1.

Objective of study:
To understand about different types of risk arising to a bank and how the
banks manage and try to hedge their risks.

1.1 Justification of objectives:

To analyze the risk management of banks with the help of Asset-Liability
Management (ALM) practices adopted by different banks with respect to
Duration GAP Analysis.
1.2 Scope:
ALM practices lead to liquidity risk management of banks where the
risk mostly arises due to over extension of credit, poor asset quality
and mismanagement which ultimately leads to high level of NPA.
ALM practices also manages interest rate risk of the banks which is
caused due to changes in yield curve of G-Secs, changes in forward
exchange rates and changes in prices of other assets and inflation
rates.

1.3 Limitations:
GAP Analysis does not capture investment risk, does not incorporate future
growth and does not account for the time value of money.

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2. Methodology of study:

2.1

SOURCES OF DATA:

The study is entirely based on secondary data. The various sources of data
will include statistical tables relating to banks in India, Annual reports of the
sample banks, websites of RBI and other banks.
2.2

SAMPLE:

Four Banks will be chosen for sample, two each from private sector and
public sector.

Private sector banks chosen will be HDFC

and ICICI while the Public sector banks will be Bank of Baroda (BOB) and
IDBI.
2.3

JUSTIFICATION OF SAMPLE:

Sample should be such which can be easily compared. The banks chosen for
sample from private and public sector fall in the same category in terms of
their size.
2.4

TOOLS FOR DATA ANALYSIS:

Data Analysis would be evaluated by using the Duration GAP Analysis since it
efficiently represents the management of risk by using ALM Practices
adopted by banks.
.

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3. Literature Review:
Rajendran (2007), mentions in his abstract about derivative use by
banks in India. It has been found that the Indian private sector banks have
a high exposure of risk and have externalized their risk management
process. Foreign banks operating in India have a low risk exposure level,
but still they have moderately externalized their risk management
practices. Indian public sector banks have a large deposit base and high
risk exposure but are still internalizing their risk management through
ALM. Indian Banks have long used risk management activities such as
duration and gap analysis. Risk management through derivative securities
has been another avenue for banks to refine risk management practices.
Similar to other international markets, price and interest rate volatility in
Indian financial markets is high; hence the implications of not hedging the
bank portfolio may prove to be disastrous. Derivatives give banks an
opportunity to manage their risk exposure and to generate revenue
beyond that available from traditional bank operations. The research
objectives framed to reiterate the importance of risk management
practices through derivatives are to examine the derivative exposures in
banks and to determine the influence of derivative exposure on banks
intermediation role.
Nandi and Choudhary (2011) states in their article about the credit
risk management of loans in Indian banks. They studied how banks assess
the creditworthiness of their borrowers and how can they identify the
potential defaulters so as to improve their credit evaluation. For this
purpose, Altman Z-Score is used to arrive at an equation of the Z-Score,
which helps the banks to predict future defaulters and take necessary
action accordingly. Altman (2000) used Altman Z-Score model to examine
the unique characteristics of business failure in order to specify and

Page | 3

quantify the variables which are effective indicators and predictors of

corporate distress. Mitchell and Roy (2007) have used Altman Z-Score
model in ranking the firms and in the design of internal rating systems.
Since exposure to credit risk continues to be the leading source of
problems in banks worldwide, banks and their supervisors should be able
to portray valuable lessons from past experiences. Therefore, in this
paper, an attempt is made to understand how banks assess the
creditworthiness of borrowers. We realize that banks consider, among
other factors, the current and prospective profitability, the borrowers past
performance, its industrial sector and how the borrower is placed in it. For
this purpose, Altman Z-Score model is used. The present study has been
undertaken primarily to examine the framework of credit risk
management of Scheduled Commercial Banks (SCBs) in India.
Singh (2011), states that credit risk management is a very important
area for the banking sector and there are wide prospects of growth and
other financial institutions also face problems which are financial in
nature. Also, banking professionals have to maintain a balance between
the risks and the returns. For a large customer base banks need to have a
variety of loan products. If bank lowers the interest rates for the loans it
offers, it will suffer. Credit risk management is risk assessment that comes
in an investment. Risk often comes in investing and in the allocation of
capital. The risks must be assessed so as to derive a sound investment
decision. The greater the bank is exposed to risks, the greater the amount
of capital must be when it comes to its reserves, so as to maintain its
solvency and stability. For assessing the risk, banks should plan certain
estimates, conduct monitoring, and perform reviews of the performance
of the bank. They should also do Loan reviews and portfolio analysis in
order to determine risk involved.
Banks must be active in managing the risks in various securities and
derivatives. Still progress has to be made for analyzing the credits and
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determining the probability of defaults and risks of losses. So credit risk

management becomes a very important tool for the survival of banks.
Chakraborty and Mohapatra (2009), states that in the present day,
Asset Liability Management (ALM) has become the buzzword in the
banking world. It is a part of the overall risk management system in
banks. ALM implies examination of all the assets and liabilities
simultaneously on a continuous basis with a view to ensure a proper
balance between fund mobilization and their deployment. ALM is basically
a hedging response to the risk in financial intermediation. The ALM
approach in banks can help the managers to see their banks current
market risk profiles and evaluate the impact of alternative decisions on
the future risk profiles. Thus, ALM process for any bank aims at managing
the spread income and controlling the risks associated with generating
the spread.ALM, among other functions, is primarily concerned with risk
management and provides a comprehensive and dynamic framework for
measuring, monitoring and managing the risks associated. In the process,
it assesses various types of risks and alters the asset-liability portfolio in a
dynamic way in order to manage risks. ALM policies are intended to keep
those risks at an acceptable level given the expectations of future
market/interest rates. Most of the Indian banks, unlike foreign banks, are
liability-managed banks because they all borrow from money market to
meet their maturing liabilities.
Michael Thompson( 2010) observed that banks must alter forecasting
approach to cope up with Basel-III nuances. Following the announcement
of new Basel III capital reforms last month, financial markets were largely
unfazed by the headline that banks will have to increase their global
minimum capital to 7% of their risk-weighted assets, up from 2%.What
was less obvious in the Basel III announcement, and however, was the
impact that the new regulations will have on forecasting. Forecasting is
always a precarious activity because it assumes we can predict the future.
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This allows market participants to create a framework of expected return

against which they can then assess the risks to attaining that return. The
main fissure in the current approach to forecasting is that it is overly
precise, often condensed down to one outcome based on one scenario.
However, in a post-Basel III market, that range of potential outcomes will
be essential to determine an appropriate capital buffer. Even if these
scenarios are unlikely, they provide the framework for what could happen
in during a counter-cyclical, rogue event. Ultimately, this means adopting
a more rigorous approach to stress testing and including stress-testing
transparency everywhere a forecast is made. Thus, the forecast can be
measured and easily compared to the range of the stress test outcomes.
Caroline Binham (2012) has pointed out that the largest banks and
insurers are at least two decades behind their peers in the aviation
industry in managing risks. The majority of Financial Institutions are also
reactive waiting for an incident to occur or for the regulator to take
interest in a particular issue. As compared to the aviation industry, where
superior decisions can be challenged by the subordinates, subordinated in
banks fear they will lose their jobs if they challenge their boss.

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4. Risk in Banking An Overview

4.1 Introduction:
Banks are said to be in the business of making money by providing services
to customers and taking risks. In general, if a bank takes more risk it can
expect to make more money, but greater risk also increases the danger that
the bank could lose badly and be forced out of business. Banks run their
business with two goals in mind: to generate profit and to stay in business.
Banks therefore try to ensure that their risk taking is informed and prudent.
The control of that gambling is the business of risk management.
Risk refers to the possibility that the actual outcome of an investment will
differ from its expected outcome. Risk management is the continuing
process to identify, analyze, evaluate, and treat loss exposures and monitor
risk control and financial resources to mitigate the adverse effects of loss.
Risk management has become a very important component of bank recently.
With the increasing volume of business and complexity in financial
transactions, the depth in risk faced and their management, have
considerably increased. Risk management was relatively easy in stable
environments and under predictable circumstances of interest rates and
forex rates. However, with the increased volatility in world markets, in view
of the changing interest rate regimes and more flow of capital across
borders, risk management has become much more complex.
Risks in banks may increase if proper transparency in deals is not there or
proper regulations are not in place. Another concern for risk managers is the
operational risks. Increased use of mobile banking and Net banking and
ATMs have made it necessary to have better technologically enhanced
safeguards against hacking and other data theft and misuse. Apart from
sophistication in instruments and products, sophistication in technology also
calls for a robust safeguard for possible operational risks. Banks should give
due weight for operational risks along with credit risk and market risk to
Page | 7

ensure the smooth functioning of the banks. The new Basel Accord on
banking regulations has been formed to evolve an international standard for
banking practices, especially in terms of risk management.
The Indian banks are in the process of building a comprehensive risk
management system. With stringent adherence to the guidelines and proper
adoption of best practices, banks will be able to maintain a healthy riskreturn profile in the future.
The Government is committed to keep all the PSBs financially sound and
healthy so as to ensure that the growing credit needs of our economy are
adequately met. To meet the credit requirement of the economy, banks
would require capital funds commensurate to the increase in their Risk
Weighted Assets (RWAs). Implementation of Basel III Capital Regulations
enhances requirement of core equity capital by banks due to higher capital
ratios.
Risk Management is a discipline at the core of every financial institution and
encompasses all the activities that affect its risk profile. It involves
identification,

measurement,

monitoring

and

controlling

risks.

Risk

management as commonly perceived does not mean minimizing risk; rather

the goal of risk management is to optimize risk-reward trade -off.

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4.2

Risk Management framework:

A risk management framework encompasses the scope of risks to be

managed, the process/systems and procedures to manage risk and the roles
and responsibilities of individuals involved in risk management. The
framework should be comprehensive enough to capture all risks a bank is
exposed to and have flexibility to accommodate any change in business
activities.
An effective risk management framework includes:
a) Clearly defined risk management policies and procedures covering risk
identification, acceptance, measurement, monitoring, reporting and control.
b) A well constituted organizational structure defining clearly roles and
responsibilities of individuals involved in risk taking as well as managing it.
Banks, in addition to risk management functions for various risk categories
may institute a setup that supervises overall risk management at the bank.
Such a setup could be in the form of a separate department or banks Risk
Management Committee (RMC) could perform such function. The structure
should be such that ensures effective monitoring and control over risks being
taken. The individuals responsible for review function (Risk review, internal
audit, compliance etc) should be independent from risk taking units and
report directly to board or senior management who are also not involved in
risk taking.
c) There should be an effective management information system that
ensures flow of information from operational level to top management and a
system to address any exceptions observed. There should be an explicit
procedure regarding measures to be taken to address such deviations.

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4.3

TYPES OF RISKS IN BANKS:

OPERATIONAL RISKS:
Operational risk may be defined as the risk of monetary losses resulting from
inadequate or failed internal processes, people and systems or from external
events. Operational risk refers to the malfunctioning of information and/or
reporting system and of internal monitoring mechanism. Technical level
operational risk arises due to deficiency or malfunctioning of information
system. It relates to breakdown in internal controls/corporate governance,
error, fraud and failure to perform in a timely manner.

CREDIT RISKS:
Credit Risk occurs when customers default or fail to comply with their
obligation to service debt, triggering a total or partial loss. Components of
credit risk are individual loans, market conditions and
geographical/industry/group concentrations. Risk issues get reflected in loan
losses, rising NPA and concentrations.

LIQUIDITY RISKS:
Liquidity risk is when the bank is unable to meet a financial commitment
arising out of a variety of situations. These include: usage of non-funded
credit line, maturing liabilities (withdrawal or non-renewal of deposits) or
disbursement to customers.

INTEREST-RATE RISKS:
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Interest rate risk occurs due to movements in interest rates. Interest rate risk
is the possibility that assets or liabilities have to be re-priced on account of
changes in the market rates and its impact on the income of the bank.
FOREIGN EXCHANGE RISKS:
The movements in the currencies give rise to forex risk.
Responsibilities
lies with dealers, back-office functionaries and supervisory staff to
ensure that specified forex risks in banks is addressed to.
MARKET RISKS:
Market risk signifies the adverse movement in the market value of
trading portfolio during the period required to liquidate the transaction.
Assessment of market risk is made with reference to instability or
volatility of market parameters like interest rates, stock exchange
indices, exchange rates. Market risks pose a significant threat to banks
as those customers of banks which are exposed to stock market have a
higher chance of defaulting.

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5. CREDIT RISK:

5.1

Meaning of Credit Risk

The Reserve Bank of India has defined Credit Risk as the possibility of
the loss that stems from outright default due to inability or unwillingness of a
customer or counter party to meet their commitments in relation to lending,
trading, settlement and other financial transactions. If the probability of loss
is high, the credit risk involved is also high and vice-versa.
5.2

Bifurcation of Credit Risk

The study of credit risk can be bifurcated to facilitate better cognition of the
concept.

Overall Credit Risk

Firm Credit risk

Portfolio Credit
Risk

A single borrower/obligor exposure is generally known as Firm Credit Risk

while the credit exposure to a group of similar borrowers , is called portfolio
Credit Risk This bifurcation is important for the proper understanding and
management of credit risk as the ultimate reasons for failure to pay can be
traced to economic, industry, or customer specific factors. While risk

Page | 12

decides the fate of overall portfolio, portfolio risk in turn determines the
quantum of capital cushion required.
Both firm credit risk and portfolio credit risk are impacted or triggered by
systematic and unsystematic risks.

Firm Credit
Risk

Portfolio Credit Risk

Credit risk

Systematic
Risk
Socio-political
Risks
Economic Risks
Other
Exogenous Risks

Unsystematic
Risk
Business
Risks

Financial
Risks

External forces that affect all business and households in the country or
economic system are called systematic risks and are considered as
uncontrollable. The second type of credit risks is unsystematic risks and is
controllable risks. They do not affect the entire economy or all business
enterprises/households. Such risks are largely industry-specific and /or firm
specific. A creditor can diversify these risks by extending credit to a range of
customers.
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5.3

Sources of Credit Risk:

Credit related losses can occur in the following ways:

A customer fails to repay money that was lent by the bank
A customer enters into a derivative contract with the bank in which the
payments are based on market prices, and then the market moves so
that the customer owes money, but customer fails to pay.
The bank holds a debt security (e.g. a bond or a loan) and the credit
quality of the security issuer falls, causing the value of the security to
fall. Here, a default has not occurred, but the increased possibility of a
default makes the security less valuable.
The bank holds a debt security and the markets price for risk changes.
For example, the price for all BB-rated bonds may fall because the
market is less wiling to take risks. In this case, there is no credit event,
just a change in market sentiment. This risk is therefore typically
treated as market risk

5.4

Need for Credit Risk Analysis

Much of importance has been attached to credit risk analysis, especially by

banks

and other financial intermediaries with significant credit exposure.

The main reasons are as follows:

Prudence : It is the responsibility of the supplier of the credit to
ensure that their actions are prudent, because excessive credit will
prove destructive to everyone involved as has been evidenced by the
demise of many banks in Japan during the past decade, as the result of
over lending in the late 1980s. Usually everyone is very confident
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during the heightened pace of economic activity, and financial

institutions are no exceptions. Lending during the boom- phase is
highly challenging and so is providing credit during a recession period.

Increase in bankruptcies: Recessionary phases are common in the

economy, although the timing and causes may be different for different
countries. In 2002/2003, the US economy went through massive job
losses and sluggish growth and was almost on the verge of an
economic slowdown. Given the fact that the incidence of bankruptcies
during recession is high, the role of accurate credit analysis is very
important

Disintermediation: With the expansion of the secondary capital and

debt markets, many good credit-worthy customers, especially the
larger ones access and raise funds directly from public. Since credit
rating is compulsory for raising debt from the public market, the firms
that are not able to fulfill this requirement approach financial
intermediaries, including banks. This can result in the lowering of the
quality of the credit asset portfolio. Hence, a more vigilant approach by
the lenders is necessary.

Increase in Competition: he banking business is witnessing more

competition with the advent of the new generation banks and
liberalization policies pursued by governments. With the increase in the
competition, naturally pricing is under pressure. In other words, as your
returns become lower, technically your risk level should also reduce. So
tighter credit risk analysis is necessary.

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 Volatility of collateral/asset values: Gone are the days, when

collaterals offered comfort. While it is no longer easy to insist on
collateral security in view of the increasing competition in the market.
The land and houses that are as collateral security with the bank
against the loan issued by the bank to customer may touch all time
high during boom period but during recession it may not quote even
half the value of the credit extended during boom periods.

Poor Asset Quality: Banks in India and abroad face the problem of
non-performing assets (NPA), i.e. credit assets that are on the verge of
becoming credit losses. In other words, they display high risk
tendencies to become bad debts. NPA management is a major
challenge for banks. Credit Risk analysis helps to keep check on NPA.

High impact of Credit Losses: It is a common perception that a

small percentage of bad debts is acceptable and wont do much
damage. However, unfortunately this is not true. Even a small credit
facility turning bad will hurt business, especially for banks and other
financial intermediaries operating in a highly competitive sector. Credit
Risk Analysis helps in minimizing credit loss which is a best option
rather than attempting to book 20, 25 or 50 times the business
volumes, to ensure adequate returns to shareholders.

5.5

Why Measure Credit Risk?

There are three main sets of decisions for which it is important to measure
credit

risk

such

as:

Origination,

Portfolio

optimization,

and

Capitalization

Page | 16

1. Supporting Origination Decisions: The most basic decision is whether

to accept a new asset into the portfolio. The origination decision can be
framed in two possible ways:
Given the risk and a fixed price, is the asset worth taking?
This is the type of decision made when dealing with a large volume of retail
customers. It is a more rigid approach where there is little opportunity to
modify the price, and therefore the decision becomes yes/no
Given the risk, what price is required to make the asset worth buying?
This approach is typically used in a flexible, liquid trading environment, or in
negotiating rates and fees for a corporate loan

2. Supporting Portfolio Optimization: In optimizing a portfolio, the

manager seeks to minimize the ratio of risk to return. To reduce the
portfolios risk, the manager must know where there are concentrations of
risk and how the risk can be diversified. Quantifying credit risks with the
help of appropriate credit-portfolio model helps the bank manager to
identify risk concentrations in the given portfolio and allow the manager
to try what- if analyses to test strategies for diversifying the portfolio.

3. Supporting Capital Management: Quantification of credit risks helps

to set the provisions for expected losses over the next year, and the
reserves, in case losses are unusually bad. Credit risk measurement also
helps to ensure whether the total economic capital available is sufficient
to maintain the banks target credit rating given the risks or not. If it is
insufficient, the bank must raise more capital, reduce the risk or expect to
be downgraded.

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5.6

Types of Credit Structure

Credit risk can arise in many ways, from granting loans to trading
derivatives. The amount of credit risk depends largely on the structure of the
agreement between the bank and its customers. An agreement between a
bank and a customer that creates credit exposure is often called a credit
structure or a credit facility.

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1.Credit Exposure

Credit Exposure

To Large

To Retail

Corporations

Customers

Commercial loans

Personal Loans

Commercial Lines
Letter Of Credit &
Gurantees

Credit
Structur
e

Credit cards
Car Loans
Leases and hire-

Leases

purchase

Credit derivatives

agreements
Credit Exposures In

Mortgages

Trading Operations

Home-equity lines
of credit

Bonds
Asset-backed
securities
Securities lending
and repos
Margin accounts
Credit exposure for
derivatives

5.7

Credit Exposure to Large Corporations:

Commercial Loans: Typically, commercial loans have fixed structure for

disbursements from the bank to the company and have a fixed schedule
of repayments, including interest payments. There may also be a fee
paid by the company at the initiation of the loan. The loan may be
Page | 19

secured (collateralized) or unsecured. If it is secured, then in the event

of default, the bank will take legal possession of some specified asset
and be able to sell this to reduce the loss. An unsecured loan is a
general obligation of the company and in the case of default; the bank
will just get its share of the residual value of the company. The loan may
also be classified as senior or Subordinated(also called junior).When a
company liquidates, it pays off the senior loans first; then if there are
any remaining assets, it pays off the subordinated loans. As senior loans
always get paid before subordinated loans, they have lower loss in the
event of default.
For credit risk measurement, the most important loan features are the
collateral type,

the level of seniority, the term or maturity and the

scheduled amounts that are expected to be outstanding (i.e. the amount

that the company owes the bank at any given time)

Commercial Lines: In a standard loan, the pattern of disbursements and

repayments is set on the day of closing deal. For a line of credit (also
known as revolver or a commitment), only a maximum amount is set in
advance. The company then draws on the line according to its needs
and repays it when it wishes. With a line of credit, the bank faces the
possibility of loss on both the drawn and undrawn amounts, and should
therefore set aside capital for each.

Letters of Credit: There are two primary types of letters of credit (LC):
Trade LC and Backup LC. Trade LC is tied to specific export transactions.
A trade LC guarantees payment from a local importer to an overseas
exporter; if the importer fails to pay, the bank will pay, and then try to
reclaim the amount from the importer. For the bank, this creates a shortterm exposure to the local importer.

A backup letter of credit is a

Page | 20

general form of guarantee or credit enhancement in which the bank

agrees to make payments to a third party if the banks customer fails.
This is used to lower the cost of the customers getting credit from the
third party, because the third party now only faces the risk of a bank
default. He bank faces the full default risk from its customer and has the
same risk as if it had given the customer a direct loan.

Leases: Leases are form of collateralized loan, but with different tax
treatment in certain situations. In an equipment lease, the equipment is
given to the customer, and n return, the customer makes rental
payments. After sufficient payments, the customer may keep the
equipment. In terms of credit risk, this is equivalent to giving the
customer a loan, having them buy the equipment, and pledging the
equipment as collateral to secure the loan. In both the cases, if the
customer stops making payments, the bank ends up owing the
equipment.

Credit Derivatives: In almost all cases, the calculation of the risk for credit
derivatives can be based on the analysis that would be used for the
underlying loan.

As a simple example, consider a derivative in which one bank agrees to

pay an initial amount, and in return, a second bank agrees to make
payments equal to all the payments they receive from a particular
corporate loan. For the first bank, if the corporation defaults, the bank will
receive less money and will therefore make a loss. For the second bank, if
the corporation defaults, the bank will receive less money from the
corporations, but it will also need to pay less to the first bank. The
changes in payments therefore cancel each other out, and they make no
Page | 21

loss. Through this agreement, the economic risk of the loan has been
transferred from the second bank to the first. In measuring the risk for the
first bank, we would treat this credit derivative as if it were just a loan to
the corporation.

5.8

Credit Exposure to Retail Customers:

Personal Loans: Personal loans are typically unsecured and may be

used by the customer for any purpose. They are generally structured to
have a fixed time for repayment. The interest charges may be fixed at
the time of origination, or may float according to the banks published
prime rate, which the bank may change at its discretion.

Credit Cards: Credit cards are again generally unsecured by collateral,

but they have no fixed time for repayment. The interest-rate is
typically 10% to 15% above the floating prime rate, to compensate for
the very heavy default rates experienced on credit cards.

Car Loans: Car loans are same as personal loans except that they are
for a specific purpose and have the car as collateral. They tend to have
a lower loss given default than personal loans because of the
collateral, and they have a lower probability of default because the
customer is unwilling to lose the car.

Leases and Hire-Purchase Agreements: In a lease, the customer is

allowed to use a physical asset (such as a car) that is owned by the
bank. Leases are typically structured so that at the end of a finite
period, the asset will be returned to the bank. The customer makes
regular payments to cover the interest that would have been required
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to purchase the asset and to cover depreciation. The customer

typically has the option to buy the asset outright at the end of the
lease for a prespecified lump sum.
Hire- purchase agreements are similar to leases except that the
payments include the full value of the asset, and the customer is
certain to own the asset at the end of the agreement
Leases and hire-purchase agreements are similar to car loans in that
they are secured by the physical asset that has been purchased.
Leases are structured such that the bank continues to own the physical
asset legally until all lease payments have been made. This makes
repossession easier and reduces the loss given default.

Mortgages: Mortgages use the customers home as collateral. This

minimizes the probability of default. Furthermore, banks generally
ensure that the loan to value ratio is less than 90%, so even if the
property value drops by 10%, the bank will still have a loss given
default of 0.

Home-Equity Lines of credit: A home-equity line of credit (HELOC) is

like a credit card but secured by the customers house. This ensures a
low probability of default.

5.9

Credit Exposures in Trading Operations

Page | 23

 Bonds: Bonds credit risk depends on the level of seniority and whether
it is secured with collateral or not.
Asset- Backed Securities: Asset- backed securitization is used with
retail assets, such as credit cards and mortgages. In an asset-backed
security, the payments from many uniform assets are bundled together
to form a pool. This pool is then used to make payments to several sets
of bonds. The analysis of the credit risk of an asset-backed security is
the same as the analysis of a portfolio of loans. In this case, we
calculate the probability distribution of the payments from the pool of
underlying assets and use this to estimate the probability that the pool
will sufficient to pay the bonds. The calculation of the probability
distribution depends on the risk of the individual assets and the
correlation between them.

Securities lending and Repurchase Agreements: Sec lending and repos

agreements are common functions in banks trading operations. From
credit-risk perspective, both sec lending and repos are short-term
collateralized loans. In sec lending, counterparty asks to borrow a
security from the bank for a limited period of time. The security is
typically a share or bond. To minimize the credit risk, the counterparty
gives collateral to the bank that is worth slightly more than the
borrowed security. The collateral is typically in the form of cash. At the
end of the trade, the counterparty returns the security and the bank
returns the cash, less a small amount as a fee.
Repos are very similar to securities lending except that they are used
to gain funding. In a repo, a security is sold by the bank with a
guarantee from the bank to repurchase it at a fixed price and date. At
the time of sale, the bank receives cash. At the time of repurchase, the
bank sends the cash to the counterparty, plus a small additional
amount, which is effectively an interest payment for the loan.
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In both the cases, the bank could make a credit loss if the counterparty
defaults and the value of the security have risen to be higher than the
amount of cash that the bank was expecting to pay to get the security
back. The expected exposure at default will be the average amount by
which the value of the security can be expected to exceed the cash.

Margin Accounts: A margin account is another form of collateralized

loan. In a margin account, a customer takes a loan from the bank, and
then with the loan and his own funds, purchases a security. The
security is then held by the bank as collateral against the loan. The
pledging of the security as collateral by the customer to the bank is
called hypothecation. It is also possible for the bank to pledge the
security to another bank to get a loan. This is called rehypothecation.
Margin accounts are used by customers who want to leverage their
positions and increase their potential returns. As an example, consider
a customer who has %10000 and takes a loan for $10000. Thus
customer now has $20000 which he can use to buy securities worth
$20000. If the price rises by 10% to $22,000 and the customer sells
these securities, then after paying back the loan

with interest, the

customer has a little less than $12,000, a nearly 20%gain, conversely ,

if the price falls by 10%, the customer makes a 20% loss. Typically,
retail customers are allowed to borrow only up to half the value of the
securities that own. If the value of the securities falls, the bank will ask
the customer for more cash to maintain the 50% ratio; this is called a
margin call. If the customer does not respond, the bank will sell all or
part of the shares. After paying off the, any residual value is given back
to the customer. If the securities lost more than 50% of their value
before they are liquidated, and the customer failed to make up the
difference, the bank would suffer credit loss.

Page | 25

5.10

Credit Risk and Basel Accords

The Basel Committee on Banking Supervision was established in the mid

1980s. It is a committee of national banking regulators, such as the Bank
of England and the Federal Reserve Board. The purpose of the committee
is to set common standards for banking regulations and to improve the
stability of the international banking system. Basel Accords helps the
banks in managing credit risk and as well as other risks.
1998 Basel Accord:
The 1998 accord was motivated largely by low amount of available capital
kept by Japanese banks in relation to the risks in their lending portfolios.
This low ratio was believed to allow the Japanese banks to make loans at
unfairly low rates. The 1998 accord required that all banks should hold
available capital equal to atleast 8% of their risk-weighted assets (RWA)
.The first accord has two basic principals:
1. To ensure adequate level of capital in the international banking system.
2. To create more level playing field in competitive terms so that banks
could no longer build business volume without adequate capital
backing.
The prescribed formula is given below:

Tier1 + Tier 2 Capital

Risk Weighted Assets
Capital: While tier 1 capital consists of paid-up share capital and disclosed
reserves. Tier 2 capital comprises undisclosed reserves, asset revaluation
reserves, hybrid capital instruments (such as mandatory convertible debt)
Page | 26

and subordinated debt. Also, the tier 1 capital should be at least 50% of
the total capital.

Risk Weighted Assets: Assets in the balance sheet of a bank have been
differentiated, based on the risks. While central government/Central bank
obligations carry nil (0%) risk, those of the private business sector carry
full risk (100%).The portfolio approach is adopted to measure risk with
assets

classified

into

four

buckets(0%,20%,50%,and

100%).

This

distinction, depending upon counter parties, gives a unique perspective to

the capital adequacy of a banking institution. If a bank has more counter
parties having nil (or lower) risk, it needs to hold less capital than a bank
which has parties with 100% risk weight.

Basel 2 (New) Accord:

The suggested form of new Accord was published in January 2001 to obtain
comments from the banking industry. The final Accord will be effective from
2006 2007. The new Accord retains the same concepts of EWA and Tier 1
and Tier 2 available capital, but it changes the method for calculating RWA.
The new Accord has three pillars:
i) Minimum requirement of Capital
ii) Role of supervisory review process
iii) Market discipline
The measurement of minimum requirement of capital gives many
formulas to replace the simple calculations of the 1998 Accord. The
supervisory review pillar requires regulators to ensure that the bank has
effective risk management, and requires the regulators to increase the
Page | 27

required capital if they think that the risks are not being adequately
measured. The market discipline pillar requires banks to disclose large
amounts of information so that depositors and investors can decide for
themselves the risk of the bank and require commensurately high interestrates and return on capital.
6. Market Risk:
Banks are exposed to market risk via their trading activities and
their balance sheets. The measurement of trading risk is probably
the most advanced of the three main types of risks faced by banks.

6.1

Meaning of Market Risk:

It is the risk that the value of on and off-balance sheet positions of a financial
institution will be adversely affected by movements in market rates or prices
such as interest rates, foreign exchange rates, equity prices, credit spreads
and/or commodity prices resulting in a loss to earnings and capital.
6.2

Three Main factors of Market risk are:

Interest rate risk:

Interest rate risk arises when there is a mismatch between positions, which
are subject to interest rate adjustment within a specified period. The banks
lending, funding and investment activities give rise to interest rate risk. The
immediate impact of variation in interest rate is on banks net interest
income, while a long term impact is on banks net worth since the economic
value of banks assets, liabilities and off-balance sheet exposures are
affected. Consequently there are two common perspectives for the
assessment of interest rate risk
a) Earning perspective: In earning perspective, the focus of analysis
is the impact of variation in interest rates on accrual or reported earnings.
Page | 28

This is a traditional approach to interest rate risk assessment and obtained

by measuring the changes in the Net Interest Income (NII) or Net Interest
Margin (NIM) i.e. the difference between the total interest income and the
total interest expense.
b) Economic Value perspective: It reflects the impact of fluctuation
in the interest rates on economic value of a financial institution. Economic
value of the bank can be viewed as the present value of future cash flows. In
this respect economic value is affected both by changes in future cash flows
and discount rate used for determining present value. Economic value
perspective considers the potential longer-term impact of interest rates on
an institution.
Sources of interest rate risks:
Interest rate risk occurs due to
(1) Differences between the timing of rate changes and the timing of cash
flows (re-pricing risk);
(2) Changing rate relationships among different yield curves effecting bank
activities (basis risk);
(3) Changing rate relationships across the range of maturities (yield curve
risk);
(4) interest-related options embedded in bank products (options risk).

Foreign Exchange Risk:

It is the current or prospective risk to earnings and capital arising from
adverse movements in currency exchange rates. It refers to the impact of
adverse movement in currency exchange rates on the value of open foreign
currency position. The banks are also exposed to interest rate risk, which
Page | 29

arises from the maturity mismatching of foreign currency positions. Even in

cases where spot and forward positions in individual currencies are balanced,
the maturity pattern of forward transactions may produce mismatches. As a
result, banks may suffer losses due to changes in discounts of the currencies
concerned. In the foreign exchange business, banks also face the risk of
default of the counter parties or settlement risk. While such type of risk
crystallization does not cause principal loss, banks may have to undertake
fresh transactions

in the cash/spot market for

replacing the failed

transactions. Thus, banks may incur replacement cost, which depends upon
the currency rate movements. Banks also face another risk called time-zone
risk, which arises out of time lags in settlement of one currency in one center
and the settlement of another currency in another time zone. The Forex
transactions with counter parties situated outside Pakistan also involve
sovereign or country risk.

Liquidity risk
Liquidity risk is potential outcome of the inability of the banks to generate
cash to cope up with the decline in the deposits or increase in the assets, to
the large extent it is an outcome of the mismatch in the maturity patterns of
the assets & liabilities.
Liquidity risk is considered a major risk for institutions. It arises when the
cushion provided by the liquid assets are not sufficient enough to meet its
obligation. In such a situation, institutions often meet their liquidity
requirements from the market. However, conditions of funding through
market depend upon liquidity in the market and borrowing institutions
liquidity. Accordingly, an institution short of liquidity may have to undertake
transactions at heavy cost resulting in loss of earnings or in worst case
scenario, the liquidity risk could result in bankruptcy of the institution if it is
unable to undertake transactions even at current market prices.
Page | 30

Possible needs for the liquidity are manifold they can be classified into 4
broad categories
1. Funding risk: - the need to replace the outflows of the funds. e.g. non
renewal of the wholesale funds
2. Time risk: - the need to compensate for the no receipt of the expected
inflow of the funds e.g. when the borrower fails to meet his
commitment.
3. Call risk:- the need to find new funds when contingent liability becomes
due e.g. a sudden surge in the borrowing under ATMs
4. The need to undertake new transactions when desirable, e.g. a request
for the imp client.

6.3

Market Risk Management

6.3.1 Board and senior Management Oversight.

Likewise other risks, the concern for management of Market risk must start
from the top management. Effective board and senior management
oversight of the banks overall market risk exposure is cornerstone of risk
management process. For its part, the board of directors has following
responsibilities.
a) Delineate banks overall risk tolerance in relation to market risk.
b) Ensure that banks overall market risk exposure is maintained at prudent
levels and consistent with the available capital.
c) Ensure that top management as well as individuals responsible for market
risk management possess sound expertise and knowledge to accomplish the
risk management function.

Page | 31

d) Ensure that the bank implements sound fundamental principles that

facilitate the identification, measurement, monitoring and control of market
risk.
e) Ensure that adequate resources (technical as well as human) are devoted
to market risk management.

Accordingly, senior management is responsible to:

a) Develop and implement procedures that translate business policy and
strategic direction set by BOD into operating standards that are well
understood by banks personnel.
b) Ensure adherence to the lines of authority and responsibility that board
has established for measuring, managing, and reporting market risk.
c) Oversee the implementation and maintenance of Management
Information System that identify, measure, monitor, and control banks
market risk.
d) Establish effective internal controls to monitor and control market risk.

The institutions should formulate market risk management policies which are
approved by board. The policy should clearly delineate the lines of authority
and the responsibilities of the Board of Directors, senior management and
other personnel responsible for managing market risk; set out the risk
management structure and scope of activities; and identify risk management

Page | 32

issues, such as market risk control limits, delegation of approving authority

for market risk control limit setting and limit excesses.

6.3.2 Organizational Structure for Market Risk Management

The organizational structure used to manage market risk vary depending
upon the nature size and scope of business activities of the institution,
however, any structure does not absolve the directors of their fiduciary
responsibilities of ensuring safety and soundness of institution. While the
structure varies depending upon the size, scope and complexity of business,
at a minimum it should take into account following aspect.
a) The structure should conform to the overall strategy and risk policy set by
the BOD.
b) Those who take risk (front office) must know the organizations risk profile,
products that they are allowed to trade, and the approved limits.
c) The risk management function should be independent, reporting directly
to senior management or BOD.
d) The structure should be reinforced by a strong MIS for controlling,
monitoring and reporting market risk, including transactions between an
institution and its affiliates.

Page | 33

Besides the role of Board as discussed earlier a typical organization set up

for
Market Risk Management should include:

The Risk Management Committee

The Asset-Liability Management Committee (ALCO)

The Middle Office.

Risk Management Committee: It is generally a board level subcommittee

constituted to supervise overall risk management functions of the bank. The
structure of the committee may vary in banks depending upon the size and
volume of the business. Generally it could include heads of Credit, Market
and operational risk Management Committees. It will decide the policy and
strategy for integrated risk management containing various risk exposures of
the bank including the market risk. The responsibilities of Risk Management
Committee with regard to market risk management aspects include:
a) Devise policies and guidelines for identification, measurement, monitoring
and control for all major risk categories.
b) The committee also ensures that resources allocated for risk management
are adequate given the size nature and volume of the business and the
managers and staffs that take, monitor and control risk possess sufficient
knowledge and expertise.
c) The bank has clear, comprehensive and well-documented policies and
procedural guidelines relating to risk management and the relevant staff fully
understands those policies.
d) Reviewing and approving market risk limits, including triggers or stop
losses for traded and accrual portfolios.
Page | 34

e) Ensuring robustness of financial models and the effectiveness of all

systems used to calculate market risk.
f) The bank has robust Management information system relating to risk
reporting.

Asset-Liability

Committee:

Popularly

known

as

ALCO,

is

senior

management level committee responsible for supervision / management of

Market Risk (mainly interest rate and Liquidity risks). The committee
generally comprises of senior managers from treasury, Chief Financial
Officer, business heads generating and using the funds of the bank, credit,
and individuals from the departments having direct link with interest rate
and liquidity risks. The CEO or some senior person nominated by CEO should
be head of the committee. The size as well as composition of ALCO could
depend on the size of each institution, business mix and organizational
complexity. To be effective ALCO should have members from each area of the
bank that significantly influences liquidity risk. In addition, the head of the
Information system Department (if any) may be an invitee for building up of
MIS and related computerization. Major responsibilities of the committee
include:
a) To keep an eye on the structure /composition of banks assets and
liabilities and decide about product pricing for deposits and advances.
b) Decide on required maturity profile and mix of incremental assets and
liabilities.
c) Articulate interest rate view of the bank and deciding on the future
business strategy.
d) Review and articulate funding policy.
e) Decide the transfer pricing policy of the bank.
Page | 35

f) Evaluate market risk involved in launching of new products.

ALCO should ensure that risk management is not confined to collection of
data.
Rather, it will ensure that detailed analysis of assets and liabilities is carried
out so as to assess the overall balance sheet structure and risk profile of the
bank.
The ALCO should cover the entire balance sheet/business of the bank while
carrying out the periodic analysis.

Middle Office:

The risk management functions relating to treasury

operations are mainly performed by middle office. The concept of middle

office has recently been introduced so as to independently monitor measure
and analyze risks inherent in treasury operations of banks. Besides the unit
also prepares report for the information of senior management as well as
banks ALCO. Basically the middle office performs risk review function of dayto-day activities. Being a highly specialized function, it should be staffed by
people who have relevant expertise and knowledge. The methodology of
analysis and reporting may vary from bank to bank depending on their
degree of sophistication and exposure to market risks. These same criteria
will govern the reporting requirements demanded of the Middle Office, which
may vary from simple gap analysis to computerized VaR modeling. Middle
Office staff may prepare forecasts (simulations) showing the effects of
various possible changes in market conditions related to risk exposures.
Banks using VaR or modeling methodologies should ensure that its ALCO is
aware of and understand the nature of the output, how it is derived,
assumptions and variables used in generating the outcome and any
shortcomings of the methodology employed. Segregation of duties should be

Page | 36

evident in the middle office, which must report to ALCO independently of the
treasury function.

6. Operational Risk:
The management of specific operational risks is not a new practice; it has
always been important for banks to try to prevent fraud, maintain the
integrity of internal controls, and reduce errors in transactions processing,
and so on. However, what is relatively new is the view of operational risk
management as a comprehensive practice comparable to the management
of credit and market risks in principle.

7.1 Meaning of Operational Risk:

Page | 37

Operational risk is the risk of loss resulting from inadequate or failed internal
processes, people and system or from external events.
Operational risk is associated with human error, system failures and
inadequate procedures and controls. It is the risk of loss arising from the
potential that inadequate information system; technology failures, breaches
in internal controls, fraud, unforeseen catastrophes, or other operational
problems may result in unexpected losses or reputation problems.
Operational risk exists in all products and business activities.

7.2 Operational Risk Management Principles

There are 6 fundamental principles that all institutions, regardless of their
size or complexity, should address in their approach to operational risk
management.
a) Ultimate accountability for operational risk management rests with the
board, and the level of risk that the organization accepts, together with the
basis for managing those risks, is driven from the top down by those charged
with overall responsibility for running the business.
b) The board and executive management should ensure that there is an
effective, integrated operational risk management framework. This should
incorporate a clearly defined organizational structure, with defined roles and
responsibilities for all aspects of operational risk management/monitoring
and appropriate tools that support the identification, assessment, control and
reporting of key risks.
c) Board and executive management should recognize, understand and have
defined all categories of operational risk applicable to the institution.

Page | 38

Furthermore, they should ensure that their operational risk management

framework adequately covers all of these categories of operational risk,
including those that do not readily lend themselves to measurement.
d) Operational risk policies and procedures that clearly define the way in
which all aspects of operational risk are managed should be documented and
communicated. These operational risk management policies and procedures
should be aligned to the overall business strategy and should support the
continuous improvement of risk management.
e) All business and support functions should be an integral part of the overall
operational risk management framework in order to enable the institution to
manage effectively the key operational risks facing the institution.
f) Line management should establish processes for the identification,
assessment, mitigation, monitoring and reporting of operational risks that
are appropriate to the needs of the institution, easy to implement, operate
consistently over time and support an organizational view of operational
risks and material failures.

7.3

Operational Risk Management and Measurement

Board and senior managements oversight

Likewise other risks, the ultimate responsibility of operational risk
management rests with the board of directors. Both the board and senior
management should establish an organizational culture that places a high
priority on effective operational risk management and adherence to sound
Page | 39

operating controls. The board should establish tolerance level and set
strategic direction in relation to operational risk. Such a strategy should be
based on the requirements and obligation to the stakeholders of the
institution. Senior management should transform the strategic direction
given by the board through operational risk management policy. Although
the Board may delegate the management of this process, it must ensure that
its requirements are being executed. The policy should include:
a) The strategy given by the board of the bank.
b) The systems and procedures to institute effective operational risk
management framework.
c) The structure of operational risk management function and the roles and
responsibilities of individuals involved.
The policy should establish a process to ensure that any new or changed
activity, such as new products or systems conversions, will be evaluated for
operational risk prior to going online. It should be approved by the board and
documented. The management should ensure that it is communicated and
understood throughout in the institution. The management also needs to
place proper monitoring and control processes in order to have effective
implementation of the policy. The policy should be regularly reviewed and
updated, to ensure it continue to reflect the environment within which the
institution operates.

Operational Risk Function

A separate function independent of internal audit should be established for
effective management of operational risks in the bank. Such a functional set
up would assist management to understand and effectively manage
operational risk. The function would assess, monitor and report operational
Page | 40

risks as a whole and ensure that the management of operational risk in the
bank is carried out as per strategy and policy.
To accomplish the task the function would help establish policies and
standards and coordinate various risk management activities. Besides, it
should also provide guidance relating to various risk management tools,
monitors and handle incidents and prepare reports for management and
BOD.

Operational Risk Assessment and Quantification

Banks should identify and assess the operational risk inherent in all material
products, activities, processes and systems and its vulnerability to these
risks. Risk Identification is paramount for the subsequent development of a
viable operational risk monitoring and control system.
Banks should also ensure that before new products, activities, processes and
Systems are introduced or undertaken, the operational risk inherent in them
is subject to adequate assessment procedures. While a number of techniques
are evolving, operating risk remains the most difficult risk category to
quantify. In addition to identifying the most potentially adverse risks ,banking
institutions should assess their vulnerability to these risks.It would not be
feasible at the moment to expect banks to develop such measures.
Management of operational risks has been receiving focus and attention in
the light of the Basel Committee proposal to prescribe a capital charge for
operational risks. The various aspects of operational risks are looked into by
various group heads in the corporate office and an Operational Risk
Management Committee (ORMC) has been constituted to oversee this
function.

Page | 41

However the banks could systematically track and record frequency, severity
and other information on individual loss events. Such a data could provide
meaningful information for assessing the banks exposure to operational risk
and developing a policy to mitigate / control that risk. An effective
monitoring process is essential for adequately managing operational risk.
Regular monitoring activities can offer the advantage of quickly detecting
and correcting deficiencies in the policies, processes and procedures for
managing operational risk. Promptly detecting and addressing these
deficiencies can reduce the potential frequency and/or severity of a loss
event.

8.

Asset-Liability Management (ALM)

With increased competition and removal of entry barriers, banks today are
confronted with the question of survival. There is an increasing need for
greater innovation on the deposit mobilization front and simultaneously to
invest greater capital in speedier money transfer mechanisms, innovative
products and hedging instruments. The Asset-Liability Management (ALM)
Page | 42

provides solutions to a number of problems encountered by banks. Some of

the reasons for the increased importance of ALM in banks are financial
volatility, introduction of new financial products such as interest-rate swaps,
options and futures, regulatory initiatives and heightened awareness of top
management. The successful negotiation and implementation of Basel-II
Accord is likely to lead to an even sharper focus on the risk measurement
and risk management at the institutional level. The ALM function indicates to
the manager the current market risk profile of the bank and the impact that
various alternative business decisions would have on the future risk profile.
ALM is a critical function for any bank and determines the efficiency with
which a bank is able to structure its balance sheet in order to influence net
income, return on equity and return on assets. The entire mechanism of ALM
centers on the efficient handling and mitigation of various risks faced by
banks. Today, the scope for ALM activities has greatly widened. ALM
departments are addressing foreign exchange risks as well as other risks.
Also, the ALM technique is now applies to the non-financial firms.
Corporations have adopted ALM techniques to address interest-rate
exposures, liquidity risk and foreign exchange risk. Thus, it can be said that,
ALM as a technique will continue to grow in future and an efficient ALM
technique will go a long way in managing volume, maturity, rate sensitivity,
quality and liquidity of the assets and liabilities so as to earn a sufficient and
acceptable return on the portfolio. ALM Practices of banks can be examined
through the tool of Duration GAP Analysis by looking at the interest rate
statements of the banks.

Assets and Liabilities Committee (ALCO)

An ALCO is an risk-management committee in a bank or other lending
institution that generally comprises the senior-management levels of the
Page | 43

institution. The ALCO's primary goal is to evaluate, monitor and approve

practices relating to risk due to imbalances in the capital structure.
The purposes and tasks of ALCO are:

formation of an optimal structure of the Banks balance sheet

to provide the maximum profitability, limiting the possible risk level;

control over the capital adequacy and risk diversification;

execution of the uniform interest policy;

determination of the Banks liquidity management policy;

control over the state of the current liquidity ratio and resources of the
Bank;

formation of the Banks capital markets policy;

control over dynamics of size and yield of trading transactions

(purchase/sale of currency, state and corporate securities, shares,
derivatives for such instruments) as well as extent of diversification
thereof;

control over dynamics of the basic performance indicators (ROE, ROA,

etc.) as prescribed in the Bank's policy.

The ALCO is appointed by a resolution of the Bank Executive Board and

includes no less than 7 members with the right to vote for a one-year period.
ALCO is headed by the ALCO Chairman, who is appointed by the Bank
Executive Board. The ALCO members without the right to vote are appointed
upon presentation of the ALCO Chairman by Order of the Bank Executive
Board from among Bank specialists and managers of the Bank for a one-year
period. ALCO meetings are generally held every two weeks. If necessary,
additional meetings may be convened.
All ALCO members with the right to vote have equal rights. ALCO has the
authority to resolve any matters submitted to it for consideration if more
Page | 44

than a half of the committee members with the right to vote are present
at the committee meeting. A resolution is deemed passed if more than half
of ALCO members with the right to vote being present at the meeting voted
for such resolution.
The ALCOs resolutions are binding on all Bank employees.

ALM Process:
1. Liquidity Risk Management
Page | 45

 Measure and manage liquidity needs

Assure ability to meet liabilities
Measure on ongoing basis and evolve future liquidity
requirements
Tracked through maturity or cash flow mismatches

2. Currency Risk
Volatility due to managed floating exchange rate arrangement
Increased capital flows across free economies, deregulation as
also large cross border flows made FIs' balance sheets vulnerable
to exchange rate movements.

3. Interest Rate Risk (IRR)

Changes in market interest rates adversely affect interest rates
in FI balance sheet
Impacts FI's earnings (i.e. reported profits) by changing its Net
Interest Income (NII)

Many analytical techniques for measurement and management

of Interest Rate Risk.

9. GAP ANALYSIS:
Based on the sensitivity of the assets and liabilities to the interest rate
fluctuations, they are classified into different maturity buckets. The GAP or
mismatch risk, can be measured by calculating GAPs over different time
intervals as at a given date. GAP analysis measures mismatches between
Page | 46

rate sensitive assets (RSA)and rate sensitive liabilities (RSL) (including offbalance sheet positions). An asset or liability is normally classified as rate
sensitive if:

Within the time interval under consideration, there is a cash flow

The interest rate resets/reprices contractually during the interval
It is dependent on the changes in the Bank Rate by RBI
It is contractually pre-payable or withdrawal before the stated
maturities.
GAP= RSA- RSL

GAP can be positive or negative. The positive GAP indicates it has more
RSAs than RSLs, whereas the negative GAP indicates that it has more
RSLs than RSAs.
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 it is in a
position to benefit from declining interest rates by a negative Gap (RSL >
RSA). The Gap can, therefore, be used as a measure of interest rate
sensitivity. However, the GAP analysis is subject to limitations. GAP analysis
does not capture basis risk or investment risk, is generally based on parallel
shifts in the yield curve, does not incorporate future growth or changes in the
mix of business and does not account for the time value of money. The GAPs
have been identified in the following time buckets:
Day 1
2 to 7 days
8 to 14 days
15 to 28 days
29 days and up to 3 months
Over 3 months and up to 6 months
Page | 47

 Over 6 months and up to 1 year

Over 1 year and up to 3 years
Over 3 years and up to 5 years
Above 5 years

Reasons for Mismatch or a GAP in RSA and RSL:

ASSETS
1. High Investments

The bank is focusing on generating income from non core

activities like investment

High cost of capital

Attractive avenues outside India

2. Cash and balance with bank

Less confidence in asset quality

3. Cash and balance with RBI

Attractive rate from reverse repo window

4. Loans and advances

To be competitive in market

High demand for loans

LIABILITIES

Page | 48

1. Deposits
1. Safe place to park fund
2. Non availability of other attractive avenues
2. Borrowing
1. The borrowing might be high due to liquidity crunch
2. The bank might be borrowing to meet policy compliance
3. Other liability and provision.

CONCLUSION:
A GAP arises from assets and liabilities and off-balance sheet items with
different principal amounts and maturity dates thereby creating exposure to
unexpected changes in the level of market interest rates. The acceptable
GAP as % of outflow is 20-25% beyond which the GAP value be it positive or
negative implies that banks are not managing their assets and liabilities
properly. Thus there is a need to manage risk.

10.

DATA ANALYSIS:

Duration GAP analysis with different maturity buckets is chosen for the
purpose of data analysis as it is the only tool for measuring the ALM
practices adopted by banks.
For the purpose of Data analysis, four banks are taken with two banks each
from Private sector and Public sector. Private sector banks taken are HDFC
Bank and ICICI Bank while the Public sector Banks chosen are IDBI Bank
Page | 49

and Bank of Baroda (BOB). The Banks chosen for the Purpose of Duration
GAP analysis are selected on a random basis keeping in view that they fall in
the same category in terms of their size.

The Data is taken

from the Annual report of the respective banks for the year ended 2012 for
the purpose of analysis.

GAP/Mismatch = RSA-RSL
= (Loans and Advances + Investments) - (Deposits and borrowings)
GAP as % of Outflows= GAP/ (Deposits + Borrowings)

10.1

HDFC BANK:

The Housing Development Finance Corporation Limited (HDFC) was amongst the
first to receive an 'in principle' approval from the Reserve Bank of India (RBI) to
set up a bank in the private sector, as part of the RBI's liberalisation of the Indian
Banking Industry in 1994. The bank was incorporated in August 1994 in the name
of 'HDFC Bank Limited', with its registered office in Mumbai, India. HDFC Bank
commenced operations as a Scheduled Commercial Bank in January 1995.
Promoter:
Since its inception in 1977, the Corporation has maintained a consistent and
healthy growth in its operations to remain the market leader in mortgages. Its
Page | 50

outstanding loan portfolio covers well over a million dwelling units. HDFC has
developed significant expertise in retail mortgage loans to different market
segments and also has a large corporate client base for its housing related credit
facilities.
Amalgamation:
On May 23, 2008, the amalgamation of Centurion Bank of Punjab with HDFC Bank
was formally approved by Reserve Bank of India to complete the statutory and
regulatory approval process. As per the scheme of amalgamation, shareholders of
CBoP received 1 share of HDFC Bank for every 29 shares of CBoP.
In a milestone transaction in the Indian banking industry, Times Bank Limited
(another new private sector bank promoted by Bennett, Coleman & Co. / Times
Group) was merged with HDFC Bank Ltd., effective February 26, 2000. This was
the first merger of two private banks in the New Generation Private Sector Banks.
As per the scheme of amalgamation approved by the shareholders of both banks
and the Reserve Bank of India, shareholders of Times Bank received 1 share of
HDFC Bank for every 5.75 shares of Times Bank.
Distribution network:
As on March 31, 2012, the Bank has a network of 2,776 branches in 1,568 cities
across India. All branches are linked on an online real-time basis. Customers in
over 800 locations are also serviced through Telephone Banking. The Bank also
has a network of 10,490 ATMs across India.
Businesses:
HDFC Bank caters to a wide range of banking services covering commercial and
investment banking on the wholesale side and transactional / branch banking on
the retail side.
The bank has three key business segments:
Wholesale Banking
The Bank's target market is primarily large, blue-chip manufacturing companies in
the Indian corporate sector and to a lesser extent, small & mid-sized corporates
and agri-based businesses. It is also recognised as a leading provider of cash
management and transactional banking solutions to corporate customers, mutual
funds, stock exchange members and banks.
Retail Banking
The objective of the Retail Bank is to provide its target market customers a full
range of financial products and banking services, giving the customer a one-stop
window for all his/her banking requirements. The products are backed by worldclass service and delivered to customers through the growing branch network, as
well as through alternative delivery channels like ATMs, Phone Banking,
NetBanking and Mobile Banking.
HDFC Bank was the first bank in India to launch an International Debit Card in
association with VISA (VISA Electron) and issues the MasterCard Maestro debit
card as well. The Bank launched its credit card business in late 2001. By March
2012, the bank had a total card base (debit and credit cards) of over 19.71 million.
The Bank is also one of the leading players in the "merchant acquiring" business
with over 180,000 Point-of-sale (POS) terminals for debit / credit cards acceptance
Page | 51

at merchant establishments. The Bank is well positioned as a leader in various net

based B2C opportunities including a wide range of internet banking services for
Fixed Deposits, Loans, Bill Payments, etc.
Treasury
Within this business, the bank has three main product areas - Foreign Exchange
and Derivatives, Local Currency Money Market & Debt Securities, and Equities. To
comply with statutory reserve requirements, the bank is required to hold 25% of
its deposits in government securities. The Treasury business is responsible for
managing the returns and market risk on this investment portfolio.
Capital structure:
As on 31st March, 2012 the authorized share capital of the Bank is Rs. 550 crore.
The paid-up capital as on the said date is Rs. 469,33,76,540 (234,66,88,270
equity shares of Rs. 2/- each). The HDFC Group holds 23.15% of the Bank's equity
and about 17.29 % of the equity is held by the ADS / GDR Depositories (in respect
of the bank's American Depository Shares (ADS) and Global Depository Receipts
(GDR) Issues). 30.68 % of the equity is held by Foreign Institutional Investors (FIIs)
and the Bank has 4,47,924 shareholders.
The shares are listed on the Bombay Stock Exchange Limited and The National
Stock Exchange of India Limited. The Bank's American Depository Shares (ADS)
are listed on the New York Stock Exchange (NYSE) under the symbol 'HDB' and the
Bank's Global Depository Receipts (GDRs) are listed on Luxembourg Stock
Exchange under ISIN No US40415F2002.

(GAP ANALYSIS 2012):

(Figures in lakhs)

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ANALYSIS:
As it can be clearly seen that the GAP on Day 1 is tremendously high at Rs
19, 97,587 and as a result GAP as % of Outflows is also high at 530% which
shows that HDFC Bank is over-utilizing its assets. Investments of HDFC Bank
is clearly very high which shows that bank is focused on generating income
from non-core activities since the bank may be getting attractive avenues or
rate of interest outside India. Same is the case with extremely high GAP in
Time-bucket of 3-5 years and 6 months to 1 year. However, in this cases the
Loans and Advances is much higher than the Investments which shows that
either the demand for the loans may have increased during this period or in
order to remain competitive in market the Bank may have slashed the
interest-rates for loans in the Long-run. Rest all other GAP as % of Outflows
mostly falls under normal allowable of 20-25%.

10.2

ICICI BANK:
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ICICI Bank is India's second-largest bank with total assets of Rs. 4,736.47 billion
(US$ 93 billion) at March 31, 2012 and profit after tax Rs. 64.65 billion (US$ 1,271
million) for the year ended March 31, 2012. The Bank has a network of 2,899
branches and 10,021 ATMs in India, and has a presence in 19 countries, including
India.
ICICI Bank offers a wide range of banking products and financial services to
corporate and retail customers through a variety of delivery channels and through
its specialised subsidiaries in the areas of investment banking, life and non-life
insurance, venture capital and asset management.
The Bank currently has subsidiaries in the United Kingdom, Russia and Canada,
branches in United States, Singapore, Bahrain, Hong Kong, Sri Lanka, Qatar and
Dubai International Finance Centre and representative offices in United Arab
Emirates, China, South Africa, Bangladesh, Thailand, Malaysia and Indonesia. Our
UK subsidiary has established branches in Belgium and Germany.
ICICI Bank's equity shares are listed in India on Bombay Stock Exchange and the
National Stock Exchange of India Limited and its American Depositary Receipts
(ADRs) are listed on the New York Stock Exchange (NYSE).
ICICI Bank was originally promoted in 1994 by ICICI Limited, an Indian financial
institution, and was its wholly-owned subsidiary. ICICI's shareholding in ICICI Bank
was reduced to 46% through a public offering of shares in India in fiscal 1998, an
equity offering in the form of ADRs listed on the NYSE in fiscal 2000, ICICI Bank's
acquisition of Bank of Madura Limited in an all-stock amalgamation in fiscal 2001,
and secondary market sales by ICICI to institutional investors in fiscal 2001 and
fiscal 2002. ICICI was formed in 1955 at the initiative of the World Bank, the
Government of India and representatives of Indian industry. The principal objective
was to create a development financial institution for providing medium-term and
long-term project financing to Indian businesses.
In the 1990s, ICICI transformed its business from a development financial
institution offering only project finance to a diversified financial services group
offering a wide variety of products and services, both directly and through a
number of subsidiaries and affiliates like ICICI Bank. In 1999, ICICI become the first
Indian company and the first bank or financial institution from non-Japan Asia to
be listed on the NYSE.
In October 2001, the Boards of Directors of ICICI and ICICI Bank approved the
merger of ICICI and two of its wholly-owned retail finance subsidiaries, ICICI
Personal Financial Services Limited and ICICI Capital Services Limited, with ICICI
Bank. The merger was approved by shareholders of ICICI and ICICI Bank in January
2002, by the High Court of Gujarat at Ahmedabad in March 2002, and by the High
Court of Judicature at Mumbai and the Reserve Bank of India in April 2002.
Consequent to the merger, the ICICI group's financing and banking operations,
both wholesale and retail, have been integrated in a single entity.
ICICI Bank disseminates information on its operations and initiatives on a regular
basis. The ICICI Bank website serves as a key investor awareness facility, allowing
stakeholders to access information on ICICI Bank at their convenience.
ICICI Bank's Cash Management Services offer a full range of receivable and
Page | 54

payable services to meet your complex cash management needs. Payments

received from your dealers/ distributors and made to your suppliers are efficiently
processed to optimise your cash flow position and to ensure effective
management of the operations of your business.
ICICI Bank provides a gamut of products and services, ensuring that all the
business requirements of the corporations are met under one roof. Further, ICICI
Bank constantly innovates and improves its product offerings in order to improve
client servicing.
ICICI Bank offers a wide range of collection products to meet the specific
requirements of the clients like local cheque collections, upcountry cheque
collections, cash collections and electronic collections. With a wide network,
customised MIS and multiple channels for delivery of MIS, ICICI Bank renders quick
and effective management of receivables.

GAP ANALYSIS (2012):

(Figures in million)

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ANALYSIS:
GAP for most of the Time-buckets is positive which shows that ICICI Bank is
effective in utilizing its assets. However, on Day 1, GAP as % of Outflows is
very high at 117% than the normal allowable rate of 20-25% due to high
Investments and also due to NIL borrowings. Loans and Advances is
particularly low on Day1 and the bank should increase that in order to
minimize the GAP especially when the borrowing is NIL by providing loans at
cheap rate of interest. Also, GAP as % of Outflows is extremely high at 299%
on Time-bucket of 3-6 months especially due to high deposits and even due
to borrowings. The Bank should increase Investments over this period since it
is low as compared to other figures. Rest almost all the GAP as % of Outflows
is mostly around allowable limits of 20-25%.

10.3

IDBI BANK:

Industrial Development bank of India (IDBI) was constituted under Industrial

Development bank of India Act, 1964 as a Development Financial Institution
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and came into being as on July 01, 1964 vide GoI notification dated June 22,
1964. It continued to serve as a DFI for 40 years till the year 2004 when it
was transformed into a Bank. In order that the name of the Bank truly
reflects the functions it is carrying on, the name of the Bank was changed
from IDBI Ltd to IDBI Bank Limited and the new name became effective from
May 07, 2008 upon issue of the Fresh Certificate of Incorporation by Registrar
of Companies, Maharashtra. The Bank has been accordingly functioning in its
present name of IDBI Bank Limited.
IDBI Bank Ltd. is today one of India's largest commercial Banks. On October
1, 2004, the erstwhile IDBI converted into a Banking company (as Industrial
Development Bank of India Limited) to undertake the entire gamut of
Banking activities while continuing to play its secular DFI role. Post the
mergers of the erstwhile IDBI Bank with its parent company (IDBI Ltd.) on
April 2, 2005 (appointed date: October 1, 2004) and the subsequent merger
of the erstwhile United Western Bank Ltd. with IDBI Bank on October 3, 2006,
the tech-savvy, new generation Bank with majority Government shareholding
today touches the lives of millions of Indians through an array of corporate,
retail, SME and Agri products and services.
IDBI Bank Ltd. is a Universal Bank with its operations driven by a cutting
edge core Banking IT platform. The Bank offers personalized banking and
financial solutions to its clients in the retail and corporate banking arena
through its large network of Branches and ATMs, spread across length and
breadth of India. We have also set up an overseas branch at Dubai and have
plans to open representative offices in various other parts of the Globe, for
encashing emerging global opportunities. Our experience of financial
markets will help us to effectively cope with challenges and capitalize on the
emerging opportunities by participating effectively in our countrys growth
process.
As on March 31, 2012, IDBI Bank has a balance sheet of Rs.2.91 lakh crore
and business size (deposits plus advances) of Rs.3.92 lakh crore. As an
Universal Bank, IDBI Bank, besides its core banking and project finance
domain, has an established presence in associated financial sector
businesses like Capital Market, Investment Banking and Mutual Fund
Business. Going forward, IDBI Bank is strongly committed to work towards
emerging as the 'Bank of choice' and 'the most valued financial
conglomerate', besides generating wealth and value to all its stakeholders.
IDBI upholds the highest standards of corporate governance in its operations.
The responsibility for maintaining these high standards of governance lies
with its Board of Directors. Two Committees of the Board viz. the Executive
Committee and the Audit Committee are adequately empowered to monitor
Page | 57

implementation of good corporate governance practices and making

necessary disclosures within the framework of legal provisions and banking
conventions.

GAP ANALYSIS (2012):

(Figures in crores)

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ANALYSIS:
The GAP as % of Outflows for most of the Time-buckets is extremely negative
than the normal desirable limit up to 20-25% due to high deposits which
shows that IDBI is exposed to more liabilities. Hence, they should focus more
on Investments and provide attractive rate of interest to make Loans more
attractive. However, the positive GAP is also extremely high during Timebucket of 2-7 days at 295% due to high Investments and also Above 5 year
period due to increased Loans and Advances. IDBI Bank needs to maintain
effective balance between Risk-sensitive Assets and Risk-sensitive Liabilities
for all the Time-buckets in order to effectively manage its Assets and
Liabilities.

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10.4

BANK OF BARODA:

Bank of Baroda was incorporated on 20th July 1908, under the Companies
Act of 1897, and with a paid up capital of Rs 10 Lacs .The bank, along with
13 other major commercial banks of India, was nationalised on 19 July 1969,
by the Government of India. Bank of Baroda (BoB) is the highest profitmaking public sector undertaking (PSU) bank in India and the second largest
PSU bank in terms of number of total business in India . BoB has total assets
in excess of Rs. 3.58 lack crores or Rs. 3,583 billion, a network of 4007
branches (out of which 3914 branches are in India) and offices, and over
2000 ATMs. Its total global business was Rs. 7,003.30 billion as of 30 Sep
2012. Its headquarter is in Vadodara and corporate headquarter is in Bandra
Kurla Complex,Mumbai.
Among the Bank of Barodas overseas branches
are ones in the worlds major financial centers such as New York, London,
Dubai, Hong Kong, Brussels and Singapore as well as number in other
countries. The tagline of Bank of Baroda is "India's International Bank".
Bank of Baroda is a pioneer in various customer centric initiatives in the
Indian banking sector. The initiatives include setting up of specialized NRI
Branches, Gen-Next Branches and Retail Loan Factories/ SME Loan Factories
with an assembly line approach of processing loans for speedy disbursal of
loans. The major ongoing initiatives of the Bank are detailed below:
Business Process Reengineering (BPR)
Bank had initiated a major Business Process Reengineering to give a big
boost to sales growth by enhancing customer satisfaction and by making
possible alternate channel migration thus reinventing itself to challenges of
the 21st century. Banks BPR project known as Project- Navnirmaan has
altogether 18 activities covering both the BPR and organisational
restructuring, aimed at transforming the Banks branches into modern sales
& service outlets.
New Technology Platform
Bank has made substantial progress in its end-to-end business and IT
strategy project covering the Banks domestic, overseas and subsidiary
operations. All Branches, Extension Counters in India, overseas business and
five sponsored Regional Rural Banks are on the Core Banking Solution (CBS)
platform. Bank has been providing to its customers Internet Banking, viz.,
Baroda Connect and other facilities such as online payment of direct and
indirect taxes and certain State Government taxes, utility bills, rail tickets,
online shopping, donation to temples and institutional fee payment. Bank
has a wide network of ATMs across the country and has also launched mobile
ATMs in select cities. Initiatives have been taken to provide corporate
customers with facilities like direct salary upload, trade finance and State Tax
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payments etc. Bank has introduced Mobile Banking (Baroda M-connect) and
prepaid gift cards.
Corporate Social Responsibility (CSR) Initiatives
Bank has always upheld inclusive growth high on its agenda. Bank has
established 36 Baroda Swarojgar Vikas Sansthan (Baroda R-SETI) for
imparting training to unemployed youth, free of cost for gainful self
employment & entrepreneurship skill development and 52 Baroda Gramin
Paramarsh Kendra and for knowledge sharing, problem solving and credit
counseling for rural masses across the country, as on 31.03.2011. Bank has
also established 18 Financial Literacy and Credit Counseling Centres (FLCC)
in order to spread awareness among the rural masses on various financial
and banking services and to speed up the process of Financial Inclusion, as
on 31.03.2011.

GAP ANALYSIS (2012):

(Figures in crores)

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ANALYSIS:
Leaving the last 3 Time-buckets, GAP as % of Outflows of all the other Timebuckets is negative which clearly shows that BOB is more exposed to
Liabilities and the Bank should focus on improving its GAP by providing the
Loans at more attractive rate of interest. Even the positive GAP is much more
than the rather acceptable level of 20-25% which is not a good sign and it
also shows that BOB is not maintaining proportionate balance of its Assets
and Liabilities in all the Time-buckets because of which earlier Time-bucket
shows negative GAP and the last 3 Time-bucket show positive GAP.

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10.5

COMPARATIVE ANALYSIS:

HDFC Bank Vs IDBI Bank:

On DAY 1, HDFC Bank showed an extremely high GAP as % of Outflows

of 530% as contrasting to -58% of IDBI Bank which shows that both
these banks have adopted different approaches. While the Investments of
HDFC bank is very high, IDBI Bank in contrast have deposits on their
higher side which suggests that HDFC bank focused on earning revenue
from short- term point of view such as lending at overnight call or money
rates.
On Time-bucket of 2-7 days, the scenario got reversed where HDFC
bank showed negative GAP as % of Outflows of -9% while IDBI bank
shows positive figure of 295%. In this Time-bucket, the Investments of
IDBI bank is greater than their liabilities while HDFC bank has more
deposits than their Investment and Advances resulting in their negative
GAP.
Again, on the Time-bucket of 6 months to 1 year, HDFC bank showed
positive GAP as % of Outflows of 149% due to their higher lending of
Advances as contrast to IDBI bank which shows negative figure of -70%
since their deposits are much higher than their Advances which suggests
that customer are more inclined to deposit in IDBI bank during this Timebucket.
Finally, for the Time-bucket of Above 5 years, HDFC bank showed
negative GAP as % of Outflows of -46% due to their extremely high
deposits as against their Advances while IDBI bank showed contrasting
figure of 168% since their Advances itself was higher than both their

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Deposits and Borrowings which suggests that IDBI focuses on lending

from long-term point of view to earn more revenues.

Conclusion:
Looking at the above comparison, it can be concluded that HDFC is effective
in utilizing its assets in the short term while IDBI bank is effective in utilizing
its assets in the long term.

ICICI Bank Vs Bank of Baroda:

On Day 1 of maturity Time-bucket, ICICI bank showed positive GAP

as % of Outflows of 117% due to extremely high Investments as
compared to deposits, while on the other hand, Bank of Baroda
showed negative figure of -12% due to a bit of higher deposits than
Advances. However, this figure is within the normal allowable GAP of
20-25% hence the bank was successful in maintaining GAP within
normal limits. ICICI bank should reduce their Investments and utilize
such funds for deposits.
For the Time-bucket of 2-7 days, Bank of Baroda showed negative
GAP as % of Outflows of -67% due to their higher deposits as
compared to normal allowable GAP of 5% of ICICI bank.
For the period of 3-6 months, both the banks showed negative GAP as
%of Outflows, however, this figure was much higher for ICICI bank at
-299% as compared to -34% of Bank of Baroda since ICICI bank had
huge deposits and borrowings which suggests that ICICI bank is not
much keen in Investments in the short-term.

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 For the period of Above 5 years, both the banks showed positive GAP
as % of Outflows. However, the difference was more at 63% for Bank
of Baroda as compared to normal 8% within allowable limits for ICICI
bank.

Conclusion:
From the above comparison, it can be concluded that ICICI bank is effective
in utilizing its assets in short as well as long-term except for the time-bucket
of 3-6 months where it was negative at -299%, while Bank of Baroda in only
effective in utilizing its assets in the long-term while it has more liabilities in
the short-term.

Overall, it can be concluded that Private sector banks effectively

utilizes its assets in the short-term while Public sector banks utilizes
its assets efficiently in the long-term.

11.

CONCLUSION:

ALM was developed in the 1980s to help financial institutions control a sharp
increase in interest rate risk. Subsequently, it evolved into a set of
Page | 65

techniques that enable financial institutions to manage a much broader set

of risks. ALM is likely to play a growing role in financial institutions going
forward. In the future, the management of interest rate risk will be more
important to the performance of financial institutions.
However, as observed by RBI, the highest amount of focus in any commercial
banks is on credit risk, since it accounts for more than 95% of total risk.
Managing credit risk is crucial because of the default of principal itself. Banks
have to appropriately price their loan products on the basis of risk models.
Apart from these, banks have to follow exposure limit norms, credit structure
given by the RBI. If a sound risk management governance and disclosure
practices is followed with competence and integrity, only then the credit
system of bank will grow stronger.

12.

RECOMMENDATIONS:

The two types of banks balance sheet risks include interest rate risk and
liquidity risks.
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 So their regular monitoring and managing is the need of the hour.

While increasing the size of the balance sheet, the degree of asset
liability mismatch should be kept in control. Because, the excessive
mismatch would result in volatility in earnings.
Banks can also use sensitivity analysis for risk management purpose. It
is found that the all bank are exposed to interest rate risk.
RBI has issued detailed guidelines in October 1999 for implementation
of risk management in banking covering methodologies for
measurement, monitoring and control of credit, provisioning of NPAs,
etc so that the banks are required to follow these guidelines with
necessary flexibility of their operations.
Banks are required to adopt suitable infrastructure supported by
appropriate technological back up, complete automation of their
operations to rate the level of risk in a credit proposal.
The framework of credit risk management should be implemented
with utmost deliberation. It means that there should be meetings at
regular intervals and in turn, top officials of the bank should organize
risk management meetings with RBI, so that supervision review
process role of Basel Accord (Third Pillar) will be discharged smoothly.
Officers of the banks should be provided with proper training and
development and these officers should work as a team to handle the
tools and techniques of modern risk management, which has the
ultimate aim to achieve bank growth.
Banks should incorporate international best practices which can add
further strength to our existing framework of Credit Risk Management
(CRM).
Banks should maintain continuous dialogue with peer organizations,
banking associations and international institutions.

Bibliography for References:

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1. Annual report of HDFC, ICICI, IDBI and BANK of Baroda for the year
ended March, 2012.
www.rbi.org.in
http://www.bharatbasha.com
http://pages.stern.nyu.edu/~ealtman/Zscores.pdf.
http://web.ebscohost.com/ehost/pdfviewer/pdfviewer?
vid=5&sid=840da896-2547-4efc-913e6dd6ccfd9c28@sessionmgr111&hid=127.
6. Allen, F. & A.M.Santomero (2001). What do financial intermediaries do?
Journal of Banking and Finance, 25(12), 271-294.
2.
3.
4.
5.

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