Alm objective & scope and other related matters

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Alm objective & scope and other related matters

  1. 1. ASSET LIABILITY MANAGEMENT OBJECTIVE & SCOPE AND RELATED MATTERS
  2. 2. PROPOSED COVERAGE AN OVERVIEW OFTHE OBJECTIVES AND SCOPE OF ALM ALM POLICY ALCO OPERATIONAL ASPECTS REPORTS & OTHER RELATED MATTERS
  3. 3.  WHAT IS ALM? WHAT IS BALANCE SHEET? WHAT IS BALANCE SHEET MANAGEMENT?
  4. 4.  WHAT IS BANKING? THE TRADITIONAL DEFINITION THE MODERN DEFINITION BANKING IS A RISKY BUSINESS BUT RISK IS THE BUSINESS OF BANKING
  5. 5. RISK REVISITED WHAT IS RISK? SIMPLY PUT RISK CAN BE DEFINED AS THE POSSIBILITY / PROBABILITY OF LOSS THE OTHER NAME FOR RISK IS, “OPPORTUNITY”
  6. 6.  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
  7. 7. ALM FOCUS Asset Liability ManagementInterest rate risk Liquidity risk management management
  8. 8. 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
  9. 9. 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
  10. 10. 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
  11. 11. 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
  12. 12.  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
  13. 13. 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
  14. 14.  ALM GUIDELINES RBI CIRCULAR DATED APRIL 15, 2002 ISSUED TO ALL SCHEDULED UCBs SCHEDULED UCBs REQUIRED TO PUT IN PLACE AN EFFECTIVE ALM SYSTEM
  15. 15.  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
  16. 16.  TO BEGIN WITH ATLEAST 60% COVERAGE OF LIABILITIES & ASSETS – REMAINING 40% ON ESTIMATES 100% COVERAGE BY APRIL 1, 2003
  17. 17. ALM – THE PILLARS  THE THREE PILLARS OF ALM  ALM INFORMATION SYSTEMS  ALM ORGANISATION  ALM PROCESS
  18. 18. ALM INFORMATION SYSTEMS MIS – INFORMATION AVAILABILITY, ACCURACY, ADEQUACY AND EXPEDIENCY
  19. 19. ALM ORGANISATION STRUCTURE AND RESPONSIBILITIES LEVEL OF TOP MANAGEMENT INVOLVEMENT
  20. 20. ALM PROCESS RISK IDENTIFICATION RISK MEASUREMENT RISK MANAGEMENT RISK POLICIES AND PROCEDURES, PRUDENTIAL LIMITS AND AUDITING, REPORTING & REVIEW
  21. 21. 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”
  22. 22. LIQUIDITY RISK  HOW DOES IT ARISE?  MISMATCH IN THE TIMING OF INFLOWS AND OUTFLOWS
  23. 23. 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
  24. 24.  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
  25. 25. OBJECTIVES MEETING THE STATUTORY PRESCRIPTIONS MEETING INTERNAL REQUIREMENT OF FUNDS FOR LIABILITY PAYMENTS DISBURSEMENTS MINIMISING THE COST OF CARRY & AVOIDING FIRE SALE OF ASSETS
  26. 26.  IMPORTANCE OF LIQUIDITY IMPACT OF LIQUIDITY
  27. 27. MANIFESTATIONS OF LIQUIDITY RISK FUNDING RISK TIME RISK CALL RISK
  28. 28. THE TRADE OFF EARNINGS Vs LIQUIDITY THE PRICE OF LIQUIDITY. THE IMPACT ON NIM
  29. 29. 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
  30. 30. 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
  31. 31. ALCO CRUCIAL ROLE A VERY IMPORTANT COMMITTEE CONSISTS OF SENIOR MANAGEMENT INCLUDING THE CEO CHIEFS OF INVESTMENT, TREASURY, CREDIT & PLANNING
  32. 32.  TAKES A VIEW ON LR & IRR ALM SUPPORT GROUPS -DEDICATED STAFF - SHOULD BE RESPONSIBLE FOR ANALYSING, MONITORING & REPORTING THE RISK PROFILE TO ALCO
  33. 33.  RESPONSIBLE FOR BALANCE SHEET PLANNING BEHAVIOURAL PATTERN NET BORROWING – CAP DRI DEPOSITS COMMITTED LINES OF CREDIT
  34. 34.  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
  35. 35. 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
  36. 36. PRUDENTIAL LIMITS - ALCO’S ROLE MAXIMUM CUMULATIVE OUTFLOWS ACROSS ALL TIME BANDS CAPS ON SINGLE / GROUP EXPOSURES, INDUSTRY-WISE EXPOSURES ETC.
  37. 37. ALM POLICY THE MAIN INGREDIENTS
  38. 38. 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
  39. 39. 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
  40. 40. REPORTS STATEMENT OF INTEREST RATE SENSITIVITY – QUARTERLY TO MONTHLY – 1/4/2003 SHORT TERM DYNAMIC LIQUIDITY STATEMENT – EACH REPORTING FRIDAY
  41. 41.  REQUIREMENTS OF OVERSIGHT
  42. 42.  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
  43. 43.  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
  44. 44. -THANK YOU-

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