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TRANSCRIPT
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K.Eswar
ASSET-LIABILITYMANAGEMENT
Presented byK.Eswar
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ALM &
BANKSBanks are exposed to credit and market risks in view ofasset-liability transformation in the back drop ofliberalization of Indian financial markets.
Banking is not about avoiding risk but managing it.
Strategic management in a deregulated environmentcovering spreads, profitability and long term viability.
Risks should be identified, measured and managed.
Inter-relationship between various risks should beunderstood.
Need for sharper assessment and efficacy of liquiditymanagement.
Need for comprehensive ALM.
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ALM Objectives
Liquidity Risk Management.
Interest Rate Risk Management.
Currency Risks Management.
Profit Planning and GrowthProjection.
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RBI DIRECTIVES
Issued draft guidelines on 10thSept98.
Final guidelines issued on 10thFeb99 for
implementation of ALM w.e.f. 01.04.99.
To begin with 60% of asset &liabilitieswill be covered gradually covering 100%.
Initially Gap Analysis to be applied in the
first stage of implementation.
Disclosure to the B/S on the maturitypattern of deposits / borrowings / advances
and investments.
In Oct 2007 amendments to ALM function
issued . Splitting the first time bucket.
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ALM STATEMENTS TO BE
SUBMITTED ToRBI1. Statement of Structural Liquidity (Annexure -
I) [DSB Statement No.8] - Rupee
2. Statement of Interest Rate Sensitivity (Annexure -II) [DSB Statement No. 9] - Rupee
3. Statement of Dynamic Liquidity (Annexure - III)
4. Statement of Maturity and Position (MAP) (Annexure -IV) [DSB Statement No.10 ] - Forex
5. Statement of Sensitivity to Interest Rate(SIR)(Annexure - V)[DSB Statement No.11] - Forex
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LIQUIDITY RISKS
Broadly of three types:
Funding Risk: Due to withdrawal/non-renewal ofdeposits
Time Risk: Non-receipt of inflows on account of
assets(loan installment) Call Risk: Contingent liabilities & new demand
for loans
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Managing Liquidity Risk.
Setting tolerance limits: Cumulative cash flow mismatches.
Take care of draw down of commitments. marketability of
liquid assets, discount to price volatility and drop in price
in the event of forced sale.
Core liability to core assets.
(Core liability: core portion of SB,CD,TD, Share capital ,
reserves and subordinated debts.)
(Core assets: Statutory balances of CRR and SLR, Long
term loans and fixed assets.)
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Managing Liquidity Risk.
Purchased Fund to liquid assets:Ratio of bulk deposit to liquidassets:
(Purchased funds consist of callborrowings , refinance availed,
bulk deposit, inter bank termborrowing.)
(short term liquid assets : cash,call/CBLO lending, HFT andAFS Investments, dues fromBanks in current account.
Loan to capital ratio.
CD to total liabilities.
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Measuring and Managing
LiquidityStock approach.
Flow approach.
Stock approach:Ratio of core deposit to total assets.
Net loans to total deposits.
Ratio of time deposit to total deposits.
Ratio of market liabilities to total assets.
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Flow approach.
Measuring and managing net funding requirements:
Construction of maturity ladder,
Liquidity gap based on residual maturities of assets and liabilities to arrive at
deficit or surplus,
cumulative gap, behavioral pattern, off balance sheet items.
Evaluate on alternate scenarios.
Managing Market access.
Contingency planning.
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Flow approach
IF there is a significant funding requirement
in a period say 30 days hence:
Alternative options ? Acquire an asset or rollover the liability.
Objective to close gap before it gets too
close. Managing market access and contingency
planning is key to efficacy of the ALM
function.
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Interest Rate Sensitivity.
Head of Account Rate sensitivity and time
bucket
Liability
Capital Reserve NRS
CD NRS
SB Sensitive to the extent of
interest paying(core)portion.Include in 3-6
month.Non interest paying
portionin non rate sensitive
bucket.
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Head of Account Rate sensitivity and time
bucket
Liability
Term Deposit and CD Sensitive and reprices onmaturity.Amount should be
distributed to different
buckets on the basis of
remaining term tomaturity.How ever in case of
floating rate deposits, place
under time bucket when
deposits become contractually
become due for reprising.
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Head of Account Rate sensitivity and time
bucket
Borrowing Fixed Sensitive and reprices on
maturity.Amount to bedistributed to different
buckets on the basis of
remaining maturity.
Borrowings floating Sensitive and repcies
when interest rate is
reset.Distribute to the
bucket when refers to
repricing date.
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Head of Account Rate sensitivity and timebucket
Borrowing Zero coupon Sensitive and reprises on
maturity. Amount should
be appropriated to therespective maturity
bucket.
Borrowing from RBI Upto 1 month bucket.
Refinance from other
agencies.
Fixed Rate :As per
respective maturity
Floating : Reprices when
interest rate is reset.
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Head of Account Rate sensitivity and time
bucket
Other Liabilities andProvisions.
Bills payable Non sensitive.
Inter office adjustment Non sensitive.
Provisions. Non Sensitive.
Repo/Bills
rediscounting/Swaps
Reprices on maturity and
should be distributed in
the respective buckets.
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Head of Account Rate sensitivity and time
bucket
Investments:Fixed Rate/Zero coupon Sensitive on maturity.
Floating Rate Sensitive at next repricing
date.
Shares /Units of MF Non sensitive.
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Head of Account Rate sensitivity and time
bucket
AdvancesBP and Bills discounted Sensitive on maturity.
CC/OD/Loans repayable
on demand and Term Loan
Sensitive only when
PLR/risk premium is
changed.
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Head of Account Rate sensitivity and time
bucket
Reverse
Repo,swaps,Rediscounting.
Sensitive on maturity.
Swaps Sensitive and to be shown
with reference to maturity.
Note : Amount to be
shown net of provisions
,interest suspense, claims
received from ECGC.CGTS
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Heads of Accounts Classification into time buckets
3. Balances with other
Banks:
(i) Current Account
(ii) Money at Call and Short
Notice, Term Deposits
and other placements.
(i) Non-withdrawable portion on account of stipulations of
minimum balances may be shown underOver 1-3yearsbucket and the remaining balances may be shown under
Day 1 bucket.
(ii) Respective maturity buckets.
4. Investments
(Net of provisions)*
(i) Approved Securities (i) Respective maturity buckets, excluding the amount required to
be reinvested to maintain SLR corresponding to the DTL profile in
various time buckets.
(ii) Corporate debentures and
Bonds, PSU Bonds, CDs and
CPs, Redeemable Preference
shares, Units of Mutual Funds
(close ended etc.)
(ii) Respective maturity buckets. Investments classified as NPIs
should be shown under over 3-5 years bucket (Sub-standard) or
over 5 years bucket (Doubtful).
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Heads of Accounts Classification into time buckets
(iii) Shares
(iv) Units of Mutual Funds
(Open ended)
(iii) Listed shares (except strategic investments) in 2-7 days
bucket with a haircut of 50%.
Other Shares in Over5 years bucket.
(iv) Day 1 bucket.
(v) Investments inSubsidiaries/ Joint
Ventures.
(v) Over5 years bucket.
(vi) Securities in the
Trading Book.
(vi) Day 1, 2-7 days, 8-14 days, 15-28 days and 29-90 days
according to defeasance periods.
* Provisions may be netted from the gross investments provided provisions are held security-
wise. Otherwise provisions should be shown in over 5 years bucket.
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Heads of Accounts Classification into time buckets
6. NPAs
(Net of provisions, interest
suspense and claims received
from ECGC/DICGC)
(i) Sub-standard (i) Over3-5 years bucket.
(ii) Doubtful and Loss (ii) Over5 years bucket.
7. Fixed Assets/
Assets on lease.
Over5 years bucket/
Interim cash flows may be shown under respective maturity
buckets.
8. Other Assets
Intangible Assets Intangible assets and assets not representing cash receivables
may be shown in Over5 years bucket.
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Heads of Accounts Classification into time buckets
C. Off Balance Sheet Items
1. Lines of Credit
committed/available.(i) Lines of Credit
committed to/from
Institutions.
(ii) Unavailed portion of
Cash Credit/
Overdraft/Demand loancomponent of Working
Capital limits (outflow).
(iii) Export Refinance
Unavailed (inflow)
(i) Day 1 bucket.
(ii) Banks should undertake a study of the behavioural and
seasonable pattern of potentital availments in the accounts
and the amounts so arrived at may be shown under relevantmaturity buckets upto 12 months.
(iii) Day 1 bucket.
2. Contingent Liabilities
Letters of Credit/Guarantees (outflow)
Devolvement of Letters of Credit/Guarantees, initially entails cash
outflows. Thus, historical trend analysis ought to be conducted onthe devolvements and the amounts so arrived at in respect of
outstanding Letters of Credit/Guarantees (net of margins) should be
distributed amongst various time buckets. The assets created out of
devolvements may be shown under respective maturity buckets on
the basis of probable recovery dates.
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Heads of Accounts Classification into time buckets
3. Other Inflows/Outflows
(i) Repo / Bills
Rediscounted(DUPN)/CBLO/Swaps
INR/USD, maturing
forex forward contracts
etc. (outflow/inflow).
(i) Respective maturity buckets.
(ii) Interest payable/receivable
(outflow/inflow)
Accrued interest
which are appear-
ing in the books
on the reporting
day.
(ii) Respective maturity buckets.
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Note:
(i) Liability on account of event cash flows i.e. short fall in CRR balance onreporting Fridays, wage settlement, capital expenditure etc. which are known to
the Banks and any other contingency may be shown under respective maturitybuckets. The event cash outflows, including incremental SLR requirementshould be reported against OutflowsOthers.
(ii) All overdue liabilities may be placed in the Day 1, 2-7 days and 8-14 daysbuckets based on behavioural estimates.
(iii) Interest and instalments from advances and investments which are overdue forless than one month may be placed in Day 1, 2-7 days and 8-14 days buckets,based on behavioural estimates. Further, interest and instalments due (beforeclassification as NPAs) may be placed in 29 days to 3 months bucket if theearlier receivables remain uncollected.
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ADDRESSING MISMATCHES
Mismatches can be positive or negative
Positive Mismatch: M.A.>M.L. and vice-versa forNegative Mismatch
In case of +ve mismatch, excess liquidity can bedeployed in money market instruments, creatingnew assets & investment swaps etc.
Forve mismatch,it can be financed from marketborrowings(call/Term),Bills rediscounting,repos &deployment of foreign currency converted intorupee.
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DYNAMIC LIQUIDITY
Prepared every fortnight for ALCO
Projection is given for the next three months
Tools for assessing the day to day liquidity
needs of the bank
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CALCULATION OF NII/NIM
NII: INT.EARNED-INT. EXPENDED
INT. EARNED: ADV+INVESTMENT
INT. EXPENDED:DEPOSITS+INT. ON
RBI BORROWINGS
NIM= (NII/TOT.EARNING ASSET)X100
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Q. Net Interest Margin NIM is defined as
a. Net interest income divided by total earning assets.
b. Interest incomeinterest expenses. c. total interest income divided by total assets.
d. None of above.
Q..Ratio of share holders funds to total assets is called as
a. Debt equity ratio. b. TOL/TNW ratio.
c. Economic equity ratio.
d. No ne of above.
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Q. Under gap method the net funding requirement is calculated based on
a. residual maturities of assets and liabilities.
b. Actual maturities of assets and liabilities
c. Both the above. d. None of above.
Q. Cash inflows arise from mainly:
a. Maturing assets.
b. Maturing liabilities.
c. Maturing off balance sheet exposure.
d. Maturing time deposits.
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Capital , Reserves and Surplus are slotted in which time bucket inStructural Liquidity Statement:
Over 5 years.
Over 3 Years. Over 1 Year.
Over 6 months.
Q. Saving and Current deposit may be treated as volatile portion up to
a. 10% and 15 % respectively.
b.20% and 30% respectively.
c. 30% and 40% respectively. d. None of above
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Q. Core portion of Cash credit advances may be shown undera. 1-3 year time bucket.
b. over 3 year time bucket.
c. Over 5 years time bucket. d. None of above.
Q. Term Loans to be shown under:
a. Interest and principal of the loan under residual maturity bucket.
b. Principal under residual maturity bucket.
c. all in 5 year and above bucket. d. None of above.
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Q. Sub Standard loans to be shown under
a. Over one year bucket.
b. Over 2 year bucket.
c. Over 3 years bucket.
d. Over 3-5 year bucket.
Q. Fixed Assets:
a. Over 5 year bucket. b. Over 2 year bucket.
c. Over 1 year bucket.
d. none of above.
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Q. The net cumulative negative mismatchesduring the day 1, 2-7, 8-14 and 15-28 days
buckets if exceed the prudential limits may befinanced from market by
a. Market borrowings ( call /term)
b. Bills discounting
c. Repo
d. All above.
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Q. In a given time band a negative or liability sensitive gap occurs when
a. Rate sensitive liabilities exceed rate sensitive assets.
b. Rate sensitive assets exceed rate sensitive liabilities.
c. None of above.
d. All the above.
Q. with a negative gap , an increase in market interest rates could cause a
a. decline in net interest income.
b. Increase in net interest income.
c. None of above.
d. All above.
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None of above.
Q. Under Put option the buyer has
a. Right to sell but not obligation to sell
b. Right to buy but not obligation to buy c. Right to receive interest payments.
d. None of above.
Q. Under Call option the buyer has
a. Right to buy but not obligation to buy b. right to sell but not obligation to buy
c. None of above.
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Q. Short term dynamic liquidity statement relate to
a. monitoring liquidity on dynamic basis over a time horizon of 1-90 days.
b. monitoring liquidity on dynamic basis over a time horizon of 7-90 days.
c. monitoring liquidity on dynamic basis over a time horizon of 28-90days.
d. None of above.
Q. In statement of interest rate sensitivity :
a. Only rupee assets and liabilities and off balance sheet positions should
be reported. b. All assets and liabilities should be reflected.
c. Only foreign currency assets and liabilities should be reflected.
d. None of above.
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Q. Provisions and inter office adjustments are
a. Rate sensitive.
b. Rate non sensitive.
c. None of above.
d. all of above.
Q. Current account balance is
a. Rate sensitive. b. Rate non sensitive.
c. None of above.
d. All of above.
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Thank You