training programme on asset liability management – an impact
TRANSCRIPT
Training Programme on Asset Liability Management
– An Impact Evaluation Study
Samir R Samantara
U D Shirsalkar
Niraj K Verma
Impact Evaluation Study of Training Programme on Asset Liability Management
CONTENTS
Particulars Page No.
FOREWORD I
ACKNOWLEDGEMENTS II
LIST OF TABLES III
LIST OF FIGURES IV
LIST OF APPENDIX V
LIST OF ABBREVIATIONS VI
EXECUTIVE SUMMARY VII
I INTRODUCTION 1
II OBJECTIVE, SAMPLE DESIGN AND METHODOLOGY 4
III RESULTS AND DISCUSSION 8
IV CONCLUSION AND POLICY PRESCRIPTION 23
REFERENCES 25
APPENDIX 26
Impact Evaluation Study of Training Programme on Asset Liability Management
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FOREWORD
The development of the banking system is always associated with the contemporary
changes in the economy. The Indian banking industry particularly Regional Rural Banks
has undergone a metamorphosis in the last two decades due to changes in the political,
economic, financial, social, legal and technological environments. The significant advances
in technology and deregulation of financial markets across the countries created new
opportunities, encouraging banks to enter every business that had been thrown open. The
banks are now moving towards universal banking concepts, while adding new channels and
a series of innovative product offerings catering to various segments at an attractive price.
This makes it imperative for the banks to adopt sophisticated risk management techniques
and to establish a link between risk exposures and capital. Effective management of risk
has always been the focus area for banks owing to the increasing sophistication in the
product range and services and the complex channels that deliver them.
The challenge for the banks is to put in place a risk control system that minimizes the
volatility in profit and engenders risk consciousness across the rank and file of the
organization. Sound risk management will ensure a healthy bottom line for the bank as risk
taken by the bank will be commensurate with return and will be within an approved risk
management policy. As all transactions of the banks revolve around raising and deploying
the funds, Asset-Liability Management (ALM) gains more significance as an initiative
towards the risk management practices by the Indian banks. The introduction of ALM in
RRBs with a focus on a continuous rearrangement of assets and liabilities of the balance
sheet so as to maintain the profit, minimise interest rate risk and provide adequate liquidity
is a step in this direction to address the challenge. In order to assess the impact of ALM
training programme for RRBs conducted during last 2-3 years, it was felt by BIRD to
conduct a study.
BIRD conducted a study covering 16 RRBs, 36 officers trained by BIRD in 10 States. The
study brings out the fact that implementation of ALM in RRBs in the form of constitution
of ALCO, periodicity of ALCO meeting and number of items in the agenda and tools of
ALM was in a sub-optimal stage. A few policy pointers on redesigning the ALM training
module in the form of suggestions/feedbacks from trainee officers of RRBs included latest
ALM tools & techniques (Duration Gap Analysis, Simulation and Value at Risk (VaR), use
of software package(CLORET,ASCROM,ALMAN, FINACLE, etc), sessions by
professionals handling ALM desk and capacity building of support staffs.
The study has further suggested that there is a need to adopt ALM as a critical exercise of
balancing the risk profile due to financial intermediation with the long/short term profits as
well as its long-run sustenance.
I am sure that the study findings will be useful to bankers, academicians, policy makers and
other stake-holders in initiating follow-up actions.
Shri K K Gupta
Director
BIRD, Lucknow
21.10.2014
Impact Evaluation Study of Training Programme on Asset Liability Management
II
ACKNOWLEDGEMENTS
The study team sincerely records its obligation to Shri Sunil Chawla, Joint Director BIRD,
Lucknow, for his continuous encouragement and suggestions and guidance in various fora,
which helped the study team to enrich the contents of the report.
The study team gratefully acknowledges the guidance and the valuable inputs provided by
all the Faculty Members of Finance group, BIRD, Lucknow.
The study team also makes special mention of the Top management teams of three RRBs
Viz, Aryavat Gramin Bank, Baroda Rajasthan Gramin Bank and Bihar Gramin Bank for
their useful suggestions and comments.
The study team is grateful to team of officers from sixteen Regional Rural Banks, for
required inputs (feedbacks through questionnaire) and insights offered in consolidating the
report.
However, the opinions expressed in the study report, are that of the Study Team and not
necessarily reflect those of BIRD. The contents can be reproduced with proper
acknowledgement. The write-up is based on information & data procured from various
sources and no responsibility is accepted for the accuracy of facts and figures. BIRD or the
Study Team assumes no liability, if any, person or entity relies on views, opinions or facts
& figures finding place in this Report.
Study team: Shri/s Samir R Samantara, U. D.Shirsalkar and N.K.Verma
Deputy General Managers/Faculty Members, BIRD, Lucknow
Impact Evaluation Study of Training Programme on Asset Liability Management
III
LIST OF TABLES
Table II.1 : Sample Frame – RRB Banks and Trainees
Table III.1: RRB Trainees/participants having understanding about various type of risk
Table III.2: Knowing financial market instruments
Table III.3: ALM Concept
Table III.4: Usefulness of ALM Training
Table III.5: ALM Desk
Table III.6: ALM Desk - sharing of inputs
Table III.7: ALM training – effectiveness for participants
Table III.8: ALM Policy
Table III.9: ALM Policy Formulation
Table III.10: ALM training – effectiveness for banks
Table III.11: ALM – types of tools
Table III.12: ALM - Mitigation of liquidity risk
Table III.13: ALM training – Impact on profitability
Table III.14: ALM training – Improvement in financial position of banks
Table III.15: ALM training – Suggestion for improvement
Table III.16: Statistical results of step-wise regression model – sample RRBs
Table III.16: Statistical results of regression model having dummy variables – RRBs
received
ALM training inputs by BIRD
Impact Evaluation Study of Training Programme on Asset Liability Management
IV
LIST OF FIGURES
Figure III.1: RRB Trainees/participants having understanding about various type of risk
Figure III.2: Knowing financial market instruments
Figure III.3: ALM Concept
Figure III.4: Usefulness of ALM Training
Figure III.5: ALM Desk
Figure III.6: ALM Desk - sharing of inputs
Figure III.7: ALM training – effectiveness for participants
Figure III.8: ALM Policy
Figure III.9: ALM Policy Formulation
Figure III.10: ALM training – effectiveness for banks
Figure III.11: ALM – types of tools
Figure III.12: ALM - Mitigation of liquidity risk
Figure III.13: ALM training – Impact on profitability
Figure III.14: ALM training – Improvement in financial position of banks
Figure III.15: ALM training – Suggestion for improvement
Impact Evaluation Study of Training Programme on Asset Liability Management
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LIST OF APPENDIX
Appendix I DETAILS OF THE DATA EXTRACTION AND COVERAGE
Appendix II ALM SYSTEM - A FORMALIZED FRAMEWORK FOR
MANAGEMENT OF MARKET RISKS
Appendix III CORRELATION MATRIX & STEP-WISE REGRESSION
RESULTS
Appendix IV QUESTIONNAIRE
Appendix V KEY FINANCIAL RATIOS OF SAMPLE RRBS (BANK-WISE)
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ABBREVIATIONS
ALCO Asset Liability Management Committee
ALM Asset Liability Management
ANOVA Analysis of Variance
ASCROM Asset Classification & Credit Monitoring
BIRD Bankers Institute of Rural Development
FIMMDA Fixed Income Money Market and Derivatives Association of India
NIM Net Interest Margin
NSE National Stock Exchange of India Ltd.
OTCEI Over-The-Counter Exchange of India
RRB Regional Rural Banks
SEBI Securities and Exchange Board of India
VaR Value at Risk
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Executive Summary
Asset Liability Management Policy aims to lay down the ALM structure, define the role of
identified individuals or committees and the top management, measure and manage the
asset liability related risks facing the bank by setting down various risk limits and lay down
the MIS process to keep the various levels of management including the top management
informed to enable them take appropriate decision in a timely manner. The assets and
liabilities of the bank have to be managed to maximize profitability and enhance capital
thereby increasing shareholders’ value and also to protect the organization from financial
stress arising out of adverse movement in market rates and thereby continue to serve the
customers and community more effectively.
The major objective of the study was to assess the impact of ALM Programmes conducted
by BIRD for Regional Rural Banks. The specific Terms of Reference (ToR) of the study
were to critically review the progress of ALM policy formulation with focus on
bottlenecks/constraints in the implementation of the ALM and to estimate the effectiveness
of liquidity & interest risk management and pricing of loan product.
During the study a survey was conducted to find out the training effectiveness.
Questionnaire was used to collect data/feedback/input from respondents. Respondents were
officials of RRBs. From the study it was found that in all respects the training programs
were successful and for majority of the respondents the training program met their needs
and expectations. Some suggestions like incorporation of latest ALM tools and techniques
in the training modules and designing the training programme keeping in view the jobs
assigned or to be assigned merit consideration.
Major findings/observation from the study are as under :
(i) The respondents were able to understand various types of risks like Liquidity Risk(94%),
Interest Rate Risk(91%), Credit Risk(88%) and Operational Risk (77%) after attending the
ALM programme.
(ii) 83% of the respondents came to know about the financial market instruments and terms
like SEBI, OTCEI, NSE, FIMMDA etc., after attending the programme. Remaining
officers knew about these terms even before attending the programme. 56% of the
respondents had knowledge/experience in ALM before the training indicating strong entry–
level behavior.
(iii) Majority of the respondents had indicated that the course material provided during the
training was useful. 22 % of the respondents have not been posted in ALM desk despite
receiving training. Further, 8% of the respondents felt that there was no scope for use of
knowledge gained during the training in their day-to-day functioning.
(iv) Majority of the respondents indicated that their banks have formulated ALM policy
approved by Board. Further,78% of the respondents indicated that training programme at
BIRD helped in formulation/refinement of the policy in their bank.
Impact Evaluation Study of Training Programme on Asset Liability Management
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(v) In percentage terms, officials from RRBs indicated that training programme at BIRD
helped in constitution of ALCO(16.7 %), in finalizing agenda items for ALCO(77.8 %),
in understanding interest rate movements & expected spreads(86.1 %), mismatches in
maturity pattern(75 %), pricing of loan products/ risk mitigating measures for liquidity &
interest rate risks(91.7 %), operational issues & difficulties associated in implementation
of the ALM(88.9 %), discussions on investment portfolio(83.3%). Further, majority of
the respondents agreed that training programme at BIRD helped in areas for further
improvement.
(vi) Majority of the respondents indicated that training programme at BIRD helped in using
some of the ALM tools. To be specific, 83.3 % of the respondents indicated that training
programme at BIRD helped in understanding impact of interest rate movement on Net
Interest Margin (NIM) and gap statement to measure Interest Rate Risk(77.8 %).
(vii) As regards mitigation of liquidity risk, 94.4 % of the respondents mentioned that their
banks are putting assets and liabilities in different time buckets, 52.8 % responded
affirmatively on preparing Structural Liquidity statement, 61.1 % on preparing Dynamic
Liquidity statement and 47.2 % on preparing both Dynamic Liquidity statement and
Structural Liquidity statement. Only 5.6 % of the respondents indicated that they are
preparing neither Dynamic Liquidity statement nor Structural Liquidity statement.
(vii) 78 % of the respondents indicated that the profitability of the bank has improved after
implementation of ALM concept in the bank. In terms of percentage contribution in
improving financial position of the bank, they have ranked Dynamic Liquidity Ladder
(94.4 %), Gap Statement to measure interest rate risk (80.6 %) and Duration concept
(25 %).
(viii) As regards suggestions to bring about improvement in the training programme on
ALM conducted by BIRD, 83.3 % of the respondents indicated that the programme does
not need any changes and may continue to be conducted in the present format. However,
11.1% felt that the contents of the programme were inadequate and needed to be up-graded,
while remaining respondents could not comment on the issue as they were not presently
working on the ALM desk (5.6 %).
(ix) Mean Net Interest Margin (NIM) of the two categories (RRB officers who attended
ALM training conducted by BIRD and those who did not attend is different. If all other
variables are held constant, it may be partially concluded that there is a significant
difference in the NIM level of the two categories (sample RRB - 0.96 and other RRBs –
0.91). Further, one percentage increase in number of ALM training programme for RRBs
may lead to percentage increase in NIM by 13 basis points (0.13).
(x) Relevant items in the agenda of ALCO - NAI1 (0.4329) as a whole influenced
significantly the Net Interest Margin compared to other variables, i.e. ALM Policy &
Constitution of ALCO (0.1339) and Periodicity of meeting (0.2142) clearly indicating the
importance of interest rate sensitivity on NIM variability, structural/dynamic liquid
statement, duration analysis as an agenda items in ALCO meeting.
1 NAI – Number of Relevant Items in Agenda.
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Conclusion and Policy Issues
Asset Liability Management is a risk management technique and an on-going process of
formulating, implementing, monitoring, and revising strategies related to assets and
liabilities in an attempt to achieve financial objectives for a given set of risk tolerances and
constraints. Thus a general perspective of ALM as per study team may be laid out as - ALM
is a hierarchy (to execute the process), a process (to track, report and monitor risk
management), a tool (to analyze relevant data), a technique (to measure risk and suggest
alternatives) and a repository (a versatile data warehouse). The study team is of the opinion
that since interest rate risk and liquidity risks are significant risks in a bank’s balance sheet,
they should be regularly monitored and managed. These two aspects should be a key input
in business planning process of a bank. Banks should make sure that increased balance
sheet size should not result in excessive asset liability mismatch resulting in volatility in
earnings. There should be proper limit structures, which should be monitored by Asset
Liability Management Committee (ALCO) on a regular basis. The effectiveness of ALM
system should be improved with a good Fund Transfer Pricing system by involving all
ALCO members in decisions, as ALM sheet item granularity depends on distribution of
time buckets of short-duration. Further, the study brings out the fact that implementation
of ALM in RRBs in the form of constitution of ALCO, periodicity of ALCO meeting and
number of items in the agenda and tools of ALM was in a sub-optimal stage.
Based on the feedbacks/suggestion/inputs received on training effectiveness on ALM
programme for RRBs, the study team is of the opinion that in all respects the training
programs were successful and for majority of the respondents the training program met
their needs and expectations. However it was found that there should be more on the job
support to encourage employees to practice what they learnt. A few policy pointers on
redesigning the ALM training module in the form of suggestions/feedbacks from trainee
officers of RRBs included coverage on latest ALM tools & techniques (Duration Gap
Analysis, Simulation and Value at Risk (VaR), use of software
package(CLORET2,ASCROM,ALMAN3, FINACLE4, etc), sessions by professionals
handling ALM desk and capacity building of support staff.
2 CLORET menu option will generate GLMAS.txt and PLMAS.txt which will be copied / imported to PC where cloret software is installed. Please take care that GLMAS.TXT is generated for 01st April of Calendar Year and PLMAS.TXT is generated for 31st March
Calendar Year.
3 Batch job is set for ALMAN Download in CSOLOP. It generates file named XXXXXXFD.DDMMYYYY is generated. Where the
XXXXXX is the branch ALPHA and DDMMYYYY is the date of download for which it is created. This file is available in the directory
of the user who has done CSOLOP for that day. This file is created in UNIX; therefore we have to bring it to PC to copy on floppy so that the data can be uploaded in ALMAN package.
4 FINACLE–Core Banking System. All transactions are accounted in FINACLE on daily basis. ASCROM–Advances Monitoring
System Data from FINACLE uploaded to ASCROM and Reports generated for Advances Monitoring. CLORET–Closing Return System. Data from FINACLE uploaded to CLORET and Final Financials and Schedules generated from CLORET.
Impact Evaluation Study of Training Programme on Asset Liability Management
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Introduction
Banks’ Asset Liability Management (ALM) philosophy is aimed at accomplishing its mission of
profit maximizing through efficient market risk management by ensuring returns commensurate
with the level of risk taken. In an increasingly deregulated market, banks are facing greater
exposure to market risks, viz. interest rate risk, foreign exchange risk and liquidity risk. Asset
Liability Management System provides a comprehensive and dynamic framework for measuring,
monitoring and managing these risks. The objectives of ALM Policy are to formulate guidelines
for management of Liquidity Risk and Interest Rate Risk; fixing market risk limits; efficient
liquidity risk management for ensuring the bank's ability to meet its liabilities as they
become due; interest rate risk management to keep the volatility of the net interest margin within
acceptable limits and profit planning and growth projections like Net Interest Margin, Market
Value of Equity etc. Thus the areas of consideration of the policy for ALM are Liquidity and
funding risk, Interest rate risk, Forex rate risk, pricing risk in relation to Interest Rate fluctuation,
Pricing of lending and deposit rates, Allocation of resources, etc.
As per NABARD guidelines, the Board of Directors has overall responsibility for deciding
the Risk Management Policy of the bank and setting of potential limits. ALM is the function of
Asset Liability Management Committee (ALCO)1, which will operate under the guidance
and supervision of the Board and /or Sub-Committee of Board on ALM and Risk Management.
The ALCO2 is responsible for Balance Sheet planning from risk returns perspective, particularly
strategic management of interest rate and liquidity risk. ALCO is also responsible for establishing
ALM monitoring and management procedures as per risk management guidelines issued by the
regulator and adhering to parameters, procedures and policies decided by the Board.
As per NABARD guidelines banks were asked to set interim targets so as to cover 100
percent of the business by April 1, 2009. Once the ALM System stabilizes and the
1 Asset Liability Management Committee (ALCO) in general is headed by the Chairman consisting of following Officers: Chief Manager (HRM), Chief Manager (OPR), Senior Manager (ADV), Senior Manager (OPR), Manager (I.T.), Manager (Investment) and Senior Manager(Risk Management) as Convener of ALCO. The quorum for meeting of ALCO shall be five members. The ALCO shall endeavour to meet at least once in a month 2 The ALCO would focus on the following business issues (i) Product pricing (Interest rate) for deposits and advances, (ii) Deciding on desired maturity profile and mix of incremental assets and liabilities. (iii) Articulating interest rate view of the bank and deciding on the future business strategy, (iv) Reviewing and articulating funding policy, including liquidity management.,(v) Monitoring and managing exposures/ mismatches, (vi) Reviewing impact on monetary policies and economic/ political changes on the balance sheet, (vii) Deciding the transfer pricing policy (TPM) or TPM of the bank, (viii) Recommending changes in the liquidity and interest rate sensitivity mismatch limits or any provision of this policy and (ix) Monitoring the structure of Balance Sheet in light of Capital Adequacy requirement.
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bank gains experience, it should be prepared to switchover to more sophisticated
computerized technique like Duration Gap Analysis, Simulation and Value at Risk (VaR) for
interest rate risk Management. The details of the data extraction and coverage are given in
Appendix- I.
Asset Liability Management Policy aims to lay down the ALM structure, define the roles of
identified individuals or committees and the top management, measure and manage the asset
liability related risks facing the bank by setting down various risk limits and lay down the MIS
process to keep the various levels of management including the top management informed to
enable them take appropriate decision in a timely manner. The assets and liabilities of the bank
shall be managed to maximize profitability and enhance capital thereby increasing shareholders’
value and also to protect the organization from financial stress arising out of adverse movement
in market rates and thereby continue to serve the customers and community more effectively.
For attaining the objectives3, the ALM policy may look into allocation of resources Interest rate
risk, Pricing risk, Liquidity risk and Funding risk. The Board of Directors shall have the overall
responsibility for deciding the ALM management policy of the bank and setting up of prudential
limits. The Board of Directors4 shall have ultimate responsibility for implementing and ensuring
adherence to this policy.
If deemed necessary, the function of periodic supervision may be delegated to a Sub-
Committee of Board on ALM and Risk Management. If deemed fit, the Board may decide to
include in the Sub-Committee persons who are not board members. ALM on a
continuing basis is the function of Asset Liability Management Committee (ALCO)5,
3 Objectives of the ALM Policy : · Setting guidelines for management of Liquidity Risk and Interest Rate Risk; Setting risk limits, wherever required; Managing liquidity risk; Managing interest rate risk & Profit planning and projections of business parameters 4 The board may periodically review the fund management activities of the bank. The review shall, inter alias, include the following : a) Study and analysis of the minutes of the ALCO meetings; b) Review of Bank’s liquidity position; c) Monitoring of internal and external factors affecting liquidity position; d) Periodic review of Bank’s liquidity strategies, policies and procedures; e) Study of Bank’s interest rate sensitivity analysis; f) Study of contingency funding plan 5 Liquidity and Market Risk management functions shall be centralized at Head Office level with the Asset Liability Management Committee (ALCO). It may be the top operational unit for managing the balance sheet within the performance/ risk parameters determined by the Risk Management, Internal Audit and Internal Control System Board. Asset Liability Management Committee (ALCO) may be headed by the Chairman/Managing Director (Chairman of ALCO) of the bank. The other members may consist of General Managers and departmental heads. The Chairman/ Managing Director may be the competent person for deciding upon the number of members as well as composition of the ALCO. Depending on the subject being dealt with, other senior functionary/ies may be called to attend the meetings as invitees from time to time. Chairman of ALCO may be empowered to make necessary changes in composition of ALCO. Functional Head of Risk Management department may be the convener of ALCO. The ALCO shall
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which may operate under the guidance and supervision of the Board. Balance sheet planning may
be the primary responsibility of ALCO, with special emphasis on liquidity risk and interest rate
risk management. Establishment of process and procedure for management of ALM in line with
guidelines from the regulator/ supervisor and monitoring of the same on an ongoing basis may be
the responsibility of ALCO6. ALCO shall draw upon the in-house expertise available in the
concerned departments of the bank for effective discharge of its responsibilities. ALCO shall have
the overall responsibility of spread management, for achieving the targets set by the Board, in line
with the directions given by the Board. Any matter relating to size, composition and price of assets
and liabilities may be the functional area of ALCO. Deposit rates, lending rates, concession/
loading (mark down or mark-up) to lending rates, transfer pricing etc., may be first discussed by
the ALCO. Only upon approval from ALCO, the matter may be placed before the Board. To focus
exclusively on the risks faced by a financial institution in Asset Liability transformation process,
the instrument of a systematized ALM process is needed. Asset Liability Management can be
defined as a continuous rearrangement of assets and liabilities of the balance sheet so as to
maintain the profit, minimise interest rate risk and provide adequate liquidity. ALM system is a
formalized framework for management of market risks through measuring, monitoring and
managing liquidity and interest risks. The details are given in Appendix – II.
Need for an evaluation of ALM Programme:
The study group has defined the evaluation as an attempt to obtain information on the effects of
training on performance and to assess the value of training in the light of that information.
Basically, the impact evaluation7 has been attempted to address the effectiveness of training to
improve performance of employees on the jobs/tasks. Review of literature has been attempted
through cross references of various study reports/working papers on evaluation of training
programmes by reputed research organizations including BIRD.
Endeavour to meet at least once in a month. In the absence of Chairman/ Managing Director, the senior most General Manager shall chair the meetings. The quorum for the meetings of the Committee shall be three members. 6 ALCO would, inter alias, focus on the following areas: Desired maturity profile and mix of incremental assets and liabilities; Composition of Capital Funds in the light of the Capital Adequacy regulations; Future interest rate movement and the consequent future business strategy; Liquidity position; Exposures to various sectors, groups, industries etc.; Mismatches in inflow /outflow; Product pricing for deposits and advances; Impact of economic/ political changes on the balance sheet; Transfer pricing policy (TPM) or TPM rates of the Bank; Investment operations of the Bank 7 Evaluation must be continuous, be specific and based on objective method and standards.
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Objective, Sample Design and Methodology
The major objective of the study was to assess the impact of ALM Training8 Programmes
conducted by BIRD on Regional Rural Banks. The specific Terms of Reference (ToR) of the study
were
(i) To critically review the progress of ALM policy formulation with focus on
bottlenecks/constraints in the implementation of the ALM.
(ii) To quantitatively estimate
the effectiveness of liquidity & interest risk management and pricing of loan product.
The study was based on both primary as well as secondary data. The secondary information had
been collected from various published and unpublished sources of RRBs, controlling/sponsor
banks and other financial institutions. Data/information on ALM information system, ALM
decision making processes(ALM Committee/ALCO), tools/techniques(Traditional Gap Analysis,
Maturity Gap analysis, Duration Gap analysis), strategies for liquidity and interest rate risk
management through ALM has been used to examine progress made under ALM framework
(information systems, organization and processes for effective implementation. To collect data
from the trainees, a multi-stage stratified sampling design on the lines given below has been
adopted. The survey of the trainees has been carried out in selected RRBs on the basis of total
number of trainees covered during 2011-12, 2012-13 and 2013-14. Subsequently, the state, the
bank and trainee officers formed three stages of sample selection within the selected region.
8 Definition of Training: “It is any attempt to improve current performance by increasing an employee’s ability to
perform through learning, usually by changing the employee’s attitude or increasing his or her skills and knowledge.”
General objectives of any Training program are: (a) to impart the basic knowledge and skill to the new entrants and
enable them to perform their jobs well; (b) to equip the employee to meet the changing requirements of the job and
the organization; (c) to teach the employee the new techniques and ways of performing the job or operation and (d)
to prepare employees for higher level tasks.
Training benefits both the employees and employers. It makes the employee more productive and more useful to an
organization; Training enables the employee to develop and rise within the organization; Training makes the employee
more loyal to an organization; Training makes an employee to work more efficiently; Training enables to secure
promotions easily; Training reduces wastages as the employees use the tools properly.
Areas of training: Knowledge: Awareness of the rules & regulations and policies of the company; Social Skills:
Teaching the employee how to be a team member and get ahead; Technical Skills: Teaching the employee regarding
the technical aspects of his job; Decision making and Problem solving Skills: Emphasis on methods and techniques
for making organizational decisions and solving work related problems.
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Depending upon the number of trainees covered during last three years, a sample of 36 trainee
officers has been selected using simple random sampling out of total 67 trainees. Keeping in view
the distribution of RRBs(amalgamated), the sample RRBs has been drawn in such a way that the
rural banking infrastructure(particularly RRBs) is truly represented. The total number of RRBs
selected within the region has been further distributed according to the number of trainees covered,
size of the bank in terms of business and coverage, etc. RRBs have been selected on the basis of
probability proposal to size method applied independently to each stratum. An independent trainee
was the ultimate sampling unit for the selection of sample. From the same state, a sample of 2-3
RRB officials (as a control sample) who had not undergone similar training, had been selected to
have a comparative analysis. In this impact evaluation9 study both pre-post and with-without
approaches representing temporal and spatial variation have been adopted.
The data has been collected with the help of pre-tested questionnaires10. The type of data collected
with these questionnaires included information on the following variables.
9 Evaluation of Training: Definition: “Any attempt to obtain information on the effects of training on performance
and to assess the value of training in the light of that information.”
Objectives of Training Evaluation: To check the effectiveness of training to improve performance of employees on
the jobs; To ascertain how far the training is useful to improve career prospects of individual employees in the
organization; To identify the deficiencies of the training for the purpose it is intended in order to incorporate additions
to the training program; To identify unnecessary aspects in the training program for the purpose of deleting such
things from the training program.
Principles of Evaluation: Evaluation must be continuous, must be specific, must be based on objective method and
standards and Evaluation specialist must be clear about the goods and purpose of evaluation.
10 Techniques of Evaluation: Questionnaires; Tests; Interviews; Cost benefit analysis and Feed back
Evaluation methods: Test-retest method: Participants are given a test before they begin the program. After the
program is completed the participants retake the test. This test may not be valid but more importantly, Increase in test
scores may be due to causes other than the training program. Pre-post performance method: In this method each
participant is evaluated prior to training and rated on actual job performance. After instruction (program) is completed
the participant is reevaluated. It deals directly with job behavior. Experimental – Control group method: Two
groups are established i.e. experimental & Control group, comparable as to skills, intelligence and learning abilities
and evaluated on actual job performance. Members of control group work on the job but do not undergo training.
Experimental group is given the training. At the conclusion of the training the two groups are reevaluated.
Four factor comparison method (Kirkpatrick model): This method is proposed by Kirkpatrick& others. According
to this method evaluation of following 4 factors are essential to determine the effectiveness of training program. These
are Reaction: Employees reaction to the training program by itself is a good indicator. This is subjective evaluation.
However it reveals the attitude of the trainees to the training program. Reaction is obtained by opinion surveys and
taking majority views. Learning: In this case an attempt is made to assess whether the trainees have learned the skills
and knowledge intended to be imparted through the training program. Behavior: here the trainee’s behavioral pattern
is examined carefully after his training program for the purpose of evaluating whether there are changes in his
behavior in the job compared to the period before the training program was imparted. Result: This is a method of
evaluating quantifiable indices or attributes of performance which can be directly related as a result of training. For
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i. Trainee questionnaire – Understanding of various risks/financial market instruments, concept
of ALM, posting in the concerned desk, programme meeting the needs and expectations, adequate
training facilities provided, contents of programme logically organized, exchange of
knowledge/skills gained with colleagues, usefulness of training and training materials, ability to
handle the job/task, usefulness in day-to-day functioning, use of various types of ALM tools,
linkage between ALM and profitability, suggestions in the training programme on ALM, etc.
ii. Field level questionnaire- ALM policy formulation, constitution of ALCO, periodicity of
meetings, agenda items (interest rate movements & expected spreads, mismatches in maturity
pattern, funding policy, liquidity position, net interest margin, investment portfolio, etc.), pricing
of loan products, risk mitigating measures in liquidity & risk management, staffing pattern,
operational issues and difficulties associated with the implementation of the ALM and areas for
further improvement.
Table II.1 Sample frame of Banks and Trainees
Feedback received after
canvassing trainee questionnaire
to all 67 trainees
No. of RRBs
covered
No. of RRBs covered for
canvassing field level
questionnaire
States covered
during field visit
36 16 03 UP, Bihar and
Rajasthan
Primary data has been supported by secondary data for the study. Data on the progress, operation
aspects under the ALM Programme, etc., were collected from the RRBs covered under the study.
Top Management/senior bankers of RRBs was interviewed during field visits to assess the
operational advantages and disadvantages of the Programme. Qualitative parameters like ALM
policy, constitution of ALCO, periodicity of meeting and number of relevant items in the agenda
of ALCO were assigned number/value on a 1 to 5 scale depending upon their
performances/progress for sample RRBs. Various techniques of evaluation like questionnaires,
interviews & feed-back; evaluation methods like pre-post performance method; experimental–
control group method and four factor comparison method (reaction, learning, behaviour, and
result) have been attempted. Primary data and secondary data (A profile of RRBs-Bank-wise for
example Productivity, reduction in rejection rates of finished goods, incidents of accidents, absenteeism, conflicts,
etc….
Impact Evaluation Study of Training Programme on Asset Liability Management
7
year 2013 and 2014) have been tabulated and analyzed using statistical tools such as mean,
percentage share, weighted average, pie-chart, correlation matrix, step-wise regression, ANOVA11
and Dummy variable, etc., to derive inferences.
Limitations of the study:
1. Due to organizational restructuring (post-amalgamation) the sample was restricted to 36.
More samples would have provided better results.
2. The study is restricted to trained officers of RRBs only as it has no universal application.
3. Details like work-experience in ALM desk were not given by some employees during the
survey.
4. The study findings are based on the impressionistic views of some officers instead of their
experience of working on the ALM desk.
11 ANOVA – Analysis of Variance
Impact Evaluation Study of Training Programme on Asset Liability Management
8
Results and Discussion
Impact of the training (Studying the demand side - testing the water)
Trainee Questionnaire
1. After attending the training programme at BIRD, I am able to understand the various types of
risks indicated below, associated with banks
Type of Risk Able to understand
Yes No
Credit Risk 32 04
Liquidity Risk 34 02
Interest Rate Risk 33 03
Operational Risk 28 08
The above pie chart shows that:
94 % of the respondents have understanding about liquidity risk.
91 % of the respondents have understanding about interest risk.
88 % of the respondents have understanding about credit risk.
77 % of the respondents have understanding about operational risk.
88.9 %
94.4 %91.7 %
77.8 %
% of RRB Trainees/participants having understanding about various type of risk
Credit Risk
Liquidity Risk
Interest Rate Risk
Operational Risk
Impact Evaluation Study of Training Programme on Asset Liability Management
9
2. I came to know about the financial market instruments and terms like SEBI, OTCEI, NSE,
FIMMDA etc., after attending the programme
Yes No. I knew these terms even before
attending the training programme
The above pie chart shows that 83% of the respondents came to know about the financial market
instruments and terms like SEBI, OTCEI, NSE, FIMMDA etc., after attending the programme.
3. I came to know on the concept of ALM after attending the programme
Yes No. I knew about ALM even before
attending the training programme
The above pie chart shows that 56 of the respondents had knowledge/experience in ALM
before the training indicating strong entry–level behavior.
Impact Evaluation Study of Training Programme on Asset Liability Management
10
4. Whether the course material provided during the training was useful?
Yes 36
No Nil.
All the respondents had indicated that course material provided during the training was useful.
5. Have you been posted to the ALM desk /Cell after attending the training conducted by BIRD?
I was posted to the desk even before I attended the training 07
I have been posted to the desk after attending the training
programme
21
I have not been posted although I have undergone the training 08
At present I am working on ALM desk (yes / no) 28
22 % of the respondents have not been posted in ALM desk despite receiving training.
Impact Evaluation Study of Training Programme on Asset Liability Management
11
6. Whether you shared the inputs received during training with other colleagues working on
ALM desk?
Yes 36
No Nil
All the respondents had indicated that course material provided during the training was useful.
7. To what extent the knowledge gained during the training is useful in your day-to-day
functioning?
To a great extent 23
To some extent 10
No scope for use 3
8% of the respondents felt that there was no scope for use of knowledge gained during the
training in our day-to-day functioning.
8. Whether your bank has formulated ALM policy?
Yes 36
No Nil
All the respondents indicated that their banks have formulated ALM policy approved by Board.
Impact Evaluation Study of Training Programme on Asset Liability Management
12
9. If answer to above question is ‘yes’, whether the training programme at BIRD helped you to
assist in formulation/refinement of the policy in your bank
The programme helped me to a great extent in assisting in
formulation / refinement of ALM policy in my bank 10
The programme helped to some extent in assisting in formulation /
refinement of ALM policy in my bank 18
Policy was formulated in the bank before I attended the programme 6
I did not get an opportunity to assist in formulation / refinement of
the policy 2
78% of the respondents indicated that training programme at BIRD helped in
formulation/refinement of the policy in their bank.
Impact Evaluation Study of Training Programme on Asset Liability Management
13
10. Whether the training programme has helped the bank in any of the following areas?
Particulars Programme helped
Yes No
Constitution of ALCO 6 30
Finalising agenda items for ALCO 28 8
Understanding interest rate movements and expected spreads 31 5
Understanding mismatches in maturity pattern 27 9
Understanding pricing of loan products, risk mitigating measures for
liquidity and interest rate risks
33 3
Operational issues and difficulties associated in implementation of the
ALM
32 4
Areas for further improvement 36 0
Discussions on investment portfolio 30 6
16.7 % of the respondents indicated that training programme at BIRD helped in Constitution of
ALCO.
77.8 % of the respondents indicated that training programme at BIRD helped in Finalising agenda
items for ALCO.
86.1 % of the respondents indicated that training programme at BIRD helped understanding
interest rate movements and expected spreads.
75 % of the respondents indicated that training programme at BIRD helped in Understanding
mismatches in maturity pattern
91.7 % of the respondents indicated that training programme at BIRD helped in understanding
pricing of loan products, risk mitigating measures for liquidity and interest rate risks.
88.9 % of the respondents indicated that training programme at BIRD helped in Operational issues
and difficulties associated in implementation of the ALM.
83.3 % of the respondents indicated that training programme at BIRD helped in Discussions on
investment portfolio
All the respondents indicated that training programme at BIRD helped in Areas for further
improvement.
16
.7
77
.8 86
.1
75
.0 91
.7
88
.9 10
0.0
83
.3
83
.3
22
.2
13
.9 25
.0
8.3 11
.1
0.0
16
.7
IN %
AG
E
PROG. HELPED
Yes
No.
Impact Evaluation Study of Training Programme on Asset Liability Management
14
11. What type of ALM tools have been introduced by your bank after your attending the
training programme?
Particulars Tool used / introduced
Yes No
Preparation of Liquidity Gap Statement 33 3
Preparation of Gap Statement to measure interest rate
risk 28 8
Duration concept 6 30
Impact of interest rate movement on Net Interest
Margin (NIM) 30 6
Only some of these tools have been introduced 36 0
None of these tools are used in the bank for ALM 0 36
91.7 % of the respondents indicated that training programme at BIRD helped in preparation of
Liquidity Gap Statement Constitution of ALCO.
77.8 % of the respondents indicated that training programme at BIRD helped in preparation of
Gap Statement to measure interest rate risk.
16.7 % of the respondents indicated that training programme at BIRD helped understanding
Duration concept.
83.3 % of the respondents indicated that training programme at BIRD helped in Understanding
Impact of interest rate movement on Net Interest Margin (NIM).
All the respondents indicated that training programme at BIRD helped in using some of the ALM
tools.
91.7
77.8
16.7
83.3
100.0
0.08.3
22.2
83.3
16.7
0.0
100.0
0.0
20.0
40.0
60.0
80.0
100.0
120.0
Preparation ofLiquidity Gap
Statement
Preparation ofGap Statement
to measureinterest rate risk
Durationconcept
Impact ofinterest rate
movement onNet Interest
Margin (NIM)
Only some ofthese tools havebeen introduced
None of thesetools are used in
the bank forALM
(in
%ag
e)
ALM Tools
Yes No
Impact Evaluation Study of Training Programme on Asset Liability Management
15
12. In order to mitigate liquidity risk, which of the following statements have been introduced in
your bank after you are attending the training programme?
Particulars Statement introduced
Yes No
Putting assets and liabilities in different time buckets 34 2
Structural Liquidity statement (1) 19 17
Dynamic Liquidity statement (2) 22 14
Statements at (1) and (2) only are introduced 17 19
None of the above statements introduced 2 34
94.4 % of the respondents indicated that in order to mitigate liquidity risk, they are putting assets
and liabilities in different time buckets.
52.8 % of the respondents indicated that in order to mitigate liquidity risk, they are preparing
Structural Liquidity statement.
61.1 % of the respondents indicated that in order to mitigate liquidity risk, they are preparing
Dynamic Liquidity statement.
47.2 % of the respondents indicated that in order to mitigate liquidity risk, they are preparing both
Dynamic Liquidity statement and Structural Liquidity statement.
Only 5.6 % of the respondents indicated that they are preparing neither Dynamic Liquidity
statement nor Structural Liquidity statement.
94
.4
52
.8 61
.1
47
.2
5.6
5.6
47
.2
38
.9
52
.8
94
.40.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
90.0
100.0
P U T T I N G A S S E T S A N D
L I A B I L I T I E S I N D I F F E R E N T
T I M E B U C K E T S
S T R U C T U R A L L I Q U I D I T Y
S T A T E M E N T
D Y N A M I C L I Q U I D I T Y
S T A T E M E N T
S T A T E M E N T S A T ( 1 ) A N D
( 2 ) O N L Y A R E I N T R O D U C E D
N O N E O F T H E A B O V E
S T A T E M E N T S I N T R O D U C E D
IN %
AG
E
LIQUIDITY RISK MITIGATION
Yes
No
Impact Evaluation Study of Training Programme on Asset Liability Management
16
13. In your opinion whether the profitability of the bank has improved after implementation of
ALM concept in the bank?
Yes 28
No 8
78 % of the respondents indicated that the profitability of the bank has improved after
implementation of ALM concept in the bank.
78%
22%
profitability of the bank has improved
Yes
No
Impact Evaluation Study of Training Programme on Asset Liability Management
17
14. Which of the following areas related to ALM, in your opinion, have contributed in bringing
about overall improvement in the financial position of the bank?
Particulars Whether resulted in improving
financial position of the bank
Yes No
Preparation of Liquidity Gap Statement 31 5
Preparation of Gap Statement to measure interest rate
risk 29 7
Introduction of Duration concept 9 27
Preparation of Structural Liquidity Ladder 26 10
Preparation of Dynamic Liquidity Ladder 34 2
None of the above 2 34
86.1 % of the respondents indicated that preparation of Liquidity Gap Statement resulted in
improving financial position of the bank
80.6 % of the respondents indicated that preparation of Gap Statement to measure interest rate risk
resulted in improving financial position of the bank
25 % of the respondents indicated that Introduction of Duration concept resulted in improving
financial position of the bank
72.2 % of the respondents indicated that Preparation of Structural Liquidity Ladder resulted in
improving financial position of the bank
94.4 % of the respondents indicated that Preparation of Dynamic Liquidity Ladder
Only 5.6 % of the respondents indicated that none of the above areas related to ALM resulted in
improving financial position of the bank.
86
.1
80
.6
25
.0
72
.2
94
.4
5.61
3.9 19
.4
75
.0
27
.8
5.6
94
.4P R E P A R A T I O N O F L I Q U I D I T Y
G A P S T A T E M E N T
P R E P A R A T I O N O F G A P
S T A T E M E N T T O M E A S U R E
I N T E R E S T R A T E R I S K
I N T R O D U C T I O N O F D U R A T I O N
C O N C E P T
P R E P A R A T I O N O F
S T R U C T U R A L L I Q U I D I T Y
L A D D E R
P R E P A R A T I O N O F D Y N A M I C
L I Q U I D I T Y L A D D E R
N O N E O F T H E A B O V E
IN %
AG
E
IMPROVING FINANCIAL POSITION OF THE BANK
Yes No
Impact Evaluation Study of Training Programme on Asset Liability Management
18
15. What suggestions would you like to give to bring about improvement in the training
programme on ALM conducted by BIRD?
Particulars
The programme does not need any changes and may continue to be
conducted in the present format. 30
The contents of the programme were inadequate and needs to be
upgraded 4
Cannot comment as I am not presently working on the ALM desk 2
83.3 % of the respondents indicated that the programme does not need any changes and may
continue to be conducted in the present format.
11.1 % of the respondents indicated that the contents of the programme were inadequate and needs
to be upgraded
5.6 % of the respondents indicated that they cannot comment as they are not presently working on
the ALM desk
83
.3
11
.1
5.6
IMPROVEMENT IN THE TRAINING PROGRAMME
Impact Evaluation Study of Training Programme on Asset Liability Management
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Field level Questionnaire
In order to study the determinants of profitability of RRB, the study team has applied cross -
sectional multiple step-wise regression analysis using data for select RRBs. Among the
explanatory variables, we have taken ALM policy formulation, constitution of ALCO,
periodicity of meetings, agenda item( interest rate movements & expected spreads,
mismatches in maturity pattern, funding policy, liquidity position, net interest margin,
investment portfolio, pricing of loan products, risk mitigating measures in liquidity, pricing
of loan products, risk mitigating measures in liquidity & risk management, staffing pattern).
Using dummy variables (ALM training by BIRD and Non-trainees), the intercept term has
been allowed to vary across the cost of fund, so as to pick up difference in Net interest
margin. In the regression model, the dependent variables Net interest margin is frequently
influenced not only by variables that can be readily quantified on some well -defined scale
(i.e. cost of funds, Yield on assets, Liquidity risk and interest risk, etc.), but also by variables
that are essentially qualitative in nature (i.e. ALM policy formulation, constitution of ALCO,
Periodicity of meetings,). Since such qualitative variables usually indicate the presence or
absence of an attribute (in the present study it is either officers of RRBs attended ALM
training by BIRD or otherwise), one method of ‘quantifying’ such attribute is by constructing
artificial variables that take on values of 1 or 0, 0 indicating the absence of an attribute and
1 indicating the presence (or possession) of that attribute. Variables that assume such as 0
and 1 value are called dummy variables.
Impact Evaluation Study of Training Programme on Asset Liability Management
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Analytical Model:
In case of ANOVA model, the regression model contains explanatory variable that are
exclusively dummy, or qualitative, in nature. For example, we have taken the following
model:
Yi = αi + βiDi + ξi
Where, Y = Net Interest Margin (NIM),
Di = 1 if, officers of RRBs attended ALM training by BIRD
= 0, otherwise
The results corresponding to above regression are as follows:
Ŷi = 0.91 + 0.0469 Di t = (4.74) (1.689); R2
= 0.3648
As these results show, the estimated mean NIM (one of the financial Ratios) of RRBs
received ALM training inputs by BIRD is 0.9569(α+β) and otherwise 0.91(α). Since βi is
statistically significant at 90% level of confidence, the results indicate that the mean NIM
of the two categories (RRBs attended ALM training conducted by BIRD or otherwise) is
different. If all other variables are held constant, it may be partially concluded that there is
a significant difference in the NIM level of the two categories. However, the present model
is too simple to answer this question definitely, especially in view of the cross-sectional data
used in the analysis.
To draw the best-fit regression equation, the study team have adopted the method of stepwise
regression. This procedure evaluates each variable in turn on the basis of extent of correlation
(Correlation matrix) and accumulates the model by adding variables sequentially. The variable
having highest correlation with the dependent variable could be added to the model first, then the
second best or so on. Variables are added as long as R2 is increasing. To avoid the problem of
Impact Evaluation Study of Training Programme on Asset Liability Management
21
multi-colinearity12, we dropped many variables from the model and selected only three variables.
Details are given in the Appendix - III.
Table 1.1 Statistical results of step-wise regression model – sample RRBs
Variables No. of relevant items
in the agenda of
ALCO(NAI))
Periodicity of
meeting(PM)
ALM Policy &
Constitution of
ALCO(APCO)
Co-efficients 0.4329* 0.2142* 0.1339**
‘t’ value 2.92 2.74 1.98 R2 = .9724, Ŕ2 = .9614, ‘F’ value = 88.19, ‘D’ stat = 2.34 DL = 0.525 DU = 2.016 D.F. = 1872
* Stands for 10% level of significance. ** Stands for 20% level of significance.
The estimated elasticities13 βi for all the variables with respect to Net Interest Margin for the
sample RRBs are presented in Table 1.1. It is observed from the table that No. of relevant items
in the agenda of ALCO - NAI (0.4329) as a whole influence significantly to the Net Interest
Margin compared to other variables, i.e. ALM Policy & Constitution of ALCO (0.1339) and
Periodicity of meeting (0.2142).
Table 1.2 Statistical results of regression model having dummy variables – RRBs received
ALM training inputs by BIRD
Varible/s Co-efficient St.dev. t - ratio
Constant 0.91
Dummy variable 0.0469** 1.680 2.499
D.F -1874 R2 = 0.36 Ŕ2 = 0.29
Dummy variable = RRBs received ALM training by BIRD (RATI)
* Stands for 5% level of significance, ** Stands for 10% level of significance.
In the above model, there are quantitative and qualitative variables one each. Coefficients of all
these variables are statistically significant at the 10% level of significance. For instance, holding
all other factors constant, the level of Net Interest Margin is expected to be higher by about 0.13
times in percentage term (13 basis points) of the RRBs received ALM training by BIRD.
12 Multi-colinearity occurs where there is strong relationship among explanatory variables. 13 Increase in percentage term of independent variable tends to increase/decrease in percentage term of dependent variable.
Impact Evaluation Study of Training Programme on Asset Liability Management
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Further, average level of NIM of RRBs received ALM training by BIRD (i.e. when the
dummy variable is equal to 1) and otherwise (i.e. when the dummy variable takes a value of
zero) is
NIMi = 0.91 + 0.0469 RATIi ------------------(i)
For significance, we have used various statistical tools like “t” value and R2. For cross section
analysis, we have taken care of the multi- colinearity problem by taking one variable at a time
considering the high value in correlation matrix.
Impact Evaluation Study of Training Programme on Asset Liability Management
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Conclusion and Policy Prescription
Implementation of ALM tools effectively is likely to improve the risk management systems and
Net interest Margin of RRBs as the banks aim for adequate capitalization to meet the underlying
credit risks and strengthen the overall financial system of the country. However there is some
teething problem like lack of a coherent, documented and practical policy is a big hindrance to
ALM implementation. Most often, ALCO members may not be aware of implications of risks
being measured and impact thereof. Officers in RRBs need to understand risk measurements and
risk mitigation procedures. Measurement of risk is a fairly simple phenomenon and does go on
regardless. Failures inevitably occur due to lack of understanding, coupled with a feeling that top
management knows all that is there in banking. Risk organization in RRBs generally land up
reporting to treasury, as they are people who come closest to understanding complex financial
instruments. The fact that they are a business unit, in charge of ‘risk taking’ is overlooked.
‘Risk taking’ and ‘Risk management’ are generally two distinct parts of any organization and both
must report to Board independently. Openness and transparency are essential to proper risk
mitigation. Most organizations react badly to positions going wrong by taking more risks and enter
a vicious cycle of risks. Thus, it is required that RRBs follow policy in both letter and spirit. Data
may not be available at all times in requisite format. It must be remembered that many data items
are assumptions and gaps must be measured in perspective. However, in modern banking, it is
mapping of models to zero coupon bonds that are an issue. Once again, arguments are that this
should exist within the bank. Based on sophistication required, multiple models may be used to
validate this conversion. This is strictly outside ALM framework but integrates into ALM
framework. A zero gap is not practical. Returns are expected for taking risks. Banks assume
market and credit risk and hence they make returns. ALCO’s job is to correctly determine positions
and put in place appropriate remedial measures using appropriate risks. It is not to show things as
good when they are not. The study team is of the opinion that Interest rate risk and liquidity risks
are significant risks in a bank’s balance sheet, which should be regularly monitored and managed.
These two aspects should be a key input in business planning process of a bank. Banks should
make sure that increased balance sheet size should not result in excessive asset liability mismatch
resulting in volatility in earnings. There should be proper limit structures, which should be
monitored by Asset Liability Management Committee (ALCO) on a regular basis.
Impact Evaluation Study of Training Programme on Asset Liability Management
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The effectiveness of ALM system should be improved with a good Fund Transfer Pricing system
by involving all ALCO members in decisions as ALM sheet item granularity depends on
distribution for non-term products. Further, the study brings out the fact that implementation of
ALM in RRBs in the form of constitution of ALCO, periodicity of ALCO meeting and number of
items in the agenda and tools of ALM was in a sub-optimal stage.
Based on the feedbacks/suggestion/inputs received on training effectiveness on ALM programme
for RRBs, the study team is of the opinion that in all respects the training programs were successful
and for majority of the respondents the training program met their needs and expectations.
However it was found that there should be more on the job support to encourage employees to
practice what they learnt. A few policy pointers on redesigning the ALM training module in the
form of suggestions/feedbacks from trainee officers of RRBs included latest ALM tools &
techniques (Duration Gap Analysis, Simulation and Value at Risk (VaR), use of software
package(CLORET, ASCROM, ALMAN, FINACLE, etc), sessions by professionals handling
ALM desk and capacity building of support staffs.
Impact Evaluation Study of Training Programme on Asset Liability Management
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References
Reserve Bank of India, (1999). Asset-Liability Management (ALM) System:
Circular No. DBOD.No.BP.BC.8/21.04.098/99 dated
February 10, 1999.
---------------------------, (2007). Guidelines on Asset-Liability Management (ALM)
System–Amendments: Circular No DBOD. No BP.BC..
.38/21.04.098/2007-08 dated October 24, 2007.
---------------------------, (2008). Guidelines on Asset - Liability Management (ALM):
Circular No. DBOD.No.BP.BC.68/21.04.098/2007-
08 dated April 9, 2008.
NABARD, (2007). Guidelines for Introduction of Asset-Liability Management
(ALM) in Select Regional Rural Banks : Circular No. Circular
No.16/DoS.7/2006.07 Ref. NB.DoS.HO.POL.4420/P.108/2006-
07 dated January 9, 2007.
--------------, (2008). Introduction of Asset-Liability Management (ALM) in Regional
Rural Banks (RRBs) : Circular No. 111 / DOS - 24 /2008 Ref.
NB.DoS.HO.POL/1323/P-108/2008-09 dated 30 June 2008
--------------, (2013). Implementation of Asset-Liability Management Systems in
Regional Rural Banks : Circular No.25/DoS-03/2013 Ref.
NB.DoS.HO.POL./3898/P-108/2012-13 January 30, 2013.
--------------, (2014). Profile Data on RRBs from Off-site Surveillance System (OSS):
http://nabnet.in/projects/oss/# (Accessed on 02 September 2014).
Government of India, (1998). Report of the Committee on Banking Sector Reforms :
(Chairman: M Narasimham).
Kannan, K (1996). Relevance and importance of asset-liability management in Banks :
The Journal of the Indian Institute of Bankers, 67(4).
Jalan, B (2000). Agenda for Banking in the New Millennium : Reserve Bank of India
Bulletin, March, p(61-64)
Jain, J.L. (1996). Strategic planning for asset liability management: The Journal of the
Indian Institute of Bankers, 67(4).
Jain Manjula et al. Asset-Liability Mangement in the Indian Banks – Issues and
Implications : (http://www.smsvaranasi.com/insight/asset-
liability_management_in_the_indian_banks_issues_and_implications.pdf (Accessed on 14 June
2014).
Impact Evaluation Study of Training Programme on Asset Liability Management
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APPENDIX-I
Consolidated statement of the bank business at weekly, monthly intervals and Balance sheet
(annually) which cover 100% of Assets & Liabilities are taken as base figures. Till
100 %conversion of branches in to CBS the above data will obtain in CLORET as well as
others format prescribed by the bank. After 100% conversion of the branches in to CBS, the
above data will be obtained in prescribed format on daily basis from the Accounts & Audit
Department.
The changes in the business figures reported in daily/ weekly/monthly statements of the
bank is available from the data for which consolidated figures are available, to the date for which
structural liquidity statement is to be prepared, are added or subtracted to the base figures to arrive
at overall estimated business figures of the bank for the structural liquidity statement. In this
process, for the preparation of daily structural liquidity statement, the growth of the non
CBS branches gets updated on weekly basis.
Residual maturity pattern of Term Deposits is generated from the data submitted by the Regions
and processed by ALMAN package at quarterly intervals for every quarter end. The bank will
endeavor to generate the report on monthly basis. For preparing the daily structural liquidity
statement the balances of Term Deposit are extrapolated in the proportion of latest available data
on residual maturity pattern generated from ALMAN package.
Till the implementation of ASCROM14 system, the Residual Maturity of advances will be obtained
from the selected branches on the basis of ABC approach. After full implementation of
ASCROM system in the bank the residual maturity of advances will be obtained on quarterly
basis. For preparing the daily structural liquidity statement the balances of advances (expect
CC/OD) are extrapolated in the proportion of the latest available residual maturity pattern of
advances from ASCROM package.
Residual maturity pattern of investments will be obtained from the investment deptt.on
quarterly basis.
Liquidity Risk Management.
Measuring and managing liquidity risk are among the most vital activities of the bank. By ensuring
a bank's ability to meet its liabilities as they become due, liquidity management can reduce the
probability of an irreversible adverse situation developing. The analysis of liquidity requires bank
managements to measures not only the liquidity position of the bank on an ongoing basis but
also to examine how funding requirements are likely to evolve under crises scenarios.
The bank will manage the liquidity risk by Traditional Gap Approach.
Liquidity Risk Management through "Traditional Gap Approach":
1. For measuring the liquidity risk, Bank shall use maturity ladder and calculation of gaps (surplus
/deficit) between inflows and outflows of funds as per NABARD guidelines.
14 ASCROM – Asset Classification and Credit Monitoring
Impact Evaluation Study of Training Programme on Asset Liability Management
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2. The statement of structural liquidity will be prepared by placing all cash inflow & out flow in
the maturity ladder according to the expected timing of Cash Flows in the format prescribed by
NABARD for preparation of structural liquidity statement.
3. The guidelines for classification of various components of assets and liabilities into different
time buckets for preparation of structural liquidity statement, as provided by NABARD will
be followed. For certain other items of assets and liabilities, which are of non-maturity in
nature and where NABARD has not provided any norm for classification in to different
time buckets the norms prescribed in ALM policy, discussed hereafter, will be followed.
4. For the bucketing of current deposits, saving deposits Cash Credit, overdraft and Bills payable
information in the following format will be provided by the bank's data center for CBS branches.
For Non-CBS branches weekly data will be provided by the Regions.
G/L
Code
G/L
Head
Date Op.Balance Dr. Cr. Total
Limit*
Closing
Bal.
*Wherever applicable
After obtaining above data, outflow will be calculated as under: Liability Heads- Saving, Current
deposit and Bills payable:
• The difference between debit and credit will be calculated for each day (weekly basis till
100% CBS has not done) of one year from the date of calculation, for respective liability heads as
above separately.
• The data points where the amount of debit is more than the amount of credit ie where net
outflow of funds has taken place will only be considered.
• Average of net debit, ie outflow of funds will be calculated for respective heads.
• Standard deviation of credits and debits for respective heads over a period of past one year
will be calculated by applying normal statistical technique.
• The average of the opening balance under respective heads will be calculated
from the data series provided.
• The outflow ,as % to outstanding balance as on the date of calculation, will be calculated
by applying the formula as under:-
[(Average Dr.+ Standard Deviation of Dr.)-( Average Cr.+ Standard Deviation of
Cr.)]*100
Average Op. Balance
The difference will be subject to back testing using the usual techniques. Suggestion, if any to
improve the calculated will de put up to ALCO for amendments in the policy.
Asset Head - Overdraft/ Cash Credit:
• The difference between credit & debit will be calculated for each day (Till the CBs is
not completed ,weekly difference may be taken) of one year from the date of calculation for
respective Assets Heads as above separately.
• The Opening and Closing balance will be subjected to Exponential Smoothing
Impact Evaluation Study of Training Programme on Asset Liability Management
28
Technique with damping factor of 0.99. For this, the balance in the first day will be zero. The
balance in the second day will be the balance of 1st day. The balance in the third and the
subsequent days will be calculated as under;-
Smoothed balance = (0.01*balance of previous day) + (0.99* smoothed balance of previous.
day)
The smoothed balance for the past one year in respect of opening balance, debits and credits will
be calculated.
• Average net credit ie inflow of funds will be calculated for respective heads.
• Average of the smoothed opening balance will be calculated from the data series.
• The inflow % as to outstanding balance as on the date of calculation will be arrived
at by applying the formula as under:-
{[Average Credit - Average Debit]*100}/Average Op. Bal.
The Balances in the heads will be classified into different time buckets as under:-
Outflow Current Deposits 1-14 days, 15-28days, 1-3
years, and over 5 years
Saving Deposits 1-14 days, 15-28days, 1-3
years , and over 5 years
Bills payable 1-14 days
Inflow Cash Credit 1-14 days, 15-28days, 1-3
years , and over 5 years
Overdraft 1-14 days, 15-28days, 1-3
years , and over 5 years
The above equations will give the average inflow/outflow for one day. For inflow/outflow in the
1-14 days will be multiplied by the number of days between the bucket ie.14 days. Similarly for
the 15-28 days the one inflow/outflow will be multiplied by the number of days between the
buckets i.e. 14 days. The amount placed in these buckets will be ‘volatile’. In case of Saving
Bank, Current Deposit, Cash Credit & Overdraft last 36 months balances will be arranged
date wise and minimum will be calculated which will be the minimum core amount and will
be placed in the over 5 years buckets. The remaining balance (excluding volatile and minimum
core) will be placed in
1-3 years buckets.
As per NABARD guidelines the excess balance over the required CLR/SLR may be shown
under 1-14 days’ time bands, the statutory balance may be distributed amongst various time
bands corresponding to the maturity profile of DTL with a time-lag of 28 days.
All contingent liabilities will be estimated and placed in gap reported as under:
/Un-availed portion of cash credit/overdraft: Potential availment in the unavailed portion of
CCIOD accounts (excluding where limit utilization is 100% or more) will be worked out as under:-
1. Quarter wise percentage of utilisation of limits will be worked out for the last 4 quarters based
on the sanctioned limit and balance outstanding (Cr. Balance to be ignored) on the last day of the
respective quarters.
Impact Evaluation Study of Training Programme on Asset Liability Management
29
2. Difference between the percentages of utilization from the above worked out. The difference
obtained for each consecutive quarter is divided by the unavailed percentage of each preceding
quarter. The highest percentage thus obtained is treated as potential percentage availment of the
unavailed portion.
3. The unavailed portion is worked out through the latest quarter 's information by taking the
difference between the total limits and the outstanding balance (Cr. Balance ignored).
4. The potential availment amount is worked out by multiplying the potential percentage
availment ( worked out in point no.2 above) to the unavailed amount ( as obtained in point (3)
above) and this is distributed uniformly up to one year buckets in proportion of number of days.
Letter of Credit/ Bank Guarantee:-
Expected devolvement in LC will be worked out separately as under:-
• Quarter wise total amount devolved for the previous four quarters would be taken and its
average would be worked out.
• Since devolvement of LIC initially entails cash out flows and subsequently amount
gets recovered, the actual devolvement will be limited to one quarter figures on an average.
• Bank guarantee is normally not expected to devolve on the bank. Therefore
devolvement under Bank Guarantee will be bucketed in proportion of number of days up to one
year.
• The average so worked out as above will be the likely devolvement amount and would be
distributed uniformly up to 90 days buckets in proportion of number of days to depict outflow of
funds, in respect of Letter of Credit. In respect of Bank Guarantee the likely devolvement will
be distributed up to one year in the proportion of number of days in each time bucket.
All other assets and liabilities where specific maturity dates are available will be bucketed
to respective maturity buckets and the assets and liabilities for which specific maturity dates are
not available and which do not represent cash payable or cash receivable will be bucketed
in Over 5 years bucket. Details of bucketing of all items of assets and liability and off balance
sheet for the preparation of structural liquidity statement have been provided in Appendix-I.
Structural Liquidity- Prudential limits:-
As per NABARD guidelines, RRBs however, are expected to monitor their cumulative
mismatches (running total) across all time bands by establishing internal prudential limits with the
approval of the Board. The mismatches (negative gap between cash inflow & outflow) during 1-
14 and 15-28 days’ time bands in normal course should not exceed 20% of the cash out flows in
each time band.
Impact Evaluation Study of Training Programme on Asset Liability Management
30
In the light of new ALM guidelines of NABARD, it is proposed to fix prudential gap limits as
under:-
Sl No. Time Bucket Negative Gap limit%
As per NABARD
guidelines( not exceeded
of cash flow)
Proposed for
approval for the
Bank( not
exceeded of cash
flow)
01 1-14 days & 14-28 days 20% 20%
02 29days to 3 months * 40%
03 Over 3 months to 6months * 60%
04 Over 6 months to 1 year * 60%
05 Over 1 year to 3 years * 45%
06 Over 3 year to 5 years * 40%
07 Over 5 years * 40%
08 Cumulative mismatch upto1
year
* 50%
(* NABARD has not stipulated any limit for these buckets.)
Dynamic Liquidity:
In order to enable the bank to monitor their short term liquidity on a dynamic basis over a time
horizon spanning from 1-90 days, bank may estimate their short term liquidity profile on
the basis of business projections and other commitments for planning purposes.
Negative gap. dynamic liquidity statement (cumu1ative up to 90 days ) after taking into
consideration net increase in deposits, advances and investments but excluding unavailed limit in
refinance and borrowing facilities, should not exceed 10 percent.
Back testing of dynamic liquidity statement should be carried out once in a year and the results
obtained should be used as a input for further fine tuning of the statement and utilizing it as
decision supporting tool for business development.
Contingency Plan:
Strategies for managing Short Term liquidity mismatches will be made through the contingency
plan by utilization of refinance limits from NABARD, Sp. Bank, NHB, SIDBI & other
agencies, CBLO borrowing , Sale of excess SLR investments kept in held for trading or available
foe sale categories.
Adequacy of the contingency plan to meet Short Term fund requirement should be
reviewed by ALCO regularly through structural liquidity gap analysis.
Currency Risk:-
At present Bank is not doing foreign exchange business.
Interest Rate Risk (RII).
Interest rate risk is the risk where changes in market interest rates might adversely affect a bank's
financial condition. The changes in interest rates affect banks in a larger way. The immediate
impact of changes in interest rates is on bank's earning by changing its Net Interest Income (Nil).
A Long Term impact of changing interest rates is on bank's Market Value of Equity (MVE) or
Net Worth as the economic value of bank's assets, liabilities
Impact Evaluation Study of Training Programme on Asset Liability Management
31
and off - balance sheet positions gets affected due to variation in market interest rates. The
interest rate risk when viewed from these two perspectives is known as "earning perspective" and
economic value perspective. There are many analytical tools for measurement and management
of Interest Rate Risk. In the context of weak MIS, slow pace of computerization and the absence
of total deregulation, the "Traditional Gap Analysis" is considered as a suitable method to
measure the Interest Rate Risk in the first place.
Traditional Gap Analysis :-
Simple Gap model will be used for the measurement of interest rate sensitivity .The exercise
will be done for the last reporting Friday of the month and reported to ALCO. The Interest Rate
Sensitivity gap is measured as the difference between Rate Sensitive Assets(RSAs) and Rate
Sensitive Liabilities (RSLs), including off-balance sheet positions. The reporting format
prescribed by NABARD for Interest Rate Sensitivity gap report will be used for this purpose.
The statement of Interest Rate Sensitivity is generated by grouping rate sensitive
liabilities and rate sensitive assets and off-balance sheet position into time buckets according
to residual maturity or next repricing period, whichever is earlier. The benchmark
classification of various items of rate sensitive assets and liabilities and off balance sheet items,
as provided by NABARD will be followed which is enclosed as Appendix II.
ln interest rate sensitivity gap report, all advances that are linked to interest rate (BPLR/Base
Rate) are supposed to be placed in the period (bucket) in which interest rate is expected
to change. As & when gap report are prepared expected date of revision of interest rate
has to be estimated and advances that come under interest rate to be placed in specific bucket.
The Gap is the difference between Rate Sensitive Assets (RSA) and Rate Sensitive Liabilities
(RSL) for each time band. The positive Gap indicates that it has more RSAs than RSLs
where as the negative Gap indicates that it has more RSLs. The Gap report indicate whether
the institution is in a position to benefit from rising interest rate by having a positive Gap
( RSA>RSL) OR whether it is in a position to benefit from declining interest rate by a negative
Gap ( RSL > RSA) The Gap can, tl1erefore be used as a measure of interest rate sensitivity.
Interest Rate Sensitivity- Prudential Limits:-
The NABARD has not prescribed any limit on the individual gaps for interest rate
sensitivity. However , the guidelines stipulate that each bank should set prudential limits on
individual Gaps with the approval of the Board. The prudential limits should have a bearing
on the Total Assets , Earning Assets or Equity. In this context the following prudential
limits for Interest Rate Sensitivity are suggested:-
SI.No. Maturity Bucket Interest Rate Sensitivity(Negative gap)
1 1-28 days 20% of total Rate Sensitive assets
2 29 days to 3 months 20% of total cumulative Rate Sensitive assets
3 Over 3 months to 6
months
20% of total cumulative Rate Sensitive assets
Impact Evaluation Study of Training Programme on Asset Liability Management
32
4 Over 6 months to 1 year 20% of total cumulative Rate Sensitive assets
5 Over 1 year to 3 years 15% of total cumulative Rate Sensitive assets
6
Over 3 years to 5 years 2.5% of total cumulative Rate Sensitive assets
7 Over 5 years 2.5% of total cumulative Rate Sensitive assets
In case of need , up to 50% of individual gap limits specified against each maturity
bucket between one d ay and up to one year may be allowed to cumulate to immediate
preceding or immediate succeedi ng maturity bucket and will be reported to ALCO.
Earning at Risk:
Impact on Bank 's net interest income (Nil) is worked out for the period of next one year
by analyzing the impact due to an adverse change in interest rate on the rate sensitive gap position
up to one year time buckets. The EaR will be calculated for last rep01ting Friday of each month
and reported to ALCO. EaR will be calculated for the following scenarios:
It is assumed that at the change in interest rates is general, uni-directional and is applicable by
the same amount and the same time on all rate sensitive assets and liabilities, for working
out the decline in Nil.
Basis Risk:
The change in the rate of interest on different assets and liabilities comes with different
magnitudes which are referred to as the basis risk. When the basis risk causes the NIM to expand
it is favorable but when it contracts the NIM it is unfavorable to the bank. So factoring in the
basis risk, diffe rent rate shocks will be applied to the respective time buckets and the effect
will be calculated fior the next full year. The basis will be calculated once in a qua1ter and will
be used for the next quarter. The bank also work out Earning at Risk (EaR) i.e.20-30% of the
last years Nil or Net Interest Margin ( NIM) based on views on interest rate movement.
Implementation:
Action plan of ALCO will be implemented by the respective deptt. ,ALCO shall review
implementation and apprise progress to ALCO/Sub-Committee of Board on ALM & Risk
Management/Board periodically. Bank shall endeavor to maintain the exposures with in the
prudential limits prescribed in ALM policy.
Review of the Policy and prudential Limits:
Bank shall generally review the policy and prudential limits fixed there in every year. Pending
such review of the revised policy, the policy in vogue will continue.
Reporting and Review:-
The following review notes are also to be considered by ALCO with frequency mentioned
and suitable corrections I adjustments in the policy decisions where ever required be brought
about.
Impact Evaluation Study of Training Programme on Asset Liability Management
33
SI.No. Particulars Periodicity for
review
Purpose Reviewing
Departments
1 Structural Liquidity Monthly Liquidity risk
management
ALCO/to Board on
quarterly Basis
2 Liquidity Risk
Indicators
Monthly Liquidity risk
management
ALCO/to Board
on quarterly Basis
3 Dynamic Liquidity Monthly Liquidity risk
management
ALCO/to Board
on quarterly Basis
4 Interest rate
Sensitivity analysis
Quarterly Interest Rate Risk
Management
ALCO/to Board
on quarterly Basis
ALCO will ensure the adherence to the ALM objectives and guidelines. The Deptt. will apprise
the position in this regard to ALCO on monthly basis and to Board on quarterly basis.
Impact Evaluation Study of Training Programme on Asset Liability Management
34
Maturity Profile - Liquidity
Heads Classification into Time Band (Bucketing Pattern)
A.Outflow
1 Capital,Reseves
and Surplus
Over 5 year band
2 Demand Deposit
( Current and
Saving Bank
Deposit)
Saving Bank and Current Deposit may be classified into volatile
and Core position Saving Bank( I 0%) and Current( 15%) Deposit
is generally withdrawable on demand. This portion may be
treated as volatile while volatile portion can be placed in the first
time band ie, 1-14 days , the core portion may be placed in over 1-3
years time band .
(As per NABARD guidelines the above classification of Saving
Bank & Current Deposits is only a benchmark.)
The Bank may also classify the Saving Bank and Current
Deposits on behavioral pattern on following basis:-
Behavioral analysis of the bank gives the average out flow for
one day. For outflow in 1-14 days bucket the one-day outflow is
multiplied by the number of days between the buckets 14. Last 36
months balances is arranged date wise and minimum is calculated
which is the minimum core amount and is placed in the over 5
years bucket. The remaining balance (excluding volatile and
minimum core) is placed in the 1-3 vears bucket.
3 Term Deposits Respective maturity buckets
4 Certificate of
Deposit,
Borrowings &
Bonds ( including
sub-ordinated Debt)
Respective maturity buckets.
5 Other Liabilities
and Provisions
i. Bills Payable 1-14 days time band
ii. Branch
Adjustments
The net credit balance may be shown in 1-14 days time band.
iii. Provisions other
than for loan loss
and depreciation
in investments
Respective time bands depending on the purpose
iv. Other Liabilities Respective time bands. Items not representing cash payable
(ie.Guarantee fee received in advance, etc.) may be placed in over 5
years’ time bands.
Impact Evaluation Study of Training Programme on Asset Liability Management
35
Heads Classification into Time Band
B. Inflow
1. Cash l-14 days time bands
2. Balance with RBI/ Public Sector Bank
for CRR/SLR purpose
While the excess balance over required
CRR/SLR may be shown under 1-14 days time
bands, the Statutory Balances may be
distributed amongst various time bands
corresponding to the maturity profile of DTL
with a time -lag of 28 days
3. Balances with other Banks
(i) Current Account Non- withrawable portion on account of
stipulations of minimum balances may be
shown under over 1-3 years time band and the
remaining balances may be shown under 1-14
days time band.
short notice, Term Deposits and other
placements
4. Investments(Net of Provision)
(i) Approved securities Respective residual maturity time bands
excluding the amount required to be reinvested
to maintain SLR corresponding to DTL profile
in various time bands..
(ii) PSU bonds, CDs and CPs, Units of
UTI (close ended) etc.
Respective residual maturity time band.
Investments classified as NPAs should be shown
under over 3-5 years time bands(Sub standard)
or over 5years time band( Doubtful)
(iii ) Equity of all India Fls
,Units of UTI(Open ended)
Over 5 years time bands.
(iv) Securities in the
Trading Books
1-14, 15-28 and 29-90 days time bands
corresponding to defeasance periods.
5. Advances
(i) Bills Purchased and Discounted
(including bills under DUPN)
Respective residual maturity time bands.
(ii) Cash Credit I
Overdraft(including TOD) and
Demand Loan
component of working Capital
Behavioural & Seasonal pattern of availments
based on outstanding and the core and
volatile portion should be identified while
the volatile p011ion could be shown in the near
-term maturity time bands , the core portion
may be shown under over 1-3 year time band.
Impact Evaluation Study of Training Programme on Asset Liability Management
36
(iii) Term Loans Interim cash flow (Installments) should be
shown under respective maturity time bands.
6. NPA(Net of provisions, overdue interest Reserves and claims received from DICGC)
(i) Sub- standard Over 3-5 years time bands
(ii) Doubtful and loss Over 5 years time bands
7. Fixed Assets Over 5 years time bands
8. Other Assets (branch
Adjustment)
The net debit balance may be shown in 1-14
days time band. Intangible Assets and assets
not representin g cash receivables may be
shown in over 5 years time band .
Impact Evaluation Study of Training Programme on Asset Liability Management
37
Heads Classification into Time Band C. Contingent Liabilities /Lines of Credit committed I available and other Inflows/Outflows
I. Unavailed portion
of Cash Credit/
Overdraft / demand
Loan component
of
Working Capital
limit (Outflow)
Behavioural and seasonal pattern of potential availments
in the accounts and the amounts so arrived at may be
shown under relevant residual maturity time bands with in 12
months Potential availment in the unavailed portion ofCC/OD accounts
(excluding where limit utilization is 100% or more) is
worked out as under:-
(1) Quarter wise percentage of utilization of limits is
worked out for the last "4" quarters based on the
sanctioned limit and balance outstanding (Cr, balance
to be ignored) on the last day of the respective
quarters.
(2) Difference between the percentages of utilization
from the above is worked out. The difference obtained for
each consecutive quarter is divided by the unavailed
percentage of each preceding quarter. The highest
percentage thus obtained is treated as potential percentage
availment ofthe unavai led portion.
(3) The unaveiled portion is worked out throu gh the
latest quarter's information by taking the difference
between the total limits and the outstanding balance (Cr.
Balance ignored).
(4) The potential availment amount is worked out by
multiplying the potential percentage availment to
the unavailed amount (as obtained in point (3)
above) and this is distributed uniformly upto one
year buckets in proportion of number of days.
2. Contingent
Liabilities-Letters
of Credit I
Guarantees
devolvement
(Outflow)
Expected development in LC will be worked out
separately as under:-
1) Quarter wise total amount developed for the previous four
quarters is taken and its average is worked out.
2) Since development of LIC initially entails cashout
flows and subsequently amounts get recovered,
hence actual devolvement will be limited to one
quarter figures on an average. Bank guarantee is
normally not expected to devolve on the bank.
Therefore development under Bank Guarantee will
be bucketed in proportion of number of days up to
one year. 3) The average so worked out as above will be the likely
devolvement amount and would be distributed
uniformly up to 90 days buckets in proportion of
number of days to
38
depict outflow of funds, in respect of letter of
Credit . In respect of Bank Guarantee the likely
devolvement will be distributed up to one year in
the proportion of number of days in each time
bucket.
3. Repos/ Bills
Rediscounte
d (DUPN)
(OUTFLO
W/
INFLOW)
Respective residual maturity time band'
4. Interest payable
/receivable
( outflow/Inflow)
Accrued
Interest which
are
appearing in
the
books on the
reporting day.
Respective time bands.
Note:
•Liabilities on account of event cash flows i .e. short fall in CRR/SLR balances on
reporting Fridays, wage settlement, Capital Expenditure, etc. which is known to the bank
& other contingent liabilities may be shown under respective maturity bands.
•All overdue liabilities should be placed in the 1-14 days time band.
•Interest & Installments from advances and investments, which are overdue for less than
one month, may be placed in over 3-6 months; time band. Further interest & installments
due (before classification as NPA) may be placed in over 6-12 months time band if earlier
receivables remain uncollected .
39
Interest Rate Sensitivity
S.No
Heads Rate sensitivity and time band
Liabilities·
1. Capital Non Sensitive
2. Reserves and
surplus
Non Sensitive
3. Current
DeQosits Non Sensitive
4. Saving Bank
Deposits
Sensitive to the extent of interest paying
(core)portion. This should be included in over 3-6
months time band. The non - interest - paying
portion may be shown in Non - Sensitive band. 5. Term Deposits
and Certificates of
Deposit
Sensitive , reprices or resetting of interest rates on
maturity. The amounts should be distributed to
different time bands on the basis of remaining term
to maturity. 6. Borrowings - Fixed
Sensitive, reprices on maturity. The amount should
be distributed to different time bands on the basis of
remaining maturity. 7. Borrowings -
Floating Sensitive, reprices when interest rate is reset. The
amount should be distributed to the appropriate time
band that refers to the respective date. 8. Borrowings -
Zero Coupon
Sensitive, repnces on maturity. The amounts
should be distributed in the respective maturity
time band. 9. Borrowings -
from RBI
Upto 3 months time band.
10. Refinance from
other Agencies
Fixed rate: As per respective maturity.
Floating rate: Reprises when interest rate is Reset.
11. Other Liabilities and provisions
(I) Bills payable Non Sensitive
(ii) Branch
Adjustment Non Sensitive
(iii) Provisions Non Sensitive
(iv) Others Non Sensitive
12. Repos/ Bills Re-
discounted(DUPN)
Sensitive, re-prices on maturity and amounts
should be distributed in the respective maturity
time band.
40
Interest Rate Sensitivity
S.No
Heads Rate sensitivity and time band
Assets 1. Cash Non Sensitive 2. Balance with
RBI
Interest earning portion may be shown in over 3-6
months time band. The balance amount is Non- Sensitive.
3. Balances with other Banks (i) Current
Account
Non Sensitive (ii) Money call &
Short Notice,
Term Deposits
and other
Placement
Sensitive, on maturity. The amounts should be
distributed to respective maturity time bands.
4. Investments (Performing) (i) Fixed Rate I
Zero coupon
Sensitive on maturity
(ii) Floating Rate Sensitive at the next repricing date.
5. Shares of all
India
FI/Units of UTI
Non- sensitive
6. Advances (Performing) (i) Bills Purchased
and discounted
(including bills
underDUPN)
Sensitive on maturity
(ii) Cash Credit
I Overdrafts
(including
TOD)I Loans
repayable
on demand and
Term Loan
Sensitive , may be shown under over 3-6 months time band.
7. NPA (Advances and Investment) (i) Sub- standard Over 3-5 years time band. (ii) Doubtful and
Loss
Over 5 years time band. 8. Fixed Assets Non-sensitive 9. Other Assets:- (i) Inter-office
Ad.iustment
Non Sensitive
(ii) Other Non Sensitive 10. Othea·Products(interest rate)
(i) Other Should be suitably classified as & when introduced .
41
Appendix - II
The ALM system rests on 3 pillars
Management Information System
Organisation and responsibilities
ALM risk control process
ALM Information System
Management Information System should ensure
Information availability,
accuracy,
adequacy and
expediency
Successful implementation of the ALM process depends on the
Level of representation in the committee
Commitment of the members
Policy for the ALM process
Scope of the ALM function would revolve around the ALM Process
Risk parameters
Risk identification
Risk measurement
Risk management
Risk policies and tolerance levels.
The focus of ALM in a Financial Institution would revolve mainly around Liquidity,
Interest Rate Risks and Market risk
Liquidity
Liquidity is the ability of the bank to meet obligations as and when they fall due
If it fails to meet the obligations, Liquidity Risk arises
42
Liquidity positions should be measured and examined as to how the liquidity is likely to
evolve under differing assumptions
Liquidity needs to be tracked through maturity or cash flow mismatches
Interest Rate Risk: The likely adverse effect on financial position of a bank due to changes
in market interest rates.
The immediate impact is on the Net Interest Income (NII) - ‘Earnings Perspective’.
Long term impact is on the bank’s net worth since the economic value of on and off B/S
positions get affected. - ‘Economic Value Perspective’
Trading Book
Price/ Interest rate risk is the prime concern
Only GOI securities held under ‘Held for Trading’ category’
Marking to market on a fortnightly basis
Techniques: PVBP, VaR, Stop Loss Limit
Limits: volume,maximum maturity, holding period, duration and defeasance period.
VaR limits have also been fixed
Stop Loss policy
The ALM Policy has been approved in 140th meeting of the Board of Directors held on 12
June 2004.
The Asset Liability Management (ALM) policy of RRBs aims at managing liquidity and
interest rate risks of funds at acceptable levels. The policy emphasizes the need to
formulate, implement, and monitor asset liability strategies to achieve financial objectives
within the defined risk tolerance limits and constraints. The major focus of the policy is to
optimise returns with financial stability. The major objectives of the ALM policy are
43
a. To manage the assets and liabilities of a bank in order to enhance funds profitability
within the existing legal and regulatory framework
b. To foster stronger emphasis on risk management and to encourage improvements in
risk assessment capabilities to protect the institution from any disastrous financial
consequences arising from changes in interest rate. The policy stresses the importance of
integrating basic operations and strategic decision making with risk management.
c. To strive for effective management and measurement of liquidity so as to meet
anticipated and unanticipated operating cash needs, demands for refinance and other
withdrawals without incurring sustained negative impact on profitability.
d. To outline the measures for trading risk management so as to limit the potential loss
that would be incurred in a portfolio of assets/liabilities over a given time period.
e. To provide a dynamic framework for measuring, monitoring the foreign exchange
risk of liabilities and assets.
f. To instill an efficient management information system for adequate, accurate and
timely availability of data.
ALCO is responsible for recommending to the Board of Directors, prudent asset/liability
management policies and procedures that enable the Bank to achieve its goals while
operating in full compliance with all rules, and regulations.
ALM Policy has stipulated following tolerance limits as regards liquidity mismatch.
i) 1 to 14 days and 15 to 28 days – negative mismatch should not exceed 10% of the
cash outflows in the respective time buckets.
ii) 29 days and upto 3 months, over three months and upto 6 months, Over 6 months
and upto 1 year– negative mismatch should not exceed 15% of the cash outflows in the
respective time buckets.
For all other time buckets, the negative mismatches should not exceed 25 % of the cash
outflows in the respective time buckets.
44
The cumulative negative gap should not exceed 25% of cash outflow.
As regards interest rate sensitivity, ALM Policy has stipulated following gap to total asset
ratio limits between Rate Sensitive Assets and Rate Sensitive Liabilities -
i) All time buckets upto 1 year – negative gap should not exceed 1% of total assets.
ii) More than 1 year to 3 years– negative gap should not exceed 1% of total assets.
iii ) For all higher time buckets, no negative gap.
iv) Cumulative gap not to exceed 4% of toatal assets.
Interest rate sensitivity analysis will also include -
i) Impact of repricing of RSA and RSL in time buckets upto1 year on Net Interest Income.
ii) Duration analysis. iii)Simulation analysis.
Limits fixed for the risk to earnings arising from mismatches between the repricing of assets
and liabilities.
For the Interest rateChange variability in the Net Interest Income
+300 basis points Min +20.00%
+200 basis points Min +20.00%
+150 basis points Min +15.00%
+100 basis points Min +12.50%
0 10.00%
-100 basis points Max -12.50%
-150 basis points Max –15.00%
-200 basis points Max –20.00%
-300 basis points Max –20.00%
45
Simulation analysis.
The focus of simulation is to measure risk to net income by projecting the
future composition of the bank’s balance sheet and applying different interest rate
scenarios. Simulation modeling will be incorporated to run "what if" analyses to determine
the effect of different strategies on the bank's risk profile and profitability. simulation can
adequately assess short-term (1-2 years) interest rate risk.
Duration analysis
For capturing and isolating the risks associated with longer term repricing
imbalances, duration gap analysis of the balance sheet may be attempted to evaluate long-
term fixed-rate positions. Duration is a measure of the percentage change in the economic
value of a position that will occur given a small change in the level of the interest rates.
Calculating the precise duration for each asset, liability and off-balance sheet items can
help assess the effect of changing market rates. This will require information about all the
cash flows associated.
For minimising the risk of trading stock in Government Securities
i) The maximum amount of investments that can be deployed in Government
Securities and other Instruments exposed to market risk should not exceed 10 percent of
the total assets.
ii) The maximum maturity of the securities in the portfolio should not exceed 25 years
taking into consideration the active extreme securities in the Yield Curve.
iii) The maximum holding period in respect of the Held for Trading (HFT) Category
Securities should not exceed 90 days as prescribed by RBI. However, the average holding
period of the securities should not be more than 45 days.
iv) The duration of the portfolio should not, in any case, exceed 8 years. The structure
of the portfolio may be designed by appropriate mix of the short and long duration securities
with a view to optimizing the return with risk minimization.
v) The stop loss policy as approved by the Board should be operated effectively.
vi) The potential price risk to changes in the market risk should be measured using
Value at Risk model. with a given confidence level of 99% for a ten days horizon using
Monte Carlo simulation method. VaR of portfolio will be kept limited to Rs. 20 crore at
present
46
ALM Support Group will be responsible for
(i) Collection and compilation of data for ALCO.
(ii) Analysis, monitoring and reporting to ALCO
(iii) Undertake various analyses and simulations as enshrined in the ALM policy, including
preparation of forecast showing the effects of various possible changes in market conditions
related to the balance sheet,
(iv) Recommend the action needed to adhere to different stipulations of ALM Policy.
The Mid-office would be responsible for
(i) Independent market risk monitoring, measurement, analysis and reporting for the
ALCO,
(ii) Tracking the magnitude of market risk periodically,
(iii) Control risk related to trading operations and management of interest rate risk in the
investment portfolio
(iv) Monitoring and reporting of all types of market risk to ALCO
(v) Designing an internal Transfer Price Mechanism.
(vi) Recommend revision/updation of ALM policy in tune with RBI guidelines.
The Reports are prepared at fortnightly intervals. The Reports are to be accurate, complete
in all respects and submitted in time. All cash flows emanating over the entire life of all the
assets and liabilities are to be classified and included. The cash flows arising from the
assets, liabilities and contingencies to be classified into different time-buckets as per their
residual maturity/ timing of the cash flow.
In case of sensitive cash flow , footnote to be given mentioning the sensitivity.
The cash inflows on account of the interest and principal of the loan may be slotted in
respective time buckets as per the timing of the cash flows as stipulated in the
original/revised repayment schedule.
47
b) Interest payable on bonds / deposits / Borrowings
The cash outflows during the entire life of the deposit are to be slotted in respective time
buckets as per the residual period to the due date of payment.
Interest intervals being used to analyse the interest rate sensitivity are:-
Upto 5.0%
>5.0% to 5.5%
>5.5% to 6.0%
>6.0% to 6.5%
>6.5% to 7.0%
>7.0% to 8.5%
>8.5% to 10.5%
>10.5% to 12.5%
Above 12.5%
There was positive gap in all time buckets except in the bucket “7 to 10 years”. This gap
was fully covered by positive gap in the lower buckets indicating no liquidity risk.
Investment in G-Sec and Mutual fund constituted 2.55% of total assets as against the cap
of 10% prescribed in ALM policy. Average duration of AFS & HFT portfolio was 5.51 and
6.12 years respectively. VaR of G-Sec AFS and HFT stock at 99% confidence level for 10
days horizon as on 31 March 2014 is Rs. 8.33 crore and Rs. 0.931 crore respectively.
Notional profit on the AFS Stock , as per FIMMDA valuation was Rs. 92.53 crore as on 31
March 2014. Provision for depreciation in value of AFS stock is of Rs. 19.60 crore. Price
Value of one basis point of the AFS stock of G-Sec as on 31 March 2014 is Rs. 0.19 crore.
Impact of 100 bp change is Rs. 18.26 crore.Balance is Investment Fluctuation Reserve is
Rs. 96.43 crore. G-sec prices recovered during October sharply.10Y GOI ranged from
7.62% to 7.53%. In international market oil prices ranged from $59-$62 barrel for around
6 weeks 30% down from record high of $78.40 in July.
48
Appendix - III
Correlation Matrix has 3 rows and 3 columns.
NAI PM APCO
+--------------------------------------------------------------------------------
NAI | 1.0000 0.5714 0.1428
PM | 0.5714 1.0000 0.3429
APCO | 0.1428 0.3429 1.0000
Step-wise regression results
Step – I ---------------------------------------------------------------------------------+
| OLS regression Expl. Variable(s) = NIA |
| Dep. var. = NIM Mean = 0.91 , S.D.= 2.2774830E-01 |
| Model size: Observations = 36, Parameters = 2, Deg.Fr.= 34 |
| Residuals: Sum of squares= .4408017005E-03, Std.Dev.= .00577 |
| Fit: R-squared= .674568, Adjusted R-squared = .61478 |
| Model test: F[ 1, 34] = 6.51, Prob value = .00000 |
| Diagnostic: Log-L = 4.6288, Restricted(b=0) Log-L = 2.5691 |
| LogAmemiyaPrCrt.= -.7129, Akaike Info. Crt.= -.4947 |
+-----------------------------------------------------------------------------------------+
Step – II ----------------------------------------------------------------------------------+
| OLS regression Expl. Variable(s) = NIA, PM |
| Dep. var. = NIM Mean = 0.91, S.D.= 2.2774830E-01 |
| Model size: Observations = 36, Parameters = 3, Deg.Fr.= 33 |
| Residuals: Sum of squares= .4208017005E-03, Std.Dev.= .00537 |
| Fit: R-squared= .751234, Adjusted R-squared = .72238 |
| Model test: F[ 2, 33] = 6.45, Prob value = .00000 |
| Diagnostic: Log-L = 4.5598, Restricted(b=0) Log-L = 2.3547 |
| LogAmemiyaPrCrt.= -.7845, Akaike Info. Crt.= -.5215 |
+-----------------------------------------------------------------------------------------+
Step – III -------------------------------------------------------------------------------+
| OLS regression Expl. Variable(s) = NIA, PM, APCO |
| Dep. var. = NIM Mean = 0.91, S.D.= 2.2774830E-01 |
| Model size: Observations = 36, Parameters = 4, Deg.Fr.= 32 |
| Residuals: Sum of squares= .4108017005E-03, Std.Dev.= .00514 |
| Fit: R-squared= .782376, Adjusted R-squared = .76595 |
| Model test: F[ 3, 32] = 7.62, Prob value = .00000 |
| Diagnostic: Log-L = 5.9871, Restricted(b=0) Log-L = 2.1876 |
| LogAmemiyaPrCrt.= -.8134, Akaike Info. Crt.= -.5673 |
+-----------------------------------------------------------------------------------------+
49
Appendix - IV
Questionnaire
(Please put a tick in appropriate box)
1. After attending the training programme at BIRD, I am able to understand the various
types of risks indicated below, associated with banks:
Type of Risk Able to understand
Yes No
Credit Risk
Liquidity Risk
Interest Rate Risk
Operational Risk
2. I came to know about the financial market instruments and terms like SEBI, OTCEI,
NSE, FIMMDA etc., after attending the programme
Yes No. I knew these terms even before
attending the training programme
3. I came to know on the concept of ALM after attending the programme
Yes No. I knew about ALM even before
attending the training programme
4. Whether the course material provided during the training was useful?
Yes
No
No Scope for use
5. Have you been posted to the ALM desk /Cell after attending the training conducted by
BIRD?
I was posted to the desk even before I attended the training
I have been posted to the desk after attending the training
programme
I have not been posted although I have undergone the training
At present I am working on ALM desk (yes / no)
6. Whether you shared the inputs received during training with other colleagues working
on ALM desk?
Yes
No
50
7. To what extent the knowledge gained during the training is useful in your day-to-day
functioning?
To a great extent
To some esxtent
No scope for use
8. Whether your bank has formulated ALM policy?
Yes
No
9. If answer to above question is ‘yes’, whether the training programme at BIRD helped
you to assist in formulation/refinement of the policy in your bank
The programme helped me to a great extent in assisting in
formulation / refinement of ALM policy in my bank
The programme helped to some extent in assisting in
formulation / refinement of ALM policy in my bank
Policy was formulated in the bank before I attended the
programme
I did not get an opportunity to assist in formulation / refinement
of the policy
10. Whether the training programme has helped the bank in any of the following areas?
Particulars Programme helped
Yes No
Constitution of ALCO
Finalising agenda items for ALCO
Understanding interest rate movements and
expected spreads
Understanding mismatches in maturity pattern
Understanding pricing of loan products, risk
mitigating measures for liquidity and interest rate
risks
Operational issues and difficulties associated in
implementation of the ALM
Areas for further improvement
Discussions on investment portfolio
51
11. What type of ALM tools have been introduced by your bank after your attending the
training programme?
Particulars Tool used / introduced
Yes No
Preparation of Liquidity Gap Statement
Preparation of Gap Statement to measure interest
rate risk
Duration concept
Impact of interest rate movement on Net Interest
Margin (NIM)
Only some of these tools have been introduced
None of these tools are used in the bank for ALM
12. In order to mitigate liquidity risk, which of the following statements have been
introduced in your bank after you are attending the training programme?
Particulars Statement introduced
Yes No
Putting assets and liabilities in different time
buckets
Structural Liquidity statement
Dynamic Liquidity statement
Statements at (1) and (2) only are introduced
None of the above statements introduced
13. In your opinion whether the profitability of the bank has improved after
implementation of ALM concept in the bank?
Yes
No
14. Which of the following areas related to ALM, in your opinion, have contributed in
bringing about overall improvement in the financial position of the bank?
Particulars Whether resulted in improving
financial position of the bank
Yes No
Preparation of Liquidity Gap Statement
Preparation of Gap Statement to measure interest
rate risk
Introduction of Duration concept
Preparation of Structural Liquidity Ladder
Preparation of Dynamic Liquidity Ladder
None of the above
52
15. What suggestions would you like to give to bring about improvement in the training
programme on ALM conducted by BIRD?
Particulars Yes No
The programme does not need any changes and
may continue to be conducted in the present
format.
The contents of the programme were inadequate
and needs to be upgraded
Cannot comment as I am not presently working
on the ALM desk
53
Appendix – VI- Key Financial Ratios of Sample RRBs (Bank-wise)
Net Interest Margin
Name of the
Bank:
Name of the
State
Sponsor
Bank:
31-03-
2012
31-03-2013 31-03-2014
1.Chaitanya
Godavari
Grameena
Bank
Andhra
Pradesh Andhra Bank
0.99
0.95 1.14
2. Deccan
Grameena
Bank
Andhra
Pradesh State Bank of
Hyderabad 1.18
1.13 1.23
3. Bihar
Gramin Bank, Bihar UCO Bank
0.96 0.92 1.81
4. Uttar Bihar
Gramin Bank Bihar Central
Bank of
India 0.51
0.49 0.58
5. Chhattisgarh
Rajya Gramin
Bank
Chhattisgarh State Bank of
India 1.10
1.06 0.74
6. Baroda
Gujarat
Gramin Bank
Gujarat Bank of
Baroda 0.28
0.27 0.47
7. Dena
Gujarat
Gramin Bank
Gujarat Dena Bank 0.67
0.63 0.71
8. Saurashtra
Gramin Bank Gujarat
State Bank of
India 1.46 1.38 0.83
9. Gurgaon
Gramin Bank Haryana
Syndicate
Bank 1.36 1.28 1.51
10. Narmada
Jhabua Gramin
Bank,
Madhya
Pradesh Bank of
India 1.37
1.29 1.72
11.
Maharashtra
Gramin Bank
Maharashtra Bank of
Maharashtra 0.73
0.69 0.75
12. Vidharbha
konkan
Gramin Bank
Maharashtra Bank of
India 0.74
0.7 0.59
13. Manipur
Rural Bank Manipur
United Bank
of India 0.27 0.25 0.05
54
14. Meghalaya
Rural Bank Meghalaya
State Bank of
India 2.80 2.64 0.93
15. Mizoram
Rural Bank Mizoram
State Bank of
India 0.60 0.57 1.16
16. Odisha
Gramya Bank Odisha Indian
Overseas
Bank 0.39
0.37 0.19
17. Utkal
Gramya Bank, Odisha
State Bank of
India 0.22 0.21 0.42
18. Puduvai
Bharathiar
Grama Bank
Tamil Nadu Indian Bank 1.48
1.4 1.46
19. Punjab
Gramin Bank Punjab Punjab
National
Bank 1.12
1.03 0.77
20. Sutlej
Gramin Bank Punjab
Punjab and
Sind Bank 0.40 0.37 0.85
21. Baroda
Rajasthan
kshetriya
Gramin Bank
Rajasthan Bank of
Baroda 0.45
0.41 0.84
22. Marudhara
Gramin Bank Rajasthan State Bank of
Bikaner and
Jaipur 0.04
0.04 0.83
23. Tripura
Gramin Bank Tripura
United Bank
of India 2.02 1.85 1.99
24. Allahabad
U P Gramin
Bank
Uttar
Pradesh Allahabad
Bank 1.22
1.12 0.27
25. Gramin
Bank Of
Aryavart
Uttar
Pradesh Bank of
India 1.25
1.15 1.25
55
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