1. ASSET LIABILITY MANAGEMENT IN BANKS
Presented by:
Teena George

2. Asset Liability Management
Asset Liability can be defined as a mechanism to
address the risk faced by a bank due to mismatch
between assets and liabilities either due to liquidity or
change in interest rates.
ALM policy framework focuses on bank profitability
and long term viability.
Maturity matching of assets and liabilities across
various time horizons.

3. `ALM aims to manage the volume, mix, maturity,
rate sensitivity, quality and liquidity of assets and
liabilities as a whole so as to attain predetermined
acceptable risk/reward ratio.
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)
3. Economic Equity Ratio

4. Evolution
Pre liberalisation
Very less competition in banking sector
Main focuses on asset management
Post liberalisation
Deregulation of interest rates
Non recognition of income on accrual basis
High off balance sheet exposure
High Competition

5. Need for ALM
 Globalization of financial markets
 Deregulation of interest rates
 Diversification of ALM products’
 Healthy competition in banking sector
 Multi-currency Balance Sheet
 Integration of markets
 Narrowing of NIM/NII

6. Components of a Bank Balance Sheet

7. ALM Objectives
 Liquidity Risk Management.
 Interest Rate Risk Management.
 Currency Risks Management.
 Profit Planning and Growth
Projection.

8. Tools used by banks for ALM
ALM information systems
ALM Organization
ALM Process

9. ALM Information Systems
Usage of Real Time information system to gather the
information about the maturity and behavior of loans
and advances made by all other branches of a bank
ABC Approach :
analysing the behaviour of asset and liability
products
making rational assumptions
The data and assumptions can then
be refined

10. ALM Organization
The board should have overall responsibilities
and should set the limit for liquidity, interest rate,
foreign exchange and equity price risk
The Asset - Liability Committee (ALCO)
ALCO, consisting of the bank's senior
management (including CEO) should be
responsible for ensuring adherence to the
limits set by the Board
The role of ALCO includes product pricing
for both deposits and advances, desired
maturity profile of the incremental assets
and liabilities,
It should review the results of and progress
in implementation of the decisions made in
the previous meetings

11. ALM Process
Risk Parameters
Risk Identification
Risk Measurement
Risk Management
Risk Policies and Tolerance Level

12. Categories of Risk
Credit Risk Market Risk Operational Risk
Transaction Risk Commodity risk Process risk
Portfolio risk Interest Rate risk Infrastructure risk
Settlement risk Forex rate risk Model risk
Equity price risk Human risk
Liquidity risk

13. But under ALM risks that are typically
managed are….
Currency
Risk
Liquidity
Risk
Interest
Rate
Risk

14. Liquidity Risk
The risk that the institution might not be able to
generate sufficient cash flow to meet its financial
obligations
EFFECTS OF LIQUIDITY CRUNCH
Risk to bank’s earnings
Reputational risk
Contagion effect
Liquidity crisis can lead to runs on institutions

15. Statement of Structural Liquidity
All Assets & Liabilities to be reported as per
their maturity profile into 10 maturity Bucket
i. 1 day
ii. 2-7 days
iii. 8-14 days
iv. 15-28 days
v. 29 days and upto 3 months
vi. Over 3 months and upto 6 months
vii. Over 6 months and upto 1 year ‘
viii. Over 1 year and upto 3 years
ix. Over 3 years and upto 5 years
x. Over 5 years

16. RBI GUIDELINES ON STRUCTURAL LIQUIDITY
STATEMENT
 Main focus should be on the short-term
mismatches viz., 1day,2-7 days,7-14 days and 15-28
days.
 Maturing Liability: Cash Outflow
Maturing Assets : Cash Inflow
 The negative gap during 1day,2-7 days,7-14 days
and 15-28 days time-buckets should not exceed
5%,10%,15% and 20 %
 The SSL may be reported to RBI, once a month,
as on the third Wednesday of every month.

17. Liability mismatch
Outflows are more than inflows. Managing the
situation is based on time availability.
 Short term borrowing
 Availing finances and discounting facilities
from other banks, RBI etc.
 Sell securities, shares etc
Asset mismatch
It occurs when inflows are more than outflows.
The excess money should be deployed in profit
generating avenues like:
 Government bonds and securities
 Shares of good companies
 Any other legal investments

18. Structural liquidity statement
Time
bucket 1 day 2-7 days
8-14
days
15-28
days
29 days -
3m 3m-6m 6m-1yr 1yr-3yr 3yr-5yr Over 5 yr
Inflows 403.84 319.22 348.58 362.52 751.79 630.27 645.81 2281.06 731.66 2530.76
Outflows 96.72 378.22 307.3 218.01 669.71 1358.9 1124.37 3053.03 469.22 1015.84
Cumulative
Outflow 96.72 474.94 782.24 1000.25 1669.96 3028.86 4153.23 7206.26 7675.48 17664.63
Gap 307.13 -59.01 41.28 144.51 82.08 -728.63 -478.56 -771.96 262.44 1514.92
Cumulative
gap 307.13 248.12 289.4 433.91 515.99 -212.63 -691.19 -1463.16 -1200.72 0
Gap as % to
outflow 317.56 -15.6 13.43 66.29 12.26 -53.62 -42.56 -25.29 55.93 149.13
Cumulative
gap as % of
cumulative
outflow 317.56% 52.24% 37% 43.38% 30.90% -7.02% -16.64% -20.30% -15.64% 0%
Limit by
RBI(%) -5% -10% -15% -20%
Internal
tolerance
limit(%) -25% -30% -35% -35% -35% -10%

19. Analysis of liquidity risk position
Gap =Inflow-Outflow
Value of Gap<0 is called negative gap
Mismatch = (Negative gap/Outflow)x100
Decision Rule
Mismatch in the time buckets 1day,2-7ddays,8-
14days greater than 5%,10% and 20% implies
liquidity risk is higher
 Mismatch in any time buckets is greater than
bank’s internal tolerance limit in the
corresponding time buckets implies existence of
liquidity risk in those time buckets.

20. Interest Rate Risk (IRR)
The risk where changes in market interest rates
might adversely affect a bank's financial condition.
 Excessive interest rate risk can pose a
significant threat to a bank’s earnings and capital
base
Interest rate risk refers to volatility in Net Interest
Income (NII) or variations in Net Interest
Margin(NIM)
NIM = (Interest income – Interest expense) /
Earning assets

21. Sources of Interest Rate Risk
Interest
Rate
Risk
Basis
Re-pricing
Yield
Options

22. Interest rate risk Analysis
Traditional Gap analysis is considered to be a suitable method
to measure the Interest Rate Risk.
 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:
within the time interval under consideration, there
is a cash flow;
the interest rate resets/reprices contractually
during the interval;
it is contractually pre-payable or withdrawable
before the stated maturities;
It is dependent on the changes in the Bank Rate by RBI

23. Interest rate risk statement
The interest rate gaps may be identified in
the following time buckets:
i. 1-28 days
ii. 29 days and upto 3 months
iii. Over 3 months and upto 6 months
iv. Over 6 months and upto 1 year
v. Over 1 year and upto 3 years
vi. Over 3 years and upto 5 years
vii. Over 5 years

24. IMPACT ON NII
Gap Interest rate
Change
Impact on
NII
Positive Increases Positive
Positive Decreases Negative
Negative Increases Negative
Negative Decreases Positive

25. Findings
Liquidity Risk Management
There are no mismatches above the prudential limit
in the short term buckets i.e. 1st day, 2-7days and 8-
14days in all the years from 2010 to 2014. These are
the critical time buckets as per RBI norms
In 2010 and 2011, bank has enough assets to meet
customer demands while in 2012,2013 and 2014
outflows are greater than inflows.
Negative mismatches are there in some time
buckets of all the years. Since they are within the
internal tolerance level set by bank ,these mismatches
are manageable.

26. Interest Rate Risk Management
The bank would benefit from falling interest
rates in some time buckets while others, the
bank would benefit from rising interest rates.
The interest rate analysis shows that some of
the time buckets are liability sensitive which
shows an increase in NII if the interest rate goes
down.The bank is asset sensitive when interest
rate goes down.

27. Suggestions
If assets are more,
 Repay high cost call money and creditors
 Government bonds and securities
 Shares of good companies
 Any other legal investments
If liabilities are more,
 Short term borrowing
 Diminish excess cash balance at the branches
 Availing finances and discounting facilities
from other banks, RBI etc.
 Sell securities, shares etc

28. Conclusion
ALM technique aims to manage the volume mix,
maturity, rate sensitivity, quality and liquidity of
assets and liabilities as a whole to attain a
predetermined acceptable risk or reward ratio.
The ALM system of Dhanlaxmi bank is found to
be effective one as the liquidity risk and the
interest rate risks are maintained within the RBI
limits.
In short, ALM helps in enhancing the asset
quality, quantifying the risk associated with assets
and liabilities and controlling them. So a proper
ALM system must be implemented in every banks
for the effective functioning of a bank which
reduces the exposure of risk chances in banks.

29. THANK YOU