LITERATURE REVIEW

Over the last few years the Indian financial markets have witnessed wide ranging at fast pace. In the 1940s and the 1950s, there was an abundance of funds in banks in the form of demand and savings deposits. Because of the low cost of deposits, banks had to develop mechanism by which they could make efficient use of these funds. Hence, the focus then was mainly on asset management. But as the availability of low cost funds started to decline, liability management became the focus of bank management efforts. Liability management essentially refers to the practice of buying money through cumulative deposits, federal funds and commercial paper in order to fund profitable loan opportunities. But with an increase in volatility in interest rates and with a severe recession damaging several economies, banks started to concentrate more on the management of both sides of the balance sheet. But as the Intense competition for business involving both the assets and liabilities, together with increasing volatility in the domestic interest rates as well as foreign exchange rates, has brought pressure on the management of banks to maintain a good balance among spreads, profitability and long-term viability. These 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 risks. Asset liability management (ALM) can be defined as the ongoing process of formulating, implementing, monitoring and revising strategies related to assets and liabilities to achieve an organizations financial objectives, given the organizations risk tolerance and other constraints. ALM also is known as balance sheet management. In banking activity the gap between assets and liabilities can bring some consequences where the following risks are arose. And as a whole it influences badly on the banks functioning. Solving that problem is the primary goal of ALM. The good balance sheet management means that the return on loans and securities as the highest as possible, risks are minimized and liquid asset are in adequate amount. For these reason bank staff when managing asset and debts should follow four main strategies which include liquidity, asset, liability and capital adequacy management. Traditionally, ALM has focused primarily on the interest rate risk which is arisen when the maturity of asset and debts and their volume are not the same. For example, commercial bank is viewed as short funded when the maturity of its assets is longer than the liability maturity. On the contrary, bank can be called long funded when the maturity of debt is bigger. Both situations are risky and may be not much profitable because in both cases bank has to refinance or reinvest funds at a rate that can be unfavorable.

However, today in addition to interest rate risk, the control of a much broader range of risks such as equity, liquidity, currency, credit, operational risks etc. is engaged by balance sheet management. Also there are some methods commercial banks use to manage the risks: by matching the assets and liabilities according to the maturity pattern or the matching the duration, by hedging and by securitization. This note lays down broad guide lines in respect of interest rate and liquidity risks management systems in banks which form part of the asset-liability management (ALM) function. The initial focus of the ALM function would be to enforce the risk management discipline viz.managing business after assessing the risk involved. Asset liability management can be broadly defined as the continual rearrangement of both sides of credit unions balance sheet in an attempt to maintain responsible profitability, to minimize interest rate risk, and to provide adequate liquidity. All credit unions perform some sort of ALM analysis; however, the level of involvement and understand of the officials and management, and the quality of their analysis decisions varies widely. When the officials declare a dividend or change interest rates on loans, they are engaging in ALM. These decisions can impact liquidity and profitability. ALM strategies and techniques vary depending on the credit unions capital structure, the products and services offered, the terms of loans and deposits, and the level of the officials and managements understanding. In a small credit union with basic services ALM can consist of: Awareness of the members share and loan needs;

 Access to a line of credit for short term liquidity needs; Relatively short term investments; Ability to adjust dividends and loan rates to change in the market and Adequate earning and capital.

Daily management is usually responsible for analyzing the ALM position. The examiners role is to review the ALM process and identify weaknesses or problems that could have a negative impact on the credit unions financial position.

Objective of the ALM review the objective of the ALM review during the examination is to: Determine the credit union has sufficient liquidity to handle normal savings and loan needs and that management is aware of any cyclical changes that can effect liquidity; Analyze management approach to ALM and determine that interest rate risk is minimal ; and Ascertain the ability of the ALM process to adapt to significant changes in the market.

Scope of the ALM review- the scope of the ALM review will vary widely. Credit unions with a conservative, short-term maturity structure for saving, loans, and investments often only need a basic understanding of ALM .the review will be much more in depth in larger credit unions that offer a wide array of products, services, fixed and variable interest rates and longerterm maturities on loans and savings. If the examiners noted no major problems during prior examination and no significant changes have occurred during the examination period, examiners will review the ALM program and the monitoring of liquidity to determine if all risks are adequately managed. Keeping the size and complexity of the credit union in mind, examiners should:

Introduction
Asset liability management (ALM) plays a critical role in weaving together the different business lines in a financial institution. Managing liquidity and the balance sheet are crucial to the existence of a financial institution and sustenance of its operations. It is also essential for seamless growth of the balance sheet in a profitable way. In recent times, even large multinational financial institutions were in a deep liquidity crisis and in dire need of external intervention for survival. The practical importance of ALM and liquidity management had been somewhat underestimated. Even management of large

institutions, regulators, and observers saw how well-reputed firms and trusted institutions folded up and were not able to find a way out of the deep liquidity crisis. This resulted in regulators attaching high importance to new measures needed to ensure a sound liquidity management system. Consequently, regulators have enhanced and in some geographies, thoroughly revamped, regulatory over In banking, asset and liability management (often abbreviated ALM) is the practice of managing risks that arise due to mismatches between the assets and liabilities (debts and assets) of the bank. This can also be seen in insurance. Asset liability management basically refers to the process by which an institution manages its balance sheet in order to allow for alternative interest rate and liquidity scenarios. Banks and other financial institution provide services which expose them to various kinds of risk like credit risk, interest risk, and liquidity risk. Asset liability management is an approach that provides institutions with protection that makes such risk acceptable. Asset liability management models enable institutions measure and monitor risk, and provide suitable strategies for their management. Banks are always aiming at maximizing profitability at the same time trying to ensure sufficient liquidity to repose confidence in the minds of depositors on their ability in servicing the deposits by making timely payment of interest/returning them on due dates and meeting all other liability commitments as agreed upon. To achieve these objectives, it is essential that banks have to monitor, maintain and manage their asset and liabilities portfolios in a systematic manner taking in to account the various risks

involved in these areas .this concept has gained importance in Indian conditions in the wake of the ongoing financial sector Reforms, particularly reforms relating to interest rate deregulation. The technique of managing both assets and liabilities together has come into being as a strategic response of banks to inflationary pressure, volatility in interest rates and serve recessionary trends which marked the global economy in the seventies and eighties. Over the last few years the Indian financial markets have witnessed wide ranging changes at fast pace. Intense competition for business involving both the asset and liabilities, together in increasing volatility in the domestic interest rates as well as foreign exchange rates, has brought pressure on the management of banks to maintain a good balance among spreads, profitability and long-term viability. These pressure call for structure and comprehensive measure and not just ad hoc action. The management of banks has to base their business decision on a dynamic and integrated risk management system and process, driven by corporate strategy. Banks are exposed to several major risk in the course of their business-credit risk, interest rate risk, foreign exchange risk, equity/ commodity price risk, liquidity risk and operational risks. This note lays down broad guidelines in respect of interest rate and liquidity risks management systems in banks which form part of the asset-liability management (ALM) function. The objective of good risk management programmes should be that

these programmes should be that these programmes will evolve into a strategic tool for bank management. Asset liability management models enable institutions to measure and monitor risk, and provide suitable strategies for their management. An effective asset liability management technique aim to manage volume, mix, maturity, rate sensitivity, quality and liquidity of assets and liabilities as a whole so as to attain a predetermined acceptable risk/reward ratio. It is aimed to stabilize short-term profits, long-term earnings and long-term substance of the bank. The parameters for stabilizing ALM system are: Net interest income (NII) Net interest margin (NIM) Economic equity ratio.

DESIGN & METHODOLOGY LIMITATION OF THE STUDY 1) Lack of time, money, area and resource constraints. 2) This study could be that the result obtained might be based on the approach of the approach of the respondents. METHODOLOGY Collection of data:

 Primary data: It includes the following Face to face Telephone calls Questionnaires

Secondary data: It includes the following Journals Magazines Newspaper/internet

Analysis of data: the analysis of this data can be done

through different statistical tools like ratio analysis, regression

analysis etc.