Synopsis of End Term Project

On

ASSET LIABILITY MANAGEMENT SYSTEM

Submitted By: Mayank Mittal Supervisor: Dr. Pankaj Varshney

Class: PGDM - Finance Area: Finance

Roll No.218/2012

LAL BAHADUR SHASTRI INSTITUTE OF MANAGEMENT

NEW DELHI

FINAL YEAR PROJECT

INTRODUCTION

This project work is an attempt to study the Asset Liability Management System of the

bank. The project starts with an introduction which states why there is a need for the ALM

Policy for the Banks. The major kinds of risks faced by the bank in today’s market and

management of these risks are also stated. The major focus of my study is on the Liquidity

risk management and Interest Rate Risk management practices followed by the banks.

Various tools that are used for liquidity risk management like Preparation of Structural

Liquidity Statement, Stock Approach for liquidity management, etc. will be studied. In

addition to this, an attempt will be made to compare the Gap Statements of different banks

like HDFC, Bank of India, Axis bank, ICICI bank and SBI in order to assess the likely

mismatch that occurs between the assets and liabilities of the banks. Various tools of

Interest Rate Risk management are also to be studied like Traditional gap analysis through

preparation of IRR Statement, Earning at risk (EAR) Analysis considering all the possible

scenarios- Reprising risk, Yield curve Risk, Basis risk and Embedded option risk- for

different banks to find the NII Impact that is likely to take place in future due to interest

rate fluctuations, Modified Duration of Equity and Value at Risk (VAR).

OBJECTIVES OF THE STUDY

The main objective of this project is to study the Asset Liability Management System of the

bank and why there was a need of ALM Policy for Banks. In addition to this, an attempt

has been made to compare Gap Statements of different banks like HDFC, Bank of India,

Axis bank, ICICI bank and SBI in order to assess the likely mismatch that can occur

between the assets and liabilities of the banks for studying the major kinds of risks faced by

banks in today’s market.

The companies chosen for the study are as mentioned above :

HDFC Bank

Bank of India

Axis bank

ICICI bank

SBI

** some companies are subject to change depending on the unavailability of data and

annual reports.

HYPOTHESIS

This is a study based project. No hypothesis testing is required as such.

REVIEW OF THE EARLIER STUDIES

As per the RBI Governor, Dr. Y.V. Reddy, 'banking in modern economies is all about risk

management', he had stated 'the successful negotiation on implementation of Basel II

Accord is likely to lead to even sharper focus on the risk measurement and risk

management at the Financial Institutions. Hopefully, the Basel Committee has provided

useful guidelines for risks management.  Institution’s with sound risk management

practices is an important facet for tackling the competition.

As per the RBI documents, over the last few years the Indian financial markets have

witnessed wide ranging changes at fast pace. Intense competition for business involving

both the assets and liabilities, together with increasing volatility in the domestic interest

rates as well as foreign exchange rates, has brought pressure on the management of banks

to maintain a good balance among spreads, profitability and long-term viability. These

pressures call for structured and comprehensive measures and not just ad hoc action. The

Management of banks has to base their business decisions on a dynamic and integrated risk

management system and process, driven by corporate strategy. Banks are exposed to

several major risks in the course of their business - credit risk, interest rate risk, foreign

exchange risk, equity / commodity price risk, liquidity risk and operational risks.

The initial focus of the ALM function would be to enforce the risk management discipline

viz. managing business after assessing the risks involved. The objective of good risk

management programmes should be that these programmes will evolve into a strategic tool

for bank management.

The ALM process rests on three pillars:

•ALM information systems

=>Management Information System

=>Information availability, accuracy, adequacy and expediency

•ALM organisation

=>Structure and responsibilities

=>Level of top management involvement

•ALM process

=>Risk parameters

=>Risk identification

=>Risk measurement

=>Risk management

=>Risk policies and tolerance levels.

RESEARCH METHODOLOGY

a) Selection of Topic:

This topic is selected by me since banks in today’s markets are facing various risks and

there are set methods by RBI to evaluate these risks so I will to understand these methods.

b) Selection of Sample: A sample of 5 banks was taken from 3 from private sector and 2 from public sector.

c) Data Collection

Data will be taken from banks annual reports available on the respective bank’s website.

Study from previously conducted research on the subject and extensive study of journals on

Bank risk’s Management. CRISIL Database of LBSIM will also be used to get the

company and policy related reports.

RESEARCH TOOLS

Financial Ratios and balance sheets will be used for the research purpose. Graphs

will be made on Microsoft Excel.

SPSS and EVIEWS

STUDY PERIOD

This study period will be till sixth trimester of the academic year 2013-14.

SIGNIFICANCE OF THE STUDY

ALM is a tool that enables bank managements to take business decisions in a more

informed framework with an eye on the risks that bank is exposed to. It is an integrated

approach to financial management, requiring simultaneous decisions about the types of

amounts of financial assets and liabilities - both mix and volume - with the complexities of

the financial markets in which the institution operates. Therefore taking into account of the

immensely important nature of ALM for banks an attempt will be made by me to conduct

an empirical work on this topic using quantitative studies on the data available in form of

financial statements.

BIBLIOGRAPHY

Risk Management – by Macmillan – Indian Institute of Banking and Finance

Risk Management in Banks Current Developments- By Dhandapani Alagiri- ICFAI

University

Analyzing and Managing Banking Risk – by Hennie van Greuning & Sonja Brajovic

Bratanovic

Signature of Supervisor Signature of Student