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INDEX
SR NO. TOPIC Page No.
1. EXECUTIVE SUMMARY 3
2. METHODOLOGY 4
3.INTRODUCTION TO INDIAN FINANCIAL
SYSTEM5
4. INTRODUCTION TO FINANCIAL MARKETS 6
5. INTRODUCTION TO FINANCIAL INSTRUMENTS 7
6. INTRODUCTION TO FINANCIAL SERVICES 8
7. INTRODUCTION TO FINANCIAL INSTITUTION 9
8. BACKGROUND OF CANARA BANK 10-13
9.INTRODUCTION TO ASSET LIABILITY
MANAGEMENT14
10. MEANING OF ASSET LIABILITY MANAGEMENT 15
11. THEORETICAL DEVELOPMENT 16-19
12. ALM PROCESS 20-24
13. ADMINISTRATION OF ALM 25
14. POLICY GUIDELINES 26-37
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15. TABULATION AND ANALYSIS OF DATA 38-39
16.
EMPIRICAL ANALYSIS OF ASSET LIABILITY
MANAGEMENT OF MUTUAL TRUST BANK
LTD
40-50
17.FINDINGS OF ASSET /LIABILITY
MANAGEMENT51
18. LIABILITY MANAGEMENT AND ITS IMPACTON PROFITABILITY
52-54
19. CONCLUSION 55
20. RECOMMENDATION 56
21. BIBLIOGRAPHY 57
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EXECUTIVE SUMMARY
Asset liability management (ALM) is an overall risk management technique
forpension funds. ALM requires the board to formulate guidelines for its strategy
on contribution and indexing levels, and its attitude to risk. ALM is based on
stochastic simulation and is used as a basis for decisions on the distribution of
future contributions, funding, and indexing levels. Practicing ALM requires an
assets and liabilities committee (ALCO). An ALCO consists of seniorpensionfund management, with the chief risk officer as chairman. The committee converts
the guidelines into formal proposals on the investment strategy and the
contributions and indexing policies.
ALM does not predict the future, but it gives insight into the possible risks
a pension fund is exposed to and how to handle them.
An ALM model should be as parsimonious and uncomplicated as possible. The
purpose of such models is to act as a tool to help management understand what is
really going on, and how to reach responsible and internally consistent decisions.
http://www.qfinance.com/dictionary/liability-managementhttp://www.qfinance.com/dictionary/risk-managementhttp://www.qfinance.com/dictionary/pension-fundhttp://www.qfinance.com/dictionary/pension-fundhttp://www.qfinance.com/dictionary/pension-fundhttp://www.qfinance.com/dictionary/pension-fundhttp://www.qfinance.com/dictionary/pension-fundhttp://www.qfinance.com/dictionary/pension-fundhttp://www.qfinance.com/dictionary/pension-fundhttp://www.qfinance.com/dictionary/pension-fundhttp://www.qfinance.com/dictionary/risk-managementhttp://www.qfinance.com/dictionary/liability-management7/30/2019 Ganeshan Vanamamalai
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METHODOLOGY
PRIMARY DATA
I have not collected any primary data for this project.
SECONDARY DATA
I have collected secondary data for the project from the books which are
provided by the Library and from the websites related to the Mutual Funds and
SBI Mutual Funds.
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INTRODUCTION TO INDIAN FINANCIAL SYSTEM
The economic development of a nation is reflected by the progress of the
various economic units, broadly classified into corporate sector, government
and household sector. While performing their activities these units will be
placed in a surplus/deficit/balanced budgetary situations.
There are areas or people with surplus funds and there are those with adeficit.A
financial system or financial sector functions as an intermediary and facilitates
the flow of funds from the areas of surplus to the areas of deficit. A Financial
System is a composition of various institutions, markets, regulations and laws,practices, money manager, analysts, transactions and claims and liabilities.
Financial System;
The word "system", in the term "financial system", implies a set of complex and
closely connected or interlined institutions, agents, practices, markets,transactions, claims, and liabilities in the economy. The financial system is
concerned about money, credit and finance-the three terms are intimately related
yet are somewhat different from each other. Indian financial system consists of
financial market, financial instruments and financial intermediation.
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INTRODUCTION TO FINANCIAL MARKETS
A Financial Market can be defined as the market in which financial assets are
created or transferred. As against a real transaction that involves exchange of
money for real goods or services, a financial transaction involves creation or
transfer of a financial asset. Financial Assets or Financial Instruments represents
a claim to the payment of a sum of money sometime in the future and /or
periodic payment in the form of interest or dividend.
Money Market
The money market ifs a wholesale debt market for low-risk, highly-liquid,
short-term instrument. Funds are available in this market for periods ranging
from a single day up to a year. This market is dominated mostly by government,
banks and financial institutions.
Capital Market
The capital market is designed to finance the long-term investments. The
transactions taking place in this market will be for periods over a year.
Forex Market
The Forex market deals with the multicurrency requirements, which are met
by the exchange of currencies. Depending on the exchange rate that is
applicable, the transfer of funds takes place in this market. This is one of the
most developed and integrated market across the globe.
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INTRODUCTION TO FINANCIAL INSTRUMENTS
A financial instrument is a trad-able asset of any kind, either cash; evidence of
an ownership interest in an entity; or a contractual right to receive, or deliver,
cash or another financial instrument.
According to IAS 32 and 39, it is defined as 'any contract that gives rise to a
financial asset of one entity and a financial liability or equity instrument of
another entity'.
Financial instruments can be categorized by form depending on whether theyare cash instruments or derivative instruments:
Cash instruments are financial instruments whose value is determineddirectly by markets. They can be divided into securities, which are readily
transferable, and other cash instruments such as loans and deposits, where
both borrower and lender have to agree on a transfer.
Derivative instruments are financial instruments which derive their valuefrom the value and characteristics of one or more underlying entities such as
an asset, index, or interest rate. They can be divided into exchange-traded
derivatives and over-the-counter (OTC) derivatives.
Alternatively, financial instruments can be categorized by "asset class"
depending on whether they are equity based (reflecting ownership of the issuing
entity) or debt based (reflecting a loan the investor has made to the issuing
entity). If it is debt, it can be further categorized into short term (less than one
year) or long term.
Foreign Exchange instruments and transactions are neither debt nor equity
based and belong in their own category.
http://en.wikipedia.org/wiki/International_Accounting_Standardshttp://en.wikipedia.org/wiki/IAS_39http://en.wikipedia.org/wiki/Security_(finance)http://en.wikipedia.org/wiki/Loanshttp://en.wikipedia.org/wiki/Depositshttp://en.wikipedia.org/wiki/Derivative_(finance)http://en.wikipedia.org/wiki/Derivative_(finance)#OTC_and_exchange-tradedhttp://en.wikipedia.org/wiki/Derivative_(finance)#OTC_and_exchange-tradedhttp://en.wikipedia.org/wiki/Derivative_(finance)#OTC_and_exchange-tradedhttp://en.wikipedia.org/wiki/Ownershiphttp://en.wikipedia.org/w/index.php?title=Foreign_Exchange_instruments&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Foreign_Exchange_instruments&action=edit&redlink=1http://en.wikipedia.org/wiki/Ownershiphttp://en.wikipedia.org/wiki/Derivative_(finance)#OTC_and_exchange-tradedhttp://en.wikipedia.org/wiki/Derivative_(finance)#OTC_and_exchange-tradedhttp://en.wikipedia.org/wiki/Derivative_(finance)#OTC_and_exchange-tradedhttp://en.wikipedia.org/wiki/Derivative_(finance)http://en.wikipedia.org/wiki/Depositshttp://en.wikipedia.org/wiki/Loanshttp://en.wikipedia.org/wiki/Security_(finance)http://en.wikipedia.org/wiki/IAS_39http://en.wikipedia.org/wiki/International_Accounting_Standards7/30/2019 Ganeshan Vanamamalai
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INTRODUCTION TO FINANCIAL SERVICES
The financial services sector in India has witnessed a fundamental
transformation since the country was liberalized. India, in the last few years, has
emerged as the one of the most rapidly growing economies across the globe.
The financial services market is growing rapidly, and there is significant
potential for further growth.
The financial services sector includes broking firms, investment services,
national banks, private banks, mutual funds, car and home loans, and equity
market
Financial Services in India - Key Drivers
Indias high savings rate offers significant opportunity to put resources into the
financial markets. The country has a favourable demographic profile with a
large segment of the population under 30 years. The Census 2011 shows that
56.9 per cent of Indias total population comes in the age group 15-59 years.
The country will witness a sharp decline in the dependency ratio over the next
thirty yearswhich will be a great dividend. As the dividend begins to pay off,
with the working age-group population rising disproportionately over the next
two decades, the savings rate is likely to rise further, according to Mr Pranab
Mukherjee, Union Finance Minister
A large, untapped domestic market, with a huge growth potential Presence of financial and capital market mechanisms A large and continuously growing intellectual capital Healthy rate of economic growth
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INTRODUCTION TO FINANCIAL INSTITUTION
The need for setting aside adequate long term funding to finance industrial
development was felt when India embarked on its model of planned growth
with ambitious growth targets. It was perceived that the banks would not be able
to set aside such quantum of long term funding as they were mainly financed by
short-term deposits. Moreover, specialized financial institutions would be able
to develop expertise in project financing, which was lacking among the banks.
The banks were to concentrate on working capital financing.
National and state financial institutions were set up to provide such funding to
large, medium and small industry. Further a number of specialized institutions
were also set up to take care of specific areas or sectors. These institutions were
provided access to low cost long-term funds from the banking system for this
purpose. The specialized financial institutions mainly act as refinancing
institutions in those particular sectors.
Banks and financial institutions in case of large loans generally resort to
collective lending. Collective funding takes the form of consortium lending or
credit syndication. Both types of funding are similar with small differences. One
of the main differences being the terms and conditions under which the loan is
sanctioned. In consortium lending the terms and conditions are the same for all
participating institutions whereas in the case of credit syndication each
participating institution can stipulate its own terms and conditions
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BACKGROUND OF CANARA BANK
Canara Bank is a state-owned financial services company in India. It was
established in 1906, making it one of the oldest banks in the country. As on
2009 November, the bank had a network of 3057 branches, spread
across India. The bank also has offices abroad in London, Hong Kong, Moscow,
Shanghai, Doha, and Dubai. Ammembal Subba Rao Pai, a philanthropist,
established the Canara Hindu Permanent Fund in Mangalore, India, on 1 July
1906. The bank changed its name to Canara Bank Limited in 1910 when it
incorporated. The Government of India nationalized Canara Bank, along with
13 other major commercial banks of India, on 19 July 1969. In 1976, Canara
Bank inaugurated its 1000th branch. In 1983, Canara Bank opened its first
overseas office, a branch in London. In 1985, Canara Bank acquired Lakshmi
Commercial Bank in a rescue. In 1985, Canara Bank established a subsidiary in
Hong Kong, Indo Hong Kong International Finance. In 1996 Canara Bank
became the first Indian Bank to get ISO certification for Total Branch
Banking for its Seshadripuram branch in Bangalore. Canara Bank has now
stopped opting for ISO certification of Branches. In 2008-9, Canara Bank
opened its third foreign operation, this one a branch in Shanghai.
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INTRODUCTION
Widely known for customer centricity, Canara Bank was founded by Shri
Ammembal Subba Rao Pai, a great visionary and philanthropist, in July 1906, at
Mangalore, then a small port in Karnataka. The Bank has gone through the
various phases of its growth trajectory over hundred years of its existence. Over
the years, the Bank has been scaling up its market position to emerge as a major
'Financial Conglomerate' with as many as nine subsidiaries/sponsored
institutions/joint ventures in India and abroad.
As at March 2011, the Bank has further expanded its domestic presence, with
3253 branches spread across all geographical segments. Keeping customer
convenience at the forefront, the Bank provides a wide array of alternative
delivery channels that include 2216 ATMs, covering 846 centers. With 100%
CBs, the Bank offers technology banking, such as, Internet Banking and Funds
Transfer through NEFT and RTGS across all branches The Bank has further
enhanced its basket of new tech-products for customer convenience like CanaraGift Cards, Canara Campus Card, Canara Platinum Card, Bills Desk for utility
bills payment, Cash withdrawal at Point of Sale (POS) machines at Merchant
Establishments, VISA money transfer and the ASBA (Application Supported by
Blocked Amount) facility during FY11.
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OBJECTIVES
The main objective of Canara Bank is to serve as the apex institution for term
Finance for industry in India. Its objectives include To emerge as a Best
Practices Bank by pursuing global benchmarks in profitability, operational
efficiency, asset quality, risk management and expanding the global reach.
To provide quality banking services with enhanced customer orientation, higher
value creation for stakeholders and to continue as a responsive corporate social
citizen by effectively blending commercial pursuits with social banking.
FUNCTION
The Canara Bank has been established to perform the following functions- To
grant loans and advances to IFCI, SFCs or any other financial institution by
way of refinancing of loans granted by such institutions which are repayable
within 25 year? To grant loans and advances to scheduled banks or state co-
operative banks by way of refinancing of loans granted by such institutions
which are repayable in 15 years? To grant loans and advances to IFCI, SFCs,
other institutions, scheduled banks, state co-operative banks by way of
refinancing of loans granted by such institution to industrial concerns for
exports. To discount or rediscount bills of industrial concerns. To underwrite or
to subscribe to shares or debentures of industrial concerns. To subscribe to or
purchase stock, shares, bonds and debentures of other financial institutions. To
grant line of credit or loans and advances to other financial institutions such as
IFCI, SFCs, etc. To grant loans to any industrial concern. To guarantee deferred
payment due from any industrial concern. To provide consultancy and merchant
banking services in or outside India.
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Subsidiaries
The following are the subsidiaries of Canara Bank.
Can fin Homes Limited
Can bank Factors Limited
Can bank Venture Capital Fund Limited
Can bank Computer Services Limited
Canara Bank Securities Limited
Canara Robeco Asset Management Company Limited
Can bank Financial Services Limited
Canara HSBC Oriental Life Insurance Company Limited
Capital Structure and Operations
As on March 31, 2011, the authorized Capital of Canara bank is Rs.3000crores.
Issued, subscribed and paid up share capital was Rs.443 crores.Reserves were
Rs.17941 crores.
Branch Network
Canara Bank has a strong pan India presence with 3253 branches and 2216
ATMs,catering to all segments of an ever growing clientele base of about 3.87
crore. Across the borders the Bank has 4 branches, one each at London, Hong
Kong, Shanghai and Leicester. Canara Bank is recognized as a leading financial
conglomerate in India, with as many as nine subsidiaries/sponsored
institutions/joint ventures in India and abroad.
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INTRODUCTION TO ASSET LIABILITY MANAGEMENTAsset Liability management is very much importance for a bank. Banks are
making profit from various services provided to their customers. Banks profit is
functions of revenue earned form the assets and the cost incurred for the liability
that has occurred for acquiring funds for financing the assets. Proper
management of bank assets and liabilities can increase the profitability of the
bank. The fuming of these loans and advances and investments comes from
liability. So the earnings of a bank ultimately depend on liabilities. Banks have
to incur costs for its liability. For example, they have to give interest to the
public and also to the lending institutions. So banks liability is not cost free.
Efficient use of liabilities depends on effective liability management. Effective
liability management indicates that the cost of the liability will be less and also
it will less volatile. But less cost and less volatility is inversely related. If we
give our concentration only to less cost fund, then the funds will be volatile.
ALM has mainly two components. One is asset management and the other is
liability management. Asset management deals with how a manager can
appropriately handle the assets of the bank and efficiently use the profitable
opportunities. On the other hand, liability management deals with the liability
side of the balance sheet. A banks earning or spread is the difference between
the revenue generated mainly from the asset side of the business and expense
generated mainly from the liability side of the business. The foal of liability
management is to gain control over the banks funds sources.
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MEANING OF ASSET LIABILITY MANAGEMENT
Asset-liability management (ALM) is a term whose meaning has evolved. It is
used in slightly different ways in different contexts. ALM was pioneered by
financial institutions, but corporations now also apply ALM techniques.
Traditionally, banks and insurance companies used accrual accounting for
essentially all their assets and liabilities. They would take on liabilities, such as
deposits, life insurance policies or annuities. They would invest the proceeds
from these liabilities in assets such as loans, bonds or real estate. All assets and
liabilities were held at book value. Doing so disguised possible risks arising
from how the assets and liabilities were structured.
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THEORETICAL DEVELOPMENT
1. ASSET LIABILITY MANAGEMENT POLICY:
Asset Liability Management (ALM) is an integral part of Bank Management;
and so, it is essential to have a structured and systematic process for manage the
Balance Sheet. Banks must have a committee comprising of the senior
management of the bank to make important decisions related to the Balance
Sheet of the Bank. The committee, typically called the Asset Liability
Committee (ALCO), should meet at least once every month to analysis, review
and formulate strategy to manage the balance sheet. In every ALCO meeting,
the key points of the discussion should be minted and the action points should
be highlighted to better position the banks balance sheet.
Asset Liability management is one of the pillars of banking- in fact the concept
of Asset Liability management is at the core of financial business. The
importance of appropriate and effective Asset Liability management has always
been outlined by regulators, market operatives and individuals and yet we hear
of instances of failures in Asset Liability management mechanism- the most
notable amongst them the Barings Bank and Long Term Capital Management.
The Asset Liability Risk Management system essentially focuses on risks that
arise out of liquidity and interest rate mismatches and management of Capital
Adequacy. This aspect of risk management has become increasingly important
due to volatility that arises from a deregulated market- driven environment.
Here to the policy guideline, outlines all the areas that are required to be
covered through preciously laid down statement on Capital Adequacy,
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borrowing limits commitment limits, loan deposit ratios and medium term
funding ratio. The organization structure and job responsibilities are also
outlined and the globally accepted ALCO or The Asset Liability Committee
process is detailed. The ALCO process ensures that the management is
constantly apprised of the risks arising out of liquidity and interest rate
mismatch and step can be taken through this continuous monitoring of risk to
manage it effectively.
2. ASSET LIABILITY MANAGEMENT POLICY EFFICIENT
FRONTIER:
The five step ALMEF process:
1. Economic evaluation of the balance sheet which considers the ongoing nature
of the business.
2. Evaluation of capital markets employing a stochastic economic simulation
model,
3. Surplus optimization utilizing a multi-time period non-linear optimization
model which develops efficient frontier portfolios that explicitly consider the
liability cash flows and characteristics, as well as being dynamically linked to
changing capital market scenarios.
4. Sensitivity testing of key asset, liability and capital market factors. And
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5. A performance measurement system that culminates in a liability benchmark
index. The process loops back to step one at various stages and is reevaluated
on an ongoing basis. A diagram of the process is provided below. The result is a
prospective investment policy and strategy that considers not only the liability
profile for the existing balance, but also how the balance sheet will look going
forward.
Over the last few years the Bangladeshs financial markets have witnessed wide
ranging changes at fast pace. Intense competition for business involving both
the assets and liabilities, together with increasing volatility in the domestic
interest rates as well as foreign exchange rates, has brought pressure on the
management of banks to maintain a good balance among spreads, profitability
and long-term viability. These pressures call for structured and comprehensive
measures and not just ad hoc action. The Management of banks has to base their
business decisions on a dynamic and integrated risk management system and
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process, driven by corporate strategy. Banks are exposed to several major risks
in the course of their business - credit risk, interest rate risk, foreign exchange
risk, equity / commodity price risk, liquidity risk and operational risks.
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ALM PROCESS
The scope of ALM function can be described as follows:
Liquidity risk management Management of market risks (Including Interest Rate Risk) Funding and capital planning Profit planning and growth projection
Trading risk managementThe guidelines given in this note mainly address Liquidity and Interest Rate
risks. The Asset Liability Committee (ALCO) is responsible for balance sheet
(asset liability) risk management. Managing the asset liability is the most
important responsibility of a bank as it runs the risks for not only the bank, but
also the thousands of depositors who put money into it.
The responsibility of Asset liability Management is on the Treasury Department
of the bank. Specifically, the Asset liability Management (ALM) desk of the
Treasury Department manages the balance sheet. The results of balance sheet
analysis along with recommendation is placed in the ALCO meeting by the
Treasurer where important decisions are made to minimize risk and maximize
returns. Typically, the organizational structure looks like the following:
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ASSET LIABILITY STRUCTURE OF A BANK:
To understand how a bank operates, first we examine the bank balance sheet,
which lists its assets and liabilities. As the name implies, this list balance, that
is, it has the characteristics that:-
Total Assets = Total Liabilities + Capital
Furthermore, a banks balance sheet lists sources of banks funds (liabilities)
and uses to which they are pit (assets). Banks obtain funds by borrowing and byissuing other liabilities such as deposits. They then use these funds to acquire
assets such as securities and loans. The revenue that banks receive from their
holdings of securities and loans covers the expenses of issuing liabilities and
ideally yields a profit.
Asset Securitization:
Against the backing of the secured assets banks issue security paper to raise
funds. Securitizing assets requires a bank to set aside a group of income earning
assets such as mortgages or consumer loans and to sell securities against
those assets in the open market. For example, a bank disbursed loan for two
years, so for two years these loans are illiquid. Bank can issue stock for thatamount and for two years. The result is that they raise funds. The important
issues are that
Loans have to be good loans. Not deposit collection is necessary for that purpose. Banks loan and revenues can be increased.
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So, we can say, securitization is the transformation of illiquid assets into
security that is tradable and further liquid. The important aspects are
Here the institution has to be rated by the credit rating company. Securitization has to be done from similar loans.
When banks are offering security, they offer return to investor less than their
loan interest but higher than the deposit return.
4.2 Benefits of Securitization:
Additional sources of fund: Bank raises funds other than deposit andnon-deposit items.
Positive effect on balance sheet: Due to of security backed by goodloans bank raises funds, part of which is kept as cash balance and most of
which is disbursed further as loan for good loan request and for further
transformation. So banks risk weighted assets as well as capital adequacy
requirements decrease. The result is that banks earning increases.
No opportunity cost of fund: Bank does not need to incur anything suchas borrowing or deposit collection for raising the funds. So there does not
involve any cost.
Multiple effects for the development of the economy: Bysecuritization, a bank can raise funds without gong to deposit and non
deposit sources. This increases the banks liquidity and profitability. By
this process, bank can fund various prospective investment opportunities.
It increases more opportunity for the community and helps in increasing
the per capita income. Security will not only increase liquidity and reduce
pressure on the balance sheet of the bank, but also help to increase the
supply of good scripts in the security market. Thus, it ensures the
financial development of the country.
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Risk Involved:
If backed assets become bad loans then banks will loss those loans as well as
has to pay principal and interest tot the investors who bought the security.
Any loans pledged behind these securities must be held on the banks balance
sheet until the security papers reach maturity, which decreases the overall
liquidity of the banks loan portfolio. Moreover, with these loans remaining on
its balance sheet the bank must meet the regulatory imposed capital
requirements to back the loans.
Loan Selling:
It is the selling of some loan to some other intuitions or individuals. It generates
cash but it does not require issuing new security paper.
Loan selling is both with recourse i.e. if the buyer of the loan become unable to
get the money back from the borrower then the seller of the loan will be liable.It may be without recourse i.e. the buyer of the loan will not get protection in
case of being unable to collect the loan. The advantages of loan selling are it
reduces risk and reduces the pressure on loan. The disadvantage of the loan
selling is that due to market pressure; if one sells the good loans, then it will
create adverse impact on the financial position of the bank. Loan selling is of
following types
(a) Loan participation:
First the bank is giving loan and then asks some other parties to participate in
the process. The participator must the outsider. The participator does not
involve in the disbursement of the loan. The buyer of participation will face a
substantial loss if the selling institution or the borrower fails.
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(b) Loan striping:
A loan strip is short dated pieces of a longer-term loan and often matures
quicklya few days or weeks. It is striping some parentage of the loan and sells
it to some other institutions. The purchasing institution will be liable for the
collection of that portion of the loan. The difference between participation and
striping is that in striping a relationship between the buyer of the loan and the
borrower creates.
(c) Standby Letter of Credit:
It is a financial guarantee in the form of letter of credit. It is mainly practiced in
the North American countries. It is made of r two purposes. Performance bond
guarantee: in the developed market, nobody will purchase the security paper of
any institution without guarantee given by bank.
(d) Default Guarantee:
Through it, banks are giving guarantee that if its customer defaults, then the
bank will repay the money.
This note lays down broad guidelines in respect of interest rate and liquidity
risks management systems in banks which form part of the Asset-Liability
Management (ALM) function. The initial focus of the ALM function would be
to enforce the risk management discipline viz. managing business after
assessing the risks involved. The objective of good risk management
programmes should be that these programmes will evolve into a strategic tool
for bank manageme
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ADMINISTRATION OF ALMThere is a separate department to manage asset and liability. The treasury
department maintains asset and liability of a bank.
1 ORGANIZATIONAL STRUCTURE:
CEO / MANAGING
DIRECTOR
Head of
Consumer
Banking
Head of
Consumer
Banking
Head of
Treasury
Head of
Corporate
Banking
Head of
Finance
Head of
Credit
Head of
Operations
Head of Asset
Liability Mgt
(ALM)
Money Market
Dealers
Treasury: Responsible for ALM
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POLICY GUIDELINES:
1 Responsibility of the Board of Directors:
The overall responsibility of establishing broad business strategy,significant policies and understanding significant risks of the bank rests
with the Board of Directors.
Through the establishment of Audit Committee the Board of Directorscan monitor the effectiveness of internal control system. Bangladesh
Bank has already instructed the banks to establish Audit Committee.
The internal as well as external audit reports will be sent to the boardwithout any intervention of the bank management and ensure that the
management takes timely and necessary actions as per the
recommendations
Have periodic review meetings with the senior management to discuss theeffectiveness of the internal control system of the bank and ensure that
the management has taken appropriate actions as per the
recommendations of the auditors and internal control.
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2 Responsibility of the Senior Management:
In setting out a strong internal control framework within the organizationthe role of Managing Director is very important. He/she will establish a
Management Committee (MANCOM), which will be responsible for the
overall management of the Bank
With governance & guidance from the Board of Directors the MANCOMwill put in place policies and procedures to identify, measure, monitor
and control these risks.
The MANCOM will put in place an internal control structure in thebanking organization, which will assign clear responsibility, authority and
reporting relationship.
The MANCOM will monitor the adequacy and effectiveness of theinternal control system based on the banks established policy &
procedure.
The MANCOM will review on a yearly basis the overall effectiveness ofthe control system of the organization and provide a certification on a
yearly basis to the Board of Directors on the effectiveness of Internal
Control policy, practice and procedure
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3 ALCO & Asset Liability Management (ALM):
The banks asset liability management is monitored through ALCO. The
information flow in the ALCO can be diagramed as below:
The Committee:
As the Treasury Department is primarily responsible for Asset Liability
Management, ideally the Treasurer (or the CEO) is the Chairman of the ALCO
committee. The committee consists of the following key personnel of a bank:
- Chief Executive Officer / Managing Director
- Head of Treasury / Central Accounts Department
- Head of Finance
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- Head of Corporate Banking
- Head of Consumer Banking
- Head of Credit
- Chief Operating Officer / Head of Operations
The committee calls for a meeting once every month to set and review strategies
on ALM.
Key Agendas:
ALCO attends the following issues while managing Balance Sheet Risks:
i) Review of actions taken in previous ALCO.
ii) Economic and Market Status and Outlook.
iii) Liquidity Risk related to the Balance Sheet.
iv) Review of the price / interest rate structure.
v) Actions to be taken.
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4 Policy Recognition and Assessment:
An effective internal control system continually recognizes and assessesall of the material risks that could adversely affect the achievement of the
banks goals.
Effective risk assessment must identify and consider both internal andexternal factors. Internal factors include complexity of the organization
structure, the nature of the Banks activities, the quality of personnel,
organization changes and also employee turnover. External factors
include fluctuating economic conditions, changes in the industry, socio-
political realities and technological advances.
Risk assessment by Internal Control System differs from the business riskmanagement process, which typically focuses more on the review of
business strategies developed to maximize the risk/reward trade-off
within the different areas of the bank. The risk assessment by Internal
Control focuses more on compliance with regulatory requirements, social,
ethical and environmental risks those affect the banking industry.
5 ALCO Paper:
An ALCO paper is produced every month (usually by the Finance Department)
which covers various issues related to Balance Sheet risk management. The
ALCO paper is prepared before the ALCO meeting as the committee reviews
the ALCO paper to set strategies. An ALCO paper typically covers the
following:
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6 The ALCO Process:
The ALCO process or the ALCO meeting reviews the ALCO paper along with
the prescribed agendas. The Chairman of the committee, that is the Treasurer or
the CEO, raises issues related to the balance sheet. Treasurer suggests whether
the interest rates need to be reprised, whether the bank needs deposits or
advance growth, whether growth of deposits and advances should be on short or
longer term, what would be the transfer price of funds among the divisions,
what kind of interbank dependency the bank should have etc. In short, all issues
related to liquidity and market risk are covered. Based on the analysis and views
of the Treasurer, the committee takes decisions to reduce balance sheet risk
while maximizing profits.
7 Action Points:
The ALCO takes decisions for implementation of any/all of the following
issues:
Need for appropriate Deposit mobilization or Asset growth in rightbuckets to optimize asset-liability mismatch.
Cash flow (long/short) plan based on market interest rates and liquidity. Need for change in Fund Transfer Pricing (FTP) &/or customer rates in
line with strategy adapted.
Address to the limits that are in breach (if any) or are in line of breachand provide detailed plan to bring all limits under control.
Address to all regulatory issues that are under threat to non-compliance.
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8 Special ALCO Meeting:
Apart from the regular monthly meeting, ALCO meeting is also called as and
when any contingent situations arise. A very good example may be, during the
Eid period. At those times, market liquidity dries out and overnight rates shoot
up. Banks who are net borrowers from the market may be exposed to huge
interest expense the high rates in the market. This is an ideal time for a special
ALCO meeting, where the committee may take critical decisions for deposit
mobilization on an urgent basis for reducing dependency from the market.
9 Control Activities and Segregation of Duties:
Effective internal control system requires that an appropriate controlstructure is set up with control activities defined at every business level,
i.e. top level review; appropriate activity controls for different
departments or divisions; physical controls; checks for compliance with
exposure limits and follow-up on non-compliance; a system for approvals
and authorizations and system pf verification and reconciliation.
Control activities involve two steps: (1) the establishment of controlpolicies and procedures and (2) verification that the control policies and
procedures are being complied with.
Senior management should ensure that adequate control activities are anintegral part of the daily functions of all relevant personnel; this enables
quick response to changing conditions and avoids unnecessary costs.
Control activities are most effective when they are viewed by
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management and all other personnel as an integral part of daily activities
rather than an addition to it.
One of the most important aspects of internal control system requires thatthere is appropriate segregation of duties and personnel are not assigned
conflicting responsibilities.
Furthermore the employees must also be provided with necessaryauthority, which will enforce segregations of duties.
For employees to carry out their responsibilities properly each employeeshould have appropriate job description
Areas of potential conflicts of interest should be identified, minimized and
subject to careful independent monitoring
10 Establishment of a Compliance Culture:
A bank is said to have strong compliance culture when throughout theorganization employees are encouraged to comply with policies,
procedures and regulation. Even an individual at the lowest echelon
should be empowered to speak up without the fear of reprisal if she/he
identifies something non-compliant.
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The board of directors and the senior management must establish acompliance culture within the banking organization that emphasizes and
demonstrates to all levels of personnel the importance of internal control.
In order to establish a compliance culture the board of directors andsenior management must promote a high ethical and integrity standard.
In reinforcing ethical values the banking organization should avoidpolicies and practices that provide inadvertent incentive for inappropriate
activities. Examples of such policies and practices include undue
emphasis on performance targets or operational results, particularly short
term ones that ignore long term risks and compensation schemes that
overly depend on short term performance. The board of directors and the
senior management may establish a Code of Ethics that all levels of
personnel must sign and adhere to.
The policy statement of Asset Liability Management:
The policy statement of Asset Liability Management is laid out for the
followings and annual review would be carried out taking into the conclusion of
changes in Balance Sheet and market dynamics.
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a) Advance Deposit Ratio (AD):
The bank shall maintain Advance deposit ratio in the following manner:
Advance Deposit ratio should be fixed as per guidelines and norms set bythe Central Bank of the country. At present the Advance Deposit ratio is
84 %.
However, the Loan Deposit ratio of the bank should go up to 110% as perguidelines set in managing core risks in banking, Asset Liability
Management. (ALM)
To calculate the Advance Deposit ratio, The formula given by the CentralBank to be followed
The Loan Deposit ratio = Loan/(Deposit + Capital + Funded Reserve)
b) Wholesale Borrowing Guidelines (WBG):
To borrow from wholesale market (or interbank market), the capacity and
amount to be determined considering the following factors.
The size and turnover of the local market; our share of that market The credit limits imposed by our counter parties.
Beside these, the following factors are also to be considered at the time of fixing
the amount of borrowing.
Balance sheet size of the bank. Historical trend of market liquidity.
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Credit Rating of the bank (to understand counter party banks limits onthe concerned bank).
Stability of liquidity and interest rates of the market.
c) Commitments:
A register regarding sanction of loans to be introduced. A clause to be inserted in the sanction advice stating the time of taking
disbursement. Failing to avail the loan within disbursement time, loan
automatically cancelled.
During the continuation of time for disbursement, undrawn disbursementamount to be calculated which will be trend as commitment.
Commitment amount to be considered for raising funds for the bankalong with other factors.
d) Medium Term Funding Ratio (MTF):
Central banks guidelines regarding Medium term Funding (MTF) to befollowed.
Medium term funding ratio to be maintain in conformity with Bangladeshbanks directives.
e) Maximum Cumulative Outflow (MCO):
Maximum cumulative out flow to be maintained as per Central banks
directives and guidelines.
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f) Liquidity Contingency Plan:
Liquidity is to be maintained as per Central Banks directives. However, the
bank will place the following percentage of its customer deposits with the
central bank.
CRR 4.5% of average Time and Demand as at two Months prior period
(Interest free)
SLR 13.5% of average Time and Demand deposits as at two months prior
period
Foreign currency balance held with central bank will not qualify for CRR.
g) Capital Adequacy Ratio:
The bank will maintain a minimum capital on its risk-weighted assets. At
present, the minimum capital requirement is at 9 %.
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TABULATION AND ANALYSIS OF DATA:The collected data have been tabulated after collection. Through tabulation data
are condensed into necessary tables. After tabulation data are used for betteranalysis.
Formula Used in Empirical Analysis of Asset Liability Management:
Total Assets = Total Liabilities + Capital The Loan Deposit ratio = Loan/(Deposit + Capital + Funded Reserve) Net interest income (NII) = Interest incomeinterest Expense Net interest Margin (NIM) =Net Interest Income
Earning Assets
Rate sensitive Assets (RSA) = Rate Sensitive Liabilities (RSL) Interest sensitive gap = interest sensitive assets interest sensitive
liabilities
GAP=RSA- RSL Relative Gap (RG) = Gap
Total Asset
NW = AL NW = A L Positive duration gap =Asset durationLiability duration>0 Negative duration gap =Asset durationLiability duration
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Return on Equity (ROE) = Net Income / Equity (NI/E) Return on Earning Assets (ROEA) = Net Income / Earning Assets
(NI/EA)
Return on Loans (ROL) = Interest Income / Loans (II/L) Interest Income / Earning Assets (II/EA) Net Interest Income / Earning Assets (NII/EA) Interest Margin (IM) = Return on Fund - Cost of Fund (IM)
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EMPIRICAL ANALYSIS OF ASSET LIABILITY
MANAGEMENT OF MUTUAL TRUST BANK LTD.
To analyze the asset liability management I have analyzed of a banks Net
Interest Income, Net Interest Margin (Nim), Gap, Duration, Interest Sensitivity
Ratio, Liquidity Ratio. And tried to compare with banks profitability to find
that whether there have any relations or not.
Analysis is given below:
(a) NET INTEREST INCOME (NII):
We know: Net interest income (NII) = Interest incomeInterest Expense
Table I: Net Interest Income (Taka in
Millions)
YearInterest
Income
(-) Interest
ExpenseNII
2008 1686.87 1258.70 430.17
2007 1139.96 820.68 319.27
2006 723.09 447.70 245.38
2005 457.84 330.72 127.12
(Sources: Annual Report of MTBL)
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Here NII is increasing day by day because increase in interest rates earned on
asset, otherwise increase in interest paid on funding will decrease NII.
(b) NET INTEREST MARGIN (NIM):
We Know: Net interest Margin (NIM) =Net Interest Income
Earning Assets
Table 2: Net Interest Margin (Taka in
Millions)
Year Net Interest Income Earning Assets NIM
2008 430.17 17419.05 2.46%
2007 319.27 14779.16 2.16%
2006 245.38 8300.61 2.95%
2005 127.12 5369.61 2.36%
(Sources: Annual Report of MTBL)
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Here NIM was highest in 2006, after that gone down in 2007 and again
increased in 2008. So we can say that NIMs were on an average sequence and
ALM is going on moderate way.
(c) GAP ANALYSIS:
Gap management techniques require management to perform an analysis of the
maturities and re-pricing opportunities associated with the banks interest
sensitive assets, deposits and money market borrowings. A bank can hedge
itself by making sure for each time period that
Rate Sensitive Assets (RSA) = Rate Sensitive Liabilities (RSL)
The most familiar example of re-pricing assets is loans that are about to mature
or are coming up for renewal. If interest rate have risen since these loans were
first make, the bank will renew them only if it can get an expected yield that
approximates the higher yields currently expected on other financial instruments
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of comparable quality. Re-pricing liabilities include CDs about to mature or be
renewed, floating rate deposits, and money market borrowings.
Interest Sensitive Gap:
A gap exists between these interest sensitive assets and interest sensitive
liabilities whenInterest Sensitive Gap = Interest Sensitive Assets
Interest Sensitive Liabilities.
If interest sensitive assets in each planning period exceed (= >0) the volume of
interest sensitive liabilities, the bank is said to have a positive gap and to be
asset sensitive. In this situation if interest rate rises, the banks net interest
margin will increase because the interest revenues generated by the banks
assets will increase more than the cost of borrowed funds and vice-versa. The
banks with positive gap will reduce if interest rate falls. In the opposite situation
the bank has a negative gap and is said to be liability sensitive. Liability
sensitive (negative) gap = interest sensitive assets interest sensitive liabilities
< 0. In that case, rising interest rate will lower the banks net interest margin,
because the rising cost associate with interest sensitive liabilities will exceed
increase in interest revenue from the banks earning assets and vice -versa. Only
if interest sensitive assets and liabilities are equal is a bank relatively insulated
from interest rate risk. As a practical matter, however, a zero gap does not
eliminate all interest rate risk, because the interest rate attached to bank assets
and liabilities are not perfectly correlated in the real world. Loan interest rate,
for example, tends to lag behind interest rates on money market borrowings. In
practical world, zero gaps are also impossible.
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Maturity Gap:
The total effect of interest rate change can be summarized by its maturity gap, is
the difference between interest Rate Sensitive Assets (RSA) and the interest
Rate Sensitive Liabilities (RSL)
Rate Sensitive Assets (RSA) of the Bank is-
Money call at short notice Investment (in shares and securities) Short Term Loan and Advance Non-Banking Asset
Rate Sensitive Liabilities (RSL) of the Bank is-
Borrowing from other banks, financial institutions and agents Deposit and other accounts (except fixed deposits) Total share Holders Equity
Relative Gap:
Relative Gap (RG) =Gap
Total Asset
Table 4: Relative Gap (Taka in
Millions)
Year GAP Total Asset Relative Gap Ratio
2008 -29776.14 19306.99 -1.54
2007 -24713.06 15931.03 -1.55
2006 -13587.83 9037.53 -1.50
2006 -9903.66 5832.10 -1.69
(Sources: Annual Report of MTBL)
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Here relative gap is negative but has reduced over the time. It is somehow good
sign that they tried to cover-up this Gap.
(d) DURATION ANALYSIS:
Duration is a value and time weighted measure of maturity that considers the
timing of all cash flows from earning assets and all cash outflows associated
with liabilities. In effect, duration measures the average time needed to recover
the funds committed to an investment. The net worth (NW) of any bank is equal
to the value of its assets (A) less the value of its liability (L):
NW = AL
As interest rates changes, the value of both a banks assets and liabilities will
change, resulting in a change in net worth:
NW = A L
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Portfolio Theory of Finance Told That
1. A rise in market rates of interest will cause the market value (price) ofboth bank fixed-rate assets and liabilities to decline.
2. The longer the maturity of a banks assets and liabilities, the more they inthe market value (price) when market interest rates rise.
Duration analysis can be used to stabilize the market value of a banks net worth
(NW). It measures the sensitivity of the market value of financial instruments to
changes in interest rates. The interest rate risk of financial instruments isdirectly proportional to their duration.
Positive Duration Gap = Asset DurationLiability Duration > 0
Negative Duration Gap = Asset DurationLiability Duration < 0
With liability having a longer duration than the banks assets, a parallel change
in all interest rates will generate a larger change in liability values than assets
values. If interest rates fall, the banks liabilities will increase more in value
than its assets and net worth will decline. If interest rates rise, however, liability
values will decrease faster than assets value and banks net worth position will
increases in value.
This method of measuring interest rate risk examines the sensitivity of the
market value of the banks total assets and liabilities to changes interest rates.
Duration is a useful concept because it provides a good approximation of the
sensitivity of a securitys market value to a change in its interest rates.
% in Market Value of Security = - (% in Interest Rate)* Duration in
Year.
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Duration analysis involves comparing the average duration of the banks assets
to the average duration of its liabilities. Let us suppose that the average duration
of HYPO BANKS assets is 5 years, while the average duration of its liabilities
is 3years. With a 5% increase in interest rates, the market value of the banks
assets fall by 25% = (5%*5 years) and the market value of the liabilities
declined by 15%(= - 5%*3 years). The net result is that the net worth has
declined by 10% of the total asset value.
The interest sensitive gap is interest sensitive assets minus the interest sensitive
liabilities, where interest sensitive assets and liabilities are those items on a
banks balance sheet that mature or whose interest rate can be changed during a
given interval of time. A bank, which is asset sensitive, will suffer a decline in
its net interest margin if market interest rates fall. A bank that is liability
sensitive will experience decrease in its met margin if interest rates rise. One of
the most popular methods of neutralizing these gap risks is to buy or sell
financial futures contracts. A financial futures contract is an agreement between
a buyer and a seller reached today that call for the delivery of a particular
security in exchange for cash at some future date. The market of futures contract
changes daily as the market price of the security to be exchanged moves over
time.
The financial futures market are designed to shift the risk of interest rate
fluctuations from risk averse investors, such as commercial bank, to speculators
willing to accept and possibly profit from such risks. When a bank contracts an
exchange broker and offers to sell futures contract, this means it is promising to
deliver securities of a certain kind and quality to the buyer of those contracts on
a stipulated date at predetermined price. Conversely, a bank may enter the
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future markets as a buyer of futures contracts, agreeing to accept delivery of a
particular security named in each contract or to pay cash to the exchange-
clearing house the day the contacts mature, based on their price at that time.
A futures hedge against interest rate changes generally requires a bank to take
an opposite position in the futures market from its current position in the cash
market. Thus, a bank planning to buy bond contracts (go long) in the cash
market today may try o to protect the bonds value by selling bond contracts (go
short) in the futures market. Then, if bond prices fall in the cash market therewill be an offsetting profit in the futures market, minimizing the loss due to
changing interest rates
(e) INTEREST SENSITIVITY RATIO:
Interest Sensitivity Ratio =
RSA
RSL
Table 5: Interest Sensitivity Ration (Taka
in Millions)
Year RSA RSL ISR
2008 2420.93 32197.08 0.075
2007 1585.18 26328.25 0.060
2006 739.51 14327.34 0.050
2005 412.54 1036.21 0.039
(Source Annual Report of MTBL)
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Here is seen interest sensitivity ratio is always less than 1,
A financial institution at a given time asset or liability sensitive, If the financial
institution is asset sensitive it will be positive gap, Positive relative gap, Interest
sensitivity ratio is greater than 1. If financial institution is liability sensitive it
will be negative gap, negative relative gap, and interest sensitivity ratio is less
than 1.
Here in Mutual Trust Bank Gap is Negative, relative Gap is Negative; Interest
Sensitivity Ratio is less than
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LIQUIDITY RATIO:
Landing Deposit Ratio =Loan
DepositX 100
Table Six: Liquidity Ratio (Taka in
Millions)
Year Loan Deposit LD Ratio
2008 14373.26 16098.54 89.28%
2007 11692.97 13164.13 88.82%
2006 5904.18 7163.67 82.42%
2005 3437.13 5158.11 66.64%
(Sources: Annual Report of MTBL)
Liquidity Ratio should be 80% to 85% for a Bank. But here is 64% to 89%. So
we can say that they can use their deposits bitterly to earn more profit.
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FINDINGS OF ASSET /LIABILITY MANAGEMENT (ALM):
Here NII is increasing day by day because increase in interest ratesearned on asset, otherwise. Increase in interest paid on funding will
decrease NII.
NIM is here is similar sequence up to 2% that ALM is going onmoderately.
Here Gap is negative Here Relative Gap is also negative Here is seen Interest sensitivity ratio is always less than 1, Liquidity Ratio should be 80% to 85% for a Bank. But here is 64% to
89%. So we can say that they can use their deposits bitterly to earn
more profit.
A financial institution at a given time asset or liability sensitive, if the financial
institution is asset sensitive it will be positive gap, positive relative gap, interest
sensitivity ratio is greater than 1. If financial institution is liability sensitive it
will be negative gap, negative relative gap, and interest sensitivity ratio is less
than 1
Here in Mutual Trust Bank Gap is Negative, relative Gap is Negative; Interest
Sensitivity Ratio is less than 1. So it is a Liability Sensitive FinancialInstitution.
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LIABILITY MANAGEMENT AND ITS IMPACT ON
PROFITABILITY
It is already mentioned that effective liability management depends on less cost
and less volatile fund. It also depends on the effective utilization of the collected
funds. From the analysis, it is already clear that current deposit is the least
costly source of deposited funds whereas fixed deposit is the most costly source
of deposited funds. But current deposit is the most volatile sources in nature and
fixed deposit is the stable nature. Term deposit is consists of savings and fixed
deposit. So, for getting an appropriate liability structure, bank management
must make a balance between current and term deposit. It can also use money
market borrowing because it is less costly and flexible compared to deposit. A
bank can also rely on various off-balance sheet items for funding to its needs.
Liability management also depends on the effective use of the collected funds.
Improper use makes the collected funds burden for the bank. In this part,
various ratios are analyzed both in the context of interest cost of the funds and
their effective utilization.
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Profitability Ratios of Mutual Trust Bank Limited:
Ratios 2008 2007 2006 2005
Return on Assets (ROA) 1.74 1.55 2.106 1.68
Return on Equity (ROE) 21.72 20.30 19.61 30.74
Operating Profit Margin 19.90 21.68 26.32 21.51
Net Interest Margin (NIM) 2.47 2.16 2.95 2.37
Net Profit (tk in Millions) 336.17 247.19 259.23 187.52
Earnings per Shares (tk) 21.07 14.80 16.12 12.38
Price Earnings Ratio (Times) 15.18 40.30 14.32 12.56
The value of ROA and ROE depends on the volume of net income after tax. So,
if banks use heavily deposits, especially term deposits as sources of fund then
ultimately the interest cost will be increased. As a result values of the mentioned
ratios will be decreased.
The value of ROA has decreasing trend. The ROA of Mutual Trust Bank Ltd. is
growing over the first two years. After 2006 it has increased again. It indicates
that the management is somehow able to achieve consistent growth in the
banks spread through close control over the banks earning assets and the
pursuit of the cheapest sources of funding.
If we see only net interest margin (NIM) then the impact of liability
management can be realized directly. Because interest expense depends on
liability portion but the income portion depends on how one can utilize the
funds in an efficient and profitable way. In this case the ratio of net non-interest
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margin and net operating margin can explain the impact of liability on
profitability.
The vulnerable trend of Earning Spread of Mutual Trust Bank Ltd. reflects the
low efficiency of its intermediation functions and its strong position in the
competition. A liability structure will be effective only if the bank can earn
profit by using it. And the liability will give profit only if it is stable and less
costly. In all respect Mutual Trust Bank failed to manage its liability. As Mutual
Trust Bank is a service oriented private bank, it cannot say no to the public
regarding the acceptance of deposits. The bank has to accept a huge amount of
term loan every year. But it does not have the much opportunity to invest those
loans. The bank is suffering from bad loans. So, interest revenue from the
earning assets is becoming due in every year. It affects the banks net interest
margin. In case of investment, Mutual Trust bank invested majority of its funds
to advances. It enhances the default risk. The next major portion in the use of
fund is money market lending sector. The bank also has to maintain the required
provision for classified loans that places an adverse impact on the profit as well
as on the capital of the bank.
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CONCLUSION
Mutual Trust bank should have a strong Asset-Liability Management
Committee (ALCO) which will develop investment policy guidelines, developthe desired risk-return trade-off, will give decision regarding which types of
deposit will be accepted and which type of assets will be financed by which
type of liability.
Mutual Trust bank should have a clear ALM Policy. In the study it is found that
Mutual Trust is utilizing their collected funds properly. Improper use of funds
will increase the cost of the liability. Again a bank can make profit even by
accepting funds at high cost if it can use the funds properly.
The non-interest expense of the bank should be reduced.
The bank should accept funds according to the potentiality of investing them. If
a bank cannot invest its funds, it will increase the real cost of the fund Strong
Money Market should be developed in this country. If strong money market is
developed, then a bank can borrow funds from the market as and when required.
It will reduce the dependency of the bank on the deposit. As the money market
borrowing is less costly compared to deposited funds, it will reduce the banks
cost of fund.
Mutual Trust Bank should go for new off-balance sheet sources for getting the
required funds. It can securitize its assets when it needs funds. Again it can sell
the loan to other banks when funds are needed. Other off-balance sheet sources
can be used according to their nature.
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RECOMMENDATION
Bank should invest a significant amount in human resources development so
that they can form strong human capitals that ultimately contribute to ensureprofitability in future.
Bank should invest a significant amount in research and developments so that it
can identify the appropriate source of funned according to the nature of
investment.
Bank should have a strong monitoring cell so that the investment cannot be a
bad one. In this respect, the cell can give advice to the borrower in technical,
financial and other related issues that will ensure the efficient use of funds by
the borrower.
Mutual Trust Bank should give its customer a greater amount of ancillary
service. No funds are involved in providing ancillary services. It will reduce the
dependency of the bank on funds, which in turn will increase the fee earnings of
the bank.
Government must take necessary steps in the development of strong money
market in the country.
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BIBLIOGRAPHY
BOOKS:
Financial Markets & Services- Gordon- Natarajan
Web Sites:
www.wikipedia.com www.canara bank.com www.google.com www.ask.com
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