alm ppt
DESCRIPTION
ALMTRANSCRIPT
ASSET LIABILITY MANAGEMENT
DEFINITION
• WHAT IS ALM?
• PROACTIVE MEASURES
• RISKS FACED BY BANKS
OPERATIONAL, CREDIT, INTEREST RATE, FOREIGN EXCHANGE ETC
ALM PROCESS
• RESTS ON THREE PILLARS
• ALM INFORMATION SYSTEMS
• ALM ORGANISATION
• ALM PROCESS
INFORMATION SYSTEMS
• MIS
• INFORMATION SHOULD BE ACCURATE AND ADEQUATE.
ORGANISATION
• ALCO
• ANALYSE , MONITOR , REPORT RISK PROFILES
• FORECAST CHANGES IN MARKET THAT EFFECT BANK BALANCE SHEET
• DESIRED MATURITY AND PRICING OF BANK PRODUCTS
• COMPOSITION OF ALCO
PROCESS
• scope of ALM function can be described as follows:
• · Liquidity risk management
• · Management of market risks
• (including Interest Rate Risk)
• · Funding and capital planning
• · Profit planning and growth projection
• · Trading risk management
Components of a Bank Balance sheet
Liabilities Assets
1. Capital
2. Reserve & Surplus
3. Deposits
4. Borrowings
5. Other Liabilities
1. Cash & Balances with RBI
2. Bal. With Banks & Money at Call and Short Notices
3. Investments
4. Advances
5. Fixed Assets
6. Other AssetsContingent Liabilities
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 & SurplusComponents under this head includes:I. Statutory ReservesII. Capital Reserves III. Investment Fluctuation Reserve
IV. Revenue and Other ReservesV. 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 & ProvisionsIt 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)
Components of Assets
1. Cash & Bank Balances with RBI I. Cash in hand
(including foreign currency notes)
II. Balances with Reserve Bank of India
In Current Accounts
In Other Accounts
Components of Assets2. BALANCES WITH BANKS AND
MONEY AT CALL & SHORT NOTICE I. In India
i) Balances with Banks a) In Current Accounts b) In Other Deposit Accounts
ii) Money at Call and Short Notice
a) With Banks b) With Other InstitutionsII. Outside India a) In Current Accounts b) In Other Deposit Accounts c) Money at Call & Short Notice
Components of Assets3. Investments
A major asset item in the bank’s balance sheet. Reflected under 6 buckets as under:
I. Investments in India in : * i) Government Securities
ii) Other approved Securities
iii) Shares iv) Debentures and Bonds v) Subsidiaries and Sponsored Institutions vi) Others (UTI Shares , Commercial Papers, COD & Mutual Fund Units etc.)II. Investments outside India in ** Subsidiaries and/or Associates abroad
Components of Assets
4. AdvancesThe most important assets for a bank.A. i) Bills Purchased and Discounted
ii) Cash Credits, Overdrafts & Loans
repayable on demand
iii) Term Loans
B. Particulars of Advances :
i) Secured by tangible assets
(including advances against Book Debts)
ii) Covered by Bank/ Government Guarantees
iii) Unsecured
Components of Assets5. Fixed Asset I. Premises
II. Other Fixed Assets (Including furniture and fixtures)
6. Other Assets I. Interest accrued
II. Tax paid in advance/tax deducted at source
(Net of Provisions)
III. Stationery and Stamps
IV. Non-banking assets acquired in satisfaction of claims
V. Deferred Tax Asset (Net)
VI. Others
Contingent Liability
Bank’s obligations under LCs, Guarantees, Acceptances on behalf of constituents and Bills accepted by the bank are reflected under this heads.
Banks Profit & Loss Account
A bank’s profit & Loss Account has the following components:
I. Income: This includes Interest Income and Other Income.
II. Expenses: This includes Interest Expended, Operating Expenses and Provisions & contingencies.
Components of Income1. INTEREST EARNED
I. Interest/Discount on Advances / Bills
II. Income on Investments
III. Interest on balances with Reserve Bank
of India and other inter-bank funds
IV. Others
Components of Income 2. OTHER INCOME
I. Commission, Exchange and Brokerage
II. Profit on sale of Investments (Net)
III. Profit/(Loss) on Revaluation of Investments
IV. Profit on sale of land, buildings and other
assets (Net)
V. Profit on exchange transactions (Net)
VI. Income earned by way of dividends etc. from subsidiaries and Associates abroad/in India
VII. Miscellaneous Income
Components of Expenses
1. INTEREST EXPENDED
I. Interest on DepositsII. Interest on Reserve Bank of India / Inter-
Bank borrowingsIII. Others
Components of Expenses
2. OPERATING EXPENSES
I. Payments to and Provisions for employees II. Rent, Taxes and Lighting III. Printing and Stationery IV. Advertisement and Publicity V. Depreciation on Bank's property VI. Directors' Fees, Allowances and Expenses VII. Auditors' Fees and Expenses (including Branch Auditors) VIII. Law Charges IX. Postages, Telegrams, Telephones etc. X. Repairs and Maintenance XI. Insurance XII. Other Expenditure
Assets Liability Management
It is a dynamic process of Planning, Organizing & Controlling of Assets & Liabilities- their volumes, mixes, maturities, yields and costs in order to maintain liquidity .
Significance of ALM
• Volatility
• Product Innovations & Complexities
• Regulatory Environment
• Management Recognition
Purpose & Objective of ALMAn effective Asset Liability Management Technique aims to manage the volume, mix, maturity, rate sensitivity, quality and liquidity of assets and liabilities as a whole so as to attain a predetermined acceptable risk/reward ration.
It is aimed to stabilize short-term profits, long-term earnings and long-term substance of the bank. The parameters for stabilizing ALM system are:
1. Net Interest Income (NII)
2. Net Interest Margin (NIM)
3. Economic Equity Ratio
Liquidity Management
Bank’s liquidity management is the process of generating funds to meet contractual or relationship obligations at reasonable prices at all times.
New loan demands, existing commitments, and deposit withdrawals are the basic contractual or relationship obligations that a bank must meet.
Adequacy of liquidity position for a bank
Analysis of following factors throw light on a bank’s adequacy of liquidity position:
a. Historical Funding requirementb. Current liquidity positionc. Anticipated future funding needsd. Sources of fundse. Options for reducing funding needsf. Present and anticipated asset qualityg. Present and future earning capacity andh. Present and planned capital position
Funding Avenues
To satisfy funding needs, a bank must perform one or a combination of the following:
a. Dispose off liquid assetsb. Increase short term borrowingsc. Decrease holding of less liquid assetsd. Increase liability of a term naturee. Increase Capital funds
Types of Liquidity Risk
• Liquidity Exposure can stem from both internally and externally.
• External liquidity risks can be geographic, systemic or instrument specific.
• Internal liquidity risk relates largely to perceptions of an institution in its various markets: local, regional, national or international
Other categories of liquidity risk
• Funding Risk- Need to replace net outflows due to
unanticipated withdrawals/non-renewal• Time Risk
- Need to compensate for non-receipt of expected inflows of funds
• Call Risk- Crystallization of contingent liability
Statement of Structural LiquidityAll Assets & Liabilities to be reported as per their maturity profile into 8 maturity Buckets:
i. 1 to 14 days
ii. 15 to 28 days
iii. 29 days and up to 3 months
iv. Over 3 months and up to 6 months
v. Over 6 months and up to 1 year
vi. Over 1 year and up to 3 years
vii. Over 3 years and up to 5 years
viii. Over 5 years
STATEMENT OF STRUCTURAL LIQUIDITY
• Places 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• Shows the structure as of a particular date• Banks can fix higher tolerance level for other
maturity buckets.
An Example of Structural Liquidity
Statement 1-14Days
15-28 Days
30 Days-3 Month
3 Mths - 6 Mths
6 Mths - 1Year
1Year - 3 Years
3 Years - 5 Years
Over 5 Years Total
Capital 200 200Liab-fixed Int 300 200 200 600 600 300 200 200 2600Liab-floating Int 350 400 350 450 500 450 450 450 3400Others 50 50 0 200 300Total outflow 700 650 550 1050 1100 750 650 1050 6500Investments 200 150 250 250 300 100 350 900 2500Loans-fixed Int 50 50 0 100 150 50 100 100 600Loans - floating 200 150 200 150 150 150 50 50 1100Loans BPLR Linked 100 150 200 500 350 500 100 100 2000Others 50 50 0 0 0 0 0 200 300Total Inflow 600 550 650 1000 950 800 600 1350 6500Gap -100 -100 100 -50 -150 50 -50 300 0Cumulative Gap -100 -200 -100 -150 -300 -250 -300 0 0Gap % to Total Outflow-14.29 -15.38 18.18 -4.76 -13.64 6.67 -7.69 28.57
ADDRESSING THE MISMATCHES
• Mismatches can be positive or negative
• Positive Mismatch: M.A.>M.L. and Negative Mismatch M.L.>M.A.
• 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.
STRATEGIES…• To meet the mismatch in any maturity
bucket, the bank has to look into taking deposit and invest it suitably so as to mature in time bucket with negative mismatch.
• The bank can raise fresh deposits of Rs 300 crore over 5 years maturities and invest it in securities of 1-29 days of Rs 200 crores and rest matching with other out flows.
Maturity Pattern of Select Assets & Liabilities of A Bank
Liability/Assets Rupees(In Cr)
In Percentage
I. Depositsa. Up to 1 yearb. Over 1 yr to 3 yrsc. Over 3 yrs to 5 yrsd. Over 5 years
1520080006700230270
10052.6344.08 1.51 1.78
II. Borrowingsa. Up to 1 yearb. Over 1 yr to 3 yrsc. Over 3 yrs to 5 yrsd. Over 5 years
450180 00150120
10040.00 0.0033.3326.67
III. Loans & Advancesa. Up to 1 yearb. Over 1 yr to 3 yrsc. Over 3 yrs to 5 yrsd. Over 5 years
880034003000 4002000
10038.6434.09 4.5522.72
Iv. Investmenta. Up to 1 yearb. Over 1 yr to 3 yrsc. Over 3 yrs to 5 yrsd. Over 5 years
58001300 300 9003300
10022.41 5.1715.5256.90
STATEMENT OF INTEREST RATE SENSITIVITY• Generated by grouping RSA,RSL & OFF-
Balance sheet items in to various (8)time buckets.
RSA:• MONEY AT CALL• ADVANCES ( BPLR LINKED )• INVESTMENTRSL• DEPOSITS EXCLUDING CD• BORROWINGS
MATURITY GAP METHOD(IRS)
• THREE OPTIONS:
• A) RSA>RSL= Positive Gap
• B) RSL>RSA= Negative Gap
• C) RSL=RSA= Zero Gap
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.
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.
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 NII.- conversely, a positive gap (RSA>RSL) in a given time band, an decrease in market interest rates could cause a decline in NII.
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.
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