Caiib Bfm Module d Notes

7/23/2019 Caiib Bfm Module d Notes

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CAIIBSuper-Notes M S Ahluwalia Sirf Business

Components of Assets and Liabilities in Banks

Balance Sheet and their ManagementModule D: Balance Sheet Management
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CAIIB

SUPER NOTES

Bank Financial Management: Components of Assets and Liabilities in

BanksBalance Sheet and their Management
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Contents

Coverage:

1. Components of a BanksBalance Sheet

2. What is Asset Liability Management?

3. Significance of Asset LiabilityManagement

4. Purpose and Objectives of Asset

Liability Management

5. ALM as co-ordinated Balance Sheet

Management


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COMPONENTS OF A BANKSBALANCE SHEET

1.


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Components of Balance Sheet

Sources of Funds/Liabilities

Capital

Reserves and Surplus Deposits

Borrowings

Other liabilities andProvisions

Application of Funds/Assets

Cash in Hand and Balancewith RBI

Balances with Banks andMoney at Call and ShortNotice

Investments

Advance Fixed Assets

Other Assets


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Capital

Represents ownersstake

Cushion for depositors and creditors in case of losses

Long Term source of funds

Prescribed by RBI

AuthorisedCapital

AuthorisedCapital

IssuedCapital

IssuedCapital

SubscribedCapital

SubscribedCapital

Paid-upCapital

Paid-upCapital


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Reserves and Surplus

Statutory Reserves

Capital Reserve

Revenue Reserve

Issue of Shares at Premium

Other Reserves

ReservesReserves

The credit balance in profit and loss account

SurplusSurplus


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Deposits

Main source of funds for the banks

DepositsDeposits

DepositsPayable on

Demand

DepositsPayable on

Demand

CurrentDepositsCurrentDeposits

OverdueDepositsOverdueDeposits

Call DepositsCall Deposits

Savings BankDeposits

Savings BankDeposits

TermDeposits

TermDeposits

FixedDeposits

FixedDeposits

ShortDeposits

ShortDeposits

RecurringDepositsRecurringDeposits


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Borrowings

Refinance obtained from:

RBI

Other Commercial Banks

Other Institutions and Agencies like IDBI, EXIM Bank of India, NABARD

etc.


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Other Liabilities and Provisions

Bills Payable

Includes drafts,telegraphic

transfers,travellerscheques, mailtransferspayable,payslips,bankers

cheques andothermiscellaneousitems

Inter-OfficeAdjustments

Credit balanceof the net

inter-officeadjustments

Interest Accrued

Interestaccrued but

not due ondeposits andborrowings

Others

Income Tax

TDS

Interest Tax Provisions etc.


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Cash and Balances with RBI

Includes

Foreign Currency Notes

Cash Balances in the overseas branches

Cash in HandCash in Hand

In order to meet statutory cash reserve requirements (CRR)

Balances with RBIBalances with RBI

Balance in Current Accounts and Term Deposits with other banks

All loans made in the interbank call money market repayable within 15days notice.

Balances with Banks and money at Call and Short NoticeBalances with Banks and money at Call and Short Notice


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Investments

Investments in

Govt. Securities

Approved Securities

Shares

Debentures and Bonds

Subsidiaries and/or Joint Ventures

Other investments


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Advances

Form major part of assets for all the banks

Advances Repayable onDemand

Advances Repayable onDemand

Cash Credits

Overdrafts

Loans repayableon Demand

Advances with SpecificDue Date

Advances with SpecificDue Date

Term Loans

BillsPurchased/Discounted

BillsPurchased/Discounted

Clean orDocumentary

Domestic or

Foreign

Secured/UnsecuredAdvances

Secured/UnsecuredAdvances

Secured byTangible Assets

Covered byBank/Government

Guarantees

UnsecuredAdvances


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Fixed Assets

Immovable properties

Premises

Furniture and Fixtures

Hardware

Motor Vehicles etc


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Other/Miscellaneous Assets

Inter-OfficeAdjustmentsInter-Office

AdjustmentsInterest AccruedInterest Accrued

Tax Paid inAdvance/TaxDeducted at

Source

Tax Paid inAdvance/TaxDeducted at

Source

Stationery andStamps

Stationery andStamps

Non BankingAssets acquired in

Satisfaction ofclaims

Non BankingAssets acquired in

Satisfaction ofclaims

OthersOthers

Other items primarily include claims in the form of clearing items, unadjusted debit balances

representing additions to assets and deductions from liabilities and advances provided to the

employees of the bank.


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Contingent Liabilities

Banks obligations under issuance of Letters of Credit, Guarantees and

acceptances on behalf of constituents and bills accepted by the bank on

behalf of its customers

Claims against the bank not acknowledged as debts

Liability for partly paid-up investments

Liability on account of outstanding ForEx contracts

Other items like Arrears of Cumulative dividends, bills rediscounted,

underwriting commitments, estimated amount of contracts remaining to

be executed on capital account and not provided for etc.


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Banks P&L Statement

Profit and LossStatement

Profit and LossStatement

IncomeIncome

InterestIncomeInterestIncome

Other IncomeOther Income

ExpensesExpenses

InterestExpendedInterest

Expended

OperatingExpensesOperatingExpenses

Provisions andContingenciesProvisions andContingencies


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Income

InterestIncomeInterestIncome

Interest/Discount onAdvances/Bills

Income on Investments

Interest on balances with RBIand Other Interbank Funds

Others

OtherIncomeOther

Income

Commission, Exchange andbrokerage

Profit on Sale or Investments

Profit on Revaluation ofInvestment

Profit on Sale of Land, Buildingand Other Assets

Profit on Exchange Transactions

Income earned by way ofdividends etc

Miscellaneous Income


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ExpensesInterest ExpendedInterest Expended

Interest on Deposits

Interest on RBI/Interbank Borrowings

Others

Operating ExpensesOperating Expenses

Payments to and Provisions for Employees

Rent. Taxes and Lighting

Printing and Stationery

Advertisement and Publicity

Depreciation on Banks Property

Directors fees, Allowances and Expenses

Auditors Fees and Expenses

Law Charges

Postage

Repairs and Maintenance

Insurance

Other Expenditure

Provisions andContingenciesProvisions andContingencies


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WHAT IS ASSET LIABILITY MANAGEMENT?

2.


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Asset Liability Management

Concerned with Strategic Balance Sheet Management involving risks

caused by changes in Rates of Interest, exchange rate, credit risk, and

liquidity position of bank

Integrated Balance Sheet Management: All components of balance sheet

and its different maturity mix would be looked at from the profit angle of

the bank

ALM is the act of Planning, Acquiring and directing the flow of funds

through an organisation to generate adequate and stable earnings to

steadily build an organisationsequity over time while taking reasonable

and measured business risks


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Asset Liability Management

The management of the Net Interest Margin (NIM) to ensure its level and

riskiness are compatible with risk/return objectives of the bank

Co-ordinated management of a banks balance sheet to allow for

alternative interest rate, liquidity and prepayment summaries

Views the financial institutions as a set of inter relationships that must be

identified, coordinated and managed as an integral system

To match the assets and liabilities and minimise liquidity as well as market

risk.

Per liability basis: Matching a specific asset to support each liability


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Balance Sheet Restructuring

The strategy of actively managing the composition and mix of

assets and liabilities portfolios

Efforts are made to adjust and readjust the portfolios inresponse to corporate objectives, economic conditions and

future interest rate scenario to prevent undesirable imbalance

between asset and liability maturities


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SIGNIFICANCE OF ASSET LIABILITYMANAGEMENT

3.


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Significance of Asset Liability Management

Volatility

Ratefluctuationsaffect themarketvalue, yields,costs of

assets andliabilities

ProductInnovation

Newfinancialproductshave animpact onthe risk

profile of thebank

RegulatoryEnvironment

CentralBanks issueframeworkandguidelines todeal with

ALM policies

ManagementRecognition

Increasingawareness ofthe changein riskscenario andneed for

ALM


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PURPOSE AND OBJECTIVES OFASSET LIABILITY MANAGEMENT

4.


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Purpose

Purpose is to:

Enhance the asset quality

Quantify risks associated with assets and liabilities

Manage the risks identified above

Aims to stabilise:

Short Term profits

Long Term Earnings

Long Term Substance of the Bank


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Process

Review the interest rate structure and compare thesame to the interest/product pricing of both assets andliabilities

Review the interest rate structure and compare thesame to the interest/product pricing of both assets andliabilities

Examine the loan and investment portfolios in the light

of the foreign exchange risk and the liquidity that mightarise

Examine the loan and investment portfolios in the light

of the foreign exchange risk and the liquidity that mightarise

Examine the credit risk and contingency risk that mayoriginate either due to rate fluctuations or otherwiseand assess the quality of assets

Examine the credit risk and contingency risk that mayoriginate either due to rate fluctuations or otherwiseand assess the quality of assets

Review the actual performance against the projectionsmade and analyse the reasons for any effect on thespreads

Review the actual performance against the projectionsmade and analyse the reasons for any effect on thespreads


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Parameters for purpose of stabilising ALM

NII = Interest IncomeInterest Expenses

Measures impact of volatility on Short Term Profit

NII fluctuation needs to be minimised to stabilise Short Term Profits

Net Interest Income (NII)Net Interest Income (NII)

NIM= NII/Average Total Assets

Spread on the earning assets

Net Interest Margin (NIM)Net Interest Margin (NIM)

Shareholders Funds/Total Assets

Measures the shift between owned and total funds

Assesses the sustenance capacity

Economic Equity RatioEconomic Equity Ratio


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Objectives

MacroLevel

MacroLevel

Formulation of

critical businesspolicies

Efficientallocation of

Capital

Designing ofProducts with

efficient pricingstrategies

Micro LevelMicro Level

Profitability

through PriceMatching

Liquidity byMaturityMatching


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Micro Level Objectives

Aims to maintain spreads by ensuring deployment ofliabilities at rate higher than costs

Indicates whether institution can benefit from:

Rising interest rates by positive gap (Assets > Liabilities)

Declining interest rates by negative gap (Liabilities>Assets)

Price MatchingPrice Matching

Grouping Assets and Liabilities based on their maturityprofiles

Gap assessed to identify future financing requirements

Liquidity MatchingLiquidity Matching


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Objectives another perspective

Spread Management

Loan Quality

Generating Fee Income and Service Charges

Control of Non-Interest Operating Expenses

Tax Management

Capital Adequacy


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ALM AS CO-ORDINATED BALANCESHEET MANAGEMENT

5.


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CAIIB

Super-Notes M S Ahluwalia Sirf Business

Two Stage Approach

BalanceSheet

Management

BalanceSheet

Management

Stage 1: SpecificBalance SheetManagement

Functions

Stage 1: SpecificBalance SheetManagement

Functions

Asset Side ManagementAsset Side Management

Reserve Position ManagementReserve Position Management

Liquidity ManagementLiquidity Management

Investment/SecurityManagement

Investment/SecurityManagement

Loan ManagementLoan Management

Fixed Assets ManagementFixed Assets Management

Liability Side ManagementLiability Side Management

Liability ManagementLiability Management

Reserve Position ManagementReserve Position Management

Long-Term Management(Notes and Debentures)Long-Term Management(Notes and Debentures)

Capital ManagementCapital ManagementStage 2: Income-ExpenseFunction

Stage 2: Income-ExpenseFunction

Profit = Interest IncomeInterest ExpenseProvision for

Loan Loss + Non-InterestRevenueNon-Interest Expense

- Taxes

Profit = Interest IncomeInterest ExpenseProvision for

Loan Loss + Non-InterestRevenueNon-Interest Expense

- Taxes


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CAIIB

Super-Notes M S Ahluwalia Sirf Business

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CAIIB Super Notes M S Ahluwalia Sirf BusinessF S N t Cli k H

M S Ahluwalia, amongst other things, is a visual artist, blogger,

blog designer and of course an MBA and Banker from New

Delhi, India.

To know more about him you may visit his blog-site: Estudiante De La Vida
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Caiib Bfm Module d Notes

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