CAIIB Super Notes: Bank Financial Management: Module D: Balance Sheet Management: Components of...
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Transcript of CAIIB Super Notes: Bank Financial Management: Module D: Balance Sheet Management: Components of...
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Components of Assets and Liabilities in Bank’s Balance Sheet and their Management
Module D: Balance Sheet Management
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
CAIIB – SUPER NOTES
Bank Financial Management: Components of Assets and Liabilities in
Bank’s Balance Sheet and their Management
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Contents
Coverage:
1. Components of a Bank’s Balance Sheet
2. What is Asset Liability Management?
3. Significance of Asset Liability
Management
4. Purpose and Objectives of Asset
Liability Management
5. ALM as co-ordinated Balance Sheet
Management
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
COMPONENTS OF A BANK’S BALANCE SHEET
1.
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Components of Balance Sheet
Sources of Funds/Liabilities Sources of Funds/Liabilities
• Capital
• Reserves and Surplus
• Deposits
• Borrowings
• Other liabilities and Provisions
Application of Funds/Assets Application of Funds/Assets
• Cash in Hand and Balance with RBI
• Balances with Banks and Money at Call and Short Notice
• Investments
• Advance
• Fixed Assets
• Other Assets
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Capital
• Represents owner’s stake
• Cushion for depositors and creditors in case of losses
• Long Term source of funds
• Prescribed by RBI
Authorised Capital
Authorised Capital
Issued Capital Issued Capital
Subscribed Capital
Subscribed Capital
Paid-up Capital Paid-up Capital
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Reserves and Surplus
• Statutory Reserves
• Capital Reserve
• Revenue Reserve
• Issue of Shares at Premium
• Other Reserves
Reserves Reserves
• The credit balance in profit and loss account
Surplus Surplus
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Deposits
• Main source of funds for the banks
Deposits Deposits
Deposits Payable on
Demand
Deposits Payable on
Demand
Current Deposits Current Deposits
Overdue Deposits Overdue Deposits
Call Deposits Call Deposits
Savings Bank Deposits
Savings Bank Deposits
Term Deposits
Term Deposits
Fixed Deposits
Fixed Deposits
Short Deposits
Short Deposits
Recurring Deposits Recurring Deposits
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Borrowings
• Refinance obtained from:
– RBI
– Other Commercial Banks
– Other Institutions and Agencies like IDBI, EXIM Bank of India, NABARD
etc.
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Other Liabilities and Provisions
Bills Payable Bills Payable
• Includes drafts, telegraphic transfers, travellers cheques, mail transfers payable, payslips, banker’s cheques and other miscellaneous items
Inter-Office Adjustments Inter-Office
Adjustments
• Credit balance of the net inter-office adjustments
Interest Accrued Interest Accrued
• Interest accrued but not due on deposits and borrowings
Others Others
• Income Tax
• TDS
• Interest Tax
• Provisions etc.
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Cash and Balances with RBI
• Includes
• Foreign Currency Notes
• Cash Balances in the overseas branches
Cash in Hand Cash in Hand
• In order to meet statutory cash reserve requirements (CRR)
Balances with RBI Balances with RBI
• Balance in Current Accounts and Term Deposits with other banks
• All loans made in the interbank call money market repayable within 15 days notice.
Balances with Banks and money at Call and Short Notice Balances with Banks and money at Call and Short Notice
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Investments
• Investments in
– Govt. Securities
– Approved Securities
– Shares
– Debentures and Bonds
– Subsidiaries and/or Joint Ventures
– Other investments
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Advances
• Form major part of assets for all the banks
Advances Repayable on Demand
Advances Repayable on Demand
Cash Credits
Overdrafts
Loans repayable on Demand
Advances with Specific Due Date
Advances with Specific Due Date
Term Loans
Bills Purchased/Discounted
Bills Purchased/Discounted
Clean or Documentary
Domestic or Foreign
Secured/Unsecured Advances
Secured/Unsecured Advances
Secured by Tangible Assets
Covered by Bank/Government
Guarantees
Unsecured Advances
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Fixed Assets
• Immovable properties
• Premises
• Furniture and Fixtures
• Hardware
• Motor Vehicles etc
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Other/Miscellaneous Assets
Inter-Office Adjustments Inter-Office
Adjustments Interest Accrued Interest Accrued
Tax Paid in Advance/Tax Deducted at
Source
Tax Paid in Advance/Tax Deducted at
Source
Stationery and Stamps
Stationery and Stamps
Non Banking Assets acquired in
Satisfaction of claims
Non Banking Assets acquired in
Satisfaction of claims
Others Others
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.
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
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.
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Bank’s P&L Statement
Profit and Loss Statement
Profit and Loss Statement
Income Income
Interest Income Interest Income
Other Income Other Income
Expenses Expenses
Interest Expended Interest
Expended
Operating Expenses Operating Expenses
Provisions and Contingencies Provisions and Contingencies
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Income
Interest Income Interest Income
Interest/Discount on Advances/Bills
Income on Investments
Interest on balances with RBI and Other Interbank Funds
Others
Other Income Other
Income
Commission, Exchange and brokerage
Profit on Sale or Investments
Profit on Revaluation of Investment
Profit on Sale of Land, Building and Other Assets
Profit on Exchange Transactions
Income earned by way of dividends etc
Miscellaneous Income
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Expenses Interest Expended Interest Expended
Interest on Deposits
Interest on RBI/Interbank Borrowings
Others
Operating Expenses Operating Expenses
Payments to and Provisions for Employees
Rent. Taxes and Lighting
Printing and Stationery
Advertisement and Publicity
Depreciation on Bank’s Property
Director’s fees, Allowances and Expenses
Auditor’s Fees and Expenses
Law Charges
Postage
Repairs and Maintenance
Insurance
Other Expenditure
Provisions and Contingencies Provisions and Contingencies
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
WHAT IS ASSET LIABILITY MANAGEMENT?
2.
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
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 organisation’s equity over time while taking reasonable
and measured business risks
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
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 bank’s 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
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
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 in
response to corporate objectives, economic conditions and
future interest rate scenario to prevent undesirable imbalance
between asset and liability maturities
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
SIGNIFICANCE OF ASSET LIABILITY MANAGEMENT
3.
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Significance of Asset Liability Management
Volatility Volatility
• Rate fluctuations affect the market value, yields, costs of assets and liabilities
Product Innovation
Product Innovation
• New financial products have an impact on the risk profile of the bank
Regulatory Environment Regulatory
Environment
• Central Banks issue framework and guidelines to deal with ALM policies
Management Recognition
Management Recognition
• Increasing awareness of the change in risk scenario and need for ALM
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
PURPOSE AND OBJECTIVES OF ASSET LIABILITY MANAGEMENT
4.
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
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
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Process
Review the interest rate structure and compare the same to the interest/product pricing of both assets and liabilities
Review the interest rate structure and compare the same to the interest/product pricing of both assets and liabilities
Examine the loan and investment portfolios in the light of the foreign exchange risk and the liquidity that might arise
Examine the loan and investment portfolios in the light of the foreign exchange risk and the liquidity that might arise
Examine the credit risk and contingency risk that may originate either due to rate fluctuations or otherwise and assess the quality of assets
Examine the credit risk and contingency risk that may originate either due to rate fluctuations or otherwise and assess the quality of assets
Review the actual performance against the projections made and analyse the reasons for any effect on the spreads
Review the actual performance against the projections made and analyse the reasons for any effect on the spreads
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Parameters for purpose of stabilising ALM
• NII = Interest Income – Interest 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)
• Shareholder’s Funds/Total Assets
• Measures the shift between owned and total funds
• Assesses the sustenance capacity
Economic Equity Ratio Economic Equity Ratio
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Objectives
Macro Level
Macro Level
Formulation of critical business
policies
Efficient allocation of
Capital
Designing of Products with
efficient pricing strategies
Micro Level Micro Level
Profitability through Price
Matching
Liquidity by Maturity Matching
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Micro Level Objectives
• Aims to maintain spreads by ensuring deployment of liabilities 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 Matching Price Matching
• Grouping Assets and Liabilities based on their maturity profiles
• Gap assessed to identify future financing requirements
Liquidity Matching Liquidity Matching
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Objectives… another perspective
• Spread Management
• Loan Quality
• Generating Fee Income and Service Charges
• Control of Non-Interest Operating Expenses
• Tax Management
• Capital Adequacy
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
ALM AS CO-ORDINATED BALANCE SHEET MANAGEMENT
5.
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
Two Stage Approach B
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Stage 1: Specific Balance Sheet Management
Functions
Stage 1: Specific Balance Sheet Management
Functions
Asset Side Management Asset Side Management
Reserve Position Management Reserve Position Management
Liquidity Management Liquidity Management
Investment/Security Management
Investment/Security Management
Loan Management Loan Management
Fixed Assets Management Fixed Assets Management
Liability Side Management Liability Side Management
Liability Management Liability Management
Reserve Position Management Reserve Position Management
Long-Term Management (Notes and Debentures) Long-Term Management (Notes and Debentures)
Capital Management Capital Management Stage 2: Income-Expense Function
Stage 2: Income-Expense Function
Profit = Interest Income – Interest Expense – Provision for
Loan Loss + Non-Interest Revenue – Non-Interest Expense
- Taxes
Profit = Interest Income – Interest Expense – Provision for
Loan Loss + Non-Interest Revenue – Non-Interest Expense
- Taxes
CAIIB – Super-Notes © M S Ahluwalia Sirf Business
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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