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K.Eswar

ASSET-LIABILITYMANAGEMENT

Presented byK.Eswar


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ALM &

BANKSBanks are exposed to credit and market risks in view ofasset-liability transformation in the back drop ofliberalization of Indian financial markets.

Banking is not about avoiding risk but managing it.

Strategic management in a deregulated environmentcovering spreads, profitability and long term viability.

Risks should be identified, measured and managed.

Inter-relationship between various risks should beunderstood.

Need for sharper assessment and efficacy of liquiditymanagement.

Need for comprehensive ALM.


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ALM Objectives

Liquidity Risk Management.

Interest Rate Risk Management.

Currency Risks Management.

Profit Planning and GrowthProjection.


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RBI DIRECTIVES

Issued draft guidelines on 10thSept98.

Final guidelines issued on 10thFeb99 for

implementation of ALM w.e.f. 01.04.99.

To begin with 60% of asset &liabilitieswill be covered gradually covering 100%.

Initially Gap Analysis to be applied in the

first stage of implementation.

Disclosure to the B/S on the maturitypattern of deposits / borrowings / advances

and investments.

In Oct 2007 amendments to ALM function

issued . Splitting the first time bucket.


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ALM STATEMENTS TO BE

SUBMITTED ToRBI1. Statement of Structural Liquidity (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


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LIQUIDITY RISKS

Broadly of three types:

Funding Risk: Due to withdrawal/non-renewal ofdeposits

Time Risk: Non-receipt of inflows on account of

assets(loan installment) Call Risk: Contingent liabilities & new demand

for loans


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Managing Liquidity Risk.

Setting tolerance limits: Cumulative cash flow mismatches.

Take care of draw down of commitments. marketability of

liquid assets, discount to price volatility and drop in price

in the event of forced sale.

Core liability to core assets.

(Core liability: core portion of SB,CD,TD, Share capital ,

reserves and subordinated debts.)

(Core assets: Statutory balances of CRR and SLR, Long

term loans and fixed assets.)


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Managing Liquidity Risk.

Purchased Fund to liquid assets:Ratio of bulk deposit to liquidassets:

(Purchased funds consist of callborrowings , refinance availed,

bulk deposit, inter bank termborrowing.)

(short term liquid assets : cash,call/CBLO lending, HFT andAFS Investments, dues fromBanks in current account.

Loan to capital ratio.

CD to total liabilities.


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Measuring and Managing

LiquidityStock approach.

Flow approach.

Stock approach:Ratio of core deposit to total assets.

Net loans to total deposits.

Ratio of time deposit to total deposits.

Ratio of market liabilities to total assets.


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Flow approach.

Measuring and managing net funding requirements:

Construction of maturity ladder,

Liquidity gap based on residual maturities of assets and liabilities to arrive at

deficit or surplus,

cumulative gap, behavioral pattern, off balance sheet items.

Evaluate on alternate scenarios.

Managing Market access.

Contingency planning.


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Flow approach

IF there is a significant funding requirement

in a period say 30 days hence:

Alternative options ? Acquire an asset or rollover the liability.

Objective to close gap before it gets too

close. Managing market access and contingency

planning is key to efficacy of the ALM

function.


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Interest Rate Sensitivity.

Head of Account Rate sensitivity and time

bucket

Liability

Capital Reserve NRS

CD NRS

SB Sensitive to the extent of

interest paying(core)portion.Include in 3-6

month.Non interest paying

portionin non rate sensitive

bucket.


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bucket

Liability

Term Deposit and CD Sensitive and reprices onmaturity.Amount should be

distributed to different

buckets on the basis of

remaining term tomaturity.How ever in case of

floating rate deposits, place

under time bucket when

deposits become contractually

become due for reprising.


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bucket

Borrowing Fixed Sensitive and reprices on

maturity.Amount to bedistributed to different

buckets on the basis of

remaining maturity.

Borrowings floating Sensitive and repcies

when interest rate is

reset.Distribute to the

bucket when refers to

repricing date.


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Head of Account Rate sensitivity and timebucket

Borrowing Zero coupon Sensitive and reprises on

maturity. Amount should

be appropriated to therespective maturity

bucket.

Borrowing from RBI Upto 1 month bucket.

Refinance from other

agencies.

Fixed Rate :As per

respective maturity

Floating : Reprices when

interest rate is reset.


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bucket

Other Liabilities andProvisions.

Bills payable Non sensitive.

Inter office adjustment Non sensitive.

Provisions. Non Sensitive.

Repo/Bills

rediscounting/Swaps

Reprices on maturity and

should be distributed in

the respective buckets.


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bucket

Investments:Fixed Rate/Zero coupon Sensitive on maturity.

Floating Rate Sensitive at next repricing

date.

Shares /Units of MF Non sensitive.


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bucket

AdvancesBP and Bills discounted Sensitive on maturity.

CC/OD/Loans repayable

on demand and Term Loan

Sensitive only when

PLR/risk premium is

changed.


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bucket

Reverse

Repo,swaps,Rediscounting.

Sensitive on maturity.

Swaps Sensitive and to be shown

with reference to maturity.

Note : Amount to be

shown net of provisions

,interest suspense, claims

received from ECGC.CGTS


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Heads of Accounts Classification into time buckets

3. Balances with other

Banks:

(i) Current Account

(ii) Money at Call and Short

Notice, Term Deposits

and other placements.

(i) Non-withdrawable portion on account of stipulations of

minimum balances may be shown underOver 1-3yearsbucket and the remaining balances may be shown under

Day 1 bucket.

(ii) Respective maturity buckets.

4. Investments

(Net of provisions)*

(i) Approved Securities (i) Respective maturity buckets, excluding the amount required to

be reinvested to maintain SLR corresponding to the DTL profile in

various time buckets.

(ii) Corporate debentures and

Bonds, PSU Bonds, CDs and

CPs, Redeemable Preference

shares, Units of Mutual Funds

(close ended etc.)

(ii) Respective maturity buckets. Investments classified as NPIs

should be shown under over 3-5 years bucket (Sub-standard) or

over 5 years bucket (Doubtful).


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(iii) Shares

(iv) Units of Mutual Funds

(Open ended)

(iii) Listed shares (except strategic investments) in 2-7 days

bucket with a haircut of 50%.

Other Shares in Over5 years bucket.

(iv) Day 1 bucket.

(v) Investments inSubsidiaries/ Joint

Ventures.

(v) Over5 years bucket.

(vi) Securities in the

Trading Book.

(vi) Day 1, 2-7 days, 8-14 days, 15-28 days and 29-90 days

according to defeasance periods.

* Provisions may be netted from the gross investments provided provisions are held security-

wise. Otherwise provisions should be shown in over 5 years bucket.


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6. NPAs

(Net of provisions, interest

suspense and claims received

from ECGC/DICGC)

(i) Sub-standard (i) Over3-5 years bucket.

(ii) Doubtful and Loss (ii) Over5 years bucket.

7. Fixed Assets/

Assets on lease.

Over5 years bucket/

Interim cash flows may be shown under respective maturity

buckets.

8. Other Assets

Intangible Assets Intangible assets and assets not representing cash receivables

may be shown in Over5 years bucket.


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C. Off Balance Sheet Items

1. Lines of Credit

committed/available.(i) Lines of Credit

committed to/from

Institutions.

(ii) Unavailed portion of

Cash Credit/

Overdraft/Demand loancomponent of Working

Capital limits (outflow).

(iii) Export Refinance

Unavailed (inflow)

(i) Day 1 bucket.

(ii) Banks should undertake a study of the behavioural and

seasonable pattern of potentital availments in the accounts

and the amounts so arrived at may be shown under relevantmaturity buckets upto 12 months.

(iii) Day 1 bucket.

2. Contingent Liabilities

Letters of Credit/Guarantees (outflow)

Devolvement of Letters of Credit/Guarantees, initially entails cash

outflows. Thus, historical trend analysis ought to be conducted onthe devolvements and the amounts so arrived at in respect of

outstanding Letters of Credit/Guarantees (net of margins) should be

distributed amongst various time buckets. The assets created out of

devolvements may be shown under respective maturity buckets on

the basis of probable recovery dates.


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3. Other Inflows/Outflows

(i) Repo / Bills

Rediscounted(DUPN)/CBLO/Swaps

INR/USD, maturing

forex forward contracts

etc. (outflow/inflow).

(i) Respective maturity buckets.

(ii) Interest payable/receivable

(outflow/inflow)

Accrued interest

which are appear-

ing in the books

on the reporting

day.

(ii) Respective maturity buckets.


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Note:

(i) Liability on account of event cash flows i.e. short fall in CRR balance onreporting Fridays, wage settlement, capital expenditure etc. which are known to

the Banks and any other contingency may be shown under respective maturitybuckets. The event cash outflows, including incremental SLR requirementshould be reported against OutflowsOthers.

(ii) All overdue liabilities may be placed in the Day 1, 2-7 days and 8-14 daysbuckets based on behavioural estimates.

(iii) Interest and instalments from advances and investments which are overdue forless than one month may be placed in Day 1, 2-7 days and 8-14 days buckets,based on behavioural estimates. Further, interest and instalments due (beforeclassification as NPAs) may be placed in 29 days to 3 months bucket if theearlier receivables remain uncollected.


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ADDRESSING MISMATCHES

Mismatches can be positive or negative

Positive Mismatch: M.A.>M.L. and vice-versa forNegative Mismatch

In case of +ve mismatch, excess liquidity can bedeployed in money market instruments, creatingnew assets & investment swaps etc.

Forve mismatch,it can be financed from marketborrowings(call/Term),Bills rediscounting,repos &deployment of foreign currency converted intorupee.


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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


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CALCULATION OF NII/NIM

NII: INT.EARNED-INT. EXPENDED

INT. EARNED: ADV+INVESTMENT

INT. EXPENDED:DEPOSITS+INT. ON

RBI BORROWINGS

NIM= (NII/TOT.EARNING ASSET)X100


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Q. Net Interest Margin NIM is defined as

a. Net interest income divided by total earning assets.

b. Interest incomeinterest expenses. c. total interest income divided by total assets.

d. None of above.

Q..Ratio of share holders funds to total assets is called as

a. Debt equity ratio. b. TOL/TNW ratio.

c. Economic equity ratio.

d. No ne of above.


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Q. Under gap method the net funding requirement is calculated based on

a. residual maturities of assets and liabilities.

b. Actual maturities of assets and liabilities

c. Both the above. d. None of above.

Q. Cash inflows arise from mainly:

a. Maturing assets.

b. Maturing liabilities.

c. Maturing off balance sheet exposure.

d. Maturing time deposits.


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Capital , Reserves and Surplus are slotted in which time bucket inStructural Liquidity Statement:

Over 5 years.

Over 3 Years. Over 1 Year.

Over 6 months.

Q. Saving and Current deposit may be treated as volatile portion up to

a. 10% and 15 % respectively.

b.20% and 30% respectively.

c. 30% and 40% respectively. d. None of above


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Q. Core portion of Cash credit advances may be shown undera. 1-3 year time bucket.

b. over 3 year time bucket.

c. Over 5 years time bucket. d. None of above.

Q. Term Loans to be shown under:

a. Interest and principal of the loan under residual maturity bucket.

b. Principal under residual maturity bucket.

c. all in 5 year and above bucket. d. None of above.


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Q. Sub Standard loans to be shown under

a. Over one year bucket.

b. Over 2 year bucket.

c. Over 3 years bucket.

d. Over 3-5 year bucket.

Q. Fixed Assets:

a. Over 5 year bucket. b. Over 2 year bucket.

c. Over 1 year bucket.

d. none of above.


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Q. The net cumulative negative mismatchesduring the day 1, 2-7, 8-14 and 15-28 days

buckets if exceed the prudential limits may befinanced from market by

a. Market borrowings ( call /term)

b. Bills discounting

c. Repo

d. All above.


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Q. In a given time band a negative or liability sensitive gap occurs when

a. Rate sensitive liabilities exceed rate sensitive assets.

b. Rate sensitive assets exceed rate sensitive liabilities.

c. None of above.

d. All the above.

Q. with a negative gap , an increase in market interest rates could cause a

a. decline in net interest income.

b. Increase in net interest income.

c. None of above.

d. All above.


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None of above.

Q. Under Put option the buyer has

a. Right to sell but not obligation to sell

b. Right to buy but not obligation to buy c. Right to receive interest payments.

d. None of above.

Q. Under Call option the buyer has

a. Right to buy but not obligation to buy b. right to sell but not obligation to buy

c. None of above.


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Q. Short term dynamic liquidity statement relate to

a. monitoring liquidity on dynamic basis over a time horizon of 1-90 days.

b. monitoring liquidity on dynamic basis over a time horizon of 7-90 days.

c. monitoring liquidity on dynamic basis over a time horizon of 28-90days.

d. None of above.

Q. In statement of interest rate sensitivity :

a. Only rupee assets and liabilities and off balance sheet positions should

be reported. b. All assets and liabilities should be reflected.

c. Only foreign currency assets and liabilities should be reflected.

d. None of above.


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Q. Provisions and inter office adjustments are

a. Rate sensitive.

b. Rate non sensitive.

c. None of above.

d. all of above.

Q. Current account balance is

a. Rate sensitive. b. Rate non sensitive.

c. None of above.

d. All of above.


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