ASSET-LIABILITY

MANAGEMENT SYSTEM

Presented by
c.s.balakrishnan
 WHY ALM?
Globalisation of financial markets.
Deregulation of Interest Rates.
Multi-currency Balance Sheet.
Prevalance of Basis Risk and Embedded Option
Risk.
Integration of Markets – Money Market,
Forex Market, Government Securities Market.
Narrowing NII / NIM.
 ALM
• ALM is the process involving decision
making about the composition of assets and
liabilities including off balance sheet items of
the bank / FI and conducting the risk
assessment.
 ASSET LIABILITY
MANAGEMENT
• Various risks affecting banks / FIs
– Credit, Market, Operational
– Deregulation & competition
• Need to manage risk to protect NIM
• Need for proper risk mgt policy
• Liquidity planning, interest rate risk management
– ALM guidelines issued for banks in Feb 1999 and for
FIs in Dec 1999
 Concept of ALM
ALM is concerned with strategic management
of Balance Sheet by giving due weightage to
market risks viz. Liquidity Risk, Interest Rate
Risk & Currency Risk.
ALM function involves planning, directing,
controlling the flow, level, mix, cost and yield of
funds of the bank
ALM builds up Assets and Liabilities of the
bank based on the concept of Net Interest
Income (NII) or Net Interest Margin (NIM).
 WHAT IS ALM
• ALM is concerned with strategic Balance
Sheet management involving all market risks
• It involves in managing both sides of balance
sheet to minimise market risk
 ALM Objectives

Liquidity Risk Management.

Interest Rate Risk Management.
Currency Risks Management.
Profit Planning and Growth
Projection.
 LIQUIDITY RISK
• What is liquidity risk?
– Liquidity risk refers to the risk that the institution might not be able to
generate sufficient cash flow to meet its financial obligations

EFFECTS OF LIQUIDITY CRUNCH

• Risk to bank’s earnings
• Reputational risk
• Contagion effect
• Liquidity crisis can lead to runs on institutions
– Bank / FI failures affect economy
 LIQUIDITY RISK
• Factors affecting liquidity risk
– Over extension of credit
– High level of NPAs
– Poor asset quality
– Mismanagement
– Non recognition of embedded option risk
– Reliance on a few wholesale depositors
– Large undrawn loan commitments
– Lack of appropriate liquidity policy & contingent plan
 LIQUIDITY RISK
• Tackling the liquidity problem
– A sound liquidity policy
– Funding strategies
– Contingency funding strategies
– Liquidity planning under alternate scenarios
– Measurement of mismatches through gap statements
 LIQUIDITY RISK
• METHODOLOGIES FOR MEASUREMENT
– Liquidity index
– Peer group comparison
– Gap between sources and uses
– Maturity ladder construction
 LIQUIDITY RISK
• RBI GUIDELINES
– Structural liquidity statement
– Dynamic liquidity statement
– Board / ALCO
• ALM Information System
• ALM organisation
• ALM process (Risk Mgt process)
– Mismatch limits in the gap statement
– Assumptions / Behavioural study
 ALM SYSTEM
• Liquidity Gap report – fortnightly
– 1-14 d & 15 – 28 d – tolerance limit
– Fix cumulative gap limits
• IRS statements – monthly
– Fix prudential limits
• To compile currency wise liquidity and IRS
reports
 MATURITY PROFILE-
LIQUIDITY
• Outflows
– Capital, Reserves & Surplus
– Deposits
– Borrowings and bonds
– Other liabilities
 MATURITY PROFILE-
LIQUIDITY
• Inflows
– Cash
– Balance with RBI
– Balance with other banks
– Investments
– Advances
 IRR - Relevance in India

• Deregulation of interest rates brought:

– Volatility in rates - call, PLR, Govt. securities Yield
Curve

– Competition - free pricing of assets and liabilities

– Pressure on NII / NIM, MVE

 RSA, RSL

• RSA (Rate Sensitive Assets) – Assets whose

value is dependent on current interest rate
• RSL (Rate Sensitive Liabilities) – Liabilities
whose value is dependent on current interest
rate
 Gap/Mismatch Risk

• It arises on account of holding rate sensitive assets

and liabilities with different principal amounts,
maturity/repricing rates
• Even though maturity dates are same, if there is a
mismatch between amount of assets and liabilities it
causes interest rate risk and affects NII
 IMPACT ON NII
Gap Interest rate Impact on NII
Change
Positive Increases Positive

Positive Decreases Negative

Negative Increases Negative

Negative Decreases Positive

 ALM
ORGANISATION
Three-tier organizational set-up for ALM
Implementation :
1. Management Committee of the Board
(MC)
 Oversees the ALM implementation by ALCO
 Reviews the ALM implementation periodically
 Funding strategies for correcting the
mismatches in ALM Statements.
ASSET-LIABILITY
MANAGEMENT COMMITTEE
(ALCO) - ALCO headed by E.D.
- GM (T) – (Nodal
Officer).
- GMs : Central Accounts,
P&D, Credit, Risk
Management International
Division are the
members.
- GM (IT) & AGM (Economist)
are the invitees for
ALCO meetings.
 FUNCTIONS OF
ALCO
Implementation of ALM System
- Monitor the risk levels of the Bank.
- Articulate the Interest Rate Position & fix
interest rate on Deposits & Advances.
- Fix differential rate of interest rate on Bulk
Deposits.
- Facilitating and coordinating to put in place the
ALM System in the Bank.
 ALM STATEMENTS TO
BE SUBMITTED TO
1. Statement of Structural Liquidity
RBI
(Annexure - I) [DSB Statement No.8] - Rupee
2. Statement of Interest Rate Sensitivity
(Annexure - II) [DSB Statement No. 9] - Rupee
3. Statement of Dynamic Liquidity (Annexure - III)
4. Statement of Maturity and Position (MAP)
(Annexure - IV) [DSB Statement No.10 ] - Forex
5. Statement of Sensitivity to Interest Rate (SIR)
(Annexure - V)[DSB Statement No.11] - Forex
Tools for ALM System

Gap Analysis
Modified Gap Analysis
Duration Gap Analysis
Value at Risk (VaR)
Simulation
 LIQUIDITY RISKS
• Broadly of three types:
• Funding Risk: Due to withdrawal/non-renewal of deposits
• Time Risk: Non-receipt of inflows on account of assets(loan
installments)
• Call Risk: contingent liabilities & new demand for loans
• Dynamic liquidity is done to measure the liquidity risks
 STATEMENT OF
STRUCTURAL LIQUIDITY
• Placed all cash inflows and outflows in the maturity
ladder as per residual maturity
• Maturing Liability: cash outflow
• Maturing Assets : Cash Inflow
• Classified in to 8 time buckets
• Mismatches in the first two buckets not to exceed 20%
of outflows
• Banks can fix higher tolerance level for other maturity
buckets.
 ADDRESSING TO
MISMATCHES
• Mismatches can be positive or negative
• Positive Mismatch: M.A.>M.L. and vice-versa for
Negative Mismatch
• In case of +ve mismatch, excess liquidity can be
deployed in money market instruments, creating
new assets & investment swaps etc.
• For –ve mismatch,it can be financed from market
borrowings(call/Term),Bills rediscounting,repos &
deployment of foreign currency converted into
rupee.
 DYNAMIC LIQUIDITY
• Prepared every fortnight for ALCO
• Projection is given for the next three months
• Tools for assessing the day to day liquidity
needs of the bank
 STATEMENT OF INTEREST
RATE SENSITIVITY
• Generated by grouping RSA,RSL & OFF-
Balance sheet items in to various (8)time
buckets.
• Positive gap : Beneficial in case of rising
interest rate
• Negative gap: Beneficial in case of declining
interest rate
CALCULATION OF NII/NIM
• NII: INT.EARNED-INT. EXPENDED
• INT. EARNED: ADV+INVEST+BALANCE
WITH RBI
• INT. EXPENDED:DEPOSITS+INT. ON
RBI BORROWINGS
• NIM= (NII/TOT.EARNING ASSET)X100
 ALM & BALANACE SHEET
LIABILITY ASSET
(OUTFLOWS) (INFLOWS)
1 Capital 1 Cash & Balances with RBI

2 Reserves & Surplus 2 Balances with Banks & Money

at call/Short-notice lendings.

3 Deposits 3 Investments.
4 Borrowings 4 Advances
5 Other Liabilities & 5 Fixed Assets.
Provisions
6 Contingent Liabilities 6 Other Assets.
 SUCCESS OF ALM IN
BANKS :
PRE - CONDITIONS
1. Awareness for ALM in the Bank staff at all levels–
supportive Management & dedicated Teams.
2. Method of reporting data from Branches/ other
Departments. (Strong MIS).
3. Computerization - Full computerization, networking.
4. Insight into the banking operations, economic
forecasting, computerization, investment, credit.
5. Linking up ALM to future Risk Management
Strategies.
THANK YOU