________________ INDEX SL.N O PAGE NO 1. INTRODUCTION OF ALM 3 2. REVIEW OF LITERATURE 9 3. COMPANY PROFILE 36 4. ALM IN BAJAJ 56 5.

CHAPTER DATA ANALYSIS & INTERPRETATION 58 6. CONCLUSIONS & FINDINGS 70 7. SUGGESTIONS 71 8. GLOSSARY 72 9. BIBLIOGRAPHY 73 ________________ ________________ INTRODUCTION ________________ ________________ Introduction of ALM The Crux The Scope of ALM In Sight View The Objectives of the Study Need of the Study Methodology Limitations of the Study ________________ ________________ INTRODUCTION The composition of assets and liabilities largely decide the solvency, liquidity and profitability of a corporate entity, more so that of a financial institution. The components of the liabilities determine the cost of funds. The mix of the assets influences the return on investment. Therefore the asset liability management assumes great importance; also, it is absolutely necessary to prevent the Asset - liability mismatch, both in term of maturity (tenure) and relative costs (minimum or interest differential) particularly in the control of increasing pressure on margins. In the case of state financial corporation, the instrumentality of Business Plan and Resources Forecast (BPRF), and effective treasury management techniques can be, gainfully utilized to make correction in the existing imbalances in the resource mix and the avoidable misalignments between the profile or liabilities and the portfolio of assets. While BPRF is introduced at the instance of IDBI & SIDBI. ________________ ________________ THE CRUX : The Asset - Liability management broadly deals with both sides of the balance sheet. It is primarily concerned

with the market risk that arises from a institutions structural position. These liquidity risks. The interest rate risk possibility of change in profits caused interest rank. The delay in recoveries, liquidity risk, leads to possibility. ________________ ________________

financial are interest rate and arises from the by fluctuations in a principle cause of

Opportunities and damage due to honoring payment commitments. Both these risks are obviously the result of mismatch between the Financial Institutions / Banks as Assets and Liabilities. In case of banks of Financial Institutions, the ALM positions are relatively liquid. Usually the banking institutions hold the assets and liabilities until they mature. This practice of course is changing of late. It is increasingly becoming to bundle banking products such as loans into marketable securities and then sell them or trade them with other banks as well as other traditional and new players in the financial markets. This is especially true of asset-based securities i.e., mortgage loans, securitization is a new phenomenon in the Indian context. But it has a vast scope. It can make or mm the future of a financial institution. The stability, profitability, growth and image of Financial Institutions largely depend upon the ability and skill with which it can conduct its ALM. ________________ ________________ THE SCOPE : ALM in relation of SFCs covers a wide amount of both sources and applications of funds. The drying up of some of the conventional sources, the choice of the basket, rising cost of funds available and the associated stringent conditions, growing competition for the access to the sources and the need for arresting the erosion of net worth are the main challenges in managing the liabilities. On the assets side, the key issues are the resource allocation, the assets portfolio-mix, the yields, the recoveries, NPA management, writes off policies and above all the market and credit risk management. ________________ ________________ INSIGHT (Capacity of Understanding Hidden Truth) It is true in all cases, simply based on common sense, no profound wisdom is necessary to know and appreciate this fundamental principle of financial science. However, wisdom lies in understanding the inter-relationship between categories of assets and their interface with liabilities. It is desirable to synchronize the profiles of assets with the counterparts among liabilities. True balancing involves intelligence matching risk in mapping and contingency arrangements. ________________ ________________ OBECTIVES OF THE STUDY: 1. To know how ALM is done at APSFC.

2. To study the procedure adopted for managing ALM in APSFC. 3. To understand the problems involved in maintaining and managing ALM. 4. To learn the liquidity risk management and analysis. 5. To learn the-interest rate risk analysis and management. 6. To get know various schemes and activities of APSFC. ________________ ________________ NEED FOR THE STUDY: In the event of highly volatile interest rates and liquidity crisis, Financial Institutions/banks face the problem of real valuation of their assets and liabilities. This Mismatch of assets and liabilities may produced an effect on calculation of real worth of the business. There are some methods adopted by banks/financial institutions in order to cover the problems of liquidity mismatch and interest rate risk. The present study focused such ________________ ________________ measures taken by APSFC for its Asset - Liability management. ________________ ________________ METHODOLOGY OF THE STUDY: The study of liquidity risk analysis and interest rate risk analysis and management is based on: 1. Primary Data Collection 2. Secondary Data Collection PRIMARY DATA COLLECTION The sources of primary data collection has been gathered by interacting with Chief Manager of ALM Cell Resource Person, of ALM Cell Chief Manager of Finance & Accounting Department SECONDARY DATA COLLECTION It was collected from books regarding journals, banking, and magazines containing relevant information about ALM. The secondary data collected was to understand how effectively APSFC carries out ALM ________________ ________________ management. The other main sources of Secondary Data: Annual reports of APSFC Brochures of APSFC RBI guidelines for ALM management Indian Financial System By 'M. Y.KHAN' Asset Liabilities management by different authors LIMITATIONS OFTHE STUDY

In spite of utmost care taken for the smooth conduct of study while preparing this project; this report suffers from certain setbacks. 1. This is the study conducted with in short period, so it may not be covering all the aspects in detail. 2.The study has made an attempt for evaluating the ________________ ________________ performance of APSFC in managing liquidity risk management and interest rate risk management. 3.Due to limitations of the sources the data collection could not be adequate. ________________ ________________ REVIEW OF LITERATURE ________________ ________________ Review of Literature ALM ALM Pillars ALM Process ALM Information System Composition of ALCo Committee of Directors Definition of Risk Identification of Risk Risk Analysis Components of Risk Management Control Risk Risk in Financial Institutions Management of Liquidity Risk Management of Interest Risk Analysis ________________ ________________ Gap Analysis Duration Analysis Trend Analysis Ratio Analysis Limitations of Analysis REVIEW OF LITERATURE ASSETS LIABILITY MANAGEMENT (ALM) Asset - liability management practices which effect from April I, 1999. While guidelines on management of credit risk, market risk and operational risk will be issued later on. The RBI has issued guidelines for the introduction of Asset - liability management (ALM) as a part of the risk management and control system in banks. They are intended to form the basis for initiating collection, compilations and analysis of dates required tu support the ALM System. ________________ ________________

Over the last few years, the Indian Financial System markets have witnessed vide ranging changes at a 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 measures. The bank management has to base their business decision on a dynamic and integrated risk management system and process, driven by corporate strategy. The banks are exposed to several major risks in the course of the business credit risk, interest rate risk, foreign exchange risk, and equity/commodity price risk. Liquidity and Operational risks. It is against this background that the RBI guidelines relating to AL:!v1 focus on interest rate and liquidity risk-management system in banks, which form part: of the ALM function. The initial thrust of the ALM function would be to enforce the risk management discipline that is, managing offer assessing the risk involved. The objective of good risk Management programs should be that their programs evolve into a strategy tool for bank management. In the normal course, Financial Institutions are exposed to credit and market ________________ ________________ risks in view of the asset liability transformation. With liberalization in Indian Financial markets, over the last four years and growing integration of domestic markets and the entry of MNC's for meeting the credit needs of not only the corporate but also the retail segments, the risks associated with Financial Institutions operations have become complex and large, requiring ________________ ________________ strategic management. Financial Institutions are now operating in a fairly deregulate 1. environment and are required to determine interest rates on deposits, they can also offer deposits prescribe by the R 131: they can also offer advances on dynamic basis. The interest rates on investments of 1:1 in government and other securities are also now market related. Intense competition for business involving both assets and liabilities has brought pressure on the management of Financial Institutions to maintain a good balance among spreads, profitability and long-term liability. Imprudent liquidity management can put Financial Institutions earnings and reputation at great risk. The management of Financial Institutions have to base their business decisions on a dynamic and integrated risk management system and process driven by' corporate strategy, Financial Institutions are exposed to several major risks in the course of their business; credit risk, interest rate risk, equity/commodity price risk, liquidity risk and operational risk. It is, therefore, important that Financial Institutions introduce effective risk measure management systems that address the issues relating to interest rate and liquidity risks. Financial institutions need to address these risks in a

________________ ________________ structural manner by upgrading their risk management and adopting more comprehensive asset-liability management (ALM) practices than has been done hitherto. ALM, among other functions, is also concerned with risk management and provides a comprehensive and dynamic framework for measuring, monitoring and managing liquidity and interest rates and equity and commodity price risks of major operators in the financial system, which needs to be closely integrated with the Financial Institutions business strategy. It involves assessment of various types of risks and altering the asset-liability portfolio in a dynamic order to manage risks. The RBI guidelines relate to interest rate and liquidity risks management system in Financial Institutions, which form parts of the Asset -liability management (ALM) function. The initial focus of the ALM function would be to enforce the risk management discipline that is managing business after assessing the risks involved. The objective of good risk management systems should be that these systems would evolve into a strategic tool for financial institution management. ________________ ________________ The ALM Process rests in these pillars 1. ALM Information System A. Management Information Systems B.Information availability, accuracy. adequacy and expediency 2. ALM Organization A.Structure and Responsibilities B. Level of top Management involvement 3. ALM Process A. Risk Parameters B. Risk identification C.Risk Measurement D.Risk Management E. Risk policies and tolerance levels. ALM INFORMATION SYSTEM ALM has to support by a management philosophy that ________________ ________________ clearly specifies the risk policies and tolerance limits. This framework needs to be built on sound technology with the necessary information system as backup. Thus information is the key to the ALM process. It however, recognized that varied business profiles of Financial Institutions in the public and private sectors do not make the adoption on a uniform ALM system for all Financial Institutions feasible. ________________ ________________ These are various method prevalent worldwide for measuring risks. These range from the simple gap statement to extremely sophisticated and dam intensive risk adjusted profitability measurement methods.

However, though the central element for die entire ALM exercise, is- the availability of adequate and accurate information with expedience and the systems existing some of the major Financial Institutions do not generate information in the manner required for ALM. Collecting accurate data in a timely manner would be the biggest challenge before the NBFC's particularly those lacking fullscale computerization. However, the introduction of a base information system of risk management, risk measurement and monitoring has to be addressed urgently. Financial Institutions have heterogeneous organization structures, capital base, asset size, management profiles, business activities and geographical spread. Some of them have a large number of branches and agents/brokers, where as some have unitary offices. Considering the large number of branches and the lack of adequate support system to collect information requires ________________ ________________ for the ALM. Which analysis information on the basis of residual maturity and reprising pattern of liabilities and assets, it would take time for Financial Institutions in the present state, to get the requisite information. With respect to investment portfolio and funds management, in view of the centralized nature of the functions, it would refined overtime as the Financial Institutions management gains experience of conduction business within an ALM framework the spread of computerization will also help Financial Institutions in accessing data. The business issues than ALCO would consider, inter, should include product pricing for both deposits and advances, desired maturity profile and mix of the incremental assets and liabilities, prevailing interest rates offered by other peer NBFCs for similar services/products and so on. In addition to monitoring the risk levels, the ALCO should review the result of and progress in implementation of the decision made in the previous meeting. The ALCO should also articulate the current interest rate view of the Frs and base its decision for future business strategy on this view. With respect tothe funding policy, for instance, its responsibility would be to decide on the source and mix of liabilities or sale of ________________ ________________ assets. Towards this end, it should develop a view regarding the future direction of interest rate movements and decide on funding mixes between fixes vs. floating rate funds, wholesale vs. retail deposits, money markets vs. capital markets, funding domestic vs. foreign currency funding, and so on. Individual Financial Institutions should decide the frequency of holding their ALCO meetings. COMPOSITION OF ALCO The size (number of members) of ALCO would depend on the size of the each institution, business mix and organizational complexity. To ensure commitment of the Top management and timely response to market: dynamics the CEO/CMD/President/Director should head

the committee. The chief of investment, credit resources management/planning funds management/treasury. International Business and Economics research can be members of the committee. In addition, the head of the technology division should also be an invitee building up of MIS and related computerization. Large FI may even have sub-committee and support groups. ________________ ________________ COMMITTEE OF DIRECTORS The management committee or any other specific committee constituted by the board of directors should oversee the implementation of the system and review its function periodically. ________________ ________________ The scope of the ALM functions can be described as follows: 1. Liquidity risk management 2. Management of market risks 3. Funding and capital planning 4. Profit planning and growth projection and 5. Forecasting and analyzing 'what if scenario' and preparation of contingency plans. DEFINITION OF RISK Risk is the potential loss of an asset due to different factors. IDENTIFICATION OF RISK ALM in a commercial bank of Financial Institutions is to decide what should be the risk measurement parameters that the management would need to focus on. The appropriateness of risk management parameters depends ________________ ________________ upon the degree of volatility in the operating environment, availability of supporting data and expertise within bank/Financial Institutions and the expected market and business developments. Generally, these are two major parameters, which banks/Financial Institutions all over the world employ to measure their balance sheet risks viz., risk to the net interest income and market value portfolio equity. While the former seeks to measure the risk to the immediate profits that emanate from cash flow mismatches occurring in the accounting years, the latter measures the risk arising out of the maturity mismatches in its assets and liabilities over the future years. These two parameters together attend to MEASURING THE RISK Due to difficulty in measuring interest rate risk and also the complexes the present in the understanding of the concept measurement of interest rate risk assumes greater importance in the ALM function. It has observed that banks risk exposure depends upon the volatility of interest rates and asset prices in the financial market, the Financial Institutions maturity/gaps, the duration to

________________ ________________ measure and interest rate elasticity of its assets and liabilities and the liability of the management to measure and control the exposure. In the management of Financial Institutions assets and liabilities, interest risk management lays the foundation for a good ALM. RISK ANALYSIS Interest rate risk can be analyzed in the following four methods. 1. Gap Analysis 2. Duration Analysis 3. Value at risk 4. Simulation Gap analysis is the most important basic technique used in analyzing interest rate risk. It measures the difference between financial institution assets and liabilities and off balance sheet position which will be re priced or will mature within a predetermine period. (Gap is the difference between rate sensitive assets minus rate sensitive liabilities) ________________ ________________ COMPONENTS OF RISK MANAGEMENT Risk management may be defined as the process of identifying and controlling risk. It is also described at times as the responsibility of the management to identify measure, monitor and control various items of risk associated with Financial Institutions position and transaction. The process of risk management has three clearly identifiable steps, viz., risk identification, risk measurement and risk control. CONTROL RISK After identification and assessment of risk factor, the next step involved is risk control, the major alternatives available in risk control are 1. Avoid the exposure 2.Reduce the impact by deducing frequency of severity 3. Avoid concentration in risky area 4. Transfer the risk to another party 5.Employ risk management instruments to cover the risks ________________ ________________ RISK IN FINANCIAL INSTITUTIONS Risks in financial institutions are many and a broadly classifies into three categories They are as follows: 1. Balance sheet risks 2. Transaction risks 3. Operating and liquidity risk ________________ ________________

I. BALANCE SHEET RISK The balance sheet generally arise out of the mismatch between currency, maturity and interest rate structure of assets and liabilities resulting in 1. Interest rate mismatch risk 2. Liquidity risk 3. Foreign exchange risk 1. INTEREST RATE MISMATCH RISK It is the impact of the change in interest rate on the net interest income of the bank and value of the assets and liabilities. For example, (a) When fixed deposits are accepted on the fixed rate basis and the amount is lent on floating rate basis, any download revision of interest rate on advances will result in the reduction of income stream for the bank Financial Institutions. But interest rate on deposits can be changed only when they fall due or pre closed by the depositor. (b) A bonds (investments asset of the bank) price falls down as interest rate rise. ________________ ________________ 2. LIQUIDITY RISK Liquidity is the potential inability to meet the banks/Financial Institutions as they become due. It rises when Financial Institutions are unable to generate cash to cope with the declines in deposits or increase in loans. It originates the mismatches in the maturity of assets and liabilities as well as uncertainty of future cash flows. 3.FOREIGN EXCHANGE RISK The risk that a long (over bought) or short (over sold) position in the foreign II. TRANSACTIONS RISKS The transaction risk essentially involves two types of risks. They are 1. Credit risk 2. Price Risk l. MARKET RISK Market risk may be defined as the possibility of the loss to financial institution caused by changes in market variables. The financial institution defines market risk as the risk that the value on and off balance sheet position ________________ ________________ will be adversely affected by movements in the equity and interest rate of markets, currency, exchange rate and Commodity prices. 2. ISSUER-RISK The financial strength and standing of the institute/sovereign that has issued the instrument can affect price as well as reliability. The risk involved with the instruments issued by corporate bodies would be an ideal example. 3. INSTRUMENT RISK The nature of instrument creates risks for the investor. With many hybrid instruments in the market and with

fluctuations in market conditions, the prices of various instruments ma react differently form one another. ________________ ________________ MANAGEMENT OF LIQUIDITY RISK AND INTEREST RATE RISK LIQUIDITY RISK Measuring and managing liquidity needs are vital for the effective operations of financial institution. By ensuring a Financial Institutions ability to meet its liabilities as then become due liquidity management can reduce the probability of an adverse situation developing. The institution of liquidity transcends individual institutions, as liquidity shortfall in one institution can have repercussion on the entire system. The Financial Institutions management should measure not only the liquidity position of Financial Institutions 011 an ongoing basis but also examine how liquidity requirements are likely to evolve under different assumptions. Experience show that assets commonly considered as liquid, like government securities and other money market instrument, could also become liquid when the market and players are unidirectional. Therefore, liquidity has to tracked through, the use of the maturity or cash flow mismatches. For measuring and managing net funding requirements, the use 01' maturity ladder and calculation ________________ ________________ of cumulative surplus or deficit of funds at selected maturity dates are adopted as a standard tool. The time buckets are distributed as under: Less than one month Over 1 month to 3 months Over 3 months to 6 months Over 6 months to 12 months Less than or equal to 1 year More than 1 year and up to 3 years More than 3 years and up to 5 years More than 5 years and up to 7 years More than 7 years and up to 10 years ________________ ________________ Financial Institution holding public deposits are required to invest up to a prescribed percentage (15 % as on date) of their public deposits in approval securities, in terms of the liquid asset requirements of sections 45-IB of the RBI Act, 1934. Financial Institutions ,Fi' required to invest up to 80 percent of their deposit in the manner prescribed in the RB 1 directors issued under the act, as detailed in an earlier section. There is no such requirement for Financial Institutions that are not holding public deposit~. Thus various Financial Institutions including SFCs would be holding in their investment portfolio, securities that could be broadly classifiable as 'mandatory securities' (under obligation of law) and' non-mandate securities'. In case of Financial Institutions not holding public deposits, all the investment and in GISC.

Financial Institutions holding public deposits, the surplus securities would fall in the category of non mandatory securities. Financial Institutions holding public deposits may place mandatory securities in any time bucket suitable to them. The listed non-mandatory securities may be placed ________________ ________________ in any of the less than one month, over 1 month to 3 months, "Over 3 months to 6 months" and "over () months to 12 months" buckets, depending upon the defeasance period proposed b Financial Institutions. Unlisted non-mandatory securities (e.g., equity shares, securities without a fixed term of maturity and so on) may be placed in the "more than 10 years" buckets, where as unlisted non-mandatory securities having a fixed term of maturity may be placed in the relevant time bucket, as per residual maturity. The mandatory securities and listed securities may be marked to market for the purpose of the ALM System. Unlisted securities may be valued as per RBIs prudential norms directions. The statements of structural liquidity may be prepared by placing all cash inflows and outflows in the maturity ladder according to the expected timing of cash flows. A maturity liability is cash outflows while a maturity asset is a cash inflow while Liquidity Problems may be created due to any of the fallowing reasons: a) Funding Risk: Failure to replace net outflow of funds weather due to withdrawal of retail deposits on non-renewal of wholesale ________________ ________________ deposits. b) Time Risk: Non-receipt of expected inflow of funds e.g. Where borrowers fails to meet their commitments besides irregularly in advances which present delay in fulfilling commitments by borrowers the growth of non-performing assets also leads to immediate liquidity problem. Nonperforming assets cut into profitability as well. ALM process if it fails to take NPA problems cannot succeed. c) Call Risk: It represents sudden demand for money owing to contingent become due. If contingent liabilities start developing the may create huge drain on liquidity. d) Opportunity Risk: A Financial Institution can only grow if its customers are also prospering (succeeding) request for funds from important and valuable clients can only be profitably serviced if adequate liquidity is available. ________________ ________________ Approaches to control Liquidity 1. Maintenance of adequate liquidity remains sinquonon for banks are other financial institutions. 2.

Once maturity of assets exceeds those of liabilities there is inevitable liquidity risk. 3. Minimum criteria to remain liquid is the ability both to meet commitments when due and to undertake new transactions when desirable. 4. Confidence to rise, mobilize or, roll over the deposits from existing clients. This confidence may be found to be misplaced when liquidity prevails as existing clients at that stage may be in the grip of liquidity crisis. 5. To avail of Export Refinance Facility (ERF) and Collateralized Lending Facility (CLF) and the Additional Collateralized Lending Facility (ACLF). 6. Financial Institutions should make a number of assumptions according to their Asset -liability profiles, while determining the tolerance levels. Financial Institutions may take into accounts all relevant factors based on their asset-liability base, nature of ________________ ________________ business future strategy and so on. The tolerance levels should be determines keeping all necessary factors in view and further refined with experience gained in liquidity management. ________________ ________________ Currency Risk: Floating exchange rate arrangement has brought in its wake pronounced volatility, adding a new dimension to the risk profile of Financial Institutions balance sheets having foreign assets and liabilities. The increased capital flows across free economics, following deregulation, have contributed to increase in the volume of transactions large cross border flows together with volatility has rendered Financial Institutions balance sheet unable to exchange rates. Interest Rate Risk: Deregulation of interest rates and the operational flexibility, given to financial institution in pricing most of the assets and liabilities imply the need for the financial system to hedge the interest rate risk, defined as the risk where changes in market interest rates might adversely affects on Financial Institutions financial condition. The change in interest rates affects Financial Institutions in a larger way. The immediate impact of changes in interest rates is on Financial Institutions earnings (i.e., reported profits), by changing its net interest income (NIT). A long term impact of changing interest rates is in Financial Institutions market the of Equity (MVE) or net worth, ________________ ________________ as the economic value of Financial Institutions assets, liabilities and off balance sheet positions yet affected due to various variations in market interest rates. The interest rare risk when viewed form thee tow perspectives is known as the "earning

perspective" and "economic value perspective" respectively. The risk from the earnings perspective can be measured as changes in the net interest income (NIT) or net interest margin (NIM). These are many analytical techniques for measurement and management or interest rate risk, to begin with the traditional gap analysis is considered as a suitable method to measure the interest rate risk. It is the intention of the RBI to move over to modem techniques. Financial Institutions should make a number if assumptions according to their asset liability profiles. While determining the tolerance levels, Financial Institutions may take into account all factors based on their asset liability base nature of business, future strategy and so on The tolerance levels should be determined keeping all necessary factors in view and further refined with experience ________________ ________________ In order to enable Financial Institutions to monitor their short-term liquidity on a dynamic basic over tine horizon spanning from less than one month, over 1 to 3 months Financial Institutions should estimate their Short term liquidity profiles on the basis of business projects and other commitments for planning purpose. Interest rate risk gaps in time buckets: Over 1 month to 3 months Over 3 months to 6 months Over 6 months to 12 months Less than or equal to 1 year More than 1 year and up to 3 years More than 3 years and up to 5 years More than 5 years and up to 7 years More than 7 years and up to 10 years More than 10 years ________________ ________________ The gaps or mismatch risk can be measured by calculation gaps over different time interval, as on a given data. Gap analysis measures mismatch between interest rate sensitive liabilities and rate sensitive assets (including off-balance sheet position). ________________ ________________ Asset and Liabilities is normally classified as interest sensitive if: 1.With in the time interval under considerations, there is a cash flow. 2.The interest rate resets/reprises contractually during the interval. 3. Dependent on the RBI changes in interest rate/bank rates. 4.It is contractually pre payable or withdrawn before the state maturities. 5. Grouping rate sensitive assets and liabilities and of the-balance sheet positions into time bucket according to residual maturity or next pricing period should regenerate the gap report. 6.The gap is the difference between the rate sensitive

assets (RSA) and rate sensitive liabilities (RSL) for each time bucket. The positive gap indicates that is has more RS than RSL where as the negative gap indicates that I has more RSL than RSA. 7. The gap reports indicate the whether the institution is in a position 'LO benefit rising interest rates by having ________________ ________________ a position gap (rs3>rsl) or weather it is in position to benefit from declining interest rates by negative gap (rsl>rsa). The gap a therefore be used as a measure of interest rate sensitive. ________________ ________________ Sources of Interest Rate Risk: As financial intermediaries, financial institutions encounter interest rate risk in several ways. These can be described as follows: a) Re-Pricing Risk: This risk arises from holding assets and liabilities with different principal amounts, maturity or re-pricing dates, there by creating exposure to unexpected changes in the interest rates. b) Yield Curve Risk: Re-pricing mismatches can also expose a bank to changes in the slope and shape of the yield curve. Yield curve risk arises when unanticipated shifts of the yield curve adverse effects on a banks income or underlying economic value. For instance, the underlying economic value of a long position in 10 years government bonds hedged by a short position in 5 years government notes could declare sharply if the yield curve steepens, even if the position is hedged against parallel movements in the yield curve. c) Basis Risk: Another important source of interest rate ________________ ________________ risk (commonly referred as basis risk) arises from imperfect correlation in the adjustment of the rates and paid on different instruments with otherwise similar repricing characteristics. When interest rates change, thee differences can give risk to unexpected changes in the cash flows arid earnings spread between assets and liabilities. d) Option Risk: An additional and increasingly important source of interest rate risk arises from the option embedded in many Financial Institutions assets and liabilities. Formally, an option provides the holder that right, but not the obligation, to buy or sell in some manner after the cash flow of an instrument of financial contract. ________________ ________________ GENERAL The classification of various assets and liabilities into different time - bucket for preparation of gap reports (liquidity and interest rate sensitive) Financial Institutions that are better equipped to reasonably estimated the

behavioral pattern of various components of assets and liabilities, on the basis of the past data/empirical studies could classify them in the appropriate time-buckets, subject to approval from the ALCO board of directors. A copy of the note approved by the ALCO may be sent to the registered office of the company is located. These notes may contain 'what if scenario' analysis wider various assumed conditions and the contingency plans to face various adverse developments. The present framework does not capture the impact of premature closures of deposits and prepayments of loans and advances on the liquidity and interest rate risk profile on Financial Institutions. The magnitude of premature withdrawal of deposits at times of volatility in market interest rate is quite substantial. Financial Institution should therefore evolve a suitable mechanism supported by empirical studies and behavioral analysis to estimate ________________ ________________ the further behavioral of assets, liabilities and off-balance sheet items to changes in market variable and estimate the probabilities of the options. A scientifically evolved internal transfer pricing model of assigning values on the basis of current markets rates to funds provided and funds used is an important component for effective implementation of the ALM system. The transfer price mechanism can enhance the management of margin, that is lending or credit spread. The funding or liability spread and mismatch spread. It also helps centralizing interest rate risk at one place. Which facilities effective control and management of interest rate risk. A well defined transfer pricing system also provides a nominal framework for pricing of assets and liabilities. ________________ ________________ There are four different types of analysis: 1. Gap Analysis" 2. Duration Analysis 3. Trend Analysis 4. Ratio Analysis l. GAP ANALYSIS: Maturity/pre-pricing schedules can be used to generate simple indicators of the interest rate risk sensitivity of both earnings and economic value to changing interest rates. When this approach is used to asses the interest rate risk of current earnings. It is typically referred to as gap analysis. Gap analysis was one of the first methods developed to measure Financial Institutions interest rate risk exposure and continues to be widely used by Financial Institutions. To evaluate earnings, interest rate sensitive liabilities in each time band are sub traced from the corresponding interest rate sensitive asset to produce are pricing gap for that time band. This gap can be multiplied by as assume change in interest rate to yield an approximation of the change in the interest rate income

________________ ________________ that would result from such as interest rate movement. The size of the interest rate movement used in the analysis can be used on a variety of factors, including historical experience. Simulation of potential future interest rate movements and the judgment of bank management. A negative or liability sensitive gap occurs when liabilities exceeds assets (including off-balance sheet positions) in a given time band. This means that an increase in market interest rates could cause a decline in net interest income. Conversely, a positive or assets-sensitive. Gap implies that the Financial Institutions net interest rate income could decline as a result of decrease in the levels of the interest rates. ________________ ________________ LIMITATIONS OF GAP ANALYSIS: Although gap analysis is a very commonly used approach to assessing interest rate risk exposure, it has a number of shortcomings. First, gap analysis does not take it account of variation in the characteristics of different position with a time band. In particulars all positions with in a given time band are assumed to mature or reprise simultaneously a simplification that is likely to have greater impact on the precision of the estimates as the degree of aggregation with in a time band increases, moreover gap analysis ignore differences in spreads between interest rates that could arise as the level of the market interest rates changes. In addition, it does not take into account any changes in the timing of payments that might occur as a result of changes in the interest rate environment. Thus, it fails to account for differences in the sensitivity of income that may arise form option-related positions, for these reasons gap analysis provides only a rough approximation to the actual change in net interest income would result from the chosen change in the pattern of interest rates. Finally gap analysis fail to capture variability in non interest revenues and expenses, potentiality important sources of risk of the current ________________ ________________ income. 2. CURRENT ANALYSIS A maturity/re-pricing schedule can also used to evaluate the effects of changing interest rates on Financial Institutions economic value by applying sensitivity weights to each time band. Typically, such weights are based on estimates of the duration of the assets and liabilities that fall into each time and duration give a small change in the level of interest rates. Duration may also be defined as the weighted average of the time until expected cash flows from a security will be receive, relative to the current price of the security. The weights are the present values of each cash flow divided by the current price. In its simples form, duration measures changes in economic

value resulting from a percentage change of interest rates under the simplifying assumptions that changes in value are proportional to changes in the level ________________ ________________ of interest rates and that the timing of payments is fixed. Modified duration is standard duration divided by 1+r, where the level of market interest rate is is elasticity. As such, it ref1ects the percentage change in the economic value of the instrument for a given percentage change in the economic value of the instrument for a given percentage change in 1+r. as with simple duration, it assumes a linear relationship between percentages changes in value and percentage changes in interest rates / in other words, modified duration = Macaulay duration/Cl +r), where Macaulay duration = cft(t)/(l+r) /cft/(l+r) to the power t left = rupee value of cash flow at time t T = number of periods of time until the cash flow payment Y = periodic yield to maturity of the security generating cash flow and K = the number of cash flows. 3. TREND ANALYSIS This is a statistical tool with his we can find out the position of anything in financial institution, I did the trend ________________ ________________ analysis of "cumulative mismatch of last one year as percentage to working funds", by this, it is possible to know that how that fluctuation in funds take place in the one year mismatches. 4. RATIO ANALYSIS The liquidity ratios are very useful in the liquidity risk management analysis. Because with the ratios we can analyze "the liquidity positions for the company by taking the past data and we can interpreter the findings. Here in financial institution, we should also given by the RBI on the bank, by observing the limits and of findings we can analyze as Financial Institutions is with in the limits or not. The ratios, which are used in financial institutions, are ________________ ________________ Current assets/current liabilities Total loans/ total assets Total assets/ total liabilities Total advances/total liabilities Quick ratio The ratios, which helps to find out liquidity position of all financial institution. Liquidity and Interest rate analysis: This is the only tool, which is used in the ALM process to manage the liquidity risk, by doing the gap analysis, Financial Institutions ,can avoid risks and can earn more profits, and this is used to analyze the gaps in between

the inflows and outflows of the statement for every fortnight. By doing the gap, analysis the Financial Institutions can know about in which bucket the risk. This gap raised due to the changes in the values of the assets ________________ ________________ and liabilities and changes in their interest rates. For measuring and managing net funding requirements the use of maturity ladder and calculation of cumulative surplus / deficit of funds at selected maturity data is suggested for adoption by FI. The maturity profile is used to measure the future cash flows of banks different buckets . ________________ ________________ Value At Risk (VOR). VOR is defined as an estimate of potential loss in position or asset/liability or portfolio of assets liabilities over a given holding period at a given level of certainty or unexpected happening the probability of suffering a loss. BUCKETING: The time columns used in the below statement, are called as the time buckets. These buckets are mainly divided in to three types short - term, medium - term and long term. Allocating the items of inflows and outflows in this column is called as bucketing. Over 1 month to 3 months Over 3 months to 6 months Over 6 months to 12 months Less than or equal to 1 year More than 1 year and up to 3 years More than 3 years and up to 5 years More than 5 years and up to 7 years More than 7 years and up to 10 years ________________ ________________ More than 10 years To analyze the statement a person should have to get grip on the various items or liquidity statement. Various items are covered in the statement under the inflow and out flows. ________________ ________________ Methods to bucket: The nature of the each item is different with others. So few models are used to find out under which bucket it will come like residual maturity, behaviouralization. Residual Maturity: This is the type where the item due date is taken as a base to bucket. Based on maturity date and the starting date of the item time period is calculated. Statements preparation data should also be considered. Behaviourlization:

This is the another model which also used for the statement preparation, behaviourlizaiton means finding out the behavior in the future based in the past data, For this, statistical tools should be used like regression analysis methods, moving averages, trend analysis and various methods are used. In financial institution, behaviorlizaiton is used to various item in them cash credit is in item. ________________ ________________ COMPANY PROFILE ________________ ________________ The HDFC Bank was incorporated on August 1994 by the name of 'HDFC Bank Limited' , with its registered office in Mumbai, India. HDFC Bank commenced operations as a Scheduled Commercial Bank in January 1995. The Housing Development Finance Co rporation (HDFC) was amongst the first to receive an 'in principle' approval fro m the Reserve Bank of India (RBI) to set up a bank in the private sector, as par t of the RBI's liberalization of the Indian Banking Industry in 1994. HDFC Bank is headquartered in Mumbai. The Bank at present has an enviable networ k of over 1416 branches spread over 550 cities across India. All branches are li nked on an online real-time basis. Customers in over 500 locations are also serv iced through Telephone Banking. The Bank also has a network of about over 3382 n etworked ATMs across these cities. The promoter of the company HDFC was incepted in 1977 is India's premier housing finance company and enjoys an impeccable track record in India as well as in in ternational markets. HDFC has developed significant expertise in retail mortgage loans to different market segments and also has a large corporate client base f or its housing related credit facilities. With its experience in the financial m arkets, a strong market reputation, large shareholder base and unique consumer f ranchise, HDFC was ideally positioned to promote a bank in the Indian environmen t. The shares are listed on the Bombay Stock Exchange Limited and The National Stoc k Exchange of India Limited. The Bank's ________________ ________________ American Depository Shares ( ADS ) are listed on the New York Stock Exchange (NY SE) under the symbol 'HDB' and the Bank's Global Depository Receipts (GDRs) are listed on Luxembourg Stock Exchange. On May 23, 2008, the amalgamation of Centurion Bank of Punjab with HDFC Bank was formally approved by Reserve Bank of India to complete the statutory and regula tory approval process. As per the scheme of amalgamation, shareholders of CBoP r eceived 1 share of HDFC Bank for every 29 shares of CBoP. The merged entity now holds a strong deposit base of around Rs. 1,22,000 crore a nd net advances of around Rs. 89,000 crore. The balance sheet size of the combin ed entity would be over Rs. 1,63, 000 crore. The amalgamation added significant value to HDFC Bank in terms of increased branch network, geographic reach, and c ustomer base, and a bigger pool of skilled manpower. In a milestone transaction in the Indian banking industry, Times Bank Limited (a nother new private sector bank promoted by Bennett, Coleman & Co. / Times Group) was merged with HDFC Bank Ltd., effective February 26, 2000. This was the first merger of two private banks in the New Generation Private Sector Banks. As per the scheme of amalgamation approved by the shareholders of both banks and the Re serve Bank of India, shareholders of Times Bank received 1 share of HDFC Bank fo r every 5.75 shares of Times Bank. HDFC Bank offers a wide range of commercial and transactional banking services a nd treasury products to wholesale and retail customers. The bank has three key b

usiness segments: ________________ ________________ Wholesale Banking Services - The Bank's target market ranges from large, blue-ch ip manufacturing companies in the Indian corporate to small & mid-sized corporat e and agri-based businesses. Retail Banking Services - The objective of the Retail Bank is to provide its tar get market customers a full range of financial products and banking services, gi ving the customer a one-stop window for all his/her banking requirements. Treasury - Within this business, the bank has three main product areas - Foreign Exchange and Derivatives, Local Currency Money Market & Debt Securities, and Eq uities. The Treasury business is responsible for managing the returns and market risk on this investment portfolio. HDFC Securities (HSL) and HDB Financial Services (HDBFSL) are its subsidiaries. Services offered by the company: Personal Banking Accounts & Deposits Loans Cards Forex Investments & Insurance NRI Banking Accounts & Deposits Remittances ________________ ________________ Investments & Insurance Loans Payment Services Wholesale Banking Corporate Small & Medium Enterprises Financial Institutions & Trusts Government Sector Achievements/ recognition:HDFC Bank was the first bank in India to launch an International Debit Card in a ssociation with VISA (VISA Electron) and issues the MasterCard Maestro debit car d as well. 2011 Financial Express Best Bank Survey 2010-11 - Best in Strength and Soundness and 2nd Best in the Private Sector CNBC TV18's Best Bank & Financial Institution Awards - Best Bank and Mr. Aditya Puri, for outstanding finance professional Dun & Bradstreet Banking Awards 2011 - Best private sector bank - SME Financing

ISACA 2011 award for IT Governance - Best practices in IT Governance and IT Secu rity IBA Productivity Excellence Awards 2011 - New Channel Adopter (Private Sector) DSCI (Data Security Council of India) Excellence Awards 2011 - Security in bank FINANCE ASIA Country Awards 2011: India - Best bank, best cash management bank a nd best trade finance bank ________________ ________________ Asian Banker - Strongest bank in Asia Pacific Bloomberg UTV's Financial Leadership Awards 2011 - Best bank IBA Banking Technology Awards 2010 - Technology bank of the year, best online ba nk, best customer initiative, best use of business intelligence, best risk manag ement system and runners up - best financial inclusion IDC FIIA Awards 2011 - Excellence in customer experience 2010 Outlook Money 2010 Awards - Best Bank Business world Best Bank Awards 2010 - Best Bank (Large) Teacher's Achievement Awards 2010 (Business) - Mr. Aditya Puri The Banker and PWM 2010 Global Private Banking Awards - Best Private Bank in Ind ia Economic Times Awards for Corporate Excellence 2010 - Business Leader of the Yea r - Mr. Aditya Puri Forbes Asia - Fab 50 Companies - 5th year in a row NDTV Business Leadership Awards 2010 - Best private sector bank The Banker Magazine - World's Top 1,000 Banks MIS Asia IT Excellence Award 2010 - BEST BOTTOM-LINE I.T. Category Dun & Bradstreet Banking Awards 2010 - Overall best bank, Best private sector ba nk, Best private sector bank in SME Financing Institutional Investor Magazine Poll - HDFC Bank MD, Mr. Aditya Puri among Asian Captains of Finance 2010 ________________ ________________ IDRBT Technology 2009 Awards - IT Infrastructure, Use of IT within the Bank and Runner s-up - IT Governance (Large Banks) ACI Excellence Awards 2010 - Highly Commended - Asia Pacific HDFC Bank FE-EVI Green Business Leadership Award - Best performer in the banking category

Celent's 2010 Banking Innovation Award - Model bank Award Avaya Global Connect 2010 - Customer Responsiveness Award - Banking & Financial Services category Forbes Top 2000 Companies - HDFC Bank at 632nd position and among 130 global hig h performers Financial Express - Ernst & Young Survey 2009-10 - Best new private sector bank, Best in growth and Best in strength Asian Banker Excellence Awards 2010 - Best retail bank in India, Excellence in a utomobile lending, Best M&A integration and technology implementation The Asset Triple A Awards - Best cash management bank in India Euro money Private Banking and Wealth Management Poll 2010 - Best local bank in India (second year in a row), Best private banking services overall (moved up fr om No. 2 last year) Financial Insights Innovation Awards 2010 - Innovation in branch operations - se rver consolidation project Global Finance Award - Best trade finance provider in India for 2010 2 Banking Technology Awards 2009 - Best risk management initiative and Best use of business intelligence SPJIMR Marketing Impact Awards (SMIA) 2010 ________________ ________________ Business Today Best Employer Survey - Listed in top 10 best employers in the country 2009 Business Standard Best Banker Award - Mr. Aditya Puri, MD, HDFC Bank Fe Best Bank Awards 2009 - Best Innovator of the year award for its MD Mr. Adity a Puri - Second Best Private Bank in India - Best in Strength and Soundness Awar d Euro money Awards 2009 - 'Best Bank in India' Economic Times Brand Equity & Nielsen Research annual survey 2009 - Most Trusted Brand - Runner Up Asia Money 2009 Awards - 'Best Domestic Bank in India' IBA Banking Technology Awards 2009 - 'Best IT Governance Award - Runner up' Global Finance Award - 'Best Trade Finance Bank in India for 2009 IDRBT Banking Technology Excellence Award 2008 - 'Best IT Governance and Value D elivery' Asian Banker Excellence in Retail Financial Services - 'Asian Banker Best Retail Bank in India Award 2009 ' 2008

Finance Asia Country Awards for Achievement 2008 - 'Best Bank and Best Cash Mana gement Bank' CNN-IBN - 'Indian of the Year (Business)' Nasscom IT User Award 2008 - 'Best IT Adoption in the Banking Sector' Business India - 'Best Bank 2008' Forbes Asia - Fab 50 companies in Asia Pacific ________________ ________________ Asian Banker Excellence in Retail Financial Services - Best Retail Bank 2008 Asiamoney - Best local Cash Management Bank Award voted by Corporates Microsoft & Indian Express Group - Security Strategist Award 2008 World Trade Center Award of honour - For outstanding contribution to internation al trade services. Business Today-Monitor Group survey - One of India's 'Most Innovative Companies' Financial Express-Ernst & Young Award - Best Bank Award in the Private Sector ca tegory Global HR Excellence Awards - Asia Pacific HRM Congress: - 'Employer Brand of th e Year 2007 -2008' Award - First Runner up, & many more Business Today - 'Best Bank' Award 2007 Dun & Bradstreet American Express Corporate Best Bank Award 2007 - 'Corporate Be st Bank' Award The Bombay Stock Exchange and Nasscom Foundation's Business for Social Responsib ility Awards 2007 - 'Best Corporate Social Responsibility Practice' Award Outlook Money & NDTV Profit - Best Bank Award in the Private sector category. The Asian Banker Excellence in Retail Financial Services Awards - Best Retail Ba nk in India Asian Banker - Its Managing Director Aditya Puri wins the Leadership Achievement Award for India ________________ ________________ ________________ ________________ CHAPTER-4 ________________ ________________ DATA ANALYSIS AND INTERPRETATION SELECTED AMC S -BRIEF INTRODUCTION ________________

________________ Reliance Mutual Fund Reliance Mutual Fund (RMF) has been established as a trust under the Indian Trusts Act, 1882 with Reliance Capital Limited (RCL), as the Settler/Sponsor and Reliance Capital Trustee Co. Limited (RCTCL),astheTrustee. RMF has been registered with the Securities & Exchange Board of India (SEBI) vide registration number MF/022/95/1 dated June 30, 1995. The name of Reliance Capital Mutual Fund has been changed to Reliance Mutual Fund effective 11th. March 2004 vide SEBI's letter no. IMD/PSP/4958/2004 date 11th. March 2004. Reliance Mutual Fund was formed to launch various schemes under which units are issued to the Public with a view to contribute to the capital market and to provide investors the opportunities to make investments in diversified securities. The main objectives of the Trust are: To carry on the activity of a Mutual Fund as may be permitted at law and formulate and devise various collective Schemes of savings and investments for people in India and abroad and also ensure liquidity of investments for the Unit holders; ________________ ________________ To deploy Funds thus raised so as to help the Unit holders earn reasonable returns on their savings and To take such steps as may be necessary from time to time to realize the effects Key Personnel Mr. Kana dashy (Chairman), Mr. Aintab jhunjhunwala (MD) Ms sushi methane (Joint M.D). UTI MUTUAL FUND. UTI Mutual Fund is managed by UTI Asset Management Company Private Limited (Est.: Jan 14, 2003) who has been appointed by the UTI Trustee Company Private Limited for managing the schemes of UTI Mutual Fund and the schemes transferred / migrated from UTI Mutual Fund. The UTI Asset Management Company has its registered office at : UTI Tower, Gnu Block, Bandar - Karla Complex, Bandar (East), Mumbai - 400 051 will provide professionally managed back office support for all business services of UTI Mutual Fund (excluding fund management) in accordance with the provisions of the Investment Management Agreement, the Trust Deed, the SEBI (Mutual Funds) ________________ ________________ Regulations and the objectives of the schemes. State-of-the-art systems and communications are in place to ensure a seamless flow across the various activities undertaken by UTI AMC. UTI AMC is a registered portfolio manager under the SEBI (Portfolio Managers) Regulations, 1993 on February 3 2004, for undertaking portfolio management services and also acts as the manager and marketer to offshore funds through its 100 % subsidiary, UTI International Limited, registered in Guernsey, Channel Islands. UTI Mutual Fund has come into existence with effect from 1st February 2003. UTI Asset Management Company presently manages a

corpus of over Rs.20000 Core. UTI Mutual Fund has a track record of managing a variety of schemes catering to the needs of every class of citizenry. It has a nationwide network consisting 56 UTI Financial Centers (Fuss) and representative offices in Dubai and London. With a view to reach to common investors at district level, 11 satellite offices have also been opened in select towns and districts. It has a well-qualified, professional fund management team, who has been highly empowered to manage funds with greater efficiency and accountability in the sole interest of unit holders. The fund managers are also ably supported with a strong in-house equity research department. To ensure better management of funds, a risk management department is also in operation. ________________ ________________ It has reset and upgraded transparency standards for the mutual funds industry. All the branches, UFCs and registrar offices are connected on a robust IT network to ensure cost-effective quick and efficient service. All these have evolved UTI Mutual Fund to position as a dynamic, responsive, restructured, efficient, and transparent and SEBI compliant entity Key Personnel Mr. U.K Sinhala (Chairman& M.D), Mr. D.S R Murthy (Executive Director), Mr. Intaiyazul Bahaman (Chief Finance Officer). HDFC ASSET MANAGEMENTCOMPANYPVT. LTD HDFC Asset Management Company Ltd (AMC) was incorporated under the Companies Act, 1956, on December 10, 1999, and was approved to act as an Asset Management Company for the HDFC Mutual Fund by SEBI on June 30, 2000. ________________ ________________ The registered office of the AMC is situated at Ramon House, 3rd Floor, H.T. Parekh Margi, 169, Back bay Reclamation, Church gate, Mumbai - 400 020. In terms of the Investment Management Agreement, the Trustee has appointed the AMC to manage the Mutual Fund. As per the terms of the Investment Management Agreement, the AMC will conduct the operations of the Mutual Fund and manage assets of the schemes, including the schemes launched from time to time Key Personnel Mr. Deepak Parikh (Chairman), Mr. .NET Stench ( C E O) Mr. Mar Connolly (Executive Director). TEMPLETON ASSET MANAGEMENT (INDIA) PVT. LTD. ________________ ________________ Templeton Asset Management Company, a company incorporated under the Companies Act, 1956, is a part of the Franklin Templeton Group. The sponsor of the Fund Templeton International Inc., is a wholly owned subsidiary of Templeton Worldwide Inc., which in turn is a wholly owned subsidiary of Franklin Resources Inc. The Franklin Templeton Group is one of the world s largest Investment Management Companies. It has over 50 years of

experience in International Investment Management with 34 offices in over 23 countries, which service over 10 million unit holders. Templeton started operations in Mumbai, India in January 1996.Templeton in India has 8 different funds. Templeton has eleven offices including Mumbai, Delhi, Calcutta, Pune, Chennai, Bangalore, Cochin and Hyderabad. Key Personnel Ravi Amphora (Chairman), Deepak Catwalk (MD - Asia), B. Swami Nathan (Director & COO). ________________ ________________ SBI MUTUAL FUND. SBI Mutual Fund draws strength from India's premier and largest bank; the State Bank of India. Set up on July 1, 1955, the State Bank of India is the largest banking operation in the country. Through years of commitment to service and national development, SBI has grown into an instrument of social change. Today, it has 9,039 branches in India (excluding 4599 branches of banking subsidiaries) and 54 offices in 28 countries spread over all time zones. SBI entered into a Memorandum of Understanding with Society General Asset Management (SGAM), which offers retail investors, corporate clients and institutional investors a wide range of investment products. SGAM is a dominant player in Global Mutual Fund arena with presence in over 20 countries spanning Europe, United Sates, and Asia, managing over 250 billion Euros in assets Key Personnel Mr. Deepak Chula (M.D), Mr. Didier Turpin (C.E.O), Mr. Gants N. Murthy ( Fund Manager). ________________ ________________ PARTICULARS OF AMCS: PARTICULARS RELIANCE UTI HDFC SBI F&T No. of schemes 31 15 13 25 56 No. of schemes including options 59 59 27 56 95 Equity Schemes 20 15 10 16 33 Debt Schemes 06 26 07 08 13 Short term debt Schemes 07 02 03 05 11 Equity & Debt 02 04 02 03 07 Gilt Fund 09 02 06 04 10 ________________ ________________ PORTFOLIO MEASUREMENT METHODS: We are interested in discovering if the management of a mutual fund is performing well; that is, has management done better through its selective baying and selling of securities than would have been achieved through merely buying the market picking a large number of

securities randomly and holding them throughout the period? The most popular ways of measuring managements performance are 1. Sharpes Performance Measure 2. Tenors Performance Measure 3. Jensens Performance Measure Sharpes Performance Measure (Sharpe ratio or Reward to variability ratio) William Sharpe has attempted to get a summary measure of portfolio performance. His measure properly adjusts performance for risk. The Sharpe Index is given by: S i = r ib r* I where S i = Sharpe Index r ib = average return on portfolio t r* = riskless rate of interest I = standard deviation (risk) of the returns of portfolio ________________ ________________ While a high and positive Sharpe ratio shows a superior risk adjusted performance of a fund. A low and negative Sharpe ratio is an indication of unfavorable performance. Assumption: Sharpe assumes that the portfolio under the consideration is whole or substantially the whole of investor total portfolio. This mean, if any unsystematic risk is left, this cannot be eliminated Trey nor performance measure (Jack Trey nor): This ratio also called neither Trey nor ratio-reward to volatility ratio. It is concerned with systematic risk () . It is relationship between rewards of risk premium to the volatility of return as measured by the portfolio risk. Risk premium r ap f ro T P = = Portfolio peron with disability All risk averse investors would like to maximize this value while a high and positive trainers index shows a superior risk adjusted performance of a fund, a low and negative trainers index is indication of unfavorable performance. Assumption: Portfolio is itself only as part of the total investments portfolio. So, eliminate any unsystematic risk as his portfolio is well diversified. ________________ ________________

Jensen Performance Measure (Michael): It refers the actual return earned in portfolio and return expected out of portfolio given its level of risk. CAPM is used to calculate the expected return. The difference between the expected return and act retain can be said the return earned out of the mandatory of systematic risk. This excess return referees the manager predictive ability and managerial skills. CAPM r ap = f ro + (r am f ro ) Differential return is calculated as follows: p = r ap - r ap p = positive > Superior returns p = Negative > Unskilled management (worse portfolio) p = 0 > Neutral performance Higher alpha represents superior performance of a fund and vice versa. ________________ ________________ ________________ ________________ 9 2 ________________ ________________ FINDINGS 1. ALM is a strategic approach or managing of managing the balance sheet dynamics in such a way that the net earnings are maximized and it ensure the level and risk less with the risk return objectives of banks/FIs. 2.The composition of assets and liabilities largely decides the solvency, liquidity and profitability of a corporate entity, the components of liabilities determines the cost of funds and it broadly with both sides of balance sheet. 3. The reduction of liquidity risk by lengthens the maturity of liabilities less profitability because long term

funds to be more expansive than short term funds. 4.It also implies fewer earnings opportunities from negative gapping. 5. The appropriate balance between liquidity and profitability is determined by Top Managers. 6.It is found that in APSFC is strictly practicing ALM concept. 7. To deal with the market risk ALM works. 8. ALM is the process, which is used to manage liquidity risk and interest rate risk. 9 2 ________________ ________________ The 9. changes in the interest rate always have a effect in the risk management. 10. Interest rate risk can influence more the business than the liquidity risk in market. 11. Dealing with liquidity risk is earlier than dealing with the interest rate risk. SUGGESTIONS 1. It shall be mandatory for all state financial institutions to introduce ALM concept for better management of risk. 2.The methods of date acquisition for managing the liquidity risk management and interest rate risk management should improve. 3. The banks & financial institutions should utilize the readily available software package for ALM and for easy and speedy preparation of data for ALM meetings. 9 2 ________________ ________________ GLOSSARY ALM ASSET LIABILITIES MANAGEMENT ALCO ASSET LIABILITIES COMMITTEE IRR & ERF EXPORT REFINANCE FACILITY IRR INTEREST RATE RISK CLF COLLATERALISED LENDING FACILITY ACLF ADDITIONAL COLLATERALISED LENDING FACILITY NIT NET INTEREST INCOME MVE MARKET VALUE OF EQUITY NIM NET INTEREST MARGIN RSA RATE SENSITIVE ASSETS RSL RATE SENSITIVE LIABILITIES VAR VALUE AT RISK RBI RESERVE BANK OF INDIA SFC STATE FINANCIAL CORPORATION IDB I INDUSTRIAL DEVELOPMENT BANK OF INDIA 9 2 ________________ ________________ SIDBI SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA APSFC ANDHRA PRADESH STATE FINANCIAL

CORPORATION 9 2 ________________ ________________ BIBLIOGRAPHY INDIAN FINANCIAL SYSTEM ASSET LIABILITY MANAGEMENT RBI GUIDELINES APSFC ANNUAL REPORTS www.almis.com www.apsfc.com M.Y.KHAN S.K.KHURANA 9 2