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L I A B I L I T Y
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- C E M E N T
$$l1 ll8lll1f
N86lNl81
ComponenLs of a
8ank 8alance sheeL
Liabilities Assets
1. Capital
2. Reserve & Surplus
3. Deposits
4. Borrowings
5. Other Liabilities
1. Cash & Balances with
RBI
2. Bal. With Banks &
Money at Call and
Short Notices
3. Investments
4. Advances
5. Fixed Assets
6. Other Assets
Contingent Liabilities
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L I A B I L I T Y
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- C E M E N T
ComponenLs of LlablllLles
1 Cap|ta|
CaplLal represenLs owner's
conLrlbuLlon/sLake ln Lhe bank
lL serves as a cushlon for deposlLors and
credlLors
lL ls consldered Lo be a long Lerm sources
for Lhe bank
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L I A B I L I T Y
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- C E M E N T
ComponenLs of LlablllLles
2 8eserves Surplus
Components under th|s head |nc|udes
. Statutory Reserves
. Capital Reserves
. nvestment Fluctuation Reserve
V. Revenue and Other Reserves
V. Balance in Profit and Loss Account
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L I A B I L I T Y
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- C E M E N T
ComponenLs of LlablllLles
3 epos|ts
1hls ls Lhe maln source of bank's funds 1he
deposlLs are classlfled as deposlLs payable on
'demand' and 'Llme' 1hey are reflecLed ln
balance sheeL as under
. Demand Deposits
. Savings Bank Deposits
. Term Deposits
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L I A B I L I T Y
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- C E M E N T
ComponenLs of LlablllLles
8orrow|ngs
(8orrow|ngs |nc|ude kef|nance ]
8orrow|ngs from k8I Interbank other
|nst|tut|ons)
I. Borrowings in India
i) Reserve Bank of ndia
ii) Other Banks
iii) Other nstitutions & Agencies
II. Borrowings outside India
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L I A B I L I T Y
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- C E M E N T
ComponenLs of LlablllLles
Cther L|ab|||t|es rov|s|ons
lL ls grouped as under
. Bills Payable
. nter Office Adjustments (Net)
. nterest Accrued
V. Unsecured Redeemable Bonds
(Subordinated Debt for Tier- Capital)
V. Others(including provisions)
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L I A B I L I T Y
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- C E M E N T
ComponenLs of AsseLs
1 Cash 8ank 8a|ances w|th k8I
. Cash in hand
(including foreign currency notes)
. Balances with Reserve Bank of ndia
n Current Accounts
n Other Accounts
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L I A B I L I T Y
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- C E M E N T
ComponenLs of AsseLs
. BALANCES WITH BANKS AND MONEY AT
CALL & SHORT NOTICE
I. In India
i) BaIances with Banks
a) In Current Accounts
b) In Other Deposit Accounts
ii) Money at CaII and Short Notice
a) With Banks
b) With Other Institutions
II. Outside India
a) In Current Accounts
b) In Other Deposit Accounts
c) Money at CaII & Short Notice
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L I A B I L I T Y
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ComponenLs of AsseLs
Investments
A ma[or asseL lLem ln Lhe bank's balance sheeL
8eflecLed under 6 buckeLs as under
. nvestments in ndia in
i) Government Securities
ii) Other approved Securities
iii) Shares
iv) Debentures and Bonds
v) Subsidiaries and Sponsored Institutions
vi) Others (UTI Shares , CommerciaI Papers, COD &
MutuaI Fund Units etc.)
II. Investments outside India in **
Subsidiaries and/or Associates abroad
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L I A B I L I T Y
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- C E M E N T
ComponenLs of AsseLs
Advances
1he mosL lmporLanL asseLs for a bank
A. i) BiIIs Purchased and Discounted
ii) Cash Credits, Overdrafts & Loans
repayabIe on demand
iii) Term Loans
B. ParticuIars of Advances :
i) Secured by tangibIe assets
(incIuding advances against Book Debts)
ii) Covered by Bank/ Government Guarantees
iii) Unsecured
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L I A B I L I T Y
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- C E M E N T
ComponenLs of AsseLs
3 llxed AsseL
I. Premises
II. Other Fixed Assets (IncIuding furniture and fixtures)
6 CLher AsseLs
I. Interest accrued
II. Tax paid in advance/tax deducted at source
(Net of Provisions)
III. Stationery and Stamps
IV. Non-banking assets acquired in satisfaction of cIaims
V. Deferred Tax Asset (Net)
VI. Others
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L I A B I L I T Y
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- C E M E N T
ConLlngenL LlablllLy
8ank's obllgaLlons under LCs CuaranLees
AccepLances on behalf of consLlLuenLs and
8llls accepLed by Lhe bank are reflecLed
under Lhls heads
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L I A B I L I T Y
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- C E M E N T
8anks roflL Loss AccounL
A bank's prof|t Loss Account has the
fo||ow|ng components
l lncome 1hls lncludes lnLeresL lncome
and CLher lncome
ll Lxpenses 1hls lncludes lnLeresL
Lxpended CperaLlng Lxpenses and
rovlslons conLlngencles
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L I A B I L I T Y
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- C E M E N T
ComponenLs of lncome
. INTEREST EARNED
I. Interest/Discount on Advances / BiIIs
II. Income on Investments
III. Interest on baIances with Reserve Bank
of India and other inter-bank funds
IV. Others
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L I A B I L I T Y
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ComponenLs of lncome
. OTHER INCOME
I. Commission, Exchange and Brokerage
II. Profit on saIe of Investments (Net)
III. Profit/(Loss) on RevaIuation of Investments
IV. Profit on saIe of Iand, buiIdings and other
assets (Net)
V. Profit on exchange transactions (Net)
VI. Income earned by way of dividends etc. from
subsidiaries and Associates abroad/in India
VII. MisceIIaneous Income
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L I A B I L I T Y
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- C E M E N T
Components of Lxpenses
. INTEREST EXPENDED
I. Interest on Deposits
II. Interest on Reserve Bank of India / Inter-Bank
borrowings
III. Others
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L I A B I L I T Y
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Components of Lxpenses
. OPERATING EXPENSES
I. Payments to and Provisions for empIoyees
II. Rent, Taxes and Lighting
III. Printing and Stationery
IV. Advertisement and PubIicity
V. Depreciation on Bank's property
VI. Directors' Fees, AIIowances and Expenses
VII. Auditors' Fees and Expenses
(incIuding Branch Auditors)
VIII. Law Charges
IX. Postages, TeIegrams, TeIephones etc.
X. Repairs and Maintenance
XI. Insurance
XII. Other Expenditure
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- C E M E N T
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L I A B I L I T Y
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- C E M E N T
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L I A B I L I T Y
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- C E M E N T
lt is a dynamic rucess uf Planning,
Brganising and Cuntrulling 4ssets and
Liabilities- their vulumes, mixes,
maturities, yields and custs in urder
tu maintain liquidity and Nll.
880l ll80llll N880M0l I l Nl
efinitiun:
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880l ll80llll N880M0l I l Nl
ignificance:
vulume
Pruduct lnnuvatiun and Cumlexities
Regulatury Lnvirunment
Hanagement Recugnitiun
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L I A B I L I T Y
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- C E M E N T
880l ll80llll N880M0l I l Nl
Puruse and Bbjective:
4n effective 4LH technique aims tuwards
the management uf-
vulume
Hix
Haturity
Rate ensitivity
quality
Liquidity
uf 4ssets
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L I A B I L I T Y
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- C E M E N T
880l ll80llll N880M0l I l Nl
Puruse and Bbjective:
lt is aimed tu stabilise-
hurt-1erm Prufits
Lung 1erm Larnings
Lung 1erm ubstance
uf the banks
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L I A B I L I T Y
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- C E M E N T
880l ll80llll N880M0l I l Nl
Puruse and Bbjective:
1he arameters fur stabilisng the 4LH
system are-
Net lnterest lncume (Nll)
Net lnterest Hargin (NlH)
Lcunumic Lquity Ratiu
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L I A B I L I T Y
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- C E M E N T
880l ll80llll N880M0l I l Nl
Precunditiuns fur the uccess in Banks:
taff awareness abuut banking
ueratiuns, ecunumic furecasts, credits
& investments.
Linking 4LH tu future Risk Hanagement
trategies.
uurtive Hanagement
edicated 1eams
Lfficient Hl
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L I A B I L I T Y
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- C E M E N T
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L I A B I L I T Y
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- C E M E N T
1BRLL PlLL4R 1R41LBY
#8l 60l0lll8l$
AsseL LlablllLy ManagemenL
ALM
lnformaLlon
sysLems
ALM
organlzaLlon
ALM process
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L I A B I L I T Y
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- C E M E N T
W4nalyze asset-liability behaviuur uf tu branches and then make
reasunable assumtiuns fur uther branches
Wln resect uf FBRLX, investment urtfuliu and muney market
ueratiuns its easy tu access quality infurmatiun
lNl8f0#N1l08 $f$1lN$
lnfurmatiun is the key tu 4LH rucess.
1he rublem uf lnfurmatiun systems needs tu be
addressed by a three layered aruach.
J
WRefinement uf data uver time as bank
management gains exerience within the frame
wurk.
Wread uf cumuterizatiun will alsu hel banks
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L I A B I L I T Y
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- C E M E N T
W1he 4sset-Liability Cummittee (4LCB) cunsisting uf the bank's seniur
management including CLB shuuld be resunsible fur the adherence
W1he 4LH desk cunsisting uf uerating staff shuuld be resunsible fur
analyzing, munituring and reurting risk rufiles tu 4LCB.
lN 0#68ll1l08
W1he buard shuuld have uverall resunsibility
fur management uf risks and shuuld decide the
risk management ulicy and set limits fur
liquidity , interest rate, fureign exchange and
equity rice risks.
W1he staff shuuld alsu reare furecasts shuwing
the effects uf variuus ussible changes in market
cunditiuns related tu balance sheet and
recummend the actiun needed tu adhere tu bank's
internal limits.
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L I A B I L I T Y
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- C E M E N T
CBHPBl1lBN BF 4LCB
W1he chiefs uf lnvestment, Credit, Funds management ,
lnternatiunal banking and Lcunumic research can be
members uf the cummittee.
WBead uf Hl shuuld alsu be a art uf 4LCB
W1here shuuld be a suervisury cummittee and an
advisury cummittee.
4LCB is a decisiun making unit resunsible fur balance
sheet lanning frum risk-return ersective including
the strategic management uf interest rate and liquidity
risks.
WLach bank will have tu decide un the rule uf its 4LCB , its resunsibility as
alsu the decisiuns tu be taken by it.
W1he size uf 4LCB wuuld deend un the size uf each institutiun , business mix
and urganizatiunal cumlexity.
W1u ensure cummitment uf tu management , the CLB/CH ur L shuuld head
the cummittee.
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L I A B I L I T Y
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- C E M E N T
1he scue uf 4LH is
Liquidity risk management
Hanagement uf interest rate risk
Hanaging currency risk
Funding and caital lanning
Prufit lanning and gruwth rujectiun
lNF#00l$$
lt is a fuur-fuld rucess
Risk Parameters
Risk ldentificatiun
Risk Heasurement
Risk Hanagement
Risk ulicies and tulerance levels
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L I A B I L I T Y
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- C E M E N T
A
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L I A B I L I T Y
A
N
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- C E M E N T
Liquidity Risk arises frum funding uf lung term
assets by shurt term liabilities, thereby making
the liabilities subject tu rulluver ur refinancing
risk.
lffl01$ 0f ll#0l0l1f 0#0808
W Risk tu bank's earnings
W Reutatiunal risk
W Cuntagiun effect
W Liquidity crisis can lead tu runs un
institutiuns
W Bank / Fl failures affect ecunumy
81 l$ ll#0l0l1f #l$kF
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L I A B I L I T Y
A
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- C E M E N T
W Liquidity Lxusure can stem frum
buth internally and externally
W Lxternal liquidity risks can be
geugrahic, systemic ur instrument
secific
W lnternal liquidity risks relates largely
tu ercetiun uf an institutiun in its
variuus markets : lucal, regiunal,
natiunal ur internatiunal.
1fFl$ 0f ll#0l0l1f #l$k
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L I A B I L I T Y
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- C E M E N T
4ll 4ssets & Liabilities tu be reurted
as er their maturity rufile intu 8
maturity Buckets:
W - tu -0 days
W -1 tu 28 days
W 29 days and u tu 3 munths
W Bver 3 munths and u tu 6 munths
W Bver 6 munths and u tu - year
W Bver - year and u tu 3 years
W Bver 3 years and u tu 1 years
W Bver 1 years
$11lNl81 0f $1#0010#l ll#0l0l1f
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L I A B I L I T Y
A
N
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- C E M E N T
W Places all cash influws and uutfluws
in the maturity ladder as er residual
maturity
W Haturing Liability: cash uutfluw
W Haturing 4ssets : Cash lnfluw
W Classified in tu 8 time buckets
W Hismatches in the first twu buckets
W Hismatches in the first twu buckets
nut tu exceed 20% uf uutfluws
W huws the structure as uf a
articular date
W Banks can fix higher tulerance level
fur uther maturity buckets.
$11lNl81 0f $1#0010#l ll#0l0l1f
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L I A B I L I T Y
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N
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- C E M E N T
W Funding Risk -
Need tu relace net uutfluws due tu
unanticiated withdrawals/ nun-renewal
W 1ime Risk
Need tu cumensate fur nun-receit uf
exected influws uf funds
W Call Risk
Crystallizatiun uf cuntingent liability
018l#$ 01l60#ll$ 0f ll#0l0l1f #l$k
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L I A B I L I T Y
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- C E M E N T
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L I A B I L I T Y
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- C E M E N T
WBank's liquidity management is the
rucess uf generating funds tu meet
cuntractual ur relatiunshi
ubligatiuns at reasunable rices at
all times.
ll#0l0l1f N86lNl81
WNew luan demands, existing
cummitments, and deusit
withdrawals are the basic
cuntractual ur relatiunshi
ubligatiuns that a bank must
meet.
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L I A B I L I T Y
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- C E M E N T
4nalysis uf fulluwing facturs thruw
light un a bank's adequacy uf liquidity
usitiun:
W Bisturical Funding requirement
W Current liquidity usitiun
W 4nticiated future funding needs
W uurces uf funds
W Btiuns fur reducing funding needs
W Present and anticiated asset quality
W Present and future earning caacity
W Present and lanned caital usitiun
0l#00f 0f ll#0l0l1f F0$l1l08 f0#
88k
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L I A B I L I T Y
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N
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- C E M E N T
1u satisfy funding needs, a bank must
erfurm une ur a cumbinatiun uf the
fulluwing:
W isuse uff liquid assets
W lncrease shurt term burruwings
W ecrease hulding uf less liquid
assets
W lncrease liability uf a term nature
W lncrease Caital funds
f080l86 l80l$
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L I A B I L I T Y
A
N
A
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- C E M E N T
Hismatches can be usitive ur
negative
00#l$$l86 18l Nl$N108l$
CSl1lvL MlSMA1CP
- MAML
- Lxcess llquldlLy can
be deployed ln
money markeL
lnsLrumenLs
creaLlng new asseLs
and swaps eLc
nLCA1lvL MlSMA1CP
- MLMA
- lL can be flnanced
from markeL
borrowlngs bllls
redlscounLlng
deploymenL of
forelgn currency
converLed lnLo
rupee
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L I A B I L I T Y
A
N
A
M
- C E M E N T
lt arises un accuunt uf hulding rate sensitive
assets and liabilities with different rincial
amuunts, maturity/rericing rates.
Lven thuugh maturity dates are same, if there is a
mismatch between amuunt uf assets and liabilities
it causes interest rate risk and affects Nll.
6F 0# Nl$N108 #l$k
A IN1LkLS1 kA1L
CnANL
IMAC1 CN NII
PBl1lvL lNCRL4L PBl1lvL
PBl1lvL LCRL4L NLB41lvL
NLB41lvL lNCRL4L NLB41lvL
NLB41lvL LCRL4L PBl1lvL
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L I A B I L I T Y
A
N
A
M
- C E M E N T
A
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L I A B I L I T Y
A
N
A
M
- C E M E N T
Benerated by gruuing R4,RL & BFF-Balance
sheet items in tu variuus (8)time buckets.
Fg
Fdg
fgdfg
fg
Fgdfgdf
fg
fgdfg
fgdfg
fg
fg
fg
fg
fg
fgdf
fg
fg
fg
$11lNl81 0f l81l#l$1 #1l $l8$l1ll1f
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L I A B I L I T Y
A
N
A
M
- C E M E N T
A
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S
E
T
L I A B I L I T Y
A
N
A
M
- C E M E N T
A
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L I A B I L I T Y
A
N
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M
- C E M E N T
l81l#l$1 #1l #l$k N86lNl81
lnterest rate risk refers tu vulatility in Net lnterest
lncume (Nll) ur variatiuns in Net lnterest
Hargin(NlH). lnterest Rate risk is the exusure uf a
bank's financial cunditiuns tu adverse muvements
uf interest rates.
4n effective risk management rucess that
maintains interest rate risk within rudent levels is
essential tu safety and suundness uf the bank.
1he hased deregulatiun uf interest rates and the ueratiunal flexibility
given tu banks in ricing must uf the assets and liabilities have exused
the banking system tu lnterest Rate Risk.
Changes in interest rates alsu affect the underlying value uf the bank's
assets, liabilities and uff-balance-sheet item.
A
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L I A B I L I T Y
A
N
A
M
- C E M E N T
Ba Risk
Basis Risk
Net lnterest Pusitiun Risk
Lmbedded Btiun Risk
Yield Curve Risk
Price Risk
Reinvestment Risk
$00#0l$ 0f l81l#l$1 #1l #l$k
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L I A B I L I T Y
A
N
A
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- C E M E N T
ln the cuntext uf uur Hl, sluw ace uf
cumuterisatiun in banks and the absence uf
tutal deregulatiun, the traditiunal Ba
analysis is cunsidered as a suitable methud
tu measure the lnterest Rate Risk.
Nl$0#lNl81 0f l81l#l$1 #1l #l$k
lt is the intentiun uf RBl tu muve uver tu
mudern techniques uf lnterest Rate Risk
measurement like uratiun Ba 4nalysis &
imulatiun at a later date when banks
acquire sufficient exertise and
suhisticatiun in Hl.
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L I A B I L I T Y
A
N
A
M
- C E M E N T
1he Ba ur Hismatch risk can be measured by
calculating Bas uver different time intervals as
at a given date. Ba analysis measures
mismatches between rate sensitive liabilities and
rate sensitive assets.
6F 8lf$l$
iii) RBl changes the interest rates in cases where
interest rates are administered , and
iv) it is cuntractually re-ayable ur withdrawable
befure the stated maturities.
4n asset ur liability is nurmally classified as rate sensitive if:
i) within the time interval under cunsideratiun, there is a cash fluw,
ii) the interest rate resets cuntractually during the interval,
A
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L I A B I L I T Y
A
N
A
M
- C E M E N T
Cunversely, if a negative ga uccurs (R4RL) in given time
band, the bank wuuld be benefitted by falling interest rates.
6F 8lf$l$
lf a usitive ga (R4>RL) uccurs in a given
time band, the bank wuuld be benefitted by
rising interest rates, causing an increase in
Nll.
Lach bank shuuld set rudential limits un individual Bas with the
aruval uf the Buard/Hanagement Cummittee.
1he rudential limits shuuld have a bearing un
the tutal assets, earning assets ur equity.
A
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L I A B I L I T Y
A
N
A
M
- C E M E N T
uratiun 4nalysis: uratiun is a measure uf
the ercentage change in the ecunumic value
uf a usitiun that uccurs given a small change
in level uf interest rate.
00#1l08 8lf$l$
WFirst the duratiun uf the rate sensitive assets & liabilities
falling in each time band is tu be cumuted
W4 small change in the level uf interest like increase in deusit
rates and luan rates may result in reclusure uf deusits and
luans which cuuld alter the uverall duratiun/ ur the ecunumic
value uf the usitiun.
WBy such sensitivity analysis, banks will be
able tu cumute the imact.
A
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L I A B I L I T Y
A
N
A
M
- C E M E N T
sing simulatiun, the imact un Nll uf varying
interest rates scenarius is estimated by alying
different interest rate scenarius un the rate
sensitive assets and liabilities.
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Wtatic simulatiun
Wynamic simulatiun
ynamic simulatiun: imulatiun duly facturing
the future muvement uf rate sensitive assets and
liabilities with future interest rate scenariu is
called dynamic simulatiun.
tatic simulatiun: Cunducting simulatiun based un the existing rate
sensitive assets and liabilities tu cumute the imact un Nll is called
tatic simulatiun.