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Shah Dhara (80)
Zaveri Sonam (100)
Shah Kunjan (82)

V Financial sector reforms in 1990 brought paradigm
V For strategic purpose bank felt the need of understand
V Banks are exposed many risks but did not have any
risk management model.
V Assets and liability management model has first
introduced for risk management
V ALM involves strategic decision based on risk
V RBI had to step in and start off the process
½  c 

V ALM is a comprehensive and dynamic framework for

measuring, monitoring and managing the market risk of a
V It is the management of structure of balance sheet
(liabilities and assets) in such a way that the net earning
from interest is maximized within the overall risk-
preference (present and future) of the institutions.


V Liquidly risk management

V Management of market risk
V Trading risk management
V Funding and capital planning and Profit planning
V Growth projection.

V It helps to bank manager to take business decision.

V It provide framework with an eye on the market risk .
V It is an integrated approach to financial management.
V Requiring simultaneous decisions about the types of
amounts of financial assets and liabilities - both mix
and volume - with the complexities of the financial
markets in which the institution operates
Π c
V ALM is coordinating the banks portfolios of assets and
liability in order to maximize bank profitability.
V ALM include planning to meet liquidity needs, planning the
maturities of assets & liabilities to limit their exposure to
interest rate.
V Controlling the rates earned and paid on assets and liabilities
in order to maintain or maximize the spread between interest
cost and interest income.

Liabilities Assets
1. Capital 1. Cash & Balances with
2. Reserve & Surplus RBI
3. Deposits 2. Bal. With Banks & Money
4. Borrowings at Call and Short Notices

5. Other Liabilities 3. Investments

4. Advances
5. Fixed Assets
6. Other Assets
º c 
1. Cash & Bank Balances with RBI
I. Cash in hand
(including foreign currency notes)

II. Balances with Reserve Bank of India

In Current Accounts
In Other Accounts
2. Balances with banks and money at call and
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
3. Investments
A major asset item in the bank¶s 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
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
5. Fixed Asset
I. Premises
II. Other Fixed Assets
6. Other Assets
I. Interest accrued
II. Tax paid in advance/tax deducted at source
III. Stationery and Stamps
IV. Non-banking assets acquired in satisfaction of claims
V. Deferred Tax Asset (Net)
VI. Others

1. Capital:
V Capital represents owner¶s contribution/stake in the

V It serves as a cushion for depositors and creditors.

V It is considered to be a long term sources for the

2. Reserves & Surplus
Components under this head includes:
 Statutory Reserves
II. Capital Reserves
III. Investment Fluctuation Reserve
IV. Revenue and Other Reserves
V. Balance in Profit and Loss Account
3. Deposits

This is the main source of bank¶s funds. The deposits

are classified as deposits payable on µdemand¶ and
µtime¶. They are reflected in balance sheet as under:
I. Demand Deposits
II. Savings Bank Deposits
III. Term Deposits
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

5. Other Liabilities & Provisions
It is grouped as under:

I. Bills Payable
II. Inter Office Adjustments (Net)
III. Interest Accrued
IV. Unsecured Redeemable Bonds
(Subordinated Debt for Tier-II Capital)
V. Others (including provisions)
6. Contingent Liability

Bank¶s obligations under LCs, Guarantees,

Acceptances on behalf of constituents and Bills
accepted by the bank are reflected under this heads.

V ALM strategies is performed by the ALCO.

V In the committee the members are chief executive officer,

division manager, chief financial and accounting officers.

V The objectives of ALCO are to improve the bank¶s net

interest margin, maximize stockholders long term
earnings, and avoid excessive default risk.
(1) Spread Management:
ocuses on maintaining an adequate spread between a
banks interest expenses on liabilities and its interest
income on assets.

(2) Gap Management :

ap management focuses on identifying and matching
rate sensitive assets and liabilities to achieve
maximum profits over the course of interest rate
3) Interest Sensitivity analysis
Focuses on improving interest spread by testing the
effects of possible changes in the rates, volume, and mix
of assets and liability, given alternative movement in
interest rate.
Three pillars of ALM Process

(a) ALM Information System:

V Management information system
V Information availability, Accuracy

(b) ALM Organization

V Structure and responsibility
V Level of top management involvement

(c) ALM Process

V Risk parameter
V Risk Identification
V Risk measurement
V Risk Management
V Risk Policy and tolerance levels