2. Components of a
Bank Balance sheet
Liabilities Assets
1. Capital 1. Cash & Balances with
2. Reserve & Surplus RBI
3. Deposits 2. Bal. With Banks &
4. Borrowings Money at Call and
Short Notices
5. Other Liabilities
3. Investments
4. Advances
5. Fixed Assets
6. Other Assets
Contingent Liabilities
3. 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.
4. Components of Liabilities
2. Reserves & Surplus
Components under this head includes:
I. Statutory Reserves
II. Capital Reserves
III. Investment Fluctuation Reserve
IV. Revenue and Other Reserves
V. Balance in Profit and Loss Account
5. Components of Liabilities
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
6. Components of Liabilities
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
7. Components of Liabilities
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)
8. 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
9. Components of Assets
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
10. Components of Assets
3. 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 Bonds
v) Subsidiaries and Sponsored Institutions
vi) Others (UTI Shares , Commercial Papers, COD &
Mutual Fund Units etc.)
II. Investments outside India in **
Subsidiaries and/or Associates abroad
11. Components of Assets
4. Advances
The most important assets for a bank.
A. 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
12. Components of Assets
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
13. Contingent Liability
Bank’s obligations under LCs, Guarantees,
Acceptances on behalf of constituents and
Bills accepted by the bank are reflected under
this heads.
14. Banks Profit & Loss Account
A bank’s profit & Loss Account has the
following components:
Income: This includes Interest Income and Other
Income.
II. Expenses: This includes Interest Expended,
Operating Expenses and Provisions &
contingencies.
15. 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
16. Components of Income
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
17. Components of Expenses
1. INTEREST EXPENDED
I. Interest on Deposits
II. Interest on Reserve Bank of India / Inter-Bank
borrowings
III. Others
18. Components of Expenses
2. OPERATING 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
VI. 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
19. Assets Liability Management
It is a dynamic process of Planning,
Organizing & Controlling of Assets
& Liabilities- their volumes, mixes,
maturities, yields and costs in order
to maintain liquidity and NII.
21. Purpose & Objective 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 ration.
It is aimed to stabilize short-term profits, long-term
earnings and long-term substance of the bank. The
parameters for stabilizing ALM system are:
1. Net Interest Income (NII)
2. Net Interest Margin (NIM)
22. RBI DIRECTIVES
Issued draft guidelines
on 10th Sept’98.
Final guidelines
issued on 10th Feb’99
for implementation of
ALM w.e.f. 01.04.99.
To begin with 60% of
asset &liabilities will
be covered; 100% from
01.04.2000.
Initially Gap Analysis
23. Liquidity Management
Bank’s liquidity management is the process of
generating funds to meet contractual or
relationship obligations at reasonable prices at
all times.
New loan demands, existing commitments,
and deposit withdrawals are the basic
contractual or relationship obligations that a
bank must meet.
24. Adequacy of liquidity position for a
bank
Analysis of following factors throw light on a
bank’s adequacy of liquidity position:
b. Historical Funding requirement
c. Current liquidity position
d. Anticipated future funding needs
e. Sources of funds
f. Options for reducing funding needs
g. Present and anticipated asset quality
h. Present and future earning capacity and
h. Present and planned capital position
25. Funding Avenues
To satisfy funding needs, a bank must
perform one or a combination of the
following:
b. Dispose off liquid assets
c. Increase short term borrowings
d. Decrease holding of less liquid assets
e. Increase liability of a term nature
e. Increase Capital funds
26. Types of Liquidity Risk
Liquidity Exposure can stem from both
internally and externally.
External liquidity risks can be geographic,
systemic or instrument specific.
Internal liquidity risk relates largely to
perceptions of an institution in its various
markets: local, regional, national or
international
27. Other categories of liquidity risk
Funding Risk
- Need to replace net outflows due to
unanticipated withdrawals/non-renewal
Time Risk
- Need to compensate for non-receipt of
expected inflows of funds
Call Risk
- Crystallization of contingent liability
28. Statement of Structural Liquidity
All Assets & Liabilities to be reported as per
their maturity profile into 8 maturity Buckets:
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 1 year
vi. Over 1 year and up to 3 years
vii. Over 3 years and up to 5 years
viii. Over 5 years
29. STATEMENT OF
STRUCTURAL LIQUIDITY
Places all cash inflows and outflows in the
maturity ladder as per residual maturity
Maturing Liability: cash outflow
Maturing Assets : Cash Inflow
Classified in to 8 time buckets
Mismatches in the first two buckets not to
exceed 20% of outflows
Shows the structure as of a particular date
Banks can fix higher tolerance level for
other maturity buckets.
30. An Example of Structural Liquidity
Statement
15-28 30 Days- 3 Mths - 6 Mths - 1Year - 3 3 Years - Over 5
1-14Days Days 3 Month 6 Mths 1Year Years 5 Years Years Total
Capital 200 200
Liab-fixed Int 300 200 200 600 600 300 200 200 2600
Liab-floating Int 350 400 350 450 500 450 450 450 3400
Others 50 50 0 200 300
Total outflow 700 650 550 1050 1100 750 650 1050 6500
Investments 200 150 250 250 300 100 350 900 2500
Loans-fixed Int 50 50 0 100 150 50 100 100 600
Loans - floating 200 150 200 150 150 150 50 50 1100
Loans BPLR Linked 100 150 200 500 350 500 100 100 2000
Others 50 50 0 0 0 0 0 200 300
Total Inflow 600 550 650 1000 950 800 600 1350 6500
Gap -100 -100 100 -50 -150 50 -50 300 0
Cumulative Gap -100 -200 -100 -150 -300 -250 -300 0 0
Gap % to Total Outflow -15.38
-14.29 18.18 -4.76 -13.64 6.67 -7.69 28.57
31. ADDRESSING THE
MISMATCHES
Mismatches can be positive or negative
Positive Mismatch: M.A.>M.L. and Negative
Mismatch M.L.>M.A.
In case of +ve mismatch, excess liquidity
can be deployed in money market
instruments, creating new assets &
investment swaps etc.
For –ve mismatch,it can be financed from
market borrowings (Call/Term), Bills
rediscounting, Repos & deployment of
foreign currency converted into rupee.
32. STRATEGIES…
To meet the mismatch in any
maturity bucket, the bank has to
look into taking deposit and invest
it suitably so as to mature in time
bucket with negative mismatch.
The bank can raise fresh deposits
of Rs 300 crore over 5 years
maturities and invest it in
securities of 1-29 days of Rs 200
crores and rest matching with
33. Liability/Assets Rupees In Percentage
(In Cr)
Maturity Pattern of Select Assets & Liabilities of A Bank
I. Deposits 15200 100
a. Up to 1 year 8000 52.63
b. Over 1 yr to 3 yrs 6700 44.08
c. Over 3 yrs to 5 yrs 230 1.51
d. Over 5 years 270 1.78
II. Borrowings 450 100
a. Up to 1 year 180 40.00
b. Over 1 yr to 3 yrs 00 0.00
c. Over 3 yrs to 5 yrs 150 33.33
d. Over 5 years 120 26.67
III. Loans & Advances 8800 100
a. Up to 1 year 3400 38.64
b. Over 1 yr to 3 yrs 3000 34.09
c. Over 3 yrs to 5 yrs 400 4.55
d. Over 5 years 2000 22.72
Iv. Investment 5800 100
a. Up to 1 year 1300 22.41
b. Over 1 yr to 3 yrs 300 5.17
c. Over 3 yrs to 5 yrs 900 15.52
d. Over 5 years 3300 56.90
34. STATEMENT OF
INTEREST RATE
SENSITIVITY & OFF-
Generated by grouping RSA,RSL
Balance sheet items in to various (8)time
buckets.
RSA:
MONEY AT CALL
ADVANCES ( BPLR LINKED )
INVESTMENT
RSL
DEPOSITS EXCLUDING CD
BORROWINGS
35. MATURITY GAP METHOD
(IRS)
THREE
OPTIONS:
A) RSA>RSL=
Positive Gap
B) RSL>RSA=
Negative Gap
C) RSL=RSA=
Zero Gap
36. SUCCESS OF ALM IN BANKS :
PRE - CONDITIONS
1. Awareness for
ALM in the Bank
staff at all levels–
supportive
Management &
dedicated Teams.
2. Method of
reporting data
from Branches/
other
Departments.
(Strong MIS).
37. Interest Rate Risk Management
Interest Rate risk is the exposure of a bank’s
financial conditions to adverse movements of
interest rates.
Though this is normal part of banking
business, excessive interest rate risk can pose
a significant threat to a bank’s earnings and
capital base.
Changes in interest rates also affect the
underlying value of the bank’s assets,
liabilities and off-balance-sheet item.
38. 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.
39. 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
40. Measurement of Interest Rate Risk
Gap Analysis- Simple maturity/re-pricing Schedules
can be used to generate simple indicators of interest
rate risk sensitivity of both earnings and economic
value to changing interest rates.
- If a negative gap occurs (RSA<RSL) in given time
band, an increase in market interest rates could cause
a decline in NII.
- conversely, a positive gap (RSA>RSL) in a given
time band, an decrease in market interest rates could
cause a decline in NII.
41. 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.