Chapter - 1 INTRODUCTION The composition of assets and liabilities largely decide the solvency, liquidity and profitability of a corporate entity, more so that of a financial institution. The components of the liabilities determine the cost of funds. The mix of the assets influences the return on investment. Therefore the asset liability management assumes great importance; also, it is absolutely necessary to prevent the Asset - liability mismatch, both in term of maturity (tenure) and relative costs (minimum or interest differential) particularly in the control of increasing pressure on margins. In the case of state financial corporation, the instrumentality of Business Plan and Resources Forecast (BPRF), and effective treasury management techniques can be, gainfully utilized to make correction in the existing imbalances in the resource mix and the avoidable misalignments between the profile or liabilities and the portfolio of assets. While BPRF is introduced at the instance of IDBI & SIDBI. The Asset - Liability management broadly deals with both sides of the balance sheet. It is primarily concerned with the market risk that arises from a financial institutions structural position. These are interest rate and liquidity risks. The interest rate risk 1
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Chapter - 1
INTRODUCTION
The composition of assets and liabilities largely decide the solvency, liquidity
and profitability of a corporate entity, more so that of a financial institution. The
components of the liabilities determine the cost of funds. The mix of the assets
influences the return on investment. Therefore the asset liability management assumes
great importance; also, it is absolutely necessary to prevent the Asset - liability
mismatch, both in term of maturity (tenure) and relative costs (minimum or interest
differential) particularly in the control of increasing pressure on margins. In the case
of state financial corporation, the instrumentality of Business Plan and Resources
Forecast (BPRF), and effective treasury management techniques can be, gainfully
utilized to make correction in the existing imbalances in the resource mix and the
avoidable misalignments between the profile or liabilities and the portfolio of assets.
While BPRF is introduced at the instance of IDBI & SIDBI.
The Asset - Liability management broadly deals with both sides of the balance
sheet. It is primarily concerned with the market risk that arises from a financial
institutions structural position. These are interest rate and liquidity risks. The interest
rate risk arises from the possibility of change in profits caused by fluctuations in
interest rank. The delay in recoveries, a principle cause of liquidity risk, leads to
possibility.
Opportunities and damage due to honoring payment commitments. Both these
risks are obviously the result of mismatch between the Financial Institutions / Banks
as Assets and Liabilities. In case of banks of Financial Institutions, the ALM positions
are relatively liquid. Usually the banking institutions hold the assets and liabilities
until they mature. This practice of course is changing of late. It is increasingly
becoming to bundle banking products such as loans into marketable securities and
then sell them or trade them with other banks as well as other traditional and new
players in the financial markets.
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This is especially true of asset-based securities i.e., mortgage loans,
securitization is a new phenomenon in the Indian context. But it has a vast scope. It
can make or mm the future of a financial institution. The stability, profitability,
growth and image of Financial Institutions largely depend upon the ability and skill
with which it can conduct its ALM.
Asset - liability management practices which effect from April 1, 1999. While
guidelines on management of credit risk, market risk and operational risk will be
issued later on. The RBI has issued guidelines for the introduction of Asset - liability
management (ALM) as a part of the risk management and control system in banks.
They are intended to form the basis for initiating collection, compilations and analysis
of dates required tu support the ALM System.
Over the last few years, the Indian Financial System markets have witnessed vide
ranging changes at a 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 measures. The bank management has to base their
business decision on a dynamic and integrated risk management system and process,
driven by corporate strategy. The banks are exposed to several major risks in the
course of the business credit risk, interest rate risk, foreign exchange risk, and
equity/commodity price risk. Liquidity and Operational risks. It is against this
background that the RBI guidelines relating to AL:!v1 focus on interest rate and
liquidity risk-management system in banks, which form part: of the ALM function.
The initial thrust of the ALM function would be to enforce the risk management
discipline that is, managing offer assessing the risk involved. The objective of good
risk Management programs should be that their programs evolve into a strategy tool
for bank management.
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In the normal course, Financial Institutions are exposed to credit and market risks
in view of the asset liability transformation. With liberalization in Indian Financial
markets, over the last four years and growing integration of domestic markets and the
entry of MNC's for meeting the credit needs of not only the corporate but also the
retail segments, the risks associated with Financial Institutions operations have
become complex and large, requiring
strategic management. Financial Institutions are now operating in a fairly deregulate
1. environment and are required to determine interest rates on deposits, they can also
offer deposits prescribe by the R 131: they can also offer advances on dynamic basis.
The interest rates on investments of 1:1 –in government and other securities are also
now market related. Intense competition for business involving both assets and
liabilities has brought pressure on the management of Financial Institutions to
maintain a good balance among spreads, profitability and long-term liability.
Imprudent liquidity management can put Financial Institutions earnings and
reputation at great risk. The management of Financial Institutions have to base their
business decisions on a dynamic and integrated risk management system and process
driven by' corporate strategy, Financial Institutions are exposed to several major risks
in the course of their business; credit risk, interest rate risk, equity/commodity price
risk, liquidity risk and operational risk. It is, therefore, important that Financial
Institutions introduce effective risk measure management systems that address the
issues relating to interest rate and liquidity risks.
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NEED FOR THE STUDY:
In the event of highly volatile interest rates and liquidity crisis, Financial
Institutions/banks face the problem of real valuation of their assets and liabilities. This
Mismatch of assets and liabilities may produced an effect on calculation of real worth
of the business. There are some methods adopted by banks/financial institutions in
order to cover the problems of liquidity mismatch and interest rate risk. The present
study focused such measures taken by APSFC for its Asset - Liability management.
OBJECTIVES OF THE STUDY:
To study the ALM procedure in APSFC
To study and evaluate the performance of APSFC in managing liquidity risk and interest rate risk management.
To study the various schemes and activities of APSFC
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METHODOLOGY OF THE STUDY:
Description of the method:
To fulfill the above objectives mainly secondary data is used by collecting the records of APSFC and other published data like journals, books, internet etc…
The financial statement of different information of APSFC are collected and used for analysis to examine how the APSFC is managing it’s assets and liabilities
The primary information also collected through discussion with officers and managers of APSFC to get first hand information about risk, return, solvency and liquidity, leverage positions etc.
Under this asset liability management in APSFC the required data collected from
secondary source.
Secondary source:
Asset liabilities management related articles from various magazines
Journals and Banking books
The other main sources of secondary data
Annual reports of APSFC
Brochures of APSFC
RBI guidelines for ALM management
Indian Financial System By 'M. Y.KHAN'
Asset Liabilities management by different authors
Websites pertaining to asset liability management
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SCOPE OF THE STUDY:
ALM in relation of SFCs covers a wide gamut of both sources and
applications of funds. The drying up of some of the conventional sources, the choice
of the basket, rising cost of funds available and the associated stringent conditions,
growing competition for the access to the sources and the need for arresting the
erosion of net worth are the main challenges in managing the liabilities. On the assets
side, the key issues are the resource allocations, the assets portfolio-mix, the yields,
the recoveries, NPA management, write off policies and above all the market and
credit risk management.
LIMITATIONS OFTHE STUDY:
In spite of utmost care taken for the smooth conduct of study while preparing this
project; this report suffers from certain setbacks.
1. This is the study conducted with in short period, so it may not be covering all
the aspects in detail.
2. The study has made an attempt for evaluating the performance of APSFC in
managing liquidity risk management and interest rate risk management.
3. Due to limitations of the sources the data collection could not be adequate.
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CHAPTER -2
COMPANY PROFILE
INTRODUCTION
ROLE OF APSFC
FUNCTIONS OF APSFC
OBJECTIVES OF APSFC
LOCATION
CAPITAL STRUCTURE
MANAGEMENT OF APSFC
UNITS ELIGIBLE FOR FINANCIAL ASSISTANCE
ELIGIBILITY FOR FINANCIAL ASSISTANCE
LIMITS FOR FINANCIAL ASSISTANCE IN APSFC
LOAN SANCTION POWER
SOURCES OF FINANCIAL ASSISTANCE TO APSFC
DETAILS OF SCHEMES
MILESTONES OF APSFC
QUALITY POLICY
PERFORMANCE REVIEW OF APSFC
GOLDEN JUBLEE YEAR OF APSFC 2005-2006
INSURANCE POLICIES AT APSFC
FUTURE PLANS OF APSFC
OPERATIONAL ZONES
LENDING POLICY FOR FINANCIAL YEAR 2007-08
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ANDHRA PRADESH STATE FINANCIAL CORPORATION
INTRODUCTION
Andhra Pradesh State Corporation (APSFC) is term lending institution established
in 1956 for promoting small and medium scale industries in Andhra Pradesh under the
provisions of the State Financial Corporation Act, 1951. The corporation has many
entrepreneur friendly schemes to provide term loans, working capital term loans and
special and seed capital assistance to suit the needs of the various categories of
entrepreneurs. The corporation has 50 years of expertise in industrial financing
engaged in the business of financing tiny, small and medium scale sector units and
thriving for balanced regional development of the state.
Andhra Pradesh State Financial Corporation aims to be the leading financial
institutions in the state by providing adequate and timely financial assistance to its
customers for industrialization. APSFC shall also ensure customer satisfaction
through professional management and team work by implementing quality
management system that meets the requirement of ISO 9002:1994.
APSFC extends financial assistance for setting up of industrial and service
enterprises with in the state of the Andhra Pradesh. APSFC is actively considering
venturing into joint financing to assist the medium and large scale enterprises for both
new and existing units by means of tie up with SIDBI and other financial institutions.
In order to provide medium and long term credit to industrial under taking, which
fall outside the normal activities of commercial banks, a Central Industrial Finance
Corporation was set up under the Industrial Finance Corporation Act 1948. The State
Government also considered that the State Corporations should be established under
the special statute in order to make it possible to incorporate in the constitution. The
State Government has requested the Government of India to enact the necessary
enabling legislation, which is sort to be affected by the State Financial Corporations
Act, 1951.
APSFC came into existence on 1st November, 1956 after the amalgamation of
erstwhile Andhra Pradesh State Financial Corporation and Hyderabad State Financial
Corporation with the main objective of extending financial assistance.
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ROLE OF APSFC
APSFC has playing significant role in taking the state to its right place on the
industrial map of the country.
APSFC has been playing an important role in the development of finance
intermediary and has more made significant contribution to the
industrialization of the state by extending financial assistance to enterprises.
APSFC plays a bigger role in development of small scale entrepreneurs.
Corporation also extends working capital term loan for existing good working
units.
APSFC by providing rehabilitation schemes in order to motivate them.
It provides various friendly entrepreneur schemes in order to motivate them.
Traditionally the corporation’s main role was to lead lend money for
establishing a unit or a factory.
FUNCTIONS OF APSFC
Granting loans and advances to the Entrepreneurs.
Formulating various schemes and policies for financial assistance.
Participating in the equity capital of the Small-scale Industrial Units coming
up in backward areas.
Underwriting of the issue of stock, shares, bonds or debentures of industrial
concerns.
Providing for discounting of Bills of Exchange.
Acting as an agent of behalf of Central and State Government.
Generating non fund based income.
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OBJECTIVES OF APSFC
Extending term loan to tiny, small and medium scale industries besides
services industries like Hospital, Hotels, Construction and Marketing
Assistance to SSI products, Tourism related activities etc.
Being Development bank, encouraged first generation Entrepreneurs.
Providing Quality Service through professional management and teamwork.
Contributes for Balanced Regional Development of the State.
LOCATION
The corporation with its head office at 5-9-149, Chiragali Lane, Abids, Hyderabad
opened one branch in 1956 at Vijayawada. During 1972-73 the corporation opened
two branches at Vishakapatnam and Tirupati. In 1975-76 the corporation opened six
one man offices in six districts of Andhra Pradesh and one extra branch each in Ranga
Reddy and Medak districts.
CAPITAL STRUCTURE
APSFC started with paid-up equity capital of Rs. 1.50 crores in 1956 which now
stands at Rs. 92.22 crores against an authorized capital of Rs. 500 crores. The
Government of Andhra Pradesh holds 68.40% and IDBI 31.31% equity while the
remaining share of 0.29% is held by LIC and individual shareholders.
MANAGEMENT OF APSFC
All the activity’s that are undertaken by APSFC are decided by the Board of Directors
in the meeting. SIDBI plays an important role in decision making. The Board of
Directors consists of Chairman and Directors nominated by state government and
Director nominated by SIDBI and Director by RBI. Managing Director is appointed
by government of Andhra Pradesh in consultation with SIDBI.
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DEPARTMENTS
The departments wing in Projects Department looks in to matter of loan
enquires and verifies the project. The appraisals officers in the projects
department will appraise the project with reference to the economic viability
and technical feasibility.
The legal Department looks in to the matters related to scrutiny of title and
documentations etc.
The Internal Audit Departments are under the direct control of managing
director, conducts the regular and concurrent audit.
The Human Resource Departments look after the recruitment, leaves, staff
loans and disciplinary actions of employees.
The Finance and Accounts Department deals with accounting matters, sources
and uses of funds.
The Documentation Department provides information to corporation and the
entrepreneur about eh market, new products and provides the source of
institutional assistance and availability of raw materials etc.
The monitoring and Recovering Department deals with policy matters relating
to recovery, loss assets recovery and revival of sick industries.
Net Working Department deals with arranging training programmes
improving non fund based income.
UNITS ELIGIBLE FOR FINANCIAL ASSISTANCE
Industrial concerns under any form of ownership, whether it be a proprietary or
partnership concern, joint Hindu family, registered cooperative society, private or
public limited company engaged in or proposed to engage in one or more of following
activates are eligible for financial assistance.
Manufacture, preservation or processing of goods;
Mining or development of mines;
Hotel/Motel/Restaurants;
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Transport of passengers or goods by road or by water or by air or by rope-way
or by lift;
Generation or distribution of electricity of any other form of energy;
Maintenance, repair, testing or servicing of machinery of any description or
vehicles or vessels or motorboats or trailers or tractors;
Assembling, repairing or packing or any article with the aid of machinery or
power;
Setting up or development of industrial area or industrial estate;
Fishing or providing shore facilities for Fishing or maintenance
thereof;Providing weigh bridge facilities;
Providing engineering, technical, financial, management, marketing or other
services or facilities for industry;
Service industry such as altering, ornamenting, polishing, finishing, oiling, washing,
cleaning or otherwise treating or adapting any article or substance with a view to its use,
sale, transport, delivery or disposal;
Providing medical, health or other allied services;
Providing services relating to information technology, telecommunication or
electronics including satellite lnkage and audio or visual cable
communication;
Research and development of any concept, technology, design, process or
product;
Setting up or development of tourism realte3d facilities including amusement
parks centre, convention centre, restaurants, travel and transport (including
those at airports) tourist service agencies and guidance and counseling services
to tourists;
Development, maintenance and construction of roads;
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Bore well rigs/road laying equipments – earth excavator;
Business enterprises set up by qualified professionals in management,
C TOTAL INFLOWS 87.83 111.20 121.28 224.68 D MISMATCH(C-A) 77.02 78.85 38.95 104.09E MISMATCH AS % TO OUTFLOWS (D AS % to A) 712.24 243.76 47.31 86.32F CUMULATIVE MISMATCH 77.02 155.87 194.82 298.92G CUMULATIVE OUTFLOWS (F as A% to B) 712.24 361.13 155.25 121.47
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STATEMENT OF INTEREST RATE SENSITIVITY AS ON 30-11-2010 PRESENTED TO ALCO (Rs. In Crores)
Items / Time Buckets1-28 Days
29 Days and upto 3 Months
Over 3 Months and upto 6 Months
Over 6 Months and upto 1 Year
Over 1 Year and upto 3 Years
Over 3 Years and upto 5 Years
Over 5 Years to 7 Years
A- LIABILITIES
1 Capital
a) i Equity
ii Loan pending conversion 50.00
b) Non-perpetual preference
2 Reserves & Surplus
3 Gifts, grants, donations
4 Notes, bonds, debentures
5 Term Borrowings
i SIDBI 0.00 14.05 34.19 68.20 336.44 322.28 141.08
ii SLR 9.98 14.98 3.84 12.78 60.36 102.14
iii Commercial Banks 0.60 1.16 3.45 14.48 52.67 19.22
A TOTAL LIABILITIES (A) 10.82 32.41 82.33 121.58 600.08 550.66 167.26
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STATEMENT OF INTEREST RATE SENSITIVITY AS ON 30-11-2010 PRESENTED TO ALCO
(Rs. In Crores)
Items / Time Buckets1-28 Days
29 Days and upto 3 Months
Over 3 Months and upto 6 Months
Over 6 Months and upto 1 Year
Over 1 Year & upto 3 Years
Over 3 Years and upto 5 Years
Over 5 Years to 7 Years
B-ASSETS 1 Cash i Branch current accounts 2 Investments under various categories 3 Advances (Performing) i Standard 33.34 75.40 100.42 172.73 613.59 104.16 8.67 ii Sub-standard 126.27 iii Doubtful 97.95 iv Loss 116.82 v Interest on Standard 5.33 35.00 35.00 51.53 126.23 39.98 10.604 Assets on lease 5 Fixed Assets 6 Others Assets 0.00 0.80 6.29 0.60 2.40 2.40 2.407 Contingent items 8 Others C TOTAL ASSETS (B) 38.67 111.20 141.71 224.86 742.22 272.81 236.44 D IR GAP(C-A) 28.41 78.85 59.38 104.09 142.15 -227.85 69.17 Other products i FRA's ii IR Swaps iii Options iv Futures v Others E TOTAL OTHER PRODUCTS (D) 0.00 0.00 0.00 0.00 0.00 0.00 0.00F NET GAP (C-D) (E) 28.41 78.85 59.38 104.90 142.15 -277.85 69.71G CUMULATIVE GAP 28.41 107.26 166.64 270.73 412.88 135.03 204.20H E as % of A 263.00 244.00 72.00 86.00 24.00 -50.00 41.00 Impact of 1% interest change on 0.28 1.07 1.67 2.71 4.13 1.35 2.01 Profit annualised
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ANALYSIS AND INTERPRETATION
I. Liquidity Statement:
1. The future cash flows were shown in the time buckets as per guidelines issued by
the RBI .
2. While capital, reserves and surpluses were shown in the over 5 years buckets,
repayments towards refinance, SLR Bonds, Non-SLR Bonds, bank term loans and
public deposits were shown under respective maturity buckets.
3. Similarly, principal recovery from standard assets has been classified into
respective maturity buckets and the collection from SSD assets were shown in 3 to 5
years & DBT under over 5 years buckets.
4. There is a mismatch in the over 3 years and up to 5 years time bucket and over 5
years time bucket which works out to Rs.303 crores. However, there will be a positive
cumulative mismatch and the cumulative surplus works out to Rs.137 crores.
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II. Interest Rate Sensitivity Statement
In the interest rates sensitivity statement all the assets and liabilities are classified
into the respective time buckets. The cumulative gap in the various time buckets and
the impact of 1% change in the interest rate on the cumulative mismatch amount
works out as under:
Time Bucket Cumulative Gap Impact of 1% interest
change
1 to 28 days 28.41 0.28
29 days to 3 months 107.26 1.07
3 to 6 months 166.64 1.67
6 months to 1 year 270.73 2.71
1 to 3 years 412.88 4.13
3 to 5 years 135.03 1.35
5 to 7 years 204.20 2.04
7 to 10 years 194.87 1.95
Over 10 years 188.21 1.88
Non-sensitive 137.21 1.37
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CHAPTER -5
FINDINGS & SUGGESTIONS
1. ALM is a strategic approach or managing of managing the balance sheet dynamics
in such a way that the net earnings are maximized and it ensure the level and risk
less with the risk return objectives of banks/FIs.
2. The composition of assets and liabilities largely decides the solvency, liquidity
and profitability of a corporate entity, the components of liabilities determines the
cost of funds and it broadly with both sides of balance sheet.
3. The reduction of liquidity risk by lengthen the maturity of liabilities less
profitability because long term funds to be more expansive than short term funds.
4. It also implies fewer earnings opportunities from negative gapping.
5. The appropriate balance between liquidity and profitability is determined by Top
Managers.
6. It is found that in APSFC is strictly practicing ALM concept.
7. To deal with the market risk ALM works.
8. ALM is the process, which is used to manage liquidity risk and interest rate risk.
9. The changes in the interest rate always has a effect in the risk management.
10. Interest rate risk can influence more the business than the liquidity risk in market.
11. Dealing with liquidity risk is earlier than dealing with the interest rate risk.
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CONCLUSIONS
1. It shall be mandatory for all state financial institutions to introduce ALM concept
for better management of risk.
2. The methods of date acquisition for managing the liquidity risk management and
interest rate risk management should improve.
3. The banks & financial institutions should utilize the readily available software
package for ALM and for easy and speedy preparation of data for ALM meetings.