ASSET-LIABILITY

MANAGEMENT

Presented by
K.Eswar

K.Eswar
 ALM &
BANKS
Banks are exposed to credit and market risks in view of
asset-liability transformation in the back drop of
liberalization of Indian financial markets.
Banking is not about avoiding risk but managing it.
Strategic management in a deregulated environment
covering spreads, profitability and long term viability.
Risks should be identified, measured and managed.
Inter-relationship between various risks should be
understood.
Need for sharper assessment and efficacy of liquidity
management.
Need for comprehensive K.Eswar
ALM.
 ALM Objectives

Liquidity Risk Management.

Interest Rate Risk Management.
Currency Risks Management.
Profit Planning and Growth
Projection.

K.Eswar
RBI DIRECTIVES
• Issued draft guidelines on 10th Sept’98.
• Final guidelines issued on 10th Feb’99 for
implementation of ALM w.e.f. 01.04.99.
• To begin with 60% of asset &liabilities will be
covered gradually covering 100%.
• Initially Gap Analysis to be applied in the first
stage of implementation.
• Disclosure to the B/S on the maturity pattern
of deposits / borrowings / advances and
investments.
• In Oct 2007 amendments to ALM function
issued . Splitting the first time bucket.
K.Eswar
 ALM STATEMENTS TO BE
SUBMITTED To RBI
1. Statement of Structural Liquidity (Annexure -
I) [DSB Statement No.8] - Rupee
2. Statement of Interest Rate Sensitivity (Annexure -
II) [DSB Statement No. 9] - Rupee
3. Statement of Dynamic Liquidity (Annexure - III)
4. Statement of Maturity and Position (MAP) (Annexure -
IV) [DSB Statement No.10 ] - Forex
5. Statement of Sensitivity to Interest Rate (SIR)
(Annexure - V)[DSB Statement No.11] - Forex

K.Eswar
 LIQUIDITY RISKS

• Broadly of three types:

• Funding Risk: Due to withdrawal/non-renewal of

deposits
• Time Risk: Non-receipt of inflows on account of
assets(loan installment)
• Call Risk: Contingent liabilities & new demand
for loans
K.Eswar
 Managing Liquidity Risk.
• Setting tolerance limits: Cumulative cash flow
mismatches. Take care of draw down of commitments.
marketability of liquid assets, discount to price volatility
and drop in price in the event of forced sale.
• Core liability to core assets.
• (Core liability: core portion of SB,CD,TD, Share capital ,
reserves and subordinated debts.)
• (Core assets: Statutory balances of CRR and SLR, Long
term loans and fixed assets.)

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Managing Liquidity Risk.

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Measuring and Managing
Liquidity

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Flow approach.

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 Flow approach
• IF there is a significant funding requirement
in a period say 30 days hence:
• Alternative options ? Acquire an asset or roll
over the liability.
• Objective to close gap before it gets too
close.
• Managing market access and contingency
planning is key to efficacy of the ALM
function. K.Eswar
 Interest Rate Sensitivity.
Head of Account Rate sensitivity and time
bucket
Liability
Capital Reserve NRS
CD NRS
SB Sensitive to the extent of
interest paying(core)
portion.Include in 3-6
month.Non interest paying
portionin non rate sensitive
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bucket.
Head of Account Rate sensitivity and time
bucket
Liability
Term Deposit and CD Sensitive and reprices on
maturity.Amount should be
distributed to different
buckets on the basis of
remaining term to
maturity.How ever in case of
floating rate deposits, place
under time bucket when
deposits become contractually
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become due for reprising.
Head of Account Rate sensitivity and time
bucket
Borrowing Fixed Sensitive and reprices on
maturity.Amount to be
distributed to different
buckets on the basis of
remaining maturity.
Borrowings floating Sensitive and repcies
when interest rate is
reset.Distribute to the
bucket when refers to
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repricing date.
Head of Account Rate sensitivity and time
bucket
Borrowing Zero coupon Sensitive and reprises on
maturity. Amount should
be appropriated to the
respective maturity
bucket.
Borrowing from RBI Upto 1 month bucket.
Refinance from other Fixed Rate :As per
agencies. respective maturity
Floating : Reprices when
interest rate is reset.
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Head of Account Rate sensitivity and time
bucket
Other Liabilities and
Provisions.
Bills payable Non sensitive.
Inter office adjustment Non sensitive.
Provisions. Non Sensitive.
Repo/Bills Reprices on maturity and
rediscounting/Swaps should be distributed in
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the respective buckets.
Head of Account Rate sensitivity and time
bucket
ASSETS
Cash Non Sensitive.
Balance with RBI Non sensitive.
Balance with other Banks
Current Non Sensitive.
Money at call/notice/Term Sensitive on maturity .
Place in respective
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maturity bucket.
Head of Account Rate sensitivity and time
bucket
Investments:
Fixed Rate/Zero coupon Sensitive on maturity.
Floating Rate Sensitive at next repricing
date.
Shares /Units of MF Non sensitive.

K.Eswar
Head of Account Rate sensitivity and time
bucket
Advances
BP and Bills discounted Sensitive on maturity.
CC/OD/Loans repayable Sensitive only when
on demand and Term PLR/risk premium is
Loan changed.

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Head of Account Rate sensitivity and time
bucket
NPA: SSA 3-5 year bucket.
Doubtful Asset Over 5 years.
Fixed Asset. NRS

Inter office adjustment a/c NRS

Leased asset Sensitive on cash flow.
Distribute to respective
maturity buckets of cash
flow.
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Head of Account Rate sensitivity and time
bucket
Reverse Sensitive on maturity.
Repo,swaps,Rediscountin
g.
Swaps Sensitive and to be shown
with reference to maturity.
Note : Amount to be
shown net of provisions
,interest suspense, claims
received from ECGC. K.Eswar
GUIDANCE FOR SLOTTING THE FUTURE CASH FLOWS OF BANKS IN THE
REVISED TIME BUCKETS

Heads of Accounts Classification into time buckets

A. Outflows
1. Capital, Reserves and Over 5 years bucket
Surplus
2. Demand Deposits Savings Bank and Current Deposits may be classified into volatile
(Current and Savings and core portions. Savings Bank (10%) and Current (15%)
Deposits are generally withdrawable on demand. This portion
Bank Deposits)
maybe treated as volatile. While volatile portion can be placed in
the Day 1, 2-7 days and 8-14 days time buckets, depending upon
the experience and estimates of banks and the core portion may be
placed in over 1-3 years bucket.

The above classification of Savings Bank and Current Deposits is

only a benchmark. Banks which are better equipped to estimate
the behavioural pattern, roll-in and roll-out, embedded options
etc. on the basis of past data/empirical studies could classify them
in the appropriate buckets, i.e. behavioural maturity instead of
contractual maturity, subject to the approval of the Board/ALCO.

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Heads of Accounts Classification into time buckets

3. Term Deposits Respective maturity buckets. Banks which are better equipped to
estimate the behavioural pattern, roll-in and roll-out, embedded
options, etc. on the basis of past data/empirical studies could
classify the retail deposits in the appropriate buckets on the basis
of behavioural maturity rather than residual maturity. However,
the wholesale deposits should be shown under respective
maturity buckets (wholesale deposits for the purpose of this
statement may be Rs.15 lacs or any such higher threshold
approved by the Bank’s Board).
4. Certificates of Deposit, Respective maturity buckets. Where call/put options are built
Borrowings and Bonds into the issue structure of any instrument/s, the call/put date/s
(including Subordinated Debt) should be reckoned as the maturity date/s and the amount should
be shown in the respective time buckets.

5. Other Liabilities and

Provisions:
(i) Bills Payable (1) The core component which could reasonably be estimated on
the basis of past data and behavioural pattern may be shown
under “Over 1-3 years’ time bucket. The balance amount may be
placed in Day 1, 2-7 days and 8-14 days buckets, as per
behavioural pattern.
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Heads of Accounts Classification into time buckets
(ii) Respective buckets depending on the purpose.
(ii) Provisions other than for
loan loss and depreciation in
investments.
(iii) Respective maturity buckets. Items not representing cash
(iii) Other liabilities payables (i.e. income received in advance etc.) may be
placed in over 5 years bucket.

6. Export Refinance Respective maturity buckets of underlying assets.

Availed.
B. INFLOWS
1. Cash Day 1 bucket

2. Balance with RBI While the excess balance over the required CRR/SLR may be
shown under Day 1 bucket, the Statutory Balance may be
distributed amongst various time buckets corresponding to the
maturity profile of DTL with a time-lag of 14 days.

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Heads of Accounts Classification into time buckets
3. Balances with other
Banks:
(i) Current Account (i) Non-withdrawable portion on account of stipulations of
minimum balances may be shown under ‘Over 1-3years’
bucket and the remaining balances may be shown under
Day 1 bucket.
(ii) Respective maturity buckets.
(ii) Money at Call and Short
Notice, Term Deposits
and other placements.

4. Investments
(Net of provisions)*
(i) Approved Securities (i) Respective maturity buckets, excluding the amount required to
be reinvested to maintain SLR corresponding to the DTL profile in
various time buckets.
(ii) Corporate debentures and (ii) Respective maturity buckets. Investments classified as NPIs
Bonds, PSU Bonds, CDs and should be shown under over 3-5 years bucket (Sub-standard) or
CPs, Redeemable Preference over 5 years bucket (Doubtful).
shares, Units of Mutual Funds
(close ended etc.)
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Heads of Accounts Classification into time buckets

(iii) Shares (iii) Listed shares (except strategic investments) in 2-7 days
bucket with a haircut of 50%.
Other Shares in ‘Over 5 years’ bucket.

(iv) Units of Mutual Funds (iv) Day 1 bucket.

(Open ended)

(v) Investments in (v) ‘Over 5 years’ bucket.

Subsidiaries/ Joint
Ventures.

(vi) Securities in the (vi) Day 1, 2-7 days, 8-14 days, 15-28 days and 29-90 days
Trading Book. according to defeasance periods.

* Provisions may be netted from the gross investments provided provisions are held security-wise.
Otherwise provisions should be shown in over 5 years bucket.

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Heads of Accounts Classification into time buckets

5. Advances (Performing)

(i) Bills Purchased and (i) Respective maturity buckets.

Discounted (including
bills under DUPN)

(ii) Cash Credit/Overdraft

(including TOD) and
Demand Loan (ii) Banks should undertake a study of behavioural and
component of seasonal pattern of availments based on outstandings
Working Capital. and the core and volatile portion should be identified.
While the volatile portion could be shown in the near
term maturity buckets, the core portion may be shown
under ‘Over 1-3 years’ bucket.

(iii) Term Loans (iii) Interim cash flows may be shown under respective
maturity buckets.

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Heads of Accounts Classification into time buckets

6. NPAs
(Net of provisions, interest
suspense and claims received
from ECGC/DICGC)

(i) Sub-standard (i) ‘Over 3-5 years’ bucket.

(ii) Doubtful and Loss (ii) ‘Over 5 years’ bucket.

7. Fixed Assets/ ‘Over 5 years’ bucket/

Assets on lease. Interim cash flows may be shown under respective maturity
buckets.

8. Other Assets
Intangible Assets Intangible assets and assets not representing cash receivables
may be shown in ‘Over 5 years’ bucket.

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Heads of Accounts Classification into time buckets
C. Off Balance Sheet Items

1. Lines of Credit
committed/available.
(i) Lines of Credit (i) Day 1 bucket.
committed to/from
Institutions.
(ii) Unavailed portion of
(ii) Banks should undertake a study of the behavioural and
Cash Credit/
seasonable pattern of potentital availments in the accounts
Overdraft/Demand loan
and the amounts so arrived at may be shown under relevant
component of Working
maturity buckets upto 12 months.
Capital limits (outflow).
(iii) Day 1 bucket.
(iii) Export Refinance –
Unavailed (inflow)
2. Contingent Liabilities Devolvement of Letters of Credit/Guarantees, initially entails cash
Letters of Credit/ outflows. Thus, historical trend analysis ought to be conducted on
the devolvements and the amounts so arrived at in respect of
Guarantees (outflow)
outstanding Letters of Credit/Guarantees (net of margins) should be
distributed amongst various time buckets. The assets created out of
devolvements may be shown under respective maturity buckets on
the basis of probable recovery dates.
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Heads of Accounts Classification into time buckets

3. Other Inflows/Outflows
(i) Repo / Bills
Rediscounted (i) Respective maturity buckets.
(DUPN)/CBLO/Swaps
INR/USD, maturing
forex forward contracts
etc. (outflow/inflow).

(ii) Interest payable/ (ii) Respective maturity buckets.

receivable
(outflow/inflow) –
Accrued interest
which are appear-
ing in the books
on the reporting
day.

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Note:

(i) Liability on account of event cash flows i.e. short fall in CRR balance on
reporting Fridays, wage settlement, capital expenditure etc. which are known to
the Banks and any other contingency may be shown under respective maturity
buckets. The event cash outflows, including incremental SLR requirement
should be reported against ‘Outflows – Others’.

(ii) All overdue liabilities may be placed in the Day 1, 2-7 days and 8-14 days
buckets based on behavioural estimates.

(iii) Interest and instalments from advances and investments which are overdue for
less than one month may be placed in Day 1, 2-7 days and 8-14 days buckets,
based on behavioural estimates. Further, interest and instalments due (before
classification as NPAs) may be placed in ’29 days to 3 months bucket’ if the
earlier receivables remain uncollected.

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 STATEMENT OF
STRUCTURAL LIQUIDITY
• Place all cash inflows and outflows in the maturity
ladder as per residual maturity
• Maturing Liability: cash outflow
• Maturing Assets : Cash Inflow
• Classified in to 10 time buckets
• Mismatches in the first four buckets not to exceed
5%.10%,15% and 20% of comulative outflows
• Banks can fix higher tolerance level for other
maturity buckets.
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ADDRESSING MISMATCHES
• Mismatches can be positive or negative
• Positive Mismatch: M.A.>M.L. and vice-versa for
Negative Mismatch
• In case of +ve mismatch, excess liquidity can be
deployed in money market instruments, creating
new assets & investment swaps etc.
• For –ve mismatch,it can be financed from market
borrowings(call/Term),Bills rediscounting,repos &
deployment of foreign currency converted into
rupee.
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 DYNAMIC LIQUIDITY
• Prepared every fortnight for ALCO
• Projection is given for the next three months
• Tools for assessing the day to day liquidity
needs of the bank

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 STATEMENT OF INTEREST
RATE SENSITIVITY
• Generated by grouping RSA,RSL & OFF-
Balance sheet items in to various (8)time
buckets.
• Positive gap : Beneficial in case of rising
interest rate
• Negative gap: Beneficial in case of declining
interest rate

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 POSITIVE GAP: CASE
STUDY
• RSA: 2800
• RSL: 1800
• GAP: (+) 1000
• CHANGE IN NII= GAPx CHANGE IN
INT.RATE
• MORE REPRICABLE ASSETS THAN
LIABILITIES

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 CALCULATION OF NII/NIM
• NII: INT.EARNED-INT. EXPENDED
• INT. EARNED: ADV+INVESTMENT
• INT. EXPENDED:DEPOSITS+INT. ON
RBI BORROWINGS
• NIM= (NII/TOT.EARNING ASSET)X100

K.Eswar
 
• Q. Net Interest Margin NIM is defined as
• a. Net interest income divided by total earning assets.
• b. Interest income –interest expenses.
• c. total interest income divided by total assets.
• d. None of above.
•  
• Q..Ratio of share holders funds to total assets is called as
• a. Debt equity ratio.
• b. TOL/TNW ratio.
• c. Economic equity ratio.
• d. No ne of above.
 
• Q The institution is in a position to benefit from rising interest rates when
assets are ……………than liabilities.
• Lower.
• Greater
• Equal
• Half.
• Q. The liquidity risk arising out of unanticipated withdrawal or non
renewal of deposits is called as
• a. Funding Risk.
• b. Time risk.
• c. Market Risk
• d. Operational risk.
•  
• Q. Stock approach of measuring and managing liquidity risk and funding
requirements is based on
• a. level of assets and liabilities and balance sheet exposure on a
particular date.
• b. based on stocks pledged to Bank in Cash Credit Account
• c. Stock of Investments of bank.
• d. None of above.
•  
• Q. Flow approach to measuring and managing liquidity consist of
• a. Measuring and managing net funding requirements.
• b. Managing market access.
• c. Contingency planning.
• d. All the above.
•  
• Q. Under gap method the net funding requirement is calculated based
on
• a. residual maturities of assets and liabilities.
• b. Actual maturities of assets and liabilities
• c. Both the above.
• d. None of above.
•  
• Q. Cash inflows arise from mainly:
• a. Maturing assets.
• b. Maturing liabilities.
• c. Maturing off balance sheet exposure.
• d. Maturing time deposits.
•  
• q. Cash outflows arise out of mainly.
• a. Maturing liabilities.
• b. Maturing assets.
• c. Maturing T Bills.
• d. Maturing CPs.
•  
• Q. Different between the cash in flow and cash out flow will result
into……….. if the cash inflows are lower than the cash outflows:
• a. deficit.
• c. Surplus
• d. None of above.
• e. No impact.
•  
• Q. If there is significant deficit observed say after 30 days period the
option available for bank is to
• a. acquire an asset maturing on that day.
• b. renew or roll over a 30 day liability.
• c. Acquire a liability maturing after 30 days.
• d. None of above.
•  
• Q. In the year 2007 RBI has for the purpose of measurement of liquidity
risk split the first time bucket of 1-14 days in its structural liquidity in
• a. Four time buckets.
• b. Three time buckets
• c. Five time buckets.
• d. None of above.
• Q the net cumulative negative mismatch during the next day,
2-7 days, 8-14 days and 15-28 days buckets should not exceed
• a.5%,10%, 15% and 20% of cumulative cash inflows in
respective time bucket.
• b. 20%,15%,10% and 5% of cumulative cash inflows.
• c.10%,5%,25% and 30% of cumulative cash inflows.
• Q. Frequency of structural liquidity position is
• a. fortnightly
• b. Weekly.
• c. Monthly
• d. Quarterly.
•  
• Capital , Reserves and Surplus are slotted in which time bucket in
Structural Liquidity Statement:
• Over 5 years.
• Over 3 Years.
• Over 1 Year.
• Over 6 months.
• Q. Saving and Current deposit may be treated as volatile portion up to
• a. 10% and 15 % respectively.
• b.20% and 30% respectively.
• c. 30% and 40% respectively.
• d. None of above
• Q. Placement of volatile portion and core portion of Saving and current deposit
may be done as under:
• a. volatile portion in day 1 time bucket and core portion in 1-3 year bucket.
• b. Volatile portion in 7 day time bucket and core portion in 5 year bucket.
• c. Volatile portion in 2-7 days time bucket and core portion in 1 year time bucket.
• d. none of above.
•  
• Q. Cash should be shown under which time bucket for inflow:
• a. 1 day.
• b. 2-7 days.
• c. 8-14 days.
• d. One year.
•  
• Q. Investment in shares and mutual fund (open ended) should be shown in
• a. Over 5 year bucket
• b. Over 1 year bucket.
• c. Over 2 year Bucket.
• D. None of above.
•  
• Q. Investment in subsidiaries and joint ventures to be shown
• a. In over 5 year bucket.
• b. In over 3 year bucket.
• c. In over 1 year bucket.
• d. None of above.
•  
• Q. Core portion of Cash credit advances may be shown under
a. 1-3 year time bucket.
• b. over 3 year time bucket.
• c. Over 5 years time bucket.
• d. None of above.
•  
• Q. Term Loans to be shown under:
• a. Interest and principal of the loan under residual maturity bucket.
• b. Principal under residual maturity bucket.
• c. all in 5 year and above bucket.
• d. None of above.
•  
• Q. Sub Standard loans to be shown under
• a. Over one year bucket.
• b. Over 2 year bucket.
• c. Over 3 years bucket.
• d. Over 3-5 year bucket.
•  
• Q. Fixed Assets:
• a. Over 5 year bucket.
• b. Over 2 year bucket.
• c. Over 1 year bucket.
• d. none of above.
 
• Q. The net cumulative negative mismatches
during the day 1, 2-7, 8-14 and 15-28 days
buckets if exceed the prudential limits may be
financed from market by
• a. Market borrowings ( call /term)
• b. Bills discounting
• c. Repo
• d. All above.
• Q. Market Value of an asset is conceptually equal to
• a. Present value of current and future cash flows from that asset and liability.
• b. future value of current and future cash flows from that asset and liability.
• c. None of above.
• d. all the above.
•  
• Q. There fore rising interest rates increase the discount rates on those cash flows
and thus
• a. Decrease the market value of asset or liability.
• b. Increase the market value of asset or liability.
• c. No impact is caused.
• d. None of above.
•  
• Q. Falling interest rate decrease the discount rates on these cash flows
and thus
• a. Increase the market value of an asset or liability.
• c. Decrease the market value of an asset or liability.
• d. No Impact.
• e. None of above.
•  
• Q. What is basis risk:
• a. risk that interest rate of different assets and liabilities may change in
different magnitudes is called basis risk.
• b. Risk relating to basis on which loan is sanctioned.
• c. Risk related to yield curve.
• d. None of above.
• Q. Yield Curve Risk is known as:
• a. Risk owing to altering of yields across maturities and its
impact on NII
• b. Risk owing to wrong drawing of yield curve by Bank staff.
• c. risk of lower current yield .
• d. None of above.
•  
• Q. Gap method is basically used for
• a. measuring banks interest rate risk exposure.
• b. measure maturity mismatch
• c. Measure potential losses from off balance sheet exposure.
• d. None of above.
 
• Q. In a given time band a negative or liability sensitive gap occurs when
• a. Rate sensitive liabilities exceed rate sensitive assets.
• b. Rate sensitive assets exceed rate sensitive liabilities.
• c. None of above.
• d. All the above.
•  
• Q. with a negative gap , an increase in market interest rates could cause a
• a. decline in net interest income.
• b. Increase in net interest income.
• c. None of above.
• d. All above.
•  
•  
• Q. Higher the duration implies that a given change in the level of interest rates
will have
• a. larger impact on economic value.
• b. smaller impact on economic value.
• c. No Impact.
• d. None of above.
•  
• Q. Duration will be higher if
a. longer the maturity date or smaller the payments that occur before maturity
( coupon payments)
• b. shorter the maturity and higher the payments that occur before maturity
( coupon payments)
• c. None of above.
• d. all the above.
•  
• Q. One of the strategies for reducing the asset or liability sensitivity
could be :
• a. Increase floating rate instruments.
• b. Increase fixed rate instruments.
• c. None of above.
• d. all the above.
•  
• Q. The Duration of Zero coupon bond would be
• a. Greater than its maturity.
• b. Shorter than its maturity.
• c. Equal to its maturity.
• d. None of above.
• None of above.
• Q. Under Put option the buyer has
• a. Right to sell but not obligation to sell
• b. Right to buy but not obligation to buy
• c. Right to receive interest payments.
• d. None of above.
• Q. Under Call option the buyer has
• a. Right to buy but not obligation to buy
• b. right to sell but not obligation to buy
• c. None of above.
•  
• Q. Short term dynamic liquidity statement relate to
• a. monitoring liquidity on dynamic basis over a time horizon of 1-90 days.
• b. monitoring liquidity on dynamic basis over a time horizon of 7-90 days.
• c. monitoring liquidity on dynamic basis over a time horizon of 28-90
days.
• d. None of above.
•  
• Q. In statement of interest rate sensitivity :
• a. Only rupee assets and liabilities and off balance sheet positions should
be reported.
• b. All assets and liabilities should be reflected.
• c. Only foreign currency assets and liabilities should be reflected.
• d. None of above.
•  
• Q. Gap is the difference between
• a. Rate Sensitive Assets and Rate Sensitive Liabilities for each time
bucket.
• b. Rate Sensitive Liabilities and Rate Sensitive Assets for each time
bucket.
• c. None of above.
• d. all above.
•  
• Q If positive gap of RSA > RSL, Bank will
• A.Benefit from rising interest rate.
• B.Lose from rising interest rate.
• C.None of above.
• D.All of above.
• Q. If negative gap of RSL > RSA will benefit from
• a. declining interest rate.
• b. Rising interest rate.
• c. None of above.
• d. No impact.
•  
• Q. Capital , Reserves and Surplus are
• a. Non interest rate sensitive.
• b. Interest Rate Sensitive.
• c. None of above.
•  
• Q. Provisions and inter office adjustments are
• a. Rate sensitive.
• b. Rate non sensitive.
• c. None of above.
• d. all of above.
•  
• Q. Current account balance is
• a. Rate sensitive.
• b. Rate non sensitive.
• c. None of above.
• d. All of above.
 Thank You

12/09/21 K.Eswar 64