Meaning of asset and liability

asset
A resourcewith economic value that
an individual, corporation or
countryowns or controlswith the
expectation that itwillprovide future
benefit.
liability

Component of asset and

liability

Liabilities

Assets

1.
2.
3.
4.
5.

1. Cash & Balances with

RBI
2. Bal. With Banks &
Money at Call and Short
Notices
3. Investments
4. Advances
5. Fixed Assets
6. Other Assets

Capital
Reserve & Surplus
Deposits
Borrowings
Other Liabilities

Asset management
Liquid assets enable a bank to provide funds to
satisfy increased demand for loans. But banks,
which rely solely on asset management,
concentrate on adjusting the price and availability
of credit and the level of liquid assets.

Asset liquidity, or how salable" the bank's

assets are in terms of both time and cost, is of
primary importance in asset management.

To maximize profitability, management must

carefully weigh the full return on liquid assets (yield
plus liquidity value) against the higher return
associated with less liquid assets.

Liability Management
Liquidity needs can be met through
the discretionary acquisition of funds
on the basis of interest rate
competition.
The alternative costs of available
discretionary liabilities can be
compared to the opportunity cost of
selling various assets.

Asset liability management

ALM is an integral part of the financial
management process of any bank.
ALM can be termed as a risk management
technique designed to earn an adequate
return while maintaining a comfortable
surplus of assets beyond liabilities
It takes into consideration interest rates,
earning power, and degree of willingness to
take on debt and hence is also known as
Surplus Management

 Asset Liability Management is the 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
ALM is the process involving decision
making about the composition of assets
and liabilities including off balance sheet
items of the bank / FI and conducting the
risk assessment.

Concept of ALM

ALM is concerned with strategic

management of Balance Sheet by giving
due weightage to market risks viz. Liquidity
Risk, Interest Rate Risk & Currency Risk.
ALM function involves planning, directing,
controlling the flow, level, mix, cost and
yield of funds of the bank
ALM builds up Assets and Liabilities of the
bank based on the concept of Net Interest
Income (NII) or Net Interest Margin (NIM).

Scope of ALM

ALM is a part of overall risk management of a bank

which addresses the following risks:
Liquidity Risk: Risk arising out of unexpected
fluctuation in cash flows from the assets and
liabilities both in banking and trading books.
Interest Rate Risk: Risk arising out of fluctuations
in the interest rates on assets and liabilities in the
banking book.
Market Risk: Risk of price fluctuations due to
market factors causing changes in the value of the
trading portfolio.

WHY STUDY ABOUT ALM?

To gain
Competitive advantage
Value to the organization
To reduce
- Equity Risk
- Liquidity Risk
- Credit Risk
- Interest Rate Risk

Tools for ALM System

Gap Analysis
Modified Gap Analysis
Duration Gap Analysis
Value at Risk (VaR)
Simulation

Objective of the study

To study impact of ALM on the profitability
of different bank-groups risk planning.
To identify the measure technique of ALM;
which is commonly implement in banks
To know how the bank project their profit
and growth through ALM
To know how ALM affect the Liquidity
planning, interest rate risk management.
To Analysis the linkage of ALM to other
areas of risk management

Importance of risk management to the

achievement of organization goal
importance of risk management
24

25
18

20

importance of risk
management

15
10

5
0

not at all

some

very imp

Effective risk management can

improve organization performance
17

18
16

14

14
12
10
8
6

improve organisation
performance

8
5

4
2
0
strongly disagree

neutral

strongly disagree

Sponsor of risk management of with

in your organization
40
40
35
30
25
20
15
10
5
0

8
2

sponser of risk
management

Does your organization identify risk

in term of
organization risk identify
20
18
16
14
12
10
8
6
4
2
0

17

20

13

organization risk
identify

Your firm manage liquidity through

the ALM
firm manage liquidity through ALM
40
40
35
30

firm manage
liquidity through ALM

25
20
15

10

10
5
0

YES

NO

technique previously used by your

organization for managing asset and liability
50
45
40
35
30
25
20
15
10
5
0

46

techniques used by
oraganization
2

Which technique is mostly

implement by the bank
presently used technique
40
35
30
25
20
15
10
5
0

40

presently used
technique
7