104266109 asset liabil managemnt hdfc

7/28/2019 104266109 Asset Liabil Managemnt Hdfc

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INDEXSL.N OPAGE NO1. INTRODUCTION OF ALM 32. REVIEW OF LITERATURE 93. COMPANY PROFILE 364. ALM IN BAJAJ 565.CHAPTERDATA ANALYSIS & INTERPRETATION586. CONCLUSIONS & FINDINGS 707. SUGGESTIONS 718. GLOSSARY 729. BIBLIOGRAPHY 73

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INTRODUCTION________________________________

Introduction of ALM The Crux The Scope of ALM In Sight View The Objectives of the Study Need of the Study Methodology Limitations of the Study

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INTRODUCTIONThe composition of assets and liabilities largely

decide the solvency, liquidity and profitability of acorporate entity, more so that of a financial institution.The components of the liabilities determine the cost offunds. The mix of the assets influences the return oninvestment. Therefore the asset liability managementassumes great importance; also, it is absolutely necessaryto prevent the Asset - liability mismatch, both in term ofmaturity (tenure) and relative costs (minimum or interestdifferential) particularly in the control of increasingpressure on margins. In the case of state financialcorporation, the instrumentality of Business Plan andResources Forecast (BPRF), and effective treasurymanagement techniques can be, gainfully utilized to make

correction in the existing imbalances in the resource mixand the avoidable misalignments between the profile orliabilities and the portfolio of assets. While BPRF isintroduced at the instance of IDBI & SIDBI.

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THE CRUX :The Asset - Liability management broadly deals withboth sides of the balance sheet. It is primarily concerned


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with the market risk that arises from a financialinstitutions structural position. These are interest rate andliquidity risks. The interest rate risk arises from thepossibility of change in profits caused by fluctuations ininterest rank. The delay in recoveries, a principle cause ofliquidity risk, leads to possibility.

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Opportunities and damage due to honoring paymentcommitments. Both these risks are obviously the result ofmismatch between the Financial Institutions / Banks asAssets and Liabilities. In case of banks of FinancialInstitutions, the ALM positions are relatively liquid. Usuallythe banking institutions hold the assets and liabilities untilthey mature. This practice of course is changing of late. Itis increasingly becoming to bundle banking products suchas loans into marketable securities and then sell them ortrade them with other banks as well as other traditionaland new players in the financial markets.This is especially true of asset-based securities i.e.,mortgage loans, securitization is a new phenomenon inthe Indian context. But it has a vast scope. It can make ormm the future of a financial institution. The stability,

profitability, growth and image of Financial Institutionslargely depend upon the ability and skill with which it canconduct its ALM.

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THE SCOPE :ALM in relation of SFCs covers a wide amount of bothsources and applications of funds. The drying up of someof the conventional sources, the choice of the basket,rising cost of funds available and the associated stringentconditions, growing competition for the access to thesources and the need for arresting the erosion of net

worth are the main challenges in managing the liabilities.On the assets side, the key issues are the resourceallocation, the assets portfolio-mix, the yields, therecoveries, NPA management, writes off policies andabove all the market and credit risk management.

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INSIGHT (Capacity of Understanding Hidden Truth)It is true in all cases, simply based on common sense,no profound wisdom is necessary to know and appreciatethis fundamental principle of financial science. However,wisdom lies in understanding the inter-relationship

between categories of assets and their interface withliabilities. It is desirable to synchronize the profiles ofassets with the counterparts among liabilities. Truebalancing involves intelligence matching risk in mappingand contingency arrangements.

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OBECTIVES OF THE STUDY:1. To know how ALM is done at APSFC.


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2. To study the procedure adopted for managing ALM inAPSFC.3. To understand the problems involved in maintainingand managing ALM.4. To learn the liquidity risk management and analysis.5. To learn the-interest rate risk analysis andmanagement.6. To get know various schemes and activities of APSFC.

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NEED FOR THE STUDY:In the event of highly volatile interest rates andliquidity crisis, Financial Institutions/banks face theproblem of real valuation of their assets and liabilities.This Mismatch of assets and liabilities may produced aneffect on calculation of real worth of the business. Thereare some methods adopted by banks/financial institutionsin order to cover the problems of liquidity mismatch andinterest rate risk. The present study focused such

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measures taken by APSFC for its Asset - Liability

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METHODOLOGY OF THE STUDY:The study of liquidity risk analysis and interest rate riskanalysis and management is based on:1. Primary Data Collection2. Secondary Data CollectionPRIMARY DATA COLLECTIONThe sources of primary data collection has beengathered by interacting with - Chief Manager of ALM Cell

Resource Person, of ALM CellChief Manager of Finance & AccountingDepartmentSECONDARY DATA COLLECTIONIt was collected from books regarding journals,banking, and magazines containing relevant informationabout ALM. The secondary data collected was tounderstand how effectively APSFC carries out ALM

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management.

The other main sources of Secondary Data:Annual reports of APSFC Brochures of APSFCRBI guidelines for ALM management Indian Financial System By 'M. Y.KHAN'Asset Liabilities management by different authorsLIMITATIONS OFTHE STUDY


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In spite of utmost care taken for the smooth conduct ofstudy while preparing this project; this report suffers fromcertain setbacks.1. This is the study conducted with in short period, so itmay not be covering all the aspects in detail.2.The study has made an attempt for evaluating the

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performance of APSFC in managing liquidity riskmanagement and interest rate risk management.3.Due to limitations of the sources the data collectioncould not be adequate.

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REVIEW OFLITERATURE

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Review of Literature ALM ALM Pillars

ALM Process ALM Information System Composition of ALCo Committee of Directors Definition of Risk Identification of Risk Risk Analysis Components of Risk Management Control Risk Risk in Financial Institutions Management of Liquidity RiskManagement of Interest

Risk Analysis________________________________

Gap Analysis Duration Analysis Trend Analysis Ratio Analysis Limitations of AnalysisREVIEW OF LITERATUREASSETS LIABILITY MANAGEMENT (ALM)Asset - liability management practices which effect from

April I, 1999. While guidelines on management of creditrisk, market risk and operational risk will be issued lateron. The RBI has issued guidelines for the introduction ofAsset - liability management (ALM) as a part of the riskmanagement and control system in banks. They areintended to form the basis for initiating collection,compilations and analysis of dates required tu support theALM System.

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Over the last few years, the Indian Financial Systemmarkets have witnessed vide ranging changes at a fastpace. Intense competition for business involving both theassets and liabilities together with increasing volatility inthe domestic interest rates as well as foreign exchangerates, has brought pressure on the management of banksto maintain a good balance among measures. The bankmanagement has to base their business decision on adynamic and integrated risk management system andprocess, driven by corporate strategy. The banks areexposed to several major risks in the course of thebusiness credit risk, interest rate risk, foreign exchangerisk, and equity/commodity price risk. Liquidity andOperational risks. It is against this background that theRBI guidelines relating to AL:!v1 focus on interest rate andliquidity risk-management system in banks, which formpart: of the ALM function. The initial thrust of the ALMfunction would be to enforce the risk managementdiscipline that is, managing offer assessing the riskinvolved. The objective of good risk Managementprograms should be that their programs evolve into astrategy tool for bank management. In the normal course,Financial Institutions are exposed to credit and market

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risks in view of the asset liability transformation. Withliberalization in Indian Financial markets, over the last fouryears and growing integration of domestic markets andthe entry of MNC's for meeting the credit needs of notonly the corporate but also the retail segments, the risksassociated with Financial Institutions operations havebecome complex and large, requiring

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strategic management. Financial Institutions are nowoperating in a fairly deregulate 1. environment and arerequired to determine interest rates on deposits, they canalso offer deposits prescribe by the R 131: they can alsooffer advances on dynamic basis. The interest rates oninvestments of 1:1 in government and other securitiesare also now market related. Intense competition forbusiness involving both assets and liabilities has broughtpressure on the management of Financial Institutions tomaintain a good balance among spreads, profitability andlong-term liability. Imprudent liquidity management canput Financial Institutions earnings and reputation at greatrisk. The management of Financial Institutions have to

base their business decisions on a dynamic and integratedrisk management system and process driven by'corporate strategy, Financial Institutions are exposed toseveral major risks in the course of their business; creditrisk, interest rate risk, equity/commodity price risk,liquidity risk and operational risk. It is, therefore,important that Financial Institutions introduce effectiverisk measure management systems that address theissues relating to interest rate and liquidity risks.Financial institutions need to address these risks in a


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structural manner by upgrading their risk management andadopting more comprehensive asset-liability management(ALM) practices than has been done hitherto. ALM, amongother functions, is also concerned with risk management andprovides a comprehensive and dynamic framework formeasuring, monitoring and managing liquidity and interestrates and equity and commodity price risks of majoroperators in the financial system, which needs to be closelyintegrated with the Financial Institutions business strategy. Itinvolves assessment of various types of risks and altering theasset-liability portfolio in a dynamic order to manage risks.The RBI guidelines relate to interest rate and liquidity risksmanagement system in Financial Institutions, which formparts of the Asset -liability management (ALM) function. Theinitial focus of the ALM function would be to enforce the riskmanagement discipline that is managing business afterassessing the risks involved. The objective of good riskmanagement systems should be that these systems wouldevolve into a strategic tool for financial institution management.

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The ALM Process rests in these pillars1. ALM Information SystemA. Management Information SystemsB.Information availability, accuracy. adequacy andexpediency2. ALM OrganizationA.Structure and ResponsibilitiesB.Level of top Management involvement3. ALM ProcessA. Risk ParametersB. Risk identification

C.Risk MeasurementD.Risk ManagementE. Risk policies and tolerance levels.ALM INFORMATION SYSTEMALM has to support by a management philosophy that

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clearly specifies the risk policies and tolerance limits. Thisframework needs to be built on sound technology with thenecessary information system as backup. Thusinformation is the key to the ALM process. It however,recognized that varied business profiles of Financial

Institutions in the public and private sectors do not makethe adoption on a uniform ALM system for all FinancialInstitutions feasible.

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These are various method prevalent worldwide formeasuring risks. These range from the simple gapstatement to extremely sophisticated and dam intensiverisk adjusted profitability measurement methods.


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However, though the central element for die entire ALMexercise, is- the availability of adequate and accurateinformation with expedience and the systems existingsome of the major Financial Institutions do not generateinformation in the manner required for ALM. Collectingaccurate data in a timely manner would be the biggestchallenge before the NBFC's particularly those lacking full-scale computerization. However, the introduction of abase information system of risk management, riskmeasurement and monitoring has to be addressedurgently.Financial Institutions have heterogeneous organizationstructures, capital base, asset size, management profiles,business activities and geographical spread. Some ofthem have a large number of branches andagents/brokers, where as some have unitary offices.Considering the large number of branches and the lack ofadequate support system to collect information requires

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for the ALM. Which analysis information on the basis ofresidual maturity and reprising pattern of liabilities andassets, it would take time for Financial Institutions in the

present state, to get the requisite information. Withrespect to investment portfolio and funds management, inview of the centralized nature of the functions, it wouldrefined overtime as the Financial Institutions managementgains experience of conduction business within an ALMframework the spread of computerization will also helpFinancial Institutions in accessing data.The business issues than ALCO would consider, inter,should include product pricing for both deposits andadvances, desired maturity profile and mix of theincremental assets and liabilities, prevailing interest ratesoffered by other peer NBFCs for similar services/productsand so on. In addition to monitoring the risk levels, the

ALCO should review the result of and progress inimplementation of the decision made in the previousmeeting. The ALCO should also articulate the currentinterest rate view of the Frs and base its decision forfuture business strategy on this view. With respect tothefunding policy, for instance, its responsibility would be todecide on the source and mix of liabilities or sale of

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assets. Towards this end, it should develop a viewregarding the future direction of interest rate movementsand decide on funding mixes between fixes vs. floating

rate funds, wholesale vs. retail deposits, money marketsvs. capital markets, funding domestic vs. foreign currencyfunding, and so on. Individual Financial Institutions shoulddecide the frequency of holding their ALCO meetings.COMPOSITION OF ALCOThe size (number of members) of ALCO would dependon the size of the each institution, business mix andorganizational complexity. To ensure commitment of theTop management and timely response to market:dynamics the CEO/CMD/President/Director should head


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the committee. The chief of investment, credit resourcesmanagement/planning funds management/treasury.International Business and Economics research can bemembers of the committee. In addition, the head of thetechnology division should also be an invitee building upof MIS and related computerization. Large FI may evenhave sub-committee and support groups.

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COMMITTEE OF DIRECTORSThe management committee or any other specificcommittee constituted by the board of directors shouldoversee the implementation of the system and review itsfunction periodically.

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The scope of the ALM functions can be described asfollows:1. Liquidity risk management2. Management of market risks3. Funding and capital planning4. Profit planning and growth projection and

5.Forecasting and analyzing 'what if scenario' andpreparation of contingency plans.DEFINITION OF RISKRisk is the potential loss of an asset due to differentfactors.IDENTIFICATION OF RISKALM in a commercial bank of Financial Institutions is todecide what should be the risk measurement parametersthat the management would need to focus on. Theappropriateness of risk management parameters depends

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upon the degree of volatility in the operatingenvironment, availability of supporting data and expertisewithin bank/Financial Institutions and the expected marketand business developments. Generally, these are twomajor parameters, which banks/Financial Institutions allover the world employ to measure their balance sheetrisks viz., risk to the net interest income and market valueportfolio equity.While the former seeks to measure the risk to theimmediate profits that emanate from cash flowmismatches occurring in the accounting years, the lattermeasures the risk arising out of the maturity mismatches

in its assets and liabilities over the future years. Thesetwo parameters together attend toMEASURING THE RISKDue to difficulty in measuring interest rate risk and alsothe complexes the present in the understanding of theconcept measurement of interest rate risk assumesgreater importance in the ALM function. It has observedthat banks risk exposure depends upon the volatility ofinterest rates and asset prices in the financial market, theFinancial Institutions maturity/gaps, the duration to


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measure and interest rate elasticity of its assets andliabilities and the liability of the management to measureand control the exposure. In the management of FinancialInstitutions assets and liabilities, interest riskmanagement lays the foundation for a good ALM.RISK ANALYSISInterest rate risk can be analyzed in the following fourmethods.1.Gap Analysis2.Duration Analysis3. Value at risk4. SimulationGap analysis is the most important basic techniqueused in analyzing interest rate risk. It measures thedifference between financial institution assets andliabilities and off balance sheet position which will be repriced or will mature within a predetermine period. (Gap isthe difference between rate sensitive assets minus ratesensitive liabilities)

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COMPONENTS OF RISK MANAGEMENTRisk management may be defined as the process ofidentifying and controlling risk. It is also described at times asthe responsibility of the management to identify measure,monitor and control various items of risk associated withFinancial Institutions position and transaction. The process ofrisk management has three clearly identifiable steps, viz., riskidentification, risk measurement and risk control.CONTROL RISKAfter identification and assessment of risk factor, the

next step involved is risk control, the major alternativesavailable in risk control are1. Avoid the exposure2.Reduce the impact by deducing frequency ofseverity3. Avoid concentration in risky area4. Transfer the risk to another party5.Employ risk management instruments to cover therisks

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RISK IN FINANCIAL INSTITUTIONS

Risks in financial institutions are many and a broadlyclassifies into three categoriesThey are as follows:1. Balance sheet risks2. Transaction risks3.Operating and liquidity risk

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I. BALANCE SHEET RISKThe balance sheet generally arise out of the mismatchbetween currency, maturity and interest rate structure ofassets and liabilities resulting in1. Interest rate mismatch risk2. Liquidity risk3. Foreign exchange risk1. INTEREST RATE MISMATCH RISKIt is the impact of the change in interest rate on the netinterest income of the bank and value of the assets andliabilities. For example,(a)When fixed deposits are accepted on the fixed ratebasis and the amount is lent on floating rate basis,any download revision of interest rate on advanceswill result in the reduction of income stream for thebank Financial Institutions. But interest rate ondeposits can be changed only when they fall due orpre closed by the depositor.(b)A bonds (investments asset of the bank) price fallsdown as interest rate rise.

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2. LIQUIDITY RISKLiquidity is the potential inability to meet thebanks/Financial Institutions as they become due. It riseswhen Financial Institutions are unable to generate cash tocope with the declines in deposits or increase in loans. Itoriginates the mismatches in the maturity of assets andliabilities as well as uncertainty of future cash flows.3.FOREIGN EXCHANGE RISKThe risk that a long (over bought) or short (over sold)position in the foreignII. TRANSACTIONS RISKSThe transaction risk essentially involves two types of risks.

They are1. Credit risk2. Price Riskl. MARKET RISKMarket risk may be defined as the possibility of the lossto financial institution caused by changes in marketvariables. The financial institution defines market risk asthe risk that the value on and off balance sheet position

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will be adversely affected by movements in the equity andinterest rate of markets, currency, exchange rate and

Commodity prices.2. ISSUER-RISKThe financial strength and standing of theinstitute/sovereign that has issued the instrument canaffect price as well as reliability. The risk involved with theinstruments issued by corporate bodies would be an idealexample.3. INSTRUMENT RISKThe nature of instrument creates risks for the investor.With many hybrid instruments in the market and with


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fluctuations in market conditions, the prices of variousinstruments ma react differently form one another.

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MANAGEMENT OF LIQUIDITY RISK AND INTERESTRATE RISKLIQUIDITY RISKMeasuring and managing liquidity needs are vital forthe effective operations of financial institution. Byensuring a Financial Institutions ability to meet itsliabilities as then become due liquidity management canreduce the probability of an adverse situation developing.The institution of liquidity transcends individualinstitutions, as liquidity shortfall in one institution canhave repercussion on the entire system. The FinancialInstitutions management should measure not only theliquidity position of Financial Institutions 011 an ongoingbasis but also examine how liquidity requirements arelikely to evolve under different assumptions. Experienceshow that assets commonly considered as liquid, likegovernment securities and other money marketinstrument, could also become liquid when the marketand players are unidirectional. Therefore, liquidity has to

tracked through, the use of the maturity or cash flowmismatches. For measuring and managing net fundingrequirements, the use 01' maturity ladder and calculation

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of cumulative surplus or deficit of funds at selectedmaturity dates are adopted as a standard tool.The time buckets are distributed as under:Less than one monthOver 1 month to 3 monthsOver 3 months to 6 monthsOver 6 months to 12 months

Less than or equal to 1 yearMore than 1 year and up to 3 yearsMore than 3 years and up to 5 yearsMore than 5 years and up to 7 yearsMore than 7 years and up to 10 years

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Financial Institution holding public deposits are requiredto invest up to a prescribed percentage (15 % as on date)of their public deposits in approval securities, in terms ofthe liquid asset requirements of sections 45-IB of the RBIAct, 1934. Financial Institutions ,Fi' required to invest up

to 80 percent of their deposit in the manner prescribed inthe RB 1 directors issued under the act, as detailed in anearlier section. There is no such requirement for FinancialInstitutions that are not holding public deposit~. Thusvarious Financial Institutions including SFCs would beholding in their investment portfolio, securities that couldbe broadly classifiable as 'mandatory securities' (underobligation of law) and' non-mandate securities'. In case ofFinancial Institutions not holding public deposits, all theinvestment and in GISC.


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Financial Institutions holding public deposits, thesurplus securities would fall in the category of nonmandatory securities.Financial Institutions holding public deposits may placemandatory securities in any time bucket suitable tothem. The listed non-mandatory securities may be placed

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in any of the less than one month, over 1 month to 3months, "Over 3 months to 6 months" and "over () monthsto 12 months" buckets, depending upon the defeasanceperiod proposed b Financial Institutions.Unlisted non-mandatory securities (e.g., equity shares,securities without a fixed term of maturity and so on) may beplaced in the "more than 10 years" buckets, where asunlisted non-mandatory securities having a fixed term ofmaturity may be placed in the relevant time bucket, as perresidual maturity. The mandatory securities and listedsecurities may be marked to market for the purpose of theALM System. Unlisted securities may be valued as per RBIsprudential norms directions. The statements of structuralliquidity may be prepared by placing all cash inflows andoutflows in the maturity ladder according to the expected

timing of cash flows. A maturity liability is cash outflows whilea maturity asset is a cash inflow whileLiquidity Problems may be created due to any of thefallowing reasons:a) Funding Risk:Failure to replace net outflow of funds weather due towithdrawal of retail deposits on non-renewal of wholesale

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deposits.b) Time Risk:Non-receipt of expected inflow of funds e.g. Where

borrowers fails to meet their commitments besidesirregularly in advances which present delay in fulfillingcommitments by borrowers the growth of non-performingassets also leads to immediate liquidity problem. Non-performing assets cut into profitability as well. ALMprocess if it fails to take NPA problems cannot succeed.c) Call Risk:It represents sudden demand for money owing tocontingent become due. If contingent liabilities startdeveloping the may create huge drain on liquidity.d) Opportunity Risk:A Financial Institution can only grow if its customers arealso prospering (succeeding) request for funds from

important and valuable clients can only be profitablyserviced if adequate liquidity is available.

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Approaches to control Liquidity1.Maintenance of adequate liquidity remains sinquononfor banks are other financial institutions.2.


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Once maturity of assets exceeds those of liabilitiesthere is inevitable liquidity risk.3. Minimum criteria to remain liquid is the ability both tomeet commitments when due and to undertake newtransactions when desirable.4.Confidence to rise, mobilize or, roll over the depositsfrom existing clients. This confidence may be found tobe misplaced when liquidity prevails as existingclients at that stage may be in the grip of liquiditycrisis.5.To avail of Export Refinance Facility (ERF) andCollateralized Lending Facility (CLF) and theAdditional Collateralized Lending Facility (ACLF).6.Financial Institutions should make a number ofassumptions according to their Asset -liability profiles,while determining the tolerance levels. FinancialInstitutions may take into accounts all relevantfactors based on their asset-liability base, nature of

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business future strategy and so on. The tolerancelevels should be determines keeping all necessaryfactors in view and further refined with experiencegained in liquidity management.

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Currency Risk:Floating exchange rate arrangement has brought in itswake pronounced volatility, adding a new dimension tothe risk profile of Financial Institutions balance sheetshaving foreign assets and liabilities. The increased capitalflows across free economics, following deregulation, have

contributed to increase in the volume of transactions largecross border flows together with volatility has renderedFinancial Institutions balance sheet unable to exchangerates.Interest Rate Risk:Deregulation of interest rates and the operational flexibility,given to financial institution in pricing most of the assets andliabilities imply the need for the financial system to hedge theinterest rate risk, defined as the risk where changes in marketinterest rates might adversely affects on Financial Institutionsfinancial condition. The change in interest rates affectsFinancial Institutions in a larger way. The immediate impact ofchanges in interest rates is on Financial Institutions earnings

(i.e., reported profits), by changing its net interest income(NIT). A long term impact of changing interest rates is inFinancial Institutions market the of Equity (MVE) or net worth,

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as the economic value of Financial Institutions assets, liabilitiesand off balance sheet positions yet affected due to variousvariations in market interest rates. The interest rare risk whenviewed form thee tow perspectives is known as the "earning


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perspective" and "economic value perspective" respectively.The risk from the earnings perspective can be measured aschanges in the net interest income (NIT) or net interest margin(NIM). These are many analytical techniques for measurementand management or interest rate risk, to begin with thetraditional gap analysis is considered as a suitable method tomeasure the interest rate risk. It is the intention of the RBI tomove over to modem techniques. Financial Institutions shouldmake a number if assumptions according to their asset liabilityprofiles. While determining the tolerance levels, FinancialInstitutions may take into account all factors based on theirasset liability base nature of business, future strategy and soon The tolerance levels should be determined keeping allnecessary factors in view and further refined with experience

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In order to enable Financial Institutions to monitor theirshort-term liquidity on a dynamic basic over tine horizonspanning from less than one month, over 1 to 3 monthsFinancial Institutions should estimate their Short termliquidity profiles on the basis of business projects andother commitments for planning purpose.Interest rate risk gaps in time buckets:

Over 1 month to 3 monthsOver 3 months to 6 monthsOver 6 months to 12 monthsLess than or equal to 1 yearMore than 1 year and up to 3 yearsMore than 3 years and up to 5 yearsMore than 5 years and up to 7 yearsMore than 7 years and up to 10 yearsMore than 10 years

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The gaps or mismatch risk can be measured by

calculation gaps over different time interval, as on a givendata. Gap analysis measures mismatch between interestrate sensitive liabilities and rate sensitive assets(including off-balance sheet position).

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Asset and Liabilities is normally classified asinterest sensitive if:1.With in the time interval under considerations, thereis a cash flow.2.The interest rate resets/reprises contractually duringthe interval.

3. Dependent on the RBI changes in interest rate/bankrates.4.It is contractually pre payable or withdrawn beforethe state maturities.5.Grouping rate sensitive assets and liabilities and ofthe-balance sheet positions into time bucketaccording to residual maturity or next pricing periodshould regenerate the gap report.6.The gap is the difference between the rate sensitive


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assets (RSA) and rate sensitive liabilities (RSL) foreach time bucket. The positive gap indicates that ishas more RS than RSL where as the negative gapindicates that I has more RSL than RSA.7.The gap reports indicate the whether the institution isin a position 'LO benefit rising interest rates by having

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a position gap (rs3>rsl) or weather it is in position tobenefit from declining interest rates by negative gap(rsl>rsa). The gap a therefore be used as a measureof interest rate sensitive.

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Sources of Interest Rate Risk:As financial intermediaries, financial institutionsencounter interest rate risk in several ways. These can bedescribed as follows:a) Re-Pricing Risk: This risk arises from holding assetsand liabilities with different principal amounts, maturity orre-pricing dates, there by creating exposure to

unexpected changes in the interest rates.b) Yield Curve Risk: Re-pricing mismatches can alsoexpose a bank to changes in the slope and shape of theyield curve. Yield curve risk arises when unanticipatedshifts of the yield curve adverse effects on a banksincome or underlying economic value. For instance, theunderlying economic value of a long position in 10 yearsgovernment bonds hedged by a short position in 5 yearsgovernment notes could declare sharply if the yield curvesteepens, even if the position is hedged against parallelmovements in the yield curve.c) Basis Risk: Another important source of interest rate

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risk (commonly referred as basis risk) arises fromimperfect correlation in the adjustment of the rates andpaid on different instruments with otherwise similar re-pricing characteristics. When interest rates change, theedifferences can give risk to unexpected changes in thecash flows arid earnings spread between assets andliabilities.d) Option Risk: An additional and increasingly importantsource of interest rate risk arises from the optionembedded in many Financial Institutions assets andliabilities. Formally, an option provides the holder that

right, but not the obligation, to buy or sell in some mannerafter the cash flow of an instrument of financial contract.

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GENERALThe classification of various assets and liabilities intodifferent time - bucket for preparation of gap reports(liquidity and interest rate sensitive) Financial Institutionsthat are better equipped to reasonably estimated the


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behavioral pattern of various components of assets andliabilities, on the basis of the past data/empirical studiescould classify them in the appropriate time-buckets,subject to approval from the ALCO board of directors. Acopy of the note approved by the ALCO may be sent tothe registered office of the company is located. Thesenotes may contain 'what if scenario' analysis wider variousassumed conditions and the contingency plans to facevarious adverse developments.The present framework does not capture the impact ofpremature closures of deposits and prepayments of loansand advances on the liquidity and interest rate risk profileon Financial Institutions. The magnitude of prematurewithdrawal of deposits at times of volatility in marketinterest rate is quite substantial. Financial Institutionshould therefore evolve a suitable mechanism supportedby empirical studies and behavioral analysis to estimate

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the further behavioral of assets, liabilities and off-balancesheet items to changes in market variable and estimatethe probabilities of the options. A scientifically evolvedinternal transfer pricing model of assigning values on the

basis of current markets rates to funds provided and fundsused is an important component for effectiveimplementation of the ALM system. The transfer pricemechanism can enhance the management of margin, thatis lending or credit spread.The funding or liability spread and mismatch spread. Italso helps centralizing interest rate risk at one place.Which facilities effective control and management ofinterest rate risk. A well defined transfer pricing systemalso provides a nominal framework for pricing of assetsand liabilities.

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There are four different types of analysis:1.Gap Analysis"2. Duration Analysis3.Trend Analysis4. Ratio Analysisl. GAP ANALYSIS:Maturity/pre-pricing schedules can be used to generatesimple indicators of the interest rate risk sensitivity ofboth earnings and economic value to changing interestrates. When this approach is used to asses the interest

rate risk of current earnings. It is typically referred to asgap analysis. Gap analysis was one of the first methodsdeveloped to measure Financial Institutions interest raterisk exposure and continues to be widely used byFinancial Institutions. To evaluate earnings, interest ratesensitive liabilities in each time band are sub traced fromthe corresponding interest rate sensitive asset to produceare pricing gap for that time band. This gap can bemultiplied by as assume change in interest rate to yield anapproximation of the change in the interest rate income


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that would result from such as interest rate movement.The size of the interest rate movement used in theanalysis can be used on a variety of factors, includinghistorical experience. Simulation of potential futureinterest rate movements and the judgment of bankmanagement. A negative or liability sensitive gap occurswhen liabilities exceeds assets (including off-balancesheet positions) in a given time band.This means that an increase in market interest ratescould cause a decline in net interest income. Conversely,a positive or assets-sensitive. Gap implies that theFinancial Institutions net interest rate income coulddecline as a result of decrease in the levels of the interestrates.

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LIMITATIONS OF GAP ANALYSIS:Although gap analysis is a very commonly usedapproach to assessing interest rate risk exposure, it has anumber of shortcomings. First, gap analysis does not take

it account of variation in the characteristics of differentposition with a time band. In particulars all positions within a given time band are assumed to mature or reprisesimultaneously a simplification that is likely to havegreater impact on the precision of the estimates as thedegree of aggregation with in a time band increases,moreover gap analysis ignore differences in spreadsbetween interest rates that could arise as the level of themarket interest rates changes. In addition, it does nottake into account any changes in the timing of paymentsthat might occur as a result of changes in the interest rateenvironment. Thus, it fails to account for differences in thesensitivity of income that may arise form option-related

positions, for these reasons gap analysis provides only arough approximation to the actual change in net interestincome would result from the chosen change in thepattern of interest rates. Finally gap analysis fail tocapture variability in non interest revenues and expenses,potentiality important sources of risk of the current

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income.2. CURRENT ANALYSISA maturity/re-pricing schedule can also used to evaluatethe effects of changing interest rates on Financial

Institutions economic value by applying sensitivity weightsto each time band. Typically, such weights are based onestimates of the duration of the assets and liabilities thatfall into each time and duration give a small change in thelevel of interest rates. Duration may also be defined asthe weighted average of the time until expected cashflows from a security will be receive, relative to thecurrent price of the security. The weights are the presentvalues of each cash flow divided by the current price. Inits simples form, duration measures changes in economic


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value resulting from a percentage change of interest ratesunder the simplifying assumptions that changes in valueare proportional to changes in the level

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of interest rates and that the timing of payments is fixed.Modified duration is standard duration divided by 1+r,where the level of market interest rate is is elasticity. Assuch, it ref1ects the percentage change in the economicvalue of the instrument for a given percentage change inthe economic value of the instrument for a givenpercentage change in 1+r. as with simple duration, itassumes a linear relationship between percentageschanges in value and percentage changes in interest rates/ in other words, modified duration = Macaulay duration/Cl+r), where Macaulay duration = cft(t)/(l+r) /cft/(l+r) to thepower tleft = rupee value of cash flow at time tT = number of periods of time until the cash flow paymentY = periodic yield to maturity of the security generatingcash flow andK = the number of cash flows.3. TREND ANALYSIS

This is a statistical tool with his we can find out theposition of anything in financial institution, I did the trend________________________________

analysis of "cumulative mismatch of last one year aspercentage to working funds", by this, it is possible toknow that how that fluctuation in funds take place in theone year mismatches.4. RATIO ANALYSISThe liquidity ratios are very useful in the liquidity riskmanagement analysis. Because with the ratios we cananalyze "the liquidity positions for the company by taking

the past data and we can interpreter the findings. Here infinancial institution, we should also given by the RBI onthe bank, by observing the limits and of findings we cananalyze as Financial Institutions is with in the limits or not.The ratios, which are used in financial institutions, are

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Current assets/currentliabilitiesTotal loans/ total assetsTotal assets/ totalliabilities

Total advances/totalliabilitiesQuick ratioThe ratios, which helps to find out liquidity position of allfinancial institution.Liquidity and Interest rate analysis:This is the only tool, which is used in the ALM process tomanage the liquidity risk, by doing the gap analysis,Financial Institutions ,can avoid risks and can earn moreprofits, and this is used to analyze the gaps in between


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the inflows and outflows of the statement for everyfortnight. By doing the gap, analysis the FinancialInstitutions can know about in which bucket the risk. Thisgap raised due to the changes in the values of the assets

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and liabilities and changes in their interest rates. Formeasuring and managing net funding requirements theuse of maturity ladder and calculation of cumulativesurplus/deficit of funds at selected maturity data issuggested for adoption by FI. The maturity profile is usedto measure the future cash flows of banks differentbuckets.

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Value At Risk (VOR).VOR is defined as an estimate of potential loss inposition or asset/liability or portfolio of assets liabilitiesover a given holding period at a given level of certainty or

unexpected happening the probability of suffering a loss.BUCKETING:The time columns used in the below statement, arecalled as the time buckets. These buckets are mainlydivided in to three types short - term, medium - term andlong term. Allocating the items of inflows and outflows inthis column is called as bucketing.Over 1 month to 3 monthsOver 3 months to 6 monthsOver 6 months to 12 monthsLess than or equal to 1 yearMore than 1 year and up to 3 yearsMore than 3 years and up to 5 years

More than 5 years and up to 7 yearsMore than 7 years and up to 10 years________________________________

More than 10 yearsTo analyze the statement a person should have to getgrip on the various items or liquidity statement. Variousitems are covered in the statement under the inflow andout flows.

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Methods to bucket:The nature of the each item is different with others. Sofew models are used to find out under which bucket it willcome like residual maturity, behaviouralization.Residual Maturity:This is the type where the item due date is taken as abase to bucket. Based on maturity date and the startingdate of the item time period is calculated. Statementspreparation data should also be considered.Behaviourlization:


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This is the another model which also used for thestatement preparation, behaviourlizaiton means findingout the behavior in the future based in the past data, Forthis, statistical tools should be used like regressionanalysis methods, moving averages, trend analysis andvarious methods are used. In financial institution,behaviorlizaiton is used to various item in them cashcredit is in item.

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COMPANY PROFILE________________________________

The HDFC Bank was incorporated on August 1994 by the name of 'HDFC Bank Limited', with its registered office in Mumbai, India. HDFC Bank commenced operations asa Scheduled Commercial Bank in January 1995. The Housing Development Finance Corporation (HDFC) was amongst the first to receive an 'in principle' approval from the Reserve Bank of India (RBI) to set up a bank in the private sector, as part of the RBI's liberalization of the Indian Banking Industry in 1994.HDFC Bank is headquartered in Mumbai. The Bank at present has an enviable network of over 1416 branches spread over 550 cities across India. All branches are linked on an online real-time basis. Customers in over 500 locations are also serv

iced through Telephone Banking. The Bank also has a network of about over 3382 networked ATMs across these cities.The promoter of the company HDFC was incepted in 1977 is India's premier housingfinance company and enjoys an impeccable track record in India as well as in international markets. HDFC has developed significant expertise in retail mortgageloans to different market segments and also has a large corporate client base for its housing related credit facilities. With its experience in the financial markets, a strong market reputation, large shareholder base and unique consumer franchise, HDFC was ideally positioned to promote a bank in the Indian environment.The shares are listed on the Bombay Stock Exchange Limited and The National Stock Exchange of India Limited. The Bank's

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American Depository Shares ( ADS ) are listed on the New York Stock Exchange (NYSE) under the symbol 'HDB' and the Bank's Global Depository Receipts (GDRs) arelisted on Luxembourg Stock Exchange.On May 23, 2008, the amalgamation of Centurion Bank of Punjab with HDFC Bank wasformally approved by Reserve Bank of India to complete the statutory and regulatory approval process. As per the scheme of amalgamation, shareholders of CBoP received 1 share of HDFC Bank for every 29 shares of CBoP.The merged entity now holds a strong deposit base of around Rs. 1,22,000 crore and net advances of around Rs. 89,000 crore. The balance sheet size of the combined entity would be over Rs. 1,63, 000 crore. The amalgamation added significantvalue to HDFC Bank in terms of increased branch network, geographic reach, and c

ustomer base, and a bigger pool of skilled manpower.In a milestone transaction in the Indian banking industry, Times Bank Limited (another new private sector bank promoted by Bennett, Coleman & Co. / Times Group)was merged with HDFC Bank Ltd., effective February 26, 2000. This was the firstmerger of two private banks in the New Generation Private Sector Banks. As perthe scheme of amalgamation approved by the shareholders of both banks and the Reserve Bank of India, shareholders of Times Bank received 1 share of HDFC Bank for every 5.75 shares of Times Bank.HDFC Bank offers a wide range of commercial and transactional banking services and treasury products to wholesale and retail customers. The bank has three key b


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usiness segments:________________________________

Wholesale Banking Services - The Bank's target market ranges from large, blue-chip manufacturing companies in the Indian corporate to small & mid-sized corporate and agri-based businesses.Retail Banking Services - The objective of the Retail Bank is to provide its target market customers a full range of financial products and banking services, giving the customer a one-stop window for all his/her banking requirements.Treasury - Within this business, the bank has three main product areas - ForeignExchange and Derivatives, Local Currency Money Market & Debt Securities, and Equities. The Treasury business is responsible for managing the returns and marketrisk on this investment portfolio.HDFC Securities (HSL) and HDB Financial Services (HDBFSL) are its subsidiaries.Services offered by the company:Personal BankingAccounts & DepositsLoansCards

ForexInvestments & InsuranceNRI BankingAccounts & DepositsRemittances

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Investments & Insurance Loans Payment Services

Wholesale BankingCorporateSmall & Medium EnterprisesFinancial Institutions & TrustsGovernment SectorAchievements/ recognition:-HDFC Bank was the first bank in India to launch an International Debit Card in association with VISA (VISA Electron) and issues the MasterCard Maestro debit card as well.

2011Financial Express Best Bank Survey 2010-11 - Best in Strength and Soundness and2nd Best in the Private SectorCNBC TV18's Best Bank & Financial Institution Awards - Best Bank and Mr. AdityaPuri, for outstanding finance professionalDun & Bradstreet Banking Awards 2011 - Best private sector bank - SME Financing


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ISACA 2011 award for IT Governance - Best practices in IT Governance and IT SecurityIBA Productivity Excellence Awards 2011 - New Channel Adopter (Private Sector)DSCI (Data Security Council of India) Excellence Awards 2011 - Security in bankFINANCE ASIA Country Awards 2011: India - Best bank, best cash management bank and best trade finance bank

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Asian Banker - Strongest bank in Asia PacificBloomberg UTV's Financial Leadership Awards 2011 - Best bankIBA Banking Technology Awards 2010 - Technology bank of the year, best online bank, best customer initiative, best use of business intelligence, best risk management system and runners up - best financial inclusionIDC FIIA Awards 2011 - Excellence in customer experience2010

Outlook Money 2010 Awards - Best BankBusiness world Best Bank Awards 2010 - Best Bank (Large)Teacher's Achievement Awards 2010 (Business) - Mr. Aditya PuriThe Banker and PWM 2010 Global Private Banking Awards - Best Private Bank in IndiaEconomic Times Awards for Corporate Excellence 2010 - Business Leader of the Year - Mr. Aditya PuriForbes Asia - Fab 50 Companies - 5th year in a row

NDTV Business Leadership Awards 2010 - Best private sector bankThe Banker Magazine - World's Top 1,000 BanksMIS Asia IT Excellence Award 2010 - BEST BOTTOM-LINE I.T. CategoryDun & Bradstreet Banking Awards 2010 - Overall best bank, Best private sector bank, Best private sector bank in SME FinancingInstitutional Investor Magazine Poll - HDFC Bank MD, Mr. Aditya Puri among AsianCaptains of Finance 2010________________

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IDRBT Technology 2009 Awards - IT Infrastructure, Use of IT within the Bank and Runners-up - IT Governance (Large Banks)ACI Excellence Awards 2010 - Highly Commended - Asia Pacific HDFC BankFE-EVI Green Business Leadership Award - Best performer in the banking category


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Celent's 2010 Banking Innovation Award - Model bank AwardAvaya Global Connect 2010 - Customer Responsiveness Award - Banking & FinancialServices categoryForbes Top 2000 Companies - HDFC Bank at 632nd position and among 130 global high performersFinancial Express - Ernst & Young Survey 2009-10 - Best new private sector bank,Best in growth and Best in strengthAsian Banker Excellence Awards 2010 - Best retail bank in India, Excellence in automobile lending, Best M&A integration and technology implementationThe Asset Triple A Awards - Best cash management bank in IndiaEuro money Private Banking and Wealth Management Poll 2010 - Best local bank inIndia (second year in a row), Best private banking services overall (moved up from No. 2 last year)Financial Insights Innovation Awards 2010 - Innovation in branch operations - server consolidation projectGlobal Finance Award - Best trade finance provider in India for 2010

2 Banking Technology Awards 2009 - Best risk management initiative and Best useof business intelligenceSPJIMR Marketing Impact Awards (SMIA) 2010

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Business Today Best Employer Survey - Listed in top 10 best employers in the country2009Business Standard Best Banker Award - Mr. Aditya Puri, MD, HDFC Bank

Fe Best Bank Awards 2009 - Best Innovator of the year award for its MD Mr. Aditya Puri - Second Best Private Bank in India - Best in Strength and Soundness AwardEuro money Awards 2009 - 'Best Bank in India'Economic Times Brand Equity & Nielsen Research annual survey 2009 - Most TrustedBrand - Runner UpAsia Money 2009 Awards - 'Best Domestic Bank in India'IBA Banking Technology Awards 2009 - 'Best IT Governance Award - Runner up'

Global Finance Award - 'Best Trade Finance Bank in India for 2009IDRBT Banking Technology Excellence Award 2008 - 'Best IT Governance and Value Delivery'Asian Banker Excellence in Retail Financial Services - 'Asian Banker Best RetailBank in India Award 2009 '2008


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Finance Asia Country Awards for Achievement 2008 - 'Best Bank and Best Cash Management Bank'CNN-IBN - 'Indian of the Year (Business)'Nasscom IT User Award 2008 - 'Best IT Adoption in the Banking Sector'Business India - 'Best Bank 2008'Forbes Asia - Fab 50 companies in Asia Pacific

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Asian Banker Excellence in Retail Financial Services - Best Retail Bank 2008Asiamoney - Best local Cash Management Bank Award voted by CorporatesMicrosoft & Indian Express Group - Security Strategist Award 2008World Trade Center Award of honour - For outstanding contribution to international trade services.Business Today-Monitor Group survey - One of India's 'Most Innovative Companies'

Financial Express-Ernst & Young Award - Best Bank Award in the Private Sector categoryGlobal HR Excellence Awards - Asia Pacific HRM Congress: - 'Employer Brand of the Year 2007 -2008' Award - First Runner up, & many moreBusiness Today - 'Best Bank' Award2007Dun & Bradstreet American Express Corporate Best Bank Award 2007 - 'Corporate Best Bank' Award

The Bombay Stock Exchange and Nasscom Foundation's Business for Social Responsibility Awards 2007 - 'Best Corporate Social Responsibility Practice' AwardOutlook Money & NDTV Profit - Best Bank Award in the Private sector category.The Asian Banker Excellence in Retail Financial Services Awards - Best Retail Bank in IndiaAsian Banker - Its Managing Director Aditya Puri wins the Leadership AchievementAward for India

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CHAPTER-4________________________________

DATA ANALYSIS AND INTERPRETATIONSELECTED AMC S -BRIEF INTRODUCTION

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Reliance Mutual FundReliance Mutual Fund (RMF) has been established as a trust underthe Indian Trusts Act, 1882 with Reliance Capital Limited (RCL), as theSettler/Sponsor and Reliance Capital Trustee Co. Limited(RCTCL),astheTrustee.RMF has been registered with the Securities & Exchange Board of India(SEBI) vide registration number MF/022/95/1 dated June 30, 1995. Thename of Reliance Capital Mutual Fund has been changed to RelianceMutual Fund effective 11th. March 2004 vide SEBI's letter no.IMD/PSP/4958/2004 date 11th. March 2004. Reliance Mutual Fund wasformed to launch various schemes under which units are issued to thePublic with a view to contribute to the capital market and to provideinvestors the opportunities to make investments in diversified securities.The main objectives of the Trust are:To carry on the activity of a Mutual Fund as may bepermitted at law and formulate and devise variouscollective Schemes of savings and investments forpeople in India and abroad and also ensure liquidityof investments for the Unit holders;

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To deploy Funds thus raised so as to help the Unitholders earn reasonable returns on their savings andTo take such steps as may be necessary from time to time to realizethe effectsKey PersonnelMr. Kana dashy (Chairman),Mr. Aintab jhunjhunwala (MD)Ms sushi methane (Joint M.D).UTI MUTUAL FUND.UTI Mutual Fund is managed by UTI Asset Management

Company Private Limited (Est.: Jan 14, 2003) who has been appointed bythe UTI Trustee Company Private Limited for managing the schemes ofUTI Mutual Fund and the schemes transferred / migrated from UTIMutual Fund.The UTI Asset Management Company has its registered office at :UTI Tower, Gnu Block, Bandar - Karla Complex, Bandar (East),Mumbai - 400 051 will provide professionally managed back officesupport for all business services of UTI Mutual Fund (excluding fundmanagement) in accordance with the provisions of the InvestmentManagement Agreement, the Trust Deed, the SEBI (Mutual Funds)

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Regulations and the objectives of the schemes. State-of-the-art systemsand communications are in place to ensure a seamless flow across thevarious activities undertaken by UTI AMC.UTI AMC is a registered portfolio manager under the SEBI(Portfolio Managers) Regulations, 1993 on February 3 2004, forundertaking portfolio management services and also acts as the managerand marketer to offshore funds through its 100 % subsidiary, UTIInternational Limited, registered in Guernsey, Channel Islands.UTI Mutual Fund has come into existence with effect from 1stFebruary 2003. UTI Asset Management Company presently manages a


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corpus of over Rs.20000 Core.UTI Mutual Fund has a track record of managing a variety of schemescatering to the needs of every class of citizenry. It has a nationwidenetwork consisting 56 UTI Financial Centers (Fuss) and representativeoffices in Dubai and London. With a view to reach to common investorsat district level, 11 satellite offices have also been opened in select townsand districts. It has a well-qualified, professional fund management team,who has been highly empowered to manage funds with greater efficiencyand accountability in the sole interest of unit holders. The fund managersare also ably supported with a strong in-house equity researchdepartment. To ensure better management of funds, a risk managementdepartment is also in operation.

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It has reset and upgraded transparency standards for themutual funds industry. All the branches, UFCs and registrar offices areconnected on a robust IT network to ensure cost-effective quick andefficient service. All these have evolved UTI Mutual Fund to position asa dynamic, responsive, restructured, efficient, and transparent and SEBIcompliant entityKey PersonnelMr. U.K Sinhala (Chairman& M.D),Mr. D.S R Murthy (Executive Director),

Mr. Intaiyazul Bahaman (Chief Finance Officer). HDFC ASSET MANAGEMENTCOMPANYPVT. LTDHDFC Asset Management Company Ltd (AMC) wasincorporated under the Companies Act, 1956, onDecember 10, 1999, and was approved to act as an AssetManagement Company for the HDFC Mutual Fund by SEBIon June 30, 2000.

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The registered office of the AMC is situated at Ramon House, 3rdFloor, H.T. Parekh Margi, 169, Back bay Reclamation, Church gate,Mumbai - 400 020.

In terms of the Investment Management Agreement, the Trustee hasappointed the AMC to manage the Mutual Fund.As per the terms of the Investment ManagementAgreement, the AMC will conduct the operations of theMutual Fund and manage assets of the schemes, includingthe schemes launched from time to timeKey PersonnelMr. Deepak Parikh (Chairman),Mr. .NET Stench ( C E O)Mr. Mar Connolly (Executive Director). TEMPLETON ASSET MANAGEMENT (INDIA) PVT.LTD.

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Templeton Asset Management Company, a companyincorporated under the Companies Act, 1956, is a part ofthe Franklin Templeton Group. The sponsor of the FundTempleton International Inc., is a wholly owned subsidiaryof Templeton Worldwide Inc., which in turn is a whollyowned subsidiary of Franklin Resources Inc. The FranklinTempleton Group is one of the world s largest InvestmentManagement Companies. It has over 50 years of


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experience in International Investment Management with34 offices in over 23 countries, which service over 10million unit holders. Templeton started operations inMumbai, India in January 1996.Templeton in India has 8different funds. Templeton has eleven offices includingMumbai, Delhi, Calcutta, Pune, Chennai, Bangalore,Cochin and Hyderabad.Key PersonnelRavi Amphora (Chairman),Deepak Catwalk (MD - Asia),B. Swami Nathan (Director & COO).

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SBI MUTUAL FUND.SBI Mutual Fund draws strength from India's premier and largestbank; the State Bank of India. Set up on July 1, 1955, the State Bankof India is the largest banking operation in the country.Through years of commitment to service and national development,SBI has grown into an instrument of social change. Today, it has 9,039branches in India (excluding 4599 branches of banking subsidiaries) and54 offices in 28 countries spread over all time zones.SBI entered into a Memorandum of Understanding with SocietyGeneral Asset Management (SGAM), which offers retail investors,

corporate clients and institutional investors a wide range of investmentproducts. SGAM is a dominant player in Global Mutual Fund arena withpresence in over 20 countries spanning Europe, United Sates, and Asia,managing over 250 billion Euros in assetsKey PersonnelMr. Deepak Chula (M.D),Mr. Didier Turpin (C.E.O),Mr. Gants N. Murthy ( Fund Manager).

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PARTICULARS OF AMCS:PARTICULARS RELIANCE UTI HDFC

SBI F&TNo. of schemes 31 15 1325 56No. of schemes including options 59 59 2756 95Equity Schemes 20 15 10 1633Debt Schemes 06 26 07 0813Short term debt Schemes 07 02 03 0511Equity & Debt 02 04 02 0307

Gilt Fund 09 02 06 0410

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PORTFOLIO MEASUREMENT METHODS:We are interested in discovering if the management of a mutualfund is performing well; that is, has management done better through itsselective baying and selling of securities than would have been achievedthrough merely buying the market picking a large number of


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securities randomly and holding them throughout the period?The most popular ways of measuring managements performanceare1. Sharpes Performance Measure2. Tenors Performance Measure3. Jensens Performance MeasureSharpes Performance Measure (Sharpe ratio or Reward tovariability ratio)William Sharpe has attempted to get a summary measure ofportfolio performance. His measure properly adjusts performance forrisk. The Sharpe Index is given by:Si= rib r*I

where Si= Sharpe Indexrib= average return on portfolio t

r* = riskless rate of interestI= standard deviation (risk) of the returns of portfolio

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While a high and positive Sharpe ratio shows a superior risk adjustedperformance of a fund. A low and negative Sharpe ratio is an indicationof unfavorable performance.Assumption: Sharpe assumes that the portfolio under theconsideration is whole or substantially the whole of investor

totalportfolio. This mean, if any unsystematic risk is left, this cannot be

eliminatedTrey nor performance measure (Jack Trey nor):This ratio also called neither Trey nor ratio-reward to volatility ratio.It is concerned with systematic risk () . It is relationship betweenrewards of risk premium to the volatility of return as measured by theportfolio risk.Risk premium rap fro TP= =Portfolio

per

on

with disabilityAll risk averse investors would like to maximize this value while a highand positive trainers index shows a superior risk adjusted performance ofa fund, a low and negative trainers index is indication of unfavorableperformance.Assumption: Portfolio is itself only as part of the total investmentsportfolio. So, eliminate any unsystematic risk as his portfolio is welldiversified.

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Jensen

Performance Measure (Michael):It refers the actual return earned in portfolio and return expected outof portfolio given its level of risk.CAPM is used to calculate the expected return. The differencebetween the expected return and act retain can be said the return earnedout of the mandatory of systematic risk.This excess return referees the manager

predictive ability andmanagerial skills.CAPMrap= fro+ (ram

fro)Differential return is calculated as follows:p

= rap

- rapp

= positive > Superior returns

p= Negative > Unskilled management (worse portfolio)p

= 0 > Neutral performanceHigher alpha represents superior performance of a fundand vice versa.

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9 2________________________________

FINDINGS1. ALM is a strategic approach or managing of managingthe balance sheet dynamics in such a way that the net

earnings are maximized and it ensure the level and riskless with the risk return objectives of banks/FIs.2.The composition of assets and liabilities largelydecides the solvency, liquidity and profitability of acorporate entity, the components of liabilitiesdetermines the cost of funds and it broadly with bothsides of balance sheet.3.The reduction of liquidity risk by lengthens thematurity of liabilities less profitability because long term


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funds to be more expansive than short term funds.4.It also implies fewer earnings opportunities fromnegative gapping.5. The appropriate balance between liquidity andprofitability is determined by Top Managers.6.It is found that in APSFC is strictly practicing ALMconcept.7. To deal with the market risk ALM works.8. ALM is the process, which is used to manage liquidityrisk and interest rate risk.9 2

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The 9.changes in the interest rate always have a effectin the risk management.10. Interest rate risk can influence more the businessthan the liquidity risk in market.11. Dealing with liquidity risk is earlier than dealingwith the interest rate risk.SUGGESTIONS1. It shall be mandatory for all state financial institutionsto introduce ALM concept for better management of

risk.2.The methods of date acquisition for managing theliquidity risk management and interest rate riskmanagement should improve.3.The banks & financial institutions should utilize thereadily available software package for ALM and for easyand speedy preparation of data for ALM meetings.9 2

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GLOSSARY

ALM ASSET LIABILITIES MANAGEMENTALCO ASSET LIABILITIES COMMITTEE IRR &ERF EXPORT REFINANCE FACILITYIRR INTEREST RATE RISKCLF COLLATERALISED LENDING FACILITYACLF ADDITIONAL COLLATERALISED LENDINGFACILITYNIT NET INTEREST INCOMEMVE MARKET VALUE OF EQUITYNIM NET INTEREST MARGINRSA RATE SENSITIVE ASSETSRSL RATE SENSITIVE LIABILITIESVAR VALUE AT RISK

RBI RESERVE BANK OF INDIASFC STATE FINANCIAL CORPORATIONIDB I INDUSTRIAL DEVELOPMENT BANK OF INDIA9 2

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SIDBI SMALL INDUSTRIES DEVELOPMENT BANK OFINDIAAPSFC ANDHRA PRADESH STATE FINANCIAL


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CORPORATION9 2

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BIBLIOGRAPHYINDIAN FINANCIAL SYSTEMASSET LIABILITY MANAGEMENTRBI GUIDELINESAPSFC ANNUAL REPORTSwww.almis.comwww.apsfc.comM.Y.KHANS.K.KHURANA9 2

104266109 asset liabil managemnt hdfc

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