ASSET LIABILITY MANAGEMENT POLICY

Policy Statement

Banks are exposed to several risks in the course of its business such as credit risk,
interest rate risk, equity/securities price risk, liquidity risk and operational risk, etc.,
which require comprehensive risk management system & process.

Reserve Bank of India, has, from time to time, emphasized the need to address these
risks, in a structured manner by upgrading the risk management systems, practices
and procedures and for adopting more comprehensive asset liability management
practices.

It is therefore important to have effective risk management systems that address the
issues inter-alia, related to interest rate and liquidity risks. The bank is therefore basing
its business decisions on a dynamic and integrated risk management system and
process, driven by corporate strategy.

Asset Liability Management (ALM) can be termed as a risk management technique

designed to earn an adequate return while maintaining a comfortable surplus of assets
over liabilities. It takes into consideration interest rates, earning power and degree of
willingness to take on debt and hence is also known as Surplus Management. ALM,
among other functions, is also concerned with risk management and provides a
comprehensive as well as dynamic framework for measuring, monitoring and
managing liquidity and interest rate risks of major operators in the financial system,
that need to be closely integrated with business strategy. ALM is an integral part of the
financial management process of the bank. It is concerned with strategic balance
sheet management, involving risks caused by changes in the interest rates and the
liquidity position of the bank. It involves assessment of various types of risks and
altering the asset-liability portfolio in a dynamic way in order to manage risks.

The guidelines in respect of Asset Liability Management issued by NABARD from time
to time have been considered while preparing the policy.
OBJECTIVES:

The key objective shall be managing the liquidity and interest rate risks faced by the
bank and setting prudential limits for the management of the bank to adhere to. The
objectives shall be to plan and manage the assets and liabilities in a manner so as to
ensure achieving desired earnings in the short term and protecting the Market Value
of Equity (MVE) in the medium/ long term.

Asset Liability Management among other functions also provide dynamic

framework for measuring, monitoring and managing liquidity, interest rate risks.
The ALM process rests on three pillars.

ALM Information Systems: - Management Information Systems - Information

availability, accuracy, adequacy and expediency

ALM Organization: - Structure and responsibilities. - Level of senior management

involvement.

ALM Process: - Risk parameters - Risk identification, measurement & management

- Risk policies and tolerance levels.

ALM Information Systems:

ALM has to be supported by a management philosophy which clearly specifies the risk
policies and tolerance limits. This framework needs to be built on sound methodology
with necessary information system as back up. Thus, information is the key to the ALM
process. The following systems are to be established for the purpose of
implementation of ALM:

1. Information is obtained from the Core ing Solution software which allows for
mapping of various assets and liabilities with respect to loans and advances,
deposits and borrowings.
2. Information with respect to other assets, other liabilities etc. which need to be
analyzed for residual maturities are obtained from the respective department
handling such GL heads. A standard format will be designed and circulated to
these departments for submission of the necessary information on a periodic
basis (period is presently quarterly).
 3. Bench Mark rate for the determination of change in interest rate environment is
chosen as the Policy Repo Rate and is monitored continuously from the Bi-
monthly Monetary Policy Statements published by RBI.
4. The ing department has been identified as the nodal department which will
designate one person as the Risk Officer, who shall be responsible for
preparation of the forecasts and possible scenarios which may occur based on
perceptible change in interest rates in the short, medium and long terms.
5. All information pertaining to future business strategies will be made available to
the ing department from the CEO’s office.
6. The accuracy of information provided by the various departments should be
verified by the ing department and the department will be responsible for any
data inconsistencies.
7. The information should be compiled within a period of 1 month from the end of
the quarter for which the statements are being made.
8. Once compiled, the same may be put up to CEO along with all necessary
background data and will be passed on to the concurrent auditor for verification
of the authenticity and consistency of data apart from the reasonability of
assumptions made in preparation of the data.

ALM Organization:

Successful implementation of the risk management process would require strong

commitment on the part of the senior management in the company, to integrate basic
operations and strategic decision making with risk management. The Board of
Directors will have overall responsibility for management of risks and will decide the
risk management policy of the and set limits for liquidity and interest rate risks.

The organizational structure for implementation of the Asset-Liability Management

policy would consist of:

1. Risk Management Committee of the Board & Audit Committee of the Board
2. Risk Management Committee of Executives
3. ALCO
4. ALM support group

The roles and responsibilities of these committees/ group would be as under:

1. Risk Management Committee of the Board (RMCB)/Audit-Committee of
the Board(ACB):
a. RMCB would be constituted by the Board and shall oversee the
implementation of the system and review it’s functioning periodically.
b. The RMCB would review the ALM policy, Credit Risk Management
Policy, Investment Policy and Information Technology Policy for a
financial year and would recommend the same to Board of Directors for
their approval.
c. ACB would review the tolerance limits for liquidity/ interest rate risks and
would recommend to Board of Directors for its approval from time to
time.
d. As per the directions of the Board, the ALM statements would be
reported to the Audit-Committee and Risk Management Committee on
quarterly basis for necessary guidance.

2. Risk Management Committee of Executives: The Risk Management

Committee of Executives (RMCE) constituted by the Board comprises of Chief
Executive Officer, GMs, DGMs and AGMs of the . The RMCE shall meet on a
quarterly basis or earlier as and when required to manage the risks associated
with the operations. The broad responsibilities of the committee under Asset-
Liability Management would be as under: (It may be noted that RMCE would
have responsibilities with respect to other risks like credit risk, compliance risk
etc. which may be incorporated in the Risk Management Policy of the )
a. Examination of and recommending approval for risk-related policies of
the Institution before these are submitted to the RMCB and Board of
Directors seeking its approvals.
b. Incorporation of the regulatory compliance with regard to asset liability
management and credit risk in the Institutions policies and guidelines.
c. Monitoring of asset liability mis-match risk on an institution–wide basis
and ensuring adequate liquidity, compliance with the prudential limits
and risk parameters approved by the Board and RMCD.
d. Laying down procedures, effective control and comprehensive risk
reporting framework.
e. Creating strong MIS for reporting, monitoring and controlling risks.
 3. Asset and Liability Committee (ALCO): The Asset and Liability Committee
(ALCO) is responsible for balance sheet risk management. Managing the
assets and liabilities to ensure maximum level of structural balance sheet
stability and optimum profitability is an important responsibility of the ALCO.
ALCO would consist of CEO, GMs and DGMs of the . The responsibilities of
the ALCO would include:
a. Balance sheet planning from risk -return perspective including the
strategic management of interest rate and liquidity risk
b. Decide on the major aspects of balance sheet structure, such as maturity
and currency mix of assets and liabilities, mix of wholesale versus retail
funding, deposit mix etc
c. Decide on how to respond to significant, actual and expected increases
and decreases in required funding
d. Product pricing for deposits and advances
e. Deciding on desired maturity profile and mix of the incremental assets
and liabilities
f. Evaluate market risk involved in launching of new products
g. Review liquidity contingency plan for the
h. Review of Liquidity Mismatches
i. Review of Interest-Rate Sensitivity position
j. Decision on Resource Raising and Deployment vis-a-vis Cost of
borrowings/ Yields on advances
k. Strategies for deployment of surplus funds

4. ALM support group: The support group would be headed by the AGM of the
ing department who will coordinate with different departments to prepare the
ALM statements apart from analy sing, monitoring and reporting the ALM
statements to ALCO. The group would scan the macroeconomic environment
to provide key information to ALCO for taking critical decisions, if required.

ALM Process:-

I. Liquidity Risk Management

Measuring and managing liquidity needs are vital for effective operation of the . By
ensuring ability to meet its liabilities as they become due, liquidity management can
reduce the probability of developing an adverse situation. Liquidity management
involves measuring liquidity position on ongoing basis. For measuring and managing
net funding requirements, the use of a maturity ladder and calculation of cumulative
surplus or deficit of funds at selected maturity bucket may be adopted as a standard
tool, in line with RBI stipulations.

In line with RBI guidelines, the following maturity profile would be used for measuring
the future cash flows of the in different time buckets:

i. 1 to 14 days

ii. 15 to 28 days

iii. 29 days and upto 3 months

iv. Over 3 months and upto 6 months

v. Over 6 months and upto 1 year

vi. Over 1 year and upto 3 years

vii. Over 3 years and upto 5 years

viii. Over 5 years

Within each time bucket, there could be mismatches depending on cash inflows and
outflows. While the mismatches up to 1 year would be relevant since these provide
early warning signals of an impending liquidity problem, the main focus has to be
short term mismatches i.e during 1-14 days and 15-28 days . RBI has therefore
advised NBFCs to monitor their cumulative mismatches across all time buckets and
establish/ fix internal prudential limits for the time buckets. As per the RBI guidelines,
the mismatches occurring in 1-14 days & 15–28 days buckets in normal course may
not exceed 20% of the cash outflows in each time bucket. The board has fixed the
following prudential limits for negative gap and cumulative negative gaps under
different time bucket as follows:
 Sl. No. Time Bucket Structural Liquidity

Negative Gap Cumulative

as % of outflow Negative Gap as
% of outflow)

1. 1 to 14 days 20% -

2. 15 to 28 days 20% -

3. 29 days and upto 20% 5%

3 months

4. Over 3 months 25% 10%

and upto 6 months

5. Over 6 months 25% 15%

and upto 1 year

6. Over 1 year and 30% 15%

upto 3 years

7. Over 3 years and 40% 25%

upto 5 years

8. Over 5 years 40% 25%

(II) Interest Rate Risk (IRR):-

The deregulation of interest rates and optional flexibility given to s in pricing most of
the assets and liabilities to imply need for the ing system to hedge the interest rate
risk. The interest rate risk is the risk where changes in the market interest risk might
adversely affect the ’s financial condition both current as well as future earnings.

The risk from earning prospective can be measured as changes in the net interest
income (NII) or net interest margin (NIM). The traditional gap analysis is considered
as a suitable method to measure the interest rates risk for the s. The gap or mismatch
risk can be measured by calculating gaps over different time intervals as at a given
date.
 The Gap is the difference between Rate Sensitive Assets (RSA) and Rate Sensitive
Liabilities (RSL) for each time bucket. The positive Gap indicates that it has more
RSAs than RSLs whereas the negative Gap indicates that it has more RSLs. The Gap
reports indicate whether the institution is in a position to benefit from rising interest
rates by having a positive Gap (RSA > RSL) or whether it is in a position to benefit
from declining interest rates by a negative Gap (RSL > RSA). The Gap is therefore
being used as a measure of interest rate sensitivity.

Gap analysis measures mismatches between rates sensitive liabilities and rate
sensitive assets (including off-balance sheet positions). All investment, advances,
borrowings etc. that mature/re-price within a specified time frame are interest rates
sensitive and repayment of loan instalments is also rate sensitive. The Gaps may be
identified in the following time buckets:

a) 1-28 days
b) 29 days and upto 3 months
c) Over 3 months and upto 6 months
d) Over 6 months and upto 1 year
e) Over 1 year and upto 3 years
f) Over 3 years and upto 5 years
g) Over 5 years
h) Non-sensitive

The risk measure adopted is the percentage of 1-year cumulative gap to Earning
assets. The prudential limit set by the board is -15% to +15%.

(III) COMPLIANCE AND REVIEW:

1. Preparation of Statements:

The following statements would be prepared by the Risk Officer of the bank with the
help of ALM support group.

1. The Statement of Structural Liquidity (as per the format prescribed by

 NABARD) shall be prepared on quarterly basis by placing all cash inflows
and outflows in the maturity ladder according to the expected timing of
cash flows.
2. In order to monitor liquidity on a dynamic basis over a time horizon
spanning from 1-90 days, would estimate its short-term liquidity profile on
the basis of business projections and other commitments for planning
purposes as per format prescribed by NABARD.
3. Statement of interest rate sensitivity will be prepared by grouping rate
sensitive assets and liabilities into time buckets according to their residual
maturity or next repricing period whichever is earlier in the format
prescribed by NABARD.

2. Internal Reporting requirements:

1. The Risk Officer would submit the statements so prepared to the Risk
Management Committee of executives.
2. The statements would then be reviewed by the ACB for any revision in
prudential limits, based on the maturity pattern.
3. Once the statements are put up to the RMCB by the RMCE, the same will
be reviewed by RMCB for any changes suggested by RMCE in risk
outlook/ mitigation strategies proposed by RMCE.
4. RMCB finalizes the risk management aspects and ensures that there is
no breach in prudential limits and forwards the same to the board for
approval.

3. External Reporting Requirements:

Once the board has approved, the statements will be submitted on ENSURE Portal
to NABARD within the stipulated time frame. The CEO would be responsible for any
delays in submission of the statements to NABARD.

4. Review of the Policy

The policy will be reviewed on a yearly basis by the RMCB based on the
recommendations by the RMCE. The changes, if any, will be approved by the board.