Alm

INTRODUCTION
Asset Liability Management (ALM) is a strategic approach of managing the balance sheet dynamics
in such a way that the net earnings are maximized. This approach is concerned with management of net
interest margin to ensure that its level and riskiness are compatible with the risk return objectives.
If one has to define Asset and Liability management without going into detail about its need and
utility, it can be defined as simply management of money which carries value and can change its shape
very quickly and has an ability to come back to its original shape with or without an additional growth.
The art of proper management of healthy money is ASSET AND LIABILITY MANAGEMENT (ALM
The Liberalization measures initiated in the country resulted in revolutionary changes in the sector.
There was a shift in the policy approach from the traditionally administered market regime to a free
market driven regime. This has put pressure on the earning capacity of co-operative, which forced them
to foray into new operational areas thereby exposing themselves to new risks. As major part of funds at
the disposal from outside sources, the management is concerned about RISK arising out of shrinkage in
the value of asset, and managing such risks became critically important to them. Although co-operatives
are able to mobilize deposits, major portions of it are high cost fixed deposits. Maturities of these fixed
deposits were not properly matched with the maturities of assets created out of them. The tool called
ASSET AND LIABILITY MANAGEMENT provides a better solution for this.
ASSET LIABILITY MANAGEMENT (ALM) is a portfolio management of assets and liability of an
organization. This is a method of matching various assets with liabilities on the basis of expected rates of
return and expected maturity pattern
In the context of ALM is defined as a process of adjusting s liability to meet loan demands,
liquidity needs and safety requirements. This will result in optimum value of the same time reducing the
risks faced by them and managing the different types of risks by keeping it within acceptable levels.

RBI revises asset liability management guidelines
February 6/2012In the era of changing interest rates, Reserve MUTHOOT FINANCE
CORP of India (RBI) has now revised its Asset Liability Management guidelines. MUTHOOT
FINANCE CORPs have now been asked to calculate modified duration of assets (loans) and
liabilities (deposits) and duration of equity.
This was stated by the executive director of RBI, V K Sharma, and here today. He said that
this concept gives MUTHOOT FINANCE CORPs a single number indicating the impact of a 1
per cent change of interest rate on its capital, captures the interest rate risk, and can thus help
them move forward towards assessment of risk based capital. This approach will be a graduation
from the earlier approach, which led to a mismatch between the assets and liabilities.
The ED said that RBI has been laying emphasis that MUTHOOT FINANCE CORPs should
maintain a more realistic balance sheet by giving a true picture of their non performing assets
(NPAs), and they should not be deleted to show huge profits. Though the MUTHOOT
FINANCE CORPing system in India has strong risk management architecture, initiatives have to
be taken at the MUTHOOT FINANCE CORP specific level as well as broader systematic level.
He also emphasized on the need for sophisticated credit-scoring models for measuring the credit
risks of commercial and industrial portfolios.
Emphasizing on a need for an effective control system to manage risks, he said that the
implementation of BASEL II norms by commercial MUTHOOT FINANCE CORPs should not
be delayed. He said that the MUTHOOT FINANCE CORPs should have a robust stress testing
process for assessment of capital adequacy in wake of economic downturns, industrial
downturns, market risk events and sudden shifts in liquidity conditions. Stress tests should
enable the MUTHOOT FINANCE CORPs to assess risks more accurately and facilitate planning
for appropriate capital requirements.
Sharma spoke at length about the need to extend the framework of integrated risk
management to group-wide level, especially among financial conglomerates. He said that RBI
has already put in place a framework for oversight of financial conglomerates, along with SEBI
and IRDA. He also said that at the systematic level efforts are being made to create an enabling
environment for all market participants in terms of regulation, infrastructure and instruments.
NEED AND IMPORTANTS OF THE STUDY:

The need of the study is to concentrates on the growth and performance of MUTHOOT and to
calculate the growth and performance by using asset and liability management and to know the
management of nonperforming assets.

To know financial position of MUTHOOT
To analyze existing situation of MUTHOOT
To improve the performance of MUTHOOT
To analyze competition between MUTHOOT with other cooperatives.
IMPORTANTS OF THE STUDY:
Fees and Charges:-
Fees payable on the Credit Card by the Card member:-
The fees may vary for each Card member, and from offer to offer. The same is communicated to
the Card member at the time of applying for the credit card. The above fees as applicable are billed to
the card account and are stated in the card statement of the month in which it is card charged.
Annual Fees
Renewal Fees
Cash Advance Fees:-
The Card member can use the Card to access cash in an emergency from ATMs in India or abroad.

SCOPE OF THE STUDY:
In this study the analysis based on ratios to know asset and liabilities management under
MUTHOOT and to analyze the growth and performance of MUTHOOT by using the calculations under
asset and liability management based on ratio.

Ratio analysis
Comparative statement
Common size balance sheet.
GEOGRAPHICAL SCOPE:-
The same problem was with the all other branches of MUTHOOT MUTHOOT FINANCE CORP even out
of the pune city. The management is conducting the same research on a big ground whi le my
contribution is tiny. Though my sample si ze and geographical area was defined and
confine to a particular territory but the application of output from the research are going to be
wide.
PRODUCT SCOPE:-

Studying the increasing business scope of the MUTHOOT FINANCE CORP.
Market segmentation to find the potential customers for the MUTHOOT FINANCE
CORP.
To study how the various products are positioned in the market.
Corporate marketing of products.
Customers perception on the various products of the MUTHOOT FINANCE CORP

OBJECTIVES OF THE STUDY

To study the concept of ASSET & LIABLITY MANAGEMENT in MUTHOOT
To study process of CASH INFLOWS and OUTFLOWS in MUTHOOT
To study RISK MANAGEMENT under MUTHOOT
To study RESERVES CYCLE of ALM under MUTHOOT
To study FUNCTIONS AND OBJECTIVES of ALM committee.

METHODOLOGY OF THE STUDY

The study of ALM Management is based on two factors.

1. Primary data collection.

2. Secondary data collection

PRIMARY DATA COLLECTION:

The sources of primary data were

The chief manager ALM cell

Department Sr. manager financing & Accounting

System manager- ALM cell

Gathering the information from other managers and other officials of the organization.

SECONDARY DATA COLLECTION:

Collected from books regarding journal, and management containing relevant information
about ALM and Other main sources were

Annual report of the MUTHOOT
Published report of the MUTHOOT
RBI guidelines for ALM.

LIMITATION OF THE STUDY:

This subject is based on past data of MUTHOOT
The analysis is based on structural liquidity statement and gap analysis.
The study is mainly based on secondary data.
Approximate results: The results are approximated, as no accurate data is Available.
Study takes into consideration only LTP and issue prices and their difference for
Concluding whether an issue is overpriced or under priced leaving other.
The study is based on the issues that are listed on NSE only.

CHAPTER-II
REVIEW OF LITERATURE

Paper Title:-Sovereign Risk and Asset and Liability
Management Conceptual Issues(SRALM)
Authour:- G. Papaioannou, and Author Iva Petrova(2000)
Findings:-
Country practices towards managing financial risks on a sovereign balance sheet continue to evolve. Each
crisis period, and its legacy on sovereign balance sheets, reaffirms the need for strengthening financial
risk management. This paper discusses some salient features embedded in in the current generation of
sovereign asset and liability management (SALM) approaches, including objectives, definitions of
relevant assets and liabilities, and methodologies used in obtaining optimal SALM outcomes. These
elements are used in developing an analytical SALM framework which could become an operational
instrument in formulating asset management and debtor liability management strategies at the sovereign
level. From a portfolio perspective, the SALM approach could help detect direct and derived sovereign
risk exposures. It allows analyzing the financial characteristics of the balance sheet, identifying sources
of costs and risks, and quantifying the correlations among these sources of risk. The paper also outlines
institutional requirements in implementing an SALM framework and seeks to lay the ground for further
policy and analytical work on this topic.JEL

Paper Title :- Integrating Asset-Liability Risk Management with
Portfolio Optimization for Individual Investors II (IALRM)
Author :- Travis L. Jones, Ph.D.(2002)
Findings :-

A majority of private client practitioners rely on mean-variance optimization (MVO),rules of thumb, or
model portfolios for making asset allocation recommendations. Considerations for income levels and
other constraints figure into the typical approach. However, not enough attention is given to the nature
of an investors multiple time horizons and implications for cash flows. These are the future demands
placed upon the portfolio. The risks that these demands will not be met need to be clearly understood in
order to validate any asset allocation decision. This study presents an approach of incorporating MVO
within a multi-horizon, asset-liability Management risk model. This approach allows for cash-flow
matching of a portion of an investors portfolio within the optimization framework. This allows an
individuals portfolio to
provide short-term cash flow, as needed, while also considering the longer-term demands on the
portfolio.
Part Title :- Asset & liability management (ALM) modelling with risk
control by stochastic dominance.
Author name :- Xi Yang, Jacek Gondzi & Andreas Grothey(2001)
Findings:-
An Asset Liability Management model with a novel strategy for controlling the risk of underfunding is
presented in this article. The basic model involves multi-period decisions (portfolio rebalancing) and
deals with the usual uncertainty of investment returns and future liabilities. Therefore, it is well suited
to a stochastic programming approach. A stochastic dominance concept is applied to control the risk of
underfunding through modelling a chance constraint. A small numerical example and an out-of-sample
back test are provided to demonstrate the advantages of this new model, which includes stochastic
dominance constraints, over the basic model and a passive investment strategy. Adding stochastic
dominance constraints comes with a price. This complicates the structure of the underlying stochastic
program. Indeed, the new constraints create a link between variables associated with different
scenarios of the same time stage. This destroys the usual tree structure of the constraint matrix in the
stochastic program and prevents the application of standard stochastic programming approaches, such
as (nested) Benders decomposition and progressive hedging. Instead, we apply a structure-exploiting
interior point method to this problem. The specialized interior point solver, object-oriented parallel
solver, can deal efficiently with such problems and outperforms the industrial strength commercial
solver CPLEX on our test problem set. Computational results on medium-scale problems with sizes
reaching about one million variables demonstrate the efficiency of the specialized solution technique.
The solution time for these non-trivial asset liability models appears to grow sub linearly with the key
parameters of the model, such as the number of assets and the number of realizations of the
benchmark portfolio, which makes the method applicable to truly large-scale problems.

Paper Title:- An investigation of asset liability management practices
in Kenya Commercial MUTHOOT FINANCE CORPs(IALM)
Author:- Macharia, & Irungu Peter(2003)
Findings :-
Risk management practices in commercial MUTHOOT FINANCE CORPs are commonly known as asset
liability management and it remains critical in ensuring safety of depositors' funds as well as investors'
stake. Asset liability management is a requirement by the Central MUTHOOT FINANCE CORPs of any
country in order to ensure full compliance to the set risk management guidelines. This study was
designed to establish the asset/liability management practices by Commercial MUTHOOT FINANCE
CORPs in Kenya and to find out the extent of asset-liability management by these MUTHOOT FINANCE
CORPs. The study will be important to commercial MUTHOOT FINANCE CORPs, scholars and it will
contribute more knowledge to the existing information on asset liability management. The population
under study comprised of all Heads of Treasury Operations of the 43 Commercial MUTHOOT FINANCE
CORPs in Kenya. Census study was used because the population was relatively small for sampling and
gave a better representation of the various risk management practices employed by various commercial
MUTHOOT FINANCE CORPs as well as their asset liability management practices. Each respondent filled
and submitted a self administered questionnaire that was dropped and picked later. The questionnaire
responses were summarized and the results analyzed using Statistical data analysis programme (SPSS) to
describe the relationship between the dependent and the independent variables. Findings were
presented by way of charts, graphs and tables. Several deductions were drawn from the findings. These
included: responding MUTHOOT FINANCE CORPs employed both conventional and MUTHOOT FINANCE
CORP-specific asset liability management practices. Most MUTHOOT FINANCE CORPs considered
credit/default risk to be the most critical of all financial risk exposures though some empirical evidence
shows that foreign exchange risk is the most critical risk for most firms. Majority of the MUTHOOT
FINANCE CORPs did not find the Kenyan currency market to be information efficient: speculation and
forecasting techniques were extensively used by most of them. Regular and systematic appraisal of
asset/liability management policies was a common practice amongst most MUTHOOT FINANCE CORPs.
Most MUTHOOT FINANCE CORPs also indicated that their asset/liability management systems were
governed by guidelines set by the management board which is a cross functional outfit covering all the
major functions in the MUTHOOT FINANCE CORP this showed that ALM is a highly strategic issue in the
MUTHOOT FINANCE CORPs Most MUTHOOT FINANCE CORPs, regardless of their size, extensively
utilized most of the conventional hedging instruments. Micro hedge approach, accounting and economic
exposure measurement strategies, natural hedging and diversification were some of the most utilized
strategies. Some hedging practices were considered by most MUTHOOT FINANCE CORPs to be more
important than others. These included use of forward contracts and foreign currency options as hedging
instruments, and use of matching/natural hedging strategy.
Paper Title:- Industry - with Asset Liability Management in Indian
MUTHOOT FINANCE CORPing special reference to Interest Rate Risk
Management in ICICI MUTHOOT FINANCE CORP
Author:- Dr. B. Charumathi
Findings:-
Assets and Liabilities Management (ALM) is a dynamic process of planning, organizing, coordinating and
controlling the assets and liabilities their mixes, volumes, maturities, yields and costs in order to
achieve a specified Net Interest Income (NII). The NII is the difference between interest income and
interest expenses and the basic source of MUTHOOT FINANCE CORPs profitability. The easing of controls
on interest rates has led to higher interest rate volatility in India. Hence, there is a need to measure and
monitor the interest rate exposure of Indian MUTHOOT FINANCE CORPs. This paper entitled A Study on
the Assets and Liabilities Management (ALM) Practices with special reference to Interest Rate Risk
Management at ICICI MUTHOOT FINANCE CORP is aimed at measuring the Interest Rate Risk in ICICI
MUTHOOT FINANCE CORP by using Gap Analysis Technique. Using publicly available information, this
paper attempts to assess the interest rate risk carried by the ICICI MUTHOOT FINANCE CORP in March
2005, 2006, & 2007. The findings revealed that the MUTHOOT FINANCE CORP is exposed to interest rate
risk .Index TermsInterest volatility, risk, Indian MUTHOOT FINANCE CORPs

Paper Title:- ASSET-LIABILITY MANAGEMENT UNDER BENCHMARK
AND MEAN-VARIANCECRITERIA IN A JUMP DIFFUSION MARKET
Author :- Yan ZENG(1), Zhongfei LI(2)
Findings:-
Assets and Liabilities Management (ALM) is a dynamic process of planning, organizing, coordinating and
controlling the assets and liabilities their mixes, volumes, maturities, yields and costs in order to
achieve a specified Net Interest Income (NII). The NII is the difference between interest income and
interest expenses and the basic source of MUTHOOT FINANCE CORPs profitability. The easing of controls
on interest rates has led to higher interest rate volatility in India. Hence, there is a need to measure and
monitor the interest rate exposure of Indian MUTHOOT FINANCE CORPs. This paper entitled A Study on
the Assets and Liabilities Management (ALM) Practices with special reference to Interest Rate Risk
Management at ICICI MUTHOOT FINANCE CORP is aimed at measuring the Interest Rate Risk in ICICI
MUTHOOT FINANCE CORP by using Gap Analysis Technique. Using publicly available information, this
paper attempts to assess the interest rate risk carried by the ICICI MUTHOOT FINANCE CORP in March
2005, 2006, & 2007. The findings revealed that the MUTHOOT FINANCE CORP is exposed to interest rate
risk. Index TermsInterest volatility, risk, Indian MUTHOOT FINANCE CORPs

Pepar Title :- Optimal Asset Allocation in Asset Liability
Management
Author:- Jules H. van Binsbergen, Michael W. Brandt
Findings :-
We study the impact of regulations on the investment decisions of a defined benefits pension plan. We
assess the influence of ex ante (preventive) and ex post (punitive) risk constraints on the gains to
dynamic, as opposed to myopic, decision making. We find that preventive measures, such as Value-at-
Risk constraints, tend to decrease the gains to dynamic investment. In contrast, punitive constraints,
such as mandatory additional contributions from the sponsor when the plan becomes underfunded,
lead to very large utility gains from solving the dynamic program. We also show that financial reporting
rules have real effects on investment behavior. For example, the current requirement to discount
liabilities at a rolling average of yields, as opposed to at current yields, induces grossly suboptimal
investment decisions.

Paper Title: IMPORTANCE OF ASSET AND LIABILITY MANAGEMENT IN
THE NIGERIA MUTHOOT FINANCE CORPING INDUSTRY (A CASE STUDY
OF EQUITY MUTHOOT FINANCE CORP NIGERIA LIMITED)
Authors:- faloye and andrew
Findings :-
This study examines the extent to which Asset and Liability management is crucial to the existence and
survival of a MUTHOOT FINANCE CORP. MUTHOOT FINANCE CORPing is confidence driven and the
extent to which this confidence is secured and retained depends on the efficiency with which MUTHOOT
FINANCE CORP asset and liabilities are managed to the satisfaction of the various constituencies that the
MUTHOOT FINANCE CORP serves viz: Depositors, Borrowers, Shareholders, Regulatory Authorities and
the Community. The scope of this survey is an in-depth study of the Assets and Liabilities Management
in EquityMUTHOOT FINANCE CORP of Nigeria Limited in the years before re-structure (1993 to 1995)
and after the re-structure (1996 to 1998). The survey will be limited to select Heads of Department and
above. The survey would also cover both the surviving members of the Meridien Equity MUTHOOT
FINANCE CORP, the restructuring management from Nigerian Intercontinental Merchant MUTHOOT
FINANCE CORP Limited and new members of staff after the restructure. It was found out that the crisis
of confidence in the financial system and its illiquidity is traced to the macro-economic and political
problems of the country. Government's unsuccessful attempt to arrest the above through various
measures as well as the massive looting of the treasury led to high loan defaults and exacerbated the
financial crisis and the resulting mass liquidation of financial Institutions and commercial MUTHOOT
FINANCE CORPs did not properly address the problem of effective Asset and liability management and
this triggered off the MUTHOOT FINANCE CORP failures already witnessed. It can therefore be
concluded that effective asset and liability management is critical factor in a commercial MUTHOOT
FINANCE CORP. It is of utmost necessity that good asset and liability management policies should be in
place in a capitalist society to mobilize available resources (liabilities) and divert them to profitable
instruments (assets) to achieve MUTHOOT FINANCE CORP viability and growth: Inefficient Asset and
Liability Management could result in MUTHOOT FINANCE CORP failure.

Paper title :-A Financial assets and liabilities management support
system
Author:- Yung-Hsin Wang, Ta-Hua Kuo
Findings :-
This paper describes the design and implementation of a decision support system (DSS) based on the
fund dispatching decision viewpoint from the financial division of a business group. An integrated data
warehouse is established and the technique of online analytical processing (OLAP) is applied to analyze
daily transaction data of an enterprise resource planning system with determined management goal.
We adopt the Business Dimensional Lifecycle approach to accomplish the system design and
development. The DSS system developed is to provide latest and timely information of financial asset
and liability positions in each company within the case business group so that decision makers can have
a clear decision support in fund dispatching. While most related researches on fund dispatching focused
especially on efficient MUTHOOT FINANCE CORP capital management and few studies were done for
general financial department of traditional enterprise let alone for the business group, this study has
made a progress in this issue and the resultant system is applicable to the similar business group .the
interest rate changing adversely, this in turn protects the owner's equity of the MUTHOOT FINANCE
CORP. We use seven-day's reacquired interest rate data to estimate the frequency distribution of the
fluctuation of the future market rate and solved the problem to describe the fluctuation of the interest
rate with multi-factors.

ASSET LIABILITY MANAGEMENT (ALM) SYSTEM:-
Asset-Liability Management (ALM) can be termed as a risk management technique
designed to earn an adequate return while maintaining a comfortable surplus of assets beyond
liabilities. It takes into consideration interest rates, earning power, and degree of willingness to
take on debt and hence is also known as Surplus Management.
But in the last decade the meaning of ALM has evolved. It is now used in many different
ways under different contexts. ALM, which was actually pioneered by financial institutions and
MUTHOOT FINANCE CORPs, are now widely being used in industries too. The Society of
Actuaries Task Force on ALM Principles, Canada, offers the following definition for ALM:
"Asset Liability Management is the on-going process of formulating, implementing, monitoring,
and revising strategies related to assets and liabilities in an attempt to achieve financial
objectives for a given set of risk tolerances and constraints."

Basis of Asset-Liability Management
Traditionally, MUTHOOT FINANCE CORPs and insurance companies used accrual
system of accounting for all their assets and liabilities. They would take on liabilities - such as
deposits, life insurance policies or annuities. They would then invest the proceeds from these
liabilities in assets such as loans, bonds or real estate. All these assets and liabilities were held at
book value. Doing so disguised possible risks arising from how the assets and liabilities were
structured.
Consider a MUTHOOT FINANCE CORP that borrows 1 Crore (100 Lakhs) at 6 % for a
year and lends the same money at 7 % to a highly rated borrower for 5 years. The net transaction
appears profitable-the MUTHOOT FINANCE CORP is earning a 100 basis point spread - but it
entails considerable risk. At the end of a year, the MUTHOOT FINANCE CORP will have to
find new financing for the loan, which will have 4 more years before it matures. If interest rates
have risen, the MUTHOOT FINANCE CORP may have to pay a higher rate of interest on the
new financing than the fixed 7 % it is earning on its loan.
Suppose, at the end of a year, an applicable 4-year interest rate is 8 %. The MUTHOOT
FINANCE CORP is in serious trouble. It is going to earn 7 % on its loan but would have to pay 8
% on its financing. Accrual accounting does not recognize this problem. Based upon accrual
accounting, the MUTHOOT FINANCE CORP would earn Rs 100,000 in the first year although
in the preceding years it is going to incur a loss.
The problem in this example was caused by a mismatch between assets and liabilities.
Prior to the 1970's, such mismatches tended not to be a significant problem. Interest rates in
developed countries experienced only modest fluctuations, so losses due to asset-liability
mismatches were small or trivial. Many firms intentionally mismatched their balance sheets and
as yield curves were generally upward sloping, MUTHOOT FINANCE CORPs could earn a
spread by borrowing short and lending long.
Things started to change in the 1970s, which ushered in a period of volatile interest rates that
continued till the early 1980s. US regulations which had capped the interest rates so that MUTHOOT
FINANCE CORP could pay depositors, was abandoned which led to a migration of dollar deposit
overseas. Managers of many firms, who were accustomed to thinking in terms of accrual accounting,
were slow to recognize this emerging risk. Some firms suffered staggering losses. Because the firms used
accrual accounting, it resulted in more of crippled balance sheets than MUTHOOT FINANCE CORP
Interest Rate Risk:-
Interest Rate Risk refers to the risk of changes in interest rates subsequent to the creation
of the assets and liabilities at fixed rates. The phased deregulations of interest rates and the
operational flexibility given in pricing most of the assets and liabilities imply the need for system
to hedge the interest rate risk. This is a risk where changes in the market interest rates might
adversely affect financial conditions.

The changes in interest rates affects in large way. The immediate impact of change in interest
rates is on earnings by changing its Net Interest Income (NII). A long term impact of changing interest
rates is on Market Value of Equity (MVE) or net worth as the economic value of assets, liabilities and off-
balance sheet positions get affected due to variation in market interest rates.

The risk from the earnings perspective can be measured as changes in the Net Interest
Income (NII) OR Net Interest Margin (NIM).

There are many analytical techniques for measurement and management of interest rate
risk. In MIS of ALM, slow pace of computerization in and the absence of total deregulation, the
traditional GAP ANALYSIS is considered as a suitable method to measure the interest rate risk.

Data Interpretation
Gap Analysis:-
The Gap or mismatch risk can be measured by calculating Gaps over different time buckets as at
a given date. Gap analysis measures mismatches between rate sensitive liabilities and rate sensitive
assets including off-balance sheet position.

An asset or liability is normally classified as rate sensitive if:

If there is a cash flow within the time interval.

The interest rate resets or reprocess contractually during the interval.

RBI changes the interest rates i.e., on saving deposits, export credit, refinance, CRR balances and
so on, in case where interest rate are administered.

It is contractually pre-payable or withdraw able before the stated maturities

The Gap is the difference between Rate Sensitive Assets (RSA) and Rate sensitive Liabilities
(RSA) for each time bucket.

The positive GAP indicates that RSAs are more than RSLs (RSA>RSL).

The negative GAP indicates that RSAs are more than RSALs (RSA<RSL).

They can implement ALM policies for the better identification of the mismatch, risk and for the
implementation of various remedial measures.

GENERAL:-
The classification of various components of assets and liabilities into different time buckets for
preparation of Gap reports (Liquidity and interest rate sensitivity) may be done as indicated in
Appendices I & II as a sort of bench mark, which are better equipped to reasonably estimate the
behavioral pattern, embedded options, rolls-in and rolls-out etc of various components of assets and
liabilities on the basis of past date. Empirical studies could classify them in the appropriate time buckets,
subject to approval from the HDFC / Board. A copy of the note approved by the ALOC / Board may be
sent to the Department of Supervision.

The present framework does not capture the impact of embedded options, i.e., the
customers exercising their options (premature closure of deposits and prepayment of loans and
advances) on the liquidity and interest rate risks profile. The magnitude of embedded option risk
at times of volatility in market interest rates is quite substantial should, therefore evolve suitable
mechanism, supported by empirical studies and behavioral analysis to estimate the future
behavior of assets; liabilities and off-balance sheet items to changes in market variables and
estimate the embedded options.
A scientifically evolved internal transfer pricing model by assigning values on the basis of current
market rates to funds provided and funds used is an imported component for elective implementation
of ALM systems. The transfer price mechanism can enhance the management of margin i.e., landings or
credit spread the funding or liability spread and mismatch spread. It also helps centralizing interest rate
risk at one place which facilitates effective control and management of interest rate risk. A well defined
transfer pricing system also provides a rational framework for pricing of assets and liabilities.

COMPARATIVE ASSET LIABILITY SHEET AS ON 31
ST
MARCH 2011-12

As at 31-Mar-12 As at 31-Mar-11
ABSOLUTE
INCREASE/
DECREAES
CHANGE
IN %
CAPITAL AND
LIABILITIES

Capital 4,652,257 4,577,433 74,824 1.634627967
Reserves and Surplus 249,111,291 210,618,369 38,492,922 18.27614665
Employees Stock Options
(Grants) Outstanding
Deposits
2,085,864,054 1,674,044,394 411,819,660 24.60028309
Borrowings 143,940,610 129,156,925 14,783,685 11.44629682
Other Liabilities and
Provisions
289,928,565 206,159,441 83,769,124 40.63317382

2,773,525,565 2,224,585,697 548,939,868 24.67604951
ASSETS

Cash and Balances with
Reserve Bank of India
251,008,158 154,832,841 96,175,317 62.11557986
Balances with Banks and
Money at Call and Short
notice
45,680,191 144,591,147 -98,910,956 -68.40733894
Investments 709,293,656 586,076,161 123,217,495 21.02414382
Advances 1,599,826,654 1,258,305,939 341,520,715 27.14130995
Fixed Assets 21,706,480 21,228,114 478,366 2.253455017
Other Assets 146,010,773 59,551,495 86,459,278 145.1840596

2,773,525,912 2,224,585,697 548,940,215 24.67606511
Contingent Liabilities 5,751,224,839 4,790,515,044 960,709,795 20.05441557
Bills for Collection 134,284,924 81,248,646 53,036,278 65.27650688

Interpretation:

The total current liabilities for the year are Rs.206159441 is less than the total assets for the year
are Rs.2224585697. Therefore the assets are more than the liabilities. So there is a positive gap of
Rs.548939688 i.e 24.67%

-1,000,000,000
0
1,000,000,000
2,000,000,000
3,000,000,000
4,000,000,000
5,000,000,000
6,000,000,000
7,000,000,000
As at 31-Mar-11
As at 31-Mar-10

ST
MARCH 2010-11

ABSOLUTE
INCREASE/
DECREAES
CHANGE
IN %
CAPITAL AND
LIABILITIES

Capital 4,577,433 4,253,841 323,592 7.607054424
Equity Share Warrants

4,009,158 -4,009,158 -100
29,135 54,870 -25,735 -46.90176781
Deposits 1,674,044,394 1,428,115,800 245,928,594 17.22049388
Borrowings 129,156,925 91,636,374 37,520,551 40.9450411
Other Liabilities and Provisions 206,159,441 162,428,229 43,731,212 26.92340628

2,224,585,697 1,832,707,732 391,877,965 21.38245822
ASSETS

154,832,841 135,272,112 19,560,729 14.4602821
Money at Call and Short notice
144,591,147 39,794,055 104,797,092 263.3486133
Investments 586,076,161 588,175,488 -2,099,327 -0.356921878
Advances 1,258,305,939 988,830,473 269,475,466 27.25193786
Fixed Assets 21,228,114 17,067,290 4,160,824 24.37893772
Other Assets 59,551,495 63,568,314 -4,016,819 -6.318901269

2,224,585,697 1,832,707,732 391,877,965 21.38245822
Bills for Collection 81,248,646 85,522,390 -4,273,744 -4.997222365

-1,000,000,000
0
1,000,000,000
2,000,000,000
3,000,000,000
4,000,000,000
5,000,000,000
6,000,000,000
As at 31-Mar-10
As at 31-Mar-09
ABSOLUTE INCREASE/
DECREAES
Interpretation:

The total current liabilities for the year are Rs.43731212 is less than the total assets for the year are
Rs.1832707732. Therefore the assets are more than the liabilities. So there is a positive gap of Rs.
391877965 i.e 21.38%

ST
MARCH 2009-10

ABSOLUTE
INCREASE/
DECREAES
CHANGE
IN %
CAPITAL AND
LIABILITIES

Capital 4,253,841 3,544,329
709,512 20.01823

4,009,158 -

Reserves and Surplus 142,209,460 111,428,076
30,781,384 27.62444
54,870 -

Deposits 1,428,115,800 1,007,685,910
420,429,890 41.72232
Borrowings 26,858,374 45,949,235
-19,090,861 -41.5477
Provisions
227,206,229 163,158,482
64,047,747 39.25493

1,832,707,732 1,331,766,032
500,941,700 37.61484
ASSETS

135,272,112 125,531,766
9,740,346 7.759268
notice
39,794,055 22,251,622
17,542,433 78.83665
Investments 588,175,488 493,935,382
94,240,106 19.07944
Advances 988,830,473 634,268,934
354,561,539 55.90082
Fixed Assets 17,067,290 11,750,917
5,316,373 45.2422
Other Assets 63,568,314 44,027,411
19,540,903 44.38349

1,832,707,732 1,331,766,032
500,941,700 37.61484
Contingent Liabilities 4,059,816,885 5,930,080,864
-1,870,263,979 -31.5386
Bills for Collection 85,522,390 69,207,148
16,315,242 23.5745

Interpretation:

500941700 i.e 37.61%

-3,000,000,000
-2,000,000,000
-1,000,000,000
0
1,000,000,000
2,000,000,000
3,000,000,000
4,000,000,000
5,000,000,000
6,000,000,000
7,000,000,000
As at 31-Mar-09
As at 31-Mar-08

ST
MARCH 2008-09

ABSOLUTE
INCREASE/
DECREAES
CHANGE
IN %
CAPITAL AND
LIABILITIES

Capital 354,43 319,39 3504 10.970913
Reserves and Surplus 11,142,80 6,113,76 502904 82.257727
Deposits 100,768,60 68,297,94 3247066 47.542664
Borrowings 4,478,86 2,815,39 166347 59.084887
Provisions
16,431,91 13,689,13 274278 20.036189

133,176,60 91,235,61 4194099 45.969978
ASSETS

12,553,18 5,075,25 747793 147.34112
notice
2,225,16 3,971,40 -174624 -43.970388
Investments 49,393,54 30,564,80 1882874 61.602693
Advances 63,426,90 46,944,78 1648212 35.10959
Fixed Assets 1,175,13 966,67 20846 21.564753
Other Assets 4,402,69 3,712,71 68998 18.584269

133,176,60 91,235,61 4194099 45.969978
Contingent Liabilities 593,008 328,148,24 -32221816 -98.192866
Bills for Collection 6,920,71 4,60683 231388 50.227163

Interpretation:

-40000000
-30000000
-20000000
-10000000
0
10000000
20000000
30000000
40000000
As at 31-Mar-08
As at 31-Mar-07
ABSOLUTE INCREASE/ DECREAES
CHANGE IN %
4194099 i.e 45.96%

CHAPTER-VI

FINDINGS
CONCLUSION
SUGGESTIONS
BIBILIOGRAPHY

FINDINGS

ALM technique is aimed to tackle the market risks. Its objective is to stabilize and
improve Net interest Income (NII).
Implementation of ALM as a Risk Management tool is done using maturity profiles and
GAP analysis.
ALM presents a disciplined decision making framework for s while at the same time
guarding the risk levels.
There has been a small reduction in Gross Sales and with the performance of prefab Division
the Gross Profit gap has narrowed and contributing to the EBIT. The Gross Profit has
increased considerably from 6584124 Cr in Last year to 968547 Cr in year. The interest
payment has increased by 6987Cr in the Current year and the Profit before Tax at 69857
when compared to 5874568 cr in Last year.
Perform Division realization has increased by 8% even the Turnover has come to 641.80 Cr
from 400.09 Cr in last year.
The profit After Tax has came 856996 Cr to 6584548 in Current year because of slope in
Cement Industry.
The PAT is in an increasing trend from 2008-2009 because of increase in sale prices and
also decreases in the cost of manufacturing. In 2010 and 2011even the cost of manufacturing
has increased by 5% because of higher sales volume PAT has increased considerably, which
leads to higher EPS, which is at 98.366 in 2010.
The company also increased considerably which investors in coming period. The company
has taken up a plant expansion program during the year to increase the production activity
and to meet the increase in the demand

CONCLUSION

The purpose of ALM is not necessarily to eliminate or even minimize risk. The level of risk will vary with
the return requirement and entitys objectives.
Financial objectives and risk tolerances are generally determined by senior management of an entity
and are reviewed from time to time.
All sources of risk are identified for all assets and liabilities. Risks are broken down into their component
pieces and the underlying causes of each component are assessed.
Relationships of various risks to each other and/or to external factors are also identified.
Risk exposure can be quantified 1) relative to changes in the component pieces, 2) as a maximum
expected loss for a given confidence interval in a given set of scenarios, or 3) by the distribution of
outcomes for a given set of simulated scenarios for the component piece over time.
Regular measurement and monitoring of the risk exposure is required. Operating within a dynamic
environment, as the entitys risk tolerances and financial objectives change, the existing ALM strategies
may no longer be appropriate.
Hence, these strategies need to be periodically reviewed and modified. A formal, documented
communication process is particularly important in this step.

Suggestions

They should strengthen its management information system (MIS) and computer
processing capabilities for accurate measurement of liquidity and interest rate
Risks in their Books.
In the short term the Net interest income or Net interest margins (NIM) creates
economic value of the which involves up gradation of existing systems &
Application software to attain better & improvised levels.
It is essential that remain alert to the events that effect its operating environment
& react accordingly in order to avoid any undesirable risks.
HDFC requires efficient human and technological infrastructure which will future
lead to smooth integration of the risk management process with effective business
strategies.

BIBILIOGRAPHY

Title of the Books Author Publications

1. Risk management Gustavson hoyt sout western, Thomson learning(2001)
2. India financial system M.Y. Khan Mcgraw Hill Edition
3. Management Research magazine P.M.Dileep Kumar

Web sites
www.hdfc.com
www.investoros.com
www.financeindia.com
www.google.com

ies. Firms had no options but to accrue the losses over a subsequent period of 5 to 10 years.
One example, which drew attention, was that of US mutual life insurance company "The
Equitable." During the early 1980s, as the USD yield curve was inverted with short-term interest
rates sky rocketing, the company sold a number of long-term Guaranteed Interest Contracts
(GICs) guaranteeing rates of around 16% for periods up to 10 years. Equitable then invested the
assets short-term to earn the high interest rates guaranteed on the contracts. But short-term
interest rates soon came down. When the Equitable had to reinvest, it couldn't get even close to
the interest rates it was paying on the GICs. The firm was crippled. Eventually, it had to
demutualize and was acquired by the Axa Group.
Increasingly MUTHOOT FINANCE CORPs and asset management companies started to
focus on Asset-Liability Risk. The problem was not that the value of assets might fall or that the
value of liabilities might rise. It was that capital might be depleted by narrowing of the difference
between assets and liabilities and that the values of assets and liabilities might fail to move in
tandem. Asset-liability risk is predominantly a leveraged form of risk.
The capital of most financial institutions is small relative to the firm's assets or liabilities,
and so small percentage changes in assets or liabilities can translate into large percentage
changes in capital. Accrual accounting could disguise the problem by deferring losses into the
future, but it could not solve the problem. Firms responded by forming asset-liability
management (ALM) departments to assess these asset-liability risk.
Techniques for assessing Asset-Liability Risk:-
Techniques for assessing asset-liability risk came to include Gap Analysis and Duration Analysis.
These facilitated techniques of managing gaps and matching duration of assets and liabilities. Both
approaches worked well if assets and liabilities comprised fixed cash flows. But cases of callable debts,
home loans and mortgages which included options of prepayment and floating rates, posed problems
that gap analysis could not address. Duration analysis could address these in theory, but implementing
sufficiently sophisticated duration measures was problematic. Accordingly, MUTHOOT FINANCE CORPs
and insurance companies started using Scenario Analysis.
Under this technique assumptions were made on various conditions, for example: -
Several interest rate scenarios were specified for the next 5 or 10 years. These specified
conditions like declining rates, rising rates, a gradual decrease in rates followed by a sudden rise,
etc. Ten or twenty scenarios could be specified in all.
Assumptions were made about the performance of assets and liabilities under each scenario.
They included prepayment rates on mortgages or surrender rates on insurance products.
Assumptions were also made about the firm's performance-the rates at which new business
would be acquired for various products, demand for the product etc.
Market conditions and economic factors like inflation rates and industrial cycles were also
included.
Based upon these assumptions, the performance of the firm's balance sheet could be projected
under each scenario. If projected performance was poor under specific scenarios, the ALM committee
would adjust assets or liabilities to address the indicated exposure. Let us consider the procedure for
sanctioning a commercial loan. The borrower, who approaches the MUTHOOT FINANCE CORP, has to
appraise the MUTHOOT FINANCE CORPs credit department on various parameters like industry
prospects, operational efficiency, financial efficiency, management qualities and other things, which
would influence the working of the company. On the basis of this appraisal, the MUTHOOT FINANCE
CORPs would then prepare a credit-grading sheet after covering all the aspects of the company and the
business in which the company is in.
Then the borrower would then be charged a certain rate of interest, which would cover the risk
of lending.
But the main shortcoming of scenario analysis was that, it was highly dependent on the choice of
scenarios. It also required that many assumptions were to be made about how specific assets or
liabilities will perform under specific scenarios. Gradually the firms recognized a potential for different
type of risks, which was overlooked in ALM analyses. Also the deregulation of the interest rates in US in
mid 70 s compelled the MUTHOOT FINANCE CORPs to undertake active planning for the structure of the
balance sheet. The uncertainty of interest rate movements gave rise to Interest Rate Risk thereby
causing MUTHOOT FINANCE CORPs to look for processes to manage this risk.
In the wake of interest rate risk came Liquidity Risk and Credit Risk, which became inherent
components of risk for MUTHOOT FINANCE CORPs. The recognition of these risks brought Asset Liability
Management to the centre-stage of financial intermediation. Today even Equity Risk, which until a few
years ago was given only honorary mention in all but a few company ALM reports, is now an
indispensable part of ALM for most companies. Some companies have gone even further to include
Counterparty Credit Risk, Sovereign Risk, as well as Product Design and Pricing Risk as part of their
overall ALM.
Now a day's a company has different reasons for doing ALM. While some companies view ALM
as a compliance and risk mitigation exercise, others have started using ALM as strategic framework to
achieve the company's financial objectives. Some of the business reasons companies now state for
implementing an effective ALM framework include gaining competitive advantage and increasing the
value of the organization.
Asset-Liability Management Approach:-
ALM in its most apparent sense is based on funds management. Funds management represents
the core of sound MUTHOOT FINANCE CORP planning and financial management. Although funding
practices, techniques, and norms have been revised substantially in recent years, it is not a new concept.
Funds management is the process of managing the spread between interest earned and interest paid
while ensuring adequate liquidity. Therefore, funds management has following three components,
which have been discussed briefly.
Liquidity Management:-
Liquidity represents the ability to accommodate decreases in liabilities and to fund increases in
assets. An organization has adequate liquidity when it can obtain sufficient funds, either by increasing
liabilities or by converting assets, promptly and at a reasonable cost. Liquidity is essential in all
organizations to compensate for expected and unexpected balance sheet fluctuations and to provide
funds for growth. The price of liquidity is a function of market conditions and market perception of the
risks, both interest rate and credit risks, reflected in the balance sheet and off-balance sheet activities in
the case of a MUTHOOT FINANCE CORP. If liquidity needs are not met through liquid asset holdings, a
MUTHOOT FINANCE CORP may be forced to restructure or acquire additional liabilities under adverse
market conditions. Liquidity exposure can stem from both internally (institution-specific) and externally
generated factors. Sound liquidity risk management should address both types of exposure. External
liquidity risks can be geographic, systemic or instrument-specific. Internal liquidity risk relates largely to
the perception of an institution in its various markets: local, regional, national or international.
Determination of the adequacy of a MUTHOOT FINANCE CORP's liquidity position depends upon an
analysis of its: -
Historical funding requirements
Current liquidity position
Anticipated future funding needs
Sources of funds
Present and anticipated asset quality
Present and future earnings capacity
Present and planned capital position
As all MUTHOOT FINANCE CORPs are affected by changes in the economic climate, the
monitoring of economic and money market trends is key to liquidity planning. Sound financial
management can minimize the negative effects of these trends while accentuating the positive ones.
Management must also have an effective contingency plan that identifies minimum and maximum
liquidity needs and weighs alternative courses of action designed to meet those needs. The cost of
maintaining liquidity is another important prerogative. An institution that maintains a strong liquidity
position may do so at the opportunity cost of generating higher earnings. The amount of liquid assets a
MUTHOOT FINANCE CORP should hold depends on the stability of its deposit structure and the potential
for rapid expansion of its loan portfolio. If deposit accounts are composed primarily of small stable
accounts, a relatively low allowance for liquidity is necessary.
Additionally, management must consider the current ratings by regulatory and rating agencies
when planning liquidity needs. Once liquidity needs have been determined, management must decide
how to meet them through asset management, liability management, or a combination of both.
Asset Management:-
Many MUTHOOT FINANCE CORPs (primarily the smaller ones) tend to have little influence over the
size of their total assets. Liquid assets enable a MUTHOOT FINANCE CORP to provide funds to satisfy
increased demand for loans. But MUTHOOT FINANCE CORPs, which rely solely on asset management,
concentrate on adjusting the price and availability of credit and the level of liquid assets. However,
assets that are often assumed to be liquid are sometimes difficult to liquidate. For example, investment
securities may be pledged against public deposits or repurchase agreements, or may be heavily
depreciated because of interest rate changes. Furthermore, the holding of liquid assets for liquidity
purposes is less attractive because of thin profit spreads.
Asset liquidity, or how "salable" the MUTHOOT FINANCE CORP's assets are in terms of both time
and cost, is of primary importance in asset management. To maximize profitability, management must
carefully weigh the full return on liquid assets (yield plus liquidity value) against the higher return
associated with less liquid assets. Income derived from higher yielding assets may be offset if a forced
sale, at less than book value, is necessary because of adverse balance sheet fluctuations.
Seasonal, cyclical, or other factors may cause aggregate outstanding loans and deposits to move
in opposite directions and result in loan demand, which exceeds available deposit funds. A MUTHOOT
FINANCE CORP relying strictly on asset management would restrict loan growth to that which could be
supported by available deposits. The decision whether or not to use liability sources should be based on
a complete analysis of seasonal, cyclical, and other factors, and the costs involved. In addition to
supplementing asset liquidity, liability sources of liquidity may serve as an alternative even when asset
sources are available.
Liability Management:-
Liquidity needs can be met through the discretionary acquisition of funds on the basis of interest
rate competition. This does not preclude the option of selling assets to meet funding needs, and
conceptually, the availability of asset and liability options should result in a lower liquidity maintenance
cost. The alternative costs of available discretionary liabilities can be compared to the opportunity cost
of selling various assets. The major difference between liquidity in larger MUTHOOT FINANCE CORPs and
in smaller MUTHOOT FINANCE CORPs is that larger MUTHOOT FINANCE CORPs are better able to control
the level and composition of their liabilities and assets. When funds are required, larger MUTHOOT
FINANCE CORPs have a wider variety of options from which to select the least costly method of
generating funds. The ability to obtain additional liabilities represents liquidity potential. The marginal
cost of liquidity and the cost of incremental funds acquired are of paramount importance in evaluating
liability sources of liquidity. Consideration must be given to such factors as the frequency with which the
MUTHOOT FINANCE CORPs must regularly refinance maturing purchased liabilities, as well as an
evaluation of the MUTHOOT FINANCE CORP's ongoing ability to obtain funds under normal market
conditions.
The obvious difficulty in estimating the latter is that, until the MUTHOOT FINANCE CORP goes to
the market to borrow, it cannot determine with complete certainty that funds will be available and/or at
a price, which will maintain a positive yield spread. Changes in money market conditions may cause a
rapid deterioration in a MUTHOOT FINANCE CORP's capacity to borrow at a favorable rate. In this
context, liquidity represents the ability to attract funds in the market when needed, at a reasonable cost
vis-e-vis asset yield. The access to discretionary funding sources for a MUTHOOT FINANCE CORP is
always a function of its position and reputation in the money markets.
Although the acquisition of funds at a competitive cost has enabled many MUTHOOT FINANCE
CORPs to meet expanding customer loan demand, misuse or improper implementation of liability
management can have severe consequences. Further, liability management is not riskless. This is
because concentrations in funding sources increase liquidity risk. For example, a MUTHOOT FINANCE
CORP relying heavily on foreign interMUTHOOT FINANCE CORP deposits will experience funding
problems if overseas markets perceive instability in U.S. MUTHOOT FINANCE CORPs or the economy.
Replacing foreign source funds might be difficult and costly because the domestic market may view the
MUTHOOT FINANCE CORP's sudden need for funds negatively. Again over-reliance on liability
management may cause a tendency to minimize holdings of short-term securities, relax asset liquidity
standards, and result in a large concentration of short-term liabilities supporting assets of longer
maturity. During times of tight money, this could cause an earnings squeeze and an illiquid condition.
Also if rate competition develops in the money market, a MUTHOOT FINANCE CORP may incur a
high cost of funds and may elect to lower credit standards to book higher yielding loans and securities. If
a MUTHOOT FINANCE CORP is purchasing liabilities to support assets, which are already on its books,
the higher cost of purchased funds may result in a negative yield spread.
Preoccupation with obtaining funds at the lowest possible cost, without considering maturity
distribution, greatly intensifies a MUTHOOT FINANCE CORP's exposure to the risk of interest rate
fluctuations. That is why MUTHOOT FINANCE CORPs who particularly rely on wholesale funding sources,
management must constantly be aware of the composition, characteristics, and diversification of its
funding sources.

Procedure for Examination of Asset Liability Management:-
In order to determine the efficacy of Asset Liability Management one has to follow a
comprehensive procedure of reviewing different aspects of internal control, funds management and
financial ratio analysis. Below a step-by-step approach of ALM examination in case of a MUTHOOT
FINANCE CORP has been outlined.
Step 1
The MUTHOOT FINANCE CORP/ financial statements and internal management reports should be
reviewed to assess the asset/liability mix with particular emphasis on: -
Total liquidity position (Ratio of highly liquid assets to total assets).
Current liquidity position (Minimum ratio of highly liquid assets to demand liabilities/deposits).
Ratio of Non Performing Assets to Total Assets.
Ratio of loans to deposits.
Ratio of short-term demand deposits to total deposits.
Ratio of long-term loans to short term demand deposits.
Ratio of contingent liabilities for loans to total loans.
Ratio of pledged securities to total securities.

Step 2
It is to be determined that whether MUTHOOT FINANCE CORP management adequately assesses
and plans its liquidity needs and whether the MUTHOOT FINANCE CORP has short-term sources of
funds. This should include: -
Review of internal management reports on liquidity needs and sources of satisfying these needs.
Assessing the MUTHOOT FINANCE CORP's ability to meet liquidity needs:-
Step 3
The MUTHOOT FINANCE CORPs future development and expansion plans, with focus on funding and
liquidity management aspects has to be looked into. This entails: -
Determining whether MUTHOOT FINANCE CORP management has effectively addressed the
issue of need for liquid assets to funding sources on a long-term basis.
Reviewing the MUTHOOT FINANCE CORP's budget projections for a certain period of time in the
future.
Determining whether the MUTHOOT FINANCE CORP really needs to expand its activities. What
are the sources of funding for such expansion and whether there are projections of changes in
the MUTHOOT FINANCE CORP's asset and liability structure?
Assessing the MUTHOOT FINANCE CORP's development plans and determining whether the
MUTHOOT FINANCE CORP will be able to attract planned funds and achieve the projected asset
growth.
Determining whether the MUTHOOT FINANCE CORP has included sensitivity to interest rate risk
in the development of its long term funding strategy.

Step 4
Examining the MUTHOOT FINANCE CORP's internal audit report in regards to quality and
effectiveness in terms of liquidity management
Step 5
Reviewing the MUTHOOT FINANCE CORP's plan of satisfying unanticipated
liquidity needs by: -
Determining whether the MUTHOOT FINANCE CORP's management assessed the potential
expenses that the MUTHOOT FINANCE CORP will have as a result of unanticipated financial or
operational problems.
Determining the alternative sources of funding liquidity and/or assets subject to necessity.
Determining the impact of the MUTHOOT FINANCE CORP's liquidity management on net
earnings position.
Step 6
Preparing an Asset/Liability Management Internal Control Questionnaire which should include
the following: -
Whether the board of directors has been consistent with its duties and responsibilities and
included: -
A line of authority for liquidity management decisions.
A mechanism to coordinate asset and liability management decisions.
A method to identify liquidity needs and the means to meet those needs.
Guidelines for the level of liquid assets and other sources of funds in relationship to needs.
Does the planning and budgeting function consider liquidity requirements?
Are the internal management reports for liquidity management adequate in terms of effective
decision making and monitoring of decisions.
Are internal management reports concerning liquidity needs prepared regularly and reviewed as
appropriate by senior management and the board of directors.
Whether the MUTHOOT FINANCE CORP's policy of asset and liability management prohibits or
defines certain restrictions for attracting borrowed means from MUTHOOT FINANCE CORP
related persons (organizations) in order to satisfy liquidity needs.
Does the MUTHOOT FINANCE CORP's policy of asset and liability management provide for an
adequate control over the position of contingent liabilities of the MUTHOOT FINANCE CORP?
Is the foregoing information considered an adequate basis for evaluating internal control in that
there are no significant deficiencies in areas not covered in this questionnaire that impair any
controls?
Asset Liability Management in Indian Context:-
The post-reform MUTHOOT FINANCE CORPing scenario in India was marked by interest rate
deregulation, entry of new private MUTHOOT FINANCE CORPs, and gamut of new products along with
greater use of information technology. To cope with these pressures MUTHOOT FINANCE CORPs were
required to evolve strategies rather than ad hoc solutions. Recognising the need of Asset Liability
management to develop a strong and sound MUTHOOT FINANCE CORPing system, the RBI has come out
with ALM guidelines for MUTHOOT FINANCE CORPs and FIs in April 1999.The Indian ALM framework
rests on three pillars: -
ALM Organisation (ALCO):-
The ALCO or the Asset Liability Management Committee consisting of the MUTHOOT
FINANCE CORPs senior management including the CEO should be responsible for adhering to
the limits set by the board as well as for deciding the business strategy of the MUTHOOT
FINANCE CORP in line with the MUTHOOT FINANCE CORPs budget and decided risk
management objectives. ALCO is a decision-making unit responsible for balance sheet planning
from a risk return perspective including strategic management of interest and liquidity risk. The
MUTHOOT FINANCE CORPs may also authorise their Asset-Liability Management
Committee (ALCO) to fix interest rates on Deposits and Advances, subject to their reporting to
the Board immediately thereafter. The MUTHOOT FINANCE CORPs should also fix maximum
spread over the PLR with the approval of the ALCO/Board for all advances other than consumer
credit.

ALM Information System:-
The ALM Information System is required for the collection of information accurately,
adequately and expeditiously. Information is the key to the ALM process. A good information
system gives the MUTHOOT FINANCE CORP management a complete picture of the
MUTHOOT FINANCE CORP's balance sheet.

ALM Process:-
The basic ALM processes involving identification, measurement and management of risk
parameter .The RBI in its guidelines has asked Indian MUTHOOT FINANCE CORPs to use
traditional techniques like Gap Analysis for monitoring interest rate and liquidity risk. However
RBI is expecting Indian MUTHOOT FINANCE CORPs to move towards sophisticated
techniques like Duration, Simulation, VaR in the future. For the accrued portfolio, most Indian
Private Sector MUTHOOT FINANCE CORPs use Gap analysis, but are gradually moving
towards duration analysis. Most of the foreign MUTHOOT FINANCE CORPs use duration
analysis and are expected to move towards advanced methods like Value at Risk for the entire
balance sheet. Some foreign MUTHOOT FINANCE CORPs are already using VaR for the entire
balance sheet.
ALM has evolved since the early 1980's. Today, financial firms are increasingly using
market value accounting for certain business lines. This is true of universal MUTHOOT
FINANCE CORPs that have trading operations. Techniques of ALM have also evolved. The
growth of OTC derivatives markets has facilitated a variety of hedging strategies. A significant
development has been securitization, which allows firms to directly address asset-liability risk by
removing assets or liabilities from their balance sheets. This not only eliminates asset-liability
risk; it also frees up the balance sheet for new business.
Thus, the scope of ALM activities has widened. 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.
ALM is a comprehensive and dynamic framework for measuring, monitoring and
managing the market risk of a MUTHOOT FINANCE CORP. It is the management of structure
of balance sheet (liabilities and assets) in such a way that the net earning from interest is
maximised within the overall risk-preference (present and future) of the institutions. The ALM
functions extend to liquidly risk management, management of market risk, trading risk
management, funding and capital planning and profit planning and growth projection. Benefits of
ALM - It is a tool that enables MUTHOOT FINANCE CORP managements to take business
decisions in a more informed framework with an eye on the risks that MUTHOOT FINANCE
CORP is exposed to. It is an integrated approach to financial management, requiring
simultaneous decisions about the types of amounts of financial assets and liabilities - both mix
and volume - with the complexities of the financial markets in which the institution operates
The concept of ALM is of recent origin in India. It has been introduced in Indian MUTHOOT
FINANCE CORPing industry w.e.f. 1
st
April, 1999. ALM is concerned with risk management
and provides a comprehensive and dynamic framework for measuring, monitoring and managing
liquidity, interest rate, foreign exchange and equity and commodity price risks of a MUTHOOT
FINANCE CORP that needs to be closely integrated with the MUTHOOT FINANCE CORPs
business strategy.
Therefore, ALM is considered as an important tool for monitoring, measuring and managing the
market risk of a MUTHOOT FINANCE CORP. With the deregulation of interest regime in India, the
MUTHOOT FINANCE CORPing industry has been exposed to the market risks. To manage such risks,
ALM is used so that the management is able to assess the risks and cover some of these by taking
appropriate decisions.
The assets and liabilities of the MUTHOOT FINANCE CORPs balance sheet are nothing but
future cash inflows or outflows. With a view to measure the liquidity and interest rate risk, MUTHOOT
FINANCE CORPs use of maturity ladder and then calculate cumulative surplus or deficit of funds in
different time slots on the basis of statutory reserve cycle, which are termed as time buckets.
As a measure of liquidity management, MUTHOOT FINANCE CORPs are required to monitor their
cumulative mismatches across all time buckets in their Statement of Structural Liquidity by establishing
internal prudential limits with the approval of the Board / Management Committee.

The ALM process rests on three pillars:
i. ALM Information Systems
Management Information Systems
Information availability, accuracy, adequacy and expediency
ii. ALM Organization
Structure and responsibilities
Level of top management involvement
iii. ALM Process
Risk parameters
Risk identification
Risk measurement
Risk management
Risk policies and tolerance levels.
As per RBI guidelines, commercial MUTHOOT FINANCE CORPs 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 (also
called 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 MUTHOOT
FINANCE CORPs 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 term-money market, RBI revised these
guidelines and it was provided that
the MUTHOOT FINANCE CORPs 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 viz., 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
liabililty. 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
turnout to be risky for the MUTHOOT FINANCE CORP. MUTHOOT FINANCE CORPs are required
to monitor such mismatches and take appropriate steps so that MUTHOOT FINANCE CORP is not
exposed to risks due to the interest rate movements during that period.
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 recognise the cumulative impact on liquidity.
The Boards of the MUTHOOT FINANCE CORPs 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.
Asset-Liability Committee (ALCO) is the top most committee to oversee the implementation of
ALM system and it is to be headed by CMD or ED. ALCO considers product pricing for both
deposits and advances, the desired maturity profile of the incremental assets and liabilities in
addition to monitoring the risk levels of the MUTHOOT FINANCE CORP. It will have to articulate
current interest rates view of the MUTHOOT FINANCE CORP and base its decisions for future
business strategy on this view.

Rate Sensitive Assets & Liabilities : -

An asset or liability is termed as rate sensitive when
Within the time interval under consideration, there is a cash flow,
The interest rate resets/reprices contractually during the interval,
BI changes interest rates where rates are administered and,
It is contractually pre-payable or withdrawal before the stated maturities.
Assets and liabilities which receive / pay interest that vary with a benchmark rate are re-
priced at pre-determined intervals and are rate sensitive at the time of re-pricing.
INTEREST RISK:
The phased deregulation of interest rates and the operational flexibility given to
MUTHOOT FINANCE CORPs in pricing most of the assets and liabilities imply the need for
the MUTHOOT FINANCE CORPing system to hedge the Interest-Rate Risk. Interest Rate Risk
is the risk where changes in market interest rates might adversely affect the MUTHOOT
FINANCE CORPs Net Interest Income. The gap report should be generated by grouping
interest rate sensitive liabilities, assets and off balance sheet positions into time buckets
according to residual maturity or next reprising period, whichever is earlier. Interest rates on
term deposits are fixed during their currency while the advance interest rates are floating rates.
The gaps on the assets and liabilities are to be identified on different time buckets from 128
days, 29 days upto 3 months and so on. The interest changes should be studied vis-a-vis the
impact on profitability on different time buckets to assess the interest rate risk.
GAP ANALYSIS:-
The various items of rate sensitive assets and liabilities and off-balance sheet items are classified
into time buckets such as 1-28 days, 29 days and upto 3 months etc. and items non-sensitive to
interest based on the probable date for change in interest.The gap is the difference between Rate
Sensitive Assets (RSA) and Rate Sensitive Liabilities (RSL) in various time buckets. The
positive gap indicates that it has more RSAS than RSLS whereas the negative gap indicates that
it has more RSLS. The gap reports indicate whether the institution is in a position to benefit from
rising interest rates by having a Positive Gap (RSA > RSL) or whether it is a position to benefit
from declining interest rate by a negative Gap (RSL > RSA).

TOTAL FINANCIAL SERVICES FIRMS RISK:-

Total Risk
(Responsibility of CEO)

Business Risk Financial Risk

Product Market Risk Capital Market Risk

(Responsibility of the (Responsibility of the

Chief Operating Officer) Chief Financial Officer)

Credit Interest rate
Strategic Liquidity
Regulatory currency
Operating Settlement
Human resources Basis
Legal

PRODUCT MARKET RISK:-

This risk decision relate to the operating revenues and expenses of the form that impact the
operating position of the profit and loss statements which include crisis, marketing, operating systems,
labor cost, technology, channels of distributions at strategic focus. Product Risks relate to variations in
the operating cash flows of the firm, which effect Capital Market, required Rates Of Return :

CREDIT RISK

STRATEGIC RISK

COMMODITY RISK

OPERATIVE RISK

HUMAN RESOURCES RISK

LEGAL RISK

Risk in Product Market relate to the operational and strategic aspects of managing
operating revenues and expenses. The above types of Product Risks are explained as follows :

CREDIT RISK:-

The most basic of all Product Market Risk or other financial intermediary is the erosion of value
due to simple default or non-payment by the borrower. Credit risk has been around for centuries and is
thought by many to be the dominant financial services todays intermediate the risk appetite of lenders
and essential risk ness of borrowers. manage this risk by ;
making intelligent lending decisions so that expected risk of borrowers is both accurately
assessed and priced;
Diversifying across borrowers so that credit losses are not concentrated in time;
purchasing third party guarantees so that default risk is entirely or partially shifted away from
lenders.
STRATEGIC RISK:-

This is the risk that entire lines of business may succumb to competition or obsolescence. In the
language of strategic planner, commercial paper is a substitute product for large corporate loans.
Strategic risk occurs when a is not ready or able to compete in a newly developing line of business. Early
entrants enjoyed a unique advantage over newer entrants. The seemingly conservative act of waiting for
the market to develop posed a risk in itself. Business risk accrues from jumping into lines of business but
also from staying out too long.

COMMODITY RISK:-
Commodity prices affects and other lenders in complex and often unpredictable ways.
The macro effect of energy price increases on inflation also contributed to a rise in interest rates,
which adversely affected the value of many fixed rate financial assets. The subsequent crash in
oil prices sent the process in reverse with nearly equally devastating effe.

OPERATING RISK:-

Machine-based system offer essential competitive advantage in reducing costs and improving
quality while expanding service and speed. No element of management process has more potential for
surprise than systems malfunctions. Complex, machine-based systems produce what is known as the
black box effect. The inner working of system can become opaque to their users. Because developers
do not use the system and users often have not constitutes a significant Product Market Risk. No
financial service firm can small management challenge in the modern financial services company.
HUMAN RESOURCES RISK:

Few risks are more complex and difficult to measure than those of personnel policy; they are
Recruitment, Training, Motivation and Retention. Risk to the value of the Non-Financial Assets as
represented by the work force represents a much more subtle of risk. Concurrent with the loss of key
personal is the risk of inadequate or misplaced motivation among management personal. This human
redundancy is conceptually equivalent to safety redundancy in operating systems. It is not inexpensive,
but it may well be cheaper than the risk of loss. The risk and rewards of increased attention to the
human resources dimension of management are immense.

LEGAL RISK:-

This is the risk that the legal system will expropriate value from the shareholders of financial
services firms. The legal landscape today is full of risks that were simply unimaginable even a few years
ago. More over these risks are very hard to anticipate because they are often unrelated to prior events
which are difficult and impossible to designate but the management of a financial services firm today
must have these risks at least in view. They can cost millions.

CAPITAL MARKET RISK:-

In the Capital Market Risk decision relate to the financing and financial support of
Product Market activities. The result of product market decisions must be compared to the
required rate of return that results from capital market decision to determine if management is
creating value. Capital market decisions affect the risk tolerance of product market decisions
related to variations in value associated with different financial instruments and required rate of
return in the economy.

LIQUIDITY RISK

INTEREST RATE RISK

CURRENCY RISK

SETTLEMENT RISK

BASIS RISK

LIQUIDITY RISK:-

For experienced financial services professionals, the foremost capital market risk is that of
inadequate liquidity to meet financial obligations. The obvious form is an inability to pay desired
withdrawals. Depositors react desperately to the mere prospect of this situation.

They can drive a financial intermediary to collapse by withdrawing funds at a rate that exceeds
its capacity to pay. For most of this century, individual depositors who lost faith in ability to repay them
caused failures from liquidity. Funds are deposited primarily as a financial of rate. Such funds are called
purchased money or headset funds as they are frequently bought by employees who work on the
money desk quoting rates to institutions that shop for the highest return. To check liquidity risk, firms
must keep the maturity profile of the liabilities compatible with that of the assets. This balance must be
close enough that a reasonable shift in interest rates across the yield curve does not threaten the safety
and soundness of the entire firm.

INTEREST RATE RISK:-
In extreme conditions, Interest Rate fluctuations can create a liquidity crisis. The fluctuation in the
prices of financial assets due to changes in interest rates can be large enough to make default risk a
major threat to a financial services firms viability. Theres a function of both the magnitude of change in
the rate and the maturity of the asset. This inadequacy of assessment and consequent mispricing of
assets, combined with an accounting system that did not record unrecognized gains and losses in asset
values, created a financial crisis. Risk based capital rules pertaining to have done little to mitigate the
interest rate risk management problem. The decision to pass it of, however is not without large cost, so
the cost benefit tradeoff becomes complex.

CURRENCY RISK:-
The risk of exchange rate volatility can be described as a form of basis risk among currencies instead
of basis risk among interest rates on different securities. Balance sheets comprised of numerous
separate currencies contain large camouflaged risks through financial reporting systems that do not
require assets to be marked to market. Exchange rate risk affects both the Product Markets and The
Capital Markets. Ways to contain currency risk have developed in todays derivative market through the
use of swaps and forward contracts. Thus, this risk is manageable only after the most sophisticated and
modern risk management technique is employed
SETTLEMENT RISK:-

Settlement Risk is a particular form of default risk, which involves the competitors. Amounts settle
obligations having to do with money transfer, check clearing, loan disbursement and repayment, and all
other inter- transfers within the worldwide monetary system. A single payment is made at the end of
the day instead of multiple payments for individual transactions.

BASIS RISK :-

Basis risk is a variation on the interest rate risk theme, yet it creates risks that are less
easy to observe and understand. To guard against interest rate risk, somewhat non comparable
securities may be used as a hedge. However, the success of this hedging depends on a steady and
predictable relationship between the two no identical securities. Basis can negate the hedge
partially or entirely, which vastly increases the Capital Market Risk exposure of the firm.

CHAPTER-V
DATA ANALYSIS
&
INTERPRETATION

RISK MANAGEMENT SYSTEM

Assuming and managing risk is the essence of business decision-making. Investing in a
new technology, hiring a new employee, or launching a marketing campaign is all decisions with
uncertain outcomes. As a result all the major management decisions of how much risk to take
and how to manage the risk.

The implementation of risk management varies from business to business, from one
management style to another and from one time to another. Risk management in the financial
services industry is different from others. Circumstances, Institutions and Managements are
different. On the other hand, an investment decision is no recent history of legal and political
stability, insights into the potential hazards and opportunities.

Many risks are managed quantitatively. Risk exposure is measured by some numerical index. Risk
cost tradeoff many tools are described by numerical valuation formulas.

Risk management can be integrated into a risk management system. Such a system can
be utilized to manage the trading position of a small-specialized division or an entire financial
institution. The modules of the system can be implemented with different degrees of accuracy
and sophistication.

RISK MANAGEMENT SYSTEM

Dynamics of risk factors

Cash flows Arbitrage
Generator Pricing Model

Price and Risk
Profile Of Contingent Claims

Dynamic Risk Target
Trading Rules Optimizer Risk Profile

RISK MANAGEMENT SYSTEM:-

Arbitrage pricing models range from simple equations to large scale numerically
sophisticated algorithms. Cash flow generators also vary from a single formula to a simulator
that accounts for the dependence of cash flows on the history of the risk factors.

Financial engineers are continuously incorporating advances in econometric techniques,
asset pricing models, simulation techniques and optimization algorithms to produce better risk
management systems.

The important ingredient of the risk management approach is the treatment of risk factors
and securities as an integrated portfolio. Analyzing the correlation among the real, financial and
strategic assets of an organization leads to clear understanding of risk exposure. Special
attention is paid to risk factors, which translate to correlation among the values of securities.
Identifying the correlation among the basic risk factors leads to more effective risk
management.

CONCLUSION:-

The burden of the Risk and its Costs are both manageable and transferable. Financial service firms,
in the addition to managing their own risk, also sell financial risk management to others. They sell their
services by bearing customers financial risks through the products they provide. A financial firm can
offer a fixed-rate loan to a borrower with the risk of interest rate movements transferred from the
borrower to the. Financial innovations have been concerned with risk reduction than any other subject.
With the possibility of managing risk near zero, the challenge becomes not how much risk can be
removed.

Financial services involve the process of intermediation between those who have financial
resources and those who need them, either as a principal or as an agent. Thus, value breaks into several
distinct functions, and it includes the intermediation of the following:
Maturity Preference mismatch, Default, Currency Preference mis-match, Size of
transaction and Market access and information.

RISK MANAGEMENT IN MUTHOOT FINANCE CORP:-

Narasimham committee II , advised to address market risk in a structured manner by adopting
Asset and Liability Management practices with effect from April 1
st
1989.

Asset and liability management (ALM) is the Art and Science of choosing the best mix
of assets for the firms asset portfolio and the best mix of liabilities for the firms liability
portfolio. It is particularly critical for Financial Institutions.

For a long time it was taken for granted that the liability portfolio of financial firms was
beyond the control of the firm and so management concentrated its efforts on choosing the asset
mix. Institutions treasury department used the funds provided by deposits to structure an asset
portfolio that was appropriate for the given liability portfolio.

With the advent of Certificate of Deposits (CDs), a tool by which to manipulate the mix of
liabilities that supported their Asset portfolios, which has been one of the active management of
assets and liabilities.

Asset and liability management program evolve into a strategic tool for management, the main
elements of the ALM system are:
ALM INFORMATION.
ALM ORGANISATION.
ALM FUNCTION.

ALM INFORMATION:-

ALM is a risk management tool through which Market risk associated with business are identified,
measured and monitored to maintain profits by restructuring Assets and Liabilities. The ALM framework
needs to be built on sound methodology with necessary information system as back up. Thus the
information is key element to the ALM process.

There are various methods prevalent worldwide for measuring risks. These range from the simple
Gap statement to extremely sophisticate and data intensive Risk adjusted profitability measurement
(RAPM) methods. The central element for the entire ALM exercise is the availability of adequate and
accurate information.

However, the existing systems in many Indians do not generate information in manner required for
the ALM. Collecting accurate data is the biggest challenge before, the particularly those having wide
network of branches, but lacking full-scale computerization.

Therefore the introduction of these information systems for risk measurement and monitoring has
to be addressed urgently.

The large network of branches and the lack of support system to collect information required for
the ALM which analysis information on the basis of residual maturity and behavioral pattern, it would
take time for s in the present state to get the requisite information.
ALM ORGANISATION:-
Successful implementation of the risk management process requires strong commitment on
the part of senior management in the to integrate basic operations and strategic decision making
with risk management.
The Board of Directors should have overall responsibility for management of risk and
should decide the risk management policy of the, setting limits for liquidity, interest rate, foreign
exchange and equity / price risk.
The Asset Liability Management Committee (MUTHOOT FINANCE CORP) consisting of
the s senior management, including CEO/CMD should be responsible for ensuring adherence to
the limits set by the Board of Directors as well as for deciding the business strategy of the (on
the assets and liabilities sides) in line with the s budget and decided risk management objective.
The ALM support group consisting of operation staff should be responsible for analyzing, monitoring
and reporting the risk profiles to the MUTHOOT FINANCE CORP. The staff should also prepare forecasts
(simulations) showing the effects of various possible changes in market condition related to the balance
sheet and recommend the action needed to adhere to s internal limits,
The MUTHOOT FINANCE CORP is a decision-making unit responsible for balance
sheet planning from a risk-return perspective including the strategic management of interest rate
and liquidity risks. Each has to decide on the role of its MUTHOOT FINANCE CORP, its
responsibility as also the decision to be taken by it. The business and risk management strategy
of the should ensure that the operates within the limits / parameters set by the Board. The
business issues that an MUTHOOT FINANCE CORP would consider, inter alia, will include
product pricing for deposits and advances, desired maturity profile and mix of the incremental
Assets and Liabilities, etc. in addition to monitoring the risk levels of the , the MUTHOOT
FINANCE CORP should review the results of and progress in implementation of the decisions
made in the previous meetings. The MUTHOOT FINANCE CORP would also articulate the
current interest rate view of the and base its decisions for future business strategy on this view. In
respect of this 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 funding mixes between fixed vs. floating rate
funds, wholesale vs. retail deposits, Money markets vs. Capital market funding, domestic vs.
foreign currency funding etc. Individuals will have to decide the frequency for holding their
MUTHOOT FINANCE CORP meetings.

TYPICAL BUSINESS OF MUTHOOT FINANCE CORP

Reviewing of the impact of the regulatory changes on the industry.

Overseeing the budgetary process;

Reviewing the interest rate outlook for pricing of assets and liabilities (Loans and
Deposits)

Deciding on the introduction of any new loan / deposit product and their impact on
interest rate / exchange rate and other market risks;

Reviewing the asset and liability portfolios and the risk limits and thereby, assessing the
capital adequacy;

Deciding on the desired maturity profile of incremental assets and liabilities and thereby
assessing the liquidity risk; and

Reviewing the variances in actual and projected performances with regard to Net Interest
Margin(NIM), spreads and other balance sheet ratios.

COMPOSITION OF MUTHOOT FINANCE CORP:-
The size (number of members) of MUTHOOT FINANCE CORP would depend on the
size of each institution, business mix and organizational complexity, To ensure commitment of
the Top management and timely response to market dynamics, the CEO/MD or the GM should
head the committee. The chiefs of Investment, Credit, Resources Management or Planning,
Funds Management / Treasury (domestic), etc., can be members of the committee. In addition,
the head of the computer (technology) Division should also be an invitee for building up of MIS
and related computerization. Some of may even have Sub-Committee and Support Groups.

ALM ORGANIZATION consists of following categories:

ALM BOARD

MUTHOOT FINANCE CORP

ALM CELL

COMMITTEE OF DIRECT

ALM BOARD:-

The Board of management should have overall responsibility for management of risk and
should decide the risk management policy of the and set limits for liquidity and interest rate
risks.
MUTHOOT FINANCE CORP:-

The MUTHOOT FINANCE CORP has constituted an Asset- Liability committee
(MUTHOOT FINANCE CORP). The committee may consist of the following members.

i) General Manager Head of Committee

ii) General Manager (Loans & Advances) Member

iii) General Manager (CMI & AD) Member

iv) AGM / Head of the ALM Cell Member

The MUTHOOT FINANCE CORP is a decision making unit responsible for ensuring
adherence to the limits set by board as well as for balance sheet planning from risk return
perspective including the strategic management of interest rate and liquidity risks, in line with
the s budget and decided risk management objectives.

The Business issues that an MUTHOOT FINANCE CORP would consider interalia, will include fixation
of interest rates for both deposits and advances, desired maturity profile of the incremental assets and
liabilities etc.

The MUTHOOT FINANCE CORP would also articulate the current interest rate due of the
and base its decisions for future business strategy on this view. In respect of funding policy, for
instance, its responsibility would be decided on source and mix of liability.

Individuals will have to decide the frequency for their MUTHOOT FINANCE CORP
meetings. However, it is advised that MUTHOOT FINANCE CORP should meet at least once in
a fortnight. The MUTHOOT FINANCE CORP should review results of and process in
implementation of the decisions made in the previous meetings

ALM CELL:-

The ALM desk / cell consisting of operating staff should be responsible for analyzing, monitoring
and reporting the profiles to the MUTHOOT FINANCE CORP. 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 the internal limits.

COMMITTEE OF DIRECTORS:-

They should also constitute professional, management and supervisory committee, consisting of
three to four directors, which will oversee the implementation of the ALM system, and review its
functioning periodically.

ALM PROCESS

The scope of ALM function can be described as follows:

Liquidity Risk Management

Interest Rate Risk Management

Currency Risk Management

Settlement Risk Management

Basis Risk Management

The RBI guidelines mainly address Liquidity Risk Management and Interest Rate Risk Management.

The following are the concepts discussed for analysis of Asset-Liability Management
under above mentioned risks.

Liquidity Risk

Maturity profiles

Interest rate risk

Gap analysis
Liquidity Risk Management:-

Measuring and managing liquidity needs are vital activities of the Risk. By assuring a
returns ability to meet its liability as they become due, liquidity management can reduce the
probability of an adverse situation development. The importance of liquidity transcends
individual institutions, as liquidity shortfall in one institution can have repercussions on the
entire system.
Liquidity risk management refers to the risk of maturing liability not finding enough
maturing assets to meet these liabilities. It is the potential inability to meet the liability as they
became due. This risk arises because borrows funds for different maturities in the form of
deposits, market operations etc. and lock them into assets of different maturities.
Liquidity Gap also arises due to unpredictability of deposit withdrawals, changes in loan
demands. Hence measuring and managing liquidity needs are vital for effective and viable
operations.
Liquidity measurement is quite a difficult task and usually the stock or cash flow approaches are
used for its measurement. The stock approach used certain liquidity ratios. The liquidity ratios
are the ideal indicators of liquidity of Operating in developed financial markets, the ratio do not
reveal the real liquidity profile of s which are operating generally in a fairly illiquid market. The
assets, which are commonly considered as liquid like Government securities, have limited
liquidity when the market and players are in one direction. Thus analysis of liquidity involves
tracking of cash flow mismatches.

The statement of structural liquidity may be prepared by placing all cash inflows and outflows in
the maturity ladder according to the expected timing of cash flows.

The position of Assets and Liabilities are classified according to the maturity patterns a maturing
liability will be a cash outflow while a maturing asset will be a cash inflows. The measuring of the future
cash flows of s is done in different time buckets.

The time buckets, given the statutory Reserve cycle of 14 days may be distributed as under:
1 to 14 days
15 to 28 days
29 days and up to 3 months
Over 3 months and up to 6 months
Over 6 months and up to 1 year
Over 1 year and up to 3 years
Over 3 years and up to 5 years

Interest Rate Risk:-
Interest Rate Risk refers to the risk of changes in interest rates subsequent to the creation
of the assets and liabilities at fixed rates. The phased deregulations of interest rates and the
operational flexibility given in pricing most of the assets and liabilities imply the need for system
to hedge the interest rate risk. This is a risk where changes in the market interest rates might
adversely affect financial conditions.

The changes in interest rates affects in large way. The immediate impact of change in interest
rates is on earnings by changing its Net Interest Income (NII). A long term impact of changing interest
rates is on Market Value of Equity (MVE) or net worth as the economic value of assets, liabilities and off-
balance sheet positions get affected due to variation in market interest rates.

The risk from the earnings perspective can be measured as changes in the Net Interest
Income (NII) OR Net Interest Margin (NIM).

There are many analytical techniques for measurement and management of interest rate
risk. In MIS of ALM, slow pace of computerization in and the absence of total deregulation, the
traditional GAP ANALYSIS is considered as a suitable method to measure the interest rate risk.

Data Interpretation
Gap Analysis:-
The Gap or mismatch risk can be measured by calculating Gaps over different time buckets as at
a given date. Gap analysis measures mismatches between rate sensitive liabilities and rate sensitive
assets including off-balance sheet position.

An asset or liability is normally classified as rate sensitive if:

If there is a cash flow within the time interval.

The interest rate resets or reprocess contractually during the interval.

RBI changes the interest rates i.e., on saving deposits, export credit, refinance, CRR balances and
so on, in case where interest rate are administered.

It is contractually pre-payable or withdraw able before the stated maturities

The Gap is the difference between Rate Sensitive Assets (RSA) and Rate sensitive Liabilities
(RSA) for each time bucket.

The positive GAP indicates that RSAs are more than RSLs (RSA>RSL).

The negative GAP indicates that RSAs are more than RSALs (RSA<RSL).

They can implement ALM policies for the better identification of the mismatch, risk and for the
implementation of various remedial measures.

GENERAL:-
The classification of various components of assets and liabilities into different time buckets for
preparation of Gap reports (Liquidity and interest rate sensitivity) may be done as indicated in
Appendices I & II as a sort of bench mark, which are better equipped to reasonably estimate the
behavioral pattern, embedded options, rolls-in and rolls-out etc of various components of assets and
liabilities on the basis of past date. Empirical studies could classify them in the appropriate time buckets,
subject to approval from the MUTHOOT / Board. A copy of the note approved by the ALOC / Board may
be sent to the Department of Supervision.

The present framework does not capture the impact of embedded options, i.e., the
customers exercising their options (premature closure of deposits and prepayment of loans and
advances) on the liquidity and interest rate risks profile. The magnitude of embedded option risk
at times of volatility in market interest rates is quite substantial should, therefore evolve suitable
mechanism, supported by empirical studies and behavioral analysis to estimate the future
behavior of assets; liabilities and off-balance sheet items to changes in market variables and
estimate the embedded options.
A scientifically evolved internal transfer pricing model by assigning values on the basis of current
market rates to funds provided and funds used is an imported component for elective implementation
of ALM systems. The transfer price mechanism can enhance the management of margin i.e., landings or
credit spread the funding or liability spread and mismatch spread. It also helps centralizing interest rate
risk at one place which facilitates effective control and management of interest rate risk. A well defined
transfer pricing system also provides a rational framework for pricing of assets and liabilities.

ST
MARCH 2011-12

ABSOLUTE
INCREASE/
DECREAES
CHANGE
IN %
CAPITAL AND
LIABILITIES

Capital 4,652,257 4,577,433 74,824 1.634627967
Deposits
2,085,864,054 1,674,044,394 411,819,660 24.60028309
Borrowings 143,940,610 129,156,925 14,783,685 11.44629682
Provisions
289,928,565 206,159,441 83,769,124 40.63317382
2,773,525,565 2,224,585,697 548,939,868 24.67604951
ASSETS
Reserve MUTHOOT of
India
251,008,158 154,832,841 96,175,317 62.11557986
Balances with MUTHOOTs
and Money at Call and
Short notice
45,680,191 144,591,147 -98,910,956 -68.40733894
Investments 709,293,656 586,076,161 123,217,495 21.02414382
Advances 1,599,826,654 1,258,305,939 341,520,715 27.14130995
Fixed Assets 21,706,480 21,228,114 478,366 2.253455017
Other Assets 146,010,773 59,551,495 86,459,278 145.1840596
2,773,525,912 2,224,585,697 548,940,215 24.67606511
Bills for Collection 134,284,924 81,248,646 53,036,278 65.27650688

Interpretation:

The total current liabilities for the year are Rs.206159441 is less than the total assets for the year
are Rs.2224585697. Therefore the assets are more than the liabilities. So there is a positive gap of
Rs.548939688 i.e 24.67%

-1,000,000,000
0
1,000,000,000
2,000,000,000
3,000,000,000
4,000,000,000
5,000,000,000
6,000,000,000
7,000,000,000
As at 31-Mar-11
As at 31-Mar-10

ST
MARCH 2010-11

ABSOLUTE
INCREASE/
DECREAES
CHANGE
IN %
CAPITAL AND
LIABILITIES

Capital 4,577,433 4,253,841 323,592 7.607054424
Equity Share Warrants 4,009,158 -4,009,158 -100
29,135 54,870 -25,735 -46.90176781
Deposits 1,674,044,394 1,428,115,800 245,928,594 17.22049388
Borrowings 129,156,925 91,636,374 37,520,551 40.9450411
Other Liabilities and Provisions 206,159,441 162,428,229 43,731,212 26.92340628
2,224,585,697 1,832,707,732 391,877,965 21.38245822
ASSETS
Reserve MUTHOOT of India
154,832,841 135,272,112 19,560,729 14.4602821
and Money at Call and Short
notice
144,591,147 39,794,055 104,797,092 263.3486133
Investments 586,076,161 588,175,488 -2,099,327 -0.356921878
Advances 1,258,305,939 988,830,473 269,475,466 27.25193786
Fixed Assets 21,228,114 17,067,290 4,160,824 24.37893772
Other Assets 59,551,495 63,568,314 -4,016,819 -6.318901269
2,224,585,697 1,832,707,732 391,877,965 21.38245822
Bills for Collection 81,248,646 85,522,390 -4,273,744 -4.997222365

-1,000,000,000
0
1,000,000,000
2,000,000,000
3,000,000,000
4,000,000,000
5,000,000,000
6,000,000,000
As at 31-Mar-10
As at 31-Mar-09
ABSOLUTE INCREASE/
DECREAES
Interpretation:

391877965 i.e 21.38%

ST
MARCH 2009-10

ABSOLUTE
INCREASE/
DECREAES
CHANGE
IN %
CAPITAL AND
LIABILITIES

Capital 4,253,841 3,544,329
709,512 20.01823

4,009,158 -

Reserves and Surplus 142,209,460 111,428,076
30,781,384 27.62444
54,870 -

Deposits 1,428,115,800 1,007,685,910
420,429,890 41.72232
Borrowings 26,858,374 45,949,235
-19,090,861 -41.5477
Provisions
227,206,229 163,158,482
64,047,747 39.25493
1,832,707,732 1,331,766,032
500,941,700 37.61484
ASSETS
Reserve MUTHOOT of India
135,272,112 125,531,766
9,740,346 7.759268
notice
39,794,055 22,251,622
17,542,433 78.83665
Investments 588,175,488 493,935,382
94,240,106 19.07944
Advances 988,830,473 634,268,934
354,561,539 55.90082
Fixed Assets 17,067,290 11,750,917
5,316,373 45.2422
Other Assets 63,568,314 44,027,411
19,540,903 44.38349
1,832,707,732 1,331,766,032
500,941,700 37.61484
Contingent Liabilities 4,059,816,885 5,930,080,864
-1,870,263,979 -31.5386
Bills for Collection 85,522,390 69,207,148
16,315,242 23.5745

Interpretation:

500941700 i.e 37.61%

-3,000,000,000
-2,000,000,000
-1,000,000,000
0
1,000,000,000
2,000,000,000
3,000,000,000
4,000,000,000
5,000,000,000
6,000,000,000
7,000,000,000
As at 31-Mar-09
As at 31-Mar-08

ST
MARCH 2008-09

ABSOLUTE
INCREASE/
DECREAES
CHANGE
IN %
CAPITAL AND
LIABILITIES

Capital 354,43 319,39 3504 10.970913
Reserves and Surplus 11,142,80 6,113,76 502904 82.257727
Deposits 100,768,60 68,297,94 3247066 47.542664
Borrowings 4,478,86 2,815,39 166347 59.084887
Provisions
16,431,91 13,689,13 274278 20.036189
133,176,60 91,235,61 4194099 45.969978
ASSETS
Reserve MUTHOOT of
India
12,553,18 5,075,25 747793 147.34112
notice
2,225,16 3,971,40 -174624 -43.970388
Investments 49,393,54 30,564,80 1882874 61.602693
Advances 63,426,90 46,944,78 1648212 35.10959
Fixed Assets 1,175,13 966,67 20846 21.564753
Other Assets 4,402,69 3,712,71 68998 18.584269
133,176,60 91,235,61 4194099 45.969978
Contingent Liabilities 593,008 328,148,24 -32221816 -98.192866
Bills for Collection 6,920,71 4,60683 231388 50.227163

Interpretation:

-40000000
-30000000
-20000000
-10000000
0
10000000
20000000
30000000
40000000
As at 31-Mar-08
As at 31-Mar-07
ABSOLUTE INCREASE/
DECREAES
4194099 i.e 45.96%

CHAPTER-VI

FINDINGS
CONCLUSION
SUGGESTIONS
BIBILIOGRAPHY

FINDINGS

ALM technique is aimed to tackle the market risks. Its objective is to stabilize and
improve Net interest Income (NII).
Implementation of ALM as a Risk Management tool is done using maturity profiles and
GAP analysis.
ALM presents a disciplined decision making framework for s while at the same time
guarding the risk levels.
There has been a small reduction in Gross Sales and with the performance of prefab Division
the Gross Profit gap has narrowed and contributing to the EBIT. The Gross Profit has
increased considerably from 6584124 Cr in Last year to 968547 Cr in year. The interest
payment has increased by 6987Cr in the Current year and the Profit before Tax at 69857
when compared to 5874568 cr in Last year.
Perform Division realization has increased by 8% even the Turnover has come to 641.80 Cr
from 400.09 Cr in last year.
The profit After Tax has came 856996 Cr to 6584548 in Current year because of slope in
Cement Industry.
The PAT is in an increasing trend from 2008-2009 because of increase in sale prices and
also decreases in the cost of manufacturing. In 2010 and 2011even the cost of manufacturing
has increased by 5% because of higher sales volume PAT has increased considerably, which
leads to higher EPS, which is at 98.366 in 2010.
The company also increased considerably which investors in coming period. The company
has taken up a plant expansion program during the year to increase the production activity
and to meet the increase in the demand

CONCLUSION

The purpose of ALM is not necessarily to eliminate or even minimize risk. The level of risk will vary with
the return requirement and entitys objectives.
Financial objectives and risk tolerances are generally determined by senior management of an entity
and are reviewed from time to time.
All sources of risk are identified for all assets and liabilities. Risks are broken down into their component
pieces and the underlying causes of each component are assessed.
Relationships of various risks to each other and/or to external factors are also identified.
Risk exposure can be quantified 1) relative to changes in the component pieces, 2) as a maximum
expected loss for a given confidence interval in a given set of scenarios, or 3) by the distribution of
outcomes for a given set of simulated scenarios for the component piece over time.
Regular measurement and monitoring of the risk exposure is required. Operating within a dynamic
environment, as the entitys risk tolerances and financial objectives change, the existing ALM strategies
may no longer be appropriate.
Hence, these strategies need to be periodically reviewed and modified. A formal, documented
communication process is particularly important in this step.

Suggestions

They should strengthen its management information system (MIS) and computer
processing capabilities for accurate measurement of liquidity and interest rate
Risks in their Books.
In the short term the Net interest income or Net interest margins (NIM) creates
economic value of the which involves up gradation of existing systems &
Application software to attain better & improvised levels.
It is essential that remain alert to the events that effect its operating environment
& react accordingly in order to avoid any undesirable risks.
MUTHOOT requires efficient human and technological infrastructure which will
future lead to smooth integration of the risk management process with effective
business strategies.

BIBILIOGRAPHY

Title of the Books Author Publications

4. Risk management Gustavson hoyt sout western, Thomson learning(2001)
5. India financial system M.Y. Khan Mcgraw Hill Edition
6. Management Research magazine P.M.Dileep Kumar

Web sites
www.MUTHOOT.com
www.investoros.com
www.financeindia.com
www.google.com

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INTRODUCTION

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