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ASSET-LIABILITY MANAGEMENT SYSTEM

ASSET-LIABILITY MANAGEMENT SYSTEM. ALM. Dr. Sanjay Kavishwar Dean – Academics & Admissions Tirpude’s DMSR. WHY ALM?. Globalisation of financial markets. Deregulation of Interest Rates. Multi-currency Balance Sheet. Prevalance of Basis Risk and Embedded Option Risk.

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ASSET-LIABILITY MANAGEMENT SYSTEM

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  1. ASSET-LIABILITY MANAGEMENT SYSTEM ALM Dr. Sanjay Kavishwar Dean – Academics & Admissions Tirpude’s DMSR

  2. 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. Sanjay Kavishwar

  3. 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. Sanjay Kavishwar

  4. 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 Sanjay Kavishwar

  5. 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). Sanjay Kavishwar

  6. 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 Sanjay Kavishwar

  7. ALM Objectives • Liquidity Risk Management. • Interest Rate Risk Management. • Currency Risks Management. • Profit Planning and Growth Projection. Sanjay Kavishwar

  8. LIQUIDITY RISK • What is liquidity risk? • Liquidity risk refers to the risk that the institution might not be able to generate sufficient cash flow to meet its financial obligations EFFECTS OF LIQUIDITY CRUNCH • Risk to bank’s earnings • Reputational risk • Liquidity crisis can lead to runs on institutions • Bank / FI failures affect economy Sanjay Kavishwar

  9. LIQUIDITY RISK • Factors affecting liquidity risk • Over extension of credit • High level of NPAs • Poor asset quality • Mismanagement • Non recognition of embedded option risk • Reliance on a few wholesale depositors • Large undrawn loan commitments • Lack of appropriate liquidity policy & contingent plan Sanjay Kavishwar

  10. LIQUIDITY RISK • Tackling the liquidity problem • A sound liquidity policy • Funding strategies • Contingency funding strategies • Liquidity planning under alternate scenarios • Measurement of mismatches through gap statements Sanjay Kavishwar

  11. LIQUIDITY RISK • METHODOLOGIES FOR MEASUREMENT • Liquidity index • Peer group comparison • Gap between sources and uses • Maturity ladder construction Sanjay Kavishwar

  12. LIQUIDITY RISK • RBI GUIDELINES • Structural liquidity statement • Dynamic liquidity statement • Board / ALCO • ALM Information System • ALM organisation • ALM process (Risk Mgt process) • Mismatch limits in the gap statement • Assumptions / Behavioural study Sanjay Kavishwar

  13. ALM SYSTEM • Liquidity Gap report – fortnightly • 1-14 d & 15 – 28 d – tolerance limit • Fix cumulative gap limits • IRS statements – monthly • Fix prudential limits • To compile currency wise liquidity and IRS reports Sanjay Kavishwar

  14. MATURITY PROFILE-LIQUIDITY • Outflows • Capital, Reserves & Surplus • Deposits • Borrowings and bonds • Other liabilities Sanjay Kavishwar

  15. MATURITY PROFILE-LIQUIDITY • Inflows • Cash • Balance with RBI • Balance with other banks • Investments • Advances Sanjay Kavishwar

  16. IRR - Relevance in India • Deregulation of interest rates brought: • Volatility in rates - call, PLR, Govt. securities Yield Curve • Competition - free pricing of assets and liabilities • Pressure on NII / NIM Sanjay Kavishwar

  17. RSA, RSL • RSA (Rate Sensitive Assets) – Assets whose value is dependent on current interest rate • RSL (Rate Sensitive Liabilities) – Liabilities whose value is dependent on current interest rate Sanjay Kavishwar

  18. Gap/Mismatch Risk • It arises on account of holding rate sensitive assets and liabilities with different principal amounts, maturity/repricing rates • Even though maturity dates are same, if there is a mismatch between amount of assets and liabilities it causes interest rate risk and affects NII Sanjay Kavishwar

  19. IMPACT ON NII Sanjay Kavishwar

  20. ALM ORGANISATION Three-tier organizational set-up for ALM Implementation : • Management Committee of the Board (MC) • Oversees the ALM implementation by ALCO • Reviews the ALM implementation periodically • Funding strategies for correcting the mismatches in ALM Statements. Sanjay Kavishwar

  21. ASSET-LIABILITY MANAGEMENT COMMITTEE (ALCO) - ALCO headed by E.D. - GM (T) – (Nodal Officer). - GMs : Central Accounts, P&D, Credit, Risk Management International Division are the members. - GM (IT) & AGM (Economist) are the invitees for ALCO meetings. Sanjay Kavishwar

  22. FUNCTIONS OF ALCO Implementation of ALM System • Monitor the risk levels of the Bank. • Articulate the Interest Rate Position & fix interest rate on Deposits & Advances. • Fix differential rate of interest rate on Bulk Deposits. • Facilitating and coordinating to put in place the ALM System in the Bank. Sanjay Kavishwar

  23. ALM STATEMENTS TO BE SUBMITTED TO RBI • Statement of Structural Liquidity (Annexure - I) [DSB Statement No.8] - Rupee • Statement of Interest Rate Sensitivity (Annexure - II) [DSB Statement No. 9] - Rupee • Statement of Dynamic Liquidity (Annexure - III) • Statement of Maturity and Position (MAP) (Annexure - IV) [DSB Statement No.10 ] - Forex • Statement of Sensitivity to Interest Rate (SIR)(Annexure - V)[DSB Statement No.11] - Forex Sanjay Kavishwar

  24. Tools for ALM System • Gap Analysis • Modified Gap Analysis • Duration Gap Analysis • Value at Risk (VaR) • Simulation Sanjay Kavishwar

  25. 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 Sanjay Kavishwar

  26. 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. Sanjay Kavishwar

  27. 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. Sanjay Kavishwar

  28. 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 Sanjay Kavishwar

  29. STATEMENT OF INTEREST RATE SENSITIVITY • Generated by grouping RSA,RSL & OFF-Balance sheet items in to various buckets. • Positive gap : Beneficial in case of rising interest rate • Negative gap: Beneficial in case of declining interest rate Sanjay Kavishwar

  30. 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 Sanjay Kavishwar

  31. SUCCESS OF ALM IN BANKS :PRE - CONDITIONS • Awareness for ALM in the Bank staff at all levels–supportive Management & dedicated Teams. • Method of reporting data from Branches/ other Departments. (Strong MIS). • Computerization - Full computerization, networking. • Insight into the banking operations, economic forecasting, computerization, investment, credit. 5. Linking up ALM to future Risk Management Strategies. Sanjay Kavishwar

  32. Thank You!! Sanjay Kavishwar

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