ASSETS LIABILITY MANAGEMENT

Assets liability management has today become the most topical subject of any financial

institution. It encompasses the analysis and development of goals and objectives, the

development of long term strategic plans, periodic profit plans and rate sensitivity

management. In one way or another it has always been the function or responsibility of

Treasury and other financial/ strategic department is being established and assets liability

management department are being formed within financial institution. These committees are

often given extraordinary powers regarding the mix and match of assets and liabilities and

have large influence in winding up activities which do not fit business strategy.

It is true that banks create both assets and liabilities in their day-to-day operations, but it is

also equally true that risk management in bank is keener to manage their assets rather than

their liabilities. In fact, for some time, bankers were happy to keep an eye on their assets

acquisition and treated the liability as granted.

Of late, the mindset has changed and banks increasingly shown equal, if not more, interest in

liability management. In fact, bank’s main business is to manage risk. Importantly, liquidity

and interest risk management constitutes the core business of banks.

To be more precise, banks are in the business of maturity transformation. They accept

deposits of different maturities and advance loan of different maturities. Balancing and

adjusting maturity period of deposits and loans from the core business activity of banks.

If this activity of a bank is analyzed, one may observe that banks also transfer the risk

appetite of customers to each other through market operation.

These activities of banks result in management of liquidity and interest risk in their

operations. In early day’s bank were mongering risks by having in-depth knowledge of

customers.

In day-to-day operation, it is inevitable for bank to face liquidity imbalance due to various reason.

BASIS OF ASSET-LIABILITY MANAGEMENT

Traditionally, banks and insurance companies used accrual system of accounting for all their

assets and liabilities. They would take on liabilities - such as deposits, life insurance policies

or annuities. They would then invest the proceeds from these liabilities in assets such as

loans, bonds or real estate. All these assets and liabilities were held at book value. Doing so

disguised possible risks arising from how the assets and liabilities were structured.

Consider a bank that borrows 1 Core (100 Lakhs) at 6 % for a year and lends the same money

at 7 % to a highly rated borrower for 5 years. The net transaction appears profitable-the bank

is earning a 100 basis point spread - but it entails considerable risk. At the end of a year, the

bank will have to find new financing for the loan, which will have 4 more years before it

matures. If interest rates have risen, the bank may have to pay a higher rate of interest on the

new financing than the fixed 7 % it is earning on its loan.

Suppose, at the end of a year, an applicable 4-year interest rate is 8 %. The bank is in serious

trouble. It is going to earn 7 % on its loan but would have to pay 8 % on its financing.

Accrual accounting does not recognize this problem. Based upon accrual accounting, the

bank would earn Rs 100,000 in the first year although in the preceding years it is going to

incur a loss.

The problem in this example was caused by a mismatch between assets and liabilities. Prior

to the 1970's, such mismatches tended not to be a significant problem. Interest rates in

developed countries experienced only modest fluctuations, so losses due to asset-liability

mismatches were small or trivial. Many firms intentionally mismatched their balance sheets

and as yield curves were generally upward sloping, banks could earn a spread by borrowing

short and lending long.

Things started to change in the 1970s, which ushered in a period of volatile interest rates that

continued till the early 1980s. US regulations which had capped the interest rates so that

banks could pay depositors, were abandoned which led to a migration of dollar deposit

overseas. Managers of many firms, who were accustomed to thinking in terms of accrual

accounting, were slow to recognize this emerging risk. Some firms suffered staggering losses.

Because the firms used accrual accounting, it resulted in more of crippled balance sheets than

bankruptcies. Firms had no options but to accrue the losses over a subsequent period of 5 to

10 years.

One example, which drew attention, was that of US mutual life insurance company "The

Equitable." During the early 1980s, as the USD yield curve was inverted with short-term

interest rates sky rocketing, the company sold a number of long-term Guaranteed Interest

Contracts (GICs) guaranteeing rates of around 16% for periods up to 10 years. Equitable then

invested the assets short-term to earn the high interest rates guaranteed on the contracts. But

short-term interest rates soon came down. When the Equitable had to reinvest, it couldn't get

even close to the interest rates it was paying on the GICs. The firm was crippled. Eventually,

it had to demutualize and was acquired by the Axa Group.

Increasingly banks and asset management companies started to focus on Asset-Liability Risk.

The problem was not that the value of assets might fall or that the value of liabilities might

rise. It was that capital might be depleted by narrowing of the difference between assets and

liabilities and that the values of assets and liabilities might fail to move in tandem. Asset-

liability risk is predominantly a leveraged form of risk.

The capital of most financial institutions is small relative to the firm's assets or liabilities, and

so small percentage changes in assets or liabilities can translate into large percentage changes

in capital. Accrual accounting could disguise the problem by deferring losses into the future,

but it could not solve the problem. Firms responded by forming assets-liability management (

ALM ) department to assess these assets-liability risk.

 

 

 

 

 

 

 

 

 

PURPOSE AND OBJECTIVES OF   ALM

An effective Asset Liability Management technique aims 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 ratio.

THUS, PURPOSE OF ASSETS LIABILITY MANAGEMENT IS TO ENHANCE THE

ASSET AND LIABILITIES AND FURTHER MANAGE THEM. SUCH A PROCESS

WILL INVOLVE THE FOLLOWING STEPS:

I. Review the interest rate structure and compare the same to the interest/product pricing

of both assets and liabilities.

III. Examine the loan and investment portfolios in the light of the foreign exchange risk

and liquidity risk that might arise.

IV. Examine the credit risk and contingency risk that may originate either due to rate

fluctuations or otherwise and assess the quality of assets.

IV. Review, the actual performance against the projections made and analyse the reasons

for any effect on spreads.

The Assets Liability Management technique so designed to manage various risk primarily

aim to stabilize the short profits.

-Net Interest Income (NII)

-Net Interest Margin (NIM)

-Economic Equity Ratio

1. Net Interest Income (NII):

The impact of volatility on the short- term profit is measured by Net Interest Income.

Net Interest Income = Interest Income – Interest Expenses.

2. Net Interest Margin (NIM):

Net Interest Margin = Net Interested Income / Average Total Assets.

Net Interest Margin can be viewed as the ‘spread’ on earning assets.

The net income of banks comes mostly from the spreads maintained between total interest

income and total interest expense. The higher the spread the more will be the NIM.

3. Economic Equity Ratio:

The ratio of shareholders funds to the total assets measures the shifts in the ratio of owned

funds to total funds. This fact assesses the sustenance capacity of the bank.

OBJECTIVE OF ASSETS LIABILITY MANAGEMENT

At micro – level the objectives of Assets Liability Management are two folds. It aims at

profitability through Price Matching while ensuring liquidity by means of maturity matching.

1. Price Matching basically aims to maintain spreads by ensuring that deployment of

liabilities will be at a rate higher than the costs. This exercise would indicate whether the

institution is in a position to benefit from rising interest rates by having a positive gap (assets

> liabilities) or whether it is in a position to benefit from declining interest rates by a negative

gap(liabilities > assets).

2. Liquidity is ensured by grouping the assets/liabilities based on their Maturing profiles. The

gap in then assessed to identify future financing Requirements. However, there are often

maturity mismatches, which may to a certain extent affect the expected result.

SIGNIFICANCE OF ALM

In simple terms- a financial institution may have enough assets to pay off its liabilities. But

what if 50% of liabilities are maturing within 1 year but only 10% of assets maturing within

the same period. Though the financial institution has enough assets, it may become

temporarily insolvent due to severe liquidity crisis.

Thus, ALM is required to match the assets and liabilities and minimize liquidity as well as

market risk.

Assets Liability Management views the financial institution as a set of interrelationships that

must be identified coordinated and managed as an integral system. The primary management

goal is the control of income and expenses and the resulting net interest margins on ongoing

basis.

Some of reasons for growing significance ALM are:

1. Volatility

Deregulation of financial system changed the dynamics of financial markets. The vagaries of

such free economic environment are reflected in interest rate structures, money supply and

overall credit position of the market, the exchange rate and price level.

2. Product Innovation

The second reason for growing importance of ALM is rapid innovation take place in financial

product of bank. While there were some innovations that came as passing fads, others have

received tremendous response.

3.  Regulatory Environment

At the international level, Bank for International Settlement (BIS) provides a framework for

banks to tackle the market risks that may arise due to rate fluctuation and excessive credit

risk. Central Bank in various countries (including Reserve Bank of India) has issued

frameworks and guidelines for banks to develop Assets Liability Management policies.

4.  Management Recognition

All the above – mentioned aspects forced bank management to give a serious thought to

effective management of assets and liabilities. A bank shoul be in a position to relate and link

the asset side with liability side. And this calls for efficient Asset- Liability Management.

There is increasing awareness in the top management that banking is now a different game

altogether since all risks of the game have since changed.

SCOPE OF ASSETS LIABILITY MANAGEMENT

The scope of Asset Liability Management (ALM) must be clearly defined. It has the purpose

of formulating strategies, directing actions an monitoring implementation thereof for shaping

bank’s balance sheet that contributes to attainment of the bank’s goals. Normally, in such

context, the goals are,

a. To maximize or at least to stabilize the net interest margin and

b. To maximize or at least to protect the value or stock price, at an acceptable level.

It is recognized that ALM addresses to the managerial tasks of planning, directing and

monitoring. The Treasury Department undertakes operational tasks of executing the detailed

strategies and actions. In any case, neither ALM nor ALCO get associated, in any way, with

the operational aspects of funds management.

Managing risk / return trade off with in the ALM framework provided by ALCO is the task of Treasury and not ALM / ALCO.   

 

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

1. Balance With Banks & Money at Call and Short Notices

3. Investments

4. Advances

5. Fixed Assets

6. Other Assets

COMPONENTS OF LIABILITIES

1. Capital:

Capital represents owner’s 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.

2. Reserves & Surplus:

Components under this head include:

I. Statutory Reserve

II. Capital Reserves

III. Investment Fluctuation Reserve

IV. Revenue and Other Reserves

V.  Balance in Profit and Loss Account

3. Deposits:

This is the main source of bank’s 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

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

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)

IV. Other (including provision)

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

2. Balances With Banks And Money At Call & Short Notice

I. In India

i) Balances with Banks

a) In Current Accounts

b) 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

2. Investments:

A major asset item in the bank’s balance sheet. Reflected under 6 buckets as under:

I. Investments in India in:

i) Government Securities

ii) Other approved Securities

iii) Shares

iv) Debentures and Bond

v) Subsidiaries and Sponsored Institutions

vi) Others (UTI Shares, Commercial Papers, COD & Mutual Fund Units etc.)

II.   Investments outside India

Subsidiaries and/or Associates abroad  

4. Advances:

The most important assets for a bank.

i) Bills Purchased and Discounted

ii) Cash Credits, Overdrafts & Loans repayable on demand

iii) Term Loans

B.  Particulars of Advances:

i) Secured by tangible assets (including advances against Book Debts)

ii) Covered by Bank/ Government Guarantees

iii) Unsecured

5. Fixed Asset:

I.  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

CONTINGENT LIABILITY

Bank’s obligations under LCs, Guarantees, and Acceptances on behalf of constituents and

Bills accepted by the bank are reflected under this heads.

BANKS PROFIT & LOSS ACCOUNT

A bank’s profit & Loss Account has the following components:

I. Income: This includes Interest Income and Other Income.

II. Expenses: This includes Interest Expended, Operating Expenses and

Provisions & contingencies.

COMPONENTS OF INCOME

1. Interest Earned

I.  Interest/Discount on Advances / Bills

II.   Income on Investments

III. Interest on balances with Reserve Bank of India and other inter-bank funds

IV. Others

2. Other Income

I.     Commission, Exchange and Brokerage

II.    Profit on sale of Investments (Net)

III.   Profit/ (Loss) on Revaluation of Investments

IV.   Profit on sale of land, buildings and other assets (Net)

V.    Profit on exchange transactions (Net)

VI.   Income earned by way of dividends etc. from subsidiaries and Associates abroad/in

India

VII. Miscellaneous Income 

COMPONENTS OF EXPENSES

I. Payments to and Provisions for employees.

II. Rent, Taxes and Lighting

III. Printing and Stationery

IV. Advertisement and Publicity.

V.    Depreciation on Bank's property.

V. Directors' Fees, Allowances and Expenses.

VII. Auditors’ Fees and Expenses   (including Branch Auditors).

VIII. Law Charges.

IX.   Postages, Telegrams, Telephones etc.

X.    Repairs and Maintenance

XI.   Insurance

XII. Other Expenditure

 

 

 

 

 

 

 

 

 

 

 

TECHNIQUES OF ASSETS LIABILITY MANAGEMENT

Asset liability management denotes the adaptation of the profit management process in order

to handle the presence of various constraint relating to the commitments that figure in the

liabilities of an institutional investor’s balance sheet (commitments to paying pensions,

insurance premium etc.). There are, therefore, as many types of liability constraints as there

are types of institutional investor, and thus as many types of approaches to Assets liability

management.

ALM- type management techniques can be classified into several categories. A first approach

called cash-flow matching involves ensuring a perfect match between the cash flows from the

portfolio of assets and commitments in the liabilities.

This technique, which provides the advantage of simplicity and allow, in theory, for perfect

risk management, nevertheless presents a number of limitations. First of all, it will generally

be impossible to find inflation-linked securities whose maturity corresponds exactly to the

liability commitments. Moreover, most of those securities pay out coupons, which lead to

problem of reinvesting the coupons. To the extent that perfect matching is not possible, there

is a technique called immunization, which allows the residual interest rate risk created by the

imperfect match between the assets and liabilities to be managed in an optimal way. This

interest rate risk management techniques can be extended beyond a simple duration-based

approach to fairly general contexts. Including for example, hedging non-parallel shifts in the

yield curve, or to simultaneous management of interest rate risk and inflation risk. It should

be noted, however, that this technique is difficult to adapt to hedging non-linear risk related

to the presence of options hidden in the liability structures.

Another, probably more important, disadvantages of the cash-flow matching technique are

that is that represented by the positioning that is extreme and not necessary optimal for the

investor in the risk/return space. In fact, we can say that the cash-flow matching approach in

ALM is the framework. However, the lack of return, related to absence of risk premia, makes

this approach very costly, which leads to an unattractive level of contribution to assets.

In a concern to improve the profitability of the assets,  therefore to reduce the level of

contributions, it is necessary to introduce assets classes (stock, government bonds and

corporate bonds) which are not perfectly  correlated with the liabilities in to strategic

allocation. It will then involve finding the best possible compromise between the risk

(relative to the liability constraints ) there by taken on, and the excess return that the investor

can hope to obtain through the exposure to rewarded risk factor

Different techniques are then used to the optimize the surplus, i.e., the excess value of the

assets compared to the liabilities, in a risk/return space. In particular, it is useful to turn to

stochastic models that allow for a representation of the uncertainty relating to a set of risk

factors that impact the liabilities. These can be financial risk (inflation, interest rate, stocks)

or non financial risks (demographic ones in particular). When necessary, agent behavior

models are then developed which allows the impact on decisions linked to the exerting of

certain implicit options to be represented.

For example, an insured person cans (typically in exchange for penalties) Cancel his/her life

assurance contract  if the guaranteed contractual rate drops significantly below the interest

rate level prevailing at date flowing the signature of the contract, which makes the amount of

liability cash flows, and not just their current value, dependent on interest rate risk.

ASSET-LIABILITY MANAGEMENT APPROACH 

ALM in its most apparent sense is based on funds management. Funds management

represents the core of sound bank planning and financial management. Although funding

practices, techniques, and norms have been revised substantially in recent years, it is not a

new concept. Funds management is the process of managing the spread between interest

earned and interest paid while ensuring adequate liquidity. Therefore, funds management has

following three components, which have been discussed briefly.  

A. Liquidity Management

Liquidity represents the ability to accommodate decreases in liabilities and to fund increases

in assets. An organization has adequate liquidity when it can obtain sufficient funds, either by

increasing liabilities or by converting assets, promptly and at a reasonable cost. Liquidity is

essential in all organizations to compensate for expected and unexpected balance sheet

fluctuations and to provide funds for growth. The price of liquidity is a function of market

conditions and market perception of the risks, both interest rate and credit risks, reflected in

the balance sheet and off-balance sheet activities in the case of a bank. If liquidity needs are

not met through liquid asset holdings, a bank may be forced to restructure or acquire

additional liability under adverse market conditions. Liquidity exposure can stem from both

internally (institution-specific) and externally generated factors. Sound liquidity risk

management should address both types of exposure. External liquidity risks can be

geographic, systemic or instrument-specific. Internal liquidity risk relates largely to the

perception of an institution in its various markets: local, regional, national or international.

Determination of the adequacy of a bank's liquidity position depends upon an analysis of it’s:

-

Historical funding requirements

Current liquidity position

Anticipated future funding needs

Sources of funds

Present and anticipated asset quality

Present and future earnings capacity

Present and planned capital position

As all banks are affected by changes in the economic climate, the monitoring of economic

and money market trends is key to liquidity planning. Sound financial management can

minimize the negative effects of these trends while accentuating the positive ones.

Management must also have an effective contingency plan that identifies minimum and

maximum liquidity needs and weighs alternative courses of action designed to meet those

needs. The cost of maintaining liquidity is another important prerogative. An institution that

maintains a strong liquidity position may do so at the opportunity cost of generating higher

earnings. The amount of liquid assets a bank should hold depends on the stability of its

deposit structure and the potential for rapid expansion of its loan portfolio. If deposit

accounts are composed primarily of small stable accounts, a relatively low allowance for

liquidity is necessary

Additionally, management must consider the current ratings by regulatory and rating agencies

when planning liquidity needs. Once liquidity needs have been determined, management

must decide how to meet them through asset management, liability management or a

combination of both.

B. Asset Management

Many banks (primarily the smaller ones) tend to have little influence over the size of their

total assets. Liquid assets enable a bank to provide funds to satisfy increased demand for

loans. But banks, which rely solely on asset management, concentrate on adjusting the price

and availability of credit and the level of liquid assets. However, assets that are often

assumed to be liquid are sometimes difficult to liquidate. For example, investment securities

may be pledged against public deposits or repurchase agreements, or may be heavily

depreciated because of interest rate changes. Furthermore, the holding of liquid assets for

liquidity purposes is less attractive because of thin profit spreads. 

Asset liquidity, or how "salable" the bank's assets are in terms of both time and cost, is of

primary importance in asset management. To maximize profitability, management must

carefully weigh the full return on liquid assets (yield plus liquidity value) against the higher

return associated with less liquid assets. Income derived from higher yielding assets may be

offset if a forced sale, at less than book value, is necessary because of adverse balance sheet

fluctuations. 

Seasonal, cyclical, or other factors may cause aggregate outstanding loans and deposits to

move in opposite directions and result in loan demand, which exceeds available deposit

funds. A bank relying strictly on asset management would restrict loan growth to that which

could be supported by available deposits. The decision whether or not to use liability sources

should be based on a complete analysis of seasonal, cyclical, and other factors, and the costs

involved. In addition to supplementing asset liquidity, liability sources of liquidity may serve

as an alternative even when asset sources are available.  

C. Liability Management

Liquidity needs can be met through the discretionary acquisition of funds on the basis of

interest rate competition. This does not preclude the option of selling assets to meet funding

needs, and conceptually, the availability of asset and liability options should result in a lower

liquidity maintenance cost. The alternative costs of available discretionary liabilities can be

compared to the opportunity cost of selling various assets. The major difference between

liquidity in larger banks and in smaller banks is that larger banks are better able to control the

level and composition of their liabilities and assets.

The ability to obtain additional liabilities represents liquidity potential. The marginal cost of

liquidity and the cost of incremental funds acquired are of paramount importance in

evaluating liability sources of liquidity. Consideration must be given to such factors as the

frequency with which the banks must regularly refinance maturing purchased liabilities, as

well as an evaluation of the bank's ongoing ability to obtain funds under normal market

conditions.  

The obvious difficulty in estimating the latter is that, until the bank goes to the market to

borrow, it cannot determine with complete certainty that funds will be available and/or at a

price, which will maintain a positive yield spread. Changes in money market conditions may

cause a rapid deterioration in a bank's capacity to borrow at a favorable rate. In this context,

liquidity represents the ability to attract funds in the market when needed, at a reasonable cost

vis-à-vis asset yield. The access to discretionary funding sources for a bank is always a

function of its position and reputation in the money market

Although the acquisition of funds at a competitive cost has enabled many banks to meet

expanding customer loan demand, misuse or improper implementation of liability

management can have severe consequences. Further, liability management is not risk less.

This is because concentrations in funding sources increase liquidity risk. For example, a bank

relying heavily on foreign interbank deposits will experience funding problems if overseas

markets perceive instability in U.S. banks or the economy. Replacing foreign source funds

might be difficult and costly because the domestic market may view the bank's sudden need

for funds negatively. Again over-reliance on liability management may cause a tendency to

minimize holdings of short-term securities, relax asset liquidity standards, and result in a

large concentration of short-term liabilities supporting assets of longer maturity. During times

of tight money, this could cause an earnings squeeze and an illiquid condition.  

Also if rate competition develops in the money market, a bank may incur a high cost of funds

and may elect to lower credit standards to book higher yielding loans and securities. If a bank

is purchasing liabilities to support assets, which are already on its books, the higher cost of

purchased funds may result in a negative yield spread.

Preoccupation with obtaining funds at the lowest possible cost, without considering maturity

distribution, greatly intensifies a bank's exposure to the risk of interest rate fluctuations. That

is why banks who particularly rely on wholesale funding sources, management must

constantly be aware of the composition, characteristics, and diversification of its funding

sources.

ASSETS LIABILITYMANAGEMENT (ALM) SYSTEM IN BANK- RBI

GUIDELINES

1. 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.

2. This note lays down broad guidelines in respect of interest rate and liquidity risks

management systems in banks which form part of the Asset-Liability Management (ALM)

function. 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. 

3. The ALM process rests on three pillars:

1. ALM information systems.

=> Management Information System.

=> Information availability, accuracy, adequacy and expediency.

2. ALM organization

=> Structure and responsibilities.

=> Level of top management involvement.

3. ALM process

=> Risk parameters

=> Risk identification

=> Risk measurement

=> Risk management

=> Risk policies and tolerance levels.

4. ALM information systems

Information is the key to the ALM process. Considering the large network of branches and

the lack of an adequate system to collect information required for ALM which analyses

information on the basis of residual maturity and behavioural pattern it will take time for

banks in the present state to get the requisite information. The problem of ALM needs to be

addressed by following an ABC approach i.e. analyzing the behavior of asset and liability

products in the top branches accounting for significant business and then making rational

assumptions about the way in which assets and liabilities would behave in other branches. In

respect of foreign exchange, investment portfolio and money market operations, in view of

the centralized nature of the functions, it would be much easier to collect reliable information.

The data and assumptions can then be refined over time as the bank management gain

experience of conducting business within an ALM framework. The spread of computerization

will also help banks in accessing data.

5. ALM Organization

a) The Board should have overall responsibility for management of risks and should decide

the risk management policy of the bank and set limits for liquidity, interest rate, foreign

exchange and equity price risks.

b) The Asset - Liability Committee (ALCO) consisting of the bank's senior management

including CEO should be responsible for ensuring adherence to the limits set by the Board as

well as for deciding the business strategy of the bank (on the assets and liabilities sides) in

line with the bank's budget and decided risk management objectives.

c) The ALM desk consisting of operating staff should be responsible for analyzing,

monitoring and reporting the risk profiles to the ALCO. The staff should also prepare

forecasts (simulations) showing the effects of various possible changes in market conditions

related to the balance sheet and recommend the action needed to adhere to bank's internal

limits.

2) The ALCO is a decision making unit responsible for balance sheet planning from risk -

return perspective including the strategic management of interest rate and liquidity risks.

Each bank will have to decide on the role of its ALCO, its responsibility as also the decisions

to be taken by it. The business and risk management strategy of the bank should ensure that

the bank operates within the limits / parameters set by the Board. The business issues that an

ALCO would consider, inter alia, will include product pricing for both deposits and advances,

desired maturity profile of the incremental assets and liabilities, etc. In addition to monitoring

the risk levels of the bank, the ALCO should review the results of and progress in

implementation of the decisions made in the previous meetings. The ALCO would also

articulate the current interest rate view of the bank and base its decisions for future business

strategy on this view. In respect of the funding policy, for instance, its responsibility would

be to decide on source and mix of liabilities or sale of assets. Towards this end, it will have to

develop a view on future direction of interest rate movements and decide on a funding mix

between fixed vs. floating rate funds, wholesale vs. retail deposits, money market vs capital

market funding, domestic vs. foreign currency funding, etc. Individual banks will have to

decide the frequency for holding their ALCO meetings.

3) Composition of ALCO

The size (number of members) of ALCO would depend on the size of each institution,

business mix and organizational complexity. To ensure commitment of the Top Management,

the CEO/CMD or ED should head the Committee. The Chiefs of Investment, Credit, Funds

Management / Treasury (forex and domestic), International Banking and Economic Research

can be members of the Committee. In addition the Head of the Information Technology

Division should also be an invitee for building up of MIS and related computerization. Some

banks may even have sub-committees.

4) Committee of Directors

Banks should also constitute a professional Managerial and Supervisory Committee

consisting of three to four directors which will oversee the implementation of the system and

review its functioning periodically.

3. ALM Process

The scope of ALM function can be described as follows:

a) Liquidity risk management

b) Management of market risks (including Interest Rate Risk)

c) Funding and capital planning

d)Profit planning and growth projection

e)Trading risk management

The guidelines given in this note mainly address Liquidity and Interest Rate risks.

6. Liquidity Risk Management

1. Measuring and managing liquidity needs are vital activities of commercial banks. By

assuring a bank's ability to meet its liabilities as they become due, liquidity management can

reduce the probability of an adverse situation developing. The importance of liquidity

transcends individual institutions, as liquidity shortfall in one institution can have

repercussions on the entire system. Bank management should measure not only the liquidity

positions of banks on an ongoing basis but also examine how liquidity requirements are likely

to evolve under crisis scenarios. Experience shows that assets commonly considered as liquid

like Government securities and other money market instruments could also become illiquid

when the market and players are unidirectional. Therefore liquidity has to be tracked through

maturity or cash flow mismatches. For measuring and managing net funding requirements,

the use of a maturity ladder and calculation of cumulative surplus or deficit of funds at

selected maturity dates is adopted as a standard tool.

2. The Maturity Profile as given in Appendix I could be used for measuring the future cash

flows of banks in different time buckets. The time buckets given the Statutory Reserve cycle

of 14 days may be distributed as under:

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 12 months

vi) Over 1 year and up to 2 years

vii) Over 2 years and up to 5 years

viii) Over 5 years.

3. Within each time bucket there could be mismatches depending on cash inflows and

outflows. While the mismatches up to one year would be relevant since these provide early

warning signals of impending liquidity problems, the main focus should be on the short-term

mismatches viz., 1-14 days and 15-28 days. Banks, however, are expected to monitor their

cumulative mismatches (running total) across all time buckets by establishing internal

prudential limits with the approval of the Board / Management Committee. The mismatch

during 1-14 days and 15-28 days should not in any case exceed 20% of the cash outflows in

each time bucket. If a bank in view of its asset -liability profile needs higher tolerance level,

it could operate with higher limit sanctioned by its Board / Management Committee giving

reasons on the need for such higher limit. A copy of the note approved by Board /

Management Committee may be forwarded to the Department of Banking Supervision, RBI.

The discretion to allow a higher tolerance level is intended for a temporary period, till the

system stabilises and the bank is able to restructure its asset -liability pattern.

4. The Statement of Structural Liquidity may be prepared by placing all cash inflows and

outflows in the maturity ladder according to the expected timing of cash flows. A maturing

liability will be a cash outflow while a maturing asset will be a cash inflow. It would be

necessary to take into account the rupee inflows and outflows on account of forex operations

including the readily available forex resources ( FCNR (B) funds, etc) which can be deployed

for augmenting rupee resources. While determining the likely cash inflows / outflows, banks

have to make a number of assumptions according to their asset - liability profiles. For

instance, Indian banks with large branch network can (on the stability of their deposit base as

most deposits are renewed) afford to have larger tolerance levels in mismatches if their term

deposit base is quite high. While determining the to learn levels the banks may take into

account all relevant factors based on their asset-liability base, nature of business, future

strategy etc. The RBI is interested in ensuring that the tolerance levels are determined

keeping all necessary factors in view and further refined with experience gained in Liquidity

Management.

5. In order to enable the banks to monitor their short-term liquidity on a dynamic basis over a

time horizon spanning from 1-90 days, banks may estimate their short-term liquidity profiles

on the basis of business projections and other commitments. An indicative format for

estimating Short-term Dynamic Liquidity is enclosed.

6. Currency Risk

1. Floating exchange rate arrangement has brought in its wake pronounced volatility adding a

new dimension to the risk profile of banks' balance sheets. The increased capital flows across

free economies following deregulation have contributed to increase in the volume of

transactions. Large cross border flows together with the volatility has rendered the banks'

balance sheets vulnerable to exchange rate movements.

2. Dealing in different currencies brings opportunities as also risks. If the liabilities in one

currency exceed the level of assets in the same currency, then the currency mismatch can add

value or erode value depending upon the currency movements. The simplest way to avoid

currency risk is to ensure that mismatches, if any, are reduced to zero or near zero. Banks

undertake operations in foreign exchange like accepting deposits, making loans and advance

and quoting prices for foreign exchange transactions. Irrespective of the strategies adopted, it

may not be possible to eliminate currency mismatches altogether. Besides, some of the

institutions may take proprietary trading positions as a conscious business strategy.

3. Managing Currency Risk is one more dimension of Asset- Liability Management.

Mismatched currency position besides exposing the balance sheet to movements in exchange

rate also exposes it to country risk and settlement risk. Ever since the RBI (Exchange Control

Department) introduced the concept of end of the day near square position in 1978, banks

have been setting up overnight limits and selectively undertaking active day time trading.

Following the introduction of "Guidelines for Internal Control over Foreign Exchange

Business" in 1981, maturity mismatches (gaps) are also subject to control. Following the

recommendations of Expert Group on Foreign Exchange Markets in India (Sodhani

Committee) the calculation of exchange position has been redefined and banks have been

given the discretion to set up overnight limits linked to maintenance of additional Tier I

capital to the extent of 5 per cent of open position limit.

4. Presently, the banks are also free to set gap limits with RBI's approval but are required to

adopt Value at Risk (VAR) approach to measure the risk associated with forward exposures.

Thus the open position limits together with the gap limits form the risk management approach

to forex operations. For monitoring such risks banks should follow the instructions contained

in Circular A.D (M. A. Series) No.52 dated December 27, 1997 issued by the Exchange

Control Department.

7. Interest Rate Risk (IRR)

1. The phased deregulation of interest rates and the operational flexibility given to banks in

pricing most of the assets and liabilities have exposed the banking system to Interest Rate

Risk. Interest rate risk is the risk where changes in market interest rates might adversely

affect a bank's financial condition. Changes in interest rates affect both the current earnings

(earnings perspective) as also the net worth of the bank (economic value perspective). The

risk from the earnings' perspective can be measured as changes in the Net Interest Income

(Nil) or Net Interest Margin (NIM). In the context of poor MIS, slow pace of computerisation

in banks and the absence of total deregulation, the traditional Gap analysis is considered as a

suitable method to measure the Interest Rate Risk. It is the intention of RBI to move over to

modern techniques of Interest Rate Risk measurement like Duration Gap Analysis,

Simulation and Value at Risk at a later date when banks acquire sufficient expertise and

sophistication in MIS. The Gap or Mismatch risk can be measured by calculating Gaps over

different time intervals as at a given date. Gap analysis measures mismatches between rate

sensitive liabilities and rate sensitive assets (including off-balance sheet positions). An asset

or liability is normally classified as rate sensitive if:

i) Within the time interval under consideration, there is a cash flow;

ii) The interest rate resets/reprises contractually during the interval;

iii) RBI changes the interest rates (i.e. interest rates on Savings Bank Deposits,

advances up to

Rs.2 lakhs, DRI advances Export credit, Refinance CRR balance, etc.) In cases where

Interest rates are administered; and

iv) It is contractually pre-payable or withdrawal before the stated maturities.

2. The Gap Report should be generated by grouping rate sensitive liabilities, assets and off

balance sheet positions into time buckets according to residual maturity or next reprising

period, whichever is earlier. The difficult task in Gap analysis is determining rate sensitivity.

All investments, advances, deposits, borrowings, purchased funds etc. that mature/reprise

within a specified timeframe are interest rate sensitive. Similarly, any principal repayment of

loan is also rate sensitive if the bank expects to receive it within the time horizon. This

includes final principal payment and interim installments. Certain assets and liabilities

receive/pay rates that vary with a reference rate. These assets and liabilities are reprised at

pre-determined intervals and are rate sensitive at the time of reprising. While the interest rates

on term deposits are fixed during their currency, the advances portfolio of the banking system

is basically floating. The interest rates on advances could be reprised any number of

occasions, corresponding to the changes in PLR. The Gaps may be identified in the following

time buckets:

i) Up to 1 month

ii) Over one month and up to 3 months

iii) Over 3 months and up to 6 months

iv) Over 6 months and up to 12 months

v) Over 1 year and up to 3 years

vi) Over 3 years and up to 5 years

vii) Over 5 years

viii) Non-sensitive

3. The Gap is the difference between Rate Sensitive Assets (RSA) and Rate Sensitive

Liabilities (RSL) for each time bucket. The positive Gap indicates that it has more RSAs than

RSLs whereas the negative Gap indicates that it has more RSLs. The Gap reports indicate

whether the institution is in a position to benefit from rising interest rates by having a positive

Gap (RSA > RSL) or whether it is in a position to benefit from declining interest rates by a

negative Gap (RSL > RSA). The Gap can, therefore, be used as a measure of interest rate

sensitivity.

4. Each bank should set prudential limits on individual Gaps with the approval of the

Board/Management Committee. The prudential limits should have a bearing on the total

assets, earning assets or equity. The banks may work out earnings at risk, based on their

views on interest rate movements and fix a prudent level with the approval of the

Board/Management Committee.

5. RBI will also introduce capital adequacy for market risks in due course.

6. The classification of various components of assets and liabilities into different time buckets

for preparation of Gap reports (Liquidity and Interest Rate Sensitivity) as indicated in

Appendices I & II is the benchmark. Banks which are better equipped to reasonably estimate

the behavioral pattern, embedded options, rolls-in and rolls-out, etc of various components of

assets and liabilities on the basis of past data / empirical studies could classify them in the

appropriate time buckets, subject to approval from the ALCO / Board. A copy of the note

approved by the ALCO / Board may be sent to the Department of Banking Supervision.

Term), Bills Rediscounting, Refinance from RBI / others, Repos and deployment of foreign

currency resources after conversion into rupees (unsnapped foreign currency funds) etc. 

 

 

 

 PROCEDURE FOR EXAMINATION OF ASSET LIABILITY MANAGEMENT

In order to determine the efficacy of Asset Liability Management one has to follow a

comprehensive procedure of reviewing different aspects of internal control, funds

management and financial ratio analysis. Below a step-by-step approach of ALM

examination in case of a bank has been outlined.

STEP 1

The bank/ financial statements and internal management reports should be reviewed to assess

the asset/liability mix with particular emphasis on: -

Total liquidity position (Ratio of highly liquid assets to total assets).

Current liquidity position (Minimum ratio of highly liquid assets to demand

liabilities/deposits).

Ratio of Non Performing Assets to Total Assets.

Ratio of loans to deposits.

Ratio of short-term demand deposits to total deposits.

Ratio of long-term loans to short term demand deposits.

Ratio of contingent liabilities for loans to total loans.

Ratio of pledged securities to total securities.

STEP 2

It is to be determined that whether bank management adequately assesses and plans its

liquidity needs and whether the bank has short-term sources of funds. This should include: -

Review of internal management reports on liquidity needs and sources of satisfying these

needs.

Assessing the bank’s ability to meet liquidity needs.  

STEP 3

The banks future development and expansion plans, with focus on funding and liquidity

management aspects have to be looked into. This entails: -

Determining whether bank management has effectively addressed the issue of need

for liquid assets to funding sources on a long-term basis.

Reviewing the bank's budget projections for a certain period of time in the future.

Determining whether the bank really needs to expand its activities. What are the

sources of funding for such expansion and whether there are projections of changes in

the bank's asset and liability structure?

Assessing the bank's development plans and determining whether the bank will be

able to attract planned funds and achieve the projected asset growth.

Determining whether the bank has included sensitivity to interest rate risk in the

development of its long term funding strategy.

STEP 4

Examining the bank's internal audit report in regards to quality and effectiveness in terms of liquidity management.  

STEP 5

Reviewing the bank's plan of satisfying unanticipated liquidity needs by: -

Determining whether the bank's management assessed the potential expenses that the

bank will have as a result of unanticipated financial or operational problems.

Determining the alternative sources of funding liquidity and/or assets subject to

necessity.

Determining the impact of the bank's liquidity management on net earnings position.

STEP 6

Preparing an Asset/Liability Management Internal Control Questionnaire which

should include the following: -

Whether the board of directors has been consistent with its duties and responsibilities

and included: -

A line of authority for liquidity management decisions.

A mechanism to coordinate asset and liability management decisions.

A method to identify liquidity needs and the means to meet those needs.

Guidelines for the level of liquid assets and other sources of funds in relationship to

needs.

               

STUDY OF ASSETS LIABILITY MANAGEMENT IN INDIAN BANK: CANONICAL

CORRELATION ANALYSIS ( PERIOD – 1992-2004)

INTRODUCTION

Assets liability management (ALM) defines management of all assets and liabilities of a

bank. It requires assessment of various types of risks and alerting the assets liability portfolio

to manage risk.

Till the early 1990s, the RBI has done the real banking business and commercial banks were

mere executors of what RBI decided. But now, BIS is standardizing the practices of banks

across the globe and India is part of this process.

The success of ALM, Risk Management of Assets and Liabilities. Hence, these days, without

proper management of assets and liabilities, the survival is at stake.

A bank’s liabilities include deposits, borrowing and capital. On the other side of the balance

sheet are assets which are loans of various types which banks make to the customer for

various purposes. To view the two side of bank’s balance sheet as completely integrated

units. Has an intuitive appeal. But the nature profitability of bank especially in terms of Net

Interest Margin (NIM).

ALM MODELS

Analytical models are very important for ALM analysis and scientific decision making. The

basic models are:

1. GAP Analysis Model

2. Duration GAP Analysis Models

3. Scenario Analysis Model

4. Value-at-risk models

5. Stochastic Programming Model

Any of these models is being used by banks through their Asset Liability Management

Committee (ALCO). The executive Director and other vital department heads ALCO in

banks. There are minimum four members and maximum eight members. It is responsible for

Setting business policies and strategies, Pricing assets and liabilities, Measuring risk, Periodic

review, Discussing new products and Reporting.

OBJECTIVE OF THE STUDY

Though Basel Capital Accord and subsequent RBI guidelines have given a structure for ALM

in banks, the Indian Banking system has not enforced the guidelines in total.

Public Sector bank are yet to collect 100% of ALM data because of lack of computerization

all branches.  With this background, this research aims to find out the status of Asset Liability

Management across all commercial bank in Indian with the help of multivariate technique of

canonical correlation.

The discussion paper has following objective to explore:

To study the Portfolio-Matching behavior of Indian Bank in terms of nature and

strengths of relationship between Assets and Liability.

o To find out the component of Assets explaining variance in liability and vice-

versa.

o To study the impact of ownership over Asset Liability Management in Bank

o To study impact of ALM on the profitability of different back-groups.

 METHODOLOGY

The study covers all scheduled commercial except the RBIs. The period of the study

was from 1992-2004. The banks were grouped based on ownership structure the

group were

1. Nationalized bank except SBI & Associates (19)

2. SBI and Associate (8)

3. Private Banks (30)

4. Foreign Banks (36)

RECLASSIFICATION OF ASSETS AND LIABILITIES

The assets and liabilities of a Bank are divided into various sub head. For a purpose of the

study, the assets were regrouped under six major heads and the liabilities were regrouped

under four major heads as shown in table below. This classification is guided by prior

information on the liquidity – return profile of assets and the maturity- cost profile of

liabilities. The reclassified assets and liabilities cover in the study exclude ‘other assets’  on

the asset side and ‘other liabilities’ on the liabilities side. This is necessary to deal with the

problem of singularity – a situation that produces perfect correlation with in sets and make

correlation between sets meaningless.

The relevant data has been collected from RBI website

TABLE 1 : RECLASSIFICATION OF ASSETS

Liquid Assets Cash In Hand, Bal With Banks, Money At Call And Short Notice.

SLR Securities Govt. Securities And Other Approved Securities

Investments Other Than SLR Such As Shares, Debentures, Bond Subsidiaries And Other.

Term Loans Term Loan

ShortTerm

Loans

Advance Not In TL – Bill Purchased And Discounted, Cash Credits, Overdrafts

And Loans

Fixed Assets Fixed Assets

TABLE 2: RECLASSIFICATION OF LIABILITIES

Net Worth Capital, Reserves And Surpluses

Borrowings Borrowing From RBI, Banks, Other Fls From India And Abroad

Short Term Deposits Demand Deposits And Savings Bank Deposits

Long Term Deposits All Deposits Not Included In Short Term

TABELE 3: LIQUIDITY-RETURN PROFILE OF ASSETS

Assets - Liquidity High Liquid Assets SLR Securities Short Term Loans

Medium Investment Term Loans

Low

Fixed Asset

 

TABLE 4: MATURITY – COST PROFILE OF LIABILITIES

Near

Short Term Deposits

Borrowing

Liability Maturity

Medium Term Deposits

Far Net Worth

CANONICAL CORRELATION ANALYSIS

Multivariate statistical technique, canonical correlation has been used to access the nature and

strength of relationship between the assets and liabilities. To explore the relationship between

assets and liabilities, we could merely compute the correlation between each set of assets and

each set of liabilities. Unfortunately, all of these correlations assess the same hypothesis –

that assets influence liabilities.

The technique reduces the relationship in to a few significant relationships. The essence of

canonical correlation Measures the strength of relationship between two sets of variables by

establishing linear combination of variables in one set and a linear combinations of variables

in other set. It produces an output that shows the strength of relationship between two variates

as well as individual variables accounting for variance in other set.

A=A1* (Liquid Assets) + A2* (SLR Securities) + A3* (Investment) + A4* (Term Loan) +

A5* (Short – Term Loans) + A6* (Fixed Assets)

B= B1*(Net Worth) + B2* (Borrowings) + B3* (Short –Term Deposits) +B4* (Loan- Term

Deposits)

To begin with, A &B (called canonical variates) are unknown. The technique tries to compute

the values of Ai and Bi such that the covariance between A & B is maximum.

TABLE 5: CANONICAL CORRELATION SUMMARY OF  OUTPUT

Foreign

Banks

Private bank nationalized SBI & Associate

R2 0.948 0.997 0.987 0.998

Canonical Loading

Assets 0.243 0.716 -0.046 0.237

LA 0.078 0.712 -0.328 0.744

SLR 0.314 -0.467 -0.662 0.858

Inv -0.469 -0.464 0.188 0.568

STL 0.268 0.461 0.747 -0.88

FA -0.903 -0.945 -0.728 0.644

Liabilities

NW -0.664 -0.948 -0.885 0.831

Bor 0.171 -0.523 0.593 -0.83

STD 0.498 0.972 0.126 -0.457

LTD -0.255 -0.201 0.007 0.964

Redundancy

Asset 0.212 0.426 0.279 0.476

Liability 0.196 0.539 0.288 0.629

The first row (R2) is measure of the significance of the correlation. In this case all the

correlation is significant. The canonical loading is measure of the strength of the association

which means it is a present of variance linearly shared by an original variable with one of the

canonical varieties. A loading greater than 40% is assumed to be significant. A negative

loading indicates an inverse relationship.

For example, for foreign bank, Fixed Assets (FA) under assets has a loading of -0.903Net

worth under liabilities has loading of -0.664. Since both are negative, this means there is a

strong correlation between FA and NW. Similarly for foreign banks, we can observe that

there is a strong negative correlation between short-term deposit with both Term Loan and

Fixed Asset.

OBSERVATION

As per the summary table above, the canonical co-relation coefficients of different set of

banks indicate that different banks have different degree of association among constituents of

assets and liabilities. Bank-Groups can be arranged in decreasing order of correlation:

o SBI and Associate

o Private Banks

o Nationalized Banks

o Foreign Banks

Redundancy factors indicate how redundant one set of variables which gives an idea about

independent and dependent sets. This also gives an idea about the fact whether the bank is

asset-managed or liability-managed. Looking at the redundancy factors, the independent and

dependent sets for different bank-group can be identified:

TABLE 6: CAUSE EFFECT RELATIONSHIP

Bank Independent Set Dependent Set

Foreign Liability Asset

Private Asset Liability

Nationalized Asset Liability

SBI & Associates Asset Liability

Other than Foreign bank groups, remaining three have assets as their independent set this

means during the study period (1992-2004), these banks were actively managing assets and

liability was dependent upon how well the assets are managed. This is in perfect consonance

with the micro indicator. 

 

 

FOREIGN BANKS

The canonical function coefficient or the canonical weight of different constituents in case of

foreign banks Term Loans and Fixed Assets from asset side Net Worth Short – term Deposit

from liability side have significant presence with following interpretation :

Very strong co-relation between Fixed Asset and Net Worth.

Strong negative correlation between short-term deposit with both

Term loan and Fixed Assets. This indicates –

o Proper using of short- term deposit.

o Not use for long- term assets or long term losses.

PRIVATE BANKS

In case of private bank all constituents’ of asset side Liquidate Assets, SLR Securities, Short-

term loans, investment, Term Loans, and Fixed Assets and significantly explaining the co-

relation while on liability side only Net Worth and Short –Term Deposit are contributing.

This shows how actively these banks manage their assets to generate maximum return. This

relationship can be interpreted in the following ways:

Very strong co-relation between FA and NW.

Short- term deposit is used for Liquid Assets, SLR and Short –Term Loans As defines

above LA, SLR and STL – all are highly liquid section of assets. So it is very prudent

to employ short term deposits.

NATIONALIZED BANKS

In case of nationalized banks investment, short-term loan, fixed asset contribute significantly

in explaining asset part while net worth and borrowings constituent of liability is major

factor. The major interpretations are:

Very strong co-relation between FA NW.

Nationalized banks use borrowing for Short-term loans.

There is negative co-relation between Borrowing and Investment.

o More concerned with liquidity than profitability.

o Conservative strategy (in comparison to Private Banks).

o Good short-term maturity/liquidity management.

Nationalized Banks use a borrowing (which is never term maturity) for Short- term a loan

which is effective way of ALM. 

SBI & ASSOCIATES

For SBI group all constitute of liability namely Net Worth, Borrowings short-term deposit

and long term deposit are significant while in assets side SLR investment, Investment, Term

loans and Fixed Assets are significant.

Following can be interpreted:

Very strong correlation between FA and NW.

Strong correlation between Borrowing and SLR.

Correlation between Long term Deposits and ‘Term Loan, Investment and SLR’.

Short –term Deposits and Short-term liabilities are correlated.

Most Conservative strategy.

Over concerned with liquidity.

Use long-term funds for Long as well as medium &short-term loan.

CONCLUSION

Based on this decision above, it can be conclude that ownership and structure of the banks do

affect their ALM procedure. The discussion paper concludes with following findings:

Among all groups, SBI & association have best Assets-Liability maturity pattern

Other than Foreign Bank- all other banks can be called liability manage banks.

Across all banks, Fixed Assets and Net Worth are highly correlated.

Private Banks are aggressive in profit generation.

Nationalized Banks (including SBI &Associates) are excessively concerned about

Liquidity.

The aggressive strategy adopted by private banks is being reflected in terms of better

profitability.