View stunning SlideShares in full-screen with the new iOS app!Introducing SlideShare for AndroidExplore all your favorite topics in the SlideShare appGet the SlideShare app to Save for Later — even offline
View stunning SlideShares in full-screen with the new Android app!View stunning SlideShares in full-screen with the new iOS app!
Components of a Bank Balance sheetLiabilities Assets1. Capital 1. Cash & Balances with2. Reserve & Surplus RBI3. Deposits 2. Bal. With Banks &4. Borrowings Money at Call and Short Notices5. Other Liabilities 3. Investments 4. Advances 5. Fixed Assets 6. Other Assets Contingent Liabilities
Components of Liabilities1.Capital: Capital represents owner’s contribution/stake in the bank.- It serves as a cushion for depositors and creditors.- It is considered to be a long term sources for the bank.
Components of Liabilities2. Reserves & SurplusComponents under this head includes:I. Statutory ReservesII. Capital ReservesIII. Investment Fluctuation ReserveIV. Revenue and Other ReservesV. Balance in Profit and Loss Account
Components of Liabilities3. Deposits This is the main source of bank’s funds. The deposits are classified as deposits payable on ‘demand’ and ‘time’. They are reflected in balance sheet as under:I. Demand DepositsII. Savings Bank DepositsIII. Term Deposits
Components of Liabilities4. 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 & AgenciesII. Borrowings outside India
Components of Liabilities5. Other Liabilities & Provisions It is grouped as under:I. Bills PayableII. Inter Office Adjustments (Net)III. Interest AccruedIV. Unsecured Redeemable Bonds (Subordinated Debt for Tier-II Capital)V. Others(including provisions)
Components of Assets1. Cash & Bank Balances with RBII. Cash in hand (including foreign currency notes)II. Balances with Reserve Bank of India In Current Accounts In Other Accounts
Components of Assets2. BALANCES WITH BANKS AND MONEY AT CALL & SHORT NOTICEI. 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 InstitutionsII. Outside India a) In Current Accounts b) In Other Deposit Accounts c) Money at Call & Short Notice
Components of Assets3. 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
Components of Assets4. AdvancesThe most important assets for a bank.A. i) Bills Purchased and Discounted ii) Cash Credits, Overdrafts & Loans repayable on demand iii) Term LoansB. Particulars of Advances : i) Secured by tangible assets (including advances against Book Debts) ii) Covered by Bank/ Government Guarantees iii) Unsecured
Components of Assets5. Fixed Asset I. Premises II. Other Fixed Assets (Including furniture and fixtures)6. Other Assets I. Interest accrued II. Tax paid in advance/tax deducted at source (Net of Provisions) III. Stationery and Stamps IV. Non-banking assets acquired in satisfaction of claims V. Deferred Tax Asset (Net) VI. Others
Contingent LiabilityBank’s obligations under LCs, Guarantees,Acceptances on behalf of constituents andBills accepted by the bank are reflected underthis heads.
Banks Profit & Loss Account A bank’s profit & Loss Account has the following components:Income: This includes Interest Income and Other Income.II. Expenses: This includes Interest Expended, Operating Expenses and Provisions & contingencies.
Components of Income1. INTEREST EARNEDI. Interest/Discount on Advances / BillsII. Income on InvestmentsIII. Interest on balances with Reserve Bank of India and other inter-bank fundsIV. Others
Components of Income2. OTHER INCOMEI. Commission, Exchange and BrokerageII. Profit on sale of Investments (Net)III. Profit/(Loss) on Revaluation of InvestmentsIV. Profit on sale of land, buildings and other assets (Net)V. Profit on exchange transactions (Net)VI. Income earned by way of dividends etc. from subsidiaries and Associates abroad/in IndiaVII. Miscellaneous Income
Components of Expenses1. INTEREST EXPENDED I. Interest on DepositsII. Interest on Reserve Bank of India / Inter-Bank borrowingsIII. Others
Components of Expenses2. OPERATING EXPENSESI. Payments to and Provisions for employeesII. Rent, Taxes and LightingIII. Printing and StationeryIV. Advertisement and PublicityV. Depreciation on Banks propertyVI. Directors Fees, Allowances and ExpensesVII. Auditors Fees and Expenses (including Branch Auditors)VIII. Law Charges IX. Postages, Telegrams, Telephones etc. X. Repairs and Maintenance XI. InsuranceXII. Other Expenditure
Assets Liability ManagementIt is a dynamic process of Planning,Organizing & Controlling of Assets& Liabilities- their volumes, mixes,maturities, yields and costs in orderto maintain liquidity and NII.
Purpose & Objective of ALMAn effective Asset Liability Management Techniqueaims to manage the volume, mix, maturity, ratesensitivity, quality and liquidity of assets andliabilities as a whole so as to attain a predeterminedacceptable risk/reward ration.It is aimed to stabilize short-term profits, long-termearnings and long-term substance of the bank. Theparameters for stabilizing ALM system are: 1. Net Interest Income (NII) 2. Net Interest Margin (NIM)
RBI DIRECTIVES Issued draft guidelines on 10th Sept’98. Final guidelines issued on 10th Feb’99 for implementation of ALM w.e.f. 01.04.99. To begin with 60% of asset &liabilities will be covered; 100% from 01.04.2000. Initially Gap Analysis
Liquidity ManagementBank’s liquidity management is the process ofgenerating funds to meet contractual orrelationship obligations at reasonable prices atall times.New loan demands, existing commitments,and deposit withdrawals are the basiccontractual or relationship obligations that abank must meet.
Adequacy of liquidity position for a bank Analysis of following factors throw light on a bank’s adequacy of liquidity position:b. Historical Funding requirementc. Current liquidity positiond. Anticipated future funding needse. Sources of fundsf. Options for reducing funding needsg. Present and anticipated asset qualityh. Present and future earning capacity andh. Present and planned capital position
Funding Avenues To satisfy funding needs, a bank must perform one or a combination of the following:b. Dispose off liquid assetsc. Increase short term borrowingsd. Decrease holding of less liquid assetse. Increase liability of a term naturee. Increase Capital funds
Types of Liquidity Risk Liquidity Exposure can stem from both internally and externally. External liquidity risks can be geographic, systemic or instrument specific. Internal liquidity risk relates largely to perceptions of an institution in its various markets: local, regional, national or international
Other categories of liquidity risk Funding Risk - Need to replace net outflows due to unanticipated withdrawals/non-renewal Time Risk - Need to compensate for non-receipt of expected inflows of funds Call Risk - Crystallization of contingent liability
Statement of Structural LiquidityAll Assets & Liabilities to be reported as pertheir maturity profile into 8 maturity Buckets: 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 vi. Over 1 year and up to 3 years vii. Over 3 years and up to 5 years viii. Over 5 years
STATEMENT OF STRUCTURAL LIQUIDITY 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 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.
ADDRESSING THE MISMATCHES Mismatches 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 deployed in money market instruments, creating new assets & investment swaps etc. For –ve mismatch,it can be financed from market borrowings (Call/Term), Bills rediscounting, Repos & deployment of foreign currency converted into rupee.
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
Liability/Assets Rupees In Percentage (In Cr) Maturity Pattern of Select Assets & Liabilities of A BankI. Deposits 15200 100a. Up to 1 year 8000 52.63b. Over 1 yr to 3 yrs 6700 44.08c. Over 3 yrs to 5 yrs 230 1.51d. Over 5 years 270 1.78II. Borrowings 450 100a. Up to 1 year 180 40.00b. Over 1 yr to 3 yrs 00 0.00c. Over 3 yrs to 5 yrs 150 33.33d. Over 5 years 120 26.67III. Loans & Advances 8800 100a. Up to 1 year 3400 38.64b. Over 1 yr to 3 yrs 3000 34.09c. Over 3 yrs to 5 yrs 400 4.55d. Over 5 years 2000 22.72Iv. Investment 5800 100a. Up to 1 year 1300 22.41b. Over 1 yr to 3 yrs 300 5.17c. Over 3 yrs to 5 yrs 900 15.52d. Over 5 years 3300 56.90
STATEMENT OF INTEREST RATE SENSITIVITY & OFF- Generated by grouping RSA,RSL Balance sheet items in to various (8)time buckets.RSA: MONEY AT CALL ADVANCES ( BPLR LINKED ) INVESTMENTRSL DEPOSITS EXCLUDING CD BORROWINGS
MATURITY GAP METHOD (IRS) THREE OPTIONS: A) RSA>RSL= Positive Gap B) RSL>RSA= Negative Gap C) RSL=RSA= Zero Gap
SUCCESS OF ALM IN BANKS : PRE - CONDITIONS 1. Awareness for ALM in the Bank staff at all levels– supportive Management & dedicated Teams. 2. Method of reporting data from Branches/ other Departments. (Strong MIS).
Interest Rate Risk Management Interest Rate risk is the exposure of a bank’s financial conditions to adverse movements of interest rates. Though this is normal part of banking business, excessive interest rate risk can pose a significant threat to a bank’s earnings and capital base. Changes in interest rates also affect the underlying value of the bank’s assets, liabilities and off-balance-sheet item.
Interest Rate Risk Interest rate risk refers to volatility in Net Interest Income (NII) or variations in Net Interest Margin(NIM). Therefore, an effective risk management process that maintains interest rate risk within prudent levels is essential to safety and soundness of the bank.
Sources of Interest Rate Risk Interest rate risk mainly arises from: Gap Risk Basis Risk Net Interest Position Risk Embedded Option Risk Yield Curve Risk Price Risk Reinvestment Risk
Measurement of Interest Rate Risk Gap Analysis- Simple maturity/re-pricing Schedules can be used to generate simple indicators of interest rate risk sensitivity of both earnings and economic value to changing interest rates. - If a negative gap occurs (RSA<RSL) in given time band, an increase in market interest rates could cause a decline in NII. - conversely, a positive gap (RSA>RSL) in a given time band, an decrease in market interest rates could cause a decline in NII.
Measurement of Interest Rate Risk Duration Analysis: Duration is a measure of the percentage change in the economic value of a position that occur given a small change in level of interest rate.