ALM and
Fund Management
Jyoti Kumar Pandey
Deputy General Manager
&
Member of Faculty
College of Agricultural Banking, Pune
4/8/2020
College of Agricultural Banking, RBI, PUNE
What is Banking
• Section 5(b) defines banking ‘Accepting for the
purpose of lending or investment of deposits or
money repayable on demand or otherwise and
withdrawable by cheque, draft, order or
otherwise’
Risk taking is an inherent function
of banking - Allan Greenspan
4/8/2020
College of Agricultural Banking, RBI, PUNE
Banks get affected by
•
•
•
•
4/8/2020
Actions of Central Banks
Actions of the Government
Domestic and International Disturbances
Inflation
College of Agricultural Banking, RBI, PUNE
Deregulation
• Banks are now operating in a fairly deregulated
environment and are required to determine on
their own, interest rates on deposits and
advances
• Intense competition for business involving both
the assets and liabilities together with increasing
volatility in the interest rates has brought
pressure on the management of banks to
maintain a good balance among spreads
4/8/2020
College of Agricultural Banking, RBI, PUNE
Risks Faced by Banks
• Credit Risk
• Market Risk
 Liquidity Risk
 Interest Rate Risk
• Operational Risk
4/8/2020
College of Agricultural Banking, RBI, PUNE
Effects of Risk Factors
• Loss of Market Value
• Loss of Reserves
• Loss of stakeholders confidence
4/8/2020
College of Agricultural Banking, RBI, PUNE
ALM
• The ALM guidelines issued by RBI has been
formulated to serve as a benchmark for banks
which lack a formal ALM system
• Those who already have their existing system
may fine tune their information and reporting
system
4/8/2020
College of Agricultural Banking, RBI, PUNE
Purpose of ALM
• Capture the maturity structure of the cash flows
(inflows and outflows) in the Statement of
Structural Liquidity
• Tolerance levels for various maturities may be
fixed by the bank keeping in view bank’s ALM
profile, extent of stable deposit base, nature of
cash flows etc.
4/8/2020
College of Agricultural Banking, RBI, PUNE
ALM
• ALM is about managing market risk and liquidity
risk together
• Capital market exposure of banks is small
• Exchange risk is highly specialized
• Hence ALM is an integrated risk management
approach for managing liquidity risk, interest rate
risk
4/8/2020
College of Agricultural Banking, RBI, PUNE
The problem of mismatch
•
•
•
•
•
•
4/8/2020
Mismatches in maturity
Mismatches in interest rate
How does bank makes the spread?
Borrow short and lend long and keep the spread
Maturity mismatch is the basis of profitability
Risk management does not eliminate mismatch –
merely manages them
College of Agricultural Banking, RBI, PUNE
The problem of mismatch
• Interest Rate Risk  Affects profitability
• Liquidity Risk  May lead to liquidation
• General Strategy
 Eliminate Liquidity Risk (not the mismatch)
 Manage Interest Rate Risk
 Consciously create gaps
4/8/2020
College of Agricultural Banking, RBI, PUNE
Asset Liability Transformation
• Banks are exposed to credit and market risks in
view of the asset-liability transformation
• With liberalisation, banks’ operations have
become complex and large , requiring strategic
management
4/8/2020
College of Agricultural Banking, RBI, PUNE
ALM Pillars
• ALM Information Systems
• ALM Organisation
• ALM Process
Applicable to Scheduled UCBs and Tier II UCBs
For Tier II UCBs – effective date is December 2008
4/8/2020
College of Agricultural Banking, RBI, PUNE
ALM Pillars
• ALM Information systems
 MIS
 Information availability
 Accuracy
 Adequacy
 Expediency
4/8/2020
College of Agricultural Banking, RBI, PUNE
(Contd.)
ALM Pillars
• ALM Organisation
 Structure and responsibilities
 Level of top management involvement
4/8/2020
College of Agricultural Banking, RBI, PUNE
(Contd.)
ALM Pillars
•
•
•
•
•
•
4/8/2020
ALM Process
Risk Parameters
Risk Identification
Risk Measurement
Risk Management
Risk Policies and Procedures, prudential limits
and auditing, reporting and review
College of Agricultural Banking, RBI, PUNE
(Contd.)
ALM Information Systems
• 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
• Banks may utlilise ‘Gap Analysis’ or ‘Simulation’
• Important to have availability of timely, adequate
and accurate information
4/8/2020
College of Agricultural Banking, RBI, PUNE
ALM Information Systems
(Contd.)
• ALM Data could be developed by following
approach, in case UCBs do not have requisite
information
 Analyse behaviour 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
UCBs have limited area of operations and hence it would be easier
for them to make such assumptions and better access to data
4/8/2020
College of Agricultural Banking, RBI, PUNE
ALM Organisation
• Board should have overall responsibility for management of risk
 Board should decide risk management policy and procedure, set
prudential limits, auditing, reporting and review mechanism in respect
of liquidity, interest rate and forex risk
• ALCO
 Consisiting of bank’s senior management including CEO
 Responsible for adherence to the polices and limits set by Board
 Responsible for deciding business strategies (on asset liability side) in
line with bank’s business and risk objectives
• ALM Support Group
 Consisting of operating staff
 Responsible for analysing, monitoring and reporting risk profiles to
ALCO
 Prepare forecasts showing effects of various possible changes in
market conditions affecting balance sheet and suggesting action to
adhere to bank’s internal limits
4/8/2020
College of Agricultural Banking, RBI, PUNE
ALM Organisation
(Contd.)
• ALCO decision making unit responsible for
 Balance Sheet planning from risk-return perspective which includes
management of liquidity, interest rate and forex risks
 Pricing of deposits and advances, desired maturity profile etc.
 Monitoring the risk levels of the bank
 Review of the results and progress of implementation of decisions
made in previous meeting
 Future business strategies based on bank’s current view on interest
rates
 To decide on source and mix of liabilities or sale of assets
 To develop future direction of interest rate movements
 To decide on funding mix between fixed and floating rate funds,
wholesale vs. retails deposits, short term vs. long term deposits etc.
4/8/2020
College of Agricultural Banking, RBI, PUNE
ALM Organisation
(Contd.)
• ALCO size would be dependent on the size of the
UCB
• May comprise of
 CEO or Secretary
 Chief of Investment / Treasury including those of forex,
credit, planning etc.
 Head of IT if a separate division exists
• UCBs may at their discretion may have Subcommittees and Support Groups
4/8/2020
College of Agricultural Banking, RBI, PUNE
ALM Process
• Scope is
 Liquidity Risk Management
 Interest Rate Risk Management
 Trading (Price) risk Management
 Funding and Capital Management
 Profit Planning and business Projections
UCBs, generally, are not exposed to forex risk
4/8/2020
College of Agricultural Banking, RBI, PUNE
ALM
•Liquidity Risk
•Interest Rate Risk
4/8/2020
College of Agricultural Banking, RBI, PUNE
Liquidity Risk
• Arising due to
 Over extension of credit
 High level of NPAs
 Poor asset quality
 Mismanagement
 Hot Money
 Non recognition of embedded option risk
 Reliance on few wholesale depositors
 Large undrawn loan commitments
 Lack of appropriate liquidity policy and contingent plan
4/8/2020
College of Agricultural Banking, RBI, PUNE
Liquidity vs. Earnings
• Bank must be in a position to: Balance their need for liquidity with their need for
earnings
 More liquid assets tend to provide lower return than do
less liquid assets
4/8/2020
College of Agricultural Banking, RBI, PUNE
Assessing Liquidity Position
• Assessing a bank’s liquidity position can be
challenging
• An adequate position for one bank may not be
sufficient for another
• A position considered adequate for a bank in one
time period may not be so in another
• BANK SPECIFIC & DYNAMIC
4/8/2020
College of Agricultural Banking, RBI, PUNE
Liquidity risk-Manifestation
• Funding risk
 Need to replace net outflows due to unanticipated
withdrawal/non-renewal of deposits
• Time Risk
 Need to compensate for non-receipt of expected inflows
of funds-performing assets turning into non-performing
assets
4/8/2020
College of Agricultural Banking, RBI, PUNE
Liquidity Risk - Measurement
• Two methods are employed:
 Stock approach - Employing ratios
 Flow approach - Time bucket analysis
4/8/2020
College of Agricultural Banking, RBI, PUNE
Liquidity Risk - Measurement
• Liquidity Ratios
 Volatile Liability Dependence Ratio
 Volatile Liabilities minus Temporary Investments to Earning
Assets net of Temporary Investments
 Shows the extent to which bank’s reliance on volatile funds
to support Long Term assets
– where volatile liabilities represent wholesale deposits which
are market sensitive and temporary investments are those
maturing within one year and those investments which are
held in the trading book and are readily sold in the market
 Growth in Core Deposits to growth in assets
 Higher the ratio the better
4/8/2020
College of Agricultural Banking, RBI, PUNE
Liquidity Risk – Measurement
(Contd.)
• Purchased Funds to Total Assets
 where purchased funds include the entire inter-bank and
other money market borrowings, including Certificate of
Deposits and institutional deposits
• Loan Losses to Net Loans
• Loans to core deposits
4/8/2020
College of Agricultural Banking, RBI, PUNE
Liquidity Risk – Measurement
• Does not lead to proper assessment of liquidity
gaps due to:
 Illiquidity of liquid assets
 Their ready marketability
 Difficulty to convert easily into liquid cash with least loss of
value from the previously quoted market rates
4/8/2020
College of Agricultural Banking, RBI, PUNE
(Contd.)
Liquid Assets to Total Assets
• Liquid Assets to Total Assets
 Show the percentage of liquid assets in the asset
structure of the bank - 18-20%
• Liquid assets generally are cash balances with
RBI + balances with other banks + investments
available for sale + money market instruments
4/8/2020
College of Agricultural Banking, RBI, PUNE
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 depositorsSometimes taken as a measure of bank liquidity-2022%
4/8/2020
College of Agricultural Banking, RBI, PUNE
Loans to Deposits
• 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
4/8/2020
College of Agricultural Banking, RBI, PUNE
Loans to Assets
• Loans to Assets
 This ratio indicates the percentage of illiquid assets to
total assets
 A rise in this ratio would indicate lower liquidity
4/8/2020
College of Agricultural Banking, RBI, PUNE
Loans to Core Deposits
• Loans to Core Deposits
 Those deposits which are not subject to any large
volatility
 Average level of previous years deposit is generally
taken as core deposits
 This ratio helps in assessing level of deployment of core
portion of deposits
4/8/2020
College of Agricultural Banking, RBI, PUNE
Loans to Investments
• Loans to Investments
 While loans provide higher returns compared to
investments, these suffer from credit risk and are more
illiquid than investments
 A proper mix of loans and investments keeping in view
liquidity and yield considerations need to be fixed
4/8/2020
College of Agricultural Banking, RBI, PUNE
Cash Flow Approach
• Preparing a structural liquidity by taking into account
balance sheet on particular date and place in maturity
ladder according to time buckets
• Identify the liquidity needs - to evolve methods to meet it
• Negative gaps in individual time buckets indicate the need.
The need could be controlled by
 prudential limits
 as also by regulating the basis of business structure/financial
flexibility of banks
• Regulatory Limit of 20% on outflows in first two time
buckets
4/8/2020
College of Agricultural Banking, RBI, PUNE
RBI Guidelines on Liquidity Risk
• Methodology prescribed in ALM System- Structural
Liquidity Statement & Dynamic Liquidity Ladder are simple
• Need to make assumptions and trend analysis- Behavioural
maturity analysis
• Variance Analysis at least once in six months and
assumptions fine-tuned
• Track the impact of exercise of options & potential liquidity
needs
• Cap on inter-bank borrowings & Call money
4/8/2020
College of Agricultural Banking, RBI, PUNE
• SSL Layout
Structural Liquidity Statement – Sch.
UCBs
Circular Sept. 17, 2008 for Scheduled UCBs
More granular approach adopted – by splitting first bucket of 1 – 14 days in SSL
into Next Day, 2-7 days and 8 – 14 days
Net cumulative negative mismatches during the Next Day, 2 – 7 days, 8 – 14 days
and 15 – 28 days bucket should not exceed 5%, 10%, 15% and 20% of the
cumulative cash outflows in the respective buckets
Banks may undertake dynamic liquidity management and should prepare the SSL
on daily basis to Top Management / ALCO
SSL may be reported to RBI at fortnightly intervals within 10 days of the reporting
Friday
Revised format would be applicable from January 01, 2009
UCBs in Tier II are also covered
Scheduled UCBs to report structural liquidity position and interest rate sensitivity
to RBI as part of OSS data
4/8/2020
College of Agricultural Banking, RBI, PUNE
Structural Liquidity Statement – Sch.
UCBs
(Contd.)
Heads of Account
A.
Classification into time bands
Outflows
1.Capital, Reserves and Surplus
Over 5 year band
2. Demand Deposits (Current &
Savings)
Volatile and Core Deposits. Savings (10%) and Current (15%) are withdrawable on
demand generally and hence volatile. Volatile portion in 1 day, 2 – 7 days and 8 – 14
days, depending upon the experience and estimates of the banks and rest (core
portion) 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
3. Term Deposits
Respective maturity buckets
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)
4. CDs
Respective maturity buckets
5. Other Liabilities
i. Bills payable
Core component which could be estimated on the basis of past data and behavioral
pattern in ‘over 1 – 3 years’ time bucket. Balance in Day 1, 2 – 7 days and 8 – 14 days
time band
iii. Provisions other than for loan loss
and dep. On investments
Respective time bands. Items not representing cash payables (Guarantees fees
received in advance etc.) may be placed in over 5 years time band
6. Export Refinance – Availed
Respective Time bands of underlying assets
College of Agricultural Banking, RBI, PUNE
Structural Liquidity Statement – Sch.
UCBs
(Contd.)
Heads of Account
Classification into time bands
B. Inflows
1.
Cash
2. Balance with RBI / PSU banks /
SCBs and DCCBs etc.
Day 1 bucket
Excess balance over required CRR / SLR under Day 1 bucket. The statutory balances
distributed in different time bands corresponding to the maturity profile of DTL with 14
days time lag
3.Balances with other banks
i.
ii.
Current Account
Money at Call & Short Notice
Non-withdrawable portion on stipulation of minimum balance in 1-3 years band and
remaining balance in Day 1 bucket band.
Respective residual maturity bands
4. Investments
i.
Approved Securities
i.
ii.
PSU Bonds, CDs and CPs, Units
of UTI (Close ended) etc.
Equities of All India FIs etc.
iii.
iv.
Units of mutual funds
Securities in trading books
v.
Investment in subsidiaries
Respective Residual time bands except amount required to be reinvested for
maintaining SLR / CRR
Residual maturity. Investment classified as NPAs in 3-5 years band (substandard) and
over 5 years (doubtful)
Listed shares in 2 – 7 days bucket with haircut of 50 %. Other shares in over 5 years
bucket
Day 1 bucket
Day 1 bucket, 2-7days, 8-14 days, 15-28 days and 29 – 90 days according to
defeasance period
Over 5 years bucket
College of Agricultural Banking, RBI, PUNE
Structural Liquidity Statement – Sch.
UCBs
(Contd.)
6. NPAs
i.
ii.
Substandard
Doubtful and Loss
7. Fixed Assets
3-5 years band
Over 5 years band
Over 5 years band
8. Other Assets
i.
Intangible assets
Intangible assets and assets not representing cash flows may be shown in over 5
years bucket
9. Contingent liabilities LCs / Guarantees (outflows)
Assets created out of developments may be shown under respective maturity bucket
on the basis of probable date of recovery
10. Lines of credit committed
i.
Lines of credit committed to /
from institutions and Export
Refinance
ii.
Unavailed portion of cash
credit / overdraft etc.
Day 1 bucket
Repo etc.
Based on respective residual time bands
Interest Payable
Respective Time Band
4/8/2020
Based on behavioral pattern and seasonal pattern arrive at potential availments and
put under relevant maturity bucket up to 12 months
College of Agricultural Banking, RBI, PUNE
Structural Liquidity Statement – Sch.
UCBs
(Contd.)
• Liability on account of event cash flows – CRR / SLR
shortfall, wage settlement and any other contingency under
respective maturity bands
• All overdue liabilities in Day 1, 2 – 7 days and 8 – 14 days
bucket based on behavioral estimates
• Interest and installments from advances and investments
which are due for less than one month – 1-6 months time
band
• Interest and installments from advances and investments
which are over due for less than one month may be placed
in Day 1, 2-7 days and 8 – 14 days based on behavioral
pattern. Further, interest and installments due (before
classification as NPAs may be placed in 29 days – 3 months
bucket if the earlier receivables remain uncollected
4/8/2020
College of Agricultural Banking, RBI, PUNE
Liquidity Risk Management for Tier 1
UCBs
• Basic guidelines for liquidity management issued
on September 17, 2008
• Banks advised to prepare
 Statement of Structural Liquidity and
 Statement of Short Term Dynamic Liquidity
• To be prepared as on the last reporting Friday of
March / June / September / December and
submit to the Board within one month from the
last reporting Friday
• First such submission to be made to the Board as
on last reporting Friday of December 2008
4/8/2020
College of Agricultural Banking, RBI, PUNE
Liquidity Risk Management for Tier 1
UCBs (contd.)
•
Maturity profile of SSL into 8 buckets
i. 1-14 days
ii. 15-28 days
iii. 29 and up to 3 months
iv. Over 3months 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
•
4/8/2020
Mismatches (negative gaps) during 1-14 and 1528 days time bands in normal course should not
exceed 20 % of the cash flows in each time
band
College of Agricultural Banking, RBI, PUNE
Liquidity Risk Management for Tier 1
UCBs (contd.)
•
Short Term Dynamic Liquidity Statement
i. 1-14 days
ii. 15-28 days
iii. 29-90 days
•
•
4/8/2020
STDL required for securities in the trading book
SLR investments / securities are generally not
very liquid and lack depth and are therefore
shown in the residual maturity bands
corresponding to residual maturity
College of Agricultural Banking, RBI, PUNE
Liquidity Risk Management for Tier 1
UCBs (contd.)
•
•
•
•
4/8/2020
Holding period not to exceed 90 days
Cut loss limit is prescribed
Defeasance periods are prescribed – Time taken
to liquidate the position on the basis of liquidity
in the secondary market are prescribed
Marking to market on a weekly basis
College of Agricultural Banking, RBI, PUNE
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
4/8/2020
College of Agricultural Banking, RBI, PUNE
Maturity Profile Liquidity for Tier 1 UCBs
Heads of Account
A.
Classification into time bands
Outflows
1.Capital, Reserves and Surplus
Over 5 year band
2. Demand Deposits (Current &
Savings)
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
3. Term Deposits
Respective residual time bands
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)
4. CDs
Respective Residual Time Bands
5. Other Liabilities
i. Bills payable
1-14 days time band
ii. Branch Adjustments
Net credit balance in 1-14 days time band
iii. Provisions other than for loan loss
and dep. On investments
Respective time bands. Items not representing cash payables (Guarantees fees
received in advance etc.) may be placed in over 5 years time band
6. Export Refinance – Availed
Respective Time bands of underlying assets
College of Agricultural Banking, RBI, PUNE
Maturity Profile Liquidity for Tier 1 UCBs
(contd.)
Heads of Account
Classification into time bands
B. Inflows
1.
Cash
2. Balance with RBI / PSU banks /
SCBs and DCCBs etc.
1-14days time band
Excess balance over required CRR / SLR under 1-14 days band. 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.
ii.
Current Account
Money at Call & Short Notice
Non-withdrawable portion on stipulation of minimum balance in 14-3 year band and
remaining balance in 1-14 days band.
Respective residual maturity bands
4. Investments
i.
Approved Securities
i.
ii.
PSU Bonds, CDs and CPs,
Units of UTI (Close ended)
etc.
Equities of All India FIs etc.
iii.
Securities in trading books
Respective Residual time bands except amount required to be reinvested for
maintaining SLR / CRR
Residual maturity. Investment classified as NPAs in 3-5 years band (substandard) and
over 5 years (doubtful)
Over 5 year band
1-14, 15-28 and 29-90 days time bands
College of Agricultural Banking, RBI, PUNE
Maturity Profile Liquidity for Tier 1 UCBs
(contd.)
6. NPAs
i.
ii.
Substandard
Doubtful and Loss
7. Fixed Assets
3-5 years band
Over 5 years band
Over 5 years band
8. Other Assets
i.
ii.
Branch Adjustments
Leased Assets
Net debit balance in 1-14 days band. Intangible assets and assets not representing
cash receivables in 5 years time band
Interim cash flows under residual maturity time bands
Contingent liabilities i. Unavailed portion of Cash
Credit / Overdraft / Demand
Loan component of working
capital
ii. Export Refinance – Unavailed
(inflow)
Under residual maturity time bands within 12 months based on behavioral and
seasonal patterns
LC
Based on past history
Repo etc.
Based on respective residual time bands
Interest Payable
Respective Time Band
4/8/2020
1-14 days band
College of Agricultural Banking, RBI, PUNE
ALM for Tier II UCBs
•
•
•
•
Similar to what prescribed to Scheduled UCBs
Initially at least 60% of assets and liabilities to
be covered and remaining 40% on assessment
basis only
100% coverage by April 01, 2010
Statements required to be prepared
 Statement of Structural Liquidity
 Statement of Interest Rate Sensitivity
 Short-Term Dynamic Liquidity Statement
4/8/2020
College of Agricultural Banking, RBI, PUNE
ALM for Tier II UCBs – SSL
•
•
•
•
4/8/2020
To be prepared, to start with, as on last reporting Friday
of March / June / September / December
To be put up to the ALCO / Top Management within a
month from the close of the last reporting Friday
Reporting on a fortnightly basis from December 2008
(intended)
Maturity profile of SSL into 8 buckets
i. 1-14 days
ii. 15-28 days
iii. 29 and up to 3 months
iv. Over 3months 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
College of Agricultural Banking, RBI, PUNE
ALM for Tier II UCBs – SSL
•
•
•
•
4/8/2020
(contd.)
Mismatches in cash flows to be kept at minimum
Initially for 1-14 and 15-28 days it may not
exceed 20% normally
In case banks wishes to operate on a higher
limit, it could be done with approval of the
Board / Management
Objective of RBI is to enforce tolerance level
strictly with effect from April 01, 2010
College of Agricultural Banking, RBI, PUNE
ALM for Tier II UCBs – SIRS
•
•
•
•
•
4/8/2020
Only rupee assets, liabilities and off-balance
sheet positions to be reported
Statement to be prepared as on last Friday of
March / June / September / December
To be submitted to ALCO / Top Management
within one month of reporting Friday
To be placed before the Board in its next
meeting
Banks expected to move over to monthly
reporting system from April 01, 2010
College of Agricultural Banking, RBI, PUNE
ALM for Tier II UCBs – SIRS
•
(contd.)
Maturity profile of SIRS into 7 time bands
i. Up to 3 months
ii. Over 3months and up to 6 months
iii. Over 6 months and up to 1 year
iv. Over 1 year and up to 3 years
v. Over 3 years and up to 5 years
vi. Over 5 years
vii. Non-sensitive
•
•
•
4/8/2020
Gap is the difference between Rate Sensitive Assets (RSA)
and Rate Sensitive Liabilities (RSL)
If RSA > RSL = +ve Gap – Bank benefits if interest rate
goes up
If RSA < RSL or RSL > RSA = -ve Gap – Bank benefits if
interest rate goes down
College of Agricultural Banking, RBI, PUNE
ALM for Tier II UCBs – SIRS
•
•
•
•
4/8/2020
(contd.)
Banks to set prudential limits on individual gaps
with the approval of the Board
The prudential limits should have a bearing on
the Total Assets, Earning Assets or Equity
Banks need to work out Earnings at Risk (EaR)
i.e. 20 – 30% of the last years NII or Net
Interest Margin – based on their views of
interest rate movements
After sufficient experience is gained by the UCB
in ALM, RBI may consider introduce capital
adequacy for market risk
College of Agricultural Banking, RBI, PUNE
ALM for Tier II UCBs – STDS
•
•
4/8/2020
To be prepared as on each reporting Friday
To be put up to the ALCO / Top Management
within 2-3 days from the close of the reporting
Friday
College of Agricultural Banking, RBI, PUNE
ALM for Tier II UCBs – Other Issues
•
SSL and SIRS could be reported through OSS
 Communication to be issued
•
4/8/2020
All the three ALM Statements may be put up to
the ALCO as on last Friday of December 2008
College of Agricultural Banking, RBI, PUNE
Some points
• Break the beyond 5 year bucket into financial and
non-financial
• The sum of all the gaps in the structural liquidity
may or may not be zero
• The cumulative gaps – also called forward
payment structure
• Why is the forward payment structure significant?
• Stress testing
4/8/2020
College of Agricultural Banking, RBI, PUNE
Cumulative Gaps
0d-14d 14d-28d 28d- 3m 3m-6m
6m-1y
1y - 3y
3y - 5y Above 5y
Cash Inflow
195
210
230
250
295
375
430
525
Cash Outflow
180
240
261
285
322
445
480
560
15
-30
-31
-35
-27
-70
-50
-35
-9.15% -18.67% -11.63%
-6.67%
Gap
Gap %
Cumulative Gap
Cum Gap %
7.69% -14.29% -13.48% -14.00%
15
7.69%
-15
-46
-81
-108
-178
-228
-263
-7.14% -20.00% -32.40% -36.61% -47.47% -53.02%
-50.10%
• Forward Payment Structure indicates
future liquidity position
• Long term strategic approach needed to
correct an increasingly negative FPS
4/8/2020
College of Agricultural Banking, RBI, PUNE
Dynamic Liquidity Gap Analysis
• Tracking cash flow on a short term time horizonchanges 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
4/8/2020
College of Agricultural Banking, RBI, PUNE
Short-Term Dynamic Liquidity Statement
• Main focus on short term mismatches
 1-14days
 15-28 days
 29-90 days
4/8/2020
College of Agricultural Banking, RBI, PUNE
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)
Refinance
60
Total Inflows
729
Mismatch(Inflows-Outflows)
Mismatch as a % of Total Outflows
4/8/2020
619
College of Agricultural Banking, RBI, PUNE
(-)496
(-)40.49%
Reasons for Interest Rate Risk
• On account of asset transformation
 Many deposits are used for one big loan
• Periodical review of assets and liabilities
• Due to mismatches between maturity / repricing
dates as well as maturity amounts between
assets and liabilities
• Depositors and borrowers may pre-close their
accounts
4/8/2020
College of Agricultural Banking, RBI, PUNE
RSA and RSL
• Rate Sensitive Assets (RSA) – Assets whose
value is dependent on current interest rate
• Risk Sensitive Liabilities (RSL) – Liabilities whose
value is dependent on current interest rate
4/8/2020
College of Agricultural Banking, RBI, PUNE
Gap / Mismatch Risk
• Arises on account of holding RSA and RSL 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
NIM
4/8/2020
College of Agricultural Banking, RBI, PUNE
Interest Rate Risk
• Assessed by Gap Report – Gaps between RSA
and RSL
• Asset / Liabilities are rate sensitive if:
 Within the time interval under consideration there is a
Cash Flow
 Repayment of term loans
 Interest rate resets / reprices
 Change in interest rate in CC account, Term Loans before
maturity
 RBI changes interest rates
 Interest on Savings Bank Deposits, CRR balance etc.
4/8/2020
College of Agricultural Banking, RBI, PUNE
Interest Rate Risk
• Assessed by Gap Report – Gaps between RSA
and RSL
• Gaps may be identified in the following time
bands:
 Upto 3 months
 Over 3 months and upto 6 months
 Over 6 months and upto 1 year
 Over 1 year and upto 3 years
 Over 3 years and upto 5 years
 Over 5 years
 Non-sensitive
4/8/2020
College of Agricultural Banking, RBI, PUNE
(contd.)
Interest Rate Risk
(contd.)
• Immediate impact of changes is on bank’s profit
by change in its spread – NII
 NII gives the earning perspective
• Long term impact is change in its MVE or Net
Worth
 As marked to market value of bank’s asset – liabilities,
off-balance sheet positions get affected
 Gives the economic value perspective
4/8/2020
College of Agricultural Banking, RBI, PUNE
Interest Rate Risk
(contd.)
• Each bank to set its prudential limits on individual
gaps with approval of Board
• Prudential limits set with respect to bearing on
Total Assets, Earning Assets or Equity
• Bank’s may work out their Earnings at Risk – 2030% of last year’s NII or NIM
4/8/2020
College of Agricultural Banking, RBI, PUNE
Interest Rate Sensitivity
Heads of Account
A.
(Contd.)
Classification into time bands
Liabilities
1.Capital, Reserves and Surplus
Non Sensitive
2. Current Deposits
Non Sensitive
3. Savings Bank Deposits
Sensitive to the extent of interest paying (core) portion. Include in 3-6 months time
band. Non interest part in non-sensitive band
4. Term Deposits and CDs
Sensitive. In different time bands based on residual term of maturity
5. Borrowings – Fixed
Sensitive. In different time bands based on residual term of maturity
6. Borrowings – Floating
Sensitive. Distributed to appropriate time bands that refers to resetting dates
7. Borrowings – Zero Coupon
Sensitive. In different time bands based on respective maturity band
8. Borrowings from RBI
Upto 3 months time band
9. Refinance from other Agencies
Fixed Rate – As per maturity
Floating Rate – Reprices when interest rate is reset
10. Other Liabilities & Provision
Bills payable, Branch
Adjustments, Provisions, Others
Non-Sensitive
11. Repos / Bill Rediscounted
Sensitive. Reprices on maturity and should be distributed to respective maturity bands
College of Agricultural Banking, RBI, PUNE
Interest Rate Sensitivity
Heads of Account
Classification into time bands
B. Assets
1.Cash
Non Sensitive
2. Balance with RBI
Interest portion in 3-6 months time band. Balance is non sensitive
3. Balance with other banks
i.
Current Accounts
ii.
Money at Call and Short
Notice, Term Deposits and
other placements
i.
ii.
Non sensitive
Sensitive on maturity. Amount distributed in different time bands
i.
ii.
Sensitive on maturity
Sensitive at next repricing date
4. Investments (performing)
i.
Fixed Rate / Zero Coupon
ii.
Floating Rate
5. Share of All India FIs, other
cooperatives / Units of UTI
6. Advancers (performing)
i.
Bills purchased and discounted
ii.
Cash Credits / Overdrafts /
Loans repayable on demand
and Term Loans
Non Sensitive
i.
ii.
Sensitive on maturity
Sensitive may be shown in 3+6 months band
College of Agricultural Banking, RBI, PUNE
(Contd.)
Interest Rate Sensitivity
Heads of Account
Classification into time bands
7. NPAs (Advances &
Investments)
i.
Substandard
ii.
Doubtful and Loss
i.
ii.
8. Fixed Assets
Non Sensitive
9. Other Assets
i.
Inter-Office Adjustments
ii.
Leased Assets
iii.
Others
i.
ii.
10. Reverse Repos, Swaps, Bills
Rediscounted
11. Other products (Interest
Rate)
i.
Swaps
ii.
Other
iii.
Over 3-5 years time band
Over 5 year time band
Non Sensitive
Sensitive on cash flows. Distributed in respective maturity bands
corresponding to cash flow dates
Non Sensitive
Sensitive on maturity
i.
ii.
Sensitive. Should be distributed under different bands with reference to
maturity
Should be suitably classified as and when introduced
College of Agricultural Banking, RBI, PUNE
(Contd.)
Gist
• Scheduled UCBS and Tier II UCBs
 Have 3 pillars I n place
 ALM Information Systems
 ALM Organisation
 ALM Process
 Prepare 3 statements
 Statement of Structural Liquidity (quarterly)
 Short Term Dynamic Liquidity Statement (fortnightly)
 Statement of Interest Rate Sensitivity (quarterly)
 Review of Statements by ALCO / Top Management
 To report from last reporting Friday of December 2008
 SIRS to be moved to monthly reporting by April 01,
2010
 SSL to be fortnightly basis from December 2008
4/8/2020
College of Agricultural Banking, RBI, PUNE
Gist
 Scheduled UCBs already reporting SSL and SIRS
through OSS
 For Tier II UCBs separate communication to follow
4/8/2020
College of Agricultural Banking, RBI, PUNE
(contd.)
Gist
(contd.)
• Tier I UCBs
 Prepare 2 Statements
 Statement of Structural Liquidity (quarterly)
 Statement of Short Term Dynamic Liquidity (quarterly)
 To be put up to the Board as on last Friday of December
2008
 For reporting through OSS separate communication to
follow
4/8/2020
College of Agricultural Banking, RBI, PUNE
Thank You
4/8/2020
College of Agricultural Banking, RBI, PUNE