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CHAPTER I
INTRODUCTION
Introduction of topic
Statement of problem
CHAPTER II
METHODOLOGY
Objectives of the study
Need for the study
Scope of the study
Limitations of the study
Review of literature
CHAPTER III
COMPANY PROFILE & INDUSTRY PROFILE
CHAPTER IV
THEORITICAL BACKGROUND
CHAPTER - V
DATA ANALYSIS & INTERPRETATION
FINDINGS
SUGGESTIONS & CONCLUSIONS
BIBLIOGRAPHY
INTRODUCTION
Asset Liability Management(ALM) is a strategic approach of managing the balance sheet
dynamics in such a way that the net earnings are maximized. This approach is concerned with
management of net interest margin to ensure that its level and riskiness are compatible with the
risk return objectives of the bank.
If one has to define Asset and Liability management without going into detail about its
need and utility, it can be defined as simply management of money which carries value and can
change its shape very quickly and has an ability to come back to its original shape with or
without an additional growth. The art of proper management of healthy money is ASSET AND
LIABILITY MANAGEMENT (ALM).
The Liberalization measures initiated in the country resulted in revolutionary changes in
the Banking sector. There was a shift in the policy approach of banks from the traditionally
administered market regime to a free market driven regime. This has put pressure on the earning
capacity of co-operative banks, which forced them to foray into new operational areas thereby
exposing themselves to new risks.
As major part of funds at the disposal of banks come from outside sources, the bank
management are concerned about RISK arising out of shrinkage in the value of asset, and
managing such risks became critically important to them. Although co-operative banks are able
to mobilize deposits, major portions of it are high cost fixed deposits. Maturities of these fixed
deposits were not properly matched with the maturities of assets created out of them. The tool
called ASSET AND LIABILITY MANAGEMENT provides a better solution for this.
ASSET LIABILITY MANAGEMENT (ALM) is a portfolio management of assets and
liability of an organization. This is a method of matching various assets with liabilities on the
basis of expected rates of return and expected maturity patter
2
Ratio analysis
Comperartive statement
Common size balance sheet.
INTRODUCTION
ASSET LIABILITY MANAGEMENT:
capacity of co-operative banks, which forced them to foray into new operational areas thereby
exposing themselves to new risks.
As major part of funds at the disposal of banks come from outside sources, the bank
management are concerned about RISK arising out of shrinkage in the value of asset, and
managing such risks became critically important to them. Although co-operative banks are able
to mobilize deposits, major portions of it are high cost fixed deposits. Maturities of these fixed
deposits were not properly matched with the maturities of assets created out of them. The tool
called ASSET AND LIABILITY MANAGEMENT provides a better solution for this.
ASSET LIABILITY MANAGEMENT (ALM) is a portfolio management of assets and
liability of an organization. This is a method of matching various assets with liabilities on the
basis of expected rates of return and expected maturity pattern.
In the context of banks, ALM is defined as a process of adjusting banks liability to
meet loan demands, liquidity needs and safety requirements. This will result in optimum value
of the bank, at the same time reducing the risks faced by them and managing the different types
of risks by keeping it within acceptable levels.
OBJECTIVES:
The main objective of ALM approach is to manage market risk in a way so as to
minimize the impact of net interest, income fluctuations in the short run and protect the net
economic value of the bank in the long run. The objectives of the ALM processTo control liquidity risk.
To control volatility of the net interest income.
To ensure a balance between profitability and growth rate.
risk
10
than has been done hitherto. ALM among other functions, is also concerned with risk
management and provides a comprehensive and dynamic framework for measuring, monitoring
and managing liquidity interest rate, foreign exchange and equity and commodity price risk of a
bank that needs to be closely integrated with the banks business strategy. It involves assement of
various types of risks altering the asset liability portfolio in a dynamic way in order to manage
risks.
The initial focus of the ALM function would be to enforce the risk management
discipline, viz., managing business after assessing the risks involved.
11
12
The results of the analyses in second step are used as the basis for decisions regarding
ways to handle existing risks. In some situations, the best plan may be to do nothing. In other
cases, sophisticated ways to finance potential losses may be arranged. The available techniques
for managing risks are GAP Analysis, VAR Analysis, Heinrich Domino theory etc., with
consideration of when each technique is appropriate.
Risk measurement:
Once risk sources have been identified it is often helpful to measure the extent of the risk
that exists. As pert of the overall risk evaluation, in some situations it may be possible to measure
the degree of risk in a meaningful way. In other cases, especially those involving individuals
computation of the degree of risk may not yield helpful information.
Risk review decisions:
Following a decision about the optimal methods for handling identified risks, the
business or individual must implement the techniques selected. However, risk management
should be an ongoing process in which prior decisions are reviewed regularly. Sometimes new
risk exposures arise or significant changes in expected loss frequency or severity occur. The
dynamic nature of many risks requires a continual scrutiny of past analysis and decisions.
14
DIMENSIONS OF RISK
Specifically two broad categories of risk are the basis for classifying financial services risk.
(1) Product market Risk.
(2) Capital market Risk.
Economists have long classified management problems as relating to either The
Product Markets Risks or The Capital Markets Risks.
TOTAL FINANCIAL SERVICES FIRMS RISK.
Total Risk
(Responsibility of CEO)
Business Risk
Financial Risk
(Responsibility of the
(Responsibility of the
Credit
Interest rate
Strategic
Liquidity
Regulatory
currency
Operating
Settlement
Human resources
Basis
Legal
15
16
intermediate the risk appetite of lenders and essential risk ness of borrowers. Banks manage this
risk by ; (A) making intelligent lending decisions so that expected risk of borrowers is both
accurately assessed and priced; (B) Diversifying across borrowers so that credit losses are not
concentrated in time; (C) purchasing third party guarantees so that default risk is entirely or
partially shifted away from lenders.
(2). STRATEGIC RISK:
This is the risk that entire lines of business may succumb to competition or obsolescence. In
the language of strategic planner, commercial paper is a substitute product for large corporate
loans. Strategic risk occurs when a bank is not ready or able to compete in a newly developing
line of business. Early entrants enjoyed a unique advantage over newer entrants. The seemingly
conservative act of waiting for the market to develop posed a risk in itself. Business risk accrues
from jumping into lines of business but also from staying out too long.
(3). COMMODITY RISK:
Commodity prices affect banks and other lenders in complex and often unpredictable ways.
The macro effect of energy price increases on inflation also contributed to a rise in interest rates,
which adversely affected the value of many fixed rate financial assets. The subsequent crash in
oil prices sent the process in reverse with nearly equally devastating effects.
18
19
to prior events which are difficult and impossible to designate but the management of a financial
services firm today must have these risks at least in view. They can cost millions.
20
ability to repay them caused bank failures from liquidity. Funds are deposited primarily as a
financial of rate. Such funds are called purchased money or headset funds as they are
frequently bought by employees who work on the money desk quoting rates to institutions that
shop for the highest return. To check liquidity risk, firms must keep the maturity profile of the
liabilities compatible with that of the assets. This balance must be close enough that a reasonable
shift in interest rates across the yield curve does not threaten the safety and soundness of the
entire firm.
2. INTEREST RATE RISK:
In extreme conditions, Interest Rate fluctuations can create a liquidity crisis. The fluctuation
in the prices of financial assets due to changes in interest rates can be large enough to make
default risk a major threat to a financial services firms viability. Theres a function of both the
magnitude of change in the rate and the maturity of the asset. This inadequacy of assessment and
consequent mispricing of assets, combined with an accounting system that did not record
unrecognized gains and losses in asset values, created a financial crisis. Risk based capital rules
pertaining to banks have done little to mitigate the interest rate risk management problem. The
decision to pass it of, however is not without large cost, so the cost benefit tradeoff becomes
complex.
3. CURRENCY RISK:
The risk of exchange rate volatility can be described as a form of basis risk among
currencies instead of basis risk among interest rates on different securities. Balance sheets
comprised of numerous separate currencies contain large camouflaged risks through financial
reporting systems that do not require assets to be marked to market. Exchange rate risk affects
21
both the Product Markets and The Capital Markets. Ways to contain currency risk have
developed in todays derivative market through the use of swaps and forward contracts. Thus,
this risk is manageable only after the most sophisticated and modern risk management technique
is employed
4. SETTLEMENT RISK:
Settlement Risk is a particular form of default risk, which involves the banks competitors.
Amounts settle obligations having to do with money transfer, check clearing, loan disbursement
and repayment, and all other inter-bank transfers within the worldwide monetary system. A
single payment is made at the end of the day instead of multiple payments for individual
transactions.
5. BASIS RISK :
Basis risk is a variation on the interest rate risk theme, yet it creates risks that are less easy to
observe and understand. To guard against interest rate risk, somewhat non comparable securities
may be used as a hedge. However, the success of this hedging depends on a steady and
predictable relationship between the two no identical securities. Basis can negate the hedge
partially or entirely, which vastly increases the Capital Market Risk exposure of the firm.
22
24
Composition of Foods:
The ordinary Foods contains two basic ingredients, namely, argillaceous and calcareous. In
argillaceous materials the clayey predominates and in calcareous materials the calcium carbonate
predominates.
A good chemical analysis of ordinary Foods along with desired range of ingredients.
Ingredients
Percent
Range
Lime (CaO)
62
62 67
Silica (SiO2)
22
17 25
Alumina (Al2O3)
38
34
34
Magnesia (MgO)
13
Sulphur (S)
13
Alkalies
0.2 1
25
In view of low per capita consumption in India, there is a considerable scope for growth in
Foods consumption and creation of new capacities in coming years.
The Foods industry does not appear to have adequately exploited Foods consumption in
rural segment where damaged where damaged growth is possible.
Landed cost of Foods (with import duty) continues to be higher than home market prices but
with reduced import duty, increasing imports, may pose a serious threat to the domestic Foods
industry.
Outlook
The recent change in the budget 2001 2002 relating to fiscal incentives for individual
housing and reduction in borrowing cost for this purpose and with the government reaffirmation
to accelerate the reform process, infrastructure development should logically get priority leading
to increase in demand of Foods in coming years. The addition capacity of Foods in the pipeline is
limited and therefore the demand and supply situations is expected to be more favorable and
Foods prices are likely to firm up.
51 Nos
Foods Plants
99 Nos
26
Installed Capacity
64.8 mt
Total Manpower
History
The first unit was installed at Basanthnagar with a capacity of 2.5 lack TPA (tones per
annum) incorporating humble supervision, preheated system, during the year 1969.
The second unit followed suit with added a capacity of 2 lack TPA in 1971.
The plant was further expanded to 9 lack by adding 2.5 lack tones in August, 1978, 1.13
lack tones in January, 1981 and 0.87 lack tones in September, 1981.
Power
27
Singareni Colleries makes the supply of coal for this industry and the power was obtained
from AP TRANSCO. The power demand for the factory is about 21MW. Heritage has got 2
diesel generator sets of 4MW each installed in the year 1987.
Heritage Foods now has a 15 KW captive power plant to facilitate for uninterrupted
power supply for manufactured of Foods.
HERITAGE FOODS
One among the industrial giants in the country today, serving the nation on the industrial
front HERITAGE FOODS INDIA LIMITEDhas a chequered and eventful history dating back to
the Twnties when the Industrial House of Birlas acquired it. With only a Textile Mill under it
banner in 1924, it grew from strength to strength and spread its activities to never firlds like
Rayon, Pulp, Transparent paper, Spun pipes and Refractories, Tyres, Oil Mills and Refinery
Extraction.
Looking to the wide gap between demand and supply, of a vital commodity, Foods, which
plays an important role in nation building the Government of India de licensed the Foods
Industry in the year 1966 with a view to attract private entrepreneurs to argument the Foods
product Heritage rose to the occasion and decided to set up a few Foods plants in the country.
The first Foods Plant of Heritage with a capacity of 2.5 lack tones per annum based on
dry process, was established in 1969 at Basanthnagar a backward area in Karimnagar District,
Andhra Pradesh, and christened it Heritage Foods. The second unit followed suit, which added a
capacity of 2.00 lack tones in 1971. The plant was further expanded to 9.00 lack tones by adding
2.5 lack tones in August 1978. 1.14 lack tones in January, 1981 and 0.87 lack tones in September,
1981.
Heritage Foods has outstanding track record of performance and distinguished itself
among all the Foods factories in India by bagging the coveted National Productivity Award for
two successive years, i.e., in 1985 and 1936, so also the National Awards for Foods Safety for
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two year 1985 86 and 1986 - 87. Heritage also bagged NCBMs (National Council for Foods
and Building Materials) National Award for Energy Conservation for the year 1989 90.
Heritage got the prestigious State Award Yajamnya Ratna & Best Management
Award for the year 1989; so also the FAPCCI (Federation of Andhra Pradesh Chamber of
Commerce and Industry) Award for the Best Family planning effort in the State. For the year
1987 88, Heritage also got the FAPPCI Award for Best Industrial Promotion / Expansion effort
in the state. In the year 1991 Heritage also got the May day Award of the Government of Andhra
Pradesh for Best Management and Pandit Jawaharlal Nehru Silver Rolling Trophy for the
Best Productivity effort in the State, sponsored by FAPCCI, for 1993 Heritage got the Best.
Performance:
The performance of Heritage Foods industry had been outstanding achieving over cent
per cent capacity utilization although despite many odds like power cuts and which most 40%
was waste due to wagon shortage etc.
The Company being a continuous process industry works round the clock and has an
excellent record of performance achieving over 100% capacity utilization.
Heritage has always combined technical progress with industrial performance. The
company had a glorious track record for the last 27 years in the industry.
Technology:
29
Heritage Foods uses most modern technology and the computerized control in the plant.
A team of dedicated and well experienced experts manages the plant. The quality is maintained
much above the bureau of Indian Standards.
The raw materials used for manufacturing Foods are:
Lime stone
Bauxite
Hematite
Gypsum
Competitions in sports and games are conducted every year for August 15, Independence
day and January 26, Republic Day among the employees.
Electricity
The power consumption per ton for Foods has come down to 108 units against 113 units last
year, due to implementation of various energy saving measures. The performance of captive
power plant of this section continues to be satisfactory. Total power generation during the years
was 84 million units last year. This captive power plant is playing a major role in keeping power
costs with in economic levels.
The management has introduced various HRD programs for training and development and
has taken various other measures for the betterment of employees efficiency / performance.
The section has installed adequate air polluting control systems and equipment and is ISO
14001 such as Environment Management System is under implementation.
Awards
Heritage Foods bagged many prestigious awards including national awards for productivity,
technology, conservation and several state awards since 1984. The following are the some of
important awards.
Awards of Heritage
No
Year
1984
1985 86
1985 86 87
1987 88
1987 89
Awards
National / State
State
National
Foods safety
National
State
effort
Productivity award
State
31
State
State
State
economy
Best family planning effort
State
State
1988 90
Award
Community development programs
State
12
1988 90
Energy conservation
13
1991
14
1991
1988 89
1988 89
1988 89
1989
10
1989
11
15
16
State
State
State
1993
Excellence
1994
Management Award)
Best industrial rebellion award
Rural
17
1994 95
18
1995
19
1995 96
20
National
in
Industry
development
chief
(Best
State
minister
State
State
National
1996
21
22
1996
1996 97
efforts.
Best workers welfare.
Best family welfare award.
First prize for mine environment &
23.
1999
24
2001
State
succession.
Vana Mithra
award
from
Pradesh Government.
32
Andhra
State
State
State
State
25
2007
State
Pradesh Government.
In this foods safety week celebrations, under the auspices of the Director General of
Foods Safety, Heritages Basanthnagar limestone Foods won 2 first prizes for environment and
pollution control and safe drilling and blatting and 14 2 nd prizes for over all performance,
productivity, operation and maintenance of machines publicity / propaganda etc.,
This section also bagged the award for Environment Protection in the Godavari River belt,
sponsored by the Godavari Pradushna Pariharna Pariyavarana.
Production
Last 20 years production of HERITAGE FOODS INDIA LIMITED Industry,
Basanthnagar.
Year
1983 84
7,49,197
1984 85
7,61,581
1985 86
8,05,921
1986 87
7,60,708
1987 88
5,50,254
1988 89
6,01,453
1989 90
6,43,307
1990 91
6,43,663
1991 92
7,48,258
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1992 93
6,85,596
1993 94
7,31,177
1994 95
7,84,555
1995 96
7,82,383
1996 97
7,31,049
1997 98
7,46,474
1998 99
6,88,305
1999 00
7,77,092
2000 01
6,92,424
2001 02
7,27,447
2004-05
7,34,456
2005-06
7,68,872
2006-07
8,75,012
2007-08
10,46,466
2008-09
10,56,742
34
during the second half of the year has improved and it is hoped that prices will stabilize at some
reasonable levels.
Directors:
Smt. K.G. Maheshwari,
Shri. Pramod Khaitan,
Shri B.P. Bajoria,
Shri P.K. Chokesy,
Smt. Neeta Mukerji,
(Nominee of I.C.I.C.I.),
Shri D.N. Mishra,
(Nominee of L.I.C.),
Shri Amitabha Ghosh,
(Nominee of U.T.I.),
Shri P.K. Malik,
Smt. Manjushree Khaitan,.
Secretary:
Shri S.K. Parik.,
Senior Executives:
35
Auditors:
Messrs Price Water house.,
36
To prepare development action plan at the apex level, DCCB level and at PACS level
and organize implementation.
To cover all agricultural member of PACS under cooperative kisan credit card scheme to
achieve 100 % coverage and also to provide timely and adequate credit support both short
term and long term investments.
To improve the lending to the small and marginal farmers as also SC and ST
agriculturists.
To formulate and adopt appropriate strategy for improved loan recoveries and to reduce
Non Performing Asstes (NPAs).
To ensure writing books of accounts and also ensure regular audit at all levels.
To ensure uniform accounts, Ledger maintenance at PACs level and DCCB level.
To provide basic training and also periodical refresher courses to staff members at all
level.
37
Years
Rs in crores
2004-2007
2007-2006
2006-2007
2007-2008
2.34
3.08
4.15
4.84
2008-2009
5.7
38
Many risks are managed quantitatively. Risk exposure is measured by some numerical
index. Risk cost tradeoff many tools are described by numerical valuation formulas.
Risk management can be integrated into a risk management system. Such a system can
be utilized to manage the trading position of a small-specialized division or an entire financial
institution. The modules of the system can be implemented with different degrees of accuracy
and sophistication.
39
Cash flows
Generator
Arbitrage
Pricing Model
Dynamic
Risk
Target
Trading Rules
Optimizer
40
Risk Profile
Arbitrage pricing models range from simple equations to large scale numerically
sophisticated algorithms. Cash flow generators also vary from a single formula to a
simulator that accounts for the dependence of cash flows on the history of the risk
factors.
The important ingredient of the risk management approach is the treatment of risk
factors and securities as an integrated portfolio. Analyzing the correlation among the real,
financial and strategic assets of an organization leads to clear understanding of risk
exposure. Special attention is paid to risk factors, which translate to correlation among
the values of securities. Identifying the correlation among the basic risk factors leads to
more effective risk management.
CONCLUSION
The burden of the Risk and its Costs are both manageable and transferable. Financial
service firms, in the addition to managing their own risk, also sell financial risk management to
others. They sell their services by bearing customers financial risks through the products they
41
provide. A financial firm can offer a fixed-rate loan to a borrower with the risk of interest rate
movements transferred from the borrower to the bank. Financial innovations have been
concerned with risk reduction then any other subject. With the possibility of managing risk near
zero, the challenge becomes not how much risk can be removed.
Financial services involve the process of intermediation between those who have financial
resources and those who need them, either as a principal or as an agent. Thus, value breaks into
several distinct functions, and it includes the intermediation of the following :
Maturity Preference mismatch, Default, Currency Preference mis-match, Size of
transaction and Market access and information.
42
For a long time it was taken for granted that the liability portfolio of financial firms was
beyond the control of the firm and so management concentrated its efforts on choosing the asset
mix. Institutions treasury department used the funds provided by deposits to structure an asset
portfolio that was appropriate for the given liability portfolio.
With the advent of Certificate Of Deposits (CDs), Banks had a tool by which to
manipulate the mix of liabilities that supported their Asset portfolios, which has been one of the
active management of assets and liabilities.
Asset and liability management program evolve into a strategic tool for bank management,
the main elements of the ALM system are :
ALM INFORMATION.
ALM ORGANISATION.
ALM FUNCTION.
ALM INFORMATION :
ALM is a risk management tool through which Market risk associated with business are
identified, measured and monitored to maintain profits by restructuring Assets and Liabilities.
The ALM framework needs to be built on sound methodology with necessary information
system as back up. Thus the information is key element to the ALM process.
43
There are various methods prevalent worldwide for measuring risks. These range from the
simple Gap statement to extremely sophisticate and data intensive Risk adjusted profitability
measurement (RAPM) methods. The central element for the entire ALM exercise is the
availability of adequate and accurate information.
However, the existing systems in many Indian Banks do not generate information in manner
required for the ALM. Collecting accurate data is the biggest challenge before the banks,
particularly those having wide network of branches, but lacking full-scale computerization.
Therefore the introduction of these information systems for risk measurement and
monitoring has to be addressed urgently.
The large network of branches and the lack of support system to collect information
required for the ALM which analysis information on the basis of residual maturity and
behavioral pattern, it would take time for banks in the present state to get the requisite
information.
ALM ORGANISATION :
Successful implementation of the risk management process requires strong commitment on
the part of senior management in the bank to integrate basic operations and strategic decision
making with risk management.
The Board of Directors should have overall responsibility for management of risk and
should decide the risk management policy of the bank, setting limits for liquidity, interest rate,
foreign exchange and equity / price risk.
The Asset Liability Management Committee (ALCO) consisting of the banks senior
management, including CEO/CMD should be responsible for ensuring adherence to the limits set
44
by the Board of Directors as well as for deciding the business strategy of the bank (on the assets
and liabilities sides) in line with the banks budget and decided risk management objective.
The ALM support group consisting of operation staff should be responsible for analyzing,
monitoring and reporting the risk profiles to the ALCO. The staff should also prepare forecasts
(simulations) showing the effects of various possible changes in market condition related to the
balance sheet and recommend the action needed to adhere to banks internal limits,
The ALCO is a decision-making unit responsible for balance sheet planning from a riskreturn perspective including the strategic management of interest rate and liquidity risks. Each
bank has to decide on the role of its ALCO, its responsibility as also the decision to be taken by
it. The business and risk management strategy of the bank should ensure that the bank operates
within the limits / parameters set by the Board. The business issues that an ALCO would
consider, inter alia, will include product pricing for deposits and advances, desired maturity
profile and mix of the incremental Assets and Liabilities, etc. in addition to monitoring the risk
levels of the bank, the ALCO should review the results of and progress in implementation of the
decisions made in the previous meetings. The ALCO would also articulate the current interest
rate view of the bank and base its decisions for future business strategy on this view. In respect
of this funding policy, for instance, its responsibility would be to decide on source and mix of
liabilities or sale of assets. Towards this end, it will have to develop a view on future direction of
interest rate movements and decide on funding mixes between fixed vs. floating rate funds,
wholesale vs. retail deposits, Money markets vs. Capital market funding, domestic vs. foreign
currency funding etc. Individual banks will have to decide the frequency for holding their ALCO
meetings.
45
Reviewing the interest rate outlook for pricing of assets and liabilities
(Loans
and
Deposits)
Deciding on the introduction of any new loan / deposit product and their impact on
interest rate / exchange rate and other market risks;
Reviewing the asset and liability portfolios and the risk limits and thereby, assessing the
capital adequacy;
Deciding on the desired maturity profile of incremental assets and liabilities and thereby
assessing the liquidity risk; and
Reviewing the variances in actual and projected performances with regard to Net Interest
Margin(NIM), spreads and other balance sheet ratios.
COMPOSITION OF ALCO
The size ( number of members) of ALCO would depend on the size of each institution,
business mix and organizational complexity, To ensure commitment of the Top management and
timely response to market dynamics, the CEO/MD or the GM should head the committee. The
chiefs of Investment, Credit, Resources Management or Planning, Funds Management / Treasury
46
(domestic), etc., can be members of the committee. In addition, the head of the computer
(technology) Division should also be an invitee for building up of
MIS and related computerization. Some banks may even have Sub-Committee and Support
Groups.
ALCO
The bank has constituted an Asset- Liability committee (ALCO). The committee may consists
of the following members.
i) General Manager / Banking
Head of Committee
Member
Member
Member
47
The ALCO is a decision making unit responsible for ensuring adherence to the limits set by
board as well as for balance sheet planning from risk return perspective including the strategic
management of interest rate and liquidity risks, in line with the banks budget and decided risk
management objectives.
The Business issues that an ALCO would consider interalia, will include fixation of interest
rates for both deposits and advances, desired maturity profile of the incremental assets and
liabilities etc.
The ALCO would also articulate the current interest rate due of the bank and base its
decisions for future business strategy on this view. In respect of funding policy, for instance, its
responsibility would be decided on source and mix of liability.
Individual Banks will have to decide the frequency for their ALCO meetings. However, it is
advised that ALCO should meet at least once in a fortnight. The ALCO should review results of
and process in implementation of the decisions made in the previous meetings
ALM CELL
The ALM desk / cell consisting of operating staff should be responsible for analyzing,
monitoring and reporting the profiles to the ALCO. The staff should also prepare forecasts
(simulations) showing the effects of various possible changes in market conditions related to the
balance sheet and recommend the action needed to adhere to Banks internal limits.
48
COMMITTEE OF DIRECTORS
The Banks should also constitute professional, management and supervisory committee,
consisting of three to four directors, which will oversee the implementation of the ALM system,
and review its functioning periodically.
49
ALM PROCESS
The scope of ALM function can be described as follows:
1. Liquidity Risk Management
2. Interest Rate Risk Management
3. Currency Risk Management
4. Settlement Risk Management
5. Basis Risk Management
The RBI guidelines mainly address Liquidity Risk Management and Interest Rate Risk
Management.
The following are the concepts discussed for analysis of banks Asset-Liability
Management under above mentioned risks.
Liquidity Risk
Maturity profiles
Interest rate risk
Gap analysis
1. Liquidity Risk Management :
Measuring and managing liquidity needs are vital activities of the banks. By assuring a
banks ability to meet its liability as they become due, liquidity management can reduce the
probability of an adverse situation development. The importance of liquidity transcends
individual institutions, as liquidity shortfall in one institution can have repercussions on the
entire system.
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Liquidity risk management refers to the risk of maturing liability not finding enough
maturing assets to meet these liabilities. It is the potential inability to meet the banks liability as
they became due. This risk arises because bank borrows funds for different maturities in the form
of deposits, market operations etc. and lock them into assets of different maturities.
Liquidity Gap also arises due to unpredictability of deposit withdrawals, changes in loan
demands. Hence measuring and managing liquidity needs are vital for effective and viable
operations of the bank.
Liquidity measurement is quite a difficult task and usually the stock or cash flow
approaches are used for its measurement. The stock approach used certain liquidity ratios.
The liquidity ratios are the ideal indicators of liquidity of banks operating in developed
financial markets, the ratio do not reveal the real liquidity profile of banks which are
operating generally in a fairly illiquid market. The assets, which are commonly
considered as liquid like Government securities, have limited liquidity when the market
and players are in one direction. Thus analysis of liquidity involves tracking of cash flow
mismatches.
The statement of structural liquidity may be prepared by placing all cash inflows and
outflows in the maturity ladder according to the expected timing of cash flows.
The MATURITY PROFILE could be used for measuring the future cash flows in different
time bands.
51
The position of Assets and Liabilities are classified according to the maturity patterns a
maturing liability will be a cash outflow while a maturing asset will be a cash inflows. The
measuring of the future cash flows of banks is done in different time buckets.
The time buckets, given the statutory Reserve cycle of 14 days may be distributed as under:
1. 1 to 14 days
2. 15 to 28 days
3. 29 days and upto 3 months
4. Over 3 months and upto 6 months
5. Over 6 months and upto 1 year
6. Over 1 year and upto 3 years
7. Over 3 years and upto 5 years
8. Over 5 years.
52
HEAD OF ACCOUNTS
A.OUTFLOWS
1.Capital, Reserves and Surplus
3. Term Deposits
4. Borrowings
5. Other liabilities and provisions
(i)
Bills Payable
(ii)
Inter-office Adjustment
(ii)
(iii)
(iii)
a) sub-standard
b) doubtful and Loss
(iv)
(v)
(v)
a) 2-5 years bucket.
b) Over 5 years bucket
(vi)
the purpose.
54
B. INFLOWS
1. Cash
2. Balance with other Banks
(i) Current Account
(ii)
Corporate Debentures
and bonds, CDs and
CPs,
redeemable
preference
shares,
units of Mutual Funds
(close ended). Etc.
(iii) Share / Units of Mutual
Funds
(open ended)
(iii)
Investment
in
subsidiaries /
Joint Ventures.
(i)
55
5. NPAs
b. Sub-standard
c. Doubtful and Loss
6. Fixed Assets
7. Other-office Adjustment
(i)
Inter-office Adjustment
(ii)
Others
(i)
(i)
Terms used:
CDs: Certificate of Deposits.
CPs: Commercial Papers.
DTL PROFILE: Demand and Time Liabilities.
Inter office adjustment:
Outflows: Net Credit Balances
Inflows: Net Debit Balances
Other Liabilities: Cash payables, Income received in advance, Loan Loss and
Depreciation in Investments.
Other assets: Cash Receivable, Intangible Assets and Leased Assets.
Interest Rate Risk refers to the risk of changes in interest rates subsequent to the creation
of the assets and liabilities at fixed rates. The phased deregulations of interest rates and the
operational flexibility given to banks in pricing most of the assets and liabilities imply the need
for banking system to hedge the interest rate risk. This is a risk where changes in the market
interest rates might adversely affect a banks financial conditions.
The changes in interest rates affect banks in large way. The immediate impact of change
in interest rates is on banks earnings by changing its Net Interest Income (NII). A long term
impact of changing interest rates is on banks Market Value of Equity (MVE) or net worth as the
economic value of banks assets, liabilities and off-balance sheet positions get affected due to
variation in market interest rates.
The risk from the earnings perspective can be measured as changes in the Net Interest
Income (NII) OR Net Interest Margin (NIM).
There are many analytical techniques for measurement and management of interest rate
risk. In MIS of ALM, slow pace of computerization in banks and the absence of total
deregulation, the traditional GAP ANALYSIS is considered as a suitable method to measure the
interest rate risk.
Gap Analysis:
57
The Gap or mismatch risk can be measured by calculating Gaps over different time
buckets as at a given date. Gap analysis measures mismatches between rate sensitive liabilities
and rate sensitive assets including off-balance sheet position.
58
2.2 TABLE
months
inflows
outflows
GAP
up to 3
69176.2
131724.6
62548.39
3 to 6
330487.3
95515.39
62467.14
6 to 12
157602.3
133159.8
-24442.5
above 1 yr
529926.8
430353.8
-99573
The above analysis reveals the extent of mismatches and the nature of sensitivity
of Assets and Liabilities which are having high liquidity. In short term maturity bucket of
the bank are having excess liquidity and the liquidity crisis is arising only in long term
maturity bucket. The bank can adequately plan their long liquidity according to the
buckets effect on profitability.
The bank can implement ALM policies for the better identification of the mismatch, risk
and for the implementation of various remedial measures.
59
GENERAL:
The classification of various components of assets and liabilities into different time
buckets for preparation of Gap reports (Liquidity and interest rate sensitivity) may be done as
indicated in Appendices I & II as a sort of bench mark. Banks which are better equipped to
reasonably estimate the behavioral pattern, embedded options, rolls-in and rolls-out etc of
various components of assets and liabilities on the basis of past date. Empirical studies could
classify them in the appropriate time buckets, subject to approval from the ALCO / Board. A
copy of the note approved by the ALOC / Board may be sent to the Department of Banking
Supervision.
The present framework does not capture the impact of embedded options, i.e., the
customers exercising their options (premature closure of deposits and prepayment of loans and
advances) on the liquidity and interest rate risks profile of banks. The magnitude of embedded
option risk at times of volatility in market interest rates is quite substantial banks should
therefore evolve suitable mechanism, supported by empirical studies and behavioral analysis to
estimate the future behavior of assets; liabilities and off-balance sheet items to changes in market
variables and estimate the embedded options.
A scientifically evolved internal transfer pricing model by assigning values on the basis of
current market rates to funds provided and funds used is an imported component for elective
implementation of ALM systems. The transfer price mechanism can enhance the management of
margin i.e., landings or credit spread the funding or liability spread and mismatch spread. It also
helps centralizing interest rate risk at one place which facilitates effective control and
60
management of interest rate risk. A well defined transfer pricing system also provide a rational
framework for pricing of assets and liabilities.
61
2.3 TABLE
STRUCTURAL LIQUIDITY STATEMENT AS ON 31-3-2012
S.No Particulars
A
Liabilities:
1 Deposits
I. Current A/c
II. SB A/c
III. Fixed Dep.
Sub-Total
2 Borrowings
3 Paid-up Share Capital
4 Reserves and Surpluses
5 Other provisions
6 Balance P & L A/C
7 Other Liabilities
TOTAL (A)
B.
ASSETS:
1 Cash in Hand
2 Bank Balances
3 Advances:
Agriculture-LT
Agriculture-ST
Bills purchased
Other Loans
4 Current Assets / Investments
5 Fixed Assets & other Assets
TOTAL (B)
C
Mismatches (B-A)
D
C as % to A
Rs in lakhs
Upto 3 months 3-6 months 6-12 months Above 1 year Total
797.51
2326.15
6527.21
9650.87
49186.96
14607.72
14607.72
62102.79
16270.13
16270.13
65967.38
16210.24
75048.07
829.28
77539.79
734.22
1405.71
25804.99
17632.22
329.64
574.44
25668.8
20124.38
92274.4
17226.33
22.95
1070.16
83307.67
2392.51
6978.46
117894.11
127265.08
144680.44
19013.72
64270.99
47222.42
415.72
16703.4
419571.77
3190.02
9304.61
155299.17
167793.8
321937.57
19013.72
64270.99
47222.42
415.72
34813.08
655467.3
565.04
629.98
4931.5
734.22
7532.23
49643.25
5618.56
63833.34
148457.6
80567.43
653
15400
672.05
66933.34
-10606.45
-13.68
10409.89
11200
9053.33
100745.1
17437.43
20.93
45096.54
60506.4
55954.99
395514.46
-24057.31
-5.73
1.3 GRAPH
Gap analysis
20000
10000
0
-10000
Upto 3
months
3-6 months
6-12 months
-20000
-30000
62
Above 1 year
179881.15
211676.24
329.64
56733.87
112775.2
85804.75
655467.3
63
2.4 TABLE
C
D
LIABILITIES:
1 DEPOSITS
I) Current A/C
ii) Savings Bank A/C
iii) Term Deposits
Sub-total
2 Borrowing
3 Other Liabilities
TOTAL 'A'
ASSETS
1 Cash in hand &Bank Balance
2 Advances
I) LT - operations
ii) ST-operations
iii) other loans including BP
3 Investments
4 Other Assets
TOTAL 'B'
MISMATCHES (B-A)
C as % to A
(Rs. In Lakhs)
Upto 3 momths 3-6 months 6-12 months Above 1years Total
998.25
2351.63
3860.87
7210.75
33421.23
22274
62905.98
0
0
21958.14
21958.14
73972.32
1926.62
97857.08
0
0
29535.68
29535.68
65328.19
1689.58
96553.45
2994.76
7054.9
118010.02
128059.68
139630.18
160740.84
428430.7
3993.01
9406.53
173364.71
186764.25
312351.92
186631.04
685747.21
8614.44
411.04
9025.48
22602.8
80033.7
1809.51
14775
15755.15
134976.16
72070.18
128.26
0
43083.29
17582.02
6500
678.46
67843.77
-30013.31
-30.6
0
80265.3
2860.37
10850
81.37
94057.04
-2496.41
-2.59
222561.37
5832.45
39613.13
61325.22
50512.59
379844.76
-48585.94
-11.24
245164.17
209214.74
61865.03
93450.22
67027.57
676721.73
64
1.4 GRAPH
Gap analysis
80000
60000
40000
20000
0
-20000
-40000
-60000
Upto 3
months
3-6 months
6-12 months
Above 1 year
(4)The total current liabilities for the above 1year amount Rs.428430.7. current asset
amount Rs.379844.76. current liability is more than the current asset. This a negative gap.
So the company should take steps to ensure the liquidity position.
65
66
2.5 TABLE
STRUCTURAL LIQUIDITY STATEMENT AS ON 31-3-2014
S.no
A
C
D
Rs. In lakhs
Particulars
Upto 3 months 3-6 months 6-12 months Above 1year Total
Liabilities
1 Deposits
I) Current A/C
1337.91
4013.73
5351.64
ii) SB A/C
3051.33
9153.97
12205.3
iii)Fixed Dep.
33172.78 14614.27
47364.4
57006.47
152157.92
Sub-Total
37562.02 14614.27
47364.4
70174.17
169714.86
2 ST Borrowings
16493.88 15976.62 107647.03
82276.53
222394.06
3 LT Borrowings
42.8
1454.4
957.56
182624.56
185079.32
4 Paid-up Share Capital
19192.55
19192.55
5 Reserves
116703.38
116703.38
6 Other Reserves/Provisions
3246.47
3246.47
7 Balance P&L A/C
300.38
300.38
8 Interest Payable
5021.66
987.81
1623.37
21921.62
29554.46
9 Other Liabilities
10055.84
15.15
9.97
33487.16
44568.12
TOTAL'A'
69176.2 33048.25 157602.33
529926.82
790753.6
Assets:
1 Cash in hand
954.44
954.44
2 Bank Balances
9404.34
9404.34
3 Advances:
I) LT-operations
20383.8
4633.7
236705.36
261722.86
ii) ST-operations
34340 76352.64
126802.3
64850.36
302345.3
4 Bills purchased
20.6
20.6
5 Current Assets/Investments
48220
18442
835.31
76805.6
144302.91
6 Interest Receivable
18300.57
720.75
888.31
34583.98
54493.61
7 Other Assets
100.84
17409.5
17510.34
TOTAL'B'
131724.59 95515.39 133159.62
430354.8
790753.6
MISMATCHES (B-A)
62548.39 62467.14
-24442.71
-99572.02
C as % to A
90.42
189.02
-15.51
-18.79
67
1.5 GRAPH
Gap analysis
100000
50000
0
-50000
Upto 3
months
3-6 months
-100000
-150000
assets. This is a negative gap. So the company should take steps to ensure the liquidity
position.
69
Year Ended
Year Ended
31-03-2014(Cr)
31-03-2013(Cr)
SOURCES OF FUNDS
Owned Funds
Equity Share Capital
132.74
64.69
0.00
1.33
0.00
0.00
3,292.28
2,511.18
40.77
13.17
0.12
0.21
3,465.91
2,590.58
1,332.67
1,014.08
Accumulated Depreciation
662.58
488.40
0.00
0.00
Net Block
670.09
525.68
Capital Work-in-Progress
212.86
163.63
1,988.86
1,907.76
CurrentAssets,loans&Advances
1,912.51
1,128.61
1,318.41
1,135.10
594.10
-6.49
0.00
0.00
3,465.91
2,590.58
66.37
32.34
81.69
16.60
1,988.86
1,323.33
0.00
10.11
418.65
331.01
Reserves&Surplus
Loan Funds
Secured Loans
Unsecured Loans
TOTAL
USES OF FUNDS
Fixed Assets
Gross Block
Investments
Net Current Assets
Notes:
Contingent liabilities
70
FINDINGS
1. ALM technique is aimed to tackle the market risks. Its objective is to stabilize and
GAP analysis.
3. ALM presents a disciplined decision making framework for banks while at the same time
&Rs72070.18 for the year 2012 however for the year 2013 there is a negative Gap of Rs
62548.39.
5. For duration of 3-6 months, the Bank has a negative Gap of Rs 10606.45 for the year 2013
&Rs 30013.31 for the year 2012. In the year 2013 Bank is able to maintain a positive gap of
Rs 62467.14.
6. For the duration 6-12 months, the Bank has positive Gap of Rs 17437.43 in the year 2012.
24057.31 In the year 2012 Rs 48585.94 in the year 2013 of& Rs 99572.02 in the year 2014.
Suggestions
71
1. The Bank should strengthen its management information system (MIS) and computer
processing capabilities for accurate measurement of liquidity and interest rate Risks
in their Banking Books.
1. In the short term the Net interest income or Net interest margins (NIM) creates
economic value of the Bank which involves up gradation of existing systems &
Application software to attain better & improvised levels.
2. It is essential that Bank remain alert to the events that effect its operating
future lead to smooth integration of the risk management process with effective
banks business strategies.
BIBILIOGRAPHY
Title of the Books
Author
72
1. Risk management
Gustavson hoyt
P.M.Dileep Kumar
M.Y. Khan
4. Web sites
WWW.HERITAGEAP.IN
WWW.RBI.ORG.COM
73
ANNEXURE - 1
74
STATE
CO-OPERATIVE
BANKS (SCBs)
STATE
LAND
URBAN
CO-OPERATIVE
DEVELOPMENT
CENTRAL
75
BANKS (UCBs)
CO-OPERATIVE
BANKS (CCBs)
PRIMARY
AGRICULTURAL
CREDIT
SOCIETIES (PACSs)
1.1 INDIAN BANK PROFILE
Total state co-operative banks (SCBs) till date are 28 banks.
Total primary agricultural credit societies under various CCBs are 2950.
76