INTRODUCTION:

Introduction to finance Finance is the application of the principles of financial economics to an inter related set of minority problems. It generally involves balancing risk and Profitability and is typically called managerial finance or corporate finance Investment theory is concerned with the identification of an optimal portfolio of assets, given a set of objectives and constraints, as well as with the valuation of assets. Finance can also be used by individuals (called personal finance) and by governments called public finance).

Finance as a discipline is concerned with determining value and making decisions. The finance function allocates resources, which includes acquiring, investing and managing resources. Finance is management of money Monetary support for an enterprise Money resources of a state, company, or person. Finance commercial activity of providing funds and capital Business-the activity of providing goods and services involving financial, commercial and industrial aspects Floatation-financing a commercial enterprise by bond or stock shares Banking-transacting business with a bank; depositing or withdrawing funds or requesting a loan etc. High finance large and complex financial transactions (often used with the implication that those individuals or institutions who engage in them are unethical Investing, investment-the act of investing; laying out money or capital in an enterprise with the expectation of profit Floatation-financing a commercial enterprise by bond or stock shares Banking-transacting business with a bank; depositing or withdrawing funds or requesting a loan etc.

FINANCE INVOLVES 1. INVESTMENT MANGEMENT AND VALUATION Financial markets, financial instruments, and financial institutions The risk-return framework and the identification of the asset appropriate discount rate Valuation of assets-discounting of relevant cash flows; relative valuation; contingent claim valuation The optimum allocation of funds-what to invest in how much invest when to invest. Cash flow budgeting and working capital management Comparing alternative proposals Forecasting and risk analysis Obtaining funds debt or equity sources long term or short term Optimum capital structure 4. Allocation of funds to long term capital investments optimize short term cash flow Dividend policy How much money will be needed by an individual (or family) various points in future How is it to be funded? PUBLIC FINACNE Identification of required expenditure of a public sector entity Sources of that entitys revenue Mobilization of resources for the economy Canalizing the money in productive activities Generating income or profit Creating assets for the use of masses Contributing to the activities of promotion of the economy, and Equitable development of the economy in the process, finance transforms the economy.

2. CORPORATE AND MANAGERIAL FINANCE

3. WEALTH MANAGEMENT AND PERSONAL FIANCE

MAJOR OBJECTIVES OF FINANCE

BACKGROUND OF THE STUDY INTRODUCTION TO INDIAN FINANCIAL SYSTEM The primary function of the financial system is to Provide a link between savings and investment for the creation of new wealth and permit portfolio adjustment in the composition of the existing wealth The financial system consists of a variety of institution markets and instruments related in a systematic manner and provide the principal means, by which savings are transformed into investments. Indian financial system is broadly classified into two groups: Organized sector Unorganized sector

The organized financial system comprises the following subsystems: 1. The banking system 2. Co-operative system 3. Development banking system Public sector Private sector

4. Money markets 5. Financial companies and institutions The unorganized financial system comprises of relatively less controlled moneylenders, indigenous bankers, lending pawnbrokers, landlords, traders, etc. This part of the financial system is not directly amenable to control by the Reserve Bank of India (RBI) There are also a host of financial companies, investment companies, chit funds, etc.in unorganized sector. The central bank or the government does not regulate these in a systematic manner. The financial system is also divided into users of financial services and providers. Financial institutions sell their services to households, business and government who are the users of financial services and providers. Financial institutions sell their services to households, business and government who are the users of financial services.

The providers of financial services are Central Bank Banks Financial Institutions Money and capital markets Informal financial enterprise The Indian financial system is the mirror reflection of our economy .The financial system provides services that are essential in a modern economy. Savings mobilization and promotion of investment are function of the stock and capital markets, which are a part of the organized financial system in India This system is passing through a period of reforms, structural adjustments and consolidation in the wake of economic liberalization programme, which needs to be undertaken alongside macro-economic reforms. Financial sector is opening up for expansion, growth and transparency. In the process, the financial system will not only be widened, but also be strategically planned to meet the growing needs of the economy The decades of twenty holds a promise of further financial growth, diversification, and stability. The fundamental changes in the financial system reflect and responsive of the policy makers to meet the ever growing needs of the economy The financial system needs to take cognizance of the trust building approach to institutionalizing markets as a legitimate means of exchange and resource allocation. It is obvious that this approach needs a thorough and an informed debate around the critical aspects of any market institution, players, regulation, and information. The financial inputs emanate from the financial system, while real goods and services are part of real system. The interaction between the real system (Goods and services) and the financial system (Money and capital) is necessary for the productive process. Trading in money assets constitute the activity in the financial markets and are referred to as the financial system.

Financial system of India has established a strong link between savings and investments by creating a unique mechanism through which various economicactivities are created, sustained and developed. In this background, the Indian financial system becomes the rock foundation of our economy. The financial system and the economy are complementary and have made enormous progress. It is against this backdrop that the scenario for the Indian financial system unfolds itself. Thus financial management is an integral part of the system. INTER-RELATIONSHIP IN THE FINANCIAL SYSTEM

FINANCIAL INSTITUTIONS Financial institutions are organizations that act as immobilizes and depositories of savings, and as purveyors of credit or finance. They also provide various financial services to the community. They differ from non-financial (industrial and commercial) business organization in respect of their dealings i.e., while the former deal in financial assets such as deposits, loans, securities, and so on, the later deal in real asset such as machinery, equipment, stocks of goods, real estate, and so on. The activities of different financial institutions may be either specialized or they may overlap; We need to classify financial institutions and this is done on the basis of their primary activity or the degree of their specialized with relation to savers or borrowers with whom they customarily deal or the manner of their creation .In other words, the functional, geographic, sectoral scope of activity or the type of ownership are some of the criteria which are often used to classify a large number and variety of financial institutions which exist in the economy.

STRUTURE OF FINANCIAL INSTITUTIONS.

Financial Institutions (RBI)

Banking Institutions

Non Banking Institutions

LIC Commercial Banks Co-operative Banks UTI ICICI IDBI Private sector Private sector SEBI EXIM Bank

SBI Nationalized Banks RRB SCB SLDB UCB

RESERVE BANK OF INDIA (RBI) The reserve bank is the central banking institution of India. It was originally constituted as a shareholders bank and started functioning as the central bank of India from 1 st April 1935. Before 1935, the central banking functions were divided between the central government and the Imperial bank of India. In 1926, the Hilton Young Commission recommended for an independent central bank of India. The commission was not in the favor of the conversion of the Imperial Bank into full-fledged central bank. The commission suggested that the bank should be allowed to work purely as a commercial bank and the entire central banking functions should be given to separate bank. The commission also suggested that he central bank of India should be shareholders bank. The government accepted the recommendation of the commission and the bill for the establishing the central bank was introduced in the legislative assembly in January 1927. In 1935,central bank was formed and it was called RBI. NATIONALIZATION OF RBI After independence of the country, the demand for the nationalization of the reserve bank was made. The act was made by the parliament for giving public ownership to the bank and since 1 st January 1949, the Reserve Bank is functioning as the state owned and state managed central bank of the country. The nationalization of reserve bank was viewed as a step in the right direction and in accordance with the modern trend in central banking. MANAGEMNT OF RBI A central board of directors controls the affairs of the Reserve Bank. It frames and exerts the polices of the bank. The central board consists of 16 members, namely a Governor, 3-deputy Governors appointed by 4 local boards, 6 directors nominated by the Central Government and one Government official nominated by the central government In addition, there are 4 local boards which consist of 5 members nominated by Central Government. The central office of the bank is at Mumbai and the local offices of the bank are situated at Mumbai, Delhi, chennai and Calcutta. It has organization at the head office and at regional offices for carrying out various activities and responsibilities entrusted to it. The organizational setup has expanded considerably with a continuous increase in its activities in the planning era. The

polices of the bank are framed by the central board of bank at Mumbai regulates the activities of all the departments and the branches of the bank. The branch offices of the bank are established at places like Mumbai, Calcutta, Delhi, Bangalore, Chennai, Ahmedabad and Trivandrum. FINANCIAL MARKETS A financial market is a market for creation and exchange of financial assets. Financial markets are a source of finance and help to foster sounder corporate capital structure Innovative instruments have become a major force and transforming financial markets. The wide spread application of technology has increased the global integration of financial markets by making possible round the clock trading, as well as improved its efficiency.

FUNCTIONS: Facilitates price discovery: The continual interaction among numerous buyers and sellers who

through financial markets helps in establishing the prices of financial assets. Well-organized financial markets seem to be remarkably efficient in price discovery. Providers liquidity: Investors can readily sell their financial assets through the mechanism of

financial markets. In the absence of financial markets, which provides such liquidity, the motivation of investors to hold financial assets will be considerably diminished. Thanks to negotiability and transferability of securities through the financial markets, it is possible for companies to raise long-term funds from investors with short term and medium term horizons. While one investors is substituted by another when a security is transacted the company is assured of long term availability of funds Reduces the cost of transacting: The two major costs associated with transacting are search

costs and information costs. Each costs comprises explicit costs such as expenses incurred on advertising when one wants to buy or sell an asset and implicit costs such as the effort and time one has to be put into locate customer. Information costs refer to costs incurred in evaluating the investments merits of financial assets.

CLASSIFICATION OF FINANCIAL MARKETS The financial markets are classified into 1. Organized Markets: Capital market Money market 2. Unorganized Markets: Moneylenders Indigenous bankers In the organized markets, there are standardized rules and regulations governing their financial dealings. There is also a high degree of institutionalization and instrumentalization. These markets are subject to strict supervision and control by the RBI or other regulatory bodies. In unorganized markets there are a number of moneylenders. Indigenous bankers, and traders etc., who lend money to the public Indigenous bankers also collect deposits from the public. There are private Housing finance market companies, chit funds etc. CAPITAL MARKET The capital market for financial assets, which have long or indefinite maturity generally, it deals with long term securities, which have maturity period of above one year, Capital market may be further divided into three namely: Industrial securities market Government securities market Long term loan market

INDUSTRIAL SECURITIES MARKET It is market for industrial securities namely Equity shares or ordinary shares Preference share Debentures or bonds

It is a market where industrial concerns raise their capital or debt by issuing appropriate instruments. It can be divided into two further i.e. Primary markets; it is a market for new issue or new financial claims Hence it is known also as new issue market. It deals with those securities, which are issued to the public for the first time. In the primary market, borrowers exchange new financial securities for long-term funds. Thus primary market facilities capital formation, There are three ways through which a company can raise capital in a primary market namely. Public issue Rights issue Private placement

The common method of raising capital by new companies is through sale of securities to the public. It is called public issue. When an existing company wants to raise additional capital, securities are first offered to the existing shareholders on a pre-emptive basis. It is called rights issue. Private placements are a way of selling securities privately to a small group of investors. Secondary market: it is a market for secondary sale of securities. In other words, securities, which have already passed through the new issue market, are traded in this market. Generally, such securities are quoted in stock exchange and it provides a continuous and regular market for buying and selling of securities. This market consists of all stock exchanges recognized by government of India. The stock exchanges in India are regulated under the securities contract act of 1956. The Bombay stock exchange is the principal stock exchange in which sets the tone of the other stock. GOVERNMENT SECURITIES MARKET: It is also called as guilt\edged securities market. It is a market where government securities are traded. In India there are many kind of government securities. Long-term securities are traded in this market while short-term securities are traded in money market Securities issued by the central government, state government, semi government authorities like city corporation, port trusts etc.these securities are issued in the denomination of Rs.100 and interest is

payable half yearly and they carry tax exemption also, the role of brokers in marketing these securities is practically very limited and major participant in his market in the commercial banks because they hold a very substantial portion of these securities to satisfy their statutory liquid ratio requirements. They are sold through the public debt officer of RBI while treasury bills are sold through option Government securities offer good sources of raising inexpensive the prices and yields in this market. Hence this market also plays the important role in monetary management LONG TERM LOAN MARKET: Development banks and commercial banks play a significant role in this market by supplying longterm loan to corporate customers. Long-term loans market may further be classified into: Term loans market Mortgage market Financial guarantee market

MONEY MARKET Call money market Commercial bills market Treasury bills market Short term loan market

FIANNCIAL INSTRUMENTS If refers to those documents which represents financial claims on assets. For example: bill of exchange, promissory notes, and treasury bills government bonds. These are also known as financial securities. FUNCTIONS Easily transferable Enjoy tax status investment in these securities are exempted from income tax wealth tax, subject to certain limits. Ready market i.e. bought and sold frequently and trading is possible

Liquidity Security value Facilities future trading Less handling cost Risk and return are directly proportional to other

FINANCIAL INSTRUMENTS

Long-term Instruments

Short term Instruments

EQUITY SHARES DEBENTURES PREFERANCE SHARES RETAINED EARNINGS PUBLIC DEPOSITS SAVINGS FROM NRIs LEASING.

TRADE CREDIT INSTALLMENT CREDIT ADVANCES OVER DRAFT STOCK INVEST

ASSETS-LIABILITIES MANAGEMENT
A technique companies employ in coordinating the management of assets and liabilities so that an adequate return may be earned, also known as "surplus management." Active management of a firm's Balance Sheet to maintain a mix of loans and deposits consistent with its goals for long-term growth and risk management. Firms, in the normal course of business, assume financial risk by making loans at interest rates that differ from rates paid on deposits. Deposits often have shorter maturities than loans and adjust to current market rates faster than loans. The result is a balance sheet mismatch between assets (loans) and liabilities (deposits). The function of asset-liability management is to measure and control three levels of financial risk: Interest Rate Risk (the pricing difference between loans and deposits), Credit Risk (the probability of default), and Liquidity Risk (occurring when loans and deposits have different maturities).
A primary objective in asset-liability management is managing Net Interest Margin that is, the net difference between interest earning assets (loans) and interest paying liabilities (deposits) to produce consistent growth in the loan portfolio and shareholder earnings, regardless of short-term movement in interest rates. Besides financial institutions, non-financial companies also employ AssetLiability Management, mainly through the use of derivative contracts to minimize their exposures on the liability side of the balance sheet.

ORIGIN OF THE TERM ASSETS-LIABILITIES MANAGEMENT The main function of any financial institution or banks is to collect some deposits from public and use these funds for lending and investing. For the deposits collected from public, interest is paid to the depositors. Similarly, interest is earned on lending and investing. In this process, these institutions create liabilities by way of deposits and borrowing and they create assets by way of lending and investment. For each rupee collected in the form of deposits, equal asset is created in the form of advances and investments or cash or balance.
The objectives of Asset-Liability Management are as follows:

To protect and enhance the net worth of the institution. Formulation of critical business policies and efficient allocation of Capital. To increase the Net Interest Income (NII) To actively and judiciously leverage the balance sheet to stream line the management of regulatory capital. Funding of banks operation through capital planning. Product pricing and introduction of new products. To control volatility of market value of capital from market risk.

NEED FOR FORMAL ASSETS-LIABILITIES MANAGEMENT Till mid 1991, banks and other financial institutions India were functioning in a regulated regime and traditionally they were exposed to credit risk only. Financial sector reforms, an important component of the program of stabilization and structural reforms

has brought about many changes at an unprecedented pace over the last ten years , like deregulation of interest rate, money market operations, prudential norms on capital adequacy, provisioning etc. These changes are directed towards giving freedom to banks in their operations to ensure institutions profitability and sustainable viability. Intense competition for business on the assets and liabilities sides combined with increasing volatility in both domestic interest rates and foreign exchange rates, is putting pressure on the management of banks and financial institutions to maintain spreads, profitability and long term viability. These pressures needed to be addressed, not on adhoc basis but from strategic frame work. ALM is a tool that enables financial institutions to take business decisions in a more informed frame work. The ALM functions inform the management what the current market risk profile of the bank is and the impact that various alternate business decisions would have on the future risk profile. ALM is a comprehensive and dynamic frame work for measuring, monitoring and managing the market risks i.e., liquidity risk, interest and exchange rate risk of the financial

institutions. It also has to be closely integrated with the banks business strategy, as this affects the future risk profile of financial institutions. This frame work needs to be built around a foundation of sound methodology and human, technological infrastructure. It has to be supported by the boards risk philosophy that clearly specifies the risk policies

Definitions of the terms used Assets

Anything owned by a person or organization having monetary value, usually its cost or fair market value. An asset may be a specific property, such as title to real estate or other tangible property, or enforceable claims against others. Finance. There are several major asset categories: (1) current assets-cash and short-term items convertible into cash within one year; (2) Fixed Assets-furniture, plant, and equipment owned by a firm, which are depreciated over their useful life; (3) Intangible Assets-patents, trademarks, or goodwill, which have a value and carry a cost; and (4) pledged assetscollateral for a bank loan or purchase of securities on margin. Assets have three essential characteristics:

They embody a future benefit that involves a capacity, singly or in combination with other assets, in the case of profit oriented enterprises, to contribute directly or indirectly to future net cash flows, and, in the case of not-for-profit organizations, to provide services;

The entity can control access to the benefit; and, The transaction or event giving rise to the entity's right to, or control of, the benefit has already occurred.

The accounting equation relates assets, liabilities, and owner's equity:

Assets = Liabilities + Owners Equity

CLASSIFICATION OF ASSETS
Current Assets Current assets are cash and other assets expected to be converted to cash, sold, or consumed either in a year or in the operating cycle. These assets are continually turned over in the course of a business during normal business activity. There are 5 major items included into current assets: 1. Cash - it is the most liquid asset, which includes currency, deposit accounts, and negotiable instruments (e.g., money orders, checks, bank drafts). 2. Short-term investments - include securities bought and held for sale in the near future to generate income on short-term price differences (trading securities). 3. Receivables - usually reported as net of allowance for uncollectible accounts. 4. Inventory - trading these assets is a normal business of a company. The inventory value reported on the balance sheet is usually the historical cost or fair market value, whichever is lower. This is known as the "lower of cost or market" rule. 5. Prepaid expenses - these are expenses paid in cash and recorded as assets before they are used or consumed (a common example is insurance). See also adjusting entries.

Long-term investments Often referred to simply as "investments." Long-term investments are to be held for many years and are not intended to be disposed in the near future. This group usually consists of four types of investments: 1. Investments in securities, such as bonds, common stock, or long-term notes. 2. Investments in fixed assets not used in operations (e.g., land held for sale). 3. Investments in special funds (e.g., sinking funds or pension funds). 4. Investments in subsidiaries or affiliated companies. Different forms of insurance may also be treated as long term investments.

Fixed assets
Also referred to as PPE (property, plant, and equipment). Assets which are purchased for continued and long-term use in earning profit in a business. This group includes land, buildings, machinery, furniture, tools, wasting resources (timberland, minerals), etc. They are written off against profits over their anticipated life by charging depreciation expenses (with exception of land). Accumulated depreciation is shown in the face of the balance sheet or in the notes.

These are also called capital assets in management accounting, especially when intangibles are considered.

Intangible assets
Intangible assets lack physical substance and usually are very hard to evaluate. They include patents, copyrights, franchises, goodwill, trademarks, trade names, etc. These assets are (according to US GAAP) amortized to expense over 5 to 40 years with exception of goodwill.

Other assets
This section includes a high variety of assets, most commonly:

long-term prepaid expenses long-term receivables intangible assets (if they represent just a very small fraction of total assets) property held for sale.

In a lot of cases this section is too general and broad, because assets could be classified into four above categories

Generic Bank Risk Management Framework

A broad scope of what managing a balance sheet typically involves in a co operative bankbank. Bank within a Bank

Inflows and outflows pass through Group Treasury implying that ALM acts as the Bank within bank.

RISK
Risk is inherent in banks and financial institutions and is unavoidable. The task of ALM is not to avoid risk but to manage it and keep different types of risk within an

acceptable level this requires continuous monitoring of risk exposures including capacity to anticipate changes and to act so as to structure and restructure a financial institutions business to profit from it or to minimize loss.

The institutions are normally exposed to different types of risks:

CREDIT RISK
This risk refers to the risk of default on loans and advances granted by banks when timely repayment of principal and interest or both is threatened due to inability or unwillingness of the borrowers. This causes cash-flows problems and certainty. CREDIT RISK MANAGEMENT The following ways among others, could be adopted by the institutions in managing the credit risk: Fixing exposure limit for individual borrowers, group of borrowers, industry/economic sector e.g. agriculture, transport, trade, specific regions so as to have a well diversified portfolio of loan assets; Rigorous appraisal and analysis of individual loan proposals to weed out less promising ventures. Delegation of powers to various levels for sanction of proposals. Pricing loans and advances to the risk perception of projects arrived at on the basis of a credit scoring model to ensure returns commensurate with risk and to motivate borrowers to improve performance and earn higher rating and consequently pay lower interest rate.

 Insisting on collateral security besides primary security at a margin and a granting large loans and advances on consortium basis to distribute risk. LIQUIDITY RISK Liquidity risk refers to the risk of maturing liabilities not finding enough maturing assets to meet liabilities. This risk arises because financial institution borrows funds for different maturities in the form of deposits, market operations, etc and locks them into assets of different maturities. Liquidity gap also arises due to unpredictability of deposit withdrawals, changes in loan demands. The cash shortfalls force bank to borrow funds at uneconomical high interest rate, which may cause heavy loss. The gap or mismatch in assets and liabilities can be measured by calculating gaps over different time intervals based on aggregate balance sheet data at a fixed point of time. The assets and liabilities can be classified into different maturity zones say next day, upto one month, above 1 month to 3 months, above 3months to 1year, above 1 year to 3 years and above 5 years as per convenience of the institution. When positions of the assets and liabilities is classified according to the maturity zones, the gap will appear. This position gives the status of liquidity gap to the management on assets and liabilities maturing during the zone maturity period. The management may have to take measures to bridge the gap. To do this, it may perhaps be necessary to change policies of lending, investment and resource mobilization.

MANAGEMENT OF LIQUIDITY RISK Management of liquidity risk standard measures for reducing an institutions exposure to liquidity risk includes raising the proportion of institution funds committed to readily marketable assets portfolio. At present, for domestic purpose there are no supervisory guidelines. However, with the gradual reduction in the levels of CRR and SLR and increasing variety of savings/investments, opening of capital markets for financial sector, the volatility of bank deposits is bound to increase rapidly there b enhancing the liquidity risk for the bank. It is therefore, necessary for the bank management to devise ways for monitoring and controlling such risk. INTEREST RATE RISK By traditional definition interest rate risk means changes in the interest income due to changes in the rate of interest. While this focus is not misplaced, it is definitely incomplete in as much as it overlooks an important aspect-changes in interest rate resulting in the value of assets/liabilities. Thus interest rate risk may be viewed from two different but complementary perspectives-earning sensitivity to rate fluctuations and price sensitivity of instruments/products to change in interest rate. Absence of appropriate management of interest rates, among other factors, is one of the reasons which had accentuated the spell of liquidity problems experienced in the recent past. Changes in the interest rates can affect financial institutions with regard to changes in:

 Market value of assets/liabilities and off balance sheet items, ultimately impacting the value of net worth. Net interest income due to mismatch in the reprising terms of the assets and liabilities. Net income as a result in the changes in the income. Net interest margin due to changes in interest income. Capital-asset ratio due to changes in net margin. Fluctuations in interest rates, being a very common phenomenon, thus lead to a host of risks of different dimensions to which assets and liabilities of institutions are perennially exposed. These risks are:

1. Rate level risk. 2. Volatility risks 3. Prepayment risk 4. Basis risk 5. Real interest rate risk 6. Event risk

The ALM process rests on three pillars: 1. ALM information systems Management Information System Information availability, accuracy, adequacy and expediency 2. ALM organization Structure and responsibilities Level of top management involvement 3. ALM process Risk parameters Risk identification Risk measurement Risk management Risk policies and tolerance levels. Asset Liability Committee ALCO The Asset-Liability Committee (ALCO) consisting of the bank's senior management including CEO should be responsible for ensuring adherence to the limits set by the Board as well as for deciding the business strategy of the bank (on the assets and liabilities sides) in line with the bank's budget and decided risk management objectives. The ALM desk consisting of operating 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 conditions related to the balance sheet and recommend the action needed to adhere to bank's internal limits. The ALCO is a decision making unit responsible for balance sheet planning from risk-return perspective including the strategic management of interest rate and liquidity risks. Each bank will have to decide on the role of its ALCO, its responsibility as also the decisions 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 both deposits and advances, desired maturity profile 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 the 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 a funding mix between fixed v/s floating rate funds, wholesale v/s retail deposits, money market vs capital market funding, domestic v/s foreign currency funding, etc. Individual banks will have to decide the frequency for holding their ALCO meetings. Top Management, the CEO/CMD or ED should head the Committee. The Chiefs of Investment, Credit, Funds Management/Treasury (forex and domestic), International banking and Economic Research can be members of the Committee. In addition the Head of the Information Technology Division should also be an invitee for building up of MIS and related computerization. Some banks may even have sub-committees. The size (number of members) of ALCO would depend on the size of each institution, business mix and organizational complexity. Committee composition Permanent members:

Chairman Managing Director/CEO Financial Director Risk Manager Treasury Manager ALCO officer Divisional Managers

By invitation:

Economist Risk Consultants

Purposes and Tasks of ALCO:

Formation of an optimal structure of the Banks balance sheet to provide the maximum profitability, limiting the possible risk level; Control over the capital adequacy and risk diversification; Execution of the uniform interest policy; Determination of the Banks liquidity management policy; Control over the state of the current liquidity ratio and resources of the Bank; Formation of the Banks capital markets policy; Control over dynamics of size and yield of trading transactions (purchase/sale of currency, state and corporate securities, shares, derivatives for such instruments) as well as extent of diversification thereof; Control over dynamics of the basic performance indicators (ROE, ROA, etc.) as prescribed in the Bank's policy.

Process of ALCO

Organization Structure of ALCO

Elements of Asset Liability Management There are nine elements related to ALM and they are as follows: 1. Strategic framework: The Board of Directors are responsible for setting the limits for risk at global as well as domestic levels. They have to decide how much risk they are willing to take in quantifiable terms. Also it is necessary to determine who is in charge of controlling risk in the organization and their responsibilities. 2. Organizational framework: All elements of the organization like the ALM Committee, sub committees, etc., should have clearly defined roles and responsibilities. ALM activities should be supported by the top management with proper resource allocation and personnel committee. 3. Operational framework: There should be a proper direction for risk management with detailed guidelines on all aspects of ALM. The policy statement should be well articulated providing a clear direction for ALM function. 4. Analytical framework: Analytical methods in ALM require consistency, which includes periodic review of the models used to measure risk to avoid miscalculation and verifying their accuracy. Various analytical components like Gap, Duration, Stimulation and Value-at-Risk should be used to obtain appropriate insights. 5. Technology framework: An integrated technological framework is required to ensure all potential risks are captured and measured on a timely basis. It would be worthwhile to ensure that automatic information feeds into the ALM systems and he latest software is utilized to enable management perform extensive analysis, planning and measurement of all facets of the ALM function. 6. Information reporting framework: The information reporting framework decides who receives information, how timely, how often and in how much detail and whether the amount and type of information received is appropriate and necessary for the recipients task. 7. Performance reporting framework: The performance of the traders and business units can easily be measured using valid risk measurement measures. The performance measurement considers approaches and ways to adjust performance measurement for the risks taken. The profitability of an institution comes from three sources: Asset, Liabilities and their efficient management. 8. Regulatory compliance framework: The objective of regulatory compliance element is to ensure that there is compliance with the requirements, expectations and guidelines for risk based capital and liquidity ratios.

9. Control framework: The control framework covers the control over all processes and systems. The emphasis should be on setting up a system of checks and balances to ensure the integrity of data, analysis and reporting. This can be ensured through regular internal / external reviews of the function.

REVIEW OF LITERATURE:

Asset Liability Management

1.Jules H. Van Binsbergen (Stanford University - Graduate School of Business ; Northwestern University - Kellogg School
of Management ; National Bureau of Economic Research (NBER))

Michael W. Brandt (Duke University - Fuqua School of Business ; National Bureau of Economic Research (NBER) )
September 2006 Abstract: We study the impact of regulations on the investment decisions of a defined benefits pension plan. We assess the influence of ex ante (preventive) and ex post (punitive) risk constraints on the gains to dynamic, as opposed to myopic, decision making. We find that preventive measures, such as Value-at-Risk constraints, tend to decrease the gains to dynamic investment. In contrast, punitive constraints, such as mandatory additional contributions from the sponsor when the plan becomes underfunded, lead to very large utility gains from solving the dynamic program. We also show that financial reporting rules have real effects on investment behavior. For example, the current requirement to discount liabilities at a rolling average of yields, as opposed to at current yields, induces grossly suboptimal investment decisions.

2.Harry Zheng (Imperial College London - Mathematical Finance) Lyn C. Thomas (University of Southampton - School of Management) David E. Allen (Edith Cowan University - School of Finance and Business Economics)
Abstract: Macaulay duration matched strategy is a key tool in bond portfolio immunization. It is well known that if term structures are not flat or changes are not parallel, then Macaulay duration matched portfolio can not guarantee adequate immunization. In this paper the approximate duration is proposed to measure the bond price sensitivity to changes of interest rates of non-flat term structures. Its performance in immunization is compared with those of Macaulay, partial and key rate durations using the US Treasury STRIPS and Bond data. Approximate duration turns out to be a possible contender in asset liability management: it does not assume any particular structures or patterns of changes of interest rates, it does not need short selling of bonds, and it is easy to set up and rebalance the optimal portfolio with linear programming.

3.Robert Ferstl (Oesterreichische Nationalbank ) Alex Weissensteiner (Free University of Bolzano/Bozen )

Abstract: Stochastic linear programming is a suitable numerical approach for solving practical asset-liability management problems. In this paper, we consider a multi-stage setting under time-varying investment opportunities and propose a decomposition of the benefits in dynamic re-allocation and predictability effects. A first-order unrestricted vector autoregressive process is used to model asset returns and state variables where, in addition to equity returns and dividend-price ratios, Nelson/Siegel parameters are included to account for the evolution of the yield curve. The objective is to minimize the Conditional Value at Risk of shareholder value, i.e., the difference between the mark-to-market value of (financial) assets and the present value of future liabilities.

4.Mihir Dash (Alliance Business School ) Ravi Pathak (affiliation not provided to SSRN )
June 1, 2009 Abstract: The present study analyses asset-liability management in Indian banks using the methodology of Ranjan and Nallari (2004). The study covers all scheduled commercial banks except regional rural banks (RRBs), in the five-year period 2003-08. The banks are grouped on the basis of ownership structure: viz. public sector banks (including SBI & associates), private sector banks, and foreign banks.
5.Jeremy C. Stein (Harvard University - Department of Economics; National Bureau of Economic Research (NBER) )

August 1995 Abstract: This paper develops a model of bank asset and liability management, based on the idea that information problems make it difficult for banks to raise funds with instruments other than insured deposits. The model can be used to address the question of how monetary policy works. One effect it captures is that when the Fed reduces reserves, this tightens banks' financing constraints and thereby leads to a cutback in bank lending -- this is the 'bank lending channel' in action. However, in addition to providing a specific set of microfoundations for the lending channel, the model also yields a novel account of how monetary policy affects bond-market interest rates.

6.Mihir Dash (Alliance Business School

) )

K. A. Venkatesh (Alliance Business School (ABS) Bhargav B. D.

February 1, 2011
Abstract: Asset-Liability Management (ALM) is concerned with strategic management of assets (uses of funds) and liabilities (sources of funds) of banks, against risks caused by changes in the liquidity position of the bank, interest rates, and exchange rates, and against credit risk and contingency risk. An effective ALM technique aims to manage the volume, mix, maturity, rate sensitivity, quality and liquidity of the assets and liabilities as a whole so as to attain a predetermined acceptable risk/reward ratio. The purpose of ALM is to enhance the asset quality, quantify the risks associated with the assets and liabilities and further manage them, in order to stabilize the short-term profits, the long-term earnings and the long-run sustenance of the bank. The Reserve Bank of India (RBI) has implemented the Basel II norms for the regulation of Indian banks, providing a framework for banks to develop ALM policies. The present study analyses asset-liability management in banks operating in India using the asset-liability guidelines provided by the Reserve Bank of India. The primary objective of the study was to compare the maturity gaps in public, private and foreign banks in the Indian banking industry.

7.Suman Chakraborty (The Icfai Business School (IBS) ) Subhalaxmi Mohapatra (The Icfai Business School )
November 11, 2009 Abstract: The banking scenario in India in the 1980s and now, presents a perfect study of contrast. Due to several reforms, banks are now moving away from the traditional lines of service and in the process, are exposed to more risks. One of the ways for managing the risks is Asset Liability Management(ALM). ALM is an attempt to match the assets and liabilities in terms of their maturities and interest rate sensitivities so that the risk arising from such mismatches mainly - interest rate risk and liquidity risk - be contained within the desired limit. As far as ALM in Indian banking system is concerned, it is still in a nascent stage. Against this backdrop, the objective of the paper is to study and analyze the status of ALM approach in the Indian banking system. For this purpose, a sample consisting of nationalized, private, and foreign banks operating in the Indian environment was taken and the multivariate statistical technique, canonical correlation has been done to capture the nature and strength of relationship between the assets and liabilities in these banks. From the analysis, it is derived that a majority of banks have a good ALM framework in place. The study also indicates a strong relationship between fixed assets and net worth for all groups of banks.

RESEARCH METHODOLOGY: TITLE OF THE STUDY: A study on Asset-Liability Management At BHARATH Co operative Bank ltd Statement of the problem: Also study of ALM concepts, the purpose of ALM, RBI guidelines issued with respect to ALM from time to time, identify risks involved in ALM, alternate approaches available for managing/reducing the risk.
Rationally, banks and insurance companies used accrual system of accounting for all their assets and liabilities. They would take on liabilities - such as deposits, life insurance policies or annuities. They would then invest the proceeds from these liabilities in assets such as loans, bonds or real estate. All these assets and liabilities were held at book value. Doing so disguised possible risks arising from how the assets and liabilities were structured. ALM, which was actually pioneered by financial institutions and banks, are now widely being used in industries too. The Society of Actuaries Task Force on ALM Principles, Canada, offers the following definition for ALM: "Asset Liability Management is the on-going process of formulating, implementing, monitoring, and revising strategies related to assets and liabilities in an attempt to achieve financial objectives for a given set of risk tolerances and constraints.

OBJECTIVES OF THE STUDY To gain in depth knowledge of asset liability management in banking industry.

To protect and enhance the net worth of the institution. Formulation of business policies and efficient allocation of Capital. To increase the Net Interest Income (NII) Funding of banks operation through capital planning. Product pricing and introduction of new products.

.SCOPE AND IMPORTANCE OF THE STUDY:The study will help in analyzing the ALM and for a period of three years i.e. from 2008 to 2011 of Bharath co operative bank. Asset liability management clearly explains about how the assets and liabilities are managed. The study helps us in finding out how well the organization is managing them. The study has got importance because t h e a b s o l u t e a c c o u n t i n g d a t a c a n n o t p r o v i d e m e a n i n g f u l a n d i n t e r p r e t a t i o n . Thus, Asset liability management analysis being the powerful analytical tool helps the management to analyze the performance of the firm and to make further projections, and for the smooth functioning of the business firm. LIMITATIONS OF THE STUDY:The study covers a period of 3 years with the available sources i.e. from 2008 to 2011. 1. Due to time constraint depth analysis could not be made. 2. The actual identity of the Banks is kept confidential due to the sensitive nature of the topic. 3. The study is mainly based on the secondary data provided by the bank. As such it is subject to the limitations of availability of secondary data. 4. The solutions are not applicable to every bank. RESEARCHMETODOLOGY: Case study method is adopted DATA COLLECTION METHOD: Sources of data: The data consisted of both primary data and secondary data Primary data: Primary data is first-hand information which is collected a fresh and thus happens to be original in character. This data is collected through Personal discussions with the General Manager, Deputy General Manager,

Assistant General Manager and other officers in charge of recovery department through structured questionnaire were held. Secondary data: Secondary data are those which have already been passed through the statistical process. These data is collected from RBI/IBA bulletins and journals, financial magazines, financial statements/Annual reports and Audited Reports of the Banks, Text books and Websites. Research Instruments:All the details are collected from secondary sources only. Secondary data includes, the annual reports, financial reports of the company etc., discussion with the concerned officials has also helped to verify and evaluate the variations and results either to confirm it.

Industry profile:
CO-OPERATIVE BANK: Co-operation emphasizes the idea of voluntary association of individuals for the achievement of the common goal. It stands for the principle of All for each and each for all. A co-operative banking is an institution founded on co-operative principals carrying on ordinary banking business namely accepting deposits, for the purpose of lending or investment. The first ever co-operative movement was started by Robert Owen in the year 1844, with 28 members called as ROCHDALE Society of Equitable Pioneers. It was a consumers co-operative society. FORMATION OF CO-OPERATIVE SOCIETY: The co-operative movement was first introduced in India by the co-operative society act, 1904 for credit societies alone. However in 1912, the scopes of these societies were extended to other form of societies. In the rural areas, primary co-operatives which deal with the farmers get their main finance from district central co-operative bank which controls and supervise the activities of the primary co-operatives. The district central co-operative bank in turn is under the state co-operative bank, which collects resources from reserve bank. In the urban areas co-operatives are controlled by the state co-operative banks or apex bank. According to Prof.Cavert Co-operation is a form of organization where in the person associates together as human being on a basis of equality for the promotion of economic interests of themselves. According to Dr.T.V.Raju Co-operative society is a voluntary organization of various individual, who belong to economically weaker section of the community, joins together on the basis of equality of distribution of profit for the satisfaction of their economic needs. The rainbow flag has been the co-operative emblem since 1921 and adopted in 1925. Likethe rainbow, this flag is a symbol of hope and peace. Each of the seven colours in the flag has a special meaning for co-operators. Red stands for courage. Orange offers the vision of possibilities.

 Yellow represents the challenge that greed has kindled. Green indicates a challenge to strive for membership growth. Sky Blue suggests far horizons, the need to provide education and help the less fortunate, and unity with all peoples of the world. Dark Blue represents the less fortunate who can learn to help themselves through co-operation. Violet represents warmth, beauty, and friendship.

CHARACTERISTICS OF CO-OPERATIVE BANK: Some distinguishing characteristics of co-operative banks are: They are organized and managed on the principals of co-operation, self-help and mutual help. They function with the help of One member one vote. Co-operative banks perform all the main banking functions of deposit mobilization, supply of credit and provisions of remittance facilities. Co-operative banks undertake banking business. Some of the well-developed co-operative banks are scheduled banks. Co-operative banks accept all types of deposit including current, saving, fixed or term deposits from individuals both members and non-members. Co-operative banks are financial intermediaries. TYPES OF CO-OPERATIVES: Though the co-operatives can be formed practically in every walk of life, it is possible to group them as follows: Credit Co-Operative Society.

 Agricultural Credit Society. Non-Agricultural Credit Society. Employees Credit Societies. Workers Credit Societies. Industrial Co-Operatives. Housing Co-Operatives Consumer Co-Operatives. 1.8 PROBLEMS OF CO-OPERATIVE BANK: The vital link in the co-operative credit system namely, the PCAs themselves are weak. They suffer from weak quality of loans assets and form unsatisfactory recovery of loans. They suffer to some extent officialization and politicization. They suffer from infrastructural weakness and structural flaws. They have limited scope to invest their surplus funds freely. There is lack of proper co-ordination between co-operative banks and other institutional financing agencies like commercial bank and Regional Rural Banks. There is lack of proper co-ordination between co-operative banks and other institutional financing agencies like commercial bank and Regional Rural Banks.

Company profile:
The Bharath Co-operative Bank Ltd., having its head office at No.30, 15th cross, Jayanagar 3rd Block, Bangalore-560011 was established on 27/03/1975. It is registered under Karnataka Co-operative Societies Act 1959 and is governed by guidelines of RBI issued from time to time. It is into its 37th year into the banking operations. Its Banking jurisdiction comprises of Bangalore, Bangalore Rural, Ramanagar and Hassan. Branch Network: The Bank currently has 7 branches: 1. Jayanagar 3rdBlock. 2. Mathikere. 3. Vijayanagar. 4. Indiranagar. 5. Kengeri New Town. 6. Yelahanka New Town. 7. Jayanagar 4th Block. Mission The bank was established keeping in mind the co-operative principles, thus making the public the share holders of the bank. As on the date 31/03/2011 the total numbers of shares holders (members) stands at 40315. It is one of the leading co-operative bank in Bangalore. It is committed in providing quality service to its share holders and customers. Functioning of the bank (Management): The day to day functioning of the bank is under board of management which comprises 15 directors, of which 2 are professionally qualified directors, 1 reserved for SC/ST and 1 for woman. The board of directors meets once in a month to take stock of bank position by going thru various financial statements and Management Information System (MIS). The board recommends for any new policy keeping in view the banking industry trend prevailing in the country and in particularly co-operative industry. HR: The Bank has 117+ strong human resources who are well qualified and experienced in banking sector. The bank has adopted the latest in information technology, thereby the bank and its branches are fully computerized offering there customers a good service at the counters.

Nature of business carried: The bank was established to carry out banking business keeping in mind the co-operative principles. The main objective of the bank is accepting of deposits and lending of money. Withdrawal of deposited money thru cheques, drafts or otherwise Board of directors

Organization structure:

Sub Committees

Secretary

Branch managers

Products and Service: The bank offers its customer a good and quick service under the following products: Savings Account Current Account Term Deposits Personal Loan Mortgage loan Vehicle loan Jewel Loan Overdraft Lockers

COMPETITORS: 1.ALL NATIONALISED BANKS 2.REGIONAL RURAL BANKS 3.OTHER CO OPERATIVE BANKS

Future plans: The Banks Are Intended To Provide Certain Services To Its Customers Namely: To inter-connect to all the branches. To install ATM in all the bank premises. To provide better customer service. Continuous up-gradation of skills by imparting training to staff. To increase the facility offending loans to the members of the bank. To recover the loans and advances those are issued. Presently bank as total advances of 92.00 corers as on 31/01/2012. Total deposits of 166.00 corers. The bank plans to widens its branch network by opening few more branches in the core of the city . The bank as drawn up plan to achieve 15% growth in advances in coming financial years.

DATA ANALYSIS: TABLE-1 Table showing the Share Capital of Bharath co operative bank ltd. (Rs. In crores) YEAR 1.Share Capital a. Authorized Capital b. Issued & Paid up Capital regular membersindividual regular membersinstitutions associate members total 2007-08
50000000.00

2008-09
60000000.00

2009-10 60000000.00

2010-11 60000000.00

37205425.00 174250.00

38797000.00 174000.00

40435750.00 174000.00

43649775.00 174000.00

11611300.00

11155575.00

10928900.00

10295050.00

48990975.00

50126575.00

51538650.00

54118825.00

GRAPH-1 Graph showing the share capital of Bharath co operative bank ltd.

70000000 60000000 50000000 40000000 30000000 20000000 10000000 0

Amount in crores

2007-08 2008-09 2009-10 2010-11

Particulars

TABLE-2

Table showing the Reserves and Other Reserves of Bharath co operative bank ltd. (Rs. In Lakhs) YEAR Reserve fund Other Reserves Total 2007-08 29944898.35 176040134.7 205985033.1 2008-09 35633895.01 2009-10 39683496.68 2010-11 43681972.71

182926162.74 188204369.34 189480812.34 218560057.75 227887866.02 233162785.05

GRAPH-2 Graph showing the reserves and Other Reserves of Bharath co operative bank ltd.

Reserve fund and others reserves

250000000 Amount in crores 200000000 150000000 Reserve fund 100000000 50000000 0 2007-08 2008-09 2009-10 2010-11 Years Other Reserves Total

TABLE-3 Table showing Deposits and other accounts of bharat co operative bank ltd. (Rs. In Crores) YEAR Fixed Deposits Saving Bank Deposits Current Deposits BNN Deposit Matured Deposits Credit Balance in Overdraft TOTAL 2007-08 922968324.7 437544435.9 14039996.49 7327812.00 12927560.00 0.00 2008-09 2009-10 2010-11

1043529430.00 1073609128.00 881878463.00 393691634.29 15250870.25 8293630.00 9993965.00 51692.39 481575179.93 15175195.82 9529410.00 8003011.00 0.00 574307180.94 26622785.01 12218820.00 6844928.00 0.00

1394808129.19 1470811221.93 1587891924.75 1501872176.95

GRAPH-3 Graph showing Deposits and other accounts of bharat co operative bank ltd.

TABLE-4 The Table Showing Branch Adjustments of Assets and Liabilities of bharat co operative bank ltd:

YEAR Jayanagar mathikere

2007-08

2008-09

2009-10

2010-11

282221257.09 330379222.22 357688618.41 322004162.07 151722981.75 155659391.04 169470342.60 129314823.57 49623951.10 136298037.32 103094389.60 52009762.37 3347711.20 39305074.68 50130373.20

B.E.S Extension counter 44996175.84 vijayanagara Indiranagar kengeri Yelahanka Total

102624573.48 120191793.97 60422954.22 43200114.03 60451925.41 47805938.66 73022966.26 48077315.69 35753764.82 40681676.00 29899394.92 55901461.17 63232297.95

780367114.84 872913106.59 729335696.51

Graph-4 Graph Showing Branch Adjustments of Assets and Liabilities of bharat co operative bank ltd:

Table-5 Table showing Interest Payable of bharat co operative bank ltd (Rs. In crores) YEAR Interest Payable Total 2007-08 17454104.13 17454104.13 2008-09 17400150.13 17400150.13 2009-10 14674117.13 14674117.13 2010-11 14669158.13 14669158.13

GRAPH-5 Graph showing Interest Payable of bharat co operative bank ltd

TABLE-6 Table showing Other Liabilities of bharat co operative bank ltd (Rs. In Crores) YEAR Bills Payable Sundry Liabilities 31-03-2008 8506079.08 0.00 31-03-2009 3626101 489194.00 31-03-2010 4560586.50 1720597.00 31-03-2011 6728172.50 1236440.00 7636240.00

Suspense Liabilities 5458944.10 Total

5235145.60 6706025.00

13965023.18 9350440.60 12987208.50 15600852.50

GRAPH-6 GRAPH showing Other Liabilities of bharat co operative bank ltd

TABLE-7

Table showing Interest on Loan Recievable of bharat co operative bank ltd (Rs. In Crores) YEAR Loan Interest Recievable (contra) on Assets Loan Interest Recievable (contra) on Liabilities 1887734.00 1425385.00 1346402.00 1346402.00 31-03-2008 1887734.00 31-03-2009 1425385.00 31-03-2010 1346402.00 31-03-2011 1346402.00

GRAPH-7 Graph showing Interest on Loan Recievable of bharat co operative bank ltd

TABLE-8 Table showing Overdue Interest Recievable on NPA A/c of bharat co operative bank ltd (Rs. In Crores) YEAR Liabilities 31-03-2008 26017780.00 31-03-2009 23014321.00 31-03-2010 20482377.20 31-03-2011 19457671.00

Assets

26017780.00

23014321.00

20482377.20

19457671.00

GRAPH-8 Graph showing Overdue Interest Recievable on NPA A/c of bharat co operative bank ltd

TABLE-9 Table showing Profit and Loss of bharat co operative bank ltd

(Rs. In Lakhs) YEAR Profits Percentage of Profit Total : 61889880.8 31-03-2008 17765231.66 28.70% 31-03-2009 15655640.00 25.30% 31-03-2010 16298263.11 26.33% 31-03-2011 12170746.03 19.66%

GRAPH-9 Graph showing Profit and Loss of bharat co operative bank ltd

TABLE-10 The table showing Cash maintained in different Branches of bharatco operative bank ltd YEAR Jayanagar mathikere vijayanagara Indiranagar kengeri Yelahanka 31-03-08 6724834.00 2099899.00 242164.00 783942.00 423247.00 1375633.00 31-03-09 7873003.00 2079202.00 380035.00 1111111.00 569213.00 642604.00 727084.00 31-03-10 9355301.00 1959187.00 1206183.00 440375.00 1407725.00 699404.00 510904.00 31-03-11 7674235.00 1571126.00 1727217.00 375350.00 1303449.00 517016.00 744348.00

BES College Branch 537189.00 TOTAL

12186908.00 13382252.00 15579079.00 13912786.00

GRAPH -10 Graph showing Cash maintained in different Branches of bharatco operative bank ltd

TABLE-11 The table showing Balances With other Banks of Bharath Co-operaive Bank: YEAR 31-03-08 31-03-09 24491686.69 173892.04 3664940.75 574627.26 200116.95 1516840.50 1183667.00 625323.50 706418.00 3049009.00 2000.00 38793204.14 31-03-10 21086102.28 487391.83 12254078.20 2335244.26 426908.95 616840.50 753446.00 125173.50 605921.00 3048775.00 2000.00 41741881.52 31-03-11 21197099.31 1271573.83 9129316.20 751606.26 82658.95 211152.50 903396.00 25098.50 925921.00 4566750.00 2000.00 39066572.55

Reserve Bank of 6314508.02 India State Bank of India 1099434.46 (JNR Br.) KSC Apex Bank 16104410.2 Canara Bank VijayaNagar Br. State Bank of Mysore State Bank of India MK Br. Canara Bank Indiranagar Br. Uco Bank Kengeri Br. Canara Bank Yelahanka Br. Syndicate Bank Yediyur Br. HDFC Bank Total 1274259.26 56506.95 2017040.50 583667.00 25448.50 1356699.00 4049751.00 0.00 32881724.89

GRAPH-11 Graph showing Balances With other Banks of Bharath Co-operaive Bank:

TABLE-12 The table showing Investments of Bharath Co-operative Bank:

YEAR

31-03-08

31-03-09

31-03-10

31-03-11

Shares with KSC Apex Bank 100000.0Shares 100000.0 Shares 100000.0 Shares 100000.0 Shares Other Deposits Govt. Securities TOTAL 128450773.4 782866516 911417289.4 197701182.38 786134052.00 983835234.38 316701182.38 766271688.00 1082972870.38 245250880.38 709509964.00 954760844.38

GRAPH-12 Graph showing Investments of Bharath Co-operative Bank:

TABLE-13 The table showing Loans and Advances of bharat co-operative bank ltd

YEAR Short Term Loans Medium Term Loans Long Term Loans TOTAL

31-03-08 30777121.87 101126382.1 560809864.5 692713368.48

31-03-09 28329942.15 37561853.11 603884532.50 723576327.76

31-03-10 20785195.48 79322334.00 644276435.00 744383964.48

31-03-11 25615720.31 74117580.00 700659513.00 800392813.31

GRAPH-13 Graph showing Loans and Advances of bharat co-operative bank ltd

TABLE-14 Table Showing Fixed Assets after Depreciation of Bharath Co-operative Bank: YEAR Premises Furnitures and Fixtures Total 31.03.2008 8937995.00 6090355.00 15028350.00 31.03.2009 13049714.00 4909699.30 17959413.30 31.03.10 12643455.00 5419704.55 18063159.55 31.03.11 16267629.00 6640921.00 22908550.00

GRAPH-14 Graph Showing Fixed Assets after Depreciation of Bharath Co-operative Bank:

TABLE-15 Table showing the Other Asset of bharat co operative bank ltd (Rs in Crores) YEAR Telephone Deposits Rent deposits- Branches Sundry Person Payments Kar. Housing Board Site Advance Stationery Stock Cheque Discounted Income Tax 2007-2008 32076.50 502450.00 0.00 2008-09 30704.50 502450.00 0.00 2009-10 29116.50 502450.00 201311.00 0.00 668428.00 0.00 0.00 2010-11 28656.50 390000.00 50.00 0.00 578893.00 0.00 0.00

4497800.00 0.00 430855.00 60000.00 51000.00 640686.00 0.00 0.00

Accured Interest on govt securities 0.00 Total

1512000.00 1512333.00 1512000.00

5574181.50 2685840.50 2913305.50 2509599.00

GRAPH-15 Graph showing the Other Asset of bharat co operative bank ltd

TABLE- 16 Table showing Other Charges on Loan of bharat co operative bank ltd

YEAR Other Charges on Loan

2007-2008 2216064.00

2008-09 1671814.00

2009-10 1496252.00

2010-11 934505.00

GRAPH-16 Graph showing the operating results of bharatco operative bank ltd

Findings: Till the end of 2009-10, there was excess liquidity in the short term bucket, which has been
deployed during 2010-11. There is no increase or decrease in the share capital of BCB from past four years.

Loan Pending Conversion to Share Capital is remaining un-converted for past three years.

 There is no addition to the Reserves for the past 3 years and has BCB been able to maintain only the statutory limit. steep decrease in long term borrowing during 2007-08, it has almost remained the same till 201011This is a welcome feature provided that the long term assets and long term liabilities are matching.

The decrease in long-term borrowings has also resulted in decrease in interest expenditure.
the short-term liability was not covered by the short-term assets. However, during 2010-11 the bank had undeployedshort-term assets which was 1.85 times the short-term liabilities. Cash and Bank balances are on the higher side since two years. The investments drastically came down after 31-03-08 which has shown a marginal increase during 2010-11 There is a decrease in loans and advances by 27.37% as of 31-03-08 level . The interest income is on the downward move over the past years which is not desirable because it has a direct reducing effect on the profit. other income for 2010-11 has registered a growth of 148% over that of previous year. the borrowings have come down. Consequently, the interest expenditure has also come down from 23889.30 lakhs as on 31-03-08to 16790.62 lakhs as on 31-03-11 The administrative expenses is on the downward move which is a good sign especially when the bank has not shown any significant increase in its income. The overdue loans are on the decrease since past 3 year. NPAs have come down from 55.72% as on 2009-10 to 46.22% as on 2010-11. Though the income has come down since 2009, the loss of Rs.101.04 Lakhs as at 31-03-10 has been turned around to a profit of Rs 565.17lakhs as at 31-03-11. This has been achieved by controlling the administrative and staff expenditure.

Suggestion:
The bank should curtail long term borrowings and simultaneously improve its lendings under the maturity bucket of 3 to 5 years. Bank must be initiated to convert loan pending conversation to capital so that the capital base will improve. Bank as no return on cash and bank balance, so it should minimize this head so as to improve their profitability.

 The bank should maintain other income growth performance to maintain the profitability especially because there is no improvement in its lending business. Over-dues are also on the high side, so the bank should minimize in the coming year. The bank should initiate recovery drive to bring down the NPA level to Industry acceptable standards.

Conclusion ALM was developed in the 1980s to help financial institutions control a sharp increase in interest rate risk. Subsequently, it evolved into a set of techniques that enable financial institutions to manage a much broader set of risks. ALM is likely to play a growing role in financial institutions going forward.

 In the future, the management of interest rate risk will be more important to the performance of financial institutions. The removal of regulatory barriers, combined with a trend toward consolidation, has created larger and more complex institutions in need of more sophisticated risk management tools. Regulators and rating agencies are focusing increasingly on the risk management practices of the institutions they monitor. Finally, impressive technological progress in the capture, transfer, and processing of data has made sophisticated risk management techniques available to financial institutions. The more bank managers will take advantage of these new developments to improve the transparency and flexibility of their business. In large part because they have adopted more systematic ALM, banks in developed markets offer more diverse and complex products than their emerging-market counterparts. An extension of that logic suggests that, even within developed markets, ALM could be an important determinant of bank product strategy

BIBLIOGRAPHY 1. RBI Guidelines on Asset Liability Management Practices in banks, http://www.rbi.org 2. Bharath co operative bank Annual reports from 2003-2006 3. T. Ravi Kumar (2000 edition) Asset-Liability Management 4. MacMillan (2005 edition) Risk Management

5. Prof. Sriram K Asset-Liability Management 6. B.S.Raman (2000 edition) Financial Management 7.Appaniah and Reddy (2005 edition) Financial Management