Asset liability management (ALM) refers to managing a portfolio of assets and liabilities to maximize long-term profitability and shareholder returns while maintaining safety and liquidity. It involves acquiring and allocating funds to ensure adequate liquidity and profitability at minimal risk. ALM aims to meet liquidity needs, use an optimal asset mix, match asset and liability maturities over time, and control interest rate risk. An asset and liability committee (ALCO) oversees ALM and risk management by developing policies, executing ALM strategies, maintaining analytical tools, and reviewing financial forecasts.

1. ALM

2. Asset liability Management
• ALM refers to management of portfolio of
assets and liabilities(volumes, mixes,
maturities, yields and costs) in order to
maximize profitability and shareholders
earning over long term with safety and
liquidity considered.
• Responsible for acquisition and allocation of
fund to ensure adequate liquidity, max.
profitability and min. risk.

3. Objective
• Planning to meet the liquidity needs
– Making fund available at competitive price
– Proper mix of fund
– Allocation of fund to high profitable avenue
• Arranging maturity pattern of asset & Liability
– Matching the asset and liability over different time
bond
• Controlling the interest rate

4. Strategy to attain objective
• Spread management
– Reducing cyclical rate & stabilizing the earning over long term
– Predicting the rate changes and planning to face
– Balancing default risk against benefit
– Ensuring steady and controlled growth
• Gap management
– Difference b/w asset and liability due to change in interest rate.
– Gap b/w Rate sensitive asset(RSA) or Rate sensitive Liability(RSL)
A) RSA>RSL= Positive Gap
B) RSL>RSA= Negative Gap
C) RSL=RSA= Zero Gap
– Identifying and matching the asset and liability over time bond
• Interest sensitivity Analysis
– It concern with impact of gap on bank’s overall earning
– Separating fixed and variable interest rate components
– Listing assumption regarding rate, volume & mix of projected portfolio.

5. Prerequisite for ALM
• Volatility of interest rate
• Changing deposit mix
• Increasing operating expenses
• Changing asset composition
• Enhanced significance of capital adequacy
consideration
• Increasing regulatory prescription
• Putting in place appropriate technology as DSS.

6. Asset and liability committee(ALCO)
• ALCO is responsible for ALM & Risk
management
• It is focal point for the coordinating the
activities of bank to accomplish operating
objective.

7. Activities of ALCO
• Develop and maintain asset/liability
management policies/process/procedures
• Manage and execute ALM strategy
• Maintain analytic tool and management
system necessary for ALCO to fulfill its role.
• Reviews the annual budget for forecast of
financial statement.
• Document current ALM strategy.