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26 August 2011

A Study on Asset and Liability Management in Salem Co-operative Bank

Mrs. S.Sreekala Research Scholar PSG College of Technology, Coimbatore - 641 004. Dr. V. Santhi Professor, Department of Humanities, PSG College of Technology, Coimbatore - 641 004.

INTRODUCTION ASSET AND LIABILITY MANAGEMENT The Asset and liability management includes all deposits and advances, maturity of deposits and incremental assets and liabilities, etc. It is a decision making responsible for balance sheet planning from risk and return standpoint including the strategic management of liquidity, interest rate risks. The business and risk management strategy of the bank should ensure that the bank operates within the limited parameters set by the Board. Besides monitoring the risk levels of the bank, there should proper review the results and progress in realization of the decisions made. In future business strategy decisions should be based on the banks current rate of interest. In respect of the funding policy, for instance, its responsibility would be to decide on source and liabilities mix or the assets sale. There should be efficient management of short term deposits, medium term deposits and long term deposits, loans and advances, borrowings and investments etc. NEED OF ALM ALM units create a properly aligned risk and return management process. The right mix between skills and risk appetite must be identified, expected outcomes of activities known and appropriate metrics established. The approach adopted needs to be aligned to the realities of the market the bank.

A bank needs to realize that the right level of asset and liability need to be committed to support the function. Various techniques are used to examine the mismatch in a banks balance sheet and it can be a difficult process if not supported with adequate systems. Depending on

systems and analytical support the ALM process will undertake a number of analysis designed to identify; static and dynamic mismatch. OBJECTIVE OF THE STUDY 1. To study about the management of Assets and liabilities of the Salem District Central Cooperative Bank. 2. To study about the effectiveness and performance of the Bank. 3. To suggest measures for the improvement of Salem District Central Co-operative Bank. RESEARCH METHODLOGY RESEARCH DESIGN The methodology used in the study is analytical and descriptive in nature where the researcher has to use facts (or) information already and study the characteristic of a particular group respectively and there by analyze to make a critical evaluation of the study. TYPES OF DATA SOURCES OF DATA The researcher is primarily based on secondary data, with addition information gathered from the finance department. The main sources are companys previous years annual reports and schedules. DATA COLLECTION METHOD SECONDARY DATA The secondary data has been collected from the Annual Reports of the Salem District Central Co-operative Bank. TOOLS USED FOR ANALYSIS OF DATA The tools used for analyzing the financial position of the company are 1. RATIO ANALYSIS 2. LEAST SQUARE ANALYSIS 3. CORRELATION Ratio analysis is widely used tool of financial analysis. It can be used to compare the risk and return relationship of firms of different sizes.

It is defined as the systematic use of ratio to interpret the financial statements so that the strengths and weaknesses of a firm as well as its historical performance and current financial condition can be determined. The term ratio refers to the numerical or quantitative relationship between two items/variables. This relationship can be expressed as percentage, fraction and proportion of numbers (1:4). TYPES OF RATIO Profitability Ratio Operating profit Ratio Net profit Ratio

Liquidity Ratio Current ratio

Activity Ratio

Solvency Ratio

Net profit to Net worth Ratio Fixed Assets to Net worth Ratio Net Profit to share capital Fund Ratio Fixed Assets Ratio

Proprietary Ratio Cash to Current Asset Ratio Cash to Current Liability Ratio Cash to Share Holders fund Ratio TABLE 1: Calculation of Operating Profit and Net Profit Ratio OPERATING PROFIT RATIO NET PROFIT RATIO

Income Year

Operating expense(Rs.in crore)

Income (Rs.in crore) 10398 9603.2 12387 17010 16228

Ratio

Year

200510393 2006 20069056.6 2007 200711243 2008 200816108 2009 200914752 2010 Source: Annual Report

0.99 0.94 0.91 0.95 0.91

20052006 20062007 20072008 20082009 20092010

Net profit (Rs.in lakhs) 5.3 546.67 1143.9 901.93 1475.7

Income Ratio (Rs.in crore) 10398 9603.2 12387 17010 16228 0.05 5.69 9.23 5.3 9.09

TABLE : 1.2 CALCULATION OF CURRENT & NET PROFIT TO NET WORTH RATIO CURRENT RATIO YEAR CURRENT CURRENT ASSETS LIABILITIES (Rs.in (Rs.in crore) crore) 113509 106012 77098.4 128127 150664 179748 RATIO YEAR 20052006 20062007 20072008 20082009 20092010 NET PROFIT TO NET WORTH RATIO NET PROFIT (Rs.in lakhs) 5.3 546.67 1143.9 901.93 1475.67 NET WORTH (Rs.in crore) 118144.51 125572.02 150666.52 179318.6 213408.8

RATIO 0.0044 0.4353 0.759 0.502 0.691

20052006 2006102064 2007 2007123851 2008 2008175766 2009 2009211142 2010 Source: Annual Report

1.0707 1.323 0.966 1.166 1.174

TABLE1. 3 CALCULATION OF FIXED ASSETS TO NETWORTH AND NET PROFIT TO SHARE CAPITAL FUND RATIO FIXED ASSETS TO NET WORTH RATIO YEAR FIXED ASSETS (Rs.in crore) 4635.6 23507.76 26815.71 SH. FUND (Rs.in crore) 2459.98 5673.24 9046.32 RATIO NET PROFIT TO SHARE CAPITAL FUND RATIO Net Share profit capital (Rs.in (Rs.in Year lakhs) crore) Ratio 20052006 5.3 2460 0.22 20062007 546.67 5673 9.64 20071143.9 9046 12.64

20052006 20062007 2007-

1.88 4.14 2.96

2008 200823918.65 12483.05 2009 200923450.87 15703.88 2010 Source: Annual Report

1.92 1.49

2008 20082009 20092010

901.93 1475.7

12483 15704

7.23 9.4

TABLE 1.4 CALCULATIONS OF FIXED ASSETS RATIO AND PROPRIETORY RATIO FIXED ASSETS RATIO FIXED LONG RATIO ASSET TERM S (Rs.in FUND crore) (Rs.in crore) 4635.6 2984.8 1.55 1.17 1.32 1.17 1.1 PROPRIETORY RATIO PROPRIE TOTAL TORS ASSETS FUND RATIO (Rs.in (Rs.in crore) crore) 2459.98 5673.24 9046.32 12483.05 15703.88 118144.5 125572 150666.5 179318.6 213408.8 2.082 4.517 6.004 6.961 7.358

YEAR

YEA R 20052006 20062007 20072008 20082009 20092010

20052006 200623507.7 19982.65 2007 6 200726815.7 20286.8 2008 1 200823918.6 20366.13 2009 5 200923450.8 21184.3 2010 7 Source: Annual Report

TABLE 1. 6 CALCULATION OF CASH TO CURRENT ASSETS AND CURRENT LIABILITIES RATIO

CASH TO CURRENT ASSETS RATIO Year Cash & Current Ratio bank assets balance (Rs.in (Rs.in crore) crore) 2005- 22080.97 113508.9 0.19 2006 2006- 24276.14 102064.26 0.23 2007 2007- 33333.76 123850.8 0.26 2008 2008- 48760.96 175766 0.27 2009 2009- 49706.22 211142.22 0.23 2010 Source: Annual Report

CASH TO CURRENT LIABILITIES RATIO Year Cash & Current Ratio bank Liability balance (Rs.in (Rs.in crore) crore) 2005-2006 22080.97 106012 0.21 2006-2007 2007-2008 2008-2009 2009-2010 24276.14 77098.38 33333.76 128126.9 48760.96 150664.1 49706.22 179748.4 0.31 0.26 0.32 0.27

TABLE1. 5 CALCULATION OF CURRENT ASSETS TO SHARE HOLDERS FUND RATIO CURRENT ASSETS TO PROPRIETORS FUND RATIO Year Current Share Ratio assets hol.Fund (Rs.in (Rs.in crore) crore) 2005113508.9 2459.98 46.14 2006 2006- 102064.26 5673.24 17.99 2007 2007123850.8 9046.32 13.69 2008 2008175766 12483.05 14.08 2009 2009- 211142.22 15703.88 13.44 2010 Source: Annual Report

LEAST SQUARE ANALYSIS FORMULAE: Least square (y) = a + bx a =

b =

XY X2

TABLE 2 CALCULATION OF LEAST SQUARE METHOD

YEAR

NET PROFIT (Y) (Rs.in lakhs)

X2

XY

2005-06 2006-06 2007-07 2008-08 2009-9

5.3 546.67 1143.9 901.93 1475.67

-2 -1 0 1 2

4 1 0 1 4

-10.6 -546.67 0 901.93 2951.34

EXPANSION a =

= 4073.47 5 b =

814.69

XY X2

3296 10

329.6

FORECASTING FOR THE FUTURE NET PROFIT NET PROFIT (Rs.in lakhs) 1803.49 2133.09 2462.69 2792.29 3121.89

YEAR 2010-2010 2011-2011 2012-2012 2013-2013 2014-2014

Y = a + bx 814.69 + 329.6 (3) 814.69 + 329.6 (4) 814.69 + 329.6 (5) 814.69 + 329.6 (6) 814.69 + 329.6 (7)

TABLE 3.1 CALCULATION OF CORRELATION BETWEEN NETPROFIT TO TOTAL ASSETS NET PROFIT(X) (Rs.in lakhs) 5.30 546.67 1,143.90 901.93 1,475.67 4,073.47 TOTAL ASSETS (Y) (Rs in crore) 118,144.50 125,572.00 150,666.50 179,318.60 213,408.80 787,110.40

YEAR 20052006 20062007 20072008 20082009 20092010

X 28.09 298,848.09 1,308,507.21 813,477.72 2,177,601.95 4,598,463.06

Y 13,958,122,880.25 15,768,327,184.00 22,700,394,222.25 32,155,160,305.96 45,543,315,917.44 130,125,320,509.9 0

XY 626,165.85 68,646,445.24 172,347,409.35 161,732,824.90 314,920,963.90 718,273,809.23

r = 0.863 TABLE 3.2 CALCULATION OF CORRELATION BETWEEN NETWORTH TO TOTAL ASSETS YEAR 20052006 20062007 20072008 20082009 20092010 Total r = 0.999 FINDINGS:
1. Table1.1

NET WORTH(X) 118,144.51 125,572.02 150,666.52 179,318.60 213,408.80 787,110.45

TOTAL ASSETS(Y) 118,144.50 125,572.00 150,666.50 179,318.60 213,408.80 787,110.40

X2 13,958,125,243.14 15,768,332,206.88 22,700,400,248.91 32,155,160,305.96 45,543,315,917.44 130,125,333,922.33

Y2 13,958,122,880.25 15,768,327,184.00 22,700,394,222.25 32,155,160,305.96 45,543,315,917.44 130,125,320,509.90

XY 13,958,124,061.70 15,768,329,695.44 22,700,397,235.58 32,155,160,305.96 45,543,315,917.44 130,125,327,216.12

Operating Profit shows that the ratio was fluctuating and decreasing every

year except 2008-09. ii) Net profit is very low in the year 2005-06 The net profit has been gradually increased in the year 2007-08. except 2008-09 it has further decreased.
2. Table 1.2 Shows that the current ratio of the firm is below the standard i.e., 2:1. There

is 1:1 ratio for the bank. It shows that there is less liquidity position as specified in the table ii) Net Profit to Net worth ratio is gradually increasing trend.
3. Table 1.3 Fixed to Networth ratio is fluctuating every year. Only 2006-07 showing

positive trend ii)Net Profit to Share Capital Fund is declining except 2006-07 and 07-08
4. Table 1.4 Fixed Asset Ratio shows that declining trend except 2007-08

ii)Proprietary ratio has been increased every year, the debt equity ratio increased which indicates reduction in risk.

5. Table 1.5 shows that current asset have been maintained in the year 2005-06 and it has

decreased every year. 6. Table 1.6 Cash to Current asset ratio is fluctuating and also decreasing except 2007-08 and 2008-09. Cash to Current Liability ratio shows that increasing trend except 2007-08 and 2009-10. 7. Table no 2 The Net Profit is in good position. According to the least square method the Net Profit is expected to increase.
8. Table 3.1 Correlation between Net profit to Total Assets which shows a reasonably

strong positive correlation.

9. Table 3.2 Correlation between Networth to Total Assets shows that is a strong positive

correlation. SUGGESTIONS: The current ratio of the bank does not meet the standard ratio. It would be suggested that the bank to take necessary steps to increase the current assets of the bank. Operating profit ratio shows that the expenses are higher than income. It is suggested that the bank can reduce the avoidable expenses It is suggested that the bank can increase the current account holders from the public. These funds can be utilized by the bank and increase their income without any payment of interest to the current account holders The Net Profit of the bank in the year 2005-06 was very low, which have been is now increased in the year 2009-10.. It is suggested to increase the net profit of the bank which would the risk of suffering from loss

The Net Profit, and Total asset correlated positively they should maintain the same in future.

The investments are made in government securities with low revenue. The bank invest huge amount in these securities which is suggested to reduce the level of investments

The bank has to do their major transaction with cash, so it has to be increased

Conclusion The banks performance is satisfactory. In some area they are lacking in banking position. If they improve their customer service and technology they will come up with the standard level. . According to the least square method the Net Profit is expected to increase next five year. This study reveals the findings and recommendations which would be useful for the development and improvement to the bank. References Fabozzi, FJ., & Konishi, A. (1995). Asset-liability management. New Delhi: S Chand & Co.

Harrington, R. (1987). Asset and liability management by banks. Paris: OECD. Jain, J.L. (1996). Strategic planning for asset liability management. The Journal of the Indian Institute of Bankers, 67(4).

Kannan, K (1996). Relevance and importance of asset-liability management in banks. The Journal of the Indian Institute of Bankers, 67(4).

Saunders, A. (1997). Financial institutions management (2nd ed). Chicago: Irwin. Sinkey, J.F. (1992). Commercial bank financial management(4th ed). New York: Maxwell Macmillan International Edition.

The World Bank (1995). The emerging Asian bond market: India. Prepared by ISec, Mumbai. Vaidyanathan, R (1995). Debt market in India: Constraints and prospects. Bangalore: Center for Capital Markets Education and Research, Indian Institute of Management - Bangalore