ASSET LIABILITY MANAGEMENT

Asset Liability Management

General

assets, Liability& Capital Management

Specific

Liability Management Financial

Asset Management

Balance sheet Management

Income and Expenditure

Management

In liberalized financial markets, banks assets and liabilities variations are considerably influenced by interest rate and exchange rate volatility. The competitive environment in the banking system due to removal of various barriers in their operations has added pressure to the importance of financial management. Banks have to manage not only credit risk but a variety of other financial risks including interest rate, exchange rate, liquidity, settlement, and transfer risks to maximize profit and minimize risks. The complexity of financial risks requires that a strong and dedicated risk management system is put in place covering: 1) Assets ,liabilities and off-balance sheet risks 2) Information and scientific risk management techniques and 3) Dedicated asset-liability managers or committee (ALCO) ALM as a mean of risk management technique is an important function in a bank (chart) It primarily focuses on how various functions of a bank are adequately coordinated ,essentially covering planning, directing , and controlling of the levels, changes and mixes of the various balance sheet accounts. The banking industry, to compete in a free market conditions, has to give utmost priority for managing and minimizing risks inherent in banking operations.

Across the world, it was observed that failure of risk management and control systems were significant factors for bank failures. The success of asset-liability management depends on the effective existence of 1) Information and policies and 2) Risk management system. Balance sheet of a commercial bank is a statement of its assets and liabilities at a particular point of time. It throws light on the financial health or otherwise of the bank. Another way of viewing a balance sheet is as a statement of the sources and uses of bank funds. Banks obtain funds in the form of deposits (fixed, savings and current), by borrowing from other banks (RBI, commercial banks etc) and by obtaining equity funds from the owners (i.e. shareholders of the bank) through the capital account. All these constitute the liabilities of the bank. Banks use these funds to grant loans, invest in securities, purchase equipment and hold cash items such as currency and deposits in other banks. All these are the assets of the bank. DEPOSITS BORROWINGS CAPITAL BANK FUNDS LOANS SECURITIES RESERVES RESERVES

SPECIMEN FORM OF A BANK BALANCE SHEET Balance sheet of ..................(the name of the bank) as on 31st march...................(year) Liabilities Amount (Rs.) Assets Amount (Rs.)
1) Share capital 2) Reserve fund 3) Deposits a) Demand deposits b) Time deposits c) Savings deposits 4) Borrowing from Other banks 5) Acceptance and Endorsements 6) Buildings and other Fixed Assets 7) Other liabilities xxx xxx 1) Cash a) Cash in Hand b) Cash with Central Bank c) Cash with Other Banks 2) Money at call and short notice 3) Bills purchased or discounted 4) Investments 5) Loans and Advances 6) Acceptance and Endorsements xxx xxx xxx xxx xxx xxx xxx xxx

xxx xxx xxx xxx xxx xxx xxx

Total

xxx

Total

xxx