Components of Assets and Liabilities in Banks

Balance Sheet and their Management

Module D: Balance Sheet Management

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Bank Financial Management: Components of Assets and Liabilities in

Banks Balance Sheet and their Management

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Contents
Coverage:
1.

Components of a Banks Balance Sheet

2.

What is Asset Liability Management?

3.

Significance

of

Asset

Liability

Management
4.

Purpose and Objectives of Asset

Liability Management

5.

ALM as co-ordinated Balance Sheet

Management

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1.

COMPONENTS OF A BANKS
BALANCE SHEET
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Components of Balance Sheet

Sources of Funds/Liabilities
Capital
Reserves and Surplus
Deposits
Borrowings
Other liabilities and
Provisions

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Application of Funds/Assets
Cash in Hand and Balance
with RBI
Balances with Banks and
Money at Call and Short
Notice
Investments
Advance
Fixed Assets
Other Assets

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Capital
Represents owners stake
Cushion for depositors and creditors in case of losses
Long Term source of funds
Prescribed by RBI

Authorised
Capital

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Issued
Capital

Subscribed
Capital

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Paid-up
Capital

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Reserves and Surplus

Reserves
Statutory Reserves
Capital Reserve
Revenue Reserve
Issue of Shares at Premium
Other Reserves
Surplus

The credit balance in profit and loss account

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Deposits
Main source of funds for the banks

Deposits

Current
Deposits

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Deposits
Payable on
Demand

Savings Bank
Deposits

Overdue
Deposits

Call Deposits

Term
Deposits

Fixed
Deposits

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Short
Deposits

Recurring
Deposits

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Borrowings
Refinance obtained from:
RBI
Other Commercial Banks

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

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Other Liabilities and Provisions

Bills Payable
Includes drafts,
telegraphic
transfers,
travellers
cheques, mail
transfers
payable,
payslips,
bankers
cheques and
other
miscellaneous
items

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Inter-Office
Adjustments
Credit balance
of the net
inter-office
adjustments

Interest Accrued
Interest
accrued but
not due on
deposits and
borrowings

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Others
Income Tax
TDS
Interest Tax
Provisions etc.

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Cash and Balances with RBI

Cash in Hand
Includes
Foreign Currency Notes
Cash Balances in the overseas branches
Balances with RBI
In order to meet statutory cash reserve requirements (CRR)
Balances with Banks and money at Call and Short Notice
Balance in Current Accounts and Term Deposits with other banks
All loans made in the interbank call money market repayable within 15
days notice.
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Investments
Investments in
Govt. Securities
Approved Securities

Shares
Debentures and Bonds
Subsidiaries and/or Joint Ventures
Other investments

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Advances
Form major part of assets for all the banks
Advances Repayable on
Demand

Cash Credits

Advances with Specific

Due Date

Bills
Purchased/Discounted

Term Loans

Overdrafts

Loans repayable
on Demand

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Secured/Unsecured
Advances

Clean or
Documentary

Secured by
Tangible Assets

Domestic or
Foreign

Covered by
Bank/Government
Guarantees

Unsecured
Advances

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Fixed Assets
Immovable properties
Premises
Furniture and Fixtures
Hardware
Motor Vehicles etc

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Other/Miscellaneous Assets
Inter-Office
Adjustments

Interest Accrued

Tax Paid in
Advance/Tax
Deducted at
Source

Stationery and
Stamps

Non Banking
Assets acquired in
Satisfaction of
claims

Others

Other items primarily include claims in the form of clearing items, unadjusted debit balances
representing additions to assets and deductions from liabilities and advances provided to the

employees of the bank.

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Contingent Liabilities

Banks obligations under issuance of Letters of Credit, Guarantees and

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

Claims against the bank not acknowledged as debts

Liability for partly paid-up investments

Liability on account of outstanding ForEx contracts

Other items like Arrears of Cumulative dividends, bills rediscounted,

underwriting commitments, estimated amount of contracts remaining to
be executed on capital account and not provided for etc.

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Banks P&L Statement

Profit and Loss
Statement

Income

Expenses

Interest
Income

Interest
Expended

Other Income

Operating
Expenses
Provisions and
Contingencies

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Income
Interest
Income

Other
Income

Interest/Discount on
Advances/Bills

Commission, Exchange and

brokerage

Income on Investments

Profit on Sale or Investments

Interest on balances with RBI

and Other Interbank Funds

Profit on Revaluation of
Investment

Others

Profit on Sale of Land, Building

and Other Assets
Profit on Exchange Transactions
Income earned by way of
dividends etc
Miscellaneous Income

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Expenses
Interest Expended

Provisions and
Contingencies

Operating Expenses

Payments to and Provisions for Employees

Interest on Deposits
Rent. Taxes and Lighting
Interest on RBI/Interbank Borrowings
Printing and Stationery
Others
Advertisement and Publicity
Depreciation on Banks Property
Directors fees, Allowances and Expenses
Auditors Fees and Expenses
Law Charges
Postage
Repairs and Maintenance
Insurance

Other Expenditure

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2.

WHAT IS ASSET LIABILITY MANAGEMENT?

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Asset Liability Management

Concerned with Strategic Balance Sheet Management involving risks

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

Integrated Balance Sheet Management: All components of balance sheet

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

ALM is the act of Planning, Acquiring and directing the flow of funds
through an organisation to generate adequate and stable earnings to
steadily build an organisations equity over time while taking reasonable
and measured business risks
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Asset Liability Management

The management of the Net Interest Margin (NIM) to ensure its level and
riskiness are compatible with risk/return objectives of the bank

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

alternative interest rate, liquidity and prepayment summaries

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

identified, coordinated and managed as an integral system

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

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

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Balance Sheet Restructuring

The strategy of actively managing the composition and mix of
assets and liabilities portfolios
Efforts are made to adjust and readjust the portfolios in
response to corporate objectives, economic conditions and
future interest rate scenario to prevent undesirable imbalance
between asset and liability maturities

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3.

SIGNIFICANCE OF ASSET LIABILITY

MANAGEMENT
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Significance of Asset Liability Management

Volatility

Product
Innovation

Regulatory
Environment

Management
Recognition

Rate
fluctuations
affect the
market
value, yields,
costs of
assets and
liabilities

New
financial
products
have an
impact on
the risk
profile of the
bank

Central
Banks issue
framework
and
guidelines to
deal with
ALM policies

Increasing
awareness of
the change
in risk
scenario and
need for
ALM

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4.

PURPOSE AND OBJECTIVES OF

ASSET LIABILITY MANAGEMENT
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Purpose
Purpose is to:
Enhance the asset quality
Quantify risks associated with assets and liabilities

Manage the risks identified above

Aims to stabilise:
Short Term profits
Long Term Earnings

Long Term Substance of the Bank

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Process
Review the interest rate structure and compare the
same to the interest/product pricing of both assets and
liabilities
Examine the loan and investment portfolios in the light
of the foreign exchange risk and the liquidity that might
arise
Examine the credit risk and contingency risk that may
originate either due to rate fluctuations or otherwise
and assess the quality of assets
Review the actual performance against the projections
made and analyse the reasons for any effect on the
spreads
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Parameters for purpose of stabilising ALM

Net Interest Income (NII)
NII = Interest Income Interest Expenses
Measures impact of volatility on Short Term Profit
NII fluctuation needs to be minimised to stabilise Short Term Profits
Net Interest Margin (NIM)
NIM= NII/Average Total Assets
Spread on the earning assets
Economic Equity Ratio
Shareholders Funds/Total Assets
Measures the shift between owned and total funds
Assesses the sustenance capacity
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Objectives
Macro
Level

Micro Level

Formulation of
critical business
policies

Profitability
through Price
Matching

Efficient
allocation of
Capital

Liquidity by
Maturity
Matching

Designing of
Products with
efficient pricing
strategies
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Micro Level Objectives

Price Matching
Aims to maintain spreads by ensuring deployment of
liabilities at rate higher than costs
Indicates whether institution can benefit from:
Rising interest rates by positive gap (Assets > Liabilities)
Declining interest rates by negative gap (Liabilities>Assets)
Liquidity Matching
Grouping Assets and Liabilities based on their maturity
profiles
Gap assessed to identify future financing requirements
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Objectives another perspective

Spread Management
Loan Quality
Generating Fee Income and Service Charges
Control of Non-Interest Operating Expenses
Tax Management
Capital Adequacy

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5.

ALM AS CO-ORDINATED BALANCE

SHEET MANAGEMENT
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Two Stage Approach

Reserve Position Management
Liquidity Management
Asset Side Management

Investment/Security
Management
Loan Management

Balance Sheet
Management

Stage 1: Specific
Balance Sheet
Management
Functions

Fixed Assets Management

Liability Management
Reserve Position Management
Liability Side Management

Stage 2: IncomeExpense
Function

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Profit = Interest Income

Interest Expense Provision for
Loan Loss + Non-Interest
Revenue Non-Interest Expense
- Taxes

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Long-Term Management
(Notes and Debentures)
Capital Management

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Do you have any questions or queries or some feedback to give?

Just mark an email to super.msahluwalia@yahoo.com

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

blog designer and of course an MBA and Banker from New
Delhi, India.
To know more about him you may visit his blog-site: Estudiante De La Vida

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