ASSET LIABILITY MANAGEMENT

OBJECTIVE & SCOPE

AND

RELATED MATTERS

PROPOSED COVERAGE

AN OVERVIEW

OF THE OBJECTIVES AND SCOPE OF ALM

ALM POLICY ALCO

OPERATIONAL ASPECTSREPORTS

&OTHER RELATED MATTERS

WHAT IS ALM?

WHAT IS BALANCE SHEET?

WHAT IS BALANCE SHEET MANAGEMENT?

WHAT IS BANKING?

THE TRADITIONAL DEFINITION

THE MODERN DEFINITION

BANKING IS A RISKY BUSINESS BUT RISK IS THE BUSINESS OF BANKING

RISK REVISITED

WHAT IS RISK?

SIMPLY PUT RISK CAN BE DEFINED AS THE POSSIBILITY / PROBABILITY OF LOSS

THE OTHER NAME FOR RISK IS, “OPPORTUNITY”

RISK MANAGEMENT SYSTEMS SHOULD BE ABLE TO

IDENTIFY THE VARIOUS TYPES OF RISKS WHICH THE INSTITUTION IS EXPOSED TO

MEASURE, MONITOR AND CONTROL THESE RISKS

ALM IS MAINLY CONCERNED WITH LIQUIDITY RISK AND INTEREST RATE RISK

ALM FOCUS

Asset Liability Management

Interest rate risk

management

Liquidity risk management

EVOLUTION

NO SCIENTIFIC APPROACHES TO BALANCE SHEET MANAGEMENT TILL LATE 1970s

FED DISMANTLED THE STABLE INTEREST RATES ON 6-10-1979

USA - PLR REVISED1965 - ONCE1980 - 42 TIMES

LATE 1970s - ALM ENTERED THE LEXICON OF BANKING

1990s - FULLY DEVELOPED ALM AND RMS

• THE EVOLUTION IN INDIA

• RBS

IMPLEMENTATION OF ALM GUIDELINES ISSUED BY THE RBI

EFFECTIVE BANKS APRIL 1, 1999

FIs APRIL 1, 2000

NBFCs MARCH 31, 2002

SCHEDULED UCBs JUNE 30, 2002

WHY ALM? DERUGULATION

COMPETITION

UNSCIENTIFIC & ADHOC PRICING OF DEPOSITS

ALTERNATIVE AVENUES FOR THE BORROWERS RESULTING IN INEFFICIENT DEPLOYMENT OF RESOURCES

NEED FOR OPTIMAL SPREADS, PROFITABILITY & LONG-TERM VIABILITY

IMPRUDENT BALANCE SHEET MANAGEMENT CAN PUT BANK’S EARNINGS & REPUTATION AT GREAT RISK

OBJECTIVE & SCOPE OF ALM

WHAT IS THE OBJECTIVE & SCOPE OF ALM?

THE TASK OF ALM IS NOT TO ELIMINATE RISK BUT TO MANAGE IT

ALM SHOULD BE AN INTEGRAL PART OF BANKING BUSINESS AND NOT JUST AN EXERCISE IN MEETING REGULATORY REQUIREMENTS

ALM INVOLVES ALTERING BALANCE SHEETS IN A DYNAMIC MANNER TO MANAGE RISKS

UCBs HAVE TO MANAGE BUSINESS AFTER ASSESSING RISKS INVOLVED

THEY HAVE TO BASE THEIR BUSINESS DECISIONS ON SOUND RISK MANAGEMENT SYSTEMS WITH THE ULTIMATE OBJECTIVE OF PROTECTING THE INTEREST OF DEPOSITORS & STAKEHOLDERS

THE BACKGROUND

RBI CONSTITUTED A WORKING GROUP COMPRISING SENIOR EXECUTIVES OF UCBs & THE RBI

TWO WORKSHOPS FOR SCHEDULED UCBs CONDUCTED IN JANUARY AND FEBRUARY 2002 -FEED RECEIVED ANALYSED

ALM GUIDELINES RBI CIRCULAR DATED APRIL 15, 2002 ISSUED TO ALL SCHEDULED UCBs

SCHEDULED UCBs REQUIRED TO PUT IN PLACE AN EFFECTIVE ALM SYSTEM

ADOPTION OF UNIFORM ALM SYSTEM NOT FEASIBLE GIVEN THE LEVEL OF COMPUTERISATION AND THE CURRENT STATUS OF MIS

RBI GUIDELINES – A BENCH MARK FOR BANKS WHICH LACK A FORMAL ALM

TO BEGIN WITH ATLEAST 60% COVERAGE OF LIABILITIES & ASSETS – REMAINING 40% ON ESTIMATES

100% COVERAGE BY APRIL 1, 2003

ALM – THE PILLARS

THE THREE PILLARS OF ALM

ALM INFORMATION SYSTEMS

ALM ORGANISATION

ALM PROCESS

ALM INFORMATION SYSTEMS

MIS – INFORMATION AVAILABILITY, ACCURACY, ADEQUACY AND EXPEDIENCY

ALM ORGANISATION

STRUCTURE AND RESPONSIBILITIES

LEVEL OF TOP MANAGEMENT INVOLVEMENT

ALM PROCESS

RISK IDENTIFICATION

RISK MEASUREMENT

RISK MANAGEMENT

RISK POLICIES AND PROCEDURES, PRUDENTIAL LIMITS AND AUDITING, REPORTING & REVIEW

LIQUIDITY

AVAILABILTY OF FUNDS

“HAVING JUST ENOUGH CASH TO MEET CURRENT NEEDS”

“RAISING OF SUFFICIENT FUNDS EITHER BY INCREASING LIABILITIES OR BY CONVERTING ASSETS PROMPTLY AND AT A REASONABLE COST”

 

LIQUIDITY RISK

HOW DOES IT ARISE?

MISMATCH IN THE TIMING OF INFLOWS AND OUTFLOWS

FLOW APPROACH

EIGHT BUCKETS

1 TO 14 DAYS

15 TO 28 DAYS

29 DAYS 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

TOLERANCE LEVELS FOR VARIOUS MATURITIES TO BE FIXED DEPENDING UPON BANK’S ASSET-LIABILITY PROFILE, STABILITY OF DEPOSIT BASE, NATURE OF CASH FLOWS ETC.

MISMATCHES IN THE FIRST TWO BUCKETS TO BE KEPT AT MINIMUM LEVELS – TO START WITH NEGATIVE GAP NOT TO EXCEED 20% OF CASH OUTFLOWS

THE ABOVE TOLERANCE LEVELS TO BE STRICTLY ENFORCED W.E.F APRIL 1, 2003

OBJECTIVES

MEETING THE STATUTORY PRESCRIPTIONS

MEETING INTERNAL REQUIREMENT OF FUNDS FOR

LIABILITY PAYMENTS DISBURSEMENTS

MINIMISING THE COST OF CARRY & AVOIDING FIRE SALE OF ASSETS

IMPORTANCE OF LIQUIDITY

IMPACT OF LIQUIDITY

MANIFESTATIONS OF LIQUIDITY RISK

FUNDING RISK

  TIME RISK

  CALL RISK

THE TRADE OFF

EARNINGS Vs LIQUIDITY

THE PRICE OF LIQUIDITY.

THE IMPACT ON NIM

 

WHAT IS INTEREST RATE RISK?

IT IS A MARKET RISK

ALSO KNOWN AS THE PRICE RISK

IRR IS THE RISK ON ACCOUNT OF THE ADVERSE MOVEMENT IN INTEREST RATES

THE BUCKETS 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 NON-SENSITIVE

ALCO

CRUCIAL ROLE

A VERY IMPORTANT COMMITTEE

CONSISTS OF SENIOR MANAGEMENT INCLUDING THE CEO

CHIEFS OF INVESTMENT, TREASURY, CREDIT & PLANNING

TAKES A VIEW ON LR & IRR

ALM SUPPORT GROUPS -DEDICATED STAFF - SHOULD BE RESPONSIBLE FOR ANALYSING, MONITORING & REPORTING THE RISK PROFILE TO ALCO

RESPONSIBLE FOR BALANCE SHEET PLANNING

BEHAVIOURAL PATTERN

NET BORROWING – CAP

DRI DEPOSITS

COMMITTED LINES OF CREDIT

INTEREST RATE GAPS

EXCESS CRR

QUORUM FOR MEETING

PRICING OF DEPOSITS & ADVANCES

DESIRED MATURITY PROFILE OF INCREMENTAL ASSETS & LIABILITIES

REVIEW OF THE RESULTS & PROGRESS IN IMPLEMENTATION OF THE DECISION MADE IN THE PREVIOUS MEETINGS

ALCO - KEY CONSIDERATIONS

CONCENTRATION OF DEPOSITS/SOURCES OF FUNDS

QUALITY OF MATURING ASSETS

MARKET REPUTATION

AVAILABILITY OF UNDRAWN STANDBYS

IMPACT OF OFF BALANCE SHEET EXPOSURES

PRUDENTIAL LIMITS - ALCO’S ROLE

MAXIMUM CUMULATIVE OUTFLOWS ACROSS ALL TIME BANDS

CAPS ON SINGLE / GROUP EXPOSURES, INDUSTRY-WISE EXPOSURES ETC.  

ALM POLICY

THE MAIN INGREDIENTS

CONTINGENCY FUNDING PLAN (CFP)

CONTINGENCY PLAN - IDENTIFICATION OF WORST CASE SCENARIOS AND SPECIFIC POSSIBLE COURSES OF ACTION.

THE CONTINGENCY FUNDING PLAN SHOULD BE APPROVED BY ALCO WHICH SHOULD BE PREPARED AND REVIEWED AT PERIODICAL INTERVALS

REPORTS

STATEMENT OF STRUCTURAL LIQUIDITY - TO CAPTURE THE MATURITY STRUCTURE OF CASH INFLOWS & OUTFLOWS – TO START WITH, AS ON THE LAST REPORTING FRIDAY OF MARCH / JUNE / SEPTEMBER / DECEMBER – TO PUT THE SYSTEM ON A FORTNIGHTLY BASIS – W.E.F. APRIL 2003

REPORTS

STATEMENT OF INTEREST RATE SENSITIVITY – QUARTERLY TO MONTHLY – 1/4/2003

SHORT TERM DYNAMIC LIQUIDITY STATEMENT – EACH REPORTING FRIDAY

REQUIREMENTS OF OVERSIGHT

THE SUCCESS OF ALM PROCESS DEPENDS ON THE CAPACITY TO ANTICIPATE CHANGE AND TO ACT DECISIVELY SO AS TO MAKE PROFIT FROM IT OR IN THE WORST CASE MINIMISE LOSSES

THE CRUX OF BANKING BUSINESS IS MANAGING MISMATCHES. IF BANKS WERE TO HAVE PERFECTLY MATCHED PORTFOLIOS, THEY WOULD NEITHER MAKE MONEY NOR NEED TREASURY MANAGERS / EXECUTIVES TO RUN THEIR BUSINESS. CLERKS CAN MANAGE BANKS

-THANK YOU-