Asset Liability Management in Banks

Asset liability management

Asset liability management (ALM) is the administration of policies and procedures that address financial risks associated with changing interest rates, foreign exchange rates and other factors that can affect a companys liquidity. Asset Liability Management (ALM) seeks to limit risk to acceptable levels by monitoring and anticipating possible pricing differences between a companys assets and liabilities.

Components of a Bank Balance sheet

Liability
Capital Reserve & Surplus Deposits Borrowings Other Liabilities

Contingent Liabilities

Assets Cash & Balances with RBI Bal. With Banks & Money at Call and Short Notices Investments Advances Fixed Assets Other Assets

Components of Liabilities
1.Capital: Capital represents owners contribution/stake in the bank. It serves as a cushion for depositors and creditors. It is considered to be a long term sources for the bank.

Components of Liabilities
2. Reserves & Surplus Components under this head includes: I. Statutory ReservesII. Capital Reserves III. Investment Fluctuation Reserve IV. Revenue and Other Reserves V. Balance in Profit and Loss Account

Reserves & Surplus

A statutory reserve is an amount of cash a financial institution, such as a bank, credit union, or insurance company, must keep on hand to meet the obligations incurred by virtue of accepting deposits and premium payments. The statutory reserves required of banks and credit unions are generally set by the nation's central bank, and those required of insurance companies are set by statute or regulation by the national, state or provincial government or regulatory authority. Calculated in various ways, statutory reserves are required to ensure that financial institutions are capable of paying claims even in a calamitous situation. Investment fluaction reserve -Investment reserves are established by not distributing some of the investment income when fund earnings are high. They are then used to top up the rates credited to member accounts when earnings are low. In this way, the rate credited to members on a year-to-year basis is not absolutely dependent on the market cycle. The Superannuation Industry (Supervision) legislation permits such reserves to be maintained, provided trustees establish and follow a strategy for their prudential management.

Reserves & Surplus

Capital reserve - A type of account on a municipality's or company's balance sheet that is reserved for long-term capital investment projects or any other large and anticipated expense(s) that will be incurred in the future. This type of reserve fund is set aside to ensure that the company or municipality has adequate funding to at least partially finance the projects Revenue and other reserves: Represents any reserve available for distribution, other than capital reserves and includes all reserves other than those separately classified.

Components of Liabilities
3. Deposits This is the main source of banks funds. The deposits are classified as deposits payable on demand and time. They are reflected in balance sheet as under: I. Demand Deposits II. Savings Bank Deposits III. Term Deposits

Components of Liabilities
4. Borrowings (Borrowings include Refinance / Borrowings from RBI, Inter-bank & other institutions) I. Borrowings in India i) Reserve Bank of India ii) Other Banks iii) Other Institutions & Agencies II. Borrowings outside India

Components of Liabilities
5. Other Liabilities & Provisions It is grouped as under: I. II. III. IV. V. Bills Payable Inter Office Adjustments (Net) Interest Accrued Unsecured Redeemable Bonds (Subordinated Debt for Tier-II Capital) Others(including provisions)