ALM for Practical Usage:

Because of the changed economic scenario, for any type of industry, it is the level of raw
material that is in stores which makes the concern to run or stop. More so, for a bank
where cash acts as a raw material to meet the operational needs. Bank plays on the
spread from its operation [charging more on the assets i.e., mainly from borrowers and
paying less on liabilities mainly to depositors].

Now a days, in any major manufacturing or services industry, the level of cash holding
determines the management’s efficiency level i.e., the liquidity needed for its day-to-day
operations. For, a finance industry, particularly this raw material – CASH acts as a
double edged sword i.e., if applied / used there is no guarantee that the funds which has
gone out of the system would come back as per the agreed terms & conditions, if held as
it is, there will not be any gain. On the other hand, the value of the funds would
depreciate because of the inflationary pressure. Here comes the utility of Asset Liability
Management. Generally, ALCO [Asset Liability Committee consisting of senior
management of the bank] is vested with the responsibility of overseeing the liquidity
needs of the bank – how, it should be ensured, managed, monitored etc. The operational
features are left to the various functional divisions [like: Resource Mobilisation Division
for Deposit, Credit Department for Advances, Treasury Department for funds
management] of the bank of course, after giving proper directions.

Practical uses of ALM:

1. The first and foremost use is that of determining the level of cash required for
repaying the liability obligations [after taking into considerations of inflow &
outflow of funds]. For a bank, the satisfying the level of demand is of utmost
importance – to avoid any run-on banks – the liquidity level needed for the day to
day operations – that too in the present context of 24 X 7 it is very essential.

2. If there is any surplus [inflow is more than outflow of funds], whether it could be
utilized / applied so as to generate additional income.

3. If there is deficit [outflow is more than inflow of funds], different avenues for
generating resources [not only mobilizing deposits] could be looked into for
meeting the requirement of repayment obligations in next 1 day, 15 days, 1
month, 2 months and so on for various time buckets.

4. Top management would know about the actions to be taken for plugging the
liquidity needs, of course, after vying the cost-benefit with respect to different
avenues for generating the funds needed i.e., to maintain the required liquidity
level.
 5. To facilitate better financial management, which should not be taken for granted
for, it is a ongoing process to keep a tab on the activity of the organization.

6. Gives practical orientation to Balance Sheet Management.

7. Improves quality of loan dispersed.

8. Enables to focus on fee based incomes [Non Interest Income]

9. Used in a better spread management [between asset & liability pricing]

10. Enables to control and limits exposure to different entities

11. Used to maintain required CAR [Capital Adequacy Ratio]

12. Ensures continues cash flow

13. Overall, ALM ensures required liquidity level.

14. Gives direction to management – to determine how the operations was running
previously, how it is at the present and how / where the business is leading.

Finally, it should be understood that ALM package is an instrument to limit the degree of
loss [at the most, to the extent of the balance sheet size] and magnitude of profit goes to
the extent of the capability of the management to understand and interpret the outcome of
ALM analysis and its reports.