What is asset and liability management and what methods do they follow?

1. What is asset and liability management and what methods do they follow? www.avendus.com/india

2. Asset and liability management For any business to grow, they need take certain risks from time to time. These risks are either in terms of expansion or in terms of some new product line or service that they maybe introducing. To be able to do this, it is important that they have a good backup of capital with them and good back up of assets as well. That is when asset and liability management come into picture. In simple terms, it is the management of balance sheet; the size and its quality. It also involves taking some risk and well thought decision to tackle the imbalance in asset liability ratio (if liabilities are higher). www.avendus.com/india

3. Focus on interest margin When it comes to asset and liability management, there is no denying that its core focus lies in managing the overall interest margin. In this, it is crucial that there is a very integrated approach followed in deciding the type of assets to be invested in and the size of assets being invested in. there should also be a well-thought mix of asset types. What makes asset and liability management a success is that the assets and liabilities need to match in terms of rate and maturity in order to get good yield. www.avendus.com/india

4. Different methods This function is also provided by certain investment banking companies in India. To be able to provide proper asset and liability management service, there are certain tools that the asset managers usually use. They are namely, gap analysis, duration analysis, value-at-risk method, and ultimately risk management. The tools help the wealth managers in addressing the risk factors caused as a result of mismatch within the liabilities and the assets. www.avendus.com/india

5. Duration method and gap analysis The gap that we refer to here is actually the excess of assets that are interest sensitive over the liabilities that are interest sensitive or the other way around. When these liabilities and assets become equal, the gap amounts to zero. In the duration analysis, the effect of the changes in the interest rate over the values of the assets and liabilities is analyzed. This analysis is usually done in terms of cash flow and average maturity. www.avendus.com/india

6. Risk management and value at risk The next we see is the value at risk method, in which the practice of market to market selling is approved. This approval is given on the basis of yield to maturity ratio. In risk management, the risk profile pertaining to all the said assets and liabilities are analyzed to make sure that they fall in the proper risk levels. This risk management is made possible with the help of certain hedging mechanisms available. The RBI has laid out certain guidelines that all banks need to follow. www.avendus.com/india

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