business per employees. Profit per employee.