asset liability management -
TRANSCRIPT
-
7/29/2019 Asset Liability Management -
1/40
Riddhi Gala 01
Sunil Kewalramani 05
Vikram Shah 70Laxmikar Naidu 75
Sanjeev Gawda 76
Ajay Deshpande 80
Asset LiabilityManagement in Banks
-
7/29/2019 Asset Liability Management -
2/40
Components of a
Bank Balance sheetLiabilities Assets
1. Capital
2. Reserve & Surplus3. Deposits
4. Borrowings
5. Other Liabilities
1. Cash & Balances with
RBI2. Bal. With Banks &
Money at Call and Short
Notices
3. Investments4. Advances
5. Fixed Assets
6. Other Assets
Contingent Liabilities
-
7/29/2019 Asset Liability Management -
3/40
Components of Liabilities
1. Capital:
Capital represents owners contribution/stake in
the bank.
- It serves as a cushion for depositors and
creditors.
- It is considered to be a long term sources for the
bank.
-
7/29/2019 Asset Liability Management -
4/40
Components of Liabilities
2. Reserves & Surplus
Components under this head includes:
I. Statutory ReservesII. Capital Reserves
III. Investment Fluctuation Reserve
IV. Revenue and Other Reserves
V. Balance in Profit and Loss Account
-
7/29/2019 Asset Liability Management -
5/40
Components of Liabilities
3. Deposits
This is the main source ofbanks funds. The deposits are
classified as deposits payable on demand and time. Theyare reflected in balance sheet as under:
I. Demand Deposits
II. Savings Bank Deposits
III. Term Deposits
-
7/29/2019 Asset Liability Management -
6/40
Components of Liabilities
4. Borrowings
(Borrowings include Refinance / Borrowings from RBI,
Inter-bank & other institutions)
I. Borrowings in India
i) Reserve Bank of India
ii) Other Banksiii) Other Institutions & Agencies
II. Borrowings outside India
-
7/29/2019 Asset Liability Management -
7/40
Components of Liabilities
5. Other Liabilities & Provisions
It is grouped as under:I. Bills Payable
II. Inter Office Adjustments (Net)
III. Interest Accrued
IV. Unsecured Redeemable BondsV. Others(including provisions)
-
7/29/2019 Asset Liability Management -
8/40
Components of Assets
1. Cash & Bank Balances with RBI
I. Cash in hand
(including foreign currency notes)
II. Balances with Reserve Bank of India
In Current Accounts
In Other Accounts
-
7/29/2019 Asset Liability Management -
9/40
Components of Assets
2. Balances With Banks And Money At Call & ShortNotice
I. In India
i) Balances with Banks
a) In Current Accountsb) In Other Deposit Accounts
ii) Money at Call and Short Notice
a) With Banks
b) With Other Institutions
II. Outside India
a) In Current Accounts
b) In Other Deposit Accounts
c) Money at Call & Short Notice
-
7/29/2019 Asset Liability Management -
10/40
Components of Assets
3. InvestmentsA major asset item in the banks balance sheet. Reflectedunder 6 buckets as under:
I. Investments in India in :
i) Government Securities
ii) Other approved Securities
iii) Shares
iv) Debentures and Bonds
v) Subsidiaries and Sponsored Institutions
vi) Others (UTI Shares , Commercial Papers, COD &
Mutual Fund Units etc.)
II. Investments outside India in
Subsidiaries and/or Associates abroad
-
7/29/2019 Asset Liability Management -
11/40
Components of Assets
4. AdvancesThe most important assets for a bank.A. i) Bills Purchased and Discounted
ii) Cash Credits, Overdrafts & Loans
repayable on demandiii) Term Loans
B. Particulars of Advances :
i) Secured by tangible assets
(including advances against Book Debts)
ii) Covered by Bank/ Government Guarantees
iii) Unsecured
-
7/29/2019 Asset Liability Management -
12/40
Components of Assets
5. Fixed AssetI. Premises
II. Other Fixed Assets (Including furniture and fixtures)
6. Other Assets
I. Interest accrued
II. Tax paid in advance/tax deducted at source
(Net of Provisions)
III. Stationery and Stamps
IV. Non-banking assets acquired in satisfaction of claims
V. Deferred Tax Asset (Net)
VI. Others
-
7/29/2019 Asset Liability Management -
13/40
Contingent Liability
Banks obligations under LCs, Guarantees,
Acceptances on behalf of constituents and
Bills accepted by the bank are reflectedunder this heads.
-
7/29/2019 Asset Liability Management -
14/40
Assets Liability Management
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.
-
7/29/2019 Asset Liability Management -
15/40
ALM-MIS
Management Information System
Information availability, accuracy, adequacy and expediency
ALMorganisation
Structure and responsibilities ALCO Committee
Level of top management involvement
ALMprocess
Risk parameters
Risk identification
Risk measurement Risk management
Risk policies and tolerance levels
-
7/29/2019 Asset Liability Management -
16/40
ALCO
Senior management including CEO shouldbe responsible for ensuring adherence to the
limits
Decision making unit responsible for- Strategic Management of interest & liquidity rates
- Balance sheet planning- Product pricing for both deposits and advances
- Monitoring the results & progress
- Funding mix
-
7/29/2019 Asset Liability Management -
17/40
Scope of ALM
Liquidity risk management
Management of market risks (including Interest Rate Risk)
Funding and capital planning
Profit planning and growth projection
Trading risk management
-
7/29/2019 Asset Liability Management -
18/40
Significance ofALM
Volatility
Product Innovations & Complexities
Regulatory Environment
Management Recognition
-
7/29/2019 Asset Liability Management -
19/40
Purpose & Objective of ALM
An effective Asset Liability Management Techniqueaims 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.
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:
1. Net Interest Income (NII)
2. Net Interest Margin (NIM)
-
7/29/2019 Asset Liability Management -
20/40
Liquidity Management
Banks liquidity management is the process
of generating funds to meet contractual or
relationship obligations at reasonable pricesat all times.
New loan demands, existing commitments,
and deposit withdrawals are the basiccontractual or relationship obligations that a
bank must meet.
-
7/29/2019 Asset Liability Management -
21/40
Funding Avenues
To satisfy funding needs, a bank mustperform one or a combination of thefollowing:
a. Dispose off liquid assets
b. Increase short term borrowings
c. Decrease holding of less liquid assetsd. Increase liability of a term nature
e. Increase Capital funds
-
7/29/2019 Asset Liability Management -
22/40
Categories of liquidity risk
Funding Risk
- Need to replace net outflows due to
unanticipated withdrawals/non-renewal Time Risk
- Need to compensate for non-receipt of
expected inflows of funds Call Risk
- Crystallization of contingent liability
-
7/29/2019 Asset Liability Management -
23/40
Statement Of Structural Liquidity
Places all cash inflows and outflows in thematurity ladder as per residual maturity
Maturing Liability: cash outflow
Maturing Assets : Cash Inflow Classified in to 8 time buckets
Mismatches in the first two buckets not toexceed 20% of outflows
Shows the structure as of a particular date
-
7/29/2019 Asset Liability Management -
24/40
Statement of Structural Liquidity
As per RBI guidelines issued for ALM implementation forBanks in 1999, there are 8 time buckets T-1 to T-8 classified
respectively as follows
i. 1 to 14 days
ii. 15 to 28 days
iii. 29 days and up to 3 months
iv. Over 3 months and up to 6 months
v. Over 6 months and up to 1 year
vi. Over 1 year and up to 3 years
vii. Over 3 years and up to 5 years
viii. Over 5 years
-
7/29/2019 Asset Liability Management -
25/40
An Example of Structural Liquidity
Statement1-14Days 15-28Days 30 Days-3 Month 3 Mths -6 Mths 6 Mths -1Year 1Year - 3Years 3 Years -5 Years Over 5Years Total
Capital 200 200
Liab-fixed Int 300 200 200 600 600 300 200 200 2600
Liab-floating Int 350 400 350 450 500 450 450 450 3400
Others 50 50 0 200 300
Total outflow 700 650 550 1050 1100 750 650 1050 6500
Investments 200 150 250 250 300 100 350 900 2500
Loans-fixed Int 50 50 0 100 150 50 100 100 600
Loans - floating 200 150 200 150 150 150 50 50 1100Loans BPLR Linked
100 150 200 500 350 500 100 100 2000Others 50 50 0 0 0 0 0 200 300
Total Inflow 600 550 650 1000 950 800 600 1350 6500
Gap -100 -100 100 -50 -150 50 -50 300 0
Cumulative Gap -100 -200 -100 -150 -300 -250 -300 0 0
Gap % to Total O -14.29 -15.38 18.18 -4.76 -13.64 6.67 -7.69 28.57
-
7/29/2019 Asset Liability Management -
26/40
Strategies
To meet the mismatch in any maturity bucket, thebank has to look into taking deposit and invest itsuitably so as to mature in time bucket with
negative mismatch.
The bank can raise fresh deposits of Rs 300 crore
over 5 years maturities and invest it in securities of1-29 days of Rs 200 crores and rest matching withother out flows.
-
7/29/2019 Asset Liability Management -
27/40
Interest Rate Risk
Interest rate risk refers to volatility in Net
Interest Income (NII) or variations in Net
Interest Margin(NIM).
Therefore, an effective risk management
process that maintains interest rate risk
within prudent levels is essential to safetyand soundness of the bank.
-
7/29/2019 Asset Liability Management -
28/40
Managing Interest Rate Risk
Balance Sheet Adjustments
Changing portfolio as interest rate changes
OFF Balance sheet adjustments
- Using off balance sheet derivatives like
interest rate swaps and futures
-
7/29/2019 Asset Liability Management -
29/40
Measuring Interest Rate
Sensitivity
Gap Analysis
Duration Gap Analysis
-
7/29/2019 Asset Liability Management -
30/40
GAP ANALYSIS
Gap is defined as the difference between the rate sensitive
assets and rate sensitive liabilities maturing within a
specific time period.
Gap = RSARSL
Gap Change in
Interest Rate
Change in
NII
Positive RSA > RSL Increase Increase
Positive RSA > RSL Decrease DecreaseNegative RSA < RSL Increase Decrease
Negative RSA < RSL Decrease Increase
Zero RSA = RSL Increase No Change
Zero RSA = RSL Decrease No Change
-
7/29/2019 Asset Liability Management -
31/40
ExampleLet us consider an XYZ Bank for which the maturity
pattern of Assets and Liabilities as on a particular date, say31.03.2004 is given
-
7/29/2019 Asset Liability Management -
32/40
-
7/29/2019 Asset Liability Management -
33/40
Problems with Gap Analysis
Time Horizon
Repricing of the assets / liabilities
Correlation with market
Assuming correlation with the market as 1
Focus On NII
Focusing more on NII rather than Shareholders wealth
-
7/29/2019 Asset Liability Management -
34/40
Duration Gap Analysis
DurationWeighted average time to receive all cash flows
from a financial instrument (expressed in years)
Duration GapDifference between duration of a banksassets and liabilities
It is a measure of interest rate sensitivity that explains how
changes in interest rate affect the market value of banksassets and liabilities and in turn net worth.
-
7/29/2019 Asset Liability Management -
35/40
Duration Gap Change in Interest
Rate
Change in Net
Worth
Positive Increase Decrease
Positive Decrease Increase
Negative Increase Increase
Negative Decrease Decrease
Zero Increase No Change
Zero Decrease No Change
Duration gap, Interest rates and changes in net worth
-
7/29/2019 Asset Liability Management -
36/40
Example
Duration of a 3-year loan with 12% as rate of simple interest
and having market value is Rs.700 is calculated as follows
Duration=Total Cumulative Returns/Market Value (MV) of
loan=1883.04/700 = 2.69 yrs
-
7/29/2019 Asset Liability Management -
37/40
Example
Duration Gap (DG) for the following assets and liabilities of
an organization, if the value unit is Rupees (INR) andduration is in years
-
7/29/2019 Asset Liability Management -
38/40
Here Total Assets (TA) = 100 + 700 + 200 = 1000 and
Total Liabilities (TL) = 620 + 300 = 920 (Without Equity)DA = Weighted average of Duration of all Assets
= [ MV(Ai) x DAi ] / TA for i = 1 to m; where Ai is the i th
asset out of m assets
= [700*2.69+200*4.99] /1000= 2.88 yrs
DL = Weighted average of Duration of Liabilities
= [ MV(Lj) x DLj ] / TL for j = 1 to n; where Lj is the j th
liability out of n liabilities
= [620*1+300*2.81] /920= 1.59 yrs
Duration GAP (DG) = DA- [TL/TA] DL = 2.88 - 1.59
[920/1000] = 1.42 years
-
7/29/2019 Asset Liability Management -
39/40
Problems with Duration Gap
Analysis
Immunization
Isolation of the market value of equity to interest rate
changes will be effective only if interest rate for all
maturity securities shift up or down by exactly the same
amount.
Duration Drift
-
7/29/2019 Asset Liability Management -
40/40
THANK YOU