1. ASSET-LIABILITY MANAGEMENT SYSTEM
ALM
Presented by
c.s.balakrishnan

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.

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.

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

6. 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).
The concept of ALM is concerned with the strategic management of Balance Sheet giving due weightage to all types of market risks viz. Liquidity Risk, Interest Rate Risk and Currency Risk. The objectives of ALM are as below :
Ø      Define and formulate the ALM Policy of the bank in respect of Liquidity Management, Interest Rate Risk Management and Currency Risk Management.
Ø      Propose the organizational set-up for implementing the ALM System in the Bank.
Ø      Adhere to RBI ALM guidelines of February 10, 1999 and implement the Guidelines in phases as required by RBI.
Ø      Create comprehensive MIS and take data based decisions using modern statistical tools such as Gap Analysis, Duration Gap Analysis, Value at Risk (VaR), Simulation etc.

7. 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

8. ALM Objectives Liquidity Risk Management.
Interest Rate Risk Management.
Currency Risks Management.
Profit Planning and Growth Projection.

9. LIQUIDITY RISK What is liquidity risk? EFFECTS OF LIQUIDITY CRUNCH
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
Contagion effect
Liquidity crisis can lead to runs on institutions
Bank / FI failures affect economy

10. 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

11. 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

12. LIQUIDITY RISK METHODOLOGIES FOR MEASUREMENT Liquidity index
Peer group comparison
Gap between sources and uses
Maturity ladder construction

13. 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

14. ALM SYSTEM Liquidity Gap report – fortnightly IRS statements – monthly
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

15. MATURITY PROFILE-LIQUIDITY
Outflows
Capital, Reserves & Surplus
Deposits
Borrowings and bonds
Other liabilities

16. MATURITY PROFILE-LIQUIDITY
Inflows
Cash
Balance with RBI
Balance with other banks
Investments
Advances

17. 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

18. 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

19. 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

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

21. 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.

22. 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.

23. 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.

24. 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

25. Tools for ALM System Gap Analysis Modified Gap Analysis
Duration Gap Analysis
Value at Risk (VaR)
Simulation

26. 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

27. 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.

28. 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.

29. 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

30. 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

31. 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

32. 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.

33. THANK YOU