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Assets
1. Cash & Balances with RBI 2. Bal. With Banks & Money at Call and Short Notices 3. Investments 4. Advances 5. Fixed Assets 6. Other Assets
Contingent Liabilities
Components of Liabilities
1. Capital:
Capital represents owners contribution/stake in the bank.
Components of Liabilities
2. Reserves & Surplus
Components under this head includes:
I. II. III. IV. V. Statutory Reserves Capital Reserves Investment Fluctuation Reserve Revenue and Other Reserves Balance in Profit and Loss Account
Components of Liabilities
3. Deposits
This is the main source of banks funds. The deposits are classified as deposits payable on demand and time. They are reflected in balance sheet as under: I. Demand Deposits II. Savings Bank Deposits III. Term Deposits
Components of Liabilities
4. Borrowings
(Borrowings include Refinance / Borrowings from RBI, Inter-bank & other institutions) I. Borrowings in India i) Reserve Bank of India ii) Other Banks iii) Other Institutions & Agencies II. Borrowings outside India
Components of Liabilities
5. Other Liabilities & Provisions
It is grouped as under:
Bills Payable Inter Office Adjustments (Net) Interest Accrued Unsecured Redeemable Bonds Others(including provisions)
Components of Assets
1. Cash & Bank Balances with RBI
I. Cash in hand (including foreign currency notes) II. Balances with Reserve Bank of India
Components of Assets
2. Balances With Banks And Money At Call & Short
Notice
I. In India i) Balances with Banks a) In Current Accounts b) In Other Deposit Accounts ii) Money at Call and Short Notice a) With Banks b) With Other Institutions II. Outside India a) In Current Accounts b) In Other Deposit Accounts c) Money at Call & Short Notice
Components of Assets
3. Investments
A major asset item in the banks balance sheet. Reflected under 6 buckets as under: I. Investments in India in : i) Government Securities ii) Other approved Securities iii) Shares iv) Debentures and Bonds v) Subsidiaries and Sponsored Institutions vi) Others (UTI Shares , Commercial Papers, COD & Mutual Fund Units etc.) II. Investments outside India in Subsidiaries and/or Associates abroad
Components of Assets
4. Advances
The most important assets for a bank. A. i) Bills Purchased and Discounted ii) Cash Credits, Overdrafts & Loans repayable on demand iii) Term Loans B. Particulars of Advances : i) Secured by tangible assets (including advances against Book Debts) ii) Covered by Bank/ Government Guarantees iii) Unsecured
Components of Assets
5. Fixed Asset
I. II. Premises Other Fixed Assets (Including furniture and fixtures)
6. Other Assets
I. II. III. IV. V. VI. Interest accrued Tax paid in advance/tax deducted at source (Net of Provisions) Stationery and Stamps Non-banking assets acquired in satisfaction of claims Deferred Tax Asset (Net) Others
Contingent Liability
Banks obligations under LCs, Guarantees, Acceptances on behalf of constituents and Bills accepted by the bank are reflected under this heads.
ALM-MIS
Management Information System Information availability, accuracy, adequacy and expediency Structure and responsibilities ALCO Committee Level of top management involvement Risk parameters Risk identification Risk measurement Risk management Risk policies and tolerance levels
ALM organisation
ALM process
ALCO
Senior management including CEO should be responsible for ensuring adherence to the limits
Scope of ALM
Liquidity risk management Management of market risks (including Interest Rate Risk)
Significance of ALM
Volatility
Product Innovations & Complexities Regulatory Environment Management Recognition
Liquidity Management
Banks liquidity management is the process of generating funds to meet contractual or relationship obligations at reasonable prices at all times. New loan demands, existing commitments, and deposit withdrawals are the basic contractual or relationship obligations that a bank must meet.
Funding Avenues
To satisfy funding needs, a bank must perform one or a combination of the following:
a. b. c. d. e.
Dispose off liquid assets Increase short term borrowings Decrease holding of less liquid assets Increase liability of a term nature Increase Capital funds
i.
1 to 14 days
ii. 15 to 28 days iii. 29 days and up to 3 months iv. Over 3 months and up to 6 months v. Over 6 months and up to 1 year
300 200 350 400 50 50 700 650 200 150 50 50 200 150 Loans BPLR Linked 100 150 Others 50 50 Total Inflow 600 550 Gap -100 -100 Cumulative Gap -100 -200 Gap % to Total Outflow -14.29 -15.38
Capital Liab-fixed Int Liab-floating Int Others Total outflow Investments Loans-fixed Int Loans - floating
200 600 600 300 200 350 450 500 450 450 0 550 1050 1100 750 650 250 250 300 100 350 0 100 150 50 100 200 150 150 150 50 200 500 350 500 100 0 0 0 0 0 650 1000 950 800 600 100 -50 -150 50 -50 -100 -150 -300 -250 -300
18.18 -4.76 -13.64 6.67 -7.69
200 200 450 200 1050 900 100 50 100 200 1350 300 0
28.57
200 2600 3400 300 6500 2500 600 1100 2000 300 6500 0 0
Strategies
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 crore over 5 years maturities and invest it in securities of 1-29 days of Rs 200 crores and rest matching with other out flows.
GAP ANALYSIS
Gap is defined as the difference between the rate sensitive assets and rate sensitive liabilities maturing within a specific time period. Gap = RSA RSL
Gap Positive Positive Negative Negative Zero Zero RSA > RSL RSA > RSL RSA < RSL RSA < RSL RSA = RSL RSA = RSL Change in Interest Rate Increase Decrease Increase Decrease Increase Decrease Change in NII Increase Decrease Decrease Increase No Change No Change
Example
Let us consider an XYZ Bank for which the maturity pattern of Assets and Liabilities as on a particular date, say 31.03.2004 is given
Focus On NII
Focusing more on NII rather than Shareholders wealth
Positive
Negative Negative Zero
Decrease
Increase Decrease Increase
Increase
Increase Decrease No Change
Zero
Decrease
No Change
Example
Duration of a 3-year loan with 12% as rate of simple interest and having market value is Rs.700 is calculated as follows
Example
Duration Gap (DG) for the following assets and liabilities of an organization, if the value unit is Rupees (INR) and duration is in years
Here Total Assets (TA) = 100 + 700 + 200 = 1000 and Total Liabilities (TL) = 620 + 300 = 920 (Without Equity) DA = Weighted average of Duration of all Assets = [ MV(Ai) x DAi ] / TA for i = 1 to m; where Ai is the i th asset out of m assets = [700*2.69+200*4.99] /1000 = 2.88 yrs DL = Weighted average of Duration of Liabilities = [ MV(Lj) x DLj ] / TL for j = 1 to n; where Lj is the j th liability out of n liabilities = [620*1+300*2.81] /920 = 1.59 yrs Duration GAP (DG) = DA- [TL/TA] DL = 2.88 - 1.59 [920/1000] = 1.42 years
Duration Drift
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