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MANAGEMENT SYSTEM
Presented by
c.s.balakrishnan
WHY ALM?
Globalisation of financial markets.
Deregulation of Interest Rates.
Multi-currency Balance Sheet.
Prevalance of Basis Risk and Embedded Option
Risk.
Integration of Markets – Money Market,
Forex Market, Government Securities Market.
Narrowing NII / NIM.
ALM
• ALM is the process involving decision
making about the composition of assets and
liabilities including off balance sheet items of
the bank / FI and conducting the risk
assessment.
ASSET LIABILITY
MANAGEMENT
• Various risks affecting banks / FIs
– Credit, Market, Operational
– Deregulation & competition
• Need to manage risk to protect NIM
• Need for proper risk mgt policy
• Liquidity planning, interest rate risk management
– ALM guidelines issued for banks in Feb 1999 and for
FIs in Dec 1999
Concept of ALM
ALM is concerned with strategic management
of Balance Sheet by giving due weightage to
market risks viz. Liquidity Risk, Interest Rate
Risk & Currency Risk.
ALM function involves planning, directing,
controlling the flow, level, mix, cost and yield of
funds of the bank
ALM builds up Assets and Liabilities of the
bank based on the concept of Net Interest
Income (NII) or Net Interest Margin (NIM).
WHAT IS ALM
• ALM is concerned with strategic Balance
Sheet management involving all market risks
• It involves in managing both sides of balance
sheet to minimise market risk
ALM Objectives
Gap Analysis
Modified Gap Analysis
Duration Gap Analysis
Value at Risk (VaR)
Simulation
LIQUIDITY RISKS
• Broadly of three types:
• Funding Risk: Due to withdrawal/non-renewal of deposits
• Time Risk: Non-receipt of inflows on account of assets(loan
installments)
• Call Risk: contingent liabilities & new demand for loans
• Dynamic liquidity is done to measure the liquidity risks
STATEMENT OF
STRUCTURAL LIQUIDITY
• Placed all cash inflows and outflows in the maturity
ladder as per residual maturity
• Maturing Liability: cash outflow
• Maturing Assets : Cash Inflow
• Classified in to 8 time buckets
• Mismatches in the first two buckets not to exceed 20%
of outflows
• Banks can fix higher tolerance level for other maturity
buckets.
ADDRESSING TO
MISMATCHES
• Mismatches can be positive or negative
• Positive Mismatch: M.A.>M.L. and vice-versa for
Negative Mismatch
• In case of +ve mismatch, excess liquidity can be
deployed in money market instruments, creating
new assets & investment swaps etc.
• For –ve mismatch,it can be financed from market
borrowings(call/Term),Bills rediscounting,repos &
deployment of foreign currency converted into
rupee.
DYNAMIC LIQUIDITY
• Prepared every fortnight for ALCO
• Projection is given for the next three months
• Tools for assessing the day to day liquidity
needs of the bank
STATEMENT OF INTEREST
RATE SENSITIVITY
• Generated by grouping RSA,RSL & OFF-
Balance sheet items in to various (8)time
buckets.
• Positive gap : Beneficial in case of rising
interest rate
• Negative gap: Beneficial in case of declining
interest rate
CALCULATION OF NII/NIM
• NII: INT.EARNED-INT. EXPENDED
• INT. EARNED: ADV+INVEST+BALANCE
WITH RBI
• INT. EXPENDED:DEPOSITS+INT. ON
RBI BORROWINGS
• NIM= (NII/TOT.EARNING ASSET)X100
ALM & BALANACE SHEET
LIABILITY ASSET
(OUTFLOWS) (INFLOWS)
1 Capital 1 Cash & Balances with RBI
3 Deposits 3 Investments.
4 Borrowings 4 Advances
5 Other Liabilities & 5 Fixed Assets.
Provisions
6 Contingent Liabilities 6 Other Assets.
SUCCESS OF ALM IN
BANKS :
PRE - CONDITIONS
1. Awareness for ALM in the Bank staff at all levels–
supportive Management & dedicated Teams.
2. Method of reporting data from Branches/ other
Departments. (Strong MIS).
3. Computerization - Full computerization, networking.
4. Insight into the banking operations, economic
forecasting, computerization, investment, credit.
5. Linking up ALM to future Risk Management
Strategies.
THANK YOU