INTRODUCTION OF BANKINGThe name bank derives from the Italian word banco, desk, used during theRenaissance by Florentines bankers, who used to make their transactionsabove a desk covered by a green tablecloth.Banking" means the accepting, for the purpose of lending or investment, ofdeposits of money from the public, repayable on demand or otherwise, andwithdrawable by cheque, draft, and order."Banking Company" means any company which transacts the business ofbanking in India and includes the State Bank, but does not include the IndustrialInvestment Corporation Limited. Explanation.--Any company which is engaged inthe manufacture of goods or carries on any trade and which accepts deposits ofmoney from the public merely for the purpose of financing its business as suchmanufacturer or trader shall not be deemed to transact the business of banking.Banking IndiaBanking in India has its origin as early as the Vedic period and form the economypoint of view, the major task of banks is to act as intermediaries channelingsaving to investment requirement of savers are reconciled with the credit need ofinvestors and consumers .A bank is a business which provides financial services for profit. Traditionalbanking services include receiving of money, lending money and processingtransactions.Some banks (called Banks of issue) issue as legal tender. Manybanks offer ancillary financial services to make additional profit; for example:selling Insurance Product ,Investment product & stock broking.
The Indian Banking Industry can be categorized into non-scheduled banks andscheduled banks. Scheduled banks constitute of commercial banks and co-operative banks. There are about 67,000 branches of Scheduled banks spreadacross India. During the first phase of financial reforms, there was anationalization of 14 major banks in 1969. This crucial step led to a shift fromClass banking to Mass banking. Since then the growth of the banking industry inIndia has been a continuous process.As far as the present scenario is concerned the banking industry in India is in atransition phase. The Public Sector Banks (PSBs), which are the foundation ofthe Indian Banking system account for more than 78 per cent of total bankingindustry assets. Unfortunately they are burdened with excessive Non Performingassets (NPAs), massive manpower and lack of modern technology. On the otherhand the Private Sector Banks are witnessing immense progress. They areleaders in Internet banking, mobile banking, phone banking, ATMs. On the otherhand the Public Sector Banks are still facing the problem of unhappy employees.There has been a decrease of 20 percent in the employee strength of the privatesector in the wake of the Voluntary Retirement Schemes (VRS). As far as foreignbanks are concerned they are likely to succeed. Indusland Bank was the firstprivate bank to be set up in India. IDBI, ING Vyasa Bank, SBI Commercial andInternational Bank Ltd, Dhanalakshmi Bank Ltd, Karur Vysya Bank Ltd, Bank ofRajasthan Ltd etc are some Private Sector Banks. Banks from the Public Sectorinclude Punjab National bank, Vijaya Bank, UCO Bank, Oriental Bank, AllahabadBank, Andhra Bank etc.Currently in most jurisdictions the business of banking is regulated and banksrequire permission to trade. Authorization to trade is granted by Bank regulatryauthorities and provide rights to conduct the most fundamental banking servicessuch as accepting deposist and making loans.
History of Banking in IndiaWithout a sound and effective banking system in India it cannot have a healthyeconomy. The banking system of India should not only be hassle free but itshould be able to meet new challenges posed by the technology and any otherexternal and internal factors.For the past three decades Indias banking system has several outstandingachievements to its credit. The most striking is its extensive reach. It is no longerconfined to only metropolitans or cosmopolitans in India. In fact, Indian bankingsystem has reached even to the remote corners of the country. This is one of themain reasons of Indias growth process.The first bank in India, though conservative, was established in 1786. From 1786till today, the journey of Indian Banking System can be segregated into threedistinct phases. They are as mentioned below: Early phase from 1786 to 1969 of Indian Banks Nationalization of Indian Banks and up to 1991 prior to Indian banking sector Reforms. New phase of Indian Banking System with the advent of Indian Financial & Banking Sector Reforms after 1991. To make this write-up more explanatory, I prefix the scenario as Phase I, Phase II and Phase III.Phase IThe General Bank of India was set up in the year 1786. Next came Bank ofHindustan and Bengal Bank. The East India Company established Bank ofBengal (1809), Bank of Bombay (1840) and Bank of Madras (1843) asindependent units and called it Presidency Banks. These three banks were
amalgamated in 1920 and Imperial Bank of India was established which startedas private shareholders banks, mostly Europeans shareholders.During the first phase the growth was very slow and banks also experiencedperiodic failures between 1913 and 1948. There were approximately 1100 banks,mostly small. To streamline the functioning and activities of commercial banks,the Government of India came up with The Banking Companies Act, 1949 whichwas later changed to Banking Regulation Act 1949 as per amending Act of 1965(Act No. 23 of 1965). Reserve Bank of India was vested with extensive powersfor the supervision of banking in India as the Central Banking Authority.During those day‟s public has lesser confidence in the banks. As an aftermathdeposit mobilization was slow. Abreast of it the savings bank facility provided bythe Postal department was comparatively safer. Moreover, funds were largelygiven to traders.Phase IIGovernment took major steps in this Indian Banking Sector Reform afterindependence. In 1955, it nationalized Imperial Bank of India with extensivebanking facilities on a large scale especially in rural and semi-urban areas. Itformed State Bank of India to act as the principal agent of RBI and to handlebanking transactions of the Union and State Governments all over the country.Seven banks forming subsidiary of State Bank of India was nationalized in 1960on 19th July, 1969, major process of nationalization was carried out. It was theeffort of the then Prime Minister of India, Mrs. Indira Gandhi. 14 majorcommercial banks in the country were nationalized.Second phase of nationalization Indian Banking Sector Reform was carried out in1980 with seven more banks. This step brought 80% of the banking segment inIndia. The following are the steps taken by the Government of India to RegulateBanking Institutions in the Country:
1949: Enactment of Banking Regulation Act. 1955: Nationalization of State Bank of India. 1959: Nationalization of SBI subsidiaries. 1961: Insurance cover extended to deposits. 1969: Nationalization of 14 major banks. 1971: Creation of credit guarantee corporation. 1975: Creation of regional rural banks. 1980: Nationalization of seven banks with deposits over 200 crore. After the nationalization of banks, the branches of the public sector bank India raised to approximately 800% in deposits and advances took a huge jump by 11,000%.Banking in the sunshine of Government ownership gave the public implicit faith and immense confidence about the sustainability of these institutions.Phase IIIThis phase has introduced many more products and facilities in the bankingsector in its reforms measure. In 1991, under the chairmanship of MNarasimham, a committee was set up by his name which worked for theliberalization of banking practices.The country is flooded with foreign banks and their ATM stations. Efforts arebeing put to give a satisfactory service to customers. Phone banking and netbanking is introduced. The entire system became more convenient and swift.Time is given more importance than money.The financial system of India has shown a great deal of resilience. It is shelteredfrom any crisis triggered by any external macroeconomics shock as other EastAsian Countries suffered. This is all due to a flexible exchange rate regime, theforeign reserves are high, the capital account is not yet fully convertible, andbanks and their customers have limited foreign exchange exposure.
INDIAN BANKING STRUCTURE SBI Group Nationalized Regional Banks Rural Bank Foreign Commercial Banks in India Public Indian Sector Scheduled Commercial Commercial Banks Banks Banks Private Sector Non- Scheduled BanksR Co-operative State Central PrimaryB Banks Co-operative Co-operative CreditI Banks Banks Banks IFCI, IRBI SFC, NSIC Industrial ICICI, IDBI SIDC/SIIC DICGC Development Insurance Banks and Credit Agricultural NABARD Guarantee AFC Investment LIC, GIC UIT Housing NHB Export EXIM Banks Import ECGC
Services typically offered by banksAlthough the type of services offered by a bank depends upon the type of bankand the country, services provided usually include: Taking deposits from their customers and issuing Checking and Saving accounts to individuals and businesses. Extending Loans to individuals and businesses. Cashing Cheques Facilitating money transactions such as Wire Transfer and cashier checks. Issuing Credit cards, ATM crads & debit crads Storing valuables, particularly in a Safe Deposits Box. Cashing and distributing Bank rolls. Financial Transactions can be performed through many different Channels o Branch o ATM o Mail o Telephone Banking o Online Banking INNOVATIONS IN BANKING IN INDIA o Internet Banking o Mobile Banking o Payment Systems o Benefits of Technology in Banking BANKING BEYOND BANKING o Personal Banking o Retail Banking o NRI Services o Any Branch Banking
Types of banksBanks activities can be characterized as retail banking dealing directly withindividuals and small businesses, and investment banking, relating to activitieson the financial markets. Most banks are profit-making, private enterprises.However, some are owned by government, or are non-profit making.Indian Banking system can be roughly classified into three broab categories viz. Commercial Banks Development Banks Co-operative Banks Commercial Banksthe term used for a normal bank to distinguish it from an investment bank. Afterthe great depression, the U.S. Congress required that banks only engage inbanking activities, whereas investment banks were limited to capital marketsactivities. Since the two no longer have to be under separate ownership, someuse the term "commercial bank" to refer to a bank or a division of a bank thatmostly deals with deposits and loans from corporations or large businesses.Today commercial banking system in india may be distinguished 1. Public Sectors Banks 2. Private Sector Banks. Development BanksThis type of bank provide long term finance to Industries and Trade.Developmentbanking sectors are as above-
1. Industrial Finance Corporation Of India 2. Industrial development bank of india 3. Industrial Credit And Investment Bank Of India 4. Small Industrial Development Banks Of India 5. National Bank for Agriculture And Rural Development 6. Exprot Import And Of India Co-operative BanksThe Co operative banks in India started functioning almost 100 years ago. TheCooperative bank is an important constituent of the Indian Financial System,judging by the role assigned to co operative, the expectations the co operative issupposed to fulfill, their number, and the number of offices the cooperative bankoperate. Though the co operative movement originated in the West, but theimportance of such banks have assumed in India is rarely paralleled anywhereelse in the world. The cooperative banks in India play an important role eventoday in rural financing. The businesses of cooperative bank in the urban areasalso have increased phenomenally in recent years due to the sharp increase inthe number of primary co-operative banks. Co operative Banks in India areregistered under the Co-operative Societies Act. The cooperative bank is alsoregulated by the RBI. They are governed by the Banking Regulations Act 1949and Banking Laws (Co-operative Societies) Act, 1965. Co-operative Sectors 1. State Co-operative Bank 2. Central Co-operative Bank 3. Primary Agriculture Credit Societies 4. Urban Co-operative Bank 5. Primary Land Development Bank 6. State Land Development Bank
Values & Principles of Co-Operative BankCo-operatives are based on the values of self-responsibility, democracy, equalityand Solidarity. In the tradition of their founders, co-operative members believe inthe ethical values of honesty, openness, social responsibly and caring others. Principles 1. Voluntary and open membership – Co-operative are voluntary organizations, open to all persons able to use their services and willing to accept the responsibility of membership without gender, social, racial, political discrimination. 2. Democratic member control – Co-operative are democratic organization control by their members, who actively participate in setting their polices and making decision, men and women serving as elected representative are accountable to the membership. In co-operatives, members have equal voting rights and co-operative at other levels are also organized I a democratic manner. 3. Member‟s economic participation – Members contributes equitably to and democratically controls the capital of their co-operative. At least part of capital is usually the common property of the co-operative. 4. Autonomy and independence – Co-operatives are autonomous, self help organization control by their members. 5. Education training and information – Co-operative provides education and training for their members, elected representatives, mangers and employees so that they can contribute effectively to the development of their co-operative. 6. Concern for community – Co-operative work for their substantial development of their communities through policies approved by their members.
Some facts about Cooperative banks in India 1. Some cooperative banks in India are more forward than many of the state and private sector banks. 2. According to NAFCUB the total deposits & landings of Cooperative Banks in India is much more than Old Private Sector Banks & also the New Private Sector Banks. 3. This exponential growth of Co operative Banks in India is attributed mainly to their much better local reach, personal interaction with customers, and their ability to catch the nerve of the local clientele.Cooperative banks in India finance rural areas under: 1. Farming 2. Cattle 3. Milk 4. Hatchery 5. Personal financeCooperative banks in India finance urban areas under 1. Self-employment 2. Industries 3. Small scale units 4. Home finance 5. Consumer finance 6. Personal finance
Developments in Co-operative BankingCo-operative banking has passed through many phases since the enactment ofthe Agricultural Credit Co-operative Societies Act in 1904. Co-operative banks,developed largely as an offshoot of official policy, expanded rapidly in the post-independence era and played an important role in implementation of variousGovernment schemes. Their business is now binger-engineered to strengthentheir role in contributing to financial inclusion and deepening banking penetrationin an increasingly competitive financial landscape.The co-operative Banking system, with two broad systems of Urban and Ruralco-operative, forms and integral part of India finical system with a wide networkand extensive coverage, these institutions have played an important role inenlarging the ambit of institutional credit by way of including banking habitsamong the poor and those in remote areas. In recent time, co-operative bankshave tried to improve credit deliveries through some financial innovation. Urban Co-operative BanksThe term Urban Co-operative Banks (UCBs), though not formally defined, refersto primary cooperative banks located in urban and semi-urban areas. Thesebanks, till 1996, were allowed to lend money only for non-agricultural purposes.This distinction does not hold today. These banks were traditionally centered oncommunities, localities work place groups. They essentially lent to smallborrowers and businesses. Today, their scope of operations has widenedconsiderably.The origins of the urban cooperative banking movement in India can be traced tothe close of nineteenth century when, inspired by the success of the experimentsrelated to the cooperative movement in Britain and the cooperative creditmovement in Germany such societies were set up in India. Cooperative societiesare based on the principles of cooperation, - mutual help, democratic decision
making and open membership. Cooperatives represented a new and alternativeapproach to organization as against proprietary firms, partnership firms and jointstock companies which represent the dominant form of commercial organization.The Beginnings (UCBs)The first known mutual aid society in India was probably the „Anyonya SahakariMandali‟ organized in the erstwhile princely State of Baroda in 1889 under theguidance of Vithal Laxman also known as Bhausaheb Kavthekar. Urban co-operative credit societies, in their formative phase came to be organized on acommunity basis to meet the consumption oriented credit needs of theirmembers. Salary earners‟ societies inculcating habits of thrift and self helpplayed a significant role in popularizing the movement, especially amongst themiddle class as well as organized labour. From its origins then to today, thethrust of UCBs, historically, has been to mobilize savings from the middle andlow income urban groups and purvey credit to their members - many of whichbelonged to weaker sections.The Cooperative Credit Societies Act, 1904 was amended in 1912, with a view tobroad basing it to enable organization of non-credit societies. The MaclaganCommittee of 1915 was appointed to review their performance and suggestmeasures for strengthening them. The committee observed that such institutionswere eminently suited to cater to the needs of the lower and middle income strataof society and would inculcate the principles of banking amongst the middleclasses. The committee also felt that the urban cooperative credit movement wasmore viable than agricultural credit societies. The recommendations of theCommittee went a long way in establishing the urban cooperative creditmovement in its own right.In the present day context, it is of interest to recall that during the banking crisisof 1913-14, when no fewer than 57 joint stock banks collapsed, there was a therewas a flight of deposits from joint stock banks to cooperative urban banks.Maclagan Committee chronicled this event thus:
“As a matter of fact, the crisis had a contrary effect, and in most provinces, therewas a movement to withdraw deposits from non-cooperatives and place them incooperative institutions, the distinction between two classes of security being wellappreciated and a preference being given to the latter owing partly to the localcharacter and publicity of cooperative institutions but mainly, we think, to theconnection of Government with Cooperative movement”.UCBs are unique in terms of their clientele mix and channels of credit delivery.UCBs reorganized with the objective of promoting thrift and self-help among themiddle class/lower middleclass population and providing credit facilities to thepeople with small means in the urban/semi urban centers. On account of theirlocal feel and familiarity, UCBs are important for achieving greater financialinclusion. In recent times, however, UCBs have shown several weaknesses,particularly related to their financial health.Recognising their important role in thefinancial system, it has been the endeavor of the Reserve Bank to promote theirhealthy growth. However, the heterogeneous nature of the sector has called Fora differentiated regime of regulation. In recent years, therefore, the Reserve Bankhas provided regulatory support to small and weak UCBs, while the same timestrengthening their supervision. Recent Developments(UCBs)Over the years, primary (urban) cooperative banks have registered a significantgrowth in number, size and volume of business handled. As on 31st March, 2003there were 2,104 UCBs of which 56 were scheduled banks. About 79 percent ofthese are located in five states, - Andhra Pradesh, Gujarat, Karnataka,Maharashtra and Tamil Nadu. Recently the problems faced by a few large UCBshave highlighted some of the difficulties these banks face and policy endeavorsare geared to consolidating and strengthening this sector and improvinggovernance.
STRUCTURE OF CO-OPERATIVE BANK Co-Operative Credit Structure Agricultural Credit Non-Agricultural Credit State Co-operativeShort-term & Long Term BanksMedium Term Central Co-operative State State ARDBs BanksCo-operative Banks Primary ARDBS Primary Credit Societies CentralCo-operative Banks Employee Urban Co- OtherPrimary Credit Co- operative Societies Societies operative Societies Banks 1. PACS 5. Service Co- 2. FSS 6. M-p Soc. 3. L-SCS 7. Grain Banks 4. LAMPS
Features of Cooperative BanksCo-operative Banks are organized and managed on the principal of co-operation,self-help, and mutual help. They function with the rule of "one member, onevote". Function on "no profit, no loss" basis. Co-operative banks, as a principle,do not pursue the goal of profit maximization.Co-operative bank performs all the main banking functions of depositmobilization, supply of credit and provision of remittance facilities. Co-operativeBanks provide limited banking products and are functionally specialists inagriculture related products. However, co-operative banks now provide housingloans also.UCBs provide working capital loans and term loan as well. The State Co-operative Banks (SCBs), Central Co-operative Banks (CCBs) and Urban Co-operative Banks (UCBs) can normally extend housing loans up to Rs 1 lakh to anindividual. The scheduled UCBs, however, can lend up to Rs 3 lakh for housingpurposes. The UCBs can provide advances against shares and debentures also.Co-operative bank do banking business mainly in the agriculture and rural sector.However, UCBs, SCBs, and CCBs operate in semi urban, urban, andmetropolitan areas also. The urban and non-agricultural business of these bankshas grown over the years. The co-operative banks demonstrate a shift from ruralto urban, while the commercial banks, from urban to rural.Co-operative banks are perhaps the first government sponsored, government-supported, and government-subsidized financial agency in India. They getfinancial and other help from the Reserve Bank of India NABARD, centralgovernment and state governments. They constitute the "most favored" bankingsector with risk of nationalization. For commercial banks, the Reserve Bank ofIndia is lender of last resort, but co-operative banks it is the lender of first resort
which provides financial resources in the form of contribution to the initial capital(through state government), working capital, refinance.Co-operative Banks belong to the money market as well as to the capital market.Primary agricultural credit societies provide short term and medium term loans.Land Development Banks (LDBs) provide long-term loans. SCBs and CCBs alsoprovide both short term and term loans.Co-operative banks are financial intermediaries only partially. The sources oftheir funds (resources) are (a) central and state government, (b) the ReserveBank of India and NABARD, (c) other co-operative institutions, (d) ownershipfunds and, (e) deposits or debenture issues. It is interesting to note that intra-sectoral flows of funds are much greater in co-operative banking than incommercial banking. Inter-bank deposits, borrowings, and credit from asignificant part of assets and liabilities of co-operative banks. This means thatintra-sectoral competition is absent and intra-sectoral integration is high for co-operative bank.Some co-operative bank is scheduled banks, while others are non-scheduledbanks. For instance, SCBs and some UCBs are scheduled banks but other co-operative bank is non-scheduled banks. At present, 28 SCBs and 11 UCBs withDemand and Time Liabilities over Rs 50 crore each included in the SecondSchedule of the Reserve Bank of India Act. Co-operative Banks are subject toCRR and liquidity requirements as other scheduled and non-scheduled banksare. However, their requirements are less than commercial banks. Since 1966the lending and deposit rate of commercial banks have been directly regulated bythe Reserve Bank of India. Although the Reserve Bank of India had power toregulate the rate co-operative bank but this have been exercised only after 1979in respect of non-agricultural advances they were free to charge any rates at theirdiscretion. Although the main aim of the co-operative bank is to provide cheapercredit to their members and not to maximize profits, they may access the moneymarket to improve their income so as to remain viable.
PRUDENTIAL NORMS AND ASSETS-LIABILITY MANAGEMENT GUILDLINES FOR UCBS.The reserve bank continued with its efforts to enhance the financial health ofUCBs. In pursuance, certain policy changes were made in regard to prudentialnorms on capital adequacy, income recognition, Assets classification andprovisioning in respect of UCBs.Capital adequacy requirement for UCBs are atpresent lower then those prescribed for commercial banks. By March 31 st, 2005UCBs. Would have to fall in line with the discipline applicable to commercialbanks. Accordingly, they are required to adhere to capital adequacy standards ina phased manner over a period of three years.CRAR ratio For UCBs. AS ON 31ST CRAR FOR CR A R FOR CRAR FOR MARCH SCHEDULED NON - COMMERCIAL UCBS SCHEDULED BANKS UCBS 2002 8 6 9 2003 9 7 9 2004 As applicable to 9 9 commercial bank 2005 As applicable to As applicable to commercial bank commercial bank 2006 As applicable to As applicable to commercial bank commercial bank
EXTENTION OF 90 DAYS NPA NORMSRBI has been tightening prudential norms in line with the best internationalpractices in recent years. Accordingly, to ensure greater transparency, the timeperiod for reckoning as advance as non performing would be reduced from theexisting 180 days to 90 days with effect from March 31st, 2004. In this connectionbanks were instructed to move over to charging of interest at monthly rates, witheffect from April 1, 2002.However, “gold” loans and “small” loans up to Rs.100000 will continue to be covered by the 180 days norms for recognitions ofloan impairment. LICENSING OF NEW BANKSThe number of UCBs has been rising rapidly recent years. The RBI hasconstituted a screening committee of eminent external exports to examine notonly the background and credentials of promoters but also to consider but alsoconsidering the environment / business projections submitted by the promotersand other factors influencing the viability of the proposed bank. During the yearunder review, the committee considered 90 proposals for the organization of thenew banks, and granted “in principle” approval in two cased. In addition, 22proposals were closed, as the promoters of the proposed banks failed to complywith the stipulated eligibility requirements. During the period under review, 131licenses were issued for opening new branches. WEAK BANKSBased on new classification, the number of UCBs classifies under the class II / III/ IV category as on March 31st, 2003 stood at 944. During the period underreview 142 weak banks could not comply with the stipulated minimum capitalrequirements.
CHALLENGES FACED BY UCBs.After a relatively fast growth during the priod,1993 to 1999 the sector saw asubstantial number of new urban co-operative banks coming up and growth rateof the banks being consistently higher than the all India average for all banks,the period of the year 2000-2001 till now has been that of sluggish growth anddifficulties for the sector. The share of urban banks in terms of resources grewfrom around 4% in 1993-1994 to over (% in 2001-2002. The size of a large of2000 strong urban banks also grew at a fast pace during this period. However,involvement of one of the largest urban co-operative banks in Gujarat in the stockmarket scam of 2001 sent stock waves in the entire urban co-operative bankingsector and affected the sector‟s public image very badly. Since a very largenumber of smaller urban banks in Gujarat were having deposits withMadhaupura Mercantile Co-operative bank (MMCB), which got involved in thescam, the public confidence, which had come down very badly, has not beenrestored till date. Similarly during these times there were some problems in a fewbanks in Maharashtra on account of bad management. The responses of theregulators have been by way of imposition of further stringent norms and rules inorder for them to be on par with those applied to commercial bank.In the back drop of the developments that have taken place in the urban co-operative banking sector during the last 4-5 years, the following could beidentified as main challenges to the sector in the coming years. STRENTENING THE PUBLIC IMAGEAmong all the section of banking industry urban co-operative banks constitutethe largest section in terms of number of institutions. They also constitute themost unevenly distributed group among all section of the banking industry. Out ofover 2000 urban co-operative banks in the country, over 70% are concentrated inthree states of Maharashtra, Gujarat and Karnataka. Their compositions in terms
of size also vary vastly. While there are banks with over Rs.2000 Cororedeposits, a sizable number of banks are most advanced and technologicallybeing members of RTGS etc., a large number of them are in the initial stages ofcomputerization. Even the management styles, levels of professionalisation andcompetence levels of staff also vary form bank to bank.Urban co-operative banks in any town are typically promoted by prominentmembers of the society there. They are usually businessman, traders,landowners, teachers, lawyers, social workers etc., and while in small places, thereputation of the bank generally is in keeping with the standing of the promotersand the board members. And the society in that area, in larger cities themembers and the clients look at the banks and assess them largely on theirpublic image by focusing on two factors. o Ensuring that the board members are persons of integrity and of good standing in the society who have fair understanding of banking systems. o Following principals of take adventurous decision to grow at a faster pace than others.While these are internal factors that are within the competence of the bank, thereare certain aspects on which it would not have much control but they wouldnevertheless have important bearing on the public image of the bank. If there area number of urban co-operative banks in town, it has been observed that anyproblem with one bank has a contagion effect on other banks also,notwithstanding the fact that these other banks, Bering a few are not largeenough to have a brand name and an identity by which general public coulddistinguish one from the other while taking decision on whether to keep moneysin a particular bank or not .Today, the publics perception is that deposits withonly public sector banks are safe and that there is always an element of riskinvolved when the deposits are with either smaller private sector banks or withthe co-operative banks, while it is not easy to change this perception, much can
be done by the urban co-operative banks by adhering strictly to the prudentialnorms and following the disclosure requirements so that the depositors haveaccess to the true state of health of the bank. Following the disclosure normsbecome easy if the banks has no weakness to hide. A very striking differencebetween a co-operative bank and a commercial bank is the involvement of theco-operative bank in social activities of the area of its operation. There are alarge number of well managed and sound co-operative banks who are involved inmany socially relevant activities in the field of health, education and at the time ofemergencies like natural calamities. These activities improve the image andesteem of the bank in the eyes of the local citizens. MANGING THE GROWTHIt is possible to mange a small size bank with common sense and sincerity.However, it requires professional approach and specialized financial knowledgeto mange a financial institution that is growing a very fast clip. It has beenobserved that many of the urban co-operative banks which were in the range of25-50 crores deposits have within a span of five years grown to banks with 300-500 crores deposits. This phenomenal growth brings in its wake enormouschallenges. The board of directors, however well meaning they might be find itvery difficult to run the bank unless they are supported by professionals. Thechallenge before the board would be to put a professional management team inplace and also to be able to work with that team, so that the synergies of theboard members in the form of the local feel and knowledge about the area inwhich the bank operating is complimented with professional and technicalknowledge of the management team to get the best result for the bank. Thisscenario would necessitate the board to drastically change its style offunctioning, introduce formal systems of accountability and also familiarize withthe management information systems. To bring about this change, there shouldbe complete willingness on the part of the board members to work hard towardsit.
Managing growth also involves constant efforts to look out for changes inbusiness profiles to maximize the return out of the growth and at the same timeto keep the risk management aspect in mind.As the urban co-operative banks like any other institution in the co-operativesector are democratic organizations, there is always involvement of local leaderswho invariably owe allegiance to one political party or the other. The challengebefore the urban co-operative banks is to utilize the strength of politicalconnections or allegiance of its members/promoters/directors to the benefit of theinstitution rather than its detriment as it has often been observed in the history ofco-operative banks. These co-operative leaders must firmly put the interest of thebanks above any political consideration so that health of co-operative banks is inway compromised. To elaborate, people in public life generally tend to obligeothers, and if this tendency is carried to the board room of the bank, theinstitution could be put into difficulties on account of unprofessional decision. REGULAATION OF COMMUNITY BASED FINACIAL INSTITUTIONThis subject perhaps constitutes the most formidable challenge to the regulators,the stockholders and the government. In setting out to meet the challenge ofregulating community based institutions like urban, co-operative banks, one mustfirst Cleary perceive institutions to be different from the commercial banks for thesimple reasons that the client base of co-operative banks is different from thecommercial banks. Commercial banks have the reach, the middle class and thesmall section of the lower middle class as their depositors, large and mediumindustries, SSIs, exporters and traders as their borrows, while the co-operativebanks have only the middle and lower middle class and weaker section as theirdepositors and their borrowers. While commercial banks are speared over entiregeographical region with branches in large metros, town as well as villages, Avery large number of co-operative banks have their branches confine to a single
town, which may be a small urban area or Sámi rural place. The commercialbanks collect deposits from various centers to deploy them at other centers. Theurban co-operative banks usually deploy funds collected form one place for thebenefit of borrowers in that place only. While the commercial banks on account oftheir resources and technology are in the position to offer a wide range ofservices to their clients, the urban co-operative banks on the other hand by andlarge, can offer only limited service to their customers.In view of this significant difference in the working of co-operative banks andsthat of commercial banks, a uniform prescription of norms, particularly theapplication of prudential norms will not yield the desire results. In the last 3 yearsno worth while attempt has been made to define the role of urban co-operativebanks as a sections of community based banking systems, to ascertains indetails the impact of these banks in states where they are well establishes, theneed or otherwise for promoting such institutions in other states, and above all todevelop a system of regulation and supervision that will bring the best out of theurban co-operative banks. This is a real challenge before the regulators. Theymust recognize this challenge and work upon it. If the regulators continue to whatthey have been ding during the last few years, and only concentrate onimposition of norms that are not attainable by almost half of the total number ofurban co-operative banks, they would only be succeeding only in presiding overclosure of large number of them every year.
SURAT PEOPLE‟S CO-OPERATIVE BANK LTDWith the advent of 20th century, co-operative movement gathering momentum inour country. In the early years of the century, there were only a few banks ran bysolely profit conscious foreign managements, absolutely unmindful of their socialobligation. Further there was also widespread economics exploitation of thecommon man in general and of socially and economically weaker sections of thesociety in particular by the money lenders who were lending money to them atexorbitant rates of interest with stringent conditions subjected them to crushingindebtedness. In such a socio-economic at the time, co-operative banks werelooked upon to play a vital role.Inspired by the exhortation of late autorothfield, the then register of co-operatives, Bombay province, that a large number of co-operative banks shouldbe established to cater to the banking needs of the common man, lateREVSAHEB VRUNDAVANDAS JADAV, A VISIONARY dreamt of establishinga co-operative bank. this, dream of his turned into reality when he, ably aided bylate CHUNILAL SAPAIYA, a seasoned banker founded a co-operative bank inthe name and style of “ The Surat Peoples Co-operative Bank Ltd‟‟.in the year1922 at SURAT . To be precise, it was registered on 10th march, 1922 andstarted functioning with effect from 22nd April, 1922. It enjoys the distinction of
being the “first urban co-operative bank of India‟‟. The Surat Peoples Co-operative Bank Ltd was popularly known as JADAVSAHEB‟S BANK, reasonbeing that one or the other of the four member of Jadav family were associatedwith it in some way or other during a span of six decades. Late REVSAHEBVRUNDAVANDAS JADAV, apart from being the founder of the bank, was also itsmanaging director since its inception till the year 1955. Late TAKOREBHAIbrother of REVSAHEB JADAV was honorary secretary and manager of the banksince its inception till the year 1950.Whereas late SUDHIRBHAI JADAV, son oflate REVSAHEB JADAV , was the Managing Director of the bank form the year1961 to 1985. After his retirement form the bank‟s service, he was on BOARDOF DIRECTORS of the bank for one year.Progressively marching ahead THE SURAT PEOPLE‟S CO-OPERATIVE BANKacquired the status of Scheduled Bank on 1st September, 1988. The bank hasbeen catering to the needs of small entrepreneurs, artisans, professionals, andweaker section of the society to become a co-operative bank in letter and spirit.Over the year, the SPCBL has set its eyes on strategic planning for the future inorder to arm itself to face competition in wake of sea change that the bankingindustry has been witnessing on account of policy of liberalization of economy.
ORGANISATION STRUCTURE President Vice Director Director General Manager Deputy General Manager Asst. General Manager Manager Officers ClerksThere are two AGMs in the bank. Under each AGM there is one Executive.Under executive there are three managers, similarly under managers there aretwo officers and there are three clerks.
OBJECT OF THE BANKS:The objects of the bank are as under: To encourage thrift and mutual co-operative among its members. To create funds to be lent at moderate rate of interest to the members of the banks in accordance with procedure specified in bye laws. To give possible help and necessary guidance to traders who are members of the banks, in the conduct of their business. To do HUNDI business To lend money on security to member. With previous permission of the registrar, to purchase any property for the business of or for the use of bank to construct it or to make suitable alterations as may be necessary and to maintain the same. To perform any function as may be deemed lawful for the bank and that as the central Government or State Government may direct. To do every kind of trust and agency business and particularly do the work of investment of funds, sale of properties and of recovery or acceptance of money. To undertake the management of trusts and for that purpose to accept any office of trustees executors or any office to perform duties of such a confidential nature either independently or jointly with some other person as the Bord deems its. To undertake every kind of banking and sharafi business and also to undertake of giving guarantee and letter credit on behalf of members.
STRENGTHS The bank was the first “ First Registered Urban Co-operative Bank” of India Among the first 13 Co-operative Bank to get the “Scheduled Bank” Status. The bank introduced "Total Branch Automation" in the 1992-93. Presently, all the branches are computerized. Bank has started its own “Training Centre” to provide training to the employees of other co-operative banks since 1995-96. The first Bank to provide the "Depository Participant Services" in South Gujarat. The Bank with "A" Rank. The Bank has implemented “Tele Banking Facility” and “view Account Terminal” [VAT] facility at all branches for providing better customer service.
PAST PERFORMANCEFinancial Position As on 31-3-2006 Detail Amount In Rs. Authorized Share 25,00,00,000.00 Capital Paid up Share 16,44,64,100.00 Capital Reserve Fund 54,17,29,574.75Other Reserves and 179,44,28,238.25 Funds Deposits 720,16,49,931.56 Advances 359,13,32,357.81 Investments 449,74,69,866.70 Working Capital 1009,66,95,577.50 Net Profited 9,75,12,937.42Net Non Performing 0.00 Assets Audit Class "A"
NUMBERS OF MEMBERS No. Of Members 70000 60000 50000 40000 30000 53,687 55,979 57,470 58,158 59,369 50,523 20000 10000 0 2001 2002 2003 2004 2005 2006 1 2 3 4 5 6 Year Total Numbers have increased by 20% since 2001 PAID UP SHARE CAPITAL 18000000 Paid Up Share Capital 16000000 14000000 12000000 10000000 80000000 60000000 40000000 20000000 0 1 2 3 4 5 6 7 YearPaid up Share capital has increased by nearly 60% since 2001
RESERVE FUND 60000000 Reserved Fund 50000000 40000000 30000000 20000000 10000000 0 1 2 3 4 5 6 7 Year Reserved Fund has increased by nearly 42% since 2001 DEPOSITS 8E+09 7E+09 6E+09 Deposits 5E+09 4E+09 3E+09 2E+09 1E+09 0 1 2 3 4 5 6 YearDeposits have increased by approximately 25% over 4 years since 2001
ADVANCES 4E+09 3.5E+09 Advances 3E+09 2.5E+09 2E+09 1.5E+09 1E+09 50000000 0 1 2 3 4 5 6 Year Advances have increased by nearly 22% since 2001The above charts and analysis shows the overall positive growth of the SuratPeople‟s Co-operative Bank.
AWARDS As per @1st Annual Report (1996-97) of NAFCUB - New Delhi. The Bank was awarded rank as under for : Net Profit : 6th Deposits : 8th Advances : 9th Bank achieved the coveted "Award of Excellence" from NAFCUB, New Delhi at their 8th all India conference of Urban Co-operative Banks & Credits Societies. Surat Jilla Sahakari Sangh declared our bank as the best "Urban Co- operative Bank” for the year 1999-2000 in Surat district. The bank with "A" Rank.
SERVICES Safe Deposit Lockers:We are offering you safe deposit lockers for safety of your valuablethings like gold, silver, hard cash, diamonds, important documents.We offer our customer safe deposit vault or locker at a large no ofbranches. There is a nominal annual charge which depends on the size oflockers. Basically use of lockers is to make your most valuable thing secure.Your family is going out of station, or there 2 to 3 family member at your homeso at that there is fear of thief , and even for make your self tension free youshould go for safe deposit lockers. and this all things when ever you want backyou can take back instantly from bank and again if your purpose will be solveagain you can give it back. VAT (View Account Terminal) Services You can easily have information about your account. You can come to know account status like balance, latest transaction, using just touch screen. VAT machine is available at our all branches.
Letter of Credit Service:Document, consisting of specific instructions by abuyer of goods, that is issued by a bank to theseller who is authorized to draw a specified sumof money under certain conditions, i.e., the receipt by the bank of certaindocuments within a given time. An irrevocable L/C provides guarantee by theissuing bank in the event that all terms and conditions are met by the buyer (ordrawee). A revocable L/C can be canceled or altered by the drawee after it hasbeen issued by drawees bank. SMS banking Services :We are providing tele banking service at ourall the branches. Using SMS banking you can have current information aboutyour status of account. Like balance of your account in English and gujratilanguage both. Even you can come to know status about all kinds of account.Like (Current account, Savings account, Loan Account, Overdraft). Even, we aregiving facility of tale fax also. So you can have your account statement on yourfax.
Fund TransferIn this facility, Bank gives facility of fund transfer of fund transfer between twodifferent branches. Bank provides this service at free charges. In this facilitycustomer has account in one branch of the bank, and he wants that money inother branch of the bank then customer can get his/her money form other branchwithout any risk or charges. It is not necessary customer has also account inother branch but that branch where he deposited money; he has account in thatbranch. ATM In these facilities, Bank provides a service to customer of fastest transaction in account. It is 24 hour services. Whenever customer require to withdraw money form his account in off time of bank, customer can easily withdraw money form their account, Even customer can easily get information about his account like, account balace,statement of last 5 to 6 transaction. In SPCBL, among 19 branches this service is providing in 9 branches. Pay Order Service:Pay order is most secure way to make payment to your party. Pay order can bemake of your partys name. And it is best proof that you made a payment of thisamount and on this date. So, instead of giving cheque you can make pay orderfrom bank and bank will make a payment from your account. There is no chargeof pay order. It is absolutely free service.
Demand DraftDemand Draft is a less expensive way for remitters to transfer money to yourpartys account.A demand draft is more secure than a normal cheque as it can only be creditedto a specific payees account, and a customer can only be reimbursed underindemnity if the cheque is lost or stolen. It is secure and safe. It offers aconvenient way to settle your trade business when documentation is required.Peoples bank draft is a law-cost, convenient method of making non-urgentpayments.Bank will charge you only Rs. 20/- to make Demand draft of any amount VISION 2010 Home banking, Any Window concept Inter branches connectivity [Branchless banking] Global banking facility through interest banking Bank‟s presence in metros No.1 UBRAN Co-Operative BANK for business and profit per employee Patronage for development of Surat city. Introduction of full fledged specialized branch viz. foreign exchange, agriculture advances & industries advances. Functioning as merchant banker. Technically qualified staff to meet challenges of high tech banking.
PRODUCTS DEPOSITS:1. Current Account2. Savings Account3. Recurring Deposits4. Fixed Deposits5. Cash Certificate6. Vashudhara Pension Plan7. Monthly Income Plan8. Vashudhara Deposit LOANS:1. Vashudhara Awas Yojna (Home Loan)2. Personal Loan3. Loan for Self Employed and Professionals4. Business or Industrial Loan5. Consumer Loan6. Vehicle Loan - For Personal Vehicle (two Wheeler/Car Loan) - For Commercial Loan – Vehicle using for commercial purpose.7. Education Loan8. Loan against N.S.C./K.V.P./ Gov. Security/ L.I.C. Policy9. Mortgage Loan10. Technology Up gradation Fund
Social ContributionIn this global jubilee years- The SPCP Memorable Trust with a fund of Rs 10 lakh was farmed in its golden jubilee year. Fund stands at Rs.2.60 crror on 31st march 2001 Trust donates from its interest incomes to various instantiations engaged in –Social education & Medical services.DONATIONS Bank, too, donates. Form its charity funds to various institutions. Bank‟s civic contribution Swami Vivekananda Traffic, Island at makkai pool, Nanpura, Surat. Surat People‟s bank senate Hall at VNSGU, Surat. Surat people‟s bank English Medium College Of Commerce Surat. Surat P.B.Mahavir C.T.Scan Centers Surat. Benefits for share holders Insurance cover of Rs. 1 lakh 2 share holder in case death by accidents. Awards to children of shareholders on achievements of examinations.
Purpose of StudyWe know that the basic function of bank is to accepting deposits for purposedeposits for the purpose of lending and to make investments. It involves thepricing mechanism to sustain in the market and to enhance the value creation forshareholders and deposit holders of bank. In fact there is keen competition inbanking after the introduction of economic reforms lending to liberalization offinancial and banking sector. The changes that had taken place in the operationalside of banking in the form of diversification of products/services, free to chooseproducts/market segments, emphasis on customer service adoption ofsophisticated technology etc.So we have to accept that now a day‟s scenario of banking is changed andbankers are forced to come the edge of their seats rather than sit easily and dothe business. They have to keeping keen eye on each and every movement ofmarket, industry, economy and politics. Main thing for bankers to manage thebank‟s assets and liabilities in order to maintain both liquidity and profitability.ALM is the main and most important tools for banks management. An effectiveALM implementation makes the banker more alert in managing the assets andliabilities by considering their respective maturity profiles to take necessaryinitiatives. We all know that now a day‟s co-operative banking sector is passingthrough crucial stage and for that main responsible factor is mis-management oftheir Assets-liability. So as a member of co-operative banking family I have triedmy best to Focus on the most important subject and that is Assets and LiabilityManagement.
OVERVIEW ON ALMBanking is the business which deals mainly with other people‟s money by way ofmobilizing deposits and deployment of funds through lending and investment.Increasing the “spread” is an important object and out of which the bank has tocover the Cost of Management (COM) and Risk Cost (RC) to earn net profit. Itincreases the loan and investment portfolio, the liquidity will be affected and asagainst this, if the high degree of liquidity is maintained the profitability may bedeteriorate. Therefore the position of a banker is between the “Devil and DeepSea” and it becomes crucial task of managing funds effectively. The bank mustgive weight to the principals of safety, liquidity and profitability while managing itsaffairs of business, therefore fund management is crucial task for bankingindustry and ALM is main tool of fund management.The deregulation and globalization of economy has changed the canvassignificantly. These changes led to major transformation in both theadministrative and operational side of the banking. These developments haveresulted in tough competition and more risk. The banks are moving towardsdesigning new innovative financial products/services to attract more and morecustomers and moving in new direction along with their conventional banking. Inthis backdrop, the status of co-operative banks is crucial and it is a big strugglefor them to retain their existence in the industry. They have to beprofessionalized in their functions and operations especially in field of fundmanagement by adopting some standard tools and techniques like ALM. ALM isa technique available for the bankers to manage the bank‟s assets liability orderto maintain both liquidity and spread on the basis of their respective maturityperiod.Considering the fact that the deregulated environment has brought the bank onthe subtle line of leeway where any error may prove to be very fatal and the factthat it very to err. Assets and Liabilities management has to be foreseen as amost vital component of banking industry and management.
DEFINATION AND MEAMING OF ALMAssetsItems having realizable value owned by the business are known as assets.Assets owned by the business are known as business assets. Cash, land,building, machinery, stock, furniture, goodwill, patent, copyright, trademark,etc.are included in assets.Assets are classified into three types Fixed assets, Current assets, Fictitious assetsLiabilityAny amount payable by the business to any outsiders is known as liability. Bycredit purchase of goods, the amount becomes payable or liability is created.Sometimes, liability is also created by borrowing funds.There are two types of liabilities Current liability Long-term liabilityAssets and liabilities, for not only facing the challenges ahead but also forimproving its bottom lines and thereby to improve the net worth of the bank. Thetechnique of mangeing assts and liabilities together know as Assets Liabilitymanagement (ALM) Through ALM banks not only equip themselves to price theirassets and liabilities at appropriate levels by also manage the related risks too.Eventually role of the banks form mere deposit takers and distribute throughasset liability management in the coming years
Assets Liability ManagementAsset-Liability Management has been defined as a continuous process planning,organizing, and controlling Asset and Liability volumes, maturities, rates andyields. In the present Environment it is defined as process of adjusting bankliabilities to meet loan demands, liquidity needs and safety requirements. To putit simply, assets-liability management is the management of total balance-sheetdynamics with regard to its size and quality. It involves Quantification of risk and Conscious decision making with regard to assets-liability structure in order to maximize interest earning within framework of perceived risk.In other words ALM can be defined as the process of managing the net interestmargin (NIM) within the overall risk bearing capacity of a bank. Thus it calls foran integrated approach towards financial management conditioned tosimultaneous decision making with regard to types and size of financial assetsand liabilities, their mix and volumes so as to insulate the spread from adversedirection. Thus, the secret of successful banking under deregulated andcompetitive environment hinges on matching of assets and liabilities in terms ofrate and maturity with a view to obtaining optimum yield.In other way we said Assets liability management has been organizing andcontrolling asset and liability volumes, maturities, rates and yields. Simply put,assets liability management (ALM) is a tool that enables bank management, totake business decision in a more informed framework. The ALM function informsthe manager what the current market risk profile of the bank is and the impactthat various alternative business decision would have on the future risk profile.The manger can then choose the best course of action depending on his bord‟srisk appetite. Consider for example, a situation where the chief of bank‟s retaildeposit mobilization function wants to know the kind of deposits that the
branches should be told to encourage. To answer this question correctly hewould need to know inter alia the exiting cash flow profile of the bank. Let usassume that the structure of the existing assets and liabilities of the bank aresuch that at the aggregate the maturity of assets is longer than maturity ofliabilities. This would expose the bank interest rates risk [if interest rates were toincrease it would adversely affect the banks net interest income] In order toreduce the risk the bank would have to either reduce the average maturity of itsassets perhaps by decreasing its holding of Government securities or decreasethe average maturity of its assets, perhaps by reducing its dependence on callmoney market funds. Thus, give the above information on the exiting risk profileof the bank, the retail deposits chief knows that the bank can reduce its futurerisk by marketing its long-term deposits products more aggressively. If necessaryhe may offer increased rates on long-term deposits and or decreasing rates onthe shorter term deposits.The above example illustrates how correct business decision making can beadded by the interest rate risk related information. The real world of banking is ofcourse more complicated. The risk related information is just one of many piecesof information required by a manger to take decision. In the above example itselfthe retail deposits chief would also have considered a host of other factors likecompetitive pressures, demand and supply factors, impact of the decision on thebanks retail lending products, ECT before taking a final decision. The importantthing; however is that ALM is a tool that encourages business decision making ina more disciplined framework with an eye on the risk that the bank is exposed toALM is thus a comprehensive and dynamic framework for measuring, monitoringand managing the market risk, i.e., Liquidity interest and exchange rate risk of abank. It has to be closely integrated with the bank‟s business strategy as thisaffects the future risk profile of the bank. This framework needs to be built arounda foundation of sound methodology and human and technology infrastructure. Ithas to be supported by the bord‟s risk philosophy, which clearly specifies the riskpolicies and tolerance limits.
OBJECTIVES OF ALM IN THE BANKMain objectives of the ALM are: 1. To Protect / enhance the market value of the net worth 2. To increase the net interest income 3. To maintain / protect spreads or Net Interest MarginThe primary objective of the asset-liability management is not to eliminate risk,but to manage it in such a way that the volatility of net interest income isminimized in the short-term horizon. Broadly the objectives would includecontrolling the volatility of net income, net interest margin, capital adequacy, andliquidity risk and finally ensuring an acceptable balance between profitability,growth and risk. In other words, the ultimate objective of ALM is profitability andlong term operating viability of the organization in risky environment. Scope of ALMA sound ALM should focus on 1. Review of interest rate outlook. 2. Fixation of interest / product pricing on both assets and liabilities. 3. Examining loan portfolio. 4. Examining investment portfolio. 5. Measuring foreign exchange risk. 6. Managing liquidity risk. 7. Review of actual performance vis-à-vis projections in respect of net profit, interest spread and other balance sheet ratios. 8. Budgeting and strategic planning. 9. Examining the profitability of new products. 10. Review of transfer pricing
RBI GUIDELINES ON ASSETS LIABILITY MANAGEMENTRBI had issued guidelines in February 1999 for putting in place Assets LiabilityManagement System in banks. These guidelines where issued for managingliquidity risk, interest rate risk and currency risk. Banks were asked to set up aninternal assets liability committee (ALCO) headed by chief executive office / CMDor the executive director. The managing committee of the board was also tooversee the implementation of the system and also to review periodically.Keeping in view the level of computerization and MIS system in banks adoptionof uniform Assets Liability Management System for all banks was considered notto be feasible. To begin with, banks were directed to endeavor to cover at least60% of the asset and liabilities for analysis and were required to set target forcoverage of 100% data by April 2000.As banks are aware, interest rate risk is the risk where changes in marketinterest rates might adversely affect a bank‟s financial condition. The immediateimpact of changes in interest rates is on bank‟s earnings (i.e. reported profits)through changes in its Net Interest Income (NII). A long-term impact of changesin interest rates is on bank‟s Market Value of Equity (MVE) or Net Worth throughchanges in the economic value of its assets, liabilities and off-balance sheetpositions. The interest rate risk, when viewed from these two perspectives, isknown as „earnings perspective‟ and „economic value‟ perspective,respectively.The present guidelines to banks approach interest rate risk measurement fromthe „earnings perspective‟ using the traditional Gap Analysis (TGA). Tobegin with, the TGA was considered as a suitable method to measure InterestRate Risk. Reserve Bank had also indicated then its intention to move over tomodern techniques of Interest Rate Risk measurement like Duration Gap
Analysis (DGA), Simulation and Value at Risk over time, when banks acquiresufficient expertise and sophistication in acquiring and handling MIS.Reserve Bank had advised banks on June 24, 2004 to assign explicit capitalcharge for interest rate risk in the trading book applying the standardized durationgap approach advocated by the Basel Committee on Banking Supervision. Sincebanks have gained considerable experience in implementation of the TGA andalso become familiar with the application of the DGA to their trading books, it isfelt that this would be an opportune time for banks to graduate to the DurationGap Analysis for management of Interest Rate Risk in its entirety. With thismove, banks would fully migrate to application of the „economic valueperspective‟ to interest rate risk management.The salient features of the draft guidelines furnished in the . Banks shall adopt the DGA for interest rate risk management in addition to the TGA followed presently. The proposed framework, both DGA and TGA, will be applied to all assets, liabilities and off balance sheet items of the bank. Keeping in view the level of computerization and the current MIS in banks, adoption of a uniform ALM System for all banks may not be feasible. The proposed guidelines have been formulated to serve as a benchmark for banks. Banks which have already adopted more sophisticated systems may continue their existing systems but they should fine-tune their current information and reporting system so as to be in line with the ALM System suggested in the Guidelines. Banks should adopt the modified duration gap approach while applying the DGA to measure interest rate risk in their balance sheet from the economic value perspective. In view of the evolving state of computerization and MIS in banks, a simplified framework has been suggested, which allows banks to
o group assets and liabilities under the broad heads indicated in Appendix I under various time buckets; and o compute bucket-wise Modified Duration of these groups of assets/ liabilities using the suggested common maturity, coupon and yield parameters; Reserve Bank is aware that measurement of interest rate risk with the above approximations does not reflect the true level of risk and hence would expect banks to migrate over time to application of the modified duration approach to each item of asset/ liability/ off-balance sheet item instead of applying it at the „group‟ level. However, banks with the necessary IT support, MIS and skill capabilities may straightaway implement the more granular DGA by computing the Modified Duration of each item of asset, liability and off-balance sheet item. Each bank should set appropriate internal limits for interest rate risk based on its risk bearing and risk management capacity, with the prior approval of its Board / Risk Management Committee of the Board. Banks should compute the volatility of earnings (in terms of impact on Net Interest Income) and volatility of equity (in terms of impact on it –book value of net worth) under various interest rate scenarios. Banks should adopt a more granular approach to measurement of liquidity risk by splitting the first time bucket (1-14 days as at present) in the Statement of Structural Liquidity by dividing into two buckets viz. 1-7 days and 8-14 days. In addition to the existing prudential limits operating for the 1-14 days bucket and the 15-28 days bucket, the negative mismatch during the 1-7 days bucket should not exceed 20% of the cash outflows in that bucket. The frequency of supervisory reporting of the Structural Liquidity position shall be fortnightly instead of monthly, as at present.While determining the likely cash inflow / outflows, banks have to make anumber of assumptions according to their assets liability profile. Indian bankswith large branch network can (on the stability of their deposit base as most
deposits are rolled over) afford to have large tolerance level in mismatch inthe long term if their term deposits base is quite high. While determiningtolerance level the banks may take into account all relevant factors based ontheir assets liability base, nature of business, future strategy, etc.
NEED FOR IMPLEMENTING ALM SYSTEM IN CO.OPERATIVE BANKS.Banking industry in India has undergone many changes, By the introduction ofbanking sector reforms, deregulation of interest rates, and competition in theindustry focus on customer relationship ect. The co-operative banks woke up andstarted evolving strategies and practices to make sure of their presence. Thechanges and development that took place in the industry‟s business practicespecially the field of fund management. Some initiatives were necessary toimprove further. Co-operative banks should not be exempted form suchdevelopments and in fact it is essential for them to proceed on the professionalway with the objective of widening the interest spread. The co-operative banksbegan to modify their resource pool particularly the deposit mix by acceptingmore short term deposits to reduce the cost of funds and finally the short termliabilities are the higher side then long term liabilities. This situation has causedfor the mis-matches in two ways: Maturity mis match between assets and liabilities, and Interest rate mis match between interest rate sensitive assets and interest sensitive liabilities. The second factor gets direct impact on profitability.The co-operative having local footing with strong membership base and at thesame time they have provided the required level of service to their members.Therefore to gain the member confidence, as they are the investors, it is the dutyof co-operative banks to maintain sufficient liquidity by honoring their demands intime. As a business proposition the co-operative banks also has to earn someprofit to meet other cost such as establishment cost and risk cost. With theimproved lines of business and diversified landing and investment portfolio in bigway, the co-operative banks are going to bear the impact of risk to greater extentin the forth-coming days. Therefore the co-operative banks must evolve a
suitable ALM system as suggested by RBL (Based committee on bankingsupervision) to their funds management practices. Implementing a suitable ALMmechanism in co-operative banks provide the scope for exercising selectivecontrol on assets and liabilities and also offer the following benefits. Striking a right balance between liquidly and profitability. Analyzing both the time and rate sensitivity of assets and liabilities. Supplying adequate data input to the budgeting and decision making process of bank especially in the re-alignment of Assets Liability composition. Leveling of funds in the long-run perspective by identifying the surplus/deficit at regular intervals. Reducing interest rate risk (IRR) and liquidity risk (LR).The very nature of the banking business is incurring risk to earn profit. The riskfactor is inherent in the banking business. The risks encountered by the banksare as under:- Liquidity Risk Interest Rate Risk Credit Risk Market Risk Capital Risk Commercial Risk Price Risk Operational Risk Solvency Risk Exchange Rate Risk Political Risk Human Risk Technology Risk Legal Risk
ALM SYSTEMThe frame work of Assets Liability management in bank generally includes theirmain divisions Viz. Information system process and committee which is illustratedin the Figure – 1. The information system is the basic requirement for the ALMtechnique, as the continuous supply of adequate data and information is alwaysneeded. The ALM process is an analytical framework, which enables to study the dimensions of assets and liabilities and also to find liquidity and sensitivity gaps. The ALM process gives weight to the following five elements. o Risk Parameters. o Risk Identification. o Risk Measurement. o Risk management. o Risk Policies and Tolerance Level.Third segment of ALM is the ALM committee (ALCO), which is responsible forthe successful implementation of system. The structure of the committee and thelevel of Top management involvement should be well defined to excise propercontrol over the whole system.
HOW TO WORK ALM ----------------------------------------------------------------------------------------------------------SELECTED BRANCH D A 1 A T L 2 Ho A ISM LGM IRRM C 3 B A 4MONEY N OMARKET K ALM MIS ALM PROCESS ALCO ---------------------------------- ------------------------------------------ ---------------------- o ISM Interest Spread Management. o LGM Liquidity Gap Management o IRRM Interest Rate Risk Management 1. Developing implementation and managing annual budget. 2. Review of reports and monitoring the performance. 3. Risk management program. 4. Management reporting.
ALM INFORMATION SYSYEM (ALMMIS)The implementation of ALM system necessitates the banks to conceive asuitable management information system. The ALMMIS must ensure theavailability, accuracy, adequacy and expediency of information. The head officeshould collect required data in a structural format and other information at aregular interval from benches and it should be centralized into a databank. Thedata must be accessible to make it easily available to suit the requirements ofALM committee (ALCO)The nature of data required is normally in the form of maturity wise pattern ofvarious assets and liabilities, into various time bands, needs some bases and thisprocess can be done through the past experience of bank. In these regard thebank may collect information relating to the behaviors and maturity pattern ofdeposits and advances form selected branches who contribute mainly to thevolume of business. This data collection serves the bank to make some rationalassumption for GAP analysis and report preparation. Reliable and authenticinformation should also be collected from the money market. Therefore the MISmust ensure the supply of timely adequate and accurate data and informationthrough reports collected from various terminals in order to make the ALM moreeffective.The problem of ALM needs to be addressed by following on ABC approach i.e.analyzing the behavior of assets and liability products in the top branchesaccounting for significant business and then making rational assumption aboutthe way in which assets and liabilities would behave in other branches. In respectof foreign exchange investment functions it would be much easier to collectreliable information. The data and assumptions can be refined over time as thebank management gain experience of conduction business within an ALMframework. The spread of computerization will also help banks in accessing data.
ALM ORGANIZATION (ALM COMMITTEE)Successful implementation of the risk management process would require strongcommitment on the part of their boards and senior management. The boardshould have overall responsibility for management of risks and should decide therisk management policy and procedures, set prudential limits, auditing, reportingand review mechanism in respect of liquidity rate and forex risks.The Asset-Liability Committee (ALCO) consisting of bank‟s senior managementincluding CEO should be responsible for deciding the business strategy [on theassets and liabilities sides] in line with the bank‟s business and risk managementobjectives.The ALM desk consisting of operating staff should be responsibilities foranalyzing, monitoring and reporting the risk profiles to the risk profile to theALCO. The staff should also prefer forecasts [simulation] showing the effects ofvarious possible changes in market conditions related to the balance sheet andrecommend the action to adhere to bank‟s internal limits.The ALCO is decision making unit responsible for balance sheet planning fromrisk-return perspective including the strategic management of liquidity, interestrate and forex risks. The business and risk management strategy of the bankshould ensure that the bank operates within the limits/parameters set by theboard. The business issues that an ALCO considers, inter alia, includes pricing ofboth deposits and advances, desired maturity profile and mix of incrementalassets and liabilities etc. in addition to monitoring the risk levels of the bank, theALCO should review the result of and progress in implementation of the decisionmade in the previous meeting. The ALCO‟s future business strategy decisionshould be based on the banks view on current interest rates. In respect of thefunding policy, for instance, its responsibility would be to decide on source and
mix of liabilities or sale of assets, Towards this end, it will have to develop a viewon future direction of interest rate movements and decide on funding mixesbetween fixed vs. floting rate funds, wholesale vs. retail deposits, short term vs.long term deposits etc,Individual bank will have to decide the frequency for holding their ALCO meeting.This committee meets regularly, at least once a month, through ideally it shouldbe once a fortnight , to review the liquidity potential vis-à-vis market conditionsand determines the strategies to maintain adequate liquidity, decides on raisingresources having regard to the cost in tune with the market condition, anddeployment of resources in profitable avenues. RESPONSIBILITIES OF ALCO Assessment of future interest rate scenario. Assessment of the liquidity profile of the bank. Assessment various risks, if any, in the balance sheet and drawing strategies. Monitoring spreads based on the changing scenario. Drawing strategies to hedge risks perceived. Guidance to the policies / strategies implemented and to alter/ change if situation needs. Review of actual performance vis-à-vis corporate projections. Budgeting and planning. Drawing short term as well as long term strategies depending on the situation.
COMPOSITION OF ALCOThe size [number of members] of ALCO would depend on the size of eachinstitution, level of business and organization structure. The responsibility ofAsset Liability Management is on the treasury Department of the bank. To ensurecommitment of Top management and timely response to market dynamics, theCEO or the Secretary should head the committee. The Chief ofinvestment/Treasury including forex, credit, planning etc, can be members of thecommittee. In addition, the head of the Information Technology Division if aseparate division exists should also be invitee for building up of ManagementInformation System [MIS and related IT network. Some banks, large banks, mayeven have sub-committees and supported Groups. The ALCO agenda consist ofcomprehensive data on market conditions particularly with focus on liquidity inMarket ongoing interest rates fir sources and deployment avenues, the reserveposition, the yield pattern, spread, fee based income and overall profitability, theavenues for raising resources and deployment, the classified data on maturitypattern on assets and liabilities in different buckets [block/periods] as well asclassified data on interest rate sensitive assets and liabilities. The ALCOconsiders maturity mismatches and ascertains gaps of creating liquidity in thosetime buckets. While doing so Alco considers interest rate sensitive of respectiveliabilities, if the resources are to be raised or respective assets, if surplus is to bedeployed. Major concern of ALCO in a sense, will be managing interest rate riskand in the process, liquidity risk.
ALCO FUNCTIONALCO meets periodically to assess the information of each department in detail.Generally ALCO fixes the time horizon for planning. ALCO meets frequentlywhen market is volatile, sensitive, ect, so that prompt policy decision andstrategies can be planned.During its meeting ALCO review; a) Minutes of the previous meeting. b) Review of fund gap reports and other reports. c) Current commercial and market rates, to ensure that loans are priced appropriately. d) Current liability and deposit pricing matrixes so as to ensure that funds are priced in accordance with overall funding policy. e) Prospective assessment of accessibility of funds at a price that will give a reasonable and consistent return on investment. f) Results of the implementation of funding strategies which are designed to ensure that the bank has adequate funds for credit, investment and deposit repayment.ALM committee at Surat People‟s bank include General Manger Deputy General Manger Assistant General Manger Investment Department Executive EDP executive
ALM PROCESSIn comparison with the commercial bank the scope of business and line ofbanking operation of co-operative banks are limited. BY considering the waysand means of resources mobilization and also based on the degree of exposureto new risk related lending and investment portfolio of co-operative banksexclusively focus on the following three major areas. A. Identification of Risk B. Measurement of Risk C. Management of RiskThe identification stage intensifies different types of risk encountered by bankdue to interest rate fluctuations.In the next stage bank tries to measure those risk using different modelssuggested by RBI.And finally bank takes various steps for the management of risk.Now let us see each step in detail.
STAGE 1- IDENTIFICATION OF RISKThere are different types of risk faced by the bank. In this first stage bank tries toidentify those risk, which causes gap in Assets and Liabilities.The uncertainty of interest rate movements gave rise to interest rate risk therebycausing banks to look for processes to manage their risk. In the wake of interestrate risk came with liquidity risk as inherent components of risk for banks. Therecognition of these risks brought Assets Liability Management to the centre-stage of financial intermediation.Now let us see about both the risk which causes mismatch in ALM. 1. Interest Rate RiskCATGORIES OF INTEREST RATE RISK AND THEIR IMPACTMISMATCH RISKBanks, as apart of their business of intermediation between the savers and theinvestors in the economy, assume liabilities and create assets, which are ofdifferent maturities and sizes. The liabilities and assets are priced differently andthe difference between the interest received on assets and interest paid onliabilities is bank‟s net interest income. Essentially, assets and liabilities matureor fall due for reprising at different time intervals. Obliviously, there is a reprisingmismatch between assets and liabilities. The deposits have to be reprised, maybe at higher interest rates, at the end of one year while assets will continue toprovide fix return. If interest rates rise by the time the deposit is due to mature,bank will be able to raise new deposit only at higher interest rates prevailing inthe market. This will result in interest spread between deposits and investmentgetting reduced and adversely affecting Net Interest Income (NII) of the bank.
Also, mere maturity matching between assets and liabilities need not necessarilyprotect bank from mismatch risk, the reprising may be at shorter interval and cancreate mismatch in reprising and resultant interest rate risk. BASIS RISKThe risk of interest rates attached to different group of banks assets and liabilitieschanging by different degrees are called basis risk. Further, changes in depositinterest typically lag behind loan rates. The complex linkages between interestrates in different segment of the market (Call, Repos, CDs. Inter bank TermMoney, etc.) contribute to the basis risk. Typically, in a falling interest ratescenario, it is possible that interest rate on assets may be lowered generallywhile the deposit may continue at the contracted higher interest rates Thefollowing illustration will make the concept of basis risk clear.(Interest sensitivity Gap Position 1-30 days Bucket)LIABILITIES ASSETSCall Money 50 Treasury Bills 30Repo 50 Advances 120Deposits 100Total 200 Total 150 Negative Gap 50If the interest rate rises by 1% bank will lose 0.5 crore per year assuming that therise in interest will be uniformly applicable to all the time items of assets andliabilities. But in real world interest rates on assets and liabilities do not change insame proportions. For instance, Call may go up 1%, Repo by 0.5%, Deposits by0.25%, T-Bills by 1% and advances by 0.75%. The following table shows that ifinterest rate the impact on net interest income will be gain of 0.2% crore insteadof loss of 0.5% crore as in the above case when on basis risk was taken intoaccount.
INCREASE IN (LOSS) / GAIN INTEREST RATE DUE TO INTEREST RATE RISECall Money 50 0.01 (0.5)Repo 50 0.005 (0.25)Deposits 100 0.0025 (0.25)Total (1)Treasury Bills 30 0.01 0.3Advances 120 0.0075 0.9Total 1.2 Net Impact On NII 0.2(1.2-1) YIELD CURVE RISKOn account of volatility in interest rates, the yields curve unpredictability andoften substantially, change in shape. If the interest rates on assets and liabilitiesare pegged to the bench mark rates (like T-bills cut off rates), there is the riskthat the interest spread may decreases as term spread narrows down. Assumethat the bank has raised a floating rate deposit, which will be reprised 1% abovethe 91 day T-Bills cutoff and invested the amount in a floating rate loan of samereprising interval but a spread of involved, as the spread between the twomaturities of T-Bills narrowed.
Period 91Days Tb 364 Days Term Interest Tb spread Spread Between Deposit And Loan. April 2005 6.26 6.82 0.56% 1.56% June 2005 6.34 6.98 0.64% 1.64% August 2005 6.56 7.12 0.56% 1.56% March 2007 6.89 7.34 0.45% 1.45% EMBEDDED OPTION RISKTraditionally, Banks provide an option to depositors to prematurely close thedeposits and to borrowers to prepay the advances. Banks customers would beexercising the option at the time most unfavorable to the bank in other words,depositors may prematurely close the deposits when interest rates increase andredeposit at higher rates and when interest rate decline borrowers may option toprepay the loans and renew the same at the lower rate. In both cases banks NIIis adversely affected. REINVESTMENT RISKThe expected yield on investment, generally indicated by yield to maturity, isbased on the important assumption that the bond will be held till maturity duringthe life of the bond, the periodic coupons received will be reinvested at aninterest rate equal to YTM. These assumption can go wrong in which caseincome from investments by way of coupons get reinvested at lower rates incasethe interest rate decline.
NON-PAYING LIABILITIESThe NII of the bank would be buoyant if it has more non-paying liabilities likecurrent deposits, float funds, etc, the volume of such deposits become volatileand may even decline if the corporate undertake final cash management. Withthe prospect of improvement in the payment and settlement infrastructure, suchidle balances left in the account by clients are likely to decline. The bank wouldtherefore be required to replace such liabilities with interest paying liabilities andthese would enhance the interest rate and sensitivity in the banks balance sheet.Thus the volatility in the levels of non-paying liabilities would cause the risk to theNII of the bank. PRICE RISKThe values of investments change inversely to interest rates. Thus if interest ratein the market increase, investment suffers depreciation and if interest ratedeclines investment in bank portfolio gain in value. The price changes ininvestments are on account of present values of each cash flow being alteredwhen discounted by the new interest rate. However, we can generalize theconcept and extend the same to all items of assets and liabilities of bank balancesheet, which conceptually constitute series of expected cash flows and as such,have present values (market values) which vary with market interest rates. Itfollows thus, that all items of assets and liabilities for a bank are exposed to pricerisk. Price risk will impact the values for assets and liabilities and in turn, marketvalue of net worth which the difference between markets value of assets andliabilities.
Sound Interest Rate Risk Management Sound interest rate risk management involves the application of four basicelements in the management of assets and liabilities and off-balance sheetinstruments. o Appropriate board and senior management oversight. o Adequate risk management policies and procedures. o Appropriate risk measurements, monitoring and control Function, o Comprehensive internal controls and independent audits. The specific manner in which a bank applies these elements in managingits interest rate will depend upon the complexity and nature of its holding andactivities as well as on level of interest rate risk exposure. What constitutesadequate interest rate risk management practices can therefore veryconsiderably For Example, Less complex banks, whose senior managers areactive involved in details of day to day operations may be able to rely onrelatively base interest rate risk management process. However, otherorganization that has more complex and wide-ranging activities are likely torequire more elaborate and formal interest rate risk management processes. Toaddress their broad range of financial activities and to provide seniormanagement with the information they need to monitor and direct day to dayactivities. Moreover the complex interest rate risk management processemployed at such banks require adequate internal controls that include audits orother appropriate oversight mechanisms to ensure the integrity of theinformation used by senior officials in overseeing compliance with political andlimit. The duties of the individual involved in the risk measurement, monitoringand control functions must be sufficiently separate and independent from thebusiness marks and positions takers to ensure the avoidance of conflict ofinterest
As other risk factor categories, the committee believes that interest rate risk should be monitored on a consolidated, comprehensive basis to include interest rate exposures in subsidiaries. At the same time however, institutions should fully recognize any legal distinctions and possible obstacles to cash flow movements among affiliates and adjust their risk management process accordingly. While consolidation may provide a comprehensive measure in respect of interest rate risk, it may also underestimate risk when positions in one affiliate are used to offset position in another affiliate. This is because a conventional accounting consolidation may allow theoretical offsets between such position form which a bank may not in practice be able to benefit because of legal or operational constraints. Management should recognize the potential for measures to undertake risks under such circumstances..
INTEREST RATE RISK: REGULATIORY ASPECTS RBI Guidelines:-The phased deregulation of interest rates and the operational flexibility given tobanks in pricing most of the assets and liabilities have exposed the bankingsystem to Interest Rate Risk. Interest rate risk is the risk where changes inmarket interest rates might adversely affect a banks financial condition. Changesin interest rates affect both the current earnings (earnings perspective) as alsothe net worth of the bank (economic value perspective). The risk from theearnings perspective can be measured as changes in the Net Interest Income(Nil) or Net Interest Margin (NIM). In the context of poor MIS, slow pace ofcomputerization in banks and the absence of total deregulation, the traditionalGap analysis is considered as a suitable method to measure the Interest RateRisk. It is the intention of RBI to move over to modern techniques of Interest RateRisk measurement like Duration Gap Analysis, Simulation and Value at Risk at alater date when banks acquire sufficient expertise and sophistication in MIS. TheGap or Mismatch risk can be measured by calculating Gaps over different timeintervals as at a given date. Gap analysis measures mismatches between ratesensitive liabilities and rate sensitive assets (including off-balance sheetpositions). An asset or liability is normally classified as rate sensitive if: within the time interval under consideration, there is a cash flow; the interest rate resets/reprises contractually during the interval; RBI changes the interest rates (i.e. interest rates on Savings Bank Deposits, advances upto Rs.2 lakh, DRI advances, Export credit, Refinance, CRR balance, etc.) in cases where interest rates are administered ; and it is contractually pre-payable or withdrawable before the stated maturities
2. LIQUIDITY RISK CONCEPT OF LIQUDITYLiquidity is the ease with which an individual, business firm or financial institutioncan obtain cash by selling non-cash assets. Access to cash is important infinancial management of all business enterprises as it helps in ensuing smoothfunction of the enterprises.Providing liquidity to the customers is one of the intermediation functions ofbanks. It is therefore important that bank‟s own liquidity is at a comfortable level.Bank Liquidity may be defined as ability to raise a certain amount of funds atcertain within a certain amount of time. If a bank is in a position to raise additionfunds at a cheaper rate in a short period compared to another bank, then theliquidity position of that bank is considered better than the other bank.Liquidity needs of an individual bank are to be related to the demands made orlikely to made by both depositors and borrowers for funds over a period of time.Looking to the varied customer profile of banks needs to assess its liquidityneeds based on the nature and composition of its Assets and liabilities.A bank is liquid if it can meet all the demands made for cash against it atprecisely those items when cash is demanded. Moreover whatever sourcesfunds bank may choose to upon must be available at a reasonable cost and time.The liquidity of an individual bank is different form the liquidity in the financialsystem. While the overall liquidity in the financial system is dependent on variousmacroeconomic variables and policy stance by Reserve Bank of India (RBI),which is the Central bank liquidity of an individual bank can be managed throughcareful planning and anticipation of deposits and loan changes.
Liquidity is different form liquidation of an enterprise refers to its ability to meet itsobligation as a going concern while liquidation is the process of disposal ofassets meeting its liabilities and essentially involves winding up of businessenterprise. Liquidity refers to the realizable value of units‟ assets and whether itwill be sufficient to meet liabilities. LIQQUIDITY RISKLiquidity Risk is the possibility the possibility that an institution may be unable tomeet its maturing commitments or may do so only by borrowing funds atprohibitive costs or by disposing assets at rock bottom prices.It originates form the mismatches in the maturity pattern of assets and liabilities.Analysis of liquidity risk involves the measurement of not only the liquidityposition of the bank on on-going basis but also examination of how fundsrequirements are likely to be affected, under crisis scenarios.The liquidity risk in banks manifests itself in different dimensions. Funding Risk - need to replace net outflows due to unanticipated Withdrawal / non-renewal of deposits (wholesal and retail) Time Risk - need to compensate for non-receipt of expected inflows of Funds, i.e. performing Assets turning into non-per morning Assets. Call Risk - due to crystallization of contingent liabilities and unable to Undertake profitable business opportunities when desirable.
NEED FOR LIQUIDITY BY BANKSLiquidity has two separate and mutually exclusive purposes. One need forliquidity is to provide funds to meet net decline in deposits. Other is to provideand to meet increase in loans and investments that are rising faster thandeposits. Demand form depositors :On the liability side of the balance sheet, deposit withdrawals represent animportant factor requiring banks to be liquid. Banks are able to attract depositsfrom public not only by promising some return on their money but also bycommitting themselves to repayment on demand. Banks must therefore buildadequate amount of liquidity in their assets portfolio so that they may in case ofnecessity meet any claims upon them in cash on demand. If the depositors‟cheque is not honored, the bank will lose confidence of the public, which mayresult in mass run on the banks counters. The very arrival of bank is thusendangered. Demand form Borrowers :On the asset side of the balance sheet, demands for loans form customers haveto be accommodated as these accounts have a substantial impact upon thebanks profit. High value borrowers enjoy large borrowing limit form banks whichare not always fully drawn banks require to maintain sufficient liquidity toaccommodate requests for fresh loans as also provision for full utilization ofcredit limits already sanctioned.
Statutory Requirements :Under section 24 of banking regulation Act, 1949 all scheduled Commercialbanks are required to maintain on a daily basis a proportion of net demand andtime liabilities in the form of securities approved by RBI. At present, commercialbanks are required to maintain Cash Reserve Ratio (CRR) to the extent of 6% ofnet demand and time abilities in the form of deposits in the account maintainedwith RBI. Banks have also to maintain Statutory Liquidity Ratio (SLR) to theextent of 25% of net demand and time abilities in the form of approved securities.Thus a scheduled commercial bank must maintain CRR and SLR as these areconsidered as most liquid assets. However in practice these assets can be usedonly for a brief period to take care of temporary liquidity, as have to be replacedimmediately to maintain prescribed levels.
LIQUIDITY MANAGEMNT: REGULATIORY ASPECTS RBI Guidelines:-RBI had issued guidelines in February 1999 for putting in place Asset LiabilityManagement System in Banks. These guidelines were issued for managingLiquidity Risk, Interest Rate Risk and Currency Risk. Banks were asked to set upan internal Assets Liability Committee (ALCO) headed by Chief Executive Officer/ CMD or the Executive Director. The Managing Committee or any specificcommittee of the Board was also to oversee the implementation of the systemand review functioning periodically.Measuring and managing liquidity needs are vital activities of commercial banks.By assuring a banks ability to meet its liabilities as they become due, liquiditymanagement can reduce the probability of an adverse situation developing. Theimportance of liquidity transcends individual institutions, as liquidity shortfall inone institution can have repercussions on the entire system. Bank managementshould measure not only the liquidity positions of banks on an ongoing basis butalso examine how liquidity requirements are likely to evolve under crisisscenarios. Experience shows that assets commonly considered as liquid likeGovernment securities and other money market instruments could also becomeilliquid when the market and players are unidirectional. Therefore liquidity has tobe tracked through maturity or cash flow mismatches. For measuring andmanaging net funding requirements, the use of a maturity ladder and calculationof cumulative surplus or deficit of funds at selected maturity dates is adopted asa standard tool.The Maturity Profile as given in Appendix I could be used for measuring thefuture cash flows of banks in different time buckets. The time buckets given theStatutory Reserve cycle of 14 days may be distributed as under:
1) 1 to 14 days 2) 15 to 28 days 3) 29 days and upto 3 months 4) Over 3 months and upto 6 months 5) Over 6 months and upto 12 months 6) Over 1 year and upto 2 years 7) Over 2 years and upto 5 years 8) Over 5 yearsWithin each time bucket there could be mismatches depending on cash inflows andoutflows. While the mismatches upto one year would be relevant since theseprovide early warning signals of impending liquidity problems, the main focus shouldbe on the short-term mismatches viz., 1-14 days and 15-28 days. Banks, however,are expected to monitor their cumulative mismatches (running total) across all timebuckets by establishing internal prudential limits with the approval of the Board /Management Committee. The mismatch during 1-14 days and 15-28 days shouldnot in any case exceed 20% of the cash outflows in each time bucket. If a bank inview of its asset -liability profile needs higher tolerance level, it could operate withhigher limit sanctioned by its Board / Management Committee giving reasons on theneed for such higher limit. A copy of the note approved by Board / ManagementCommittee may be forwarded to the Department of Banking Supervision, RBI. Thediscretion to allow a higher tolerance level is intended for a temporary period, till thesystem stabilizes and the bank are able to restructure its asset -liability pattern.The Statement of Structural Liquidity may be prepared by placing all cash inflowsand outflows in the maturity ladder according to the expected timing of cash flows. Amaturing liability will be a cash outflow while a maturing asset will be a cash inflow.It would be necessary to take into account the rupee inflows and outflows onaccount of forex operations including the readily available forex resources ( FCNR(B) funds, etc) which can be deployed for augmenting rupee resources.
While determining the likely cash inflows / outflows, banks have to make a numberof assumptions according to their asset - liability profiles. For instance, Indian bankswith large branch network can (on the stability of their deposit base as mostdeposits are renewed) afford to have larger tolerance levels in mismatches if theirterm deposit base is quite high. While determining the tolerance levels the banksmay take into account all relevant factors based on their asset-liability base, natureof business, future strategy etc. The RBI is interested in ensuring that the tolerancelevels are determined keeping all necessary factors in view and further refined withexperience gained in Liquidity Management.In order to enable the banks to monitor their short-term liquidity on a dynamic basisover a time horizon spanning from 1-90 days, banks may estimate their short-termliquidity profiles on the basis of business projections and other commitments. Anindicative format for estimating Short-term Dynamic Liquidity is enclosed. Basel Committee for Banking Supervision (BCBS) Principles for the assessment of liquidity management in banks:The Basel Committee for Banking Supervision has focused on developing greaterunderstanding by Commercial banks to manage their liquidity on a globalconsolidated basis. The recent technological and financial innovations haveprovided banks with risk control tools for managing their liquidity. The decliningability of banks in developed markets to rely on core deposits and their increasedreliance on wholesale funds has put pressure on liquidity.According to Basel Committee, the process used to manage liquidity depends onthe size and sophistication of the bank as well as nature and complexity of itsactivities.
SOURCES OF LIQUIDITYThe primary sources of liquidity can be classified in to two categories. The firstcategory consists of assets in which funds are temporarily invested with theassurance that they will either mature or will be paid when liquidity is readilysaleable, without material loss before maturity. The second category includes thevarious methods by which banks can borrow or otherwise obtain funds.Assets that can be classified as liquid assets and serve as primary source ofliquidity be of high credit quality. They should be either of short maturity or easilymarketable with little chance of loss. The amount of liquid assets may be limitedby the willingness of bank to hold such Assets generally earn less than loans orless liquid Assets. The sources of bank liquidity are mostly available throughmoney market and bank really on it for meeting liquidity needs in the are normalcourse of business.The potential sources of bank liquidity are as under – Money at call and short notice Short Term Central Government Securities Other Marketable Short Term Securities Securities purchased under agreement to resell Refinance form RBI Bills Rediscounting.
SOURCES OF LIQUIDITY RISKLiquidity Risk in banks may be attributed to following factors Mismatch in Tenor profile of Assets and Liabilities:Advances and investments form a major chunk on the assets side of a bank‟sbalance sheet. Banks in an effort to diversify their credit portfolio have startedlending and investing in various projects with long repayment periods. Banks dueto yield considerations have also been investing in government securities withmaturity as long as 30 years. However deposits of the bank are repayable ondemand or generally are for a maturity of 1-5 years. Thus banks have their long-term assets financed out of liabilities, which are predominantly of short term. Thismismatch in tenor profile of assets and liabilities is likely to create liquidity risk ina situation when roll over of deposits is rendered difficult. Embedded Options:Banks provide option to term depositors for prepayment of deposits on recoveryof certain penalty. Similarly borrowers are allowed by some banks to prepayloans. Both borrowers and depositors may use this option in a changing interestrate scenario to take advantage of these changes. These embedded optionsavailable both to depositors and borrowers make liquidity management a difficulttask for the bank. Non-Performing Assets:Banks are faced with the problem of non-performing assets. Loan that default inpayment of interest and principal amount with a delay exceeding two quarters areclassified as Non-Performing Assets by banks. Such assets deprive banks ofcash inflows originally envisaged at the time of sanction. Banks that have gotsubstantial funds blocked in non-performing Assets are likely to face liquidityproblems.
Undrawn credit limits:Banks provide cash credit / Overdraft facilities to borrowers for meeting workingcapital requirements. These facilities are in the form of running account andborrowers depending on need withdraw funds. Banks have to maintain sufficientliquidity to take care of utilization of undrawn credit facilities by the borrows. OBJECTIVE AND POLICIESObjectives:The objective if Liquidity Management is to maintain statutory prescriptions, meetcontractual and maturing cash outflows and to profitable deploy surplus cash.Sound liquidity management involves prudently managing cash flows as alsoconcentration of assets and liabilities (both on and off balance sheet) with a viewto satisfy that cash inflows have an appropriate relationship to approaching cashoutflows.Holding excess liquidity has a bearing on profitability because liquid assets in theform of cash and short-term securities generate lower yields. A trade off betweenliquidity needs and profitability necessitates determination of optimum level ofliquidity. This will have to be supported by liquidity planning that assessespotential future liquidity needs taking into account changes in economic, political,regulatory and other operating conditions.The primary objectives of liquidity management are to ensure An optimum liquidity position. Avoid concentration of funding that May leave the bank vulnerable to potential liquidity problems.
Policies:Banks are required to formulate Assets Liability Management Policy formanagement of market risk including risk. Liquidity Management is part of thebanks Asset Liability Management Policy and Investment Policy for liquiditymanagement should provide broad framework for identification, measurementand assessment of liquidity needs.The policy may broadly include following aspects: It should provide for the establishment of Asset Liability Committee (ALCO), the committee‟s membership and role as also periodicity of the meetings to be held by the committee. The Policy may define reporting mechanism of the decisions taken by ALCO to the Bank‟s Board / senior management and feed back to be received form the Bank‟s Board. The policy needs to specify authority structure for making liquidity and funds management decisions. The policy may provide for periodic review of the bank‟s deposit structure. The review to include the colume and trend of the various types of deposits offered, maturity distribution of time deposits, interest rates being paid on each type of deposits and caps on large deposits. The policy to address funding concentration or excessive reliance on any single source or type of funding.
The policy in conjunction with the bank‟s Investment policy should determine which type of investment is permitted, the desired mix and the maturity distribution. Conveys the Board‟s risk tolerance and establishes target liquidity ratios such as loan to deposit ratio, long-term assets funded by less stable funding sources, individual and aggregated limits on borrowed funds by type and source. The policy to specify the mechanism for periodic review of compliance with policy guidelines such as established limits and legal reserves requirements by senior management The policy to include contingency plan that addresses alternative source of funds if initial projections of funding source and uses undergo any change or if a liquidity crisis arises. The policy to formulate a process for measuring and monitoring liquidity through cash flow projections or using models. The policy to provide authority and procedures for access to wholesale funding sources and to establish a process for measuring and monitoring unused borrowing capacity. The policy to focuses on satisfying the liquidity requirements that are prescribed by RBI as part of regulatory mechanism. The policy to consider putting in place certain limits on duration of liabilities and investment portfolio. Commitment ratios – Track the total commitment given to corporate / banks and other financial institutions and to limit the off balance sheet exposure. Limit on maximum cumulative outflow across all time bands.
LIQUIDITY MANGEEMNT: PLANAll banks should have board approved written policies and procedures for theday-today management of liquidity. The liquidity strategy and policies should becommunicated throughout the bank. The board of directors should be informedregularly on the liquidity situation of the bank and the board should ensure thatsenior management monitors and controls liquidity risk.Bank management should have in place appropriate policies and procedures thatset and provide for the regular review of the limits on the sizes of liquiditypositions over particular time horizon. Management information adequate tomeasure, monitor, control and report liquidity risk should be in place.As part of the process for the on-going measurement of funding requirements,banks should analyze liquidity under various scenarios and the underlyingassumptions for such scenarios should be reviewed periodically.Relationship with lenders, other liability holders and market participants shouldbe diversified and reviewed periodically to ensure a capacity to access fundingeither through new borrowings or the sale of assets.Contingency plans should be in force and should include strategies for handlingliquidity crisis and procedures for addressing cash flow shortfalls in emergencysituations.The bank should maintain an adequate system of internal control that involvesregular independent reviews and evaluations of the effectiveness of the liquiditymanagement system and ensuring that appropriate remedial steps are taken.
Other Risk A. Credit RiskIt arises due to failure of borrowers to discharge their repayment obligation as percontracted terms. This is the oldest & most important risk for the bankers. Itoriginates out of commercial choice of customer and is closely related to thebusiness police of the people implementing the policy. Credit risk is very criticalto banks since the defaulter of a small number of large borrowers could get intostrophic losses. Similar highly volatile interest rate environment may lead todeterioration in the quality of credit portfolio. Traditional credit risk is a primarychallenge for financial institution and such risk are related to lay down creditpolicy of the bank. The misjudgment of these risks may lead to eventual failure ofthe banks, through the respective credit policies is highly interrelated with themarket risk.The credit risk is caused by market risk variables. Management of such risks isalso a vital responsibility of the bank. In a highly volatile interest rate environmentloan defaults may increase the risk by deteriorating the credit policy. B. Market RiskIt is a risk to bank‟s financial condition that would result form adverse movementin the market places. It is the risk of adverse deviations of the market to marketvalue of the trading portfolio during the period required to liquidate the tractionsor revaluing the portfolio for balance sheet purposes. Primarily the impact on themarket risk is observed in the movement of portfolio value. Any decline in valuetherefore will result in a market loss. This gets further aggravated adequacynorms by the regulatory authorities. Accidentally the market risk could prove tobe dangerous for the banks.
C. Foreign Exchange Rate Risk & Currency RiskIt is the risk to the bank due to the fluctuation in the exchange rate of foreigncurrency viz a viz –Indian currency. The impact of the movement of the rate ofexchange shall reflect directly on the fore portfolio of the bank resulting in thechange in the value of foreign exchange assets. Generally co-operative banksare not in this type on business so this risk is not that much affected to them.Floating exchange rate arrangement has brought in its wake pronouncedvolatility adding a new dimension to the risk profile of banks balance sheets. Theincreased capital flows across free economies following deregulation havecontributed to increase in the volume of transactions. Large cross border flowstogether with the volatility has rendered the banks balance sheets vulnerable toexchange rate movements.Dealing in different currencies brings opportunities as also risks. If the liabilities inone currency exceed the level of assets in the same currency, then the currencymismatch can add value or erode value depending upon the currencymovements. The simplest way to avoid currency risk is to ensure thatmismatches, if any, are reduced to zero or near zero. Banks undertakeoperations in foreign exchange like accepting deposits, making loans andadvances and quoting prices for foreign exchange transactions. Irrespective ofthe strategies adopted, it may not be possible to eliminate currency mismatchesaltogether. Besides, some of the institutions may take proprietary tradingpositions as a conscious business strategy.
DRIVERS OF UNEXPECTED OUT– COMES Uncertainty Lack of InformationUn expected out comes. Mis match in ALM Risk Lack of Knowledge Equivocal Lack of Judgment Error Lack of care GOLDEN RULES ABOUT RISK No risk is separated in watertight compartments. The final effect is through interplay of these risks. Risk is associated with product or position. Risk can reduce by increased knowledge. Avoiding risk means avoiding encashment of the opportunities.
PROBLEM IDENTIFICATION Management DilemmaManagement dilemma is usually the symptom of an actual problem. Asset –Liability Mismatch is often the biggest problem in a bank, hence its Managementis a bigger concern. For this study Management dilemma found was:“Mismatch of Assets and Liabilities at Surat People‟s Co-operative Bank” Management QuestionManagement question restates the dilemma in question form. Here themanagement question was:“How the Assets and Liabilities mismatch can be managed.” Problem StatementThe management question generated led to the formulation of the followingproblem statement.“Asset – Liability Management at Surat People‟s Co-operative Bank”
RESEARCH OBJECTIVES1. I have to Measurement and Management of Risk which affect the banks Asset – Liability position.2. To study how the interest rate and liquidity risks affect assets and Liabilities of the Bank. SCOPE OF THE STUDY1. The scope of the study includes: In depth study of Asset – Liability statement as 22 / 12 / 2006 of Surat People‟s Co-operative Bank for the measurement of interest rate risk.2. Study of Asset – Liability statement as on 26 / 12 / 2003 and as on 22 / 12 / 2006 for the purpose of measurement of liquidity risk.3. The scope also includes study of cash flow statement of 2003 to 2006 for calculation of ratios. BENEFITS OF THE STUDY1. Bank could also know about the causes of mismatch in Assets and Liabilities.2. Bank could also know different types of risks as well as how to measure and mange them which cause the mismatch.
RESEARCH DESIGN“Research design is the plan, structure and strategy of investigation conceived soas to obtain answers to research questions and to control variance.”This study can classify as exploratory study. Exploration was needed at threedifferent stages. Initially exploration was needed just to learn something about management dilemma. In the next step exploration was needed to find out how different risk affects Assets and Liability position of the bank. Finally exploration was needed to find out the measures to manage the mismatch.
SAMPLE DESIGNALCO committee is consulted by one General Manager, one Deputy GeneralManager, two Asst. General Manager and one Executive. In this study fivemembers from ALCO committee, 35 members from Loan Department and 4members from Investment Department. All the members of ALCO committee,members of loan department and members of investment department wereselected as the samples of this study.Further in this study, type of the sample selected was non-probabilisticsystematic sampling method. Since the study was about Measurement andManagement of Risk at Surat People‟s Co-operative bank, the information aboutvarious risks was available from employees of Investment Department as well asLoan Department. Primary Data collection
The primary data is seeking information from the persons experienced in the area of the study. We interviewed bank employees and agents for more detailed information. Interviewing them bought us to light many aspects, which were important across the range of the subject. Through experience survey we got data, which we couldn‟t get through secondary data analysis. DATA COLLECTION The objectives of the exploration may be accomplished with different exploratory techniques used in this study were: SOURCE OF INFORMATION INTERNAL SOURCE EXTERNAL SOURCEBUOCHURE WWW.RBI.COMMANUALS RBI MANUALSANNUAL REPORTS ALM SYSTEM IN BANKSWWW.SPCB.COM GUDILINES- RBI BOOKASSET – LIABILITY ALM IN BANKS – DILIPSTATEMENT KUMAR SARMAFINANCIAL STATEMENTS (ECONOMIST) SBH
When I just started with the project I first went on for Bank‟s internal datasources. I visited bank‟s website www.spcb.com.Then I also reffed to manual‟sbroachers, product prostrations, etc. This gave me general information aboutbank and the banking industry. Then for further details I went on for externalsources. I went on for external sources. We referred to books of economist –Dilip Kumar Sarma, RBI manuals for guidelines, website of RBI. ANALYTICAL TOOLIn this project Microsoft Excel as well as different types of the charts are used asthe analytical tool. 1. Excel Sheet - Excel sheet is used to make various calculations while measuring the interest rate risk by using the formula bar. 2. Column Charts – Column charts compare the values across the categories. They are used to show the past performance of the bank. 3. Percentage – percentage is used to calculated liquidity ratio.
LIMITATIONS OF THE STUDY1. The weights of the standardized gap are based on the forecast which is in turn based on the individual perception.2. In addition to interest rate risk and liquidity risk there are some other risks such as credit risk which fall within the ALM framework but they are not considered in the study because they have negligible impact on mismatch of Assets and Liabilities.3. Value at Risk Method is new method for quantification of risks. Through this method, the current economic value of assets and liabilities are arrived at by depreciation and appreciation of the original period value of the product with the corresponding movements of the interest rates. – This type of method does not take bank in their measurement of risk.
STAGE 2 – MEASUREMENT OF RISKINTEREST RATE RISKInterest rate risk can be measured by 3 methods: 1. Traditional Gap Method 2. Standardized Gap Method 3. Duration Gap Method Traditional Gap MethodJohn Clifford in 1975 originally formulated the concept of IRRM in an articleentitled “A perspective on Assets Liability Management” Both assets andliabilities were divided into three pools of funds – variable, fixed and non-ratefunds.Traditional gap analysis involves an analysis in management of banks position ininterest sensitive assets, liabilities and off-balance sheet items with reference tothe existing interest sensitivity exposure of the bank as on a particular day. The
gap analysis usually covers the performance period adopted by the bank for itsperformance planning. While ideally such repricing gaps may be worked out on adaily basis factoring the projected business over a given period of time, a simplermethod is adopted in practice where by assets and liabilities as on the referencedate are grouped as per the repricing maturities under predefined time buckets.The choice of the length and number of time buckets depend upon the nature ofactivity of the financial institutions. Rate Sensitive Gaps ASSETS LIABILITY Variable Variable Rate Rate --------------------------- Rate --------------------------- Sensitive Gap Fixed Rate Fixed Rate ---------------------------- Rate --------------------------- Non Sensitive Gap Non Rate Sensitive Rate Rate sensitive gap =Controllable + Non-Controllable gap
The Gap is the difference between Rate Sensitive Assets (RSA) and RateSensitive Liabilities (RSL) for each time bucket. The Positive Gap indicates that ithas more RSAs then RSLs whereas the Negative Gap indicates that it has moreRSLs. The Gap reports indicate whether the institution is in a position to benefitfrom rising interest rates by having a positive Gap (RSA >RSL) or whether it is ina position to benefit from declining interest rates by a negative Gap (RSL > RSA).The Gap can, therefore, be used as a measure of interest rate sensitivity.If management feels that in any bucket the repricing gap is high and signifies ahigher interest rate risk exposure, it will try to reduce such gaps. Thus, bank canhedge itself against interest rate changes no matter which way the rates the ratesmove, by making sure for each time bucket that the volume of repriceableliabilities.The Gap analysis address the problem of impact on Net Interest Income (NII) assuch is carried out for the planning horizon and confines itself to the possiblechanges in the interest rate occurring during such time horizon. The starting pointfor the gap analysis is therefore to decide on the time buckets and theidentification of the interest rate sensitive assets and liabilities. An item of assets/ liabilities is the interest rate sensitive if it matures or contractually falls due forrepricing during the time bucket. Thus the proceeds for the maturing loan can bereinvested in the another assets at yield related to the yield currently available onsimilar assets and liabilities like cash on hand, premises, current accountbalances are obviously kept out as they are not subject to repricing. If the amountof repriceable assets is not equal to the amount of repriceable liabilities the gapis said to be exist.If the interest rate rises, the banks NII will increase, because more of bank‟sassets will reprice at a higher rate than liabilities and therefore, revenue will
increase more than the cost of borrowed funds. On the other hand, if the interestrate falls when the bank is asset sensitive the banks NII will decline as interestrevenues form the reprised assets drop by more then interest rate expensesassociated with the repriced liabilities. Similarly, if the interest sensitive liabilitiesexceed the interest sensitive assets due for repricing in a particular time bucket,the bank is said to be liability sensitive or negatively gapped during that timebucket. The impact on NII resulting form the changes in the interest rate will beexactly opposite to those discussed for the positive gap. The importantassumption is that the extent of rise in interest rate both on asset and liability sidewill be same and concurrent across the time.When Gap =1, RSA is perfectly matched with RSL. An increase in the interestrates will have equal impact on assets and liabilities and thus net interest marginwill be maintained, assuming spread of returns on assets over liability costs waspositive at the beginning of the period.When Gap >1, there are more RSA than RSL. When the interest rate rises, themargin will also increase and opposite is true when the interest rate declines.On the other hand, if Gap <1, and interest rate rises, the cost of funding willincrease and reduce the interest margin a declining interest rate scenario, thefunding cost will fall faster, thus raising the margin.The relationship between interest rate changes and their impact on net interestincome are shown in below table: GAP INTEREST RATE IMPACT ON NII
CHANGE Positive Increase Positive Positive Decrease Negative Negative Increase Negative Negative Decrease PositiveThe adverse impact on NII is calculated by multiplying the gaps with theexpected change in the interest rates.Assumptions1. The repricing item is spread over, within the buckets, uniformly and as such the mid point of bucket can be taken as an approx. Point at which the repricing takes place.2. The assets or a liability repriced continues to remain in the balance sheet yielding income / incurring cost at the repriced rate during the remaining period of the performance horizon.3. Further, the change in rate is assumed be equal for all items of assets and liabilities. Shortcoming of Gap method 1. Basically a balance sheet concept and captures only principal assets and liabilities revenue flows are ignored 2. Static analysis: business growth is not taken in to account 3. Assumes parallel shift in the yield curve
4. Dose not take into account time value of money 5. Emphasis on short term and NII 6. Forecasting of interest rates difficult through essential 7. The simple Traditional Gap Analysis does not reckon Basis Risk 8. Simplifying assumptions are made about the time of repricing of assets and liabilities within the bucket. 9. The Bucketing is rather arbitrary and there could be mismatch within the time buckets.Gap position of Surat people‟s Co-operative Bank as on 22 / 12 / 2006 (InCrores) Up to Over 3 Over 6 Over 1 Over3 3 Months Months Year Year Over 5 Non – Month And And And And Years Sensitiv Total Up to 6 Up to 1 Up to Up to 5 e Month Year 3 Years Assets Years Total 65.15 66.30 73.19 223.48 48.02 7.71 568.56 1052.41 Liabilities Total Assets 52.07 95.16 62.01 221.51 192.49 376.89 63.89 1064.02 Interest Rate Sensitive _ Gap 13.08 28.86 -11.18 -1.97 144.47 369.18 -504.67 11.61(Repricable Asset- Repricable Liabilities) _Cumulative 13.08 15.78 4.60 2.63 147.10 516.28 11.61 Gap If Interest
Rate _ -Increases 13.08 0.2886 0.1118 0.0197 1.4447 3.6918 -5.0467 By 1 %If Interest Rate 0.131 -0.289 -0.112 0.0197 -1.4447 -3.6918 5.0467Decreases By 1 %If the first Gap -13.08 is left unattended would entail a deduction in NII by-13.08 * 0.01 * (12 / !2) = -13.08 crore if interest rate increases similarcalculation are made in respect of other relevant gaps also as shown in theabove table.Approximate Overall Size of the x Overall change inChange in Banks NII = Cumulative gap the interest rates = 11.61 x 0.01 = 0.1161 crores. STANDISED GAP METHODTraditional gap analysis would lead to conclusion that if banks gap is zero its NIIis protected form interest rate risk. However, in really zero gap does not eliminateall interest rate risk because the interest rate attached to banks assets andliabilities do not change in unison and to the same degree. Thus, to a particularcourse in the market leading to change in the interest rate, different segments(loans, call money, CDs, ect) respond to the changes in the macro indicators likebank rate. But changes in the interest rates on loans and deposits follow withlags and in-different magnitudes.In order to obviate the above problem of basis risk, the traditional gap analysiscan be modified by weighting the classes of liabilities / assets with the elasticity
of interest rate unique to the that class with reference to the bench marketinterest rate. Shortcoming of Standardized Gap method 1. Basically a balance sheet concept and captures only principal assets and liabilities revenue flows are ignored 2. Static analysis: business growth is not taken in to account 3. Assumes parallel shift in the yield curve 4. Dose not take into account time value of money 5. The Bucketing is rather arbitrary and there could be mismatch within the time buckets.Weighted Rate sensitive items of ALM statement as on December 2006 Rate Sensitive Change In Balance sheet Liabilities/ Assets Nominal Interest rate Refigured to Maturing/ Repricing Value Reflect Rate (Weights) During the Time Sensitive (1) (2)Bucket Upto 3 Months (1 * 2)Rate SensitiveLiabilitiesTotal Borrowings 0.00 0.50 0Term Deposits 65.15 0.50 32.575Saving Deposits 0.00 0.25 0Total (B) 32.58Rate SensitiveAssets
Balance With RBI 0.00 1.0 0Balance With OtherBankCall Money 15.00 1.50 22.5Term Deposit 8.50 0.50 4.25Investment inGovernment Securities 18.24 1.50 27.36Advances 7.36 1.50 11.04Total (A) 65.15Total Interest 32.57Sensitive Gap(A-B) Rate Sensitive Change In Balance sheet Liabilities/ Assets Nominal Interest rate Refigured to Maturing/ Repricing Value Reflect Rate (Weights) During the Time Sensitive (1) (2) Bucket 3-6 Month (1 * 2)Rate SensitiveLiabilitiesTotal Borrowings 0.00 0.50 0Term Deposits 42.55 0.50 21.28Saving Deposits 23.75 0.25 5.94Total (B) 27.22Rate SensitiveAssetsBalance With RBI 6.28 1.0 6.28Balance With OtherBank
Call Money 0.00 1.50 0Term Deposit 53.00 0.50 26.5Investment inGovernment Securities 16.48 1.50 24.72Advances 14.2 1.50 21.3Total (A) 78.8Total Interest 51.58Sensitive Gap(A-B) Rate Sensitive Change In Balance sheet Liabilities/ Assets Nominal Interest rate Refigured to Maturing/ Repricing Value Reflect Rate (Weights) During the Time Sensitive (1) (2)Bucket Upto 6 Month (1 * 2) to 1 yearRate SensitiveLiabilitiesTotal Borrowings 0.00 0.50 0Term Deposits 73.19 0.50 36.60Saving Deposits 0.00 0.25 0Total (B) 36.60Rate SensitiveAssetsBalance With RBI 0.00 1.0 0Balance With Other
BankCall Money 0.00 1.50 0Term Deposit 26.33 0.50 13.17Investment inGovernment Securities 2.82 1.50 4.23Advances 32.86 1.50 49.29Total (A) 66.69Total Interest 30.09Sensitive Gap(A-B) Rate Sensitive Change In Balance sheet Liabilities/ Assets Nominal Interest rate Refigured to Maturing/ Repricing Value Reflect Rate (Weights) During the Time Sensitive (1) (2)Bucket Upto 1 Year to (1 * 2) 3 yearsRate SensitiveLiabilitiesTotal Borrowings 0.00 0.50 0Term Deposits 223.48 0.50 111.74Saving Deposits 0.00 0.25 0Total (B) 111.74Rate SensitiveAssetsBalance With RBI 0.00 1.0 0Balance With Other
BankCall Money 0.00 1.50 0Term Deposit 9.84 0.50 4.92Investment inGovernment Securities 68.92 1.50 103.38Advances 142.75 1.50 214.13Total (A) 322.43Total Interest 210.69Sensitive Gap(A-B) Rate Sensitive Change In Balance sheet Liabilities/ Assets Nominal Interest rate Refigured to Maturing/ Repricing Value Reflect Rate (Weights) During the Time Sensitive (1) (2)Bucket Upto 3 Year to (1 * 2) 5 yearsRate SensitiveLiabilitiesTotal Borrowings 0.00 0.50 0Term Deposits 48.02 0.50 24.01Saving Deposits 0.00 0.25 0Total (B) 24.01Rate SensitiveAssetsBalance With RBI 0.00 1.0 0Balance With Other
BankCall Money 0.00 1.50 0Term Deposit 15.42 0.50 7.71Investment inGovernment Securities 50.72 1.50 76.08Advances 126.35 1.50 189.53Total (A) 273.32Total Interest 249.31Sensitive Gap(A-B) Rate Sensitive Change In Balance sheet Liabilities/ Assets Nominal Interest rate Refigured to Maturing/ Repricing Value Reflect Rate (Weights) During the Time Sensitive (1) (2) Bucket Over 5 Years (1 * 2)Rate SensitiveLiabilitiesTotal Borrowings 0.00 0.50 0Term Deposits 7.71 0.50 3.86Saving Deposits 0.00 0.25 0Total (B) 3.86Rate SensitiveAssetsBalance With RBI 0.00 1.0 0Balance With OtherBank
Call Money 0.00 1.50 0Term Deposit 2.56 0.50 1.28Investment inGovernment Securities 301.36 1.50 452.04Advances 72.97 1.50 109.46Total (A) 562.78Total Interest 558.92Sensitive Gap(A-B) Summary of Standardized Gap Method Up to Over 3 Over 6 Over 1 Over3 3 Months Months Year Year Over 5 Month And And And And Years Up to 6 Up to 1 Up to 3 Up to 5 Month Year Years Years Interest Rate Sensitive Gap (Repricable Asset- 32.57 51.58 30.09 210.69 249.31 558.92 Repricable Liabilities) Cumulative 32.57 84.15 114.24 324.93 574.24 1133.16 GapIf Interest RateIncreases By 1 0.3257 0.5158 0.3009 2.1069 2.4931 5.5892 %If Interest Rate Decreases -0.3257 -0.5158 -0.3009 -2.1069 -2.4931 -5.5892 By 1 %
If the first (-) 0.3257 is left unattended would entail a reduction in NIIby 32.57 * 0.01 * (12/12) = (-) 0.3257 crore if interest rate deceasesby 1%. Similar calculations are made in respect of other relevantgaps also as shown in the above table.Approximate Overall Size of the x Overall change inChange in Banks NII = Cumulative gap the interest rates = 1133.16 x 0.01 = 11.3316 crores. Traditional Method Vs Standardized Method Up to Over 3 Over 6 Over 1 Over3 3 Month Month Year Year Over 5 Month s s And And Years And And Up to Up to Up to 6 Up to 1 3 5 Month Year Years Years Interest Rate Traditional Sensitive _ GAP Gap 13.08 28.86 -11.18 -1.97 144.4 369.1 (Repricabl 7 8 Method e Asset- Repricable Liabilities) If Interest Rate _ - Increases 13.08 0.2886 0.1118 0.019 1.444 3.691 By 1 % 7 7 8 Interest RateStandardize Sensitive Gap
d (Repricabl 32.57 51.58 30.09 210.6 249.3 558.9 e 9 1 2 GAP Asset- Method Repricable Liabilities) If Interest Rate 0.325 0.5158 0.3009 2.106 2.493 5.589 Increases 7 9 1 2 By 1 %As may be seen From above that as per the Tradition Gap Method, if there is onepercent increase in bank rate impact on NII in Up to 3 months” time bucket isNegative but in Standardized Gap Method the Impact on NII is Positive. Thereason for this difference is that Standardized Gap Method takes care of BasicRisk also. In order to take care of basis risk, it is necessary that bank should bein a position to forecast not only the direction of interest rate movements butalso the changes in different assets segments. Duration Gap MethodDuration method measures the impact of the changes of interest rates on themarket value of assets and liabilities. The origin of such a method goes back tothe practice existed for calculating current value of bonds. The existing methodfor such calculation was based on cash flows and average maturity. Butcalculation of average maturity implicitly assumes no time value for money,whereas in practice early receipts are of more value than latter receipts. Durationmethod takes care of this by weighting all cash flows by the time at which theyoccur.So if the duration of a financial instrument is known, the change in the price ofthat instrument in response to a given change in interest rate can be calculated.Another feature of this method is that it is additive.
Duration is measure of the percentage change in the economic value of aposition that will occur given a small change in level of interest rates. It reflectsthe timing and size of cash flows that occur before maturity, the higher theDuration (in absolute value). Higher duration implies that a given change in thelevel of interest rates will have a larger impact on economic value.Duration – based weight can be used in combination with a maturity / repricingschedule to provide a rough approximation of the change in a bank‟s economicvalue that would occur given a particular change in the level of market interestrates.Alternatively, an institution could estimate the effect of changing market rates bycalculating the pricies duration of each assets, liability, and then deriving the netposition for the bank based on these more accurate measures, rather than byapplying an estimated average duration weight to all positions in a given timeband. This would eliminate potential errors occurring when aggregating cashflows.As Duration is the direct outcome of interest rate and maturity, it may also bedefined as the measure of price sensitivity to its change in interest rates. PROPERTIES OF DURATION 1. Duration is less than its maturity. This is because of the intermediary cash flows which reduce its effective maturity. 2. Duration is directly related to maturity. Longer the maturity larger will be the duration. 3. Duration is inversely related to the market interest rates or Yield.
4. Duration of portfolio is equal to the weighted average duration of all the items in the portfolio. 5. Higher frequency of intermediary cash flow reduces duration.Duration Gap Steps in Computation Of Duration 1. Ascertain timing a calculate magnitude of cash flows 2. Find present value of each cash flow (Using discount factors) 3. Find time- weighted PV of each cash flow 4. Find total of all TWPVs 5. Divide total in step 5 by total in step 3When the market interest rates are expected to change it will cause the changein value of assets portfolio as well as liability portfolio. This will in turn have theimpact on the net worth of the bank.
Net Worth = Assets – Liabilities.Change in Net Worth = Change in value - Change in value of Of assets Liabilities% Change in Value = Duration x Change in Yield.To protect the negative impact on net worth due to interest rate changes bankcan follow the following steps of duration Gap analysis. STEPS IN DURATION GAP ANALYSIS Management develops in interest rate forecast. Management estimates the weighted duration of Assets (DA) and weighted duration of liabilities(DL) Management calculates DGAP DGAP = DA – DL The positive DGAP indicates that duration of assets is greater than duration of liabilities. The negative DGAP indicates that duration of assets is less than duration of liabilities.
The zero DGAP indicates that duration of assets and duration liabilities are equal.The impact of changing market interest rates on the bank‟s net worth is indicatedgiven below: Nature Of DGAP Direction of interest Impact on bank‟s net rates movement worthPositive Rise Decrease Fall IncreasesNegative Rise Increases Fall DecreaseZero Rise No change Fall No Change Duration Gap at Surat People‟s BankDuration of Assets (DA) = Sum of Product of Asset‟s Duration = 4.6463 YearsDuration of Liabilities (DL) = Sum of product of Liability‟s Duration = 4.2438Years Assets LiabilitiesA Portfolio of Assets with 1064.02 A Portfolio of Liabilities 794.85a Duration of 4.64 years with a Duration of 4.24years
Equity + Reserves 269.17 1064.02 1064.02 Duration Gap = DA – Liabilities / Assets * DL = 4.64 – (794.85 / 1064.02) * 4.24 = 4.64 -3.18 = 1.46Here the duration Gap is positive. Hence impact of change in interest rates onNet Worth of the Bank will be as follows Nature Of DGAP Direction of interest Impact on bank‟s net rates movement worthPositive Rise Decrease Fall IncreasesNow we see how the value of net worth is affected through change in value ofassets and liabilities if interest rate moves in either direction.Interest rate rises by 1%% Change in value of Assets = -DA X Change in Yield = -4.64 x 0.01 = 0.0464 or 4.64%Therefore, Change in value of Assets = 1064.02 - 4.64% = 1064.02 - 49.37 = 1014.65% Change in value of Liabilities = -DL x Change in Yield = - 4.24 x 0.01 = - 0.0424 or 4.24%Therefore, Change in value of Liabilities =794.85 - 4.24%
= 794.85 – 33.70 = 761.15Change in Net Worth = Change in value - Change in value Of Assets of liabilities = 49.37 – 33.70 = 15.67 crores Assets LiabilitiesA Portfolio of Assets with 1014.65 A Portfolio of Liabilities 761.15a Duration of 4.64 years with a Duration of 4.24years Equity + Reserves 253.5 269.17 – 15.67 1014.65 1014.65Thus, the net worth will decrease by 15.67 croresInterest rate decreases by 1%% Change in value of Assets = -DA X Change in Yield = -4.64 x 0.01 = 0.0464 or 4.64%Therefore, Change in value of Assets = 1064.02 + 4.64% = 1064.02 + 49.37 = 1113.39% Change in value of Liabilities = -DL x Change in Yield = - 4.24 x 0.01 = - 0.0424 or 4.24%Therefore, Change in value of Liabilities =794.85 + 4.24% = 794.85 + 33.70 = 828.55
Change in Net Worth = Change in value - Change in value Of Assets of liabilities = 49.37 – 33.70 = 15.67 crores Assets LiabilitiesA Portfolio of Assets with 1113.39 A Portfolio of Liabilities 828.55a Duration of 4.64 years with a Duration of 4.24years Equity + Reserves 284.84 269.17+15.67 1113.39 1113.39Thus, the net worth will increase by 15.67 crores LIQUIDITY RISKLiquidity Risk can be calculated through various Liquidity Ratios such as:- 1. Liquid Assets to Total Assets 2. Loans to Deposit 3. Loans to Assets 4. Loans to Investment 5. Commitments to Total Assets 6. Net Cash Flow to Total Assets 7. Net Cash Flow to Total Liabilities 8. Net Cash Flow to Core Deposits 9. Net Cash Flow to Volatile Deposits
LIQUIDTY RATIO AT SURAT PEOPLE‟S CO-OPERATIVE BANKLiquidity ratios provide the primary means of judging a bank‟s liquidity position.For business firms, as we are aware “Current Ratio” (current assets divided bycurrent liabilities) forms the primary ratio to measure liquidity. However for banksthere are no universally recognized liquidity ratios. One reason for this is thatliabilities of non-financial firms are highly predictable because they have fixedmaturities while a large proportion of bank‟s liabilities are repayable on demand.Following liquidity ratios are generally analyzed by bank. Liquid Assets To Total Assets LIQUID ASSETS 2003 2004 2005 2006Cash 8.47 6.41 7.68 6.89Balance With RBI 31.80 31.90 34.55 41.02Balance With Other Banks 135 90.83 95.04 137.04Investment available for 285.02 375.80 357.47 289.97salesMoney market instrument 0 6.75 6.00 6.00 TOTAL 460.29 511.70 500.74 480.92Total Assets 899.37 865.78 942.07 1064.02Liquid Assets to Total 51.18% 59.10% 53.15% 45.20%
AssetsLiquid Assets as a percent of total assets show the percentage of liquid assets inthe asset structure of the bank. So we can say that higher the proportion ofLiquid Assets in the Total assets, higher the liquidity of the bank.For the Surat People‟s Co-operative Bank, Liquid Assets to Total Assets as onDecember 2003 was 51.18% While as on Dec 2004 it is 59.10% These assetsare presumed to be immediately convertible in to cash in case of any liquidityrequirements and the amounts provide a measure of liquidity position of thebank. Thus on Dec 2005 was 53.15% while as on Dec 2006 was 45.20%.TheseAssets are presumed to be as compared with last two years not to increases butas compare it decrease it not good for bank but compare with other co-operativebank its position of the bank is improving which shows the strong liquidityposition of the bank. Loan to Deposits 2003 2004 2005 2006Loans 323.02 339.86 337.63 396.49Total Deposits 681.11 623.04 682.06 783.83Loans to Total Deposits 47.42% 54.55% 49.50% 50.58%Loans to deposits ratio indicates the degree to which the bank has already usedup its available resources to accommodate the credit needs of the customers.The presumption is that the higher the ratio of loans to deposits, the less able thebank will be to make addition loans. This ratio is normally 60% which indicate isthe good position. A high loan deposits ratio indicates that a bank has a largeproportion of its interest earning assets in loans and small percent in securities.
As loans are not easily saleable like securities, a high loan deposits ratioindicates that a bank will have comparatively low liquidity.However this ratio indicates nothing about the liquidity of the remaining assets orthe nature of bank are other liabilities, which could be a source of great liquidity.In spite of this shortcoming, the loan to deposits ratio is useful as one in group ofliquidity ratios. The loan deposit ratio undoubtedly has a psychological impact onbank management. As the ratio increases, lending policies may become morecautious and selective. Obviously the total of loanable funds, roughly measuredas percentage of deposits, sets an upper limit to a bank‟s ability to makeadditional loans without recourse to more or less continuous borrowings.Since loans to total deposits ratio has increased in 2006 as compared to previousyear, bank as comparatively low liquidity. But still difference is very less and bankis till in good liquidity position. Loan to Assets 2003 2004 2005 2006Loans 323.02 339.86 337.63 396.49Assets 899.37 865.78 942.07 1064.02Loan to Assets 35.92% 39.25% 35.84% 37.26%The loans, being liquid assets for a bank, this ratio indicate the percentage ofliquid assets to total assets. Arise in this ratio would indicate lower liquidity and
the need to evaluate other liquidity ratios. Loans to total assets for both-2005 &2006 the year is nearly equal, thus bank has maintain its liquid position. Loan to Investment 2003 2004 2005 2006Loans 323.02 339.86 337.63 396.49Investment 376.56 371.40 444.79 458.54Loan to Investment 85.78% 91.50% 75.91% 86.47%Bank has got two main channels for deployment of resources viz, loans andinvestments. While loans are expected to provide higher returns compared toinvestments, these suffer form higher credit risk and more illiquid theninvestments. Thus a proper mix of loans and investments keeping in viewliquidity and yield considerations needs to be fixed.Here ratio has increased from 85.78% in 2003 to 91.51% in 2004. Then itdecreases from 75.91% in 2005 & then it anginas increased 86.47%. Thus bankis improving its position by maintain a good mix of loans and investment in theportfolio. Commitments to Total Assets 2003 2004 2005 2006Commitments 217.28 467.82 432.52 296.72Assets 899.37 865.78 942.07 1064.02Commitments to total 24.16% 54.03% 45.91% 27.89%
AssetsCommitments are total limits sanctioned for letters of credit, bank guarantees andcommitted lines of credit. If a bank has a high level off of balance sheet exposurecompared to its total assets, it can create liquidity risk. Higher the ratio createsthe problem for bank in future.Here ratio increased from 24.16% in 2003 to 54.03% in 2004. Thus it increasedmore than double so it gives signal for liquidity problem in next year or in futurebut bank can decreased their ratio from 45.91 in 2005 to from 27.89% in 2006 itsgood for future. Cash flow associated liquidity ratios.The net cash flow or mismatch in cash inflow and outflows over a particular timeperiod serve as the basic parameter to assess the liquidity position of the bank.Following ratio could be estimated for liquidity measurement. Net Cash flow to total Assets 2003 2004 2005 2006Net Cash Flow 26.66 32.59 7.01 23.32Assets 899.37 865.78 942.07 1064.02Net Cash flow to total 2.96% 3.76% 0.74% 2.19%AssetsNet cash flow to total assets will help in judging the impact of cash flow mismatchon liquidity. A ratio of 10% – 15% may be considered a tolerable level. Since
here these percentages are only 2.96%, 3.76%, 0.74% and 2.19% for 2003,2004, 2005 and 2006 respectively bank in not in a good position. Net Cash flow to total Liabilities 2003 2004 2005 2006Net Cash Flow 26.66 32.59 7.01 23.32Liabilities 881.78 849.26 929.08 1052.41Net Cash flow to total 3.02% 3.84% 0.75% 2.22%LiabilitiesSimilarly, net cash flow to total liabilities will measure liquidity under conditionswhen fluctuations in liabilities are major concern for meeting liquidity. A ratio of10% - 15% may be considered a tolerable level. Since here these percentage are3.02%, 3.84%, 0.75% and 2.22% respectively bank in not in good position. Net Cash flow to Core Deposits 2003 2004 2005 2006Net Cash Flow 26.66 32.59 7.01 23.32Core Deposits 597.18 654.42 547.74 626.18Net Cash flow to total 4.46% 4.98% 1.29% 3.72%Core Deposits
The bank has to maintain sufficient liquidity to meet payment obligations onwithdrawal of these Deposits. This Ratio indicates the extent to which cash flowsare able to meet the demand from Depositors. A bank should not require a highlevel of positive mismatch (Net cash flow) because core deposits are those whichremain with bank for considerable period of time. Here the ratios are nearly 4% -5% for three years, which are sufficient to meet liabilities. Net Cash flow to Volatile Deposits 2003 2004 2005 2006Net Cash Flow 26.66 32.59 7.01 23.32Volatile Deposits 26.73 28.19 22.66 23.97Net Cash flow to total 99.73% 115% 30.94% 97.29%Volatile DepositsThe bank has to maintain sufficient liquidity to meet payment obligations onwithdrawal of these Deposits. This ratio indicates the extent to which cash flowsare able to meet the demand form Depositors.A bank should require a high level of positive mismatch (Net cash flow) becausevolatile deposits are those, which are not remains with bank for considerableperiod of time. Here the ratios are 99.73% for the year 2003 that is adequate, butfor the year 2004 it is 115%, which is not needed. Bank reduced the ratio in 2005it is 30.94% then it increases for the year 2006 it is 97.29% its good for the bank.The ratio must maintain the level up to 100%.
STAGE 3 – MANAGEMENT OF RISK TRADITIONAL GAP METHODThe bank should mange the gaps as close to zero as possible thus performingDefensive Interest Sensitive Gap management.However, a profit maximization approach, by taking positions in gaps based on aview on interest rates would be considered Aggressive Management of Gaps.Under this approach, the bank should try to reduce or increase the size of the
gaps according to their view on interest rate movements. But this involvesconsiderable risk for the banks in the event of the interest rate view turning to beincorrect. Thus bank can mange gap by adopting following strategy. 1. If Interest rates are expected to increase in near future then Bank should try to maintain Positive Gap (i.e. rate Sensitive assets are more than the Rate Sensitive Liabilities) So that there will positive impact on NII. 2. If interest rates are expected to Decrease in near future then Bank should try to Maintain Negative Gap (i.e. Rate Sensitive Liabilities are more than the Rates Assets) so that there will be a positive impact on NII. STANDARDIZED GAP METHODGap model suggest that a bank which chooses not to speculate on future interestrates can reduce interest rate risk by obtaining a Zero Gap. Then bank is fullyhedged because its interest rate risk is negligible. Alternatively, a bank maychoose to speculate on future interest rates and actively mange the Gap.The bank should mange the gaps as close to zero as possible performingDefensive Interest Sensitive Gap Management.
However, a profit maximization approach, by taking positions in gaps based on aview on interest rates would be considered Aggressive Management of Gaps.Under this approach, the bank should try to reduce or increase the size of thegaps according to their view on interest rate movements. But this involvesconsiderable risk for the banks in the event of the interest rate view turning to beincorrect. Thus bank can mange gap by adopting following strategy. 1. If Interest rates are expected to increase in near future then Bank should try to maintain Positive Gap (i.e. rate Sensitive assets are more than the Rate Sensitive Liabilities) So that there will positive impact on NII. 2. .If interest rates are expected to Decrease in near future then Bank should try to Maintain Negative Gap (i.e. Rate Sensitive Liabilities are more than the Rates Assets) so that there will be a positive impact on NII. DURATION GAP METHOD POSSIBLE NATURE OF INTEREST RATE MANAGEMENT OUTCOME IF BANK VIEW ACTION VIEW TURNS RIGHTRisk Averse Rates will rise or Move Gap to Zero Net worth remains fall unchangedRisk Taker Rates will rise Move to Negative Net Worth Duration Gap increase
Risk Taker Rates will fall Move to positive Net Worth Duration Gap Increase LIQUIDITY RISKIt can be known form the calculation of above liquidity Ratios that except fewratios all the ratios are showing positive sign for liquidity position of the bank. Theratios like liquid assets to total assets, loans to deposits, loan to total assets,loans to investment and net cash flows to volatile deposits are showing good signfor bank liquidity. So the bank should maintain such liquidity position. On theother side bank has to focus on ratio, which is not favorable for liquidity positionof the bank. CONCLUSIONAfter having training at Surat People‟s Co-operative Bank I have found thatalthough today in the banking sector, Co-operative banks have failed in winningthe trust of the people, Surat People‟s Co-operative Bank is successful in doingso. It is having strong capital base which is the main strength of the bank.Moreover, Bank has qualified, customer oriented and co-operative staff who cantake right action at right time which the basic requirement in today‟s competitiveworld.
After doing analysis about Assets-liability management. It was found that: Bank has good liquidity position. Hence mismatch in Assets – Liability will not match affected by the liquidity risk if bank maintain the same position in future. Although much wide Gap in assets and liabilities still the Interest rates fluctuation, being beyond the control of the bank may pose problem for the Assets – Liability Management of the bank. RECOMMENDATION To manage Interest rate risk bank should be allowed to deal in derivatives for hedging purpose. Bank can use various models and ratios suggested in this report for interest rate risk and liquidity risk measurement.
Bank can follow risk management Techniques suggested for Assets – liability Management. Value at Risk Method is new method for quantification of risks. Through this method, the current economic value of assets and liabilities are arrived at by depreciation and appreciation of the original period value of the product with the corresponding movements of the interest rates. – This type of method does not take bank in their measurement of risk. BIBLIOGRAPHY References:1. Business Research Methods -Cooper and Shindler2. Annual Reports of the Bank.
3. Risk Management – CAIIB4. RBI – Report of ALM - B. Raghavendran5. State Bank of Hyderabad for ALM – Report of Dilip Sarma (Economist) Websites:1. www.spcbl.com.2. www.rbi.com.