16-08-2012, 11:28 AM
Asset - Liability Management System in banks - Guidelines
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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.
ALM information systems
Information is the key to the ALM process. Considering the large network of branches and the
lack of an adequate system to collect information required for ALM which analyses information
on the basis of residual maturity and behavioural pattern it will take time for banks in the present
state to get the requisite information. The problem of ALM needs to be addressed by following an
ABC approach i.e. analysing the behaviour of asset and liability products in the top branches
accounting for significant business and then making rational assumptions about the way in which
assets and liabilities would behave in other branches. In respect of foreign exchange, investment
portfolio and money market operations,
Composition of ALCO
The size (number of members) of ALCO would depend on the size of each institution, business
mix and organisational complexity. To ensure commitment of the Top Management, the
CEO/CMD or ED should head the Committee. The Chiefs of Investment, Credit, Funds
Management / Treasury (forex and domestic), International Banking and Economic Research can
be members of the Committee. In addition the Head of the Information Technology Division
should also be an invitee for building up of MIS and related computerisation. Some banks may
even have sub-committees.
Liquidity Risk Management
Measuring and managing liquidity needs are vital activities of commercial banks. By
assuring a bank's ability to meet its liabilities as they become due, liquidity management can
reduce the probability of an adverse situation developing. The importance of liquidity transcends
individual institutions, as liquidity shortfall in one institution can have repercussions on the entire
system. Bank management should measure not only the liquidity positions of banks on an ongoing
basis but also examine how liquidity requirements are likely to evolve under crisis scenarios.
Experience shows that assets Commonly considered as liquid like Government securities and
other money market instruments could also become illiquid when the market and players are
unidirectional. Therefore liquidity has to be tracked through maturity or cash flow mismatches.
For measuring and managing net funding requirements, the use of a maturity ladder and
calculation of cumulative surplus or deficit of funds at selected maturity dates is adopted as a
standard tool. The format of the Statement of Structural Liquidity is given in Annexure I.
Interest Rate Risk (IRR)
The phased deregulation of interest rates and the operational flexibility given to banks in
pricing most of the assets and liabilities have exposed the banking system to Interest Rate Risk.
Interest rate risk is the risk where changes in market interest rates might adversely affect a bank's
financial condition. Changes in interest rates affect both the current earnings (earnings
perspective) as also the net worth of the bank (economic value perspective). The risk from the
earnings' perspective can be measured as changes in the Net Interest Income (Nil) or Net Interest
Margin (NIM). In the context of poor MIS, slow pace of computerisation in banks and the
absence of total deregulation, the traditional Gap analysis is considered as a suitable method to
measure the Interest Rate Risk. It is the intention of RBI to move over to modern techniques of
Interest Rate Risk measurement like Duration Gap Analysis, Simulation and Value at Risk at a
later date when banks acquire sufficient expertise and sophistication in MIS. The Gap or
Mismatch risk can be measured by calculating Gaps over different time intervals as at a given
date. Gap analysis measures mismatches between rate sensitive liabilities and rate sensitive assets
(including off-balance sheet positions).