Asset Liability Management

in Banks

PRESENTED BY…
RAJIV SINGH
PRIYAMJEET MOHANTY
RAHUL KUMAR
 Assets Liability Management
It is a dynamic process of Planning,
Organizing & Controlling of Assets
& Liabilities- their volumes, mixes,
maturities, yields and costs in order
to maintain liquidity and NII.
 HISTORY OF ALM
• Mid 1970s in the U.S.A.

Deregulation of Interest Rates

Interest Rate Risk

Liquidity Risk Credit Risk

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 Definition of ALM
• ALM is defined as, “the process of decision – making
to control risks of existence, stability and growth of a
system through the dynamic balances of its assets and
liabilities.”
• The text book definition of ALM is “a risk
management technique designed to earn an adequate
return while maintaining a comfortable surplus of
assets beyond liabilities. It takes into consideration
interest rates, earning power and degree of willingness
to take on debt. It is also called surplus- management”.

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 Asset Liability Management

Asset Liability
Management Management

How Liquid are the How easily can

assets of the Bank the Bank generate
loans from market

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 Asset Liability Management
• ALM is an integral part of the financial
management process of any bank.
• ALM is concerned with strategic balance sheet
management involving risks caused by changes in
the interest rates, exchange rates and the liquidity
position of the bank.
• While managing these three risks forms the crux
of ALM, credit risk and contingency risk also
form a part of the ALM
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 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 beyond 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
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 Significance of ALM
• Volatility
• Product Innovations & Complexities
• Regulatory Environment
• Management Recognition
 Risks
• Various Risks
– Interest Rate Risk

– Foreign Exchange Risk

– Liquidity Risk

– Credit Risk

– Contingency Risk

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Purpose & Objective of ALM
An effective Asset Liability Management Technique
aims to manage the volume, mix, maturity, rate
sensitivity, quality and liquidity of assets and
liabilities as a whole so as to attain a predetermined
acceptable risk/reward ration.
It is aimed to stabilize short-term profits, long-term
earnings and long-term substance of the bank. The
parameters for stabilizing ALM system are:

1. Net Interest Income (NII)

2. Net Interest Margin (NIM)
3. Economic Equity Ratio
 Liquidity Management

Bank’s liquidity management is the process

of generating funds to meet contractual or
relationship obligations at reasonable prices
at all times.
New loan demands, existing commitments,
and deposit withdrawals are the basic
contractual or relationship obligations that a
bank must meet.
 Types of liquidity risk
• Funding Risk
- Need to replace net outflows due to
unanticipated withdrawals/non-renewal
• Time Risk
- Need to compensate for non-receipt of
expected inflows of funds
• Call Risk
- Crystallization of contingent liability
 SUCCESS OF ALM PROCESS
The ALM process rests on Three Pillars:

1. ALM Information Systems

2. ALM Organization

3. ALM Process

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 Interest Rate Risk Management
• Interest Rate risk is the exposure of a bank’s
financial conditions to adverse movements
of interest rates.
• Though this is normal part of banking
business, excessive interest rate risk can
pose a significant threat to a bank’s earnings
and capital base.
• Changes in interest rates also affect the
underlying value of the bank’s assets,
liabilities and off-balance-sheet item.
 Risk Regulation in India
• Identified further steps to be taken by banks for
improving their existing risk management
framework, suiting to Indian conditions

• 2005 – Detailed Capital Adequacy guidelines for Banks to

move towards Basel II, 2007- final guidelines

• 2006 – April 17, the ALM framework of 1999 updated.

• 2007- Pillar II guidelines being issued

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 RBI revised guidelines 2007-08
• Issued on Sept 05, 2007
• Feb 10, 1999 guidelines covered Interest Rate
and Liquidity Risk Management
• Cumulative mis-matches in first bucket to be
reported in Statement of Structural Liquidity
• -ve Gap in 1-14 and 15-28 days buckets not to
exceed 20 % of the cash flows
• Need for revising this position – Hence revised
the first bucket to 1, 2-7 & 8-14 days
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 RBI Revised ALM
• Cumulative negative mismatches / Gap in new
buckets – Next day, 2-7, 8-14 and 15-28 days not to
exceed 5, 10, 15 and 20 % respectively of cash flow
• Format of Statement of Structural Liquidity has been
revised accordingly
• Guidance instructions have been furnished
• Banks given time to fine-tune MIS by 1 Jan’08
• Reporting frequency to continue as monthly
• Supervision will be fortnightly – April 01,2008
• Financing of gaps above norms to be indicated

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THANK YOU