ABSTRACT All the banks and financial institutions have adopted the concept of asset-liability management in their streams.

The main objective of asset liability management is to manage the assets andliabilities in such a way that net earnings are maximized and it deals with both sides of the balance sheet.To solve the problems of asset liability management generally banks adopt:gap analysis, duration analysis, trend analysis and ration analysis.But APSFC has adopted the method of gap analysis to solve the problems createdin their assets and liabilities.By doing gap analysis FIs can avoid risk and can earn more profits, it is used tobenefit from rising interest rate by having a positive gap or whether it is in a position tobenefit from declining interest rates by negative gap.It should do generated by grouping rate sensitive assets, liabilities and off-balance sheet position into time buckets according to residual maturity or next pricingperiod LIST OF TABLES TABLES PAGE NUMBERS Liquidity risk maturity pattern of 61 Rupee assets and liabilitiesLiquidity risk maturity pattern of Rupee/foreign currency assets and 62LiabilitiesMaturity Pattern of Interest rate risk Sensitive rupee assets and 63LiabilitiesMaturity Pattern of Interest rate risk Sensitive 64Interpretation on Liquidity Statement 65 Relationship between interest rate Changes and net interest income 75 6 NTRODUCTION The composition of assets and liabilities largely decide the solvency, liquidity andprofitability of a corporate entity, more so that of a financial institution. The componentsof the liabilities determine the cost of funds. The mix of the assets influences the returnon 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 thecontrol of increasing pressure on margins. In the case of state financial corporation, theinstrumentality of Business Plan and Resources Forecast (BPRF) and effective treasurymanagement techniques cab be gainfully utilized to make correction in the existingimbalances in the resource mix and the avoidable misalignments between the profile of liabilities and the portfolio of assets. While BPRF is introduced at the instance of IDBI/SIDBI, the treasury management through complex, is an evolving art THE CRUX The Asset - liability management broadly deals with both sides of the balancesheet. It is primarily concerned with the market risk that arises from a financialinstitutions structural position. These are

interest rate and liquidity risks. The interest raterisk arises from the possibility of change in profits caused by fluctuations in interest rates.The delay in recoveries, a principle cause of liquidity risk, leads to possibility of lost 10

opportunities and damage due to honoring payment commitments. Both these risks areobviously the result of mismatch between the FIs / Banks Assets and Liabilities.In case of banks of FIs , the ALM positions are relatively liquid. Usually thebanking 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 asloans into marketable securities and then sell them or trade them with other banks as wellas other traditional and new players in the financial markets.This is especially true of asset-based securities i.e., mortgage loans, securitizationis a new phenomenon in the Indian context. But it has a vast scope. It can make or mar the future of a financial institution. The stability, profitability, growth and image of afinancial institutions largely depend upon the ability and skill with which it can conductits ALM. THE SCOPE ALM in relation of SFCs covers a wide gamut of both sources and applications of funds. The drying up of some of the conventional sources, the choice of the basket, risingcost 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 mainchallenges in managing the liabilities. On the assets side, the key issues are the resourceallocation, the asset portfolio-mix, the yields, the recoveries, NPA management, write off policies and above all the market and credit risk management INSIGHT (Capacity of Understanding Hidden Truth) The aggregates of either side of any balance sheet will automatically balance. This is purelogic and no magic is involved. It is true in all cases, simply based on common sense, noprofound wisdom is necessary to know and appreciate this fundamental principle of financial science. However, wisdom lies in understanding the inter-relationship betweencategories of assets and their interface with liabilities. It is desirable to synchronize theprofiles of assets with the counterparts among liabilities, perhaps we may cal them their shadows. True balancing involves intelligence matching risk mapping and contingencyarrangements.

OJECTIVE 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 better schemes and activities of APSFC NEED FOR THE STUDY In the event of highly violated interest rates and liquidity crisis, financialinstitutions/banks face the problem of real valuation of their assets and liabilities, thismismatch 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 tocover the problems of liquidity mismatch and interest rate risk, the present study focusedsuch measures taken mismatch and interest rate risk, the present study focused suchmeasures taken by APSFC for such Asset - liability management.

METHODOLOGY OF THE STUDY The study of liquidity risk analysis and interest rate risk analysis and management isbases on1. Primary Data Collection2. Secondary Data Collection PRIMARY DATA COLLECTION The sources of primary data collection were done by Chief Manager of ALM Cell Resource Person of ALM Cell Chief Manager of Finance and Accounting Department Primary data has been gathered by training programming, interviewing themanagers and other officials of the bank. SECONDARY DATA COLLECTION

It was collected from books regarding journals, banking, magazines containingrelevant information about ALM. The secondary data collected was to understand howeffectively 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 OF THE 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 theaspects in detail.2. The study has made an attempt for evaluating the performance of APSFC inmanaging 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 ASSETS LIABILITY MANAGEMENT (ALM) Asset - liability management practices which effect from April 1, 1999. While guidelineson 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 intendedto form the basis for initiating collection, compilations and analysis of dates required tosupport the ALM System.Over the last few years, the Indian Financial System markets have witnessed wide-ranging changes at a fast pace. Intense competition for business involving both the assetsand liabilities together with increasing volatility in the domestic interest rates as well asforeign exchange rates, has brought pressure on the management of banks to maintain agood balance among measures. The bank management has to base their business decisionon a dynamic and integrated risk

management system and process, driven by corporatestrategy. The banks are exposed to several major risks in the course of the business creditrisk, interest rate risk, foreign exchange risk, and equity/commodity price risk. Liquidityand Operational risks. It is against this background that the RBI guidelines relating toALM focus on interest rate and liquidity risk management system in banks, which formpart of the ALM function.The initial thrust of the ALM function would be to enforce the risk managementdiscipline that is, managing offer assessing the risk involved. The objective of good risk 19

management programs should be that their programs evolve into a strategy tool for bank management.In the normal course, FIs are exposed to credit and market risks in view of the assetliability transformation. With liberalization in Indian Financial markets, over the last fewyears and growing integration of domestic markets and the entry of MNCs for meetingthe credit needs of not only the corporates but also the retail segments, the risksassociated with FIs operations have become complex and large, requiring strategicmanagement. FIs are now operating in a fairly deregulated environment and are requiredto determine interest rates on deposits, they can also offer deposits prescribe by the RBI;they can also offer advances on dynamic basis. The interest rates on investments of FI ingovernment and other securities are also now market related. Intense competition for business involving both assets and liabilities has brought pressure on the management of FIs to maintain a good balance among spreads, profitability and long-term liability.Imprudent liquidity management can put FIs earnings and reputation at great risk. Themanagement of FIs have to base their business decisions on a dynamic and integrated risk management system and process driven by corporate stratey, FIs are exposed to severalmajor risks in the course of their business; credit risk, interest rate risk, equity/commodityprice risk, liquidity risk and operational risk. It is, therefore, important that FIs introduceeffective risk measure management systems that address the issues relating to interest rateand liquidity risks. 20

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 concernedwith risk management and provides a comprehensive and dynamic framework for measuring, monitoring and managing liquidity and interest rates and equity andcommodity price risks of major operators in the financial system, which needs to beclosely integrated with the FIs business strategy. It involves assessment of various typesof 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 FIs ,which form parts of the Asset liability management (ALM) function.The initial focus of the ALM function would be to enforce the risk

managementdiscipline 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 strategictool for financial institution management. 21

The ALM Process rests in these pillars 1. ALM Information SystemA. Management Information SystemsB. Information availability, accuracy, adequacy and expediency2. ALM OrganizationA. Structure and ResponsibilitiesB. Level of top Management involvement3. ALM ProcessA. Risk ParametersB. Risk identificationC. Risk MeasurementD. Risk ManagementE. Risk policies and tolerance levels. ALM INFORMATION SYSTEM ALM has to supported by a management philosophy that clearly specifies the risk policies and tolerance limits. This framework needs to be built on sound technology withthe necessary information system as backup. Thus information is the key to the ALMprocess. It however, recognized that varied business profiles of FIs in the public andprivate sectors do not make the adoption on a uniform ALM system for all FIs feasible.These are various method prevalent worldwide for measuring risks. These range from the 22

The ALM Process rests in these pillars 1. ALM Information SystemA. Management Information SystemsB. Information availability, accuracy, adequacy and expediency2. ALM OrganizationA. Structure and ResponsibilitiesB. Level of top Management involvement3. ALM ProcessA. Risk ParametersB. Risk identificationC. Risk MeasurementD. Risk ManagementE. Risk policies and tolerance levels. ALM INFORMATION SYSTEM ALM has to supported by a management philosophy that clearly specifies the risk policies and tolerance limits. This framework needs to be built on sound technology withthe necessary information system as backup. Thus information is the key to the ALMprocess. It however, recognized that varied business profiles of FIs in the public andprivate sectors do not make the adoption on a uniform ALM system for all FIs feasible.These are various method prevalent worldwide for measuring risks. These range from the 22

simple gap statement to extremely sophisticated and data intensive risk adjustedprofitability measurement methods. However, though the central element for the entireALM exercise is the availability of adequate and accurate information with expedienceand the systems existing some of the major FIs do not generate information in the manner required for ALM. Collecting accurate data in a timely manner would be the biggestchallenge before the NBFCs particularly those lacking full-scale computerization.However, the introduction of a base information system of risk management, risk measurement and monitoring has to be addressed urgnetly.FIs have heterogeneous organization structures, capital base, asset size, managementprofiles, business activities and geographical spread. Some of them have a large number of branches and agents/brokers, where as some have unitary offices. Considering thelarge number of branches and the lack of adequate support system to collect informationrequires for the ALM.Which analysis information on the basis of residual maturity and repricing pattern of liabilities and assets, it would take time for FIs in the present state, to get the requisiteinformation. With respect to investment portfolio and funds management, in view of thecentralized nature of the functions, it would refined overtime as the FIs managementgains experience of conduction business within an ALM framework the spread of computerization will also help FIs in accessing data. 23

Risk in financial institutions are many and are broadly classifies into threecategoriesThey are as follows:1. Balance sheet risks2.Transaction risks3.Operating and liquidity risk I.BALANCE SHEET RISK The balance sheet generally arise out of the mismatch between currency, maturityand interest rate structure of assets and liabilities resulting in1. Interest rate mismatch risk 2. Liquidity risk 3. Foreign exchange risk II. INTEREST RATE MISMATCH 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 onfloating rate basis, any download revision of interest rate on advances will result inthe reduction of income stream for the bank FIs . But interest rate on deposits cab bechanged only when they fall due or pre closed by the depositor. 30

(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/FIs as they become due. Itrises when FI are unable to generate cash to cope with the declines in deposits or increasein loans. It originates the mismatches in the maturity of assets and liabilities as well asuncertainity of future cash flows. 3.FOREIGN EXCHANGE RISK The risk that a long (over bought) or short (over sold) position in the foreigncurrency might have to be closed out at a loss duet to an adverse movement in exchangerates. II.TRANSACTIONS RISKS The transaction risk essentially involves two types of risks. They are1. Credit risk 2. Price Risk 1. CREDIT RISK Credit risk is the risk resulting from uncertainty in a counter in a counter parties 31

ability or willingness to meet its contractual obligations. For ex, A bank or financialinstitutions makes a loan to a client because it is possible that the client will fail to maketimely Principle or interest payments. That bank or financial institutions faces creditrisks.Traditionally the credit risk refers to the risk that a borrower or counter party willfail to meet its obligations. Lending, from credit cards to corporate loans, from creditcards to corporate loans, is the largest and most obvious source of credit risk. But creditrisk in some guise exists throughout banking activities, both on and off the balance sheetform acceptances, inter bank transaction, trade financing, foreign exchange, guaranteesand settlements

APSFC main objective of extending financial assistance for setting up industrialunits in Tiny, small scale and medium scale sectors and service enterprises. APSFC isjointly promoted by IDBI and Government of Andhra Pradesh.APSFC, an ISO 9001-2000 Organization, offers liberal financial assistance for acquiring fixes assets like Land, Building and Machinery, working capital term loans for existing units and seed capital assistance to smaller projects. The term loan assistancefrom the corporation is available up to Rs.500 lakhs per project and if offered throughvarious schemes of assistance to suit to the requirements of the individual enterpreneur.For extremely deserving units, APSFC offers financial assistance up to Rs. 2000 lakhs oncase to case basis. The corporation is also proposing to extend financial assistance in jointfinancing with SIDBI for bigger projects. A GOLD LETTER DAY FOR APSFC Andhra Pradesh State was formed on 1 st

November, 1956. The Andhra Pradeshlegislative assembly and the Andhra Pradesh high court were also constituted on the sameday, the Andhra Pradesh State Financial Corporation come into existence with theamalgamation of the rest while Andhra State financial corporation and Hyderabad statefinancial corporation with the mandate to promote and develop small and mediumindustries. 1 st November, 1956 is thus a gold letter day for Andhra Pradesh StateFinancial Corporation. 36

CAPITAL STRUCTURE OF APSFC APSFC started with paid up equity capital of Rs.150 Crores in 1956, which nowstands at Rs.92.22 crores against an authorized capital of Rs. 500 Crores. TheGovernment of Andhra Pradesh hods 68.4% and IDBI 31.13% equity while theremaining share of 0.29% is held by LIC and individual shareholders. LENDING NORMS 1. Financial assistance to industrial and service sector units.2. All the projects satisfying the definition of SME sector are eligible for loansirrespective of project cost.3. Financing for industrial activities which include Manufacturing/Processing industries Service sector-information technology, nursing homes, transport of goods andpassengers on road etc. Tourism-hotels, restaurants and tourist resorts. Commercial complexes, residual complexes etc. Working capital term loans to existing good working units. -

Line of credit for existing SFC assisted units. Loan repayment period normally ranges up to 8 years and the moratoriumperiod ranges up to 2 years. 37

THRUST AREAS FOR 2006-2007 1.Food Processing industries2. Information technology/IT related activities/services3.Bio-technology oriented projects4. Agro based industries5. Pharmaceuticals6. Automobile components7. Infrastructure development projects8. Hospitals, nursing homes, assistance to practicing doctors.9. Service oriented activities10. Export oriented industries11. Tourism related activities12. Construction activities13. Apparels/textiles industries14. Non-fund based activities viz. Insurance products15. GDI relief bonds fixed deposits.

17. Assistance to practicing doctors.18. Line of credit scheme for good enterpreneurs19. Credit linked capital subsidy scheme for technology up-gradation of SSI units.20. Financial assistance to export oriented industrial service enterprises. Details of some of the important schemes are as under: JOINT FINANCING WITH SIDBI APSFC is actively considering venturing into joint financing to assist the mediumand large-scale enterprises for both new and existing; units means of tie up with SIDBIand other financial institutions. Corporation is coming out with a strategic alliance withSIDBI for extending joint finance for the loans over Rs. 500 crores for SSI, SMEinfrastructure units, service sector units, tourism, pharma, construciton of roads andbridges under BOT scheme. MODERNIZATION SCHEME Under modernization scheme, existing tiny, small and medium scale units, whichare in operation atleast for 5 years are eligible for finance on machinery. In case of replacement/renovation, the machinery should have been in use in the recent for a periodof at least 5 years. Mere replacements of machinery of solely for expansion are notcovered under this scheme. 41

Financial Assistance for modernization can be considered in the following aspects: Up-gradation of the technical/manufacturing processExport orientationImport substitutionEnergy saving in the processAnti pollution measuresConservation/substitution of scare raw materialsFor acquiring DG sets of Standard make. WORKING CAPITAL TERM LOANS Existing profit making units, which are in operation for a minimum period of 2/3years, are eligible for finance under this scheme. The unit should have been earning netprofit for the last 2 years and cash profit for one year. The unit should be regular inmaking payments to the corporation and other institutions i.e. banks, the unit should havepaid at least 25% of original term loan availed from the corporation. There should not beany accumulated losses in the unit for considering working capital term loans. The mainproposal is to meet additional working capital requirements / execute specific orders.The overall DER should not be more than 2:1 for working capital term loans of above Rs 500 lakhs. The net worth should be 100% to 125% of the working capital termloan applied to the corporation. The turnover of the unit should be around 400% of theworking capital term loan applied by the unit. The unit has to offer collateral property . 42

ASSISTANCE FOR PURCHASE OF EXISTING ASSETS Corporation is extending financial assistance for purchase of existing assets.Corporation will provide financial assistance for purchase of existing assets with residuallife for carrying out permitted industrial activities except for electronic/electro medicalequipment/computer unit and other allied units where obsolescence rate is very high.Financial assistance provided under this scheme is for purchase of existing asset and notfor change of management of company/concern for carrying out the permitted industrialactivity. EXPANSION SCHEME Under expansion scheme program, any tiny, small and medium scale industry,which is in operation of at least for 5 years are eligible for finance. Financial assistancecan be considered for expansion of any existing industry under special scheme like MUNscheme, NEF scheme, SES scheme, GES a++, SSES, ERS and scheme for exportoriented.Units service enterprise in addition to under general loan scheme. Mer replacement of machinery without expansion of capacity is not covered under thisscheme.The corporation is also extending financial assistance for setting up cinematheaters/acquiring new equipment by the existing cinema theaters at selected centers.

The Government of India has allotted special fund under SME fund and theCorporation is extending financial assistance under SME fund FINANCIAL ACTIVITIES/SCHEMES OF APSFC ACTIVITY PURPOSE REMARKSGENERAL LOANS To meet part of cost of land, buildings,plant and machinery and other fixedassets.Loan is considered @75% on eligibleassets .SCHEME FOR TOURISMRELATEDFACILITIESFor setting up of:-Development of amusement parks-Cultural centers/conventional centers-Travel, transport and-Tourism service agenciesCost of project:Maximum of Rs. 20crores-Approvals fromtourism developmentagencies.ASSISTANCE FOR SETTING UP OFINDUSTRIALESTATEFor such of land, cost of landdevelopment, cost of stamp duty etc.,for development of infrastructuralfacility such as approach roads,drainage, water, supply system, power distribution lines, central effluentindustrial sheds/multistoried industrialbuildings etc.Cost of project notexceeding Rs.12crores.ASSISTANCE FOR ACQUIRINGELECTRO-MEDICLEQUIPMENTFor acquiring electro-medical and other related equipmentLoan eligiblity@75% on cost of eligible electromedical equipment. 44

SINGLE WINDOWSCHEMEFor acquiring fixed assets andto meet short term workingcapital requirements.-Overall DER not to exceed 2:1-Promoters contribution shallnot be less than 35%Collateral security requirementas per norms.NATIONALEQUITY FUNDSCHEMEFor new units and for existingprojects including outlay onmodernization /expansion.Project cost:Not exeeding Rs 50 lakhs.Promoters Contribution:Minimum of 10 % of fixedassets and 100% of WCmargin.MAHILA UDYAMNIDHI SCHEMENewunit/expansion/modernization/technology up-gradation.Project cost not exceeding Rs 10lakhs SIDBI seed capital up to25% of project cost with 1%service chargeSUPER ENTERPRENEURSSCHEMEFor acquiring fixes assetsrequired for expansion,modernization, diversification,part of equipment/other business needs/takeover of loans.-Minimum limit for sanction inRs.5 lakhs.-Loan eligibility 85%-Total DER 2:1WORKINGCAPITAL TERMLOANSTo meet additional workingcapital requirements to executespecific orders.For working capital term loansof above Rs 5 lakhs, overallDER not more than 2:1SEMFEX SCHEME For setting up industries,hotels, tourism relatedactivities, gas tankers, tippersand payloads for which seedcapital assistance is availabel.Project cost shall not exceedRs.15 lakhsMinimum promoterscontribution is 10% of theproject cost. 45

ALM ASSET LIABILITIES MANAGEMENTALCO ASSET LIABILITIES MOMMITTEEIRR INTEREST RATE RISK ERF EXPORT RERINANCE FACILITYCLF COLLATERALISED LENDING FACILITYACLF ADDITIONAL COLLATERALISED LENDING FACILITYNIT NET INTEREST INCOMEMVE MARKET VALUE OF EQUITYNIM NET INTEREST MARGINRSA RATE DENSITIVE ASSETSRSL RATE SENSITIVE LIABILITIESVAR VALUE AT RISK RBI

RESERVE BANK OF INDIASFC STATE FINANCIAL CORPORATIONIDB INDUSTRIAL DEVELOPMENT BANK OF INDIASIDBI SMALL INDUSTRIES DEVELOPMENT BAMD OF INDIAAPSFC ANDHRA PRADESH STATE FINANCIAL CORPORATION 99

BIBLIOGRAPHY 100

BIBLIOGRAPHYINDIAN FINANCIAL SYSTEM M.Y.KHANASSET LIABILITY MANAGEMENT S.K.KHURANARBI GUIDELINESAPSFC ANNUAL REPORTS WWW.ALMIS.COM WWW.APSFC.COM 101 Leave a Comment Submit Characters: 400 1905-121 Download or Print 403 Reads Uploaded by sudheerkumarips TIP Press Ctrl-F to quickly search anywhere in the document. Sections

ANALYSIS AND INTERPRETATION FINDINGS

GLOSSARY

1 p. 2001130600 2 p. apgvb oa HT 1 p. SCM-20 AQ Upload a Document Search Documents

Follow Us! scribd.com/scribd twitter.com/scribd facebook.com/scribd

About Press Blog Partners Scribd 101 Web Stuff Support FAQ Developers / API

Jobs Terms Copyright Privacy

Copyright 2012 Scribd Inc. Language: English