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ALM and

Fund Management
Jyoti Kumar Pandey
Deputy General Manager
&
Member of Faculty
College of Agricultural Banking, Pune

12/07/21 College of Agricultural Banking, RBI, PUNE


What is Banking

• Section 5(b) defines banking ‘Accepting for the


purpose of lending or investment of deposits or
money repayable on demand or otherwise and
withdrawable by cheque, draft, order or
otherwise’

Risk taking is an inherent function


of banking - Allan Greenspan

12/07/21 College of Agricultural Banking, RBI, PUNE


Banks get affected by

• Actions of Central Banks


• Actions of the Government
• Domestic and International Disturbances
• Inflation

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Deregulation

• Banks are now operating in a fairly deregulated


environment and are required to determine on
their own, interest rates on deposits and
advances
• Intense competition for business involving both
the assets and liabilities together with increasing
volatility in the interest rates has brought
pressure on the management of banks to
maintain a good balance among spreads

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Risks Faced by Banks

• Credit Risk
• Market Risk
 Liquidity Risk
 Interest Rate Risk
• Operational Risk

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Effects of Risk Factors

• Loss of Market Value


• Loss of Reserves
• Loss of stakeholders confidence

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ALM

• The ALM guidelines issued by RBI has been


formulated to serve as a benchmark for banks
which lack a formal ALM system
• Those who already have their existing system
may fine tune their information and reporting
system

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Purpose of ALM

• Capture the maturity structure of the cash flows


(inflows and outflows) in the Statement of
Structural Liquidity
• Tolerance levels for various maturities may be
fixed by the bank keeping in view bank’s ALM
profile, extent of stable deposit base, nature of
cash flows etc.

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ALM

• ALM is about managing market risk and liquidity


risk together
• Capital market exposure of banks is small
• Exchange risk is highly specialized
• Hence ALM is an integrated risk management
approach for managing liquidity risk, interest rate
risk

12/07/21 College of Agricultural Banking, RBI, PUNE


The problem of mismatch

• Mismatches in maturity
• Mismatches in interest rate
• How does bank makes the spread?
• Borrow short and lend long and keep the spread
• Maturity mismatch is the basis of profitability
• Risk management does not eliminate mismatch –
merely manages them

12/07/21 College of Agricultural Banking, RBI, PUNE


The problem of mismatch

• Interest Rate Risk  Affects profitability


• Liquidity Risk  May lead to liquidation
• General Strategy
 Eliminate Liquidity Risk (not the mismatch)
 Manage Interest Rate Risk
 Consciously create gaps

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Asset Liability Transformation

• Banks are exposed to credit and market risks in


view of the asset-liability transformation
• With liberalisation, banks’ operations have
become complex and large , requiring strategic
management

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ALM Pillars

• ALM Information Systems


• ALM Organisation
• ALM Process

Applicable to Scheduled UCBs and Tier II UCBs


For Tier II UCBs – effective date is December 2008

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ALM Pillars (Contd.)

• ALM Information systems


 MIS
 Information availability
 Accuracy
 Adequacy
 Expediency

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ALM Pillars (Contd.)

• ALM Organisation
 Structure and responsibilities
 Level of top management involvement

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ALM Pillars (Contd.)

• ALM Process
• Risk Parameters
• Risk Identification
• Risk Measurement
• Risk Management
• Risk Policies and Procedures, prudential limits
and auditing, reporting and review

12/07/21 College of Agricultural Banking, RBI, PUNE


ALM Information Systems

• ALM framework built on sound methodology with


necessary information system back-up
• ALM to be supported by management philosophy
and clearly states risk policies and procedures /
prudential limits
• Banks may utlilise ‘Gap Analysis’ or ‘Simulation’
• Important to have availability of timely, adequate
and accurate information

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ALM Information Systems (Contd.)

• ALM Data could be developed by following


approach, in case UCBs do not have requisite
information
 Analyse behaviour of asset and liability products in
sample branches that account for significant business
(60-70 per cent)
 Based on this make rational assumption for the other
branches

UCBs have limited area of operations and hence it would be easier


for them to make such assumptions and better access to data

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ALM Organisation

• Board should have overall responsibility for management of risk


 Board should decide risk management policy and procedure, set
prudential limits, auditing, reporting and review mechanism in respect
of liquidity, interest rate and forex risk
• ALCO
 Consisiting of bank’s senior management including CEO
 Responsible for adherence to the polices and limits set by Board
 Responsible for deciding business strategies (on asset liability side) in
line with bank’s business and risk objectives
• ALM Support Group
 Consisting of operating staff
 Responsible for analysing, monitoring and reporting risk profiles to
ALCO
 Prepare forecasts showing effects of various possible changes in
market conditions affecting balance sheet and suggesting action to
adhere to bank’s internal limits

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ALM Organisation (Contd.)

• ALCO decision making unit responsible for


 Balance Sheet planning from risk-return perspective which includes
management of liquidity, interest rate and forex risks
 Pricing of deposits and advances, desired maturity profile etc.
 Monitoring the risk levels of the bank
 Review of the results and progress of implementation of decisions
made in previous meeting
 Future business strategies based on bank’s current view on interest
rates
 To decide on source and mix of liabilities or sale of assets
 To develop future direction of interest rate movements
 To decide on funding mix between fixed and floating rate funds,
wholesale vs. retails deposits, short term vs. long term deposits etc.

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ALM Organisation (Contd.)

• ALCO size would be dependent on the size of the


UCB
• May comprise of
 CEO or Secretary
 Chief of Investment / Treasury including those of forex,
credit, planning etc.
 Head of IT if a separate division exists
• UCBs may at their discretion may have Sub-
committees and Support Groups

12/07/21 College of Agricultural Banking, RBI, PUNE


ALM Process

• Scope is
 Liquidity Risk Management
 Interest Rate Risk Management
 Trading (Price) risk Management
 Funding and Capital Management
 Profit Planning and business Projections

UCBs, generally, are not exposed to forex risk

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ALM

•Liquidity Risk

•Interest Rate Risk

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Liquidity Risk

• Arising due to
 Over extension of credit
 High level of NPAs
 Poor asset quality
 Mismanagement
 Hot Money
 Non recognition of embedded option risk
 Reliance on few wholesale depositors
 Large undrawn loan commitments
 Lack of appropriate liquidity policy and contingent plan

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Liquidity vs. Earnings

• Bank must be in a position to:-


 Balance their need for liquidity with their need for
earnings
 More liquid assets tend to provide lower return than do
less liquid assets

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Assessing Liquidity Position

• Assessing a bank’s liquidity position can be


challenging
• An adequate position for one bank may not be
sufficient for another
• A position considered adequate for a bank in one
time period may not be so in another
• BANK SPECIFIC & DYNAMIC

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Liquidity risk-Manifestation

• Funding risk
 Need to replace net outflows due to unanticipated
withdrawal/non-renewal of deposits

• Time Risk
 Need to compensate for non-receipt of expected inflows
of funds-performing assets turning into non-performing
assets

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Liquidity Risk - Measurement

• Two methods are employed:


 Stock approach - Employing ratios
 Flow approach - Time bucket analysis

12/07/21 College of Agricultural Banking, RBI, PUNE


Liquidity Risk - Measurement

• Liquidity Ratios
 Volatile Liability Dependence Ratio
 Volatile Liabilities minus Temporary Investments to Earning
Assets net of Temporary Investments
 Shows the extent to which bank’s reliance on volatile funds
to support Long Term assets
– where volatile liabilities represent wholesale deposits which
are market sensitive and temporary investments are those
maturing within one year and those investments which are
held in the trading book and are readily sold in the market
 Growth in Core Deposits to growth in assets
 Higher the ratio the better

12/07/21 College of Agricultural Banking, RBI, PUNE


Liquidity Risk – Measurement (Contd.)

• Purchased Funds to Total Assets


 where purchased funds include the entire inter-bank and
other money market borrowings, including Certificate of
Deposits and institutional deposits
• Loan Losses to Net Loans
• Loans to core deposits

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Liquidity Risk – Measurement (Contd.)

• Does not lead to proper assessment of liquidity


gaps due to:
 Illiquidity of liquid assets
 Their ready marketability
 Difficulty to convert easily into liquid cash with least loss of
value from the previously quoted market rates

12/07/21 College of Agricultural Banking, RBI, PUNE


Liquid Assets to Total Assets

• Liquid Assets to Total Assets


 Show the percentage of liquid assets in the asset
structure of the bank - 18-20%
• Liquid assets generally are cash balances with
RBI + balances with other banks + investments
available for sale + money market instruments

12/07/21 College of Agricultural Banking, RBI, PUNE


Liquid Assets to Total Deposits

• Liquid Assets to Total Deposits


 This ratio indicates extent of liquidity maintained by a
bank for meeting the demand made by the depositors-
Sometimes taken as a measure of bank liquidity-20-
22%

12/07/21 College of Agricultural Banking, RBI, PUNE


Loans to Deposits

• Loans to Deposits
 Loans to deposits ratio indicates the degree to which the
bank has already used up its available resources to
accommodate the credit needs of the customers
 A high loan deposit ratio indicates that a bank will have
comparatively low liquidity

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Loans to Assets

• Loans to Assets
 This ratio indicates the percentage of illiquid assets to
total assets
 A rise in this ratio would indicate lower liquidity

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Loans to Core Deposits

• Loans to Core Deposits


 Those deposits which are not subject to any large
volatility
 Average level of previous years deposit is generally
taken as core deposits
 This ratio helps in assessing level of deployment of core
portion of deposits

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Loans to Investments

• Loans to Investments
 While loans provide higher returns compared to
investments, these suffer from credit risk and are more
illiquid than investments
 A proper mix of loans and investments keeping in view
liquidity and yield considerations need to be fixed

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Cash Flow Approach

• Preparing a structural liquidity by taking into account


balance sheet on particular date and place in maturity
ladder according to time buckets
• Identify the liquidity needs - to evolve methods to meet it
• Negative gaps in individual time buckets indicate the need.
The need could be controlled by
 prudential limits
 as also by regulating the basis of business structure/financial
flexibility of banks
• Regulatory Limit of 20% on outflows in first two time
buckets

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RBI Guidelines on Liquidity Risk

• Methodology prescribed in ALM System- Structural


Liquidity Statement & Dynamic Liquidity Ladder are simple
• Need to make assumptions and trend analysis- Behavioural
maturity analysis
• Variance Analysis at least once in six months and
assumptions fine-tuned
• Track the impact of exercise of options & potential liquidity
needs
• Cap on inter-bank borrowings & Call money

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Structural Liquidity Statement – Sch.
UCBs
• SSL Layout
Circular Sept. 17, 2008 for Scheduled UCBs
More granular approach adopted – by splitting first bucket of 1 – 14 days in SSL
into Next Day, 2-7 days and 8 – 14 days
Net cumulative negative mismatches during the Next Day, 2 – 7 days, 8 – 14 days
and 15 – 28 days bucket should not exceed 5%, 10%, 15% and 20% of the
cumulative cash outflows in the respective buckets
Banks may undertake dynamic liquidity management and should prepare the SSL
on daily basis to Top Management / ALCO
SSL may be reported to RBI at fortnightly intervals within 10 days of the reporting
Friday
Revised format would be applicable from January 01, 2009
UCBs in Tier II are also covered
Scheduled UCBs to report structural liquidity position and interest rate sensitivity
to RBI as part of OSS data

12/07/21 College of Agricultural Banking, RBI, PUNE


Structural Liquidity Statement – Sch.
UCBs (Contd.)

Heads of Account Classification into time bands

A. Outflows

1.Capital, Reserves and Surplus Over 5 year band

2. Demand Deposits (Current & Volatile and Core Deposits. Savings (10%) and Current (15%) are withdrawable on
Savings) demand generally and hence volatile. Volatile portion in 1 day, 2 – 7 days and 8 – 14
days, depending upon the experience and estimates of the banks and rest (core
portion) in over 1-3 years time band.
It is only a benchmark if the system is better developed can classify based on
behavioral instead of contractual maturity
3. Term Deposits Respective maturity buckets
Appropriate time bands can be given based on behavioral instead of contractual
maturity. However, wholesale deposits (Deposits over Rs. 15 lakh should be shown in
respective residual time band)
4. CDs Respective maturity buckets

5. Other Liabilities

i. Bills payable Core component which could be estimated on the basis of past data and behavioral
pattern in ‘over 1 – 3 years’ time bucket. Balance in Day 1, 2 – 7 days and 8 – 14 days
time band
iii. Provisions other than for loan loss Respective time bands. Items not representing cash payables (Guarantees fees
and dep. On investments received in advance etc.) may be placed in over 5 years time band
6. Export Refinance – Availed Respective Time bands of underlying assets

College of Agricultural Banking, RBI, PUNE


Structural Liquidity Statement – Sch.
UCBs (Contd.)

Heads of Account Classification into time bands

B. Inflows

1. Cash Day 1 bucket

2. Balance with RBI / PSU banks / Excess balance over required CRR / SLR under Day 1 bucket. The statutory balances
SCBs and DCCBs etc. distributed in different time bands corresponding to the maturity profile of DTL with 14
days time lag
3.Balances with other banks

i. Current Account Non-withdrawable portion on stipulation of minimum balance in 1-3 years band and
ii. Money at Call & Short Notice remaining balance in Day 1 bucket band.
Respective residual maturity bands
4. Investments

i. Approved Securities Respective Residual time bands except amount required to be reinvested for maintaining
SLR / CRR
i. PSU Bonds, CDs and CPs, Units Residual maturity. Investment classified as NPAs in 3-5 years band (substandard) and
of UTI (Close ended) etc. over 5 years (doubtful)
ii. Equities of All India FIs etc.
Listed shares in 2 – 7 days bucket with haircut of 50 %. Other shares in over 5 years
iii. Units of mutual funds bucket
Day 1 bucket
iv. Securities in trading books
Day 1 bucket, 2-7days, 8-14 days, 15-28 days and 29 – 90 days according to
defeasance period
v. Investment in subsidiaries
Over 5 years bucket

College of Agricultural Banking, RBI, PUNE


Structural Liquidity Statement – Sch.
6. NPAs
UCBs (Contd.)

i. Substandard 3-5 years band


ii. Doubtful and Loss Over 5 years band
7. Fixed Assets Over 5 years band

8. Other Assets
i. Intangible assets Intangible assets and assets not representing cash flows may be shown in over 5 years
bucket
9. Contingent liabilities - Assets created out of developments may be shown under respective maturity bucket on
LCs / Guarantees (outflows) the basis of probable date of recovery

10. Lines of credit committed Day 1 bucket


i. Lines of credit committed to /
from institutions and Export
Refinance
ii. Unavailed portion of cash credit Based on behavioral pattern and seasonal pattern arrive at potential availments and
/ overdraft etc.
put under relevant maturity bucket up to 12 months
Repo etc. Based on respective residual time bands

Interest Payable Respective Time Band

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Structural Liquidity Statement – Sch.
UCBs (Contd.)

• Liability on account of event cash flows – CRR / SLR


shortfall, wage settlement and any other contingency under
respective maturity bands
• All overdue liabilities in Day 1, 2 – 7 days and 8 – 14 days
bucket based on behavioral estimates
• Interest and installments from advances and investments
which are due for less than one month – 1-6 months time
band
• Interest and installments from advances and investments
which are over due for less than one month may be placed
in Day 1, 2-7 days and 8 – 14 days based on behavioral
pattern. Further, interest and installments due (before
classification as NPAs may be placed in 29 days – 3 months
bucket if the earlier receivables remain uncollected

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Liquidity Risk Management for Tier 1
UCBs
• Basic guidelines for liquidity management issued
on September 17, 2008
• Banks advised to prepare
 Statement of Structural Liquidity and
 Statement of Short Term Dynamic Liquidity
• To be prepared as on the last reporting Friday of
March / June / September / December and
submit to the Board within one month from the
last reporting Friday
• First such submission to be made to the Board as
on last reporting Friday of December 2008

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Liquidity Risk Management for Tier 1
UCBs (contd.)
• Maturity profile of SSL into 8 buckets
i. 1-14 days
ii. 15-28 days
iii. 29 and up to 3 months
iv. Over 3months and up to 6 months
v. Over 6 months and up to 1 year
vi. Over 1 year and up to 3 years
vii. Over 3 years and up to 5 years
viii.Over 5 years
• Mismatches (negative gaps) during 1-14 and 15-
28 days time bands in normal course should not
exceed 20 % of the cash flows in each time band

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Liquidity Risk Management for Tier 1
UCBs (contd.)
• Short Term Dynamic Liquidity Statement
i. 1-14 days
ii. 15-28 days
iii. 29-90 days
• STDL required for securities in the trading book
• SLR investments / securities are generally not
very liquid and lack depth and are therefore
shown in the residual maturity bands
corresponding to residual maturity

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Liquidity Risk Management for Tier 1
UCBs (contd.)
• Holding period not to exceed 90 days
• Cut loss limit is prescribed
• Defeasance periods are prescribed – Time taken
to liquidate the position on the basis of liquidity
in the secondary market are prescribed
• Marking to market on a weekly basis

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Trading Book

• Maintained distinctly from those required for


complying with Statutory Reserve Requirements
• Subject to preconditions
 Composition and volume clearly defined
 Maximum maturity / Duration of the portfolio restricted
 Holding period not exceeding 90 days
 Cut Loss prescribed
 Marked to market on a weekly basis

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Maturity Profile Liquidity for Tier 1
UCBs
Heads of Account Classification into time bands

A. Outflows

1.Capital, Reserves and Surplus Over 5 year band

2. Demand Deposits (Current & Volatile and Core Deposits. Savings (10%) and Current (15%) are withdrawable on
Savings) demand generally and hence volatile. Volatile portion in 1-14 days and rest in over 1-3
years time band.
It is only a benchmark if the system is better developed can classify based on
behavioral instead of contractual maturity
3. Term Deposits Respective residual time bands
Appropriate time bands can be given based on behavioral instead of contractual
maturity. However, wholesale deposits (Deposits over Rs. 15 lakh should be shown in
respective residual time band)
4. CDs Respective Residual Time Bands

5. Other Liabilities

i. Bills payable 1-14 days time band

ii. Branch Adjustments Net credit balance in 1-14 days time band

iii. Provisions other than for loan loss Respective time bands. Items not representing cash payables (Guarantees fees
and dep. On investments received in advance etc.) may be placed in over 5 years time band

6. Export Refinance – Availed Respective Time bands of underlying assets

College of Agricultural Banking, RBI, PUNE


Maturity Profile Liquidity for Tier 1
UCBs (contd.)
Heads of Account Classification into time bands

B. Inflows

1. Cash 1-14days time band

2. Balance with RBI / PSU banks / Excess balance over required CRR / SLR under 1-14 days band. The statutory balances
SCBs and DCCBs etc. distributed in different time bands corresponding to the maturity profile of DTL with 28
days time lag
3.Balances with other banks

i. Current Account Non-withdrawable portion on stipulation of minimum balance in 14-3 year band and
ii. Money at Call & Short Notice remaining balance in 1-14 days band.
Respective residual maturity bands
4. Investments

i. Approved Securities Respective Residual time bands except amount required to be reinvested for
maintaining SLR / CRR
i. PSU Bonds, CDs and CPs, Residual maturity. Investment classified as NPAs in 3-5 years band (substandard) and
Units of UTI (Close ended) etc. over 5 years (doubtful)
ii. Equities of All India FIs etc.
Over 5 year band
iii. Securities in trading books
1-14, 15-28 and 29-90 days time bands

College of Agricultural Banking, RBI, PUNE


Maturity Profile Liquidity for Tier 1
UCBs (contd.)
6. NPAs

i. Substandard 3-5 years band


ii. Doubtful and Loss Over 5 years band
7. Fixed Assets Over 5 years band

8. Other Assets
i. Branch Adjustments Net debit balance in 1-14 days band. Intangible assets and assets not representing
ii. Leased Assets cash receivables in 5 years time band
Interim cash flows under residual maturity time bands
Contingent liabilities - Under residual maturity time bands within 12 months based on behavioral and
i. Unavailed portion of Cash seasonal patterns
Credit / Overdraft / Demand
Loan component of working
capital
ii. Export Refinance – Unavailed 1-14 days band
(inflow)

LC Based on past history

Repo etc. Based on respective residual time bands

Interest Payable Respective Time Band

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ALM for Tier II UCBs

• Similar to what prescribed to Scheduled UCBs


• Initially at least 60% of assets and liabilities to
be covered and remaining 40% on assessment
basis only
• 100% coverage by April 01, 2010
• Statements required to be prepared
 Statement of Structural Liquidity
 Statement of Interest Rate Sensitivity
 Short-Term Dynamic Liquidity Statement

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ALM for Tier II UCBs – SSL

• To be prepared, to start with, as on last reporting Friday


of March / June / September / December
• To be put up to the ALCO / Top Management within a
month from the close of the last reporting Friday
• Reporting on a fortnightly basis from December 2008
(intended)
• Maturity profile of SSL into 8 buckets
i. 1-14 days
ii. 15-28 days
iii. 29 and up to 3 months
iv. Over 3months and up to 6 months
v. Over 6 months and up to 1 year
vi. Over 1 year and up to 3 years
vii. Over 3 years and up to 5 years
viii.Over 5 years

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ALM for Tier II UCBs – SSL (contd.)

• Mismatches in cash flows to be kept at minimum


• Initially for 1-14 and 15-28 days it may not
exceed 20% normally
• In case banks wishes to operate on a higher
limit, it could be done with approval of the Board
/ Management
• Objective of RBI is to enforce tolerance level
strictly with effect from April 01, 2010

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ALM for Tier II UCBs – SIRS

• Only rupee assets, liabilities and off-balance


sheet positions to be reported
• Statement to be prepared as on last Friday of
March / June / September / December
• To be submitted to ALCO / Top Management
within one month of reporting Friday
• To be placed before the Board in its next
meeting
• Banks expected to move over to monthly
reporting system from April 01, 2010

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ALM for Tier II UCBs – SIRS (contd.)

• Maturity profile of SIRS into 7 time bands


i. Up to 3 months
ii. Over 3months and up to 6 months
iii. Over 6 months and up to 1 year
iv. Over 1 year and up to 3 years
v. Over 3 years and up to 5 years
vi. Over 5 years
vii. Non-sensitive
• Gap is the difference between Rate Sensitive Assets (RSA)
and Rate Sensitive Liabilities (RSL)
• If RSA > RSL = +ve Gap – Bank benefits if interest rate
goes up
• If RSA < RSL or RSL > RSA = -ve Gap – Bank benefits if
interest rate goes down

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ALM for Tier II UCBs – SIRS (contd.)

• Banks to 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
• Banks need to work out Earnings at Risk (EaR)
i.e. 20 – 30% of the last years NII or Net
Interest Margin – based on their views of
interest rate movements
• After sufficient experience is gained by the UCB
in ALM, RBI may consider introduce capital
adequacy for market risk

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ALM for Tier II UCBs – STDS

• To be prepared as on each reporting Friday


• To be put up to the ALCO / Top Management
within 2-3 days from the close of the reporting
Friday

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ALM for Tier II UCBs – Other Issues

• SSL and SIRS could be reported through OSS


 Communication to be issued
• All the three ALM Statements may be put up to
the ALCO as on last Friday of December 2008

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Some points

• Break the beyond 5 year bucket into financial and


non-financial
• The sum of all the gaps in the structural liquidity
may or may not be zero
• The cumulative gaps – also called forward
payment structure
• Why is the forward payment structure significant?
• Stress testing

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Cumulative Gaps
0d-14d 14d-28d 28d- 3m 3m-6m 6m-1y 1y - 3y 3y - 5y Above 5y
Cash Inflow 195 210 230 250 295 375 430 525
Cash Outflow 180 240 261 285 322 445 480 560
Gap 15 -30 -31 -35 -27 -70 -50 -35
Gap % 7.69% -14.29% -13.48% -14.00% -9.15% -18.67% -11.63% -6.67%
Cumulative Gap 15 -15 -46 -81 -108 -178 -228 -263
Cum Gap % 7.69% -7.14% -20.00% -32.40% -36.61% -47.47% -53.02% -50.10%

• Forward Payment Structure indicates


future liquidity position
• Long term strategic approach needed to
correct an increasingly negative FPS
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Dynamic Liquidity Gap Analysis

• Tracking cash flow on a short term time horizon-


changes on account of fresh business are
interpolated in the projections

• RBI has asked banks to monitor short term


liquidity on a dynamic basis over time horizon
spanning from 1-90 days

12/07/21 College of Agricultural Banking, RBI, PUNE


Short-Term Dynamic Liquidity Statement

• Main focus on short term mismatches


 1-14days
 15-28 days
 29-90 days

12/07/21 College of Agricultural Banking, RBI, PUNE


Dynamic Liquidity Analysis
(Amount Rs. Crore)

OUTFLOWS 1-90 days

Net increase in loans and advances 950

Net increase in investments 275

TOTAL OUTFLOWS 1225

INFLOWS

Net cash position 50

Net increase in deposits(less CRR) 619

Refinance 60

Total Inflows 729

Mismatch(Inflows-Outflows) (-)496

Mismatch as a % of Total Outflows (-)40.49%

12/07/21 College of Agricultural Banking, RBI, PUNE


Reasons for Interest Rate Risk

• On account of asset transformation


 Many deposits are used for one big loan
• Periodical review of assets and liabilities
• Due to mismatches between maturity / repricing
dates as well as maturity amounts between
assets and liabilities
• Depositors and borrowers may pre-close their
accounts

12/07/21 College of Agricultural Banking, RBI, PUNE


RSA and RSL

• Rate Sensitive Assets (RSA) – Assets whose value


is dependent on current interest rate
• Risk Sensitive Liabilities (RSL) – Liabilities whose
value is dependent on current interest rate

12/07/21 College of Agricultural Banking, RBI, PUNE


Gap / Mismatch Risk

• Arises on account of holding RSA and RSL with


different principal amounts, maturity / repricing
rates
• Even though maturity dates are same, if there is
a mismatch between amount of assets and
liabilities it causes interest rate risk and affects
NIM

12/07/21 College of Agricultural Banking, RBI, PUNE


Interest Rate Risk

• Assessed by Gap Report – Gaps between RSA and


RSL
• Asset / Liabilities are rate sensitive if:
 Within the time interval under consideration there is a
Cash Flow
 Repayment of term loans
 Interest rate resets / reprices
 Change in interest rate in CC account, Term Loans before
maturity
 RBI changes interest rates
 Interest on Savings Bank Deposits, CRR balance etc.

12/07/21 College of Agricultural Banking, RBI, PUNE


Interest Rate Risk (contd.)

• Assessed by Gap Report – Gaps between RSA and


RSL
• Gaps may be identified in the following time
bands:
 Upto 3 months
 Over 3 months and upto 6 months
 Over 6 months and upto 1 year
 Over 1 year and upto 3 years
 Over 3 years and upto 5 years
 Over 5 years
 Non-sensitive

12/07/21 College of Agricultural Banking, RBI, PUNE


Interest Rate Risk (contd.)

• Immediate impact of changes is on bank’s profit


by change in its spread – NII
 NII gives the earning perspective
• Long term impact is change in its MVE or Net
Worth
 As marked to market value of bank’s asset – liabilities,
off-balance sheet positions get affected
 Gives the economic value perspective

12/07/21 College of Agricultural Banking, RBI, PUNE


Interest Rate Risk (contd.)

• Each bank to set its prudential limits on individual


gaps with approval of Board
• Prudential limits set with respect to bearing on
Total Assets, Earning Assets or Equity
• Bank’s may work out their Earnings at Risk – 20-
30% of last year’s NII or NIM

12/07/21 College of Agricultural Banking, RBI, PUNE


Interest Rate Sensitivity (Contd.)

Heads of Account Classification into time bands

A. Liabilities

1.Capital, Reserves and Surplus Non Sensitive

2. Current Deposits Non Sensitive

3. Savings Bank Deposits Sensitive to the extent of interest paying (core) portion. Include in 3-6 months time
band. Non interest part in non-sensitive band
4. Term Deposits and CDs Sensitive. In different time bands based on residual term of maturity

5. Borrowings – Fixed Sensitive. In different time bands based on residual term of maturity

6. Borrowings – Floating Sensitive. Distributed to appropriate time bands that refers to resetting dates

7. Borrowings – Zero Coupon Sensitive. In different time bands based on respective maturity band

8. Borrowings from RBI Upto 3 months time band

9. Refinance from other Agencies Fixed Rate – As per maturity


Floating Rate – Reprices when interest rate is reset

10. Other Liabilities & Provision Non-Sensitive


Bills payable, Branch
Adjustments, Provisions, Others

11. Repos / Bill Rediscounted Sensitive. Reprices on maturity and should be distributed to respective maturity bands

College of Agricultural Banking, RBI, PUNE


Interest Rate Sensitivity (Contd.)

Heads of Account Classification into time bands

B. Assets

1.Cash Non Sensitive

2. Balance with RBI Interest portion in 3-6 months time band. Balance is non sensitive

3. Balance with other banks


i. Current Accounts i. Non sensitive
ii. Money at Call and Short ii. Sensitive on maturity. Amount distributed in different time bands
Notice, Term Deposits and
other placements
4. Investments (performing)
i. Fixed Rate / Zero Coupon i. Sensitive on maturity
ii. Floating Rate ii. Sensitive at next repricing date
5. Share of All India FIs, other Non Sensitive
cooperatives / Units of UTI
6. Advancers (performing)
i. Bills purchased and discounted i. Sensitive on maturity
ii. Cash Credits / Overdrafts / ii. Sensitive may be shown in 3+6 months band
Loans repayable on demand
and Term Loans

College of Agricultural Banking, RBI, PUNE


Interest Rate Sensitivity (Contd.)

Heads of Account Classification into time bands

7. NPAs (Advances &


Investments)
i. Substandard i. Over 3-5 years time band
ii. Doubtful and Loss ii. Over 5 year time band
8. Fixed Assets Non Sensitive

9. Other Assets
i. Inter-Office Adjustments i. Non Sensitive
ii. Leased Assets ii. Sensitive on cash flows. Distributed in respective maturity bands corresponding
iii. Others to cash flow dates
iii. Non Sensitive
10. Reverse Repos, Swaps, Bills Sensitive on maturity
Rediscounted
11. Other products (Interest
Rate)
i. Swaps i. Sensitive. Should be distributed under different bands with reference to
ii. Other maturity
ii. Should be suitably classified as and when introduced

College of Agricultural Banking, RBI, PUNE


Gist

• Scheduled UCBS and Tier II UCBs


 Have 3 pillars I n place
 ALM Information Systems
 ALM Organisation
 ALM Process
 Prepare 3 statements
 Statement of Structural Liquidity (quarterly)
 Short Term Dynamic Liquidity Statement (fortnightly)
 Statement of Interest Rate Sensitivity (quarterly)
 Review of Statements by ALCO / Top Management
 To report from last reporting Friday of December 2008
 SIRS to be moved to monthly reporting by April 01, 2010
 SSL to be fortnightly basis from December 2008

12/07/21 College of Agricultural Banking, RBI, PUNE


Gist (contd.)

 Scheduled UCBs already reporting SSL and SIRS


through OSS
 For Tier II UCBs separate communication to follow

12/07/21 College of Agricultural Banking, RBI, PUNE


Gist (contd.)

• Tier I UCBs
 Prepare 2 Statements
 Statement of Structural Liquidity (quarterly)
 Statement of Short Term Dynamic Liquidity (quarterly)
 To be put up to the Board as on last Friday of December
2008
 For reporting through OSS separate communication to
follow

12/07/21 College of Agricultural Banking, RBI, PUNE


Thank You

12/07/21 College of Agricultural Banking, RBI, PUNE

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