Definition of ALM:

ALM is a dynamic process of Planning, Organizing & Controlling of Assets & Liabilities with regard to their 1. Volumes In order to / Net Income 2. Mixes maintain 3. Maturities liquidity and 4. Costs Net Interest 5.Yields Income [NII]

Purpose & Objective of ALM

The ALM technique aims to manage the following aspects of assets and liabilities to achieve a predetermined acceptable risk/reward Volume Mix Maturity rate sensitivity Quality Liquidity ALM is aimed to stabilize short-term profits long-term earnings long-term solvency [substance] of the bank The parameters for stabilizing ALM system are Net Interest Income (NII) Net Interest Margin (NIM) Economic Equity Ratio

RBIs Actions on ALM

Draft guidelines issued in Sept1988 Final guidelines issued in Feb1999 for implementation of ALM effective 1Apr1999 To begin with 60% of 100%from1Apr2000 asset &liabilities were covered and raised to

 Gap Analysis applied in the first stage of implementation Balance sheet disclosure on maturity pattern on Deposits, Borrowings, Investment & Advances effective 31Mar2001

Liquidity Management
Banks must generate funds to meet existing/contracted commitments, existing or new relationship demands, emergencies and emerging opportunities at reasonable prices at all times Adequacy of liquidity position for a bank can be assessed based on Current liquidity position Anticipated future funding needs Planned Sources & application of funds Options for reducing funding needs Present and anticipated asset quality Present and future earning capacity and Present and planned capital position

Banks meet funding needs by a combination of the following: Dispose off liquid assets Increase short term borrowings Decrease holding of less liquid assets Increase liability of a term nature Increase Capital funds

Liquidity Exposures Internal exposure: market perception of the institution in various markets External exposure : geographic, systemic or instrument specific Internal liquidity risk relates largely to perceptions of an institution in its various markets: local, regional, national or international

Related Risks

Funding Risk: Need withdrawals/non-renewal

to

replace

net

outflows

due

to

unanticipated

Time Risk: Need to compensate for non-receipt of expected inflows of funds Call Risk: Crystallization of contingent liability

Statement of Structural Liquidity

All Assets & Liabilities to be reported as per their maturity profile into 8 maturity Buckets: 1 to 14 days 15 to 28 days 29 days and up to 3 months Over 3 months and up to 6 months Over 6 months and up to 1 year Over 1 year and up to 3 years Over 3 years and up to 5 years Over 5 years Places all cash inflows and outflows in the maturity ladder as per residual maturity Maturing Liability: cash outflow Maturing Assets : Cash Inflow Classified in to 8 time buckets Do Gap analysis Mismatches in the first two buckets not to exceed 20% of outflows Shows the structure as of a particular date Banks can fix higher tolerance level for other maturity buckets

1. 2. 3. 4. 5. 6. 7. 8.

Statement of Asset Liability Matching**

Banks Asset Liability Maturity Analysis

Asset Liability Management in a Bank :Maturity Pattern of Certain Assets & Liabilities Rs Cr Items of Asets & Liabilities Maturity Bucket in Day(s) / Month(s) 29 days >3 mths Over 6 Over 1 yr Over 3 to 3 upto 6 mths upto 3 yrs upto 1 day 2 to 7 days 8 to 14 days 15 to 28 days months mths upto 1 yr yrs 5 yrs Over 5 yrs Total LIABILTIES Deposits 16104 10880 5263 13759 36725 43863 51072 39910 27433 53871 298880 Borrowings 2482 114 2 581 1320 658 107 1985 4955 9813 22017 Foreign currency liabilities 4805 7174 2277 6463 18659 11088 9062 3195 4013 4728 71464 Total Liabilities 23391 18168 7542 20803 56704 55609 60241 45090 36401 68412 392361 ASSETS Advances 19136 3994 3358 7634 50604 23420 18880 25347 24387 36330 213090 Investments 23 2071 913 1400 7761 1900 1355 7253 8858 54333 85867 Foreign currency assets 2260 3562 1653 4074 13727 10464 7639 7002 5616 6548 62545

Actions/Strategy to Addressing the Mismatches

Mismatches [Gaps] can be positive or negative Positive Mismatch: M.A.>M.L. and Negative Mismatch M.L.>M.A In case of +ve mismatch, excess liquidity can be market instruments, creating new assets & investment swaps etc deployed in money Bills

For ve mismatch, it can be financed from market borrowings (Call/Term), rediscounting, Repos & deployment of foreign currency converted into rupee

To meet the mismatch in any maturity bucket, the bank has to look into taking deposit and invest it suitably so as to mature in time bucket with negative mismatch **The bank can raise fresh deposits of Rs 300 cr over 5 years maturities and invest it in securities of 1-29 days of Rs 200 cr and rest matching with other out flows

Key Factors for Success of ALM Process

1. Management Commitment & Support 2. Effective communication for creating awareness in Bank staff at all levels 3. Training to staff at all levels 4. Dedicated teams to manage the process 5. Effective Management Information System across the bank 6. Enterprise Resource Management and computer systems

7. Insight into the banking operations, economic forecasting, computerization, investment, credit 8. Linking up ALM to future Risk Management Strategies