ASSET-LIABILITY MANAGEMENT SYSTEM

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ASSET-LIABILITY MANAGEMENT SYSTEM
ALM

• Presented by
• c.s.balakrishnan

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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.

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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.

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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

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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).

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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

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ALM Objectives

• Liquidity Risk Management.
• Interest Rate Risk Management.
• Currency Risks Management.
• Profit Planning and Growth Projection.

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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 banks earnings
• Reputational risk
• Contagion effect
• Liquidity crisis can lead to runs on institutions
• Bank / FI failures affect economy

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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

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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

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LIQUIDITY RISK

• METHODOLOGIES FOR MEASUREMENT
• Liquidity index
• Peer group comparison
• Gap between sources and uses
• Maturity ladder construction

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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

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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

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MATURITY PROFILE-LIQUIDITY

• Outflows
• Capital, Reserves Surplus
• Deposits
• Borrowings and bonds
• Other liabilities

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MATURITY PROFILE-LIQUIDITY

• Inflows
• Cash
• Balance with RBI
• Balance with other banks
• Investments
• Advances

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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, MVE

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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

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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

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IMPACT ON NII
Gap Interest rate Change Impact on NII
Positive Increases Positive
Positive Decreases Negative
Negative Increases Negative
Negative Decreases Positive
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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.

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ASSET-LIABILITY MANAGEMENT COMMITTEE (ALCO)

• - ALCO headed by E.D.
• - GM (T) (Nodal Officer).
• - GMs Central Accounts, PD,
  Credit, Risk Management International Division
  are the members.
• - GM (IT) AGM (Economist) are the invitees
  for ALCO meetings.

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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.

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ALM STATEMENTS TO BE SUBMITTED TO RBI

1. Statement of Structural Liquidity
   (Annexure - I) DSB Statement No.8 - Rupee
2. Statement of Interest Rate Sensitivity
   (Annexure - II) DSB Statement No. 9 - Rupee
3. Statement of Dynamic Liquidity (Annexure - III)
4. Statement of Maturity and Position (MAP)
   (Annexure - IV) DSB Statement No.10 - Forex
5. Statement of Sensitivity to Interest Rate
   (SIR)(Annexure - V)DSB Statement No.11 - Forex

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Tools for ALM System

• Gap Analysis
• Modified Gap Analysis
• Duration Gap Analysis
• Value at Risk (VaR)
• Simulation

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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

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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.

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ADDRESSING TO MISMATCHES

• Mismatches can be positive or negative
• Positive Mismatch M.A.gtM.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.

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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

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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

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CALCULATION OF NII/NIM

• NII INT.EARNED-INT. EXPENDED
• INT. EARNED ADVINVESTBALANCE WITH RBI
• INT. EXPENDEDDEPOSITSINT. ON RBI BORROWINGS
• NIM (NII/TOT.EARNING ASSET)X100

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ALM BALANACE SHEET
LIABILITY (OUTFLOWS) ASSET (INFLOWS)
1 Capital 1 Cash Balances with RBI
2 Reserves Surplus 2 Balances with Banks Money at call/Short-notice lendings.
3 Deposits 3 Investments.
4 Borrowings 4 Advances
5 Other Liabilities Provisions 5 Fixed Assets.
6 Contingent Liabilities 6 Other Assets.

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SUCCESS OF ALM IN BANKS PRE - CONDITIONS

• Awareness for ALM in the Bank staff at all
  levelssupportive 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.

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THANK YOU