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ASSET AND LIABILITY MANAGEMENT IN INDIAN BANKS: A STUDY OF SELECT BANKS Introduction: Asset-Liability Management (ALM) is concerned with

strategic management of assets and liabilities of banks, against risks caused by changes in the liquidity position of the bank, interest rates, and exchange rates, and against credit risk and contingency risk. An effective ALM technique aims to manage the volume, mix, maturity, rate sensitivity, quality and liquidity of the assets and liabilities as a whole so as to attain a predetermined acceptable risk/reward ratio. The purpose of ALM is to enhance the asset quality, quantify the risks associated with the assets and liabilities and further manage them, in order to stabilize the short-term profits, the long-term earnings and the long-run sustenance of the bank. The importance of Asset Liability Management in Indian Banks is growing at a rapid pace. Indian Banks are now emphasizing more on Asset Liability Management as a means of sound financial management of Banking Operations. The Reserve Bank of India (RBI) has implemented the Basel II norms for the regulation of Indian banks which provided a framework for banks to develop sound ALM policies. The present study analyses assetliability management practices in Indian banks in the context of guidelines provided by the Reserve Bank of India. Indian banking industry: The Indian banking sector has emerged as one of the strongest drivers of Indias economic growth. The banking system of India should not only be hassle free but it should be able to meet new challenges posed by the technology and any other external and internal factors. Post Independence era, Indias banking system has several outstanding achievements to its credit. The most striking is its extensive reaches not only metropolitans or cosmopolitans but even to the remote corners of the country. This is one of the main reasons of Indias growth process. The history of Indian Banking System can be segregated into three distinct phases. They are as mentioned below: Phase I Pre-Nationalization era: Early phase from 1786 to 1969 of Indian Banks Phase II Nationalization stage: Nationalization of Indian Banks and up to 1991 prior to Indian banking sector Reforms. Phase III Post liberalization era: New phase of Indian Banking System with the advent of Indian Financial & Banking Sector Reforms after 1991 and Liberalization.

Phase I The General Bank of India was set up in the year 1786. The East India Company established Bank of Bengal (1809), Bank of Bombay (1840) and Bank of Madras (1843) as independent units and called it Presidency Banks. These three banks were amalgamated in 1920 and Imperial Bank of India was established which started as private shareholders banks, mostly Europeans shareholders. In 1865 Allahabad Bank was established and first time exclusively by Indians, Punjab National Bank Ltd. was set up in 1894 with headquarters at Lahore. Between 1906 and 1913, Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and Bank of Mysore were set up. Reserve Bank of India came in 1935. During the first phase the growth was very slow and banks also experienced periodic failures between 1913 and 1948. There were approximately 1100 banks, mostly small. To streamline the functioning and activities of commercial banks, the Government of India came up with The Banking Companies Act, 1949 which was later changed to Banking Regulation Act 1949 as per amending Act of 1965 (Act No. 23 of 1965). Reserve Bank of India was vested with extensive powers for the supervision of banking in India as the Central Banking Authority. During those days public has lesser confidence in the banks. As an aftermath deposit mobilization was slow. Not only that. The banks were selective in inviting the customers for transacting with tbe banks. Only those wealthy and strong financial backgrounds were invited to be part of the clientele for the banks. Abreast of it the savings bank facility provided by the Postal department was comparatively safer. Moreover, funds were largely given to traders. Phase II Government took major steps in this Indian Banking Sector Reform after independence. In 1955, it nationalized Imperial Bank of India with extensive banking facilities on a large scale especially in rural and semi-urban areas. It formed State Bank of India to act as the principal agent of RBI and to handle banking transactions of the Union and State Governments Seven banks forming subsidiary of State Bank of India was nationalized in 1960 on 19th July, 1969, major process of nationalization was carried out. It was the effort of the then Prime Minister of India, Mrs. Indira Gandhi. 14 major commercial banks in the country were nationalized. Second phase of nationalization Indian Banking Sector Reform was carried out in 1980 with seven more banks. This step brought 80% of the banking segment in India under Government ownership. The following are the steps taken by the Government of India to Regulate Banking Institutions in the country:

1949: Enactment of Banking Regulation Act. 1955: Nationalization of State Bank of India. 1959: Nationalization of SBI subsidiaries. 1961: Insurance cover extended to deposits. 1969: Nationalization of 14 major banks. 1971: Creation of credit guarantee corporation. 1975: Creation of regional rural banks. 1980: Nationalization of seven banks with deposits over 200 crore. After the nationalization of banks, the branches of the public sector bank India rose to approximately 800% in deposits and advances took a huge jump by 11,000%.Banking in the sunshine of Government ownership gave the public implicit faith and immense confidence about the sustainability of these institutions. Phase III This phase has introduced many more products and facilities in the banking sector in its reforms measure. In 1991, under the chairmanship of M Narasimham, a committee was set up by his name which worked for the liberalization of banking practices. The country is witnessed with the advent of foreign banks and their ATM stations. Banks started putting efforts to give a satisfactory service to customers. Phone banking and net banking was introduced. The entire system became more convenient and swift. Time is given more importance than money and the customer service has become the focal point of all banking operations. The financial system of India has shown a great deal of resilience due to strong monetary policies and banking innovations. The public policy related to the economy as well as financial sector also added to the changing phase of banking system. It is sheltered from any crisis triggered by any external macroeconomics shock as other East Asian Countries suffered. This indicated the strength of the Indian Financial System of which Banking system is also a part. Innovative financial management of Banks, Value added services offered by the banks and focus on market orientation have all added to the need for efficient management of banks to be competitive and to survive in the intense and dynamic financial system. The concept of ALM: ALM is a dynamic process of Planning, Organizing, and Controlling of Assets and Liabilities- their volumes, mixes, maturities, yields and costs in order to maintain liquidity and Net Interest Income (NII). ALM is about management of Net Interest Margin (NIM) to ensure that its level and risk factor are compatible with risk/return objectives of the bank. It is more than just managing individual assets and liabilities. It is an integrated approach to bank financial management requiring simultaneous decision about types and amount of financial assets and liabilities it
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holds or its mix and volume. In addition, ALM requires an understanding of the market area in which the bank operates. The framework of asset-liability management broadly covers area of interest rate risk, liquidity risk, exchange risk and credit risk. ALM can be defined as an operation for assessing the above mentioned risks, actively altering the asset-liability portfolio, and for strategically taking actions and managing risks with the objective of maximizing profits .ALM is not limited to on balance sheet assets and liabilities such as deposits and lendings only, but also includes off balance sheet activities such as swaps, futures and options. The objective of ALM is to make banks fully prepared to face the emerging challenges. Purpose and objectives of ALM: Review the interest rate structure and compare the same to the interest/product pricing of both assets and liabilities. Examine the loan and investment portfolios in the light of the foreign exchange risk and liquidity risk that might arise. Examine the credit risk and contingency risk that may originate either due to rate fluctuations or otherwise and assess the quality of assets. Review, the actual performance against the projections made and analyzes the reasons for any effect on spreads. Aim is to stabilize the short-term profits, long-term earnings and long-term substance of the bank. The parameters that are selected for the purpose of stabilizing asset liability management of banks are: -Net Interest Income (NII) -Net Interest Margin (NIM) -Economic Equity Ratio. The Necessity of Asset Liability Management in Indian banks ALM is introduced in Indian Banking industry from 1st April, 1999. ALM is concerned with risk management and provides a comprehensive and dynamic frame work for measuring, monitoring and managing liquidity, interest rate, foreign exchange and equity and commodity price risks of a bank that needs to be closely integrated with the banks business strategy. The asset-liability management in the Indian banks is still in its nascent stage. With the freedom obtained through reform process, the Indian banks have reached greater horizons by exploring new avenues. The government ownership of most banks resulted in a carefree attitude towards risk management. This complacent behavior of banks forced the Reserve Bank to use regulatory tactics to ensure the implementation of the ALM. Also, the postreform banking scenario is marked by interest rate deregulation, entry of new private banks, and gamut of new products and greater use of information technology. To cope with these pressures banks were required to evolve strategies rather than ad hoc fire fighting solutions. Imprudent liquidity management can put banks earnings and reputation at great
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risk. These pressures call for structured and comprehensive measures and not just contingency action. The Management of banks has to base their business decisions on a dynamic and integrated risk management system and process, driven by corporate strategy. Banks are exposed to several major risks in the course of their business credit risk, interest rate risk, foreign exchange risk, equity / commodity price risk, liquidity risk and operational risk. It is, therefore, important that banks introduce effective risk management systems that address the issues related to interest rate, currency and liquidity risks. Implementation of ALM system In 1993-94 RBI asked public sector banks to frame the ALM policy. But, first ever comprehensive circular for establishing ALM system was issued by RBI on 19 Feb, 1999. According to this circular the process of ALM rest on 3 pillars. 1. ALM Information systems Management Information System Information availability, accuracy, adequacy and expediency 2. ALM Organization Structure and responsibilities Level of top management involvement 3. ALM Process Risk parameters Risk identification Risk measurement Risk management Risk policies and tolerance levels. ALM Organization: The Asset - Liability Committee (ALCO) consisting of the bank's senior management including CEO should be responsible for ensuring adherence to the limits set by the Board as well as for deciding the business strategy of the bank (on the assets and liabilities sides) in line with the bank's budget and decided risk management objectives. The ALM desk consisting of operating staff should be responsible for analyzing, monitoring and reporting the risk profiles to the ALCO. The staff should also prepare forecasts (simulations) showing the effects of various possible changes in market conditions related to the balance sheet and recommend the action needed to adhere to bank's internal limits. The ALCO is a decision making unit responsible for balance sheet planning from risk return perspective including the strategic management of interest rate and liquidity risks. Each bank will have to decide on the role of its ALCO, its responsibility as also the decisions to be taken by it. The business and risk management strategy of the bank should
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ensure that the bank operates within the limits / parameters set by the Board. The business issues that an ALCO would consider, inter alia, will include product pricing for both deposits and advances, desired maturity profile of the incremental assets and liabilities, etc. In addition to monitoring the risk levels of the bank, the ALCO should review the results of and progress in implementation of the decisions made in the previous meetings. The ALCO would also articulate the current interest rate view of the bank and base its decisions for future business strategy on this view. In respect of the funding policy, for instance, its responsibility would be to decide on source and mix of liabilities or sale of assets. Towards this end, it will have to develop a view on future direction of interest rate movements and decide on a funding mix between fixed vs. floating rate funds, wholesale vs. retail deposits, money market vs. capital market funding, domestic vs. foreign currency funding, etc. Individual banks will have to decide the frequency for holding their ALCO meetings. ALM Information System: ALM Information System is used for the collection of information accurately, adequately and expeditiously. Information is the key to the ALM process. A good information system gives the bank management a complete picture of the banks balance sheet. ALM Process: The basic ALM process involves identification, measurement and management of risk parameters. The RBI in its guidelines has asked Indian banks to use traditional techniques like Gap Analysis for monitoring interest rate and liquidity risk. However RBI is expecting Indian banks to move towards sophisticated techniques like Duration, Simulation, VaR in the future. Management of Risk in ALM The risk management is a complex function and it requires specialized skills and expertise. Banks have been moving towards the use of sophisticated models for measuring and managing risks. Large banks and those operating in international markets should develop internal risk management models to be able to compete effectively with their competitors. As the domestic market integrates with the international markets, the banks should have necessary expertise and skill in managing various types of risks in a scientific manner. The design of risk management functions of the bank dictated by the size, complexity of functions, the level of technical expertise and the quality of MIS. Internationally adopted committee approaches for the risk management are the AssetLiability Management Committee (ALCO) deals with different types of market risk; the Credit Policy Committee (CPC) oversees the credit/counterparty risk and country risk. Risk can be defined as the chance or the probability of loss or damage. In the case of banks, these include credit risk, capital risk, market risk, interest rate risk and the liquidity risk. Since financial institutions like banks have complexities and frequent changes in their operating environments, these kinds of risks require more focus. Market Risk Management: Market risk refers to the uncertainty of future earnings resulting from changes in interest rates, exchange rates, market prices and volatilities. The
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Bank assumes market risk from consumer and corporate loans, position taking, and trading and investment activities. The strategy for controlling market risk shall involve: Stringent control and limits Strict segregation of front and back office duties. Daily reporting of positions. Regular independent review of all controls and limits. Rigorous testing and auditing of all pricing, trading, risk management and accounting systems a. Trading Risk The Bank conducts some trading activities on behalf of its customers, but also trades for its own account. Trading portfolios shall be managed with the intent to buy and sell financial instruments over a short period of time rather that hold positions for investments. Continued enhancement of the Banks trading risk management systems and processes will be kept up-to-date with market developments. Trading on behalf of customers will be done only for securities listed on the Securities Exchange, including bonds, treasury bills and shares. Such trading will be done by the Banks Licensed Representative under the supervision of the Licensed Principal. There will be no limit for trades done on behalf of customers. Securities, whether listed on the Securities Exchange or not, traded on the Banks own account will be traded by the Banks Licensed Representative under the supervision of the Licensed Principal but will be authorized by the Banks officers in accordance with established investments limits. Daily reports of profit and loss, limit overruns and compliance will be circulated to all appropriate departments and management for evaluation. Rigorous analysis and testing programs will be applied to measure risk, and to verify accuracy of various controls and limits. These will include stress testing, and sensitivity analysis. b. Foreign Exchange Risk The operational currency of the Bank is the EC Dollar. However, in order to meet customer needs, the Bank buys and sells a number of foreign currencies, holds assets and liabilities denominated in several foreign currencies and also as a result of its investments in foreign currencies and its international trading activities, the Bank receives income and pays expenses in foreign currency. The Bank is therefore exposed to foreign exchange risk associated with the effect of fluctuations in the rates of exchange in various currencies. To mitigate the risk of loss due to rate changes the Bank will match its positions as closely as possible. Interest Rate Risk management:

The function of ALM is not just protection from risk. The safety achieved through ALM also opens up opportunities for enhancing net worth. Interest rate risk (IRR) largely poses a problem to a banks net interest income and profitability. Changes in interest rates can significantly alter a banks net interest income (NII), depending on the extent of mismatch between the asset and liability interest rate reset times. Changes in interest rates also affect the market value of a banks equity, earnings, value of assets, liability, off-balance sheet items and cash flow. Hence, the objective of interest rate risk management is to maintain earnings, improve the capability, ability to absorb potential loss and to ensure the adequacy of the compensation received for the risk taken and affect risk return trade-off. Methods of managing IRR first require a bank to specify goals for either the book value or the market value of NII. the focus will be on the current value of NII and latter on the market value of equity. In either case, though, the bank has to measure the risk exposure and formulate strategies to minimize or mitigate risk. The immediate focus of ALM is interest-rate risk and return as measured by a banks NIM, NII. NIM = (NII/ Earning assets) NII= (Interest income Interest expense) A banks NIM, in turn, is a function of the interest-rate sensitivity, volume, and mix of its Earning assets and liabilities. That is, NIM = f (Rate, Volume, Mix). Effects of interest rate risk Changes in interest rates can have adverse effects both on a banks earnings and its economic value. The earnings perspective: From the earnings perspective, the focus of analyses is the impact of changes in interest rates on accrual or reported earnings. Variation in earnings (NII) is an important focal point for IRR analysis because reduced interest earnings will threaten the financial performance of an institution. Economic value perspective: Variation in market interest rates can also affect the economic value of a banks assets, liabilities, and Off Balance Sheet (OBS) positions. Since the economic value perspective considers the potential impact of interest rate changes on the present value of all future cash flows, it provides a more comprehensive view of the potential long-term effects of changes in interest rates than is offered by the earnings perspective. The economic value perspective identifies risk arising from long-term interest rate gaps. Economic Value perspective involves analyzing the expected cash inflows on assets minus expected cash outflows on liabilities plus the net cash flows or off-balance sheet items. Banking industry in India has substantially more issues associated with interest rate risks, which is due to circumstances outside its control. This poses extra challenges to the

banking sector. Over the time Asset-Liability Managers have developed a number of different ways to quantify the risk being taken. These include: (i) (ii) (iii) Maturity: Since it takes into account only the timing of the final principal payment, maturity is considered as approximate measure of risk and in a sense does not quantify risk. Duration: is the weighted average time of all cash flows, with weights being the present values of cash flows. It can again be used to determine the sensitivity of prices to change in interest rates. Convexity: Because of a change in market rates and passage of time, duration may not remain constant. With each successive basis point movement downward, bond prices increases at an increasing rate. Similarly, if rate increase, the rate of decline of bond prices declines. This property is called convexity.

The various types of interest rate risks are identified as follows: Gap/Mismatch risk: It arises from holding assets and liabilities and off balance sheet items with different principal amounts, maturity dates & re-pricing dates thereby creating exposure to unexpected changes in the level of market interest rates. Basis Risk: It is the risk that the Interest rat of different Assets/liabilities and off balance items may change in different magnitude. The degree of basis risk is fairly high in respect of banks that create composite assets out of composite liabilities. Embedded option Risk: Option of pre-payment of loan and Fore- closure of deposits before their stated maturities constitutes embedded option risk. Yield curve risk: Movement in yield curve and the impact of that on portfolio values and income. Re price risk: When assets are sold before maturities. Reinvestment risk: Uncertainty with regard to interest rate at which the future cash flows could be reinvested. Net interest position risk: When banks have more earning assets than paying liabilities, net interest position risk arises in case market interest rates adjust downwards. Techniques for measuring exposure of banks to interest rate risk Indian banks use the conventional gap reporting methodology for asset liability management for measuring interest rate risk from the earnings perspective. Gap is the measurement of the difference between risk sensitive assets and risk sensitive liabilities. Interest rate sensitivity and GAP management:

This model measures the direction and extent of asset-liability mismatch through a funding or maturity GAP (or, simply, GAP). Assets and liabilities are grouped in this method into time buckets according to maturity or the time until the first possible resetting of interest rates. For each time bucket the GAP equals the difference between the interest rate sensitive assets (RSAs) and the interest rate sensitive liabilities (RSLs). In symbols: GAP = RSAs RSLs When interest rates change, the banks NII changes based on the following interrelationships: NII = (RSAs - RSLs) x r NII = GAP x r Interrelationship between GAP and NII Sl.no 1 2 3 4 5 6 Type of GAP RSA = RSLs RSA = RSLs RSAs RSLs RSAs RSLs RSAs RSLs RSAs RSLs Change in interest rates Change in NII (NII) )) ((NII) (NII)NII (r) Increase No Change Decrease No Change Increase NII increases Decrease NII decreases Increase NII decreases Decrease NII increases

When RSA=RSL, GAP=0; indicates A zero GAP will be the best interest- sensitive GAP position either if the bank is unable to speculate interest rates accurately or if its capacity to absorb risk is close to zero. With a zero GAP, the bank is fully protected against both increases and decreases in interest rates as its NII will not change in both cases. When RSAs RSLs, Positive GAP, When RSAs RSLs, Negative GAP, In both the cases either NII may increase or decrease. As a tool for managing IRR, GAP management suffers from three limitations: Financial institutions in the normal course are incapable of out-predicting the markets, hence maintain the zero GAP. It assumes that banks can flexibly adjust assets and liabilities to attain the desired GAP. It focuses only on the current interest sensitivity of the assets and liabilities, and ignores the effect of interest rate movements on the value o bank assets and liabilities. Cumulative GAP model In this model, the sum of the periodic GAPs is equal to the cumulative GAP measured by the maturity GAP model. While the periodic GAP model corrects many of the deficiencies of the GAP model, it does not explicitly account for the influence of multiple market rates on the interest income. Duration GAP model (DAGAP)
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In order to shift the bank's focus to the economic value perspective and to upgrade the ALM system, the duration gap analysis was suggested by the Reserve Bank of India (RBI) in its circular of 17 April 2006. With the margin for interest rates to fluctuate over time, and the need for banks to obtain expertise in handling management information systems (MIS), it would become necessary for banks to adopt an improved ALM system and more sophisticated techniques such as the duration gap analysis Duration is defined as the average life of a financial instrument. It also provides an approximate measure of market value interest elasticity. The duration gap methodology should be implemented by calculating the modified duration of all assets and liabilities and the off-balance sheet items for a bank. Here, the weighted average duration of assets and weighted average duration of liabilities are used to measure the interest rate risk. Banks need to compute the duration gap as prescribed by the RBI. Duration is a measure of percentage change in the economic value of a position that will occur given a small change in the level of interest rates. Difference between duration of assets and liabilities is banks net duration. If DA>DL, a decrease in interest rate will increase the MVE of the bank. If DL>DA, an increase in interest rate will increase the MVE of the bank and a decrease in interest rate will decrease the MVE of the bank. Duration Gap Analysis recognizes the time value of money. It fails to recognize basis risk as it assumes parallel shift in yield curve. Duration gap (DGAP) = Weighted average modified duration of assets - Weight * Weighted average modified duration of liabilities Where Weight = Risk sensitive liabilities/Risk sensitive assets Weighted average duration of asset A1 = Weight A1 * Macaulay's duration of asset A1 Where Weight of an asset = Market value of asset 1/Market value of total assets Total weighted average duration of assets = Sum of weighted average duration of individual assets. Weighted average duration of liability A1 = Weight A1 * Macaulay's duration of liability A1 Where Weight of liability = Market value of liability 1/Market value of total liabilities Total weighted average duration of liabilities = Sum of weighted average duration of individual liabilities Modified duration of equity = DGAP x Leverage Leverage = Risk sensitive liabilities/Equity

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If the duration of assets is greater than the duration of the liabilities, then a rise in the interest rate will cause the market value of equity to fall. The market value of equity denotes the long-term profits of a bank. The bank will have to minimize unfavorable movement in this value due to interest rate fluctuations. The traditional gap method ignores how changes in interest rates affect the market value of the bank's equity. Simulation analysis Simulations serve to construct the risk-return profile of the banking portfolio. This model helps to introduce a dynamic element in the analysis of interest rate risk. Simulation models utilize computer power to provide WHAT IF scenarios. It is very important to combine technical expertise with an understanding of issues in the organization. Accuracy of data and reliability of the assumption made are certain requirement for a simulation model to succeed. Simulation technique attempts to overcome the limitation of GAP and Duration approaches by computer modeling the banks interest rate sensitivity. The modeling makes assumptions about future path of interest rates, shape of yield curve, changes in business activity, pricing and hedging strategies Liquidity and Funds Management: Liquidity is measured in terms of having sufficient funds available at all times, to meet fully and promptly, the legitimate demands for money made on the bank arising from deposit withdrawal, presentation of cheques, maturing investments, draws under committed loan facilities, and other financial commitments. The Bank needs to assure depositors that they can withdraw their funds when desired, borrowers of the availability of funds to meet legitimate demands for credit expansion, and employees of the bank stability & longevity. It must be remembered however that too much liquidity will have a negative impact on profitability, while too little liquidity will increase the risk of insolvency. The Bank is deemed to have adequate liquidity when it can obtain sufficient cash promptly and at a reasonable rate (cost). The determination of the adequacy of the Banks liquidity position depends upon an analysis of the Banks position relative to the following factors: historical funding requirements current liquidity position anticipated future funding needs present and anticipated asset quality present and future earnings capacity sources of funds Liquidity Risk Liquidity risk is the risk of having to fund some assets by the acquisition of additional funds under unfavorable market terms. This might occur when unexpected clearing drains occur in close proximity, when depositors are leaving the bank due to a perception of increased risk, or when loan growth is very strong.
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Liquidity risk is the potential inability of a bank to meet its payment obligations in a timely and cost effective manner. It arises when the bank is unable to generate cash to cope with a decline in deposits/liabilities or increase in assets. The Asset Liability Management (ALM) is a part of the overall risk management system in the banks. It implies examination of all the assets and liabilities simultaneously on a continuous basis with a view to ensuring a proper balance between funds mobilization and their deployment with respect to their a) maturity profiles, b) cost, c) yield, d) risk exposure, etc. It includes product pricing for deposits as well as advances, and the desired maturity profile of assets and liabilities. Tolerance levels on mismatches should be fixed for various maturities depending upon the asset liability profile, deposit mix, nature of cash flow etc. Bank should track the impact of pre-payment of loans & premature closure of deposits so as to realistically estimate the cash flow profile. The liquidity risk in banks manifest in different dimensions: Funding Risk It is the need to replace net outflows due to unanticipated withdrawals/non-renewal of deposits (wholesale and retail) Time Risk It is the need to compensate for non-receipt of expected inflows of funds, i.e. performing assets turning into non-performing assets; and Call Risk It happens due to crystallization of contingent liabilities and unable to undertake profitable business opportunities when desirable. RBI recommended Asset liability management system for measuring cash flow mismatches at different time bands. Banks should have to analyze the behavioral maturity profile of various components of on / off-balance sheet items on the basis of assumptions and trend analysis supported by time series analysis. Banks should also undertake variance analysis, at least, once in six months to validate the assumptions. The assumptions should be finetuned over a period which facilitates near reality predictions about future behavior of on/off-balance sheet items. Ratios The ALCO will monitor the Bank's liquidity position by reviewing the following measures: 1. Cash reserve Minimum 6% 2. Liquid assets 20% - 26% 3. Loans/Deposits 70% - 80% The cash reserve ratio is calculated by expressing cash reserves (comprising local cash and net balances with the Central Bank) as a percentage of total deposits. The Banking Act requires that commercial banks hold 6% of their deposits with the Central Bank. The liquid assets ratio is calculated as liquid assets expressed as a percentage of total deposits, and the Central Bank guidelines provide that this should be between 20% and 25%. Liquid assets comprise total cash reserves including foreign cash, treasury bills and other risk free
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investments, cheques held for collection and net balances with Central Bank and other banks. The loans to deposits ratio is calculated as net loans and advances expressed as a percentage of deposits. The Central Bank prudential guidelines require a ratio between 75% and 85%. A very high ratio suggests a less liquid position and presents the risk that some loans may have to be sold at a loss to meet depositors claims. A low ratio indicates excess liquidity and potentially low profits. Funding: Forecasting future events is essential to adequate liquidity planning. Sound financial management can help buffer negative changes in the Banks economic climate and accentuate positive ones. Forecasting of future events is very subjective and fraught with potential error. Management must therefore develop contingency plans in case its projections are wrong. Effective contingency planning involves identifying minimum and maximum liability needs and weighing the alternative courses of action designed to meet the needs. Monthly cash flow projections will be sought from large customers. The following are alternative ways the Bank can meet its liquidity needs: Increase core (retail) deposits Acquire interbank deposits Sell large time or notice deposits in domestic money market Borrow from Lender of last resort (Central Bank) Borrow on the Inter-Bank Market Lengthen the average life of the banks liabilities portfolio Maintain unused lines of credit with other financial institutions Loan participations The ALCO will review annually, as part of the annual budget preparation, or as often as necessary, the Banks deposit structure in relation to volume and trend of various types of deposits, maturity distribution of time deposits and rates paid compared to rates offered by competitors. Investments: Investments purchased will be consistent with a separate written investment policy. The objectives of the investment policy are to (1) provide liquidity (2) provide for interest rate risk management, and (3) provide additional profit. The investments portfolio shall be diversified to minimize the risk of loss resulting from over concentration of assets in specific class, currency, Country, or economic sector. The Bank shall adopt a flexible weightings approach (strategic asset allocation) involving the periodic adjustments of the weights for each category based either on the market analysis or on technical analysis (i.e., market timing). A new allocation therefore may be constructed to capture greater returns in a changing market. The initial allocation is as

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follows:Class Initial Allocation New Allocation Short-term investments (Money Market) 55% Fixed Income (Bonds) 45% Equities 15%. Credit Risk management: Credit risk is the risk of loss resulting from the failure of a borrower or counterparty to honor its financial or contractual obligation. Credit risk arises both in the Banks direct lending operations and in its funding, investment and trading activities, where counterparties have repayment or other obligations to the Bank. The management of the Banks credit risk shall be consistent with separate written credit policies and procedures. Credit Policy Objectives The Banks credit policies will seek to achieve the following major objectives:
Provision for loan losses / unsatisfactory assets Maximum 10% Net losses / average loans - Maximum 1%

Classified non-performing loans / total loans - Maximum 7.5% Credit Process Sample Banks credit disciplines shall be based on a division of authority, a committee system for dealing with all major exposures, and periodic independent review by the Audit Department. Banking officers, who have client contact, will develop and structure individual proposals, and will approve credits within their individual limits. Retail credits will be assessed and authorized in branches within the criteria established by the Bank. All proposals outside the officers limits will be adjudicated by the Credit Committee which will analyze the financial strength of the customers and the risks inherent in the proposals. All exceptions to the credit policy of the Bank, or credits outside of the authority of the Credit Committee, must be referred to the Executive Committee for its decision or recommendation to the Board of Directors. Higher risk exposures are subject to mandatory referral to the Board of Directors. Credit lines for off-balance sheet instruments such as credit card limits, letters of credit and guarantee, shall be managed as an integral part of the same process.At least annually, banking officers will meet formally with each commercial client to review their financial affairs and to assess the appropriateness of their credit requirements. The results will be formulated into a presentation which will be adjudicated in the same manner as a new credit. Where unusual risks exist, credits will be reviewed more frequently. In this way, the Bank will remain fully aware of customers risk profiles. Risk ratings will be reassessed with each credit presentation or review. To minimize risk the Bank will only accept those credits where there is reasonable confidence that the asset will be redeemed at face value.
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Limits and maximum maturity periods for various types of loans will be outlined in the Banks Credit Policy.

Risk Diversification The Banks credit policies and limits are intended to ensure broad diversification across various types of credit risk. Limits will be set for individual borrowers, particular industries and certain types of lending. There various risks will be determined taking into account the relative risk of the borrower, economic activity or product type. Pricing for Risk The Bank will classify loans into risk categories by economic sector and by product and will price the loans to compensate for the risk involved. Accounting for Problem Loans The Board of Directors understands that in any portfolio there will be delinquent loans which require special accounting procedures. The Bank has therefore adopted the Central Bank Prudential Guidelines with respect to loan review, loan classification, loan provisioning, and suspension of interest and loan write-offs. The guidelines require an annual review of at least 70% of the Banks credit portfolio taking into consideration; the terms of the loan, the business of the borrower, evaluation of the project being financed, security, and debt service. The loans are classified into five categories: pass, special mentioned, substandard, doubtful, and loss. Any loan classified as substandard, doubtful or loss requires a provision of 10%, 50% or 100% respectfully. A 1% provision is required for the percentage of the portfolio not reviewed. Interest should stop accruing on nonperforming credits classified as substandard, doubtful or loss unless adequate security exists and full collection is expected within three months. Interest on Government guaranteed loans should continue to accrue up to the limit of the guarantee. Write-off is recommended for loans that have been classified as loss for over three months. Tools of Credit Risk Management Exposure Ceilings: Prudential Limit is linked to Capital Funds say 15% for individual borrower entity, 40% for a group with additional 10% for infrastructure projects undertaken by the group, Threshold limit is fixed at a level lower than Prudential Exposure; Substantial Exposure, which is the sum total of the exposures beyond threshold limit should not exceed 600% to 800% of the Capital Funds of the bank (i.e. six to eight times). Review/Renewal: Multi-tier Credit Approving Authority, constitution wise delegation of powers, Higher delegated powers for better-rated customers; discriminatory time schedule
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for review/renewal, Hurdle rates and Bench marks for fresh exposures and periodicity for renewal based on risk rating, etc are formulated. Risk Rating Model: Set up comprehensive risk scoring system on a six to nine point scale. Clearly define rating thresholds and review the ratings periodically preferably at half yearly intervals. Rating migration is to be mapped to estimate the expected loss. Risk based scientific pricing: Link loan pricing to expected loss. High-risk category borrowers are to be priced high. Build historical data on default losses. Allocate capital to absorb the unexpected loss. Adopt the RAROC framework. Portfolio Management The need for credit portfolio management emanates from the necessity to optimize the benefits associated with diversification and to reduce the potential adverse impact of concentration of exposures to a particular borrower, sector or industry. Stipulate quantitative ceiling on aggregate exposure on specific rating categories, distribution of borrowers in various industry, business group and conduct rapid portfolio reviews. The existing framework of tracking the non-performing loans around the balance sheet date does not signal the quality of the entire loan book. There should be a proper & regular on-going system for identification of credit weaknesses well in advance. Initiate steps to preserve the desired portfolio quality and integrate portfolio reviews with credit decision-making process. Loan Review Mechanism This should be done independent of credit operations. It is also referred as Credit Audit covering review of sanction process, compliance status, review of risk rating, pick up of warning signals and recommendation of corrective action with the objective of improving credit quality. It should target all loans above certain cut-off limit ensuring that at least 30% to 40% of the portfolio is subjected to LRM in a year so as to ensure that all major credit risks embedded in the balance sheet have been tracked. Some of the commonly used methods to measure credit risk are: Ratio of non performing advances to total advances; Ratio of loan losses to bad debt reserves; Ratio of loan losses to capital and reserves; Ratio of loan loss provisions to impaired credit; Ratio of bad debt provision to total income. Operational Risks management: Operational Risk is defined as the risk of direct or indirect loss resulting from inadequate or failed internal processes, people and system or from external events. operational risk is defined as any risk, which is not categorized as market or credit risk, or the risk of loss arising from various types of human or technical error. It is also synonymous with settlement or payments risk and business interruption, administrative and legal risks. Operational risk has some form of link between credit and market risks. An operational problem with a business transaction could trigger a credit or market risk.
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Under the Basel II Accord, operational risk is defined as the risk of loss resulting from inadequate processes, people and systems or from external events. The management of operational risk requires systems capable of identifying, recording and quantifying operational failures that may cause financial loss. The systems are essentially tracking processes that monitor the behavior and performance of existing systems and processes. The essential elements include 1) the ability to track and monitor performances of specified operational processes and systems, 2) maintenance of databases of operational loss experience history, and 3) capacity to provide exception reporting or initiate actions to enable intervention to reduce operational risks. Bank for International Settlement (BIS) has proposed that, as of 2006, banks should be made to carry a Capital cushion against losses from this risk. Managing operational risk is becoming an important feature of sound risk management practices in modern financial markets in the wake of phenomenal increase in the volume of transactions, high degree of structural changes and complex support systems. The most important type of operational risk involves breakdowns in internal controls and corporate governance. Such breakdowns can lead to financial loss through error, fraud, or failure to perform in a timely manner or cause the interest of the bank to be compromised. The objectives of Operational Risk Management is to reduce the expected operational losses that focuses on systematic removal of operational risk sources and uses a set of key risk indicators to measure and control risk on continuous basis. The ultimate objective of operational risk management is to enhance the shareholders value by being ready for risk based capital allocation. There is no uniformity of approach in measurement of Operational Risk in the banking system at present. Methods of operational risk management: Basel II and various Supervisory bodies of the countries have prescribed various soundness standards for Operational Risk Management for Banks and similar Financial Institutions. To complement these standards, Basel II has given guidance to 3 broad methods of Capital calculation for Operational Risk. Basic indicator approach: - based on annual revenue of the Financial Institution. Standardized approach: - based on annual revenue of each of the broad business lines of the Financial Institution Advanced measurement approach: - based on the internally developed risk measurement framework of the bank adhering to the standards prescribed (methods include IMA, LDA, Scenario-based, Scorecard etc.) The Operational Risk Management framework should include identification, measurement, and monitoring, reporting, control and mitigation frameworks for Operational Risk.

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RBI Guidelines on ALM: As per RBI guidelines, commercial banks are to distribute the outflows/inflows in different residual maturity period known as Time buckets. The Assets and Liabilities were earlier divided into 8 maturity buckets (1-14 days; 15-28 days; 29-90 days; 91-180 days; 181-365 days, 1-3 years and 3-5 years and above 5 years), based on the remaining period to their maturity residual maturity. All the liability figures are outflows while the asset figures are inflows. In September, 2007, having regard to the international practices, the level of sophistication of banks in India, the need for a sharper assessment of the efficacy of liquidity management and with a view to providing a stimulus for development of the termmoney market, RBI revised these guidelines and it was provided that; (a) The banks may adopt a more granular approach to measurement of liquidity risk by splitting the first time bucket (1-14 days at present) in the Statement of Structural Liquidity into three time buckets, next day, 2-7 days and 8-14 days. Thus, now we have 10 time buckets. After such an exercise, each bucket of assets is matched with the corresponding bucket of the liability. When in a particular maturity bucket, the amount of maturing liabilities or assets does not match, such position is called a mismatch position, which creates liquidity surplus or liquidity crunch position and depending upon the interest rate movement, such situation may turn out to be risky for the bank. Banks are required to monitor such mismatches and take appropriate steps so that bank is not exposed to risks due to the interest rate movements during that period. (b) The net cumulative negative mismatches during the Next day, 2-7 days, 8-14 days and 15-28 days buckets should not exceed 5 %, 10%, 15 % and 20 % of the cumulative cash outflows in the respective time buckets in order to recognize the cumulative impact on liquidity. The Boards of the Banks have been entrusted with the overall responsibility for the management of risks and is required to decide the risk management policy and set limits for liquidity, interest rate, foreign exchange and equity price risks.

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Emerging issues in the Indian context of ALM With the onset of liberalization, Indian banks are now more exposed to uncertainty and to global competition. This makes it imperative to have proper asset-liability management system in place. The following points bring out the reasons as to why asset-liability management is necessary in the Indian context. 1. In the context of a bank, asset-liability management refers to the process of managing the net interest margin within a given level of risk. Net Interest Margin=Net interest income/Average earning assets Net interest margin can be viewed as the spread on earning assets. Efficient management of net interest margin becomes essential as the basic objective of banks is to maximize income while reducing their exposure to risk. 2. Several banks have inadequate and inefficient management system that have to be altered so as to ensure that the banks are sufficiently liquid. 3. An increasing proportion of investments by banks is being recorded on a market-tomarket basis and as such large portion of the investment portfolio s exposed to market risks. Countering the adverse impact of these changes is possible only through efficient asset-liability management techniques. 4. As the focus on the net interest margin has increased over the years, there is an increasing possibility that the risk arising out of exposure to interest rate volatility will be built into the capital adequacy norms specified by the regulatory authorities. This, in turn, will require efficient asset-liability management practices. Information technology and asset-liability management in the Indian context Many of the new private sector banks and some of the non-banking financial companies have gone in for complete computerization of their branch network and have also integrated their treasury, forex, and lending segments. The information technology initiatives of these institutions provide significant advantage to them in asset-liability management since it facilitates faster flow of information, which is accurate and reliable. It also helps in terms of quicker decision-making from the central office since branches are networked and accounts are considered as belonging to the bank rather than a branch. In other words, the boundaries of asset-liability management architecture itself is changing because of substantial changes brought about by information technology, and to that extent the operations managers are provided with multiple possibilities which were not earlier
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available in the context of large numbers of branch networks and associated problems of information collection, storage, and retrieval. In the Indian context, asset-liability management refers to the management of deposits, credit, investments, borrowing, forex reserves and capital, keeping in mind the capital adequacy norms laid down by the regulatory authorities. Information technology can facilitate decisions on the following issues: . Estimating the main sources of funds like core deposits, certificates of deposits, and call borrowings. . Reducing the gap between rate sensitive assets and rate sensitive liabilities, gives a certain level of risk. . Reducing the maturity mismatches so as to avoid liquidity problems. . Managing funds with respect to crucial factors like size and duration. LITERATURE REVIEW There is a considerable literature addressing asset-liability management in banks. One of the key motivators of asset-liability management worldwide was the Basel Committee. The Basel Committee on Banking Supervision (2001) formulated broad supervisory standards and guidelines and recommended statements of best practice in banking supervision. The purpose of the committee was to encourage global convergence toward common approaches and standards. In particular, the Basel II norms (2004) were proposed as an international standard for the amount of capital that banks need to set aside to guard against the types financial and operational risks they face. Basel II proposed setting up rigorous risk and capital management requirements designed to ensure that a bank holds capital reserves appropriate to the risk the bank exposes itself to through its lending and investment practices. Generally speaking, these rules mean that the greater risk to which the bank is exposed, the greater the amount of capital the bank needs to hold to safeguard its solvency and overall economic stability. This would ultimately help protect the international financial system from the types of problems that might arise should a major bank or a series of banks collapse. Gardner and Mills (1991) discussed the principles of asset-liability management as a part of banks strategic planning and as a response to the changing environment in prudential supervision, e-commerce and new taxation treaties. Their text provided the foundation of subsequent discussion on asset-liability management. Giokas and Vassiloglou (1991) developed a goal-programming model for bank asset and liability management. They supported the idea that apart from attempting to maximize Revenues, management tries to minimize risks involved in the allocation of the banks capital, as well as to fulfill other goals of the bank, such as retaining its market share, increasing the size of its deposits and loans. Haslem et al (1999) used canonical analysis and the interpretive framework of asset/liability management in order to identify and interpret the foreign and domestic balance sheet strategies of large U.S. banks in the context of the crisis in lending to
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LDCs. Their study found that the least profitable very large banks have the largest proportions of foreign loans, yet they emphasize domestic balance sheet (asset/liability) matching strategies. Conversely, the most profitable very large banks have the smallest proportions of foreign loans, but, nonetheless, they emphasize foreign balance sheet matching strategies. Vaidyanathan (1999) found that several banks had inadequate and inefficient Management systems and also he argued that Indian banks were more exposed to International markets, especially with respect to FOREX transactions, so that Asset Liability Management was essential, as it would enable the bank to maintain its exposure to foreign currency fluctuations given the level of risk it can handle. He also found that an increasing proportion of investments by banks were being recorded on a marked-to market basis, thus being exposed to market risks. He also suggested that, as bank profitability focus has increased over the years, there is an increasing possibility that the risk arising out of exposure to interest rate volatility would be built into the capital adequacy norms specified by the regulatory authorities, thus in turn requiring efficient asset-liability management practices. Vaidya and Shahi (2001) studied asset-liability management in Indian banks. They suggested in particular that interest rate risk and liquidity risk are two key inputs in business planning process of banks. Ranjan and Nallari (2004) used canonical analysis to examine asset-liability management in Indian banks in the period 1992-2004. They found that SBI and associates had the best asset-liability management in the period 1992-2004. They also found that, other than foreign banks, all other banks could be said to be liability managed; i.e. they all borrowed from the money market to meet their maturing obligations. Private Banks were found to be aggressive in profit generation, while nationalized banks were found to be excessively concerned about liquidity. There have been several applications of mathematical models in the field of bank management. The deterministic linear programming model of Chambers and Charnes (1961) was the first of its kind in ALM. Cohen and Hammer (1967), Robertson (1972) have realized successful applications of Chambers and Charnes model. Even though these models have differed in their treatment of disaggregation, uncertainty and dynamic considerations, they all have in common the fact that they are specified to optimize a single objective profit function subject to the relevant linear constraints. Apart from the deterministic models, several stochastic models have been proposed since the 1970s. These models, including the use of chance-constrained programming (Charnes and Thore, 1966; Charnes and Littlechild, 1968; Pogue and Bussard, 1972), dynamic programming (Samuelson, 1969; Merton, 1969,1990; Eppen and Fama, 1971), sequential decision theory (Wolf, 1969; Bradley and Crane, 1972) and stochastic linear programming under uncertainty (Cohen and Thore, 1970; Booth, 1972; Crane, 1971; Kallberg et al. 1982), presented computational difficulties.

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An alternative approach in considering stochastic models is the stochastic linear programming with simple recourse. Kusy and Ziemba (1986) employed a multi-period stochastic linear program with simple recourse to model the management of assets and liabilities in banking while maintaining computational feasibility. Their results indicate that the proposed ALM model is theoretically and operationally superior to a corresponding deterministic linear programming model and that the computational effort required for its implementation is comparable to that of the deterministic model. Another application of the multistage stochastic programming is the Russell-Yasuda Kasai model (Carino et al., 1994), which aims at maximizing the long term wealth of the firm while producing high income returns. Mihir Dash, Ravi Pathak (2008) studied asset-liability management in Indian banks using a linear programming model developed according to the asset-liability guidelines provided by the Reserve Bank of India. The study covers all scheduled commercial banks except regional rural banks (RRBs), for the year 2007-08. The banks are grouped on the basis of ownership structure: public sector banks (including SBI & associates), private sector banks, and foreign banks. The general recommendations of the study are that banks must carefully maintain and monitor their asset-liability positions, balancing profitability, liquidity, and interest rate risk. Banks which were found to satisfy all the liquidity constraints can focus on profit maximization; on the other hand, banks which were found not to satisfy all the liquidity constraints should identify which particular constraints they fail, and should subsequently pursue strategies to satisfy these constraints. Also, banks such as HSBC Bank and Standard Chartered Bank, which were found to satisfy all liquidity constraints, but at the cost of profitability, should pursue the strategy of profit maximization, ensuring that they satisfy all the guidelines of RBI. Finally, banks which are exposed to interest rate risk should focus on improving the duration of rate sensitive assets/liabilities, as far as possible.
Sayonton Roy (2010) concluded that today ALM departments are addressing (non-trading) foreign exchange risks as well as other risks. Also, ALM has extended to non-financial firms. Corporations have adopted techniques of ALM to address interest-rate exposures, liquidity risk and foreign exchange risk. They are using related techniques to address commodities risks. For example, airlines' hedging of fuel prices or manufacturers' hedging of steel prices are often presented as ALM. Thus it can be safely said that Asset Liability Management will continue to grow in future and an efficient ALM technique will go a long way in managing volume, mix, maturity, rate sensitivity, quality and liquidity of the assets and liabilities so as to earn a sufficient and acceptable return on the portfolio.

Need for the Study:

Indian banks need to be vigilant in the years to come for market opportunities particularly with the competition envisaged in the banking sector. In 2000 the beyond, the key element is that banks should strive to achieve significant increase in their assets for creating a vibrant and competitive financial system. In the context of global competition, it is an important task for the Indian banks to adopt effective ALM techniques to manage the volume, mix, maturity, rate sensitivity, quality and liquidity of assets and liability as a
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whole so as to attain a predetermined acceptable risk/reward ration. Globalization has mandated the Indian Banks to be efficient in Asset and Liability Management along with the associated risk management. There is need to insulate the ALM from the risks associated with the global financial scenario in order to survive and grow in the intense competitive conditions. An improvement in the ALM will result in higher profitability and resilience in the Indian Banks. The earlier research studies indicate the critical nature of ALM Process in order to bring in stability in the Indian Financial Sector in general and Indian Banking Sector in particular. Keeping this in view, the present research study is proposed to be undertaken. For the study, Asset and Liability Management Indian Banks in general and in Banks of the State Bank of India (SBI), Andhra Bank, Ing Vysya Bank, and Industrial Credit Investment Corporation of India (ICICI) bank in particular are chosen representing two nationalized banks (SBI, Andhra Bank) and two Private Sector Banks (Ing Vysya Bank, ICICI) proposed for the study. State Bank of India (SBI) is the nation's largest and oldest bank and Andhra Bank was nationalized in the year 1980 and ranked as best midsized bank in survey of Indias best bank for the year 2010. Ing Vysya Bank oldest private sector bank in India and ICICI bank is India's second bank (after State Bank of India) and its largest private bank. Objectives of the study: Primary Objective: the study aims at analyzing and evaluating ALM techniques and strategies followed by select banks in India. Specific Objectives:1. To give an overview Indian Banking Industry. 2. To examine the public policy with specific reference to ALM process in Indian Banks. 3. To study the ALM process in the select banks. 4. To study the reasons for Asset and Liability mismatches. 5. To evaluate the Liquidity/Risk management in select banks. 6. To study the prevailing interest rates which affect the earning stream of banks by evaluating Interest Rate Risk Management. 7. To evaluate the Management of Market Risk. 8. To determine the credit risk faced by the banks in order to identify the real reason behind the high level of NPAs and to assess the credit risk management of the banks.

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9. To offer suitable suggestions to evolve a comprehensive ALM strategy for select banks.

Research Methodology: Keeping the objectives of the study in mind, an exhaustive study of Assets and Liabilities management in commercial banks (some selected banks) has been undertaken. The data required for the purpose of the study collected from both primary and secondary sources. Primary data will be collected from the select branches of the identified banks and through detailed survey of the officials of these banks. For this purpose The SBI, Andhra Bank and Ing Vysya Bank, ICICI bank are taken. The secondary data will be collected from the official records, financial statements of the selected banks branches and RBI reports and bulletins. Further relevant data may also be collected from Journals, Books, Websites, where ever necessary. Interpretation and Analysis of Data: As the main purpose of the study is the management of assets and liabilities in Commercial Banks, the study implies understanding of various aspects related to ALM and problems aroused by asset and liabilities mismatches which is possible only with proper liquidity, interest rate, market risk management and funding, capital and profit planning and adopting suitable techniques and strategies. The data collected may; be edited, classified and tabulated by using multi variant tables will be used wherever necessary to lend the data more precision and systematization. The statistical tools like Averages, Percentages, and ANOVA will be used to analyze data. Scope of the study:The scope of the study is confirmed to the selected branches of the select banks. Scheme of Chaperisation: Chapter I: Introduction -- this chapter is intended to deal with the conceptual analysis of Asset and Liability management in banks, ALM process, the international norms BASEL I and BASEL II, the RBI policy, Bench marking, Risk exposure, Literature survey, need for the study, methodology etc. Chapter II: Banking Industry in India Trends and Performance This chapter is to deal with the brief introduction of Indian banking industry, the phases of financial sector reforms, recommendations of the Narasimham committee, current scenario of the banking industry in India. Chapter II: Liquidity and Fund Managementthis chapter includes meaning, dimensions, causes, symptoms, factors of liquidity risk, liquidity measurement approaches, RBI guidelines on liquidity risk and contingency plan for liquidity management and fund management.
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Chapter III: Interest Rate Risk Management this chapter includes measuring interest rate risk, GAP analysis, preparation of GAP report, GAP analysis prudential norms, altering GAP, duration GAP analysis and simulation. Chapter IV: Management of Market Risk this chapter explains trade and foreign exchange risk, Transaction exposure, Techniques of foreign exchange risk, Futures and Forward contracts, Derivatives, Options and Swaps. Chapter V: Operational Risk management this chapter explains meaning of operational risk, objectives and method operational risk management. Chapter VI: Conclusions and Suggestions -- This chapter is to conclude the topic by giving suggestions. The ALM would help the banks to boost up their profits, smooth recycling of funds in the nation. This would help the nation to develop more banking branches and developing the economy by providing the better financial services to the nation. References: 1. Alexander Adam, The Hand Book of Asset and Liability Management- from models to optimal return strategies, the Wiley & Sons financial series. 2. Moorad Chowdary, Bank Asset and Liability Management: strategy, trading and analysis, the Wiley & Sons financial series. 3. Dr. B. Charumathi, Asset Liability Management in Indian Banking Industry with special reference to Interest Rate Risk Management in ICICI Bank, Proceedings of the World Congress on Engineering 2008 Vol II , WCE 2008, July 2 - 4, 2008, London, U.K. 4. Asset Liability Management in Banks, a presentation by Kiran Sharma member of Faculty CAB, RBI, PUNE. 5. R. Vaidyanadhan, Asset and Liability Management: Issues and Trends in Indian context, ASCI Journal of Management 29(1). 39-48, Copyright? 1999 Administrative Staff College of India. 6. Asset Liability Management Module A, C.S.Balakrishnana, Faculty member, SPBT College. 7. Ravi Pathak, Canonical Correlation Analysis of Asset and Liability Management of Indian Banks, Electronic copy available at: http://ssrn.com/abstract=1412739. 8. Himanshu hawasthi, Asset-Liability Management-An Indian Perspective, 30 September 2008. 9. Asset Libility Management: An Overview, An Oracle Financial Services. 10. Risk Management in Banks, R.A.Raghavan, Charted accountant, February 2003. 11. Dr. B. Charumathi, Asset Liability Management in Indian Banking Industry with special reference to Interest Rate Risk Management in ICICI Bank, Proceedings of the World Congress on Engineering 2008 Vol II, July 2 - 4, 2008, London, U.K.

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12. Risk Management and Asset and Liability Management in Banks, Focus Paper, Technical Assistance Consultants Report TA6454 (REG): Supporting Regional Capacities for Financial Asset and Liability and Risk Management. 13. Srividhya Muralikrishnan, Asset Liability Management - the Indian Perspective, Asian development bank, Tata consultancy services (TCS) -29 May 2007: Available at: www.gtnews.com.

14. Vibha Batra, Karthik Srinivasan, Puneet Maheshwari, Indian Banking Sector: Challenges unlikely to derail the progress made, ICRA, June, 2011. 15. 15. Narendra Jadhav, Emerging Issues in Banking and Financial Sector in India, DBOD. No. BP. 256 / 21.04.098/ 2007-08, September 5, 2007. 16. Asset Liability Management System In Bank RBI Guidelines, November 11th, 2010. 17. From Compliance to Internal Assessment - Is risk management by Indian banks driven from within? Indian Bank Association. 18. Nicolae B. Garleanu, Lasse H. Pedersen, Liquidity and Risk Management, Working Paper 12887. Available at: http://www.nber.org/papers/w12887. 19. 19. C.S. Bala Krishnan, Asset Liability Management, Faculty member of SPBT College. 20. 20. Chowdarip, Asset Liability Management in Banking, Available at: www.authorstream.com/presentaion/chowdarip-178710. 21. 21. Peter Rose, Sylvia Hudgins, Bank Management & Financial Services, Chapter 7, Asset and Liability Management: Determining and measuring Interest Rates and Controlling Interest Sensitive and Duration GAPs. 22. 22. Vikram Singh Sankhala, Asset Liability Management, on November 9th 2010, Available at: www.slideshare.net/vikramsankhala/asset-liabilitymanagement-5711446. 23. Asset Liability system management in banks guidelines, Available at: http://rbidocs.rbi.org.in/rdocs/PressRelease/PDFs/3204.pdf

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