ASSET Liability

Manageme
nt
 Asset Liability
Management
In banking, Asset Liability
Management is the practice of
managing risks that arise due to
mismatch between the assets and
liabilities (debts and assets) of the
bank.
It is a coordinated management of the
entire portfolio of a financial
institution.
 Focus
 Bank funds are obtained from
variety of sources including current
deposits, saving deposits, fixed
deposits, short term borrowings, long
term borrowings, equity capital etc.
 Reserve requirement imposed by
RBI must of course be met
 The funds available after meeting
reserve requirement can then be
invested to produce an income for
Asset liability management focuses
on the net interest income of the
institution

Net interest income = interest

revenue
- interest expenses
 Historical
Perspective
 Recently Evolved Phenomenon
 Gained importance after
Deregulation of bank interest rate
 Bank financial management
principally was asset management
 Growth possible through tapping
funds
 Lead to liability management
 •SAVING A\C

•CURRENT A\C

INVESTMENTS Bank •F.D.

•LONG AND
SHORT TERM
BORROWINGS

•EQUITY CAPITAL
 Sources of Fund

 Core deposits

 Purchased funds
 Risks To Banks

• Liquidity Risk
• Interest rate Risk
• Credit risk
• Operational risk
• Foreign Exchange Risk
 Need of ALM

• Intense Competition

• Spreads

• Volatile Interest Rates

• Volatile Foreign Exchange Rates

 Asset Liability
Mismatch
Asset Liability Mismatch can be
due to :-

 Investment in Foreign Currency

 Difference in Duration

 Floating & Fixed Interest Rate

Bonds
 Techniques of ALM

 Gap Analysis

 Duration Analysis

 Securitisation

 OTC Derivatives Market

 Organisation

Asset Liability Committee (ALCO)

- Ensures adherence to the limits.

ALM Desk
- Operative staff
- Analyses, Monitors, Reports &
Forecasts Risk
 Effect of Rate,
Volume & Mix
Net interest income is basically determined by :-

• The interest rate earned on assets & paid for funds.

• The volume of funds.

• The mix of funds or the composition of the portfolio.

 Instruments

 Money market Instrument

 Using futures, options & swaps

 Securitisation
 Strategies for Asset
Liability Management

 Defensive

 Aggressive
 Classification

 Based on interest rate sensitivity :

• Rate Sensitive Assets/ Liabilities

• Non-Rate Sensitive Assets/ Liabilities

 Classification
ASSETS Type LIABILITY
Type

Short Term RSA Term Deposits NRSL

Securities RSA Account Balances NRSL
Variable Rate Loans RSA Money Market RSL
Short Term Loans NRSA Deposits RSL
Long Term NRSA Short Term Deposits NRSL
Securities Long Term Savings RSL
NRSA
Long Term Loans Repo Transactions NRSL
Other Assets