Alm objective & scope and other related matters
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Alm objective & scope and other related matters

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    Alm objective & scope and other related matters Alm objective & scope and other related matters Presentation Transcript

    • ASSET LIABILITY MANAGEMENT OBJECTIVE & SCOPE AND RELATED MATTERS
    • PROPOSED COVERAGE AN OVERVIEW OFTHE OBJECTIVES AND SCOPE OF ALM ALM POLICY ALCO OPERATIONAL ASPECTS REPORTS & OTHER RELATED MATTERS
    •  WHAT IS ALM? WHAT IS BALANCE SHEET? WHAT IS BALANCE SHEET MANAGEMENT?
    •  WHAT IS BANKING? THE TRADITIONAL DEFINITION THE MODERN DEFINITION BANKING IS A RISKY BUSINESS BUT RISK IS THE BUSINESS OF BANKING
    • RISK REVISITED WHAT IS RISK? SIMPLY PUT RISK CAN BE DEFINED AS THE POSSIBILITY / PROBABILITY OF LOSS THE OTHER NAME FOR RISK IS, “OPPORTUNITY”
    •  RISK MANAGEMENT SYSTEMS SHOULD BE ABLE TO IDENTIFY THE VARIOUS TYPES OF RISKS WHICH THE INSTITUTION IS EXPOSED TO MEASURE, MONITOR AND CONTROL THESE RISKS ALM IS MAINLY CONCERNED WITH LIQUIDITY RISK AND INTEREST RATE RISK
    • ALM FOCUS Asset Liability ManagementInterest rate risk Liquidity risk management management
    • EVOLUTION NO SCIENTIFIC APPROACHES TO BALANCE SHEET MANAGEMENT TILL LATE 1970s FED DISMANTLED THE STABLE INTEREST RATES ON 6-10-1979 USA - PLR REVISED  1965 - ONCE  1980 - 42 TIMES LATE 1970s - ALM ENTERED THE LEXICON OF BANKING 1990s - FULLY DEVELOPED ALM AND RMS• THE EVOLUTION IN INDIA• RBS
    • IMPLEMENTATION OF ALM GUIDELINES ISSUED BY THERBI EFFECTIVE  BANKS APRIL 1, 1999  FIs APRIL 1, 2000  NBFCs MARCH 31, 2002  SCHEDULED UCBs JUNE 30, 2002
    • WHY ALM? DERUGULATION COMPETITION UNSCIENTIFIC & ADHOC PRICING OF DEPOSITS ALTERNATIVE AVENUES FOR THE BORROWERS RESULTING IN INEFFICIENT DEPLOYMENT OF RESOURCES NEED FOR OPTIMAL SPREADS, PROFITABILITY & LONG-TERM VIABILITY IMPRUDENT BALANCE SHEET MANAGEMENT CAN PUT BANK’S EARNINGS & REPUTATION AT GREAT RISK
    • OBJECTIVE & SCOPE OF ALM WHAT IS THE OBJECTIVE & SCOPE OF ALM? THE TASK OF ALM IS NOT TO ELIMINATE RISK BUT TO MANAGE IT ALM SHOULD BE AN INTEGRAL PART OF BANKING BUSINESS AND NOT JUST AN EXERCISE IN MEETING REGULATORY REQUIREMENTS ALM INVOLVES ALTERING BALANCE SHEETS IN A DYNAMIC MANNER TO MANAGE RISKS
    •  UCBs HAVE TO MANAGE BUSINESS AFTER ASSESSING RISKS INVOLVED THEY HAVE TO BASE THEIR BUSINESS DECISIONS ON SOUND RISK MANAGEMENT SYSTEMS WITH THE ULTIMATE OBJECTIVE OF PROTECTING THE INTEREST OF DEPOSITORS & STAKEHOLDERS
    • THE BACKGROUND RBI CONSTITUTED A WORKING GROUP COMPRISING SENIOR EXECUTIVES OF UCBs & THE RBI TWO WORKSHOPS FOR SCHEDULED UCBs CONDUCTED IN JANUARY AND FEBRUARY 2002 -FEED RECEIVED ANALYSED
    •  ALM GUIDELINES RBI CIRCULAR DATED APRIL 15, 2002 ISSUED TO ALL SCHEDULED UCBs SCHEDULED UCBs REQUIRED TO PUT IN PLACE AN EFFECTIVE ALM SYSTEM
    •  ADOPTION OF UNIFORM ALM SYSTEM NOT FEASIBLE GIVEN THE LEVEL OF COMPUTERISATION AND THE CURRENT STATUS OF MIS RBI GUIDELINES – A BENCH MARK FOR BANKS WHICH LACK A FORMAL ALM
    •  TO BEGIN WITH ATLEAST 60% COVERAGE OF LIABILITIES & ASSETS – REMAINING 40% ON ESTIMATES 100% COVERAGE BY APRIL 1, 2003
    • ALM – THE PILLARS  THE THREE PILLARS OF ALM  ALM INFORMATION SYSTEMS  ALM ORGANISATION  ALM PROCESS
    • ALM INFORMATION SYSTEMS MIS – INFORMATION AVAILABILITY, ACCURACY, ADEQUACY AND EXPEDIENCY
    • ALM ORGANISATION STRUCTURE AND RESPONSIBILITIES LEVEL OF TOP MANAGEMENT INVOLVEMENT
    • ALM PROCESS RISK IDENTIFICATION RISK MEASUREMENT RISK MANAGEMENT RISK POLICIES AND PROCEDURES, PRUDENTIAL LIMITS AND AUDITING, REPORTING & REVIEW
    • LIQUIDITY  AVAILABILTY OF FUNDS  “HAVING JUST ENOUGH CASH TO MEET CURRENT NEEDS”  “RAISING OF SUFFICIENT FUNDS EITHER BY INCREASING LIABILITIES OR BY CONVERTING ASSETS PROMPTLY AND AT A REASONABLE COST”
    • LIQUIDITY RISK  HOW DOES IT ARISE?  MISMATCH IN THE TIMING OF INFLOWS AND OUTFLOWS
    • FLOW APPROACH EIGHT BUCKETS 1 TO 14 DAYS 15 TO 28 DAYS 29 DAYS UPTO 3 MONTHS OVER 3 MONTHS AND UPTO 6 MONTHS OVER 6 MONTHS AND UPTO 1 YEAR OVER 1 YEAR AND UPTO 3 YEARS OVER 3 YEARS AND UPTO 5 YEARS OVER 5 YEARS
    •  TOLERANCE LEVELS FOR VARIOUS MATURITIES TO BE FIXED DEPENDING UPON BANK’S ASSET-LIABILITY PROFILE, STABILITY OF DEPOSIT BASE, NATURE OF CASH FLOWS ETC. MISMATCHES IN THE FIRST TWO BUCKETS TO BE KEPT AT MINIMUM LEVELS – TO START WITH NEGATIVE GAP NOT TO EXCEED 20% OF CASH OUTFLOWS THE ABOVE TOLERANCE LEVELS TO BE STRICTLY ENFORCED W.E.F APRIL 1, 2003
    • OBJECTIVES MEETING THE STATUTORY PRESCRIPTIONS MEETING INTERNAL REQUIREMENT OF FUNDS FOR LIABILITY PAYMENTS DISBURSEMENTS MINIMISING THE COST OF CARRY & AVOIDING FIRE SALE OF ASSETS
    •  IMPORTANCE OF LIQUIDITY IMPACT OF LIQUIDITY
    • MANIFESTATIONS OF LIQUIDITY RISK FUNDING RISK TIME RISK CALL RISK
    • THE TRADE OFF EARNINGS Vs LIQUIDITY THE PRICE OF LIQUIDITY. THE IMPACT ON NIM
    • WHAT IS INTEREST RATE RISK?  IT IS A MARKET RISK  ALSO KNOWN AS THE PRICE RISK  IRR IS THE RISK ON ACCOUNT OF THE ADVERSE MOVEMENT IN INTEREST RATES
    • THE BUCKETS UPTO 3 MONTHS OVER 3 MONTHS AND UPTO 6 MONTHS OVER 6 MONTHS AND UPTO 1 YEAR OVER 1 YEAR AND UPTO 3 YEARS OVER 3 YEARS AND UPTO 5 YEARS OVER 5 YEARS NON-SENSITIVE
    • ALCO CRUCIAL ROLE A VERY IMPORTANT COMMITTEE CONSISTS OF SENIOR MANAGEMENT INCLUDING THE CEO CHIEFS OF INVESTMENT, TREASURY, CREDIT & PLANNING
    •  TAKES A VIEW ON LR & IRR ALM SUPPORT GROUPS -DEDICATED STAFF - SHOULD BE RESPONSIBLE FOR ANALYSING, MONITORING & REPORTING THE RISK PROFILE TO ALCO
    •  RESPONSIBLE FOR BALANCE SHEET PLANNING BEHAVIOURAL PATTERN NET BORROWING – CAP DRI DEPOSITS COMMITTED LINES OF CREDIT
    •  INTEREST RATE GAPS EXCESS CRR QUORUM FOR MEETING PRICING OF DEPOSITS & ADVANCES DESIRED MATURITY PROFILE OF INCREMENTAL ASSETS & LIABILITIES REVIEW OF THE RESULTS & PROGRESS IN IMPLEMENTATION OF THE DECISION MADE IN THE PREVIOUS MEETINGS
    • ALCO - KEY CONSIDERATIONS CONCENTRATION OF DEPOSITS/SOURCES OF FUNDS QUALITY OF MATURING ASSETS MARKET REPUTATION AVAILABILITY OF UNDRAWN STANDBYS IMPACT OF OFF BALANCE SHEET EXPOSURES
    • PRUDENTIAL LIMITS - ALCO’S ROLE MAXIMUM CUMULATIVE OUTFLOWS ACROSS ALL TIME BANDS CAPS ON SINGLE / GROUP EXPOSURES, INDUSTRY-WISE EXPOSURES ETC.
    • ALM POLICY THE MAIN INGREDIENTS
    • CONTINGENCY FUNDING PLAN (CFP) CONTINGENCY PLAN - IDENTIFICATION OF WORST CASE SCENARIOS AND SPECIFIC POSSIBLE COURSES OF ACTION. THE CONTINGENCY FUNDING PLAN SHOULD BE APPROVED BY ALCO WHICH SHOULD BE PREPARED AND REVIEWED AT PERIODICAL INTERVALS
    • REPORTS STATEMENT OF STRUCTURAL LIQUIDITY - TO CAPTURE THE MATURITY STRUCTURE OF CASH INFLOWS & OUTFLOWS – TO START WITH, AS ON THE LAST REPORTING FRIDAY OF MARCH / JUNE / SEPTEMBER / DECEMBER – TO PUT THE SYSTEM ON A FORTNIGHTLY BASIS – W.E.F. APRIL 2003
    • REPORTS STATEMENT OF INTEREST RATE SENSITIVITY – QUARTERLY TO MONTHLY – 1/4/2003 SHORT TERM DYNAMIC LIQUIDITY STATEMENT – EACH REPORTING FRIDAY
    •  REQUIREMENTS OF OVERSIGHT
    •  THE SUCCESS OF ALM PROCESS DEPENDS ON THE CAPACITY TO ANTICIPATE CHANGE AND TO ACT DECISIVELY SO AS TO MAKE PROFIT FROM IT OR IN THE WORST CASE MINIMISE LOSSES
    •  THE CRUX OF BANKING BUSINESS IS MANAGING MISMATCHES. IF BANKS WERE TO HAVE PERFECTLY MATCHED PORTFOLIOS, THEY WOULD NEITHER MAKE MONEY NOR NEED TREASURY MANAGERS / EXECUTIVES TO RUN THEIR BUSINESS. CLERKS CAN MANAGE BANKS
    • -THANK YOU-