2. PROPOSED COVERAGE
AN OVERVIEW
OF
THE OBJECTIVES AND SCOPE OF ALM
ALM POLICY
ALCO
OPERATIONAL ASPECTS
REPORTS
&
OTHER RELATED MATTERS
3. WHAT IS ALM?
WHAT IS BALANCE SHEET?
WHAT IS BALANCE SHEET MANAGEMENT?
4. WHAT IS BANKING?
THE TRADITIONAL DEFINITION
THE MODERN DEFINITION
BANKING IS A RISKY BUSINESS BUT RISK IS
THE BUSINESS OF BANKING
5. RISK REVISITED
WHAT IS RISK?
SIMPLY PUT RISK CAN BE DEFINED AS THE
POSSIBILITY / PROBABILITY OF LOSS
THE OTHER NAME FOR RISK IS,
“OPPORTUNITY”
6. RISK MANAGEMENT SYSTEMS SHOULD BE
ABLE TO
IDENTIFY THE VARIOUS TYPES OF RISKS
WHICH THE INSTITUTION IS EXPOSED TO
MEASURE, MONITOR AND CONTROL THESE
RISKS
ALM IS MAINLY CONCERNED WITH LIQUIDITY
RISK AND INTEREST RATE RISK
8. EVOLUTION
NO SCIENTIFIC APPROACHES TO BALANCE SHEET
MANAGEMENT TILL LATE 1970s
FED DISMANTLED THE STABLE INTEREST RATES
ON 6-10-1979
USA - PLR REVISED
1965 - ONCE
1980 - 42 TIMES
LATE 1970s - ALM ENTERED THE LEXICON
OF BANKING
1990s - FULLY DEVELOPED ALM AND RMS
• THE EVOLUTION IN INDIA
• RBS
9. IMPLEMENTATION OF ALM GUIDELINES ISSUED BY THE
RBI
EFFECTIVE
BANKS APRIL 1, 1999
FIs APRIL 1, 2000
NBFCs MARCH 31, 2002
SCHEDULED UCBs JUNE 30, 2002
10. WHY ALM?
DERUGULATION
COMPETITION
UNSCIENTIFIC & ADHOC PRICING OF DEPOSITS
ALTERNATIVE AVENUES FOR THE BORROWERS RESULTING IN
INEFFICIENT DEPLOYMENT OF RESOURCES
NEED FOR OPTIMAL SPREADS, PROFITABILITY & LONG-TERM
VIABILITY
IMPRUDENT BALANCE SHEET MANAGEMENT CAN PUT BANK’S
EARNINGS & REPUTATION AT GREAT RISK
11. OBJECTIVE & SCOPE OF ALM
WHAT IS THE OBJECTIVE & SCOPE OF ALM?
THE TASK OF ALM IS NOT TO ELIMINATE RISK
BUT TO MANAGE IT
ALM SHOULD BE AN INTEGRAL PART OF
BANKING BUSINESS AND NOT JUST AN
EXERCISE IN MEETING REGULATORY
REQUIREMENTS
ALM INVOLVES ALTERING BALANCE SHEETS IN
A DYNAMIC MANNER TO MANAGE RISKS
12. UCBs HAVE TO MANAGE BUSINESS AFTER
ASSESSING RISKS INVOLVED
THEY HAVE TO BASE THEIR BUSINESS
DECISIONS ON SOUND RISK MANAGEMENT
SYSTEMS WITH THE ULTIMATE OBJECTIVE OF
PROTECTING THE INTEREST OF DEPOSITORS &
STAKEHOLDERS
13. THE BACKGROUND
RBI CONSTITUTED A WORKING GROUP
COMPRISING SENIOR EXECUTIVES OF UCBs &
THE RBI
TWO WORKSHOPS FOR SCHEDULED UCBs
CONDUCTED IN JANUARY AND FEBRUARY 2002
-FEED RECEIVED ANALYSED
14. ALM GUIDELINES RBI CIRCULAR DATED APRIL
15, 2002 ISSUED TO ALL SCHEDULED UCBs
SCHEDULED UCBs REQUIRED TO PUT IN PLACE
AN EFFECTIVE ALM SYSTEM
15. ADOPTION OF UNIFORM ALM SYSTEM NOT
FEASIBLE GIVEN THE LEVEL OF
COMPUTERISATION AND THE CURRENT
STATUS OF MIS
RBI GUIDELINES – A BENCH MARK FOR BANKS
WHICH LACK A FORMAL ALM
16. TO BEGIN WITH ATLEAST 60% COVERAGE OF
LIABILITIES & ASSETS – REMAINING 40% ON
ESTIMATES
100% COVERAGE BY APRIL 1, 2003
17. ALM – THE PILLARS
THE THREE PILLARS OF ALM
ALM INFORMATION SYSTEMS
ALM ORGANISATION
ALM PROCESS
19. ALM ORGANISATION
STRUCTURE AND RESPONSIBILITIES
LEVEL OF TOP MANAGEMENT INVOLVEMENT
20. ALM PROCESS
RISK IDENTIFICATION
RISK MEASUREMENT
RISK MANAGEMENT
RISK POLICIES AND PROCEDURES,
PRUDENTIAL LIMITS AND AUDITING,
REPORTING & REVIEW
21. LIQUIDITY
AVAILABILTY OF FUNDS
“HAVING JUST ENOUGH CASH TO MEET
CURRENT NEEDS”
“RAISING OF SUFFICIENT FUNDS EITHER BY
INCREASING LIABILITIES OR BY CONVERTING
ASSETS PROMPTLY AND AT A REASONABLE
COST”
22. LIQUIDITY RISK
HOW DOES IT ARISE?
MISMATCH IN THE TIMING OF INFLOWS AND
OUTFLOWS
23. FLOW APPROACH
EIGHT BUCKETS
1 TO 14 DAYS
15 TO 28 DAYS
29 DAYS 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
24. TOLERANCE LEVELS FOR VARIOUS
MATURITIES TO BE FIXED DEPENDING UPON
BANK’S ASSET-LIABILITY PROFILE, STABILITY
OF DEPOSIT BASE, NATURE OF CASH FLOWS
ETC.
MISMATCHES IN THE FIRST TWO BUCKETS TO
BE KEPT AT MINIMUM LEVELS – TO START
WITH NEGATIVE GAP NOT TO EXCEED 20% OF
CASH OUTFLOWS
THE ABOVE TOLERANCE LEVELS TO BE
STRICTLY ENFORCED W.E.F APRIL 1, 2003
25. OBJECTIVES
MEETING THE STATUTORY PRESCRIPTIONS
MEETING INTERNAL REQUIREMENT OF FUNDS
FOR
LIABILITY PAYMENTS
DISBURSEMENTS
MINIMISING THE COST OF CARRY & AVOIDING
FIRE SALE OF ASSETS
28. THE TRADE OFF
EARNINGS Vs LIQUIDITY
THE PRICE OF LIQUIDITY.
THE IMPACT ON NIM
29. WHAT IS INTEREST RATE RISK?
IT IS A MARKET RISK
ALSO KNOWN AS THE PRICE RISK
IRR IS THE RISK ON ACCOUNT OF THE
ADVERSE MOVEMENT IN INTEREST RATES
30. THE BUCKETS
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
31. ALCO
CRUCIAL ROLE
A VERY IMPORTANT COMMITTEE
CONSISTS OF SENIOR MANAGEMENT
INCLUDING THE CEO
CHIEFS OF INVESTMENT, TREASURY, CREDIT &
PLANNING
32. TAKES A VIEW ON LR & IRR
ALM SUPPORT GROUPS -DEDICATED STAFF -
SHOULD BE RESPONSIBLE FOR ANALYSING,
MONITORING & REPORTING THE RISK PROFILE
TO ALCO
33. RESPONSIBLE FOR BALANCE SHEET
PLANNING
BEHAVIOURAL PATTERN
NET BORROWING – CAP
DRI DEPOSITS
COMMITTED LINES OF CREDIT
34. INTEREST RATE GAPS
EXCESS CRR
QUORUM FOR MEETING
PRICING OF DEPOSITS & ADVANCES
DESIRED MATURITY PROFILE OF INCREMENTAL
ASSETS & LIABILITIES
REVIEW OF THE RESULTS & PROGRESS IN
IMPLEMENTATION OF THE DECISION MADE IN
THE PREVIOUS MEETINGS
35. ALCO - KEY CONSIDERATIONS
CONCENTRATION OF DEPOSITS/SOURCES OF
FUNDS
QUALITY OF MATURING ASSETS
MARKET REPUTATION
AVAILABILITY OF UNDRAWN STANDBYS
IMPACT OF OFF BALANCE SHEET EXPOSURES
36. PRUDENTIAL LIMITS - ALCO’S ROLE
MAXIMUM CUMULATIVE OUTFLOWS ACROSS
ALL TIME BANDS
CAPS ON SINGLE / GROUP EXPOSURES,
INDUSTRY-WISE EXPOSURES ETC.
38. CONTINGENCY FUNDING PLAN (CFP)
CONTINGENCY PLAN - IDENTIFICATION OF
WORST CASE SCENARIOS AND SPECIFIC
POSSIBLE COURSES OF ACTION.
THE CONTINGENCY FUNDING PLAN SHOULD BE
APPROVED BY ALCO WHICH SHOULD BE
PREPARED AND REVIEWED AT PERIODICAL
INTERVALS
39. REPORTS
STATEMENT OF STRUCTURAL LIQUIDITY - TO
CAPTURE THE MATURITY STRUCTURE OF
CASH INFLOWS & OUTFLOWS – TO START
WITH, AS ON THE LAST REPORTING FRIDAY OF
MARCH / JUNE / SEPTEMBER / DECEMBER – TO
PUT THE SYSTEM ON A FORTNIGHTLY BASIS –
W.E.F. APRIL 2003
40. REPORTS
STATEMENT OF INTEREST RATE SENSITIVITY –
QUARTERLY TO MONTHLY – 1/4/2003
SHORT TERM DYNAMIC LIQUIDITY STATEMENT
– EACH REPORTING FRIDAY
42. THE SUCCESS OF ALM PROCESS DEPENDS ON
THE CAPACITY TO ANTICIPATE CHANGE AND
TO ACT DECISIVELY SO AS TO MAKE PROFIT
FROM IT OR IN THE WORST CASE MINIMISE
LOSSES
43. THE CRUX OF BANKING BUSINESS IS
MANAGING MISMATCHES. IF BANKS WERE TO
HAVE PERFECTLY MATCHED PORTFOLIOS,
THEY WOULD NEITHER MAKE MONEY NOR
NEED TREASURY MANAGERS / EXECUTIVES
TO RUN THEIR BUSINESS. CLERKS CAN
MANAGE BANKS
