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8/4/2019 Alm, Car Basel

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ASSET-LIABILITYMANAGEMENT IN BANKS

In India, ALM is of very recent origin.

RBI has issued guidelines on Feb 10, 1999, for implementationof ALM.

It has been implemented wef from April 1st, 1999.

WHAT IS ALM?

ALM is a comprehensive and dynamic framework formeasuring, monitoring and managing the market risk of a bank.

It is the management of structure of balance sheet (liabilitiesand assets) in such a way that the net earning from interest ismaximized within the overall risk-preference (present and

future) of the institutions. SCOPE OF ALM

The ALM functions extend to liquidity risk management,management of market risk, trading risk management, funding


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and capital planning and profit planning and growth projection.

RESIDUAL MATURITY

Residual maturity is the time period which a particular asset or

liabi9lity will still take to mature i.e. become due of repayment(once at a time, say in case of term deposit or in instalments,say in case of term loan).

MATURITY BUCKETS

Maturity buckets are different time intervals( 8 for the time

being, namely 1-14 days, 15-28 days, 29-90 days, 91-180 days,181-365 days, 1-3 years, 3-5 years and above 5 years), in whichthe value of a particular asset or liability is placed dependingupon its residual maturity.



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MISMATCH POSITION

When in a particular maturity bucket, the amount of maturingliabilities or assets does not match, such position is called amismatch position, which creates liquidity surplus or liquiditycrunch position and depending upon the interest rate

movement, such situation may turnout to be risky for the bank. The mismatches for cash flows for 1-14 days and 15-28 days

buckets are to be kept to the minimum ( not to exceed 20%each of cash out-flows for those buckets).

ROLE OF ALCO (ASSET-LIABILITY COMMITTEE)

ALCO is the top most Committee to oversee implementation ofALM system, to be headed by CMD or ED. ALCO wouldconsider product pricing for both deposits and advances, thedesired maturity profile of the incremental assets and liabilitiesin addition to mentoring the risk levels of the bank.



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It will have to articulate current interest rates view of the bankand base sits decisions for future business strategy on thisview.

BENEFISTS OF ALM

It is a tool that enables bank managements to take businessdecisions in a more informed framework with an eye on therisks that bank is exposed to.

It is an integrated approach to financial management, requiringsimultaneous decisions about the ty0pes of amounts of

financial assets and liabilities- both mix and volume- with thecomp0lexities of the financial markets in which the institutionoperates.


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