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 PROFILELIQUIDITY
• Outflows
–
–
–
–
Capital, Reserves & Surplus
Deposits
Borrowings and bonds
Other liabilities
MATURITY PROFILELIQUIDITY
• 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
Impact on NII
Positive
Interest rate
Change
Increases
Positive
Decreases
Negative
Negative
Increases
Negative
Negative
Decreases
Positive
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 headed by E.D.
(ALCO)
- 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.
1.
2.
3.
4.
5.
ALM STATEMENTS TO
BE SUBMITTED TO
RBI
Statement of Structural Liquidity
(Annexure - I) [DSB Statement No.8] - Rupee
Statement of Interest Rate Sensitivity
(Annexure - II) [DSB Statement No. 9] - Rupee
Statement of Dynamic Liquidity (Annexure III)
Statement of Maturity and Position (MAP)
(Annexure - IV) [DSB Statement No.10 ] Forex
Statement of Sensitivity to Interest Rate
(SIR)(Annexure - V)[DSB Statement No.11] -
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 & OFFBalance 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
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