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Riskmanagement modulea

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Riskmanagement modulea

  1. 1. Asset Liability Management in Banks
  2. 2. Components of a Bank Balance sheet Contingent Liabilities <ul><li>Cash & Balances with RBI </li></ul><ul><li>Bal. With Banks & Money at Call and Short Notices </li></ul><ul><li>Investments </li></ul><ul><li>Advances </li></ul><ul><li>Fixed Assets </li></ul><ul><li>6. Other Assets </li></ul><ul><li>Capital </li></ul><ul><li>Reserve & Surplus </li></ul><ul><li>Deposits </li></ul><ul><li>Borrowings </li></ul><ul><li>Other Liabilities </li></ul>Assets Liabilities
  3. 3. Components of Liabilities <ul><li>Capital: </li></ul><ul><li>Capital represents owner’s contribution/stake in the bank. </li></ul><ul><li>It serves as a cushion for depositors and creditors. </li></ul><ul><li>It is considered to be a long term sources for the bank. </li></ul>
  4. 4. Components of Liabilities <ul><li>2. Reserves & Surplus </li></ul><ul><li>Components under this head includes: </li></ul><ul><li>I. Statutory Reserves </li></ul><ul><li>II. Capital Reserves </li></ul><ul><li>III. Investment Fluctuation Reserve </li></ul><ul><li>IV. Revenue and Other Reserves </li></ul><ul><li>V. Balance in Profit and Loss Account </li></ul>
  5. 5. Components of Liabilities <ul><li>3. Deposits </li></ul><ul><li>This is the main source of bank’s funds. The deposits are classified as deposits payable on ‘demand’ and ‘time’. They are reflected in balance sheet as under: </li></ul><ul><li>I. Demand Deposits </li></ul><ul><li>II. Savings Bank Deposits </li></ul><ul><li>III. Term Deposits </li></ul>
  6. 6. Components of Liabilities <ul><li>4. Borrowings </li></ul><ul><li>(Borrowings include Refinance / Borrowings from RBI, Inter-bank & other institutions) </li></ul><ul><li>I. Borrowings in India </li></ul><ul><li> i) Reserve Bank of India </li></ul><ul><li> ii) Other Banks </li></ul><ul><li>iii) Other Institutions & Agencies </li></ul><ul><li>II. Borrowings outside India </li></ul>
  7. 7. Components of Liabilities <ul><li>5. Other Liabilities & Provisions </li></ul><ul><li>It is grouped as under: </li></ul><ul><li>I. Bills Payable </li></ul><ul><li>II. Inter Office Adjustments (Net) </li></ul><ul><li>III. Interest Accrued </li></ul><ul><li>IV. Unsecured Redeemable Bonds </li></ul><ul><li>(Subordinated Debt for Tier-II Capital) </li></ul><ul><li>V. Others(including provisions) </li></ul>
  8. 8. Components of Assets <ul><li>Cash & Bank Balances with RBI </li></ul><ul><li>I. Cash in hand </li></ul><ul><li>(including foreign currency notes) </li></ul><ul><li>II. Balances with Reserve Bank of India </li></ul><ul><li>  </li></ul><ul><li>In Current Accounts </li></ul><ul><li>In Other Accounts </li></ul>
  9. 9. Components of Assets <ul><li>2. BALANCES WITH BANKS AND MONEY AT CALL & SHORT NOTICE </li></ul><ul><li>I. In India </li></ul><ul><li>i) Balances with Banks </li></ul><ul><li>a) In Current Accounts </li></ul><ul><li>  b) In Other Deposit Accounts </li></ul><ul><li>ii) Money at Call and Short Notice </li></ul><ul><li>a) With Banks </li></ul><ul><li>  b) With Other Institutions </li></ul><ul><li>II. Outside India </li></ul><ul><li>a) In Current Accounts </li></ul><ul><li>b) In Other Deposit Accounts </li></ul><ul><li>c) Money at Call & Short Notice </li></ul>
  10. 10. Components of Assets <ul><li>3. Investments </li></ul><ul><li>A major asset item in the bank’s balance sheet. Reflected under 6 buckets as under: </li></ul><ul><li>I. Investments in India in : * </li></ul><ul><li>i) Government Securities </li></ul><ul><li>ii) Other approved Securities </li></ul><ul><li>iii) Shares </li></ul><ul><li>iv) Debentures and Bonds </li></ul><ul><li>v) Subsidiaries and Sponsored Institutions </li></ul><ul><li>vi) Others (UTI Shares , Commercial Papers, COD & </li></ul><ul><li>Mutual Fund Units etc.) </li></ul><ul><li>II. Investments outside India in ** </li></ul><ul><li>  Subsidiaries and/or Associates abroad </li></ul>
  11. 11. Components of Assets <ul><li>4. Advances </li></ul><ul><li>The most important assets for a bank. </li></ul><ul><li>A. i) Bills Purchased and Discounted </li></ul><ul><li>ii) Cash Credits, Overdrafts & Loans </li></ul><ul><li>repayable on demand </li></ul><ul><li>iii) Term Loans </li></ul><ul><li>B. Particulars of Advances : </li></ul><ul><li>i) Secured by tangible assets </li></ul><ul><li>(including advances against Book Debts) </li></ul><ul><li>ii) Covered by Bank/ Government Guarantees </li></ul><ul><li>iii) Unsecured </li></ul>
  12. 12. Components of Assets <ul><li>5. Fixed Asset </li></ul><ul><li>I. Premises </li></ul><ul><li>II. Other Fixed Assets (Including furniture and fixtures) </li></ul><ul><li>6. Other Assets </li></ul><ul><li> I. Interest accrued </li></ul><ul><li>  II. Tax paid in advance/tax deducted at source </li></ul><ul><li>(Net of Provisions) </li></ul><ul><li>  III. Stationery and Stamps </li></ul><ul><li>  IV. Non-banking assets acquired in satisfaction of claims </li></ul><ul><li>  V. Deferred Tax Asset (Net) </li></ul><ul><li>  VI. Others </li></ul>
  13. 13. Contingent Liability <ul><li>Bank’s obligations under LCs, Guarantees, Acceptances on behalf of constituents and Bills accepted by the bank are reflected under this heads. </li></ul>
  14. 14. Banks Profit & Loss Account <ul><li>A bank’s profit & Loss Account has the following components: </li></ul><ul><li>Income: This includes Interest Income and Other Income. </li></ul><ul><li>II. Expenses: This includes Interest Expended, Operating Expenses and Provisions & contingencies. </li></ul>
  15. 15. Components of Income <ul><li>INTEREST EARNED </li></ul><ul><li>I. Interest/Discount on Advances / Bills </li></ul><ul><li>  II. Income on Investments </li></ul><ul><li>  III. Interest on balances with Reserve Bank </li></ul><ul><li>of India and other inter-bank funds </li></ul><ul><li>  IV. Others </li></ul>
  16. 16. Components of Income <ul><li>2. OTHER INCOME </li></ul><ul><li>I. Commission, Exchange and Brokerage </li></ul><ul><li>II. Profit on sale of Investments (Net) </li></ul><ul><li>III. Profit/(Loss) on Revaluation of Investments </li></ul><ul><li>IV. Profit on sale of land, buildings and other </li></ul><ul><li>assets (Net) </li></ul><ul><li>V. Profit on exchange transactions (Net) </li></ul><ul><li>VI. Income earned by way of dividends etc. from subsidiaries and Associates abroad/in India </li></ul><ul><li>VII. Miscellaneous Income </li></ul>
  17. 17. Components of Expenses <ul><li>INTEREST EXPENDED </li></ul><ul><li>I. Interest on Deposits </li></ul><ul><li>II. Interest on Reserve Bank of India / Inter-Bank </li></ul><ul><li>borrowings </li></ul><ul><li>III. Others </li></ul>
  18. 18. Components of Expenses <ul><li>2. OPERATING EXPENSES </li></ul><ul><li>I. Payments to and Provisions for employees </li></ul><ul><li>II. Rent, Taxes and Lighting </li></ul><ul><li>  III. Printing and Stationery </li></ul><ul><li>IV. Advertisement and Publicity </li></ul><ul><li>  V. Depreciation on Bank's property </li></ul><ul><li>VI. Directors' Fees, Allowances and Expenses </li></ul><ul><li>  VII. Auditors' Fees and Expenses (including Branch Auditors) </li></ul><ul><li>  VIII. Law Charges </li></ul><ul><li>  IX. Postages, Telegrams, Telephones etc. </li></ul><ul><li>  X. Repairs and Maintenance </li></ul><ul><li>  XI. Insurance </li></ul><ul><li>  XII. Other Expenditure </li></ul>
  19. 19. Assets Liability Management ALM It is a dynamic process of Planning, Organizing & Controlling of Assets & Liabilities- their volumes, mixes, maturities, yields and costs in order to maintain liquidity and NII.
  20. 20. Significance of ALM <ul><li>Volatility </li></ul><ul><li>Product Innovations & Complexities </li></ul><ul><li>Regulatory Environment </li></ul><ul><li>Management Recognition </li></ul>
  21. 21. Purpose & Objective of ALM <ul><li>An effective Asset Liability Management Technique aims to manage the volume, mix, maturity, rate sensitivity, quality and liquidity of assets and liabilities as a whole so as to attain a predetermined acceptable risk/reward ration. </li></ul><ul><li>It is aimed to stabilize short-term profits, long-term earnings and long-term substance of the bank. The parameters for stabilizing ALM system are: </li></ul><ul><li>1. Net Interest Income (NII) </li></ul><ul><li>2. Net Interest Margin (NIM) </li></ul><ul><li>3. Economic Equity Ratio </li></ul>
  22. 22. RBI DIRECTIVES <ul><li>Issued draft guidelines on 10 th Sept’98. </li></ul><ul><li>Final guidelines issued on 10 th Feb’99 for implementation of ALM w.e.f. 01.04.99. </li></ul><ul><li>To begin with 60% of asset &liabilities will be covered; 100% from 01.04.2000. </li></ul><ul><li>Initially Gap Analysis to be applied in the first stage of implementation. </li></ul><ul><li>Disclosure to Balance Sheet on maturity pattern on Deposits, Borrowings, Investment & Advances w.e.f. 31.03.01 </li></ul>
  23. 23. Liquidity Management <ul><li>Bank’s liquidity management is the process of generating funds to meet contractual or relationship obligations at reasonable prices at all times. </li></ul><ul><li>New loan demands, existing commitments, and deposit withdrawals are the basic contractual or relationship obligations that a bank must meet. </li></ul>
  24. 24. Adequacy of liquidity position for a bank <ul><li>Analysis of following factors throw light on a bank’s adequacy of liquidity position: </li></ul><ul><li>Historical Funding requirement </li></ul><ul><li>Current liquidity position </li></ul><ul><li>Anticipated future funding needs </li></ul><ul><li>Sources of funds </li></ul><ul><li>Options for reducing funding needs </li></ul><ul><li>Present and anticipated asset quality </li></ul><ul><li>Present and future earning capacity and </li></ul><ul><li>h. Present and planned capital position </li></ul>
  25. 25. Funding Avenues <ul><li>To satisfy funding needs, a bank must perform one or a combination of the following: </li></ul><ul><li>Dispose off liquid assets </li></ul><ul><li>Increase short term borrowings </li></ul><ul><li>Decrease holding of less liquid assets </li></ul><ul><li>Increase liability of a term nature </li></ul><ul><li>e. Increase Capital funds </li></ul>
  26. 26. Types of Liquidity Risk <ul><li>Liquidity Exposure can stem from both internally and externally. </li></ul><ul><li>External liquidity risks can be geographic, systemic or instrument specific. </li></ul><ul><li>Internal liquidity risk relates largely to perceptions of an institution in its various markets: local, regional, national or international </li></ul>
  27. 27. Other categories of liquidity risk <ul><li>Funding Risk </li></ul><ul><li>- Need to replace net outflows due to unanticipated withdrawals/non-renewal </li></ul><ul><li>Time Risk </li></ul><ul><li>- Need to compensate for non-receipt of expected inflows of funds </li></ul><ul><li>Call Risk </li></ul><ul><ul><ul><li>- Crystallization of contingent liability </li></ul></ul></ul>
  28. 28. Statement of Structural Liquidity All Assets & Liabilities to be reported as per their maturity profile into 8 maturity Buckets: <ul><li>1 to 14 days </li></ul><ul><li>15 to 28 days </li></ul><ul><li>29 days and up to 3 months </li></ul><ul><li>Over 3 months and up to 6 months </li></ul><ul><li>Over 6 months and up to 1 year </li></ul><ul><li>Over 1 year and up to 3 years </li></ul><ul><li>Over 3 years and up to 5 years </li></ul><ul><li>Over 5 years </li></ul>
  29. 29. STATEMENT OF STRUCTURAL LIQUIDITY <ul><li>Places all cash inflows and outflows in the maturity ladder as per residual maturity </li></ul><ul><li>Maturing Liability: cash outflow </li></ul><ul><li>Maturing Assets : Cash Inflow </li></ul><ul><li>Classified in to 8 time buckets </li></ul><ul><li>Mismatches in the first two buckets not to exceed 20% of outflows </li></ul><ul><li>Shows the structure as of a particular date </li></ul><ul><li>Banks can fix higher tolerance level for other maturity buckets. </li></ul>
  30. 30. An Example of Structural Liquidity Statement
  31. 31. ADDRESSING THE MISMATCHES <ul><li>Mismatches can be positive or negative </li></ul><ul><li>Positive Mismatch: M.A.>M.L. and Negative Mismatch M.L.>M.A. </li></ul><ul><li>In case of +ve mismatch, excess liquidity can be deployed in money market instruments, creating new assets & investment swaps etc. </li></ul><ul><li>For –ve mismatch,it can be financed from market borrowings (Call/Term), Bills rediscounting, Repos & deployment of foreign currency converted into rupee. </li></ul>
  32. 32. STRATEGIES… <ul><li>To meet the mismatch in any maturity bucket, the bank has to look into taking deposit and invest it suitably so as to mature in time bucket with negative mismatch. </li></ul><ul><li>The bank can raise fresh deposits of Rs 300 crore over 5 years maturities and invest it in securities of 1-29 days of Rs 200 crores and rest matching with other out flows. </li></ul>
  33. 33. Maturity Pattern of Select Assets & Liabilities of A Bank Liability/Assets Rupees (In Cr) In Percentage I. Deposits a. Up to 1 year b. Over 1 yr to 3 yrs c. Over 3 yrs to 5 yrs d. Over 5 years 15200 8000 6700 230 270 100 52.63 44.08 1.51 1.78 II. Borrowings a. Up to 1 year b. Over 1 yr to 3 yrs c. Over 3 yrs to 5 yrs d. Over 5 years 450 180 00 150 120 100 40.00 0.00 33.33 26.67 III. Loans & Advances a. Up to 1 year b. Over 1 yr to 3 yrs c. Over 3 yrs to 5 yrs d. Over 5 years 8800 3400 3000 400 2000 100 38.64 34.09 4.55 22.72 Iv. Investment a. Up to 1 year b. Over 1 yr to 3 yrs c. Over 3 yrs to 5 yrs d. Over 5 years 5800 1300 300 900 3300 100 22.41 5.17 15.52 56.90
  34. 34. STATEMENT OF INTEREST RATE SENSITIVITY <ul><li>Generated by grouping RSA,RSL & OFF-Balance sheet items in to various (8)time buckets. </li></ul><ul><li>RSA: </li></ul><ul><li>MONEY AT CALL </li></ul><ul><li>ADVANCES ( BPLR LINKED ) </li></ul><ul><li>INVESTMENT </li></ul><ul><li>RSL </li></ul><ul><li>DEPOSITS EXCLUDING CD </li></ul><ul><li>BORROWINGS </li></ul>
  35. 35. MATURITY GAP METHOD (IRS) <ul><li>THREE OPTIONS: </li></ul><ul><li>A) RSA > RSL= Positive Gap </li></ul><ul><li>B) RSL > RSA= Negative Gap </li></ul><ul><li>C) RSL = RSA= Zero Gap </li></ul>
  36. 36. SUCCESS OF ALM IN BANKS : PRE - CONDITIONS <ul><li>Awareness for ALM in the Bank staff at all levels–supportive Management & dedicated Teams. </li></ul><ul><li>Method of reporting data from Branches/ other Departments. (Strong MIS). </li></ul><ul><li>Computerization-Full computerization, networking. </li></ul><ul><li>Insight into the banking operations, economic forecasting, computerization, investment, credit. </li></ul><ul><li>5. Linking up ALM to future Risk Management Strategies. </li></ul>
  37. 37. Interest Rate Risk Management <ul><li>Interest Rate risk is the exposure of a bank’s financial conditions to adverse movements of interest rates. </li></ul><ul><li>Though this is normal part of banking business, excessive interest rate risk can pose a significant threat to a bank’s earnings and capital base. </li></ul><ul><li>Changes in interest rates also affect the underlying value of the bank’s assets, liabilities and off-balance-sheet item. </li></ul>
  38. 38. Interest Rate Risk <ul><li>Interest rate risk refers to volatility in Net Interest Income (NII) or variations in Net Interest Margin(NIM). </li></ul><ul><li>Therefore, an effective risk management process that maintains interest rate risk within prudent levels is essential to safety and soundness of the bank. </li></ul>
  39. 39. Sources of Interest Rate Risk <ul><li>Interest rate risk mainly arises from: </li></ul><ul><ul><li>Gap Risk </li></ul></ul><ul><ul><li>Basis Risk </li></ul></ul><ul><ul><li>Net Interest Position Risk </li></ul></ul><ul><ul><li>Embedded Option Risk </li></ul></ul><ul><ul><li>Yield Curve Risk </li></ul></ul><ul><ul><li>Price Risk </li></ul></ul><ul><ul><li>Reinvestment Risk </li></ul></ul>
  40. 40. Measurement of Interest Rate Risk <ul><li>Gap Analysis - Simple maturity/re-pricing Schedules can be used to generate simple indicators of interest rate risk sensitivity of both earnings and economic value to changing interest rates. </li></ul><ul><li>- If a negative gap occurs (RSA<RSL) in given time band, an increase in market interest rates could cause a decline in NII. </li></ul><ul><li>- conversely, a positive gap (RSA>RSL) in a given time band, an decrease in market interest rates could cause a decline in NII. </li></ul>
  41. 41. Measurement of Interest Rate Risk <ul><li>Duration Analysis: Duration is a measure of the percentage change in the economic value of a position that occur given a small change in level of interest rate. </li></ul>
  42. 42. THANK YOU

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