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Synopsis of End Term Project On

ASSET LIABILITY MANAGEMENT SYSTEM

Submitted By: Mayank Mittal Class: PGDM - Finance Roll No.218/2012

Supervisor: Dr. Pankaj Varshney Area: Finance

LAL BAHADUR SHASTRI INSTITUTE OF MANAGEMENT NEW DELHI


FINAL YEAR PROJECT

INTRODUCTION This project work is an attempt to study the Asset Liability Management System of the bank. The project starts with an introduction which states why there is a need for the ALM Policy for the Banks. The major kinds of risks faced by the bank in todays market and management of these risks are also stated. The major focus of my study is on the Liquidity risk management and Interest Rate Risk management practices followed by the banks. Various tools that are used for liquidity risk management like Preparation of Structural Liquidity Statement, Stock Approach for liquidity management, etc. will be studied. In addition to this, an attempt will be made to compare the Gap Statements of different banks like HDFC, Bank of India, Axis bank, ICICI bank and SBI in order to assess the likely mismatch that occurs between the assets and liabilities of the banks. Various tools of Interest Rate Risk management are also to be studied like Traditional gap analysis through preparation of IRR Statement, Earning at risk (EAR) Analysis considering all the possible scenarios- Reprising risk, Yield curve Risk, Basis risk and Embedded option risk- for different banks to find the NII Impact that is likely to take place in future due to interest rate fluctuations, Modified Duration of Equity and Value at Risk (VAR). OBJECTIVES OF THE STUDY The main objective of this project is to study the Asset Liability Management System of the bank and why there was a need of ALM Policy for Banks. In addition to this, an attempt has been made to compare Gap Statements of different banks like HDFC, Bank of India, Axis bank, ICICI bank and SBI in order to assess the likely mismatch that can occur between the assets and liabilities of the banks for studying the major kinds of risks faced by banks in todays market.

The companies chosen for the study are as mentioned above : HDFC Bank Bank of India Axis bank ICICI bank SBI

** some companies are subject to change depending on the unavailability of data and annual reports.

HYPOTHESIS This is a study based project. No hypothesis testing is required as such.

REVIEW OF THE EARLIER STUDIES As per the RBI Governor, Dr. Y.V. Reddy, 'banking in modern economies is all about risk management', he had stated 'the successful negotiation on implementation of Basel II Accord is likely to lead to even sharper focus on the risk measurement and risk management at the Financial Institutions. Hopefully, the Basel Committee has provided useful guidelines for risks management. Institutions with sound risk management practices is an important facet for tackling the competition.

As per the RBI documents, over the last few years the Indian financial markets have witnessed wide ranging changes at fast pace. Intense competition for business involving both the assets and liabilities, together with increasing volatility in the domestic interest rates as well as foreign exchange rates, has brought pressure on the management of banks to maintain a good balance among spreads, profitability and long-term viability. These pressures call for structured and comprehensive measures and not just ad hoc action. The Management of banks has to base their business decisions on a dynamic and integrated risk management system and process, driven by corporate strategy. Banks are exposed to several major risks in the course of their business - credit risk, interest rate risk, foreign exchange risk, equity / commodity price risk, liquidity risk and operational risks. The initial focus of the ALM function would be to enforce the risk management discipline viz. managing business after assessing the risks involved. The objective of good risk management programmes should be that these programmes will evolve into a strategic tool for bank management. The ALM process rests on three pillars: ALM information systems =>Management Information System =>Information availability, accuracy, adequacy and expediency ALM organisation =>Structure and responsibilities =>Level of top management involvement ALM process =>Risk parameters =>Risk identification =>Risk measurement =>Risk management

=>Risk policies and tolerance levels.

RESEARCH METHODOLOGY a) Selection of Topic: This topic is selected by me since banks in todays markets are facing various risks and there are set methods by RBI to evaluate these risks so I will to understand these methods. b) Selection of Sample: A sample of 5 banks was taken from 3 from private sector and 2 from public sector. c) Data Collection Data will be taken from banks annual reports available on the respective banks website. Study from previously conducted research on the subject and extensive study of journals on Bank risks Management. CRISIL Database of LBSIM will also be used to get the company and policy related reports.

RESEARCH TOOLS Financial Ratios and balance sheets will be used for the research purpose. Graphs will be made on Microsoft Excel. SPSS and EVIEWS

STUDY PERIOD This study period will be till sixth trimester of the academic year 2013-14. SIGNIFICANCE OF THE STUDY ALM is a tool that enables bank managements to take business decisions in a more informed framework with an eye on the risks that bank is exposed to. It is an integrated approach to financial management, requiring simultaneous decisions about the types of amounts of financial assets and liabilities - both mix and volume - with the complexities of

the financial markets in which the institution operates. Therefore taking into account of the immensely important nature of ALM for banks an attempt will be made by me to conduct an empirical work on this topic using quantitative studies on the data available in form of financial statements.

BIBLIOGRAPHY Risk Management by Macmillan Indian Institute of Banking and Finance Risk Management in Banks Current Developments- By Dhandapani Alagiri- ICFAI University Analyzing and Managing Banking Risk by Hennie van Greuning & Sonja Brajovic Bratanovic

Signature of Supervisor

Signature of Student

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