Asset Liability Management

ASSET Liability

Management

Asset Liability Management

In banking, Asset Liability Management is the practice of managing risks that arise due to mismatch between the assets and liabilities (debts and assets) of the bank. It is a coordinated management of the entire portfolio of a financial institution.

Focus

Bank funds are obtained from variety of sources including current deposits, saving deposits, fixed deposits, short term borrowings, long term borrowings, equity capital etc.

Reserve requirement imposed by RBI must of course be met

The funds available after meeting reserve requirement can then be invested to produce an income for the bank

Asset liability management focuses on the net interest income of the institution

Net interest income = interest revenue

- interest expenses

Historical Perspective

Recently Evolved Phenomenon Gained importance after

Deregulation of bank interest rate Bank financial management

principally was asset management Growth possible through tapping

funds Lead to liability management

Bank

•SAVING A\C

•CURRENT A\C

•F.D.

•LONG AND SHORT TERM BORROWINGS

•EQUITY CAPITAL

INVESTMENTS

Core deposits

Purchased funds

Sources of Fund

Risks To Banks

• Liquidity Risk• Interest rate Risk• Credit risk• Operational risk• Foreign Exchange Risk

• Intense Competition

• Spreads

• Volatile Interest Rates

• Volatile Foreign Exchange Rates

Need of ALM

Asset Liability Mismatch

Asset Liability Mismatch can be due to :-

Investment in Foreign Currency

Difference in Duration

Floating & Fixed Interest Rate Bonds

Gap Analysis

Duration Analysis

Securitisation

OTC Derivatives Market

Techniques of ALM

Asset Liability Committee (ALCO)- Ensures adherence to the limits.

ALM Desk- Operative staff- Analyses, Monitors, Reports &

Forecasts Risk

Organisation

Net interest income is basically determined by :-

• The interest rate earned on assets & paid for

funds.

• The volume of funds.

• The mix of funds or the composition of the

portfolio.

Effect of Rate, Volume & Mix

Money market Instrument

Using futures, options & swaps

Securitisation

Instruments

Defensive

Aggressive

Strategies for Asset Liability Management

Classification

Based on interest rate sensitivity :

• Rate Sensitive Assets/ Liabilities

• Non-Rate Sensitive Assets/ Liabilities

ASSETS Type LIABILITY Type

Short Term SecuritiesVariable Rate LoansShort Term LoansLong Term SecuritiesLong Term LoansOther Assets

RSARSA RSANRSANRSANRSA

Term DepositsAccount BalancesMoney Market DepositsShort Term DepositsLong Term SavingsRepo TransactionsEquity Capital

NRSLNRSLRSLRSLNRSLRSLNRSL

Classification