Commercial banks – Liability management(2)

8/8/2019 Commercial banks Liability management(2)

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COMMERCIAL BANKS LIABILITY MANAGEMENT


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Commercial banks

Financial Intermediary

Business banking

Investment banking Retail banking


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Functions

i) Primary functions:

a) accepting deposits and

b) granting loans and advances ii) Secondary functions:

a) Issuing letters of credit, travellers cheques,

b) safe custody of valuables,

c) facilities of foreign exchange,

d) Issuing demand drafts,

e) Transferring money from one place to another


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List of commercial banks

Axis Bank

State Bank of India

Bank of Rajasthan

Catholic Syrian Bank City Union Bank

Development Credit Bank

Dhanalakshmi Bank

Federal Bank

HDFC Bank ICICI Bank

IndusInd Bank

Dena Bank

IDBI Bank Ltd.


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Liability management

Depositors money

Funds secured from other institutions

When Banks manage these above mentioned points,

it is called liability management of bank.


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Components of a

Bank Balance sheet

Liabilities Assets

1. Capital

2. Reserve & Surplus

3. Deposits

4. Borrowings

5. Other Liabilities

1. Cash & Balances with

RBI

2. Bal. With Banks &

Money at Call and Short

Notices

3. Investments

4. Advances

5. Fixed Assets

6. Other Assets


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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.


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2. Reserves & SurplusComponents under this head includes:

I. Statutory ReservesII. Capital Reserves

III. Investment Fluctuation Reserve

IV. Revenue and Other ReservesV. Balance in Profit and Loss Account


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3. Deposits

This is the main source of banks funds. The deposits

are classified as deposits payable on demand and

time. They are reflected in balance sheet as under:

I. Demand Deposits

II. Savings Bank Deposits

III. Term Deposits


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4. Borrowings

(Borrowings include Refinance / Borrowings from

RBI, Inter-bank & other institutions)

I. Borrowings in India

i) Reserve Bank of India

ii) Other Banks

iii) Other Institutions & Agencies

II. Borrowings outside India


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5. Other Liabilities & Provisions

It is grouped as under:

I. Bills Payable

II. Inter Office Adjustments (Net)

III. Interest Accrued

IV. Unsecured Redeemable Bonds(Subordinated Debt for Tier-II Capital)

V. Others(including provisions)


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How Commercial Banks

Create Credit or Money


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Deposits

The liability owed by the bank to its depositor.

How commercial banks deal with deposits?


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Capital

How commercial banks

acquire capital ?


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Success of ALM in banks:

Pre - conditions

Awareness for ALM in the Bank staff at all levelssupportive Management & dedicated Teams.

Method of reporting data from Branches/ other

Departments. (Strong MIS). Computerization-Full computerization, networking.

Insight into the banking operations, economicforecasting, computerization, investment, credit.

Linking up ALM to future Risk ManagementStrategies.


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Interest Rate Risk Management

Interest Rate risk is the exposure of a banksfinancial conditions to adverse movements ofinterest rates.

Though this is normal part of banking business,excessive interest rate risk can pose a significantthreat to a banks earnings and capital base.

Changes in interest rates also affect the underlying

value of the banks assets, liabilities and off-balance-sheet item.


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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 safety and soundness of the bank.


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Sources of Interest Rate Risk

Interest rate risk mainly arises from:

Gap Risk

Basis Risk

Net Interest Position Risk Embedded Option Risk

Yield Curve Risk

Price Risk

Reinvestment Risk


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Measurement of Interest Rate Risk

Gap Analysis- Simple maturity/re-pricingSchedules can be used to generate simpleindicators of interest rate risk sensitivity of bothearnings and economic value to changing interestrates.

- If a negative gap occurs (RSARSL) in a giventime band, an decrease in market interest ratescould cause a decline in NIM.


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Measurement of Interest Rate Risk

Duration Analysis: Duration is a measure of the

percentage change in the economic value of a

position that occur given a small change in level of

interest rate.


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Thank you

Vatsal Jariwala, 31

Shailesh Kalantry, 35

Nitin Sarawagi, 53 Nikhil Adesara, 1

Punit Kamdar, 36

Apar Rustagi, 52

Sujit Daga, 10

Commercial banks – Liability management(2)

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