Download VTU (Visvesvaraya Technological University) MBA 3rd Semester (Third Semester) 16MBAFM301-Principles and Practices of Banking PPB Notes Module 6 Important Lecture Notes (MBA Study Material Notes)
ASSET?LIABILITY?MANAGEMENT
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MODULE?6
ASSET?LIABILITY?MANAGEMENT
OUTLINE
? Asset?Liability?Management?(ALM)?in?banks
? Components?of?Liabilities?
? Components?of?Assets
? Significance?of?Asset?Liability?management
? Purpose?and?objectives
? Prerequisites?for?ALM
? Assets?and?Liabilities?Committee?(ALCO)?
? Activities?of?ALCO
FirstRanker.com - FirstRanker's Choice
MODULE?6
ASSET?LIABILITY?MANAGEMENT
OUTLINE
? Asset?Liability?Management?(ALM)?in?banks
? Components?of?Liabilities?
? Components?of?Assets
? Significance?of?Asset?Liability?management
? Purpose?and?objectives
? Prerequisites?for?ALM
? Assets?and?Liabilities?Committee?(ALCO)?
? Activities?of?ALCO
INTRODUCTION:
? The process by which an institution manages its
balance sheet in order to allow for alternative
interest rate and liquidity scenarios.
? Banks and other financial institutions provide
services which expose them to various kinds of
risks like credit risk, interest risk, and liquidity risk.
? Asset-liability management models enable
institutions to measure and monitor risk, and
provide suitable strategies for their management.
FirstRanker.com - FirstRanker's Choice
MODULE?6
ASSET?LIABILITY?MANAGEMENT
OUTLINE
? Asset?Liability?Management?(ALM)?in?banks
? Components?of?Liabilities?
? Components?of?Assets
? Significance?of?Asset?Liability?management
? Purpose?and?objectives
? Prerequisites?for?ALM
? Assets?and?Liabilities?Committee?(ALCO)?
? Activities?of?ALCO
INTRODUCTION:
? The process by which an institution manages its
balance sheet in order to allow for alternative
interest rate and liquidity scenarios.
? Banks and other financial institutions provide
services which expose them to various kinds of
risks like credit risk, interest risk, and liquidity risk.
? Asset-liability management models enable
institutions to measure and monitor risk, and
provide suitable strategies for their management.
DEFINITION:
Asset Liability Management (ALM) can be defined as a
mechanism to address the risk faced by a bank due to a
mismatch between assets and liabilities either due to
liquidity or changes in interest rates.
? Liquidity is an institution?s ability to meet its liabilities
either by borrowing or converting assets.
? Apart from liquidity, a bank may also have a mismatch due
to changes in interest rates as banks typically tend to borrow
short term (fixed or floating) and lend long term (fixed or
floating).
FirstRanker.com - FirstRanker's Choice
MODULE?6
ASSET?LIABILITY?MANAGEMENT
OUTLINE
? Asset?Liability?Management?(ALM)?in?banks
? Components?of?Liabilities?
? Components?of?Assets
? Significance?of?Asset?Liability?management
? Purpose?and?objectives
? Prerequisites?for?ALM
? Assets?and?Liabilities?Committee?(ALCO)?
? Activities?of?ALCO
INTRODUCTION:
? The process by which an institution manages its
balance sheet in order to allow for alternative
interest rate and liquidity scenarios.
? Banks and other financial institutions provide
services which expose them to various kinds of
risks like credit risk, interest risk, and liquidity risk.
? Asset-liability management models enable
institutions to measure and monitor risk, and
provide suitable strategies for their management.
DEFINITION:
Asset Liability Management (ALM) can be defined as a
mechanism to address the risk faced by a bank due to a
mismatch between assets and liabilities either due to
liquidity or changes in interest rates.
? Liquidity is an institution?s ability to meet its liabilities
either by borrowing or converting assets.
? Apart from liquidity, a bank may also have a mismatch due
to changes in interest rates as banks typically tend to borrow
short term (fixed or floating) and lend long term (fixed or
floating).
COMPONENTS OF ASSETS AND LIABILITIES
? COMPONENTS OF LIABILITIES:
? Capital
?Reserves and Surplus
?Deposits
?Borrowings
?Other liabilities and Provisions
FirstRanker.com - FirstRanker's Choice
MODULE?6
ASSET?LIABILITY?MANAGEMENT
OUTLINE
? Asset?Liability?Management?(ALM)?in?banks
? Components?of?Liabilities?
? Components?of?Assets
? Significance?of?Asset?Liability?management
? Purpose?and?objectives
? Prerequisites?for?ALM
? Assets?and?Liabilities?Committee?(ALCO)?
? Activities?of?ALCO
INTRODUCTION:
? The process by which an institution manages its
balance sheet in order to allow for alternative
interest rate and liquidity scenarios.
? Banks and other financial institutions provide
services which expose them to various kinds of
risks like credit risk, interest risk, and liquidity risk.
? Asset-liability management models enable
institutions to measure and monitor risk, and
provide suitable strategies for their management.
DEFINITION:
Asset Liability Management (ALM) can be defined as a
mechanism to address the risk faced by a bank due to a
mismatch between assets and liabilities either due to
liquidity or changes in interest rates.
? Liquidity is an institution?s ability to meet its liabilities
either by borrowing or converting assets.
? Apart from liquidity, a bank may also have a mismatch due
to changes in interest rates as banks typically tend to borrow
short term (fixed or floating) and lend long term (fixed or
floating).
COMPONENTS OF ASSETS AND LIABILITIES
? COMPONENTS OF LIABILITIES:
? Capital
?Reserves and Surplus
?Deposits
?Borrowings
?Other liabilities and Provisions
COMPONENTS OF LIABILITIES
1. Capital:
? Capital represents owner?s contribution/stake
in the bank.
? - It serves as a cushion for depositors and
creditors.
? - It is considered to be a long term sources for
the bank.
FirstRanker.com - FirstRanker's Choice
MODULE?6
ASSET?LIABILITY?MANAGEMENT
OUTLINE
? Asset?Liability?Management?(ALM)?in?banks
? Components?of?Liabilities?
? Components?of?Assets
? Significance?of?Asset?Liability?management
? Purpose?and?objectives
? Prerequisites?for?ALM
? Assets?and?Liabilities?Committee?(ALCO)?
? Activities?of?ALCO
INTRODUCTION:
? The process by which an institution manages its
balance sheet in order to allow for alternative
interest rate and liquidity scenarios.
? Banks and other financial institutions provide
services which expose them to various kinds of
risks like credit risk, interest risk, and liquidity risk.
? Asset-liability management models enable
institutions to measure and monitor risk, and
provide suitable strategies for their management.
DEFINITION:
Asset Liability Management (ALM) can be defined as a
mechanism to address the risk faced by a bank due to a
mismatch between assets and liabilities either due to
liquidity or changes in interest rates.
? Liquidity is an institution?s ability to meet its liabilities
either by borrowing or converting assets.
? Apart from liquidity, a bank may also have a mismatch due
to changes in interest rates as banks typically tend to borrow
short term (fixed or floating) and lend long term (fixed or
floating).
COMPONENTS OF ASSETS AND LIABILITIES
? COMPONENTS OF LIABILITIES:
? Capital
?Reserves and Surplus
?Deposits
?Borrowings
?Other liabilities and Provisions
COMPONENTS OF LIABILITIES
1. Capital:
? Capital represents owner?s contribution/stake
in the bank.
? - It serves as a cushion for depositors and
creditors.
? - It is considered to be a long term sources for
the bank.
2. Reserves & Surplus
? Components under this head includes:
? I. Statutory Reserves
? II. Capital Reserves
? III. Investment Fluctuation Reserve
? IV. Revenue and Other Reserves
? V. Balance in Profit and Loss Account
FirstRanker.com - FirstRanker's Choice
MODULE?6
ASSET?LIABILITY?MANAGEMENT
OUTLINE
? Asset?Liability?Management?(ALM)?in?banks
? Components?of?Liabilities?
? Components?of?Assets
? Significance?of?Asset?Liability?management
? Purpose?and?objectives
? Prerequisites?for?ALM
? Assets?and?Liabilities?Committee?(ALCO)?
? Activities?of?ALCO
INTRODUCTION:
? The process by which an institution manages its
balance sheet in order to allow for alternative
interest rate and liquidity scenarios.
? Banks and other financial institutions provide
services which expose them to various kinds of
risks like credit risk, interest risk, and liquidity risk.
? Asset-liability management models enable
institutions to measure and monitor risk, and
provide suitable strategies for their management.
DEFINITION:
Asset Liability Management (ALM) can be defined as a
mechanism to address the risk faced by a bank due to a
mismatch between assets and liabilities either due to
liquidity or changes in interest rates.
? Liquidity is an institution?s ability to meet its liabilities
either by borrowing or converting assets.
? Apart from liquidity, a bank may also have a mismatch due
to changes in interest rates as banks typically tend to borrow
short term (fixed or floating) and lend long term (fixed or
floating).
COMPONENTS OF ASSETS AND LIABILITIES
? COMPONENTS OF LIABILITIES:
? Capital
?Reserves and Surplus
?Deposits
?Borrowings
?Other liabilities and Provisions
COMPONENTS OF LIABILITIES
1. Capital:
? Capital represents owner?s contribution/stake
in the bank.
? - It serves as a cushion for depositors and
creditors.
? - It is considered to be a long term sources for
the bank.
2. Reserves & Surplus
? Components under this head includes:
? I. Statutory Reserves
? II. Capital Reserves
? III. Investment Fluctuation Reserve
? IV. Revenue and Other Reserves
? V. Balance in Profit and Loss Account
3. Deposits
This is the main source of bank?s funds. The
deposits are classified as deposits payable on
?demand? and ?time?.
They are reflected in balance sheet as under:
? a) Demand Deposits
? b) Savings Bank Deposits
? c) Term Deposits
FirstRanker.com - FirstRanker's Choice
MODULE?6
ASSET?LIABILITY?MANAGEMENT
OUTLINE
? Asset?Liability?Management?(ALM)?in?banks
? Components?of?Liabilities?
? Components?of?Assets
? Significance?of?Asset?Liability?management
? Purpose?and?objectives
? Prerequisites?for?ALM
? Assets?and?Liabilities?Committee?(ALCO)?
? Activities?of?ALCO
INTRODUCTION:
? The process by which an institution manages its
balance sheet in order to allow for alternative
interest rate and liquidity scenarios.
? Banks and other financial institutions provide
services which expose them to various kinds of
risks like credit risk, interest risk, and liquidity risk.
? Asset-liability management models enable
institutions to measure and monitor risk, and
provide suitable strategies for their management.
DEFINITION:
Asset Liability Management (ALM) can be defined as a
mechanism to address the risk faced by a bank due to a
mismatch between assets and liabilities either due to
liquidity or changes in interest rates.
? Liquidity is an institution?s ability to meet its liabilities
either by borrowing or converting assets.
? Apart from liquidity, a bank may also have a mismatch due
to changes in interest rates as banks typically tend to borrow
short term (fixed or floating) and lend long term (fixed or
floating).
COMPONENTS OF ASSETS AND LIABILITIES
? COMPONENTS OF LIABILITIES:
? Capital
?Reserves and Surplus
?Deposits
?Borrowings
?Other liabilities and Provisions
COMPONENTS OF LIABILITIES
1. Capital:
? Capital represents owner?s contribution/stake
in the bank.
? - It serves as a cushion for depositors and
creditors.
? - It is considered to be a long term sources for
the bank.
2. Reserves & Surplus
? Components under this head includes:
? I. Statutory Reserves
? II. Capital Reserves
? III. Investment Fluctuation Reserve
? IV. Revenue and Other Reserves
? V. Balance in Profit and Loss Account
3. Deposits
This is the main source of bank?s funds. The
deposits are classified as deposits payable on
?demand? and ?time?.
They are reflected in balance sheet as under:
? a) Demand Deposits
? b) Savings Bank Deposits
? c) Term Deposits
4. Borrowings:
Borrowings include Refinance / Borrowings
from RBI, Inter-bank & other institutions
? I. Borrowings in India
? i) Reserve Bank of India
? ii) Other Banks
? iii) Other Institutions & Agencies
? II. Borrowings outside India
FirstRanker.com - FirstRanker's Choice
MODULE?6
ASSET?LIABILITY?MANAGEMENT
OUTLINE
? Asset?Liability?Management?(ALM)?in?banks
? Components?of?Liabilities?
? Components?of?Assets
? Significance?of?Asset?Liability?management
? Purpose?and?objectives
? Prerequisites?for?ALM
? Assets?and?Liabilities?Committee?(ALCO)?
? Activities?of?ALCO
INTRODUCTION:
? The process by which an institution manages its
balance sheet in order to allow for alternative
interest rate and liquidity scenarios.
? Banks and other financial institutions provide
services which expose them to various kinds of
risks like credit risk, interest risk, and liquidity risk.
? Asset-liability management models enable
institutions to measure and monitor risk, and
provide suitable strategies for their management.
DEFINITION:
Asset Liability Management (ALM) can be defined as a
mechanism to address the risk faced by a bank due to a
mismatch between assets and liabilities either due to
liquidity or changes in interest rates.
? Liquidity is an institution?s ability to meet its liabilities
either by borrowing or converting assets.
? Apart from liquidity, a bank may also have a mismatch due
to changes in interest rates as banks typically tend to borrow
short term (fixed or floating) and lend long term (fixed or
floating).
COMPONENTS OF ASSETS AND LIABILITIES
? COMPONENTS OF LIABILITIES:
? Capital
?Reserves and Surplus
?Deposits
?Borrowings
?Other liabilities and Provisions
COMPONENTS OF LIABILITIES
1. Capital:
? Capital represents owner?s contribution/stake
in the bank.
? - It serves as a cushion for depositors and
creditors.
? - It is considered to be a long term sources for
the bank.
2. Reserves & Surplus
? Components under this head includes:
? I. Statutory Reserves
? II. Capital Reserves
? III. Investment Fluctuation Reserve
? IV. Revenue and Other Reserves
? V. Balance in Profit and Loss Account
3. Deposits
This is the main source of bank?s funds. The
deposits are classified as deposits payable on
?demand? and ?time?.
They are reflected in balance sheet as under:
? a) Demand Deposits
? b) Savings Bank Deposits
? c) Term Deposits
4. Borrowings:
Borrowings include Refinance / Borrowings
from RBI, Inter-bank & other institutions
? I. Borrowings in India
? i) Reserve Bank of India
? ii) Other Banks
? iii) Other Institutions & Agencies
? II. Borrowings outside India
5. Other Liabilities & Provisions
? It is grouped as under:
? I. Bills Payable
? II. Inter Office Adjustments (Net)
? III. Interest Accrued
? IV. Unsecured Redeemable Bonds
(Subordinated Debt for Tier-II Capital)
? V. Others (including provisions)
FirstRanker.com - FirstRanker's Choice
MODULE?6
ASSET?LIABILITY?MANAGEMENT
OUTLINE
? Asset?Liability?Management?(ALM)?in?banks
? Components?of?Liabilities?
? Components?of?Assets
? Significance?of?Asset?Liability?management
? Purpose?and?objectives
? Prerequisites?for?ALM
? Assets?and?Liabilities?Committee?(ALCO)?
? Activities?of?ALCO
INTRODUCTION:
? The process by which an institution manages its
balance sheet in order to allow for alternative
interest rate and liquidity scenarios.
? Banks and other financial institutions provide
services which expose them to various kinds of
risks like credit risk, interest risk, and liquidity risk.
? Asset-liability management models enable
institutions to measure and monitor risk, and
provide suitable strategies for their management.
DEFINITION:
Asset Liability Management (ALM) can be defined as a
mechanism to address the risk faced by a bank due to a
mismatch between assets and liabilities either due to
liquidity or changes in interest rates.
? Liquidity is an institution?s ability to meet its liabilities
either by borrowing or converting assets.
? Apart from liquidity, a bank may also have a mismatch due
to changes in interest rates as banks typically tend to borrow
short term (fixed or floating) and lend long term (fixed or
floating).
COMPONENTS OF ASSETS AND LIABILITIES
? COMPONENTS OF LIABILITIES:
? Capital
?Reserves and Surplus
?Deposits
?Borrowings
?Other liabilities and Provisions
COMPONENTS OF LIABILITIES
1. Capital:
? Capital represents owner?s contribution/stake
in the bank.
? - It serves as a cushion for depositors and
creditors.
? - It is considered to be a long term sources for
the bank.
2. Reserves & Surplus
? Components under this head includes:
? I. Statutory Reserves
? II. Capital Reserves
? III. Investment Fluctuation Reserve
? IV. Revenue and Other Reserves
? V. Balance in Profit and Loss Account
3. Deposits
This is the main source of bank?s funds. The
deposits are classified as deposits payable on
?demand? and ?time?.
They are reflected in balance sheet as under:
? a) Demand Deposits
? b) Savings Bank Deposits
? c) Term Deposits
4. Borrowings:
Borrowings include Refinance / Borrowings
from RBI, Inter-bank & other institutions
? I. Borrowings in India
? i) Reserve Bank of India
? ii) Other Banks
? iii) Other Institutions & Agencies
? II. Borrowings outside India
5. Other Liabilities & Provisions
? It is grouped as under:
? I. Bills Payable
? II. Inter Office Adjustments (Net)
? III. Interest Accrued
? IV. Unsecured Redeemable Bonds
(Subordinated Debt for Tier-II Capital)
? V. Others (including provisions)
COMPONENTS OF ASSETS
? 1) Cash & Bank Balances with RBI
? 2) Balances with Banks and Money at Call &
Short Notice
? 3)Investments
? 4)Advances
? 5) Fixed assets
? 6) Other Assets
FirstRanker.com - FirstRanker's Choice
MODULE?6
ASSET?LIABILITY?MANAGEMENT
OUTLINE
? Asset?Liability?Management?(ALM)?in?banks
? Components?of?Liabilities?
? Components?of?Assets
? Significance?of?Asset?Liability?management
? Purpose?and?objectives
? Prerequisites?for?ALM
? Assets?and?Liabilities?Committee?(ALCO)?
? Activities?of?ALCO
INTRODUCTION:
? The process by which an institution manages its
balance sheet in order to allow for alternative
interest rate and liquidity scenarios.
? Banks and other financial institutions provide
services which expose them to various kinds of
risks like credit risk, interest risk, and liquidity risk.
? Asset-liability management models enable
institutions to measure and monitor risk, and
provide suitable strategies for their management.
DEFINITION:
Asset Liability Management (ALM) can be defined as a
mechanism to address the risk faced by a bank due to a
mismatch between assets and liabilities either due to
liquidity or changes in interest rates.
? Liquidity is an institution?s ability to meet its liabilities
either by borrowing or converting assets.
? Apart from liquidity, a bank may also have a mismatch due
to changes in interest rates as banks typically tend to borrow
short term (fixed or floating) and lend long term (fixed or
floating).
COMPONENTS OF ASSETS AND LIABILITIES
? COMPONENTS OF LIABILITIES:
? Capital
?Reserves and Surplus
?Deposits
?Borrowings
?Other liabilities and Provisions
COMPONENTS OF LIABILITIES
1. Capital:
? Capital represents owner?s contribution/stake
in the bank.
? - It serves as a cushion for depositors and
creditors.
? - It is considered to be a long term sources for
the bank.
2. Reserves & Surplus
? Components under this head includes:
? I. Statutory Reserves
? II. Capital Reserves
? III. Investment Fluctuation Reserve
? IV. Revenue and Other Reserves
? V. Balance in Profit and Loss Account
3. Deposits
This is the main source of bank?s funds. The
deposits are classified as deposits payable on
?demand? and ?time?.
They are reflected in balance sheet as under:
? a) Demand Deposits
? b) Savings Bank Deposits
? c) Term Deposits
4. Borrowings:
Borrowings include Refinance / Borrowings
from RBI, Inter-bank & other institutions
? I. Borrowings in India
? i) Reserve Bank of India
? ii) Other Banks
? iii) Other Institutions & Agencies
? II. Borrowings outside India
5. Other Liabilities & Provisions
? It is grouped as under:
? I. Bills Payable
? II. Inter Office Adjustments (Net)
? III. Interest Accrued
? IV. Unsecured Redeemable Bonds
(Subordinated Debt for Tier-II Capital)
? V. Others (including provisions)
COMPONENTS OF ASSETS
? 1) Cash & Bank Balances with RBI
? 2) Balances with Banks and Money at Call &
Short Notice
? 3)Investments
? 4)Advances
? 5) Fixed assets
? 6) Other Assets
COMPONENTS OF ASSETS
? 1) Cash & Bank Balances with RBI
? I. Cash in hand
? (Including foreign currency notes)
? II. Balances with Reserve Bank of India
? In Current Accounts
? In Other Accounts
FirstRanker.com - FirstRanker's Choice
MODULE?6
ASSET?LIABILITY?MANAGEMENT
OUTLINE
? Asset?Liability?Management?(ALM)?in?banks
? Components?of?Liabilities?
? Components?of?Assets
? Significance?of?Asset?Liability?management
? Purpose?and?objectives
? Prerequisites?for?ALM
? Assets?and?Liabilities?Committee?(ALCO)?
? Activities?of?ALCO
INTRODUCTION:
? The process by which an institution manages its
balance sheet in order to allow for alternative
interest rate and liquidity scenarios.
? Banks and other financial institutions provide
services which expose them to various kinds of
risks like credit risk, interest risk, and liquidity risk.
? Asset-liability management models enable
institutions to measure and monitor risk, and
provide suitable strategies for their management.
DEFINITION:
Asset Liability Management (ALM) can be defined as a
mechanism to address the risk faced by a bank due to a
mismatch between assets and liabilities either due to
liquidity or changes in interest rates.
? Liquidity is an institution?s ability to meet its liabilities
either by borrowing or converting assets.
? Apart from liquidity, a bank may also have a mismatch due
to changes in interest rates as banks typically tend to borrow
short term (fixed or floating) and lend long term (fixed or
floating).
COMPONENTS OF ASSETS AND LIABILITIES
? COMPONENTS OF LIABILITIES:
? Capital
?Reserves and Surplus
?Deposits
?Borrowings
?Other liabilities and Provisions
COMPONENTS OF LIABILITIES
1. Capital:
? Capital represents owner?s contribution/stake
in the bank.
? - It serves as a cushion for depositors and
creditors.
? - It is considered to be a long term sources for
the bank.
2. Reserves & Surplus
? Components under this head includes:
? I. Statutory Reserves
? II. Capital Reserves
? III. Investment Fluctuation Reserve
? IV. Revenue and Other Reserves
? V. Balance in Profit and Loss Account
3. Deposits
This is the main source of bank?s funds. The
deposits are classified as deposits payable on
?demand? and ?time?.
They are reflected in balance sheet as under:
? a) Demand Deposits
? b) Savings Bank Deposits
? c) Term Deposits
4. Borrowings:
Borrowings include Refinance / Borrowings
from RBI, Inter-bank & other institutions
? I. Borrowings in India
? i) Reserve Bank of India
? ii) Other Banks
? iii) Other Institutions & Agencies
? II. Borrowings outside India
5. Other Liabilities & Provisions
? It is grouped as under:
? I. Bills Payable
? II. Inter Office Adjustments (Net)
? III. Interest Accrued
? IV. Unsecured Redeemable Bonds
(Subordinated Debt for Tier-II Capital)
? V. Others (including provisions)
COMPONENTS OF ASSETS
? 1) Cash & Bank Balances with RBI
? 2) Balances with Banks and Money at Call &
Short Notice
? 3)Investments
? 4)Advances
? 5) Fixed assets
? 6) Other Assets
COMPONENTS OF ASSETS
? 1) Cash & Bank Balances with RBI
? I. Cash in hand
? (Including foreign currency notes)
? II. Balances with Reserve Bank of India
? In Current Accounts
? In Other Accounts
? Balances with Banks and Money at Call & Short Notice
I. In India
i) Balances with Banks
a) In Current Accounts
b) In Other Deposit Accounts
ii) Money at Call and Short Notice
a) With Banks
b) With Other Institutions
II. outside India
a) In Current Accounts
b) In Other Deposit Accounts
c) Money at Call & Short Notice
FirstRanker.com - FirstRanker's Choice
MODULE?6
ASSET?LIABILITY?MANAGEMENT
OUTLINE
? Asset?Liability?Management?(ALM)?in?banks
? Components?of?Liabilities?
? Components?of?Assets
? Significance?of?Asset?Liability?management
? Purpose?and?objectives
? Prerequisites?for?ALM
? Assets?and?Liabilities?Committee?(ALCO)?
? Activities?of?ALCO
INTRODUCTION:
? The process by which an institution manages its
balance sheet in order to allow for alternative
interest rate and liquidity scenarios.
? Banks and other financial institutions provide
services which expose them to various kinds of
risks like credit risk, interest risk, and liquidity risk.
? Asset-liability management models enable
institutions to measure and monitor risk, and
provide suitable strategies for their management.
DEFINITION:
Asset Liability Management (ALM) can be defined as a
mechanism to address the risk faced by a bank due to a
mismatch between assets and liabilities either due to
liquidity or changes in interest rates.
? Liquidity is an institution?s ability to meet its liabilities
either by borrowing or converting assets.
? Apart from liquidity, a bank may also have a mismatch due
to changes in interest rates as banks typically tend to borrow
short term (fixed or floating) and lend long term (fixed or
floating).
COMPONENTS OF ASSETS AND LIABILITIES
? COMPONENTS OF LIABILITIES:
? Capital
?Reserves and Surplus
?Deposits
?Borrowings
?Other liabilities and Provisions
COMPONENTS OF LIABILITIES
1. Capital:
? Capital represents owner?s contribution/stake
in the bank.
? - It serves as a cushion for depositors and
creditors.
? - It is considered to be a long term sources for
the bank.
2. Reserves & Surplus
? Components under this head includes:
? I. Statutory Reserves
? II. Capital Reserves
? III. Investment Fluctuation Reserve
? IV. Revenue and Other Reserves
? V. Balance in Profit and Loss Account
3. Deposits
This is the main source of bank?s funds. The
deposits are classified as deposits payable on
?demand? and ?time?.
They are reflected in balance sheet as under:
? a) Demand Deposits
? b) Savings Bank Deposits
? c) Term Deposits
4. Borrowings:
Borrowings include Refinance / Borrowings
from RBI, Inter-bank & other institutions
? I. Borrowings in India
? i) Reserve Bank of India
? ii) Other Banks
? iii) Other Institutions & Agencies
? II. Borrowings outside India
5. Other Liabilities & Provisions
? It is grouped as under:
? I. Bills Payable
? II. Inter Office Adjustments (Net)
? III. Interest Accrued
? IV. Unsecured Redeemable Bonds
(Subordinated Debt for Tier-II Capital)
? V. Others (including provisions)
COMPONENTS OF ASSETS
? 1) Cash & Bank Balances with RBI
? 2) Balances with Banks and Money at Call &
Short Notice
? 3)Investments
? 4)Advances
? 5) Fixed assets
? 6) Other Assets
COMPONENTS OF ASSETS
? 1) Cash & Bank Balances with RBI
? I. Cash in hand
? (Including foreign currency notes)
? II. Balances with Reserve Bank of India
? In Current Accounts
? In Other Accounts
? Balances with Banks and Money at Call & Short Notice
I. In India
i) Balances with Banks
a) In Current Accounts
b) In Other Deposit Accounts
ii) Money at Call and Short Notice
a) With Banks
b) With Other Institutions
II. outside India
a) In Current Accounts
b) In Other Deposit Accounts
c) Money at Call & Short Notice
2) Investments
A major asset item in the bank?s balance sheet.
Reflected under 6 buckets as under:
I. Investments in India in:
? i) Government Securities
? ii) Other approved Securities
? iii) Shares
? iv) Debentures and Bonds
? v) Subsidiaries and Sponsored Institutions
? vi) Others (UTI Shares, Commercial Papers, COD &
Mutual Fund Units etc.)
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MODULE?6
ASSET?LIABILITY?MANAGEMENT
OUTLINE
? Asset?Liability?Management?(ALM)?in?banks
? Components?of?Liabilities?
? Components?of?Assets
? Significance?of?Asset?Liability?management
? Purpose?and?objectives
? Prerequisites?for?ALM
? Assets?and?Liabilities?Committee?(ALCO)?
? Activities?of?ALCO
INTRODUCTION:
? The process by which an institution manages its
balance sheet in order to allow for alternative
interest rate and liquidity scenarios.
? Banks and other financial institutions provide
services which expose them to various kinds of
risks like credit risk, interest risk, and liquidity risk.
? Asset-liability management models enable
institutions to measure and monitor risk, and
provide suitable strategies for their management.
DEFINITION:
Asset Liability Management (ALM) can be defined as a
mechanism to address the risk faced by a bank due to a
mismatch between assets and liabilities either due to
liquidity or changes in interest rates.
? Liquidity is an institution?s ability to meet its liabilities
either by borrowing or converting assets.
? Apart from liquidity, a bank may also have a mismatch due
to changes in interest rates as banks typically tend to borrow
short term (fixed or floating) and lend long term (fixed or
floating).
COMPONENTS OF ASSETS AND LIABILITIES
? COMPONENTS OF LIABILITIES:
? Capital
?Reserves and Surplus
?Deposits
?Borrowings
?Other liabilities and Provisions
COMPONENTS OF LIABILITIES
1. Capital:
? Capital represents owner?s contribution/stake
in the bank.
? - It serves as a cushion for depositors and
creditors.
? - It is considered to be a long term sources for
the bank.
2. Reserves & Surplus
? Components under this head includes:
? I. Statutory Reserves
? II. Capital Reserves
? III. Investment Fluctuation Reserve
? IV. Revenue and Other Reserves
? V. Balance in Profit and Loss Account
3. Deposits
This is the main source of bank?s funds. The
deposits are classified as deposits payable on
?demand? and ?time?.
They are reflected in balance sheet as under:
? a) Demand Deposits
? b) Savings Bank Deposits
? c) Term Deposits
4. Borrowings:
Borrowings include Refinance / Borrowings
from RBI, Inter-bank & other institutions
? I. Borrowings in India
? i) Reserve Bank of India
? ii) Other Banks
? iii) Other Institutions & Agencies
? II. Borrowings outside India
5. Other Liabilities & Provisions
? It is grouped as under:
? I. Bills Payable
? II. Inter Office Adjustments (Net)
? III. Interest Accrued
? IV. Unsecured Redeemable Bonds
(Subordinated Debt for Tier-II Capital)
? V. Others (including provisions)
COMPONENTS OF ASSETS
? 1) Cash & Bank Balances with RBI
? 2) Balances with Banks and Money at Call &
Short Notice
? 3)Investments
? 4)Advances
? 5) Fixed assets
? 6) Other Assets
COMPONENTS OF ASSETS
? 1) Cash & Bank Balances with RBI
? I. Cash in hand
? (Including foreign currency notes)
? II. Balances with Reserve Bank of India
? In Current Accounts
? In Other Accounts
? Balances with Banks and Money at Call & Short Notice
I. In India
i) Balances with Banks
a) In Current Accounts
b) In Other Deposit Accounts
ii) Money at Call and Short Notice
a) With Banks
b) With Other Institutions
II. outside India
a) In Current Accounts
b) In Other Deposit Accounts
c) Money at Call & Short Notice
2) Investments
A major asset item in the bank?s balance sheet.
Reflected under 6 buckets as under:
I. Investments in India in:
? i) Government Securities
? ii) Other approved Securities
? iii) Shares
? iv) Debentures and Bonds
? v) Subsidiaries and Sponsored Institutions
? vi) Others (UTI Shares, Commercial Papers, COD &
Mutual Fund Units etc.)
II. Investments outside India in
? Subsidiaries and/or Associates abroad
FirstRanker.com - FirstRanker's Choice
MODULE?6
ASSET?LIABILITY?MANAGEMENT
OUTLINE
? Asset?Liability?Management?(ALM)?in?banks
? Components?of?Liabilities?
? Components?of?Assets
? Significance?of?Asset?Liability?management
? Purpose?and?objectives
? Prerequisites?for?ALM
? Assets?and?Liabilities?Committee?(ALCO)?
? Activities?of?ALCO
INTRODUCTION:
? The process by which an institution manages its
balance sheet in order to allow for alternative
interest rate and liquidity scenarios.
? Banks and other financial institutions provide
services which expose them to various kinds of
risks like credit risk, interest risk, and liquidity risk.
? Asset-liability management models enable
institutions to measure and monitor risk, and
provide suitable strategies for their management.
DEFINITION:
Asset Liability Management (ALM) can be defined as a
mechanism to address the risk faced by a bank due to a
mismatch between assets and liabilities either due to
liquidity or changes in interest rates.
? Liquidity is an institution?s ability to meet its liabilities
either by borrowing or converting assets.
? Apart from liquidity, a bank may also have a mismatch due
to changes in interest rates as banks typically tend to borrow
short term (fixed or floating) and lend long term (fixed or
floating).
COMPONENTS OF ASSETS AND LIABILITIES
? COMPONENTS OF LIABILITIES:
? Capital
?Reserves and Surplus
?Deposits
?Borrowings
?Other liabilities and Provisions
COMPONENTS OF LIABILITIES
1. Capital:
? Capital represents owner?s contribution/stake
in the bank.
? - It serves as a cushion for depositors and
creditors.
? - It is considered to be a long term sources for
the bank.
2. Reserves & Surplus
? Components under this head includes:
? I. Statutory Reserves
? II. Capital Reserves
? III. Investment Fluctuation Reserve
? IV. Revenue and Other Reserves
? V. Balance in Profit and Loss Account
3. Deposits
This is the main source of bank?s funds. The
deposits are classified as deposits payable on
?demand? and ?time?.
They are reflected in balance sheet as under:
? a) Demand Deposits
? b) Savings Bank Deposits
? c) Term Deposits
4. Borrowings:
Borrowings include Refinance / Borrowings
from RBI, Inter-bank & other institutions
? I. Borrowings in India
? i) Reserve Bank of India
? ii) Other Banks
? iii) Other Institutions & Agencies
? II. Borrowings outside India
5. Other Liabilities & Provisions
? It is grouped as under:
? I. Bills Payable
? II. Inter Office Adjustments (Net)
? III. Interest Accrued
? IV. Unsecured Redeemable Bonds
(Subordinated Debt for Tier-II Capital)
? V. Others (including provisions)
COMPONENTS OF ASSETS
? 1) Cash & Bank Balances with RBI
? 2) Balances with Banks and Money at Call &
Short Notice
? 3)Investments
? 4)Advances
? 5) Fixed assets
? 6) Other Assets
COMPONENTS OF ASSETS
? 1) Cash & Bank Balances with RBI
? I. Cash in hand
? (Including foreign currency notes)
? II. Balances with Reserve Bank of India
? In Current Accounts
? In Other Accounts
? Balances with Banks and Money at Call & Short Notice
I. In India
i) Balances with Banks
a) In Current Accounts
b) In Other Deposit Accounts
ii) Money at Call and Short Notice
a) With Banks
b) With Other Institutions
II. outside India
a) In Current Accounts
b) In Other Deposit Accounts
c) Money at Call & Short Notice
2) Investments
A major asset item in the bank?s balance sheet.
Reflected under 6 buckets as under:
I. Investments in India in:
? i) Government Securities
? ii) Other approved Securities
? iii) Shares
? iv) Debentures and Bonds
? v) Subsidiaries and Sponsored Institutions
? vi) Others (UTI Shares, Commercial Papers, COD &
Mutual Fund Units etc.)
II. Investments outside India in
? Subsidiaries and/or Associates abroad
3) Advances
The most important assets for a bank.
? A. i) Bills Purchased and Discounted
ii) Cash Credits, Overdrafts & Loans repayable on
demand
iii) Term Loans
? B. Particulars of Advances:
i) Secured by tangible assets (including advances against
Book Debts)
ii) Covered by Bank/ Government Guarantees
iii) Unsecured
FirstRanker.com - FirstRanker's Choice
MODULE?6
ASSET?LIABILITY?MANAGEMENT
OUTLINE
? Asset?Liability?Management?(ALM)?in?banks
? Components?of?Liabilities?
? Components?of?Assets
? Significance?of?Asset?Liability?management
? Purpose?and?objectives
? Prerequisites?for?ALM
? Assets?and?Liabilities?Committee?(ALCO)?
? Activities?of?ALCO
INTRODUCTION:
? The process by which an institution manages its
balance sheet in order to allow for alternative
interest rate and liquidity scenarios.
? Banks and other financial institutions provide
services which expose them to various kinds of
risks like credit risk, interest risk, and liquidity risk.
? Asset-liability management models enable
institutions to measure and monitor risk, and
provide suitable strategies for their management.
DEFINITION:
Asset Liability Management (ALM) can be defined as a
mechanism to address the risk faced by a bank due to a
mismatch between assets and liabilities either due to
liquidity or changes in interest rates.
? Liquidity is an institution?s ability to meet its liabilities
either by borrowing or converting assets.
? Apart from liquidity, a bank may also have a mismatch due
to changes in interest rates as banks typically tend to borrow
short term (fixed or floating) and lend long term (fixed or
floating).
COMPONENTS OF ASSETS AND LIABILITIES
? COMPONENTS OF LIABILITIES:
? Capital
?Reserves and Surplus
?Deposits
?Borrowings
?Other liabilities and Provisions
COMPONENTS OF LIABILITIES
1. Capital:
? Capital represents owner?s contribution/stake
in the bank.
? - It serves as a cushion for depositors and
creditors.
? - It is considered to be a long term sources for
the bank.
2. Reserves & Surplus
? Components under this head includes:
? I. Statutory Reserves
? II. Capital Reserves
? III. Investment Fluctuation Reserve
? IV. Revenue and Other Reserves
? V. Balance in Profit and Loss Account
3. Deposits
This is the main source of bank?s funds. The
deposits are classified as deposits payable on
?demand? and ?time?.
They are reflected in balance sheet as under:
? a) Demand Deposits
? b) Savings Bank Deposits
? c) Term Deposits
4. Borrowings:
Borrowings include Refinance / Borrowings
from RBI, Inter-bank & other institutions
? I. Borrowings in India
? i) Reserve Bank of India
? ii) Other Banks
? iii) Other Institutions & Agencies
? II. Borrowings outside India
5. Other Liabilities & Provisions
? It is grouped as under:
? I. Bills Payable
? II. Inter Office Adjustments (Net)
? III. Interest Accrued
? IV. Unsecured Redeemable Bonds
(Subordinated Debt for Tier-II Capital)
? V. Others (including provisions)
COMPONENTS OF ASSETS
? 1) Cash & Bank Balances with RBI
? 2) Balances with Banks and Money at Call &
Short Notice
? 3)Investments
? 4)Advances
? 5) Fixed assets
? 6) Other Assets
COMPONENTS OF ASSETS
? 1) Cash & Bank Balances with RBI
? I. Cash in hand
? (Including foreign currency notes)
? II. Balances with Reserve Bank of India
? In Current Accounts
? In Other Accounts
? Balances with Banks and Money at Call & Short Notice
I. In India
i) Balances with Banks
a) In Current Accounts
b) In Other Deposit Accounts
ii) Money at Call and Short Notice
a) With Banks
b) With Other Institutions
II. outside India
a) In Current Accounts
b) In Other Deposit Accounts
c) Money at Call & Short Notice
2) Investments
A major asset item in the bank?s balance sheet.
Reflected under 6 buckets as under:
I. Investments in India in:
? i) Government Securities
? ii) Other approved Securities
? iii) Shares
? iv) Debentures and Bonds
? v) Subsidiaries and Sponsored Institutions
? vi) Others (UTI Shares, Commercial Papers, COD &
Mutual Fund Units etc.)
II. Investments outside India in
? Subsidiaries and/or Associates abroad
3) Advances
The most important assets for a bank.
? A. i) Bills Purchased and Discounted
ii) Cash Credits, Overdrafts & Loans repayable on
demand
iii) Term Loans
? B. Particulars of Advances:
i) Secured by tangible assets (including advances against
Book Debts)
ii) Covered by Bank/ Government Guarantees
iii) Unsecured
4) Fixed Asset
? I. Premises
? II. Other Fixed Assets (Including furniture and
fixtures)
FirstRanker.com - FirstRanker's Choice
MODULE?6
ASSET?LIABILITY?MANAGEMENT
OUTLINE
? Asset?Liability?Management?(ALM)?in?banks
? Components?of?Liabilities?
? Components?of?Assets
? Significance?of?Asset?Liability?management
? Purpose?and?objectives
? Prerequisites?for?ALM
? Assets?and?Liabilities?Committee?(ALCO)?
? Activities?of?ALCO
INTRODUCTION:
? The process by which an institution manages its
balance sheet in order to allow for alternative
interest rate and liquidity scenarios.
? Banks and other financial institutions provide
services which expose them to various kinds of
risks like credit risk, interest risk, and liquidity risk.
? Asset-liability management models enable
institutions to measure and monitor risk, and
provide suitable strategies for their management.
DEFINITION:
Asset Liability Management (ALM) can be defined as a
mechanism to address the risk faced by a bank due to a
mismatch between assets and liabilities either due to
liquidity or changes in interest rates.
? Liquidity is an institution?s ability to meet its liabilities
either by borrowing or converting assets.
? Apart from liquidity, a bank may also have a mismatch due
to changes in interest rates as banks typically tend to borrow
short term (fixed or floating) and lend long term (fixed or
floating).
COMPONENTS OF ASSETS AND LIABILITIES
? COMPONENTS OF LIABILITIES:
? Capital
?Reserves and Surplus
?Deposits
?Borrowings
?Other liabilities and Provisions
COMPONENTS OF LIABILITIES
1. Capital:
? Capital represents owner?s contribution/stake
in the bank.
? - It serves as a cushion for depositors and
creditors.
? - It is considered to be a long term sources for
the bank.
2. Reserves & Surplus
? Components under this head includes:
? I. Statutory Reserves
? II. Capital Reserves
? III. Investment Fluctuation Reserve
? IV. Revenue and Other Reserves
? V. Balance in Profit and Loss Account
3. Deposits
This is the main source of bank?s funds. The
deposits are classified as deposits payable on
?demand? and ?time?.
They are reflected in balance sheet as under:
? a) Demand Deposits
? b) Savings Bank Deposits
? c) Term Deposits
4. Borrowings:
Borrowings include Refinance / Borrowings
from RBI, Inter-bank & other institutions
? I. Borrowings in India
? i) Reserve Bank of India
? ii) Other Banks
? iii) Other Institutions & Agencies
? II. Borrowings outside India
5. Other Liabilities & Provisions
? It is grouped as under:
? I. Bills Payable
? II. Inter Office Adjustments (Net)
? III. Interest Accrued
? IV. Unsecured Redeemable Bonds
(Subordinated Debt for Tier-II Capital)
? V. Others (including provisions)
COMPONENTS OF ASSETS
? 1) Cash & Bank Balances with RBI
? 2) Balances with Banks and Money at Call &
Short Notice
? 3)Investments
? 4)Advances
? 5) Fixed assets
? 6) Other Assets
COMPONENTS OF ASSETS
? 1) Cash & Bank Balances with RBI
? I. Cash in hand
? (Including foreign currency notes)
? II. Balances with Reserve Bank of India
? In Current Accounts
? In Other Accounts
? Balances with Banks and Money at Call & Short Notice
I. In India
i) Balances with Banks
a) In Current Accounts
b) In Other Deposit Accounts
ii) Money at Call and Short Notice
a) With Banks
b) With Other Institutions
II. outside India
a) In Current Accounts
b) In Other Deposit Accounts
c) Money at Call & Short Notice
2) Investments
A major asset item in the bank?s balance sheet.
Reflected under 6 buckets as under:
I. Investments in India in:
? i) Government Securities
? ii) Other approved Securities
? iii) Shares
? iv) Debentures and Bonds
? v) Subsidiaries and Sponsored Institutions
? vi) Others (UTI Shares, Commercial Papers, COD &
Mutual Fund Units etc.)
II. Investments outside India in
? Subsidiaries and/or Associates abroad
3) Advances
The most important assets for a bank.
? A. i) Bills Purchased and Discounted
ii) Cash Credits, Overdrafts & Loans repayable on
demand
iii) Term Loans
? B. Particulars of Advances:
i) Secured by tangible assets (including advances against
Book Debts)
ii) Covered by Bank/ Government Guarantees
iii) Unsecured
4) Fixed Asset
? I. Premises
? II. Other Fixed Assets (Including furniture and
fixtures)
5) Other Assets
I. Interest accrued
II. Tax paid in advance/tax deducted at source
(Net of Provisions)
III. Stationery and Stamps
IV. Non-banking assets acquired in satisfaction
of claims
V. Deferred Tax Asset (Net)
VI. Others
FirstRanker.com - FirstRanker's Choice
MODULE?6
ASSET?LIABILITY?MANAGEMENT
OUTLINE
? Asset?Liability?Management?(ALM)?in?banks
? Components?of?Liabilities?
? Components?of?Assets
? Significance?of?Asset?Liability?management
? Purpose?and?objectives
? Prerequisites?for?ALM
? Assets?and?Liabilities?Committee?(ALCO)?
? Activities?of?ALCO
INTRODUCTION:
? The process by which an institution manages its
balance sheet in order to allow for alternative
interest rate and liquidity scenarios.
? Banks and other financial institutions provide
services which expose them to various kinds of
risks like credit risk, interest risk, and liquidity risk.
? Asset-liability management models enable
institutions to measure and monitor risk, and
provide suitable strategies for their management.
DEFINITION:
Asset Liability Management (ALM) can be defined as a
mechanism to address the risk faced by a bank due to a
mismatch between assets and liabilities either due to
liquidity or changes in interest rates.
? Liquidity is an institution?s ability to meet its liabilities
either by borrowing or converting assets.
? Apart from liquidity, a bank may also have a mismatch due
to changes in interest rates as banks typically tend to borrow
short term (fixed or floating) and lend long term (fixed or
floating).
COMPONENTS OF ASSETS AND LIABILITIES
? COMPONENTS OF LIABILITIES:
? Capital
?Reserves and Surplus
?Deposits
?Borrowings
?Other liabilities and Provisions
COMPONENTS OF LIABILITIES
1. Capital:
? Capital represents owner?s contribution/stake
in the bank.
? - It serves as a cushion for depositors and
creditors.
? - It is considered to be a long term sources for
the bank.
2. Reserves & Surplus
? Components under this head includes:
? I. Statutory Reserves
? II. Capital Reserves
? III. Investment Fluctuation Reserve
? IV. Revenue and Other Reserves
? V. Balance in Profit and Loss Account
3. Deposits
This is the main source of bank?s funds. The
deposits are classified as deposits payable on
?demand? and ?time?.
They are reflected in balance sheet as under:
? a) Demand Deposits
? b) Savings Bank Deposits
? c) Term Deposits
4. Borrowings:
Borrowings include Refinance / Borrowings
from RBI, Inter-bank & other institutions
? I. Borrowings in India
? i) Reserve Bank of India
? ii) Other Banks
? iii) Other Institutions & Agencies
? II. Borrowings outside India
5. Other Liabilities & Provisions
? It is grouped as under:
? I. Bills Payable
? II. Inter Office Adjustments (Net)
? III. Interest Accrued
? IV. Unsecured Redeemable Bonds
(Subordinated Debt for Tier-II Capital)
? V. Others (including provisions)
COMPONENTS OF ASSETS
? 1) Cash & Bank Balances with RBI
? 2) Balances with Banks and Money at Call &
Short Notice
? 3)Investments
? 4)Advances
? 5) Fixed assets
? 6) Other Assets
COMPONENTS OF ASSETS
? 1) Cash & Bank Balances with RBI
? I. Cash in hand
? (Including foreign currency notes)
? II. Balances with Reserve Bank of India
? In Current Accounts
? In Other Accounts
? Balances with Banks and Money at Call & Short Notice
I. In India
i) Balances with Banks
a) In Current Accounts
b) In Other Deposit Accounts
ii) Money at Call and Short Notice
a) With Banks
b) With Other Institutions
II. outside India
a) In Current Accounts
b) In Other Deposit Accounts
c) Money at Call & Short Notice
2) Investments
A major asset item in the bank?s balance sheet.
Reflected under 6 buckets as under:
I. Investments in India in:
? i) Government Securities
? ii) Other approved Securities
? iii) Shares
? iv) Debentures and Bonds
? v) Subsidiaries and Sponsored Institutions
? vi) Others (UTI Shares, Commercial Papers, COD &
Mutual Fund Units etc.)
II. Investments outside India in
? Subsidiaries and/or Associates abroad
3) Advances
The most important assets for a bank.
? A. i) Bills Purchased and Discounted
ii) Cash Credits, Overdrafts & Loans repayable on
demand
iii) Term Loans
? B. Particulars of Advances:
i) Secured by tangible assets (including advances against
Book Debts)
ii) Covered by Bank/ Government Guarantees
iii) Unsecured
4) Fixed Asset
? I. Premises
? II. Other Fixed Assets (Including furniture and
fixtures)
5) Other Assets
I. Interest accrued
II. Tax paid in advance/tax deducted at source
(Net of Provisions)
III. Stationery and Stamps
IV. Non-banking assets acquired in satisfaction
of claims
V. Deferred Tax Asset (Net)
VI. Others
Significance of Asset Liability Management
? Liquidity risk
? Interest rate risk
? Currency risk management
? Funding and capital management:
? Profit planning and growth.
FirstRanker.com - FirstRanker's Choice
MODULE?6
ASSET?LIABILITY?MANAGEMENT
OUTLINE
? Asset?Liability?Management?(ALM)?in?banks
? Components?of?Liabilities?
? Components?of?Assets
? Significance?of?Asset?Liability?management
? Purpose?and?objectives
? Prerequisites?for?ALM
? Assets?and?Liabilities?Committee?(ALCO)?
? Activities?of?ALCO
INTRODUCTION:
? The process by which an institution manages its
balance sheet in order to allow for alternative
interest rate and liquidity scenarios.
? Banks and other financial institutions provide
services which expose them to various kinds of
risks like credit risk, interest risk, and liquidity risk.
? Asset-liability management models enable
institutions to measure and monitor risk, and
provide suitable strategies for their management.
DEFINITION:
Asset Liability Management (ALM) can be defined as a
mechanism to address the risk faced by a bank due to a
mismatch between assets and liabilities either due to
liquidity or changes in interest rates.
? Liquidity is an institution?s ability to meet its liabilities
either by borrowing or converting assets.
? Apart from liquidity, a bank may also have a mismatch due
to changes in interest rates as banks typically tend to borrow
short term (fixed or floating) and lend long term (fixed or
floating).
COMPONENTS OF ASSETS AND LIABILITIES
? COMPONENTS OF LIABILITIES:
? Capital
?Reserves and Surplus
?Deposits
?Borrowings
?Other liabilities and Provisions
COMPONENTS OF LIABILITIES
1. Capital:
? Capital represents owner?s contribution/stake
in the bank.
? - It serves as a cushion for depositors and
creditors.
? - It is considered to be a long term sources for
the bank.
2. Reserves & Surplus
? Components under this head includes:
? I. Statutory Reserves
? II. Capital Reserves
? III. Investment Fluctuation Reserve
? IV. Revenue and Other Reserves
? V. Balance in Profit and Loss Account
3. Deposits
This is the main source of bank?s funds. The
deposits are classified as deposits payable on
?demand? and ?time?.
They are reflected in balance sheet as under:
? a) Demand Deposits
? b) Savings Bank Deposits
? c) Term Deposits
4. Borrowings:
Borrowings include Refinance / Borrowings
from RBI, Inter-bank & other institutions
? I. Borrowings in India
? i) Reserve Bank of India
? ii) Other Banks
? iii) Other Institutions & Agencies
? II. Borrowings outside India
5. Other Liabilities & Provisions
? It is grouped as under:
? I. Bills Payable
? II. Inter Office Adjustments (Net)
? III. Interest Accrued
? IV. Unsecured Redeemable Bonds
(Subordinated Debt for Tier-II Capital)
? V. Others (including provisions)
COMPONENTS OF ASSETS
? 1) Cash & Bank Balances with RBI
? 2) Balances with Banks and Money at Call &
Short Notice
? 3)Investments
? 4)Advances
? 5) Fixed assets
? 6) Other Assets
COMPONENTS OF ASSETS
? 1) Cash & Bank Balances with RBI
? I. Cash in hand
? (Including foreign currency notes)
? II. Balances with Reserve Bank of India
? In Current Accounts
? In Other Accounts
? Balances with Banks and Money at Call & Short Notice
I. In India
i) Balances with Banks
a) In Current Accounts
b) In Other Deposit Accounts
ii) Money at Call and Short Notice
a) With Banks
b) With Other Institutions
II. outside India
a) In Current Accounts
b) In Other Deposit Accounts
c) Money at Call & Short Notice
2) Investments
A major asset item in the bank?s balance sheet.
Reflected under 6 buckets as under:
I. Investments in India in:
? i) Government Securities
? ii) Other approved Securities
? iii) Shares
? iv) Debentures and Bonds
? v) Subsidiaries and Sponsored Institutions
? vi) Others (UTI Shares, Commercial Papers, COD &
Mutual Fund Units etc.)
II. Investments outside India in
? Subsidiaries and/or Associates abroad
3) Advances
The most important assets for a bank.
? A. i) Bills Purchased and Discounted
ii) Cash Credits, Overdrafts & Loans repayable on
demand
iii) Term Loans
? B. Particulars of Advances:
i) Secured by tangible assets (including advances against
Book Debts)
ii) Covered by Bank/ Government Guarantees
iii) Unsecured
4) Fixed Asset
? I. Premises
? II. Other Fixed Assets (Including furniture and
fixtures)
5) Other Assets
I. Interest accrued
II. Tax paid in advance/tax deducted at source
(Net of Provisions)
III. Stationery and Stamps
IV. Non-banking assets acquired in satisfaction
of claims
V. Deferred Tax Asset (Net)
VI. Others
Significance of Asset Liability Management
? Liquidity risk
? Interest rate risk
? Currency risk management
? Funding and capital management:
? Profit planning and growth.
Purpose and objectives of ALM
? An effective Asset Liability Management
Technique aims to manage the volume, mix,
maturity, rate sensitivity, quality and liquidity of
assets and liabilities as a whole so as to attain a
predetermined acceptable risk/reward ratio.
? It is aimed to stabilize short-term profits, long-
term earnings and long-term subsistance of the
bank.
FirstRanker.com - FirstRanker's Choice
MODULE?6
ASSET?LIABILITY?MANAGEMENT
OUTLINE
? Asset?Liability?Management?(ALM)?in?banks
? Components?of?Liabilities?
? Components?of?Assets
? Significance?of?Asset?Liability?management
? Purpose?and?objectives
? Prerequisites?for?ALM
? Assets?and?Liabilities?Committee?(ALCO)?
? Activities?of?ALCO
INTRODUCTION:
? The process by which an institution manages its
balance sheet in order to allow for alternative
interest rate and liquidity scenarios.
? Banks and other financial institutions provide
services which expose them to various kinds of
risks like credit risk, interest risk, and liquidity risk.
? Asset-liability management models enable
institutions to measure and monitor risk, and
provide suitable strategies for their management.
DEFINITION:
Asset Liability Management (ALM) can be defined as a
mechanism to address the risk faced by a bank due to a
mismatch between assets and liabilities either due to
liquidity or changes in interest rates.
? Liquidity is an institution?s ability to meet its liabilities
either by borrowing or converting assets.
? Apart from liquidity, a bank may also have a mismatch due
to changes in interest rates as banks typically tend to borrow
short term (fixed or floating) and lend long term (fixed or
floating).
COMPONENTS OF ASSETS AND LIABILITIES
? COMPONENTS OF LIABILITIES:
? Capital
?Reserves and Surplus
?Deposits
?Borrowings
?Other liabilities and Provisions
COMPONENTS OF LIABILITIES
1. Capital:
? Capital represents owner?s contribution/stake
in the bank.
? - It serves as a cushion for depositors and
creditors.
? - It is considered to be a long term sources for
the bank.
2. Reserves & Surplus
? Components under this head includes:
? I. Statutory Reserves
? II. Capital Reserves
? III. Investment Fluctuation Reserve
? IV. Revenue and Other Reserves
? V. Balance in Profit and Loss Account
3. Deposits
This is the main source of bank?s funds. The
deposits are classified as deposits payable on
?demand? and ?time?.
They are reflected in balance sheet as under:
? a) Demand Deposits
? b) Savings Bank Deposits
? c) Term Deposits
4. Borrowings:
Borrowings include Refinance / Borrowings
from RBI, Inter-bank & other institutions
? I. Borrowings in India
? i) Reserve Bank of India
? ii) Other Banks
? iii) Other Institutions & Agencies
? II. Borrowings outside India
5. Other Liabilities & Provisions
? It is grouped as under:
? I. Bills Payable
? II. Inter Office Adjustments (Net)
? III. Interest Accrued
? IV. Unsecured Redeemable Bonds
(Subordinated Debt for Tier-II Capital)
? V. Others (including provisions)
COMPONENTS OF ASSETS
? 1) Cash & Bank Balances with RBI
? 2) Balances with Banks and Money at Call &
Short Notice
? 3)Investments
? 4)Advances
? 5) Fixed assets
? 6) Other Assets
COMPONENTS OF ASSETS
? 1) Cash & Bank Balances with RBI
? I. Cash in hand
? (Including foreign currency notes)
? II. Balances with Reserve Bank of India
? In Current Accounts
? In Other Accounts
? Balances with Banks and Money at Call & Short Notice
I. In India
i) Balances with Banks
a) In Current Accounts
b) In Other Deposit Accounts
ii) Money at Call and Short Notice
a) With Banks
b) With Other Institutions
II. outside India
a) In Current Accounts
b) In Other Deposit Accounts
c) Money at Call & Short Notice
2) Investments
A major asset item in the bank?s balance sheet.
Reflected under 6 buckets as under:
I. Investments in India in:
? i) Government Securities
? ii) Other approved Securities
? iii) Shares
? iv) Debentures and Bonds
? v) Subsidiaries and Sponsored Institutions
? vi) Others (UTI Shares, Commercial Papers, COD &
Mutual Fund Units etc.)
II. Investments outside India in
? Subsidiaries and/or Associates abroad
3) Advances
The most important assets for a bank.
? A. i) Bills Purchased and Discounted
ii) Cash Credits, Overdrafts & Loans repayable on
demand
iii) Term Loans
? B. Particulars of Advances:
i) Secured by tangible assets (including advances against
Book Debts)
ii) Covered by Bank/ Government Guarantees
iii) Unsecured
4) Fixed Asset
? I. Premises
? II. Other Fixed Assets (Including furniture and
fixtures)
5) Other Assets
I. Interest accrued
II. Tax paid in advance/tax deducted at source
(Net of Provisions)
III. Stationery and Stamps
IV. Non-banking assets acquired in satisfaction
of claims
V. Deferred Tax Asset (Net)
VI. Others
Significance of Asset Liability Management
? Liquidity risk
? Interest rate risk
? Currency risk management
? Funding and capital management:
? Profit planning and growth.
Purpose and objectives of ALM
? An effective Asset Liability Management
Technique aims to manage the volume, mix,
maturity, rate sensitivity, quality and liquidity of
assets and liabilities as a whole so as to attain a
predetermined acceptable risk/reward ratio.
? It is aimed to stabilize short-term profits, long-
term earnings and long-term subsistance of the
bank.
Prerequisites for ALM
? 1. Awareness for ALM in the Bank staff at all levels?
supportive Management & dedicated Teams.
? 2. Method of reporting data from Branches/ other
Departments. (Strong MIS).
? 3. Computerization-Full computerization, networking.
? 4. Insight into the banking operations, economic
forecasting, computerization, investment, credit.
? 5. Linking up ALM to future Risk Management Strategies.
FirstRanker.com - FirstRanker's Choice
MODULE?6
ASSET?LIABILITY?MANAGEMENT
OUTLINE
? Asset?Liability?Management?(ALM)?in?banks
? Components?of?Liabilities?
? Components?of?Assets
? Significance?of?Asset?Liability?management
? Purpose?and?objectives
? Prerequisites?for?ALM
? Assets?and?Liabilities?Committee?(ALCO)?
? Activities?of?ALCO
INTRODUCTION:
? The process by which an institution manages its
balance sheet in order to allow for alternative
interest rate and liquidity scenarios.
? Banks and other financial institutions provide
services which expose them to various kinds of
risks like credit risk, interest risk, and liquidity risk.
? Asset-liability management models enable
institutions to measure and monitor risk, and
provide suitable strategies for their management.
DEFINITION:
Asset Liability Management (ALM) can be defined as a
mechanism to address the risk faced by a bank due to a
mismatch between assets and liabilities either due to
liquidity or changes in interest rates.
? Liquidity is an institution?s ability to meet its liabilities
either by borrowing or converting assets.
? Apart from liquidity, a bank may also have a mismatch due
to changes in interest rates as banks typically tend to borrow
short term (fixed or floating) and lend long term (fixed or
floating).
COMPONENTS OF ASSETS AND LIABILITIES
? COMPONENTS OF LIABILITIES:
? Capital
?Reserves and Surplus
?Deposits
?Borrowings
?Other liabilities and Provisions
COMPONENTS OF LIABILITIES
1. Capital:
? Capital represents owner?s contribution/stake
in the bank.
? - It serves as a cushion for depositors and
creditors.
? - It is considered to be a long term sources for
the bank.
2. Reserves & Surplus
? Components under this head includes:
? I. Statutory Reserves
? II. Capital Reserves
? III. Investment Fluctuation Reserve
? IV. Revenue and Other Reserves
? V. Balance in Profit and Loss Account
3. Deposits
This is the main source of bank?s funds. The
deposits are classified as deposits payable on
?demand? and ?time?.
They are reflected in balance sheet as under:
? a) Demand Deposits
? b) Savings Bank Deposits
? c) Term Deposits
4. Borrowings:
Borrowings include Refinance / Borrowings
from RBI, Inter-bank & other institutions
? I. Borrowings in India
? i) Reserve Bank of India
? ii) Other Banks
? iii) Other Institutions & Agencies
? II. Borrowings outside India
5. Other Liabilities & Provisions
? It is grouped as under:
? I. Bills Payable
? II. Inter Office Adjustments (Net)
? III. Interest Accrued
? IV. Unsecured Redeemable Bonds
(Subordinated Debt for Tier-II Capital)
? V. Others (including provisions)
COMPONENTS OF ASSETS
? 1) Cash & Bank Balances with RBI
? 2) Balances with Banks and Money at Call &
Short Notice
? 3)Investments
? 4)Advances
? 5) Fixed assets
? 6) Other Assets
COMPONENTS OF ASSETS
? 1) Cash & Bank Balances with RBI
? I. Cash in hand
? (Including foreign currency notes)
? II. Balances with Reserve Bank of India
? In Current Accounts
? In Other Accounts
? Balances with Banks and Money at Call & Short Notice
I. In India
i) Balances with Banks
a) In Current Accounts
b) In Other Deposit Accounts
ii) Money at Call and Short Notice
a) With Banks
b) With Other Institutions
II. outside India
a) In Current Accounts
b) In Other Deposit Accounts
c) Money at Call & Short Notice
2) Investments
A major asset item in the bank?s balance sheet.
Reflected under 6 buckets as under:
I. Investments in India in:
? i) Government Securities
? ii) Other approved Securities
? iii) Shares
? iv) Debentures and Bonds
? v) Subsidiaries and Sponsored Institutions
? vi) Others (UTI Shares, Commercial Papers, COD &
Mutual Fund Units etc.)
II. Investments outside India in
? Subsidiaries and/or Associates abroad
3) Advances
The most important assets for a bank.
? A. i) Bills Purchased and Discounted
ii) Cash Credits, Overdrafts & Loans repayable on
demand
iii) Term Loans
? B. Particulars of Advances:
i) Secured by tangible assets (including advances against
Book Debts)
ii) Covered by Bank/ Government Guarantees
iii) Unsecured
4) Fixed Asset
? I. Premises
? II. Other Fixed Assets (Including furniture and
fixtures)
5) Other Assets
I. Interest accrued
II. Tax paid in advance/tax deducted at source
(Net of Provisions)
III. Stationery and Stamps
IV. Non-banking assets acquired in satisfaction
of claims
V. Deferred Tax Asset (Net)
VI. Others
Significance of Asset Liability Management
? Liquidity risk
? Interest rate risk
? Currency risk management
? Funding and capital management:
? Profit planning and growth.
Purpose and objectives of ALM
? An effective Asset Liability Management
Technique aims to manage the volume, mix,
maturity, rate sensitivity, quality and liquidity of
assets and liabilities as a whole so as to attain a
predetermined acceptable risk/reward ratio.
? It is aimed to stabilize short-term profits, long-
term earnings and long-term subsistance of the
bank.
Prerequisites for ALM
? 1. Awareness for ALM in the Bank staff at all levels?
supportive Management & dedicated Teams.
? 2. Method of reporting data from Branches/ other
Departments. (Strong MIS).
? 3. Computerization-Full computerization, networking.
? 4. Insight into the banking operations, economic
forecasting, computerization, investment, credit.
? 5. Linking up ALM to future Risk Management Strategies.
Assets and Liabilities Committee (ALCO)
? ALCO, consisting of the bank's senior management (including
CEO) should be responsible for ensuring adherence to the
limits set by the Board Is responsible for balance sheet
planning from risk - return perspective including the strategic
management of interest rate and liquidity risks.
? The role of ALCO includes product pricing for both deposits
and advances, desired maturity profile of the incremental
assets and liabilities, It will have to develop a view on future
direction of interest rate movements and decide on a funding
mix between fixed Vs. floating rate funds, wholesale vs. retail
deposits, money market Vs. capital market funding, domestic
vs. foreign currency funding.
? It should review the results of and progress in implementation
of the decisions made in the previous meetings.
FirstRanker.com - FirstRanker's Choice
MODULE?6
ASSET?LIABILITY?MANAGEMENT
OUTLINE
? Asset?Liability?Management?(ALM)?in?banks
? Components?of?Liabilities?
? Components?of?Assets
? Significance?of?Asset?Liability?management
? Purpose?and?objectives
? Prerequisites?for?ALM
? Assets?and?Liabilities?Committee?(ALCO)?
? Activities?of?ALCO
INTRODUCTION:
? The process by which an institution manages its
balance sheet in order to allow for alternative
interest rate and liquidity scenarios.
? Banks and other financial institutions provide
services which expose them to various kinds of
risks like credit risk, interest risk, and liquidity risk.
? Asset-liability management models enable
institutions to measure and monitor risk, and
provide suitable strategies for their management.
DEFINITION:
Asset Liability Management (ALM) can be defined as a
mechanism to address the risk faced by a bank due to a
mismatch between assets and liabilities either due to
liquidity or changes in interest rates.
? Liquidity is an institution?s ability to meet its liabilities
either by borrowing or converting assets.
? Apart from liquidity, a bank may also have a mismatch due
to changes in interest rates as banks typically tend to borrow
short term (fixed or floating) and lend long term (fixed or
floating).
COMPONENTS OF ASSETS AND LIABILITIES
? COMPONENTS OF LIABILITIES:
? Capital
?Reserves and Surplus
?Deposits
?Borrowings
?Other liabilities and Provisions
COMPONENTS OF LIABILITIES
1. Capital:
? Capital represents owner?s contribution/stake
in the bank.
? - It serves as a cushion for depositors and
creditors.
? - It is considered to be a long term sources for
the bank.
2. Reserves & Surplus
? Components under this head includes:
? I. Statutory Reserves
? II. Capital Reserves
? III. Investment Fluctuation Reserve
? IV. Revenue and Other Reserves
? V. Balance in Profit and Loss Account
3. Deposits
This is the main source of bank?s funds. The
deposits are classified as deposits payable on
?demand? and ?time?.
They are reflected in balance sheet as under:
? a) Demand Deposits
? b) Savings Bank Deposits
? c) Term Deposits
4. Borrowings:
Borrowings include Refinance / Borrowings
from RBI, Inter-bank & other institutions
? I. Borrowings in India
? i) Reserve Bank of India
? ii) Other Banks
? iii) Other Institutions & Agencies
? II. Borrowings outside India
5. Other Liabilities & Provisions
? It is grouped as under:
? I. Bills Payable
? II. Inter Office Adjustments (Net)
? III. Interest Accrued
? IV. Unsecured Redeemable Bonds
(Subordinated Debt for Tier-II Capital)
? V. Others (including provisions)
COMPONENTS OF ASSETS
? 1) Cash & Bank Balances with RBI
? 2) Balances with Banks and Money at Call &
Short Notice
? 3)Investments
? 4)Advances
? 5) Fixed assets
? 6) Other Assets
COMPONENTS OF ASSETS
? 1) Cash & Bank Balances with RBI
? I. Cash in hand
? (Including foreign currency notes)
? II. Balances with Reserve Bank of India
? In Current Accounts
? In Other Accounts
? Balances with Banks and Money at Call & Short Notice
I. In India
i) Balances with Banks
a) In Current Accounts
b) In Other Deposit Accounts
ii) Money at Call and Short Notice
a) With Banks
b) With Other Institutions
II. outside India
a) In Current Accounts
b) In Other Deposit Accounts
c) Money at Call & Short Notice
2) Investments
A major asset item in the bank?s balance sheet.
Reflected under 6 buckets as under:
I. Investments in India in:
? i) Government Securities
? ii) Other approved Securities
? iii) Shares
? iv) Debentures and Bonds
? v) Subsidiaries and Sponsored Institutions
? vi) Others (UTI Shares, Commercial Papers, COD &
Mutual Fund Units etc.)
II. Investments outside India in
? Subsidiaries and/or Associates abroad
3) Advances
The most important assets for a bank.
? A. i) Bills Purchased and Discounted
ii) Cash Credits, Overdrafts & Loans repayable on
demand
iii) Term Loans
? B. Particulars of Advances:
i) Secured by tangible assets (including advances against
Book Debts)
ii) Covered by Bank/ Government Guarantees
iii) Unsecured
4) Fixed Asset
? I. Premises
? II. Other Fixed Assets (Including furniture and
fixtures)
5) Other Assets
I. Interest accrued
II. Tax paid in advance/tax deducted at source
(Net of Provisions)
III. Stationery and Stamps
IV. Non-banking assets acquired in satisfaction
of claims
V. Deferred Tax Asset (Net)
VI. Others
Significance of Asset Liability Management
? Liquidity risk
? Interest rate risk
? Currency risk management
? Funding and capital management:
? Profit planning and growth.
Purpose and objectives of ALM
? An effective Asset Liability Management
Technique aims to manage the volume, mix,
maturity, rate sensitivity, quality and liquidity of
assets and liabilities as a whole so as to attain a
predetermined acceptable risk/reward ratio.
? It is aimed to stabilize short-term profits, long-
term earnings and long-term subsistance of the
bank.
Prerequisites for ALM
? 1. Awareness for ALM in the Bank staff at all levels?
supportive Management & dedicated Teams.
? 2. Method of reporting data from Branches/ other
Departments. (Strong MIS).
? 3. Computerization-Full computerization, networking.
? 4. Insight into the banking operations, economic
forecasting, computerization, investment, credit.
? 5. Linking up ALM to future Risk Management Strategies.
Assets and Liabilities Committee (ALCO)
? ALCO, consisting of the bank's senior management (including
CEO) should be responsible for ensuring adherence to the
limits set by the Board Is responsible for balance sheet
planning from risk - return perspective including the strategic
management of interest rate and liquidity risks.
? The role of ALCO includes product pricing for both deposits
and advances, desired maturity profile of the incremental
assets and liabilities, It will have to develop a view on future
direction of interest rate movements and decide on a funding
mix between fixed Vs. floating rate funds, wholesale vs. retail
deposits, money market Vs. capital market funding, domestic
vs. foreign currency funding.
? It should review the results of and progress in implementation
of the decisions made in the previous meetings.
Activities of ALCO
1. ALCO decision making unit- Responsible for balance
sheet planning from risk return perspective.
2. Monitoring the market risk levels by ensuring adherence
to the various risk limits set by the bank.
3. Articulating the current interest rate view and a view on
future direction of interest rate movements.
4. Deciding the business strategy of the bank, consistent
with the interest rate view, budget and pre-determined
risk management objectives.
??.continued
FirstRanker.com - FirstRanker's Choice
MODULE?6
ASSET?LIABILITY?MANAGEMENT
OUTLINE
? Asset?Liability?Management?(ALM)?in?banks
? Components?of?Liabilities?
? Components?of?Assets
? Significance?of?Asset?Liability?management
? Purpose?and?objectives
? Prerequisites?for?ALM
? Assets?and?Liabilities?Committee?(ALCO)?
? Activities?of?ALCO
INTRODUCTION:
? The process by which an institution manages its
balance sheet in order to allow for alternative
interest rate and liquidity scenarios.
? Banks and other financial institutions provide
services which expose them to various kinds of
risks like credit risk, interest risk, and liquidity risk.
? Asset-liability management models enable
institutions to measure and monitor risk, and
provide suitable strategies for their management.
DEFINITION:
Asset Liability Management (ALM) can be defined as a
mechanism to address the risk faced by a bank due to a
mismatch between assets and liabilities either due to
liquidity or changes in interest rates.
? Liquidity is an institution?s ability to meet its liabilities
either by borrowing or converting assets.
? Apart from liquidity, a bank may also have a mismatch due
to changes in interest rates as banks typically tend to borrow
short term (fixed or floating) and lend long term (fixed or
floating).
COMPONENTS OF ASSETS AND LIABILITIES
? COMPONENTS OF LIABILITIES:
? Capital
?Reserves and Surplus
?Deposits
?Borrowings
?Other liabilities and Provisions
COMPONENTS OF LIABILITIES
1. Capital:
? Capital represents owner?s contribution/stake
in the bank.
? - It serves as a cushion for depositors and
creditors.
? - It is considered to be a long term sources for
the bank.
2. Reserves & Surplus
? Components under this head includes:
? I. Statutory Reserves
? II. Capital Reserves
? III. Investment Fluctuation Reserve
? IV. Revenue and Other Reserves
? V. Balance in Profit and Loss Account
3. Deposits
This is the main source of bank?s funds. The
deposits are classified as deposits payable on
?demand? and ?time?.
They are reflected in balance sheet as under:
? a) Demand Deposits
? b) Savings Bank Deposits
? c) Term Deposits
4. Borrowings:
Borrowings include Refinance / Borrowings
from RBI, Inter-bank & other institutions
? I. Borrowings in India
? i) Reserve Bank of India
? ii) Other Banks
? iii) Other Institutions & Agencies
? II. Borrowings outside India
5. Other Liabilities & Provisions
? It is grouped as under:
? I. Bills Payable
? II. Inter Office Adjustments (Net)
? III. Interest Accrued
? IV. Unsecured Redeemable Bonds
(Subordinated Debt for Tier-II Capital)
? V. Others (including provisions)
COMPONENTS OF ASSETS
? 1) Cash & Bank Balances with RBI
? 2) Balances with Banks and Money at Call &
Short Notice
? 3)Investments
? 4)Advances
? 5) Fixed assets
? 6) Other Assets
COMPONENTS OF ASSETS
? 1) Cash & Bank Balances with RBI
? I. Cash in hand
? (Including foreign currency notes)
? II. Balances with Reserve Bank of India
? In Current Accounts
? In Other Accounts
? Balances with Banks and Money at Call & Short Notice
I. In India
i) Balances with Banks
a) In Current Accounts
b) In Other Deposit Accounts
ii) Money at Call and Short Notice
a) With Banks
b) With Other Institutions
II. outside India
a) In Current Accounts
b) In Other Deposit Accounts
c) Money at Call & Short Notice
2) Investments
A major asset item in the bank?s balance sheet.
Reflected under 6 buckets as under:
I. Investments in India in:
? i) Government Securities
? ii) Other approved Securities
? iii) Shares
? iv) Debentures and Bonds
? v) Subsidiaries and Sponsored Institutions
? vi) Others (UTI Shares, Commercial Papers, COD &
Mutual Fund Units etc.)
II. Investments outside India in
? Subsidiaries and/or Associates abroad
3) Advances
The most important assets for a bank.
? A. i) Bills Purchased and Discounted
ii) Cash Credits, Overdrafts & Loans repayable on
demand
iii) Term Loans
? B. Particulars of Advances:
i) Secured by tangible assets (including advances against
Book Debts)
ii) Covered by Bank/ Government Guarantees
iii) Unsecured
4) Fixed Asset
? I. Premises
? II. Other Fixed Assets (Including furniture and
fixtures)
5) Other Assets
I. Interest accrued
II. Tax paid in advance/tax deducted at source
(Net of Provisions)
III. Stationery and Stamps
IV. Non-banking assets acquired in satisfaction
of claims
V. Deferred Tax Asset (Net)
VI. Others
Significance of Asset Liability Management
? Liquidity risk
? Interest rate risk
? Currency risk management
? Funding and capital management:
? Profit planning and growth.
Purpose and objectives of ALM
? An effective Asset Liability Management
Technique aims to manage the volume, mix,
maturity, rate sensitivity, quality and liquidity of
assets and liabilities as a whole so as to attain a
predetermined acceptable risk/reward ratio.
? It is aimed to stabilize short-term profits, long-
term earnings and long-term subsistance of the
bank.
Prerequisites for ALM
? 1. Awareness for ALM in the Bank staff at all levels?
supportive Management & dedicated Teams.
? 2. Method of reporting data from Branches/ other
Departments. (Strong MIS).
? 3. Computerization-Full computerization, networking.
? 4. Insight into the banking operations, economic
forecasting, computerization, investment, credit.
? 5. Linking up ALM to future Risk Management Strategies.
Assets and Liabilities Committee (ALCO)
? ALCO, consisting of the bank's senior management (including
CEO) should be responsible for ensuring adherence to the
limits set by the Board Is responsible for balance sheet
planning from risk - return perspective including the strategic
management of interest rate and liquidity risks.
? The role of ALCO includes product pricing for both deposits
and advances, desired maturity profile of the incremental
assets and liabilities, It will have to develop a view on future
direction of interest rate movements and decide on a funding
mix between fixed Vs. floating rate funds, wholesale vs. retail
deposits, money market Vs. capital market funding, domestic
vs. foreign currency funding.
? It should review the results of and progress in implementation
of the decisions made in the previous meetings.
Activities of ALCO
1. ALCO decision making unit- Responsible for balance
sheet planning from risk return perspective.
2. Monitoring the market risk levels by ensuring adherence
to the various risk limits set by the bank.
3. Articulating the current interest rate view and a view on
future direction of interest rate movements.
4. Deciding the business strategy of the bank, consistent
with the interest rate view, budget and pre-determined
risk management objectives.
??.continued
Activities of ALCO
5. Determining the desired maturity profile and mix of
assets and liabilities.
6. Product pricing for both assets and liabilities side.
7. Deciding the funding strategy i.e. source and mix of
liabilities or sale of assets.
8.Reviewing implementation of decisions made in the
previous meeting.
FirstRanker.com - FirstRanker's Choice
MODULE?6
ASSET?LIABILITY?MANAGEMENT
OUTLINE
? Asset?Liability?Management?(ALM)?in?banks
? Components?of?Liabilities?
? Components?of?Assets
? Significance?of?Asset?Liability?management
? Purpose?and?objectives
? Prerequisites?for?ALM
? Assets?and?Liabilities?Committee?(ALCO)?
? Activities?of?ALCO
INTRODUCTION:
? The process by which an institution manages its
balance sheet in order to allow for alternative
interest rate and liquidity scenarios.
? Banks and other financial institutions provide
services which expose them to various kinds of
risks like credit risk, interest risk, and liquidity risk.
? Asset-liability management models enable
institutions to measure and monitor risk, and
provide suitable strategies for their management.
DEFINITION:
Asset Liability Management (ALM) can be defined as a
mechanism to address the risk faced by a bank due to a
mismatch between assets and liabilities either due to
liquidity or changes in interest rates.
? Liquidity is an institution?s ability to meet its liabilities
either by borrowing or converting assets.
? Apart from liquidity, a bank may also have a mismatch due
to changes in interest rates as banks typically tend to borrow
short term (fixed or floating) and lend long term (fixed or
floating).
COMPONENTS OF ASSETS AND LIABILITIES
? COMPONENTS OF LIABILITIES:
? Capital
?Reserves and Surplus
?Deposits
?Borrowings
?Other liabilities and Provisions
COMPONENTS OF LIABILITIES
1. Capital:
? Capital represents owner?s contribution/stake
in the bank.
? - It serves as a cushion for depositors and
creditors.
? - It is considered to be a long term sources for
the bank.
2. Reserves & Surplus
? Components under this head includes:
? I. Statutory Reserves
? II. Capital Reserves
? III. Investment Fluctuation Reserve
? IV. Revenue and Other Reserves
? V. Balance in Profit and Loss Account
3. Deposits
This is the main source of bank?s funds. The
deposits are classified as deposits payable on
?demand? and ?time?.
They are reflected in balance sheet as under:
? a) Demand Deposits
? b) Savings Bank Deposits
? c) Term Deposits
4. Borrowings:
Borrowings include Refinance / Borrowings
from RBI, Inter-bank & other institutions
? I. Borrowings in India
? i) Reserve Bank of India
? ii) Other Banks
? iii) Other Institutions & Agencies
? II. Borrowings outside India
5. Other Liabilities & Provisions
? It is grouped as under:
? I. Bills Payable
? II. Inter Office Adjustments (Net)
? III. Interest Accrued
? IV. Unsecured Redeemable Bonds
(Subordinated Debt for Tier-II Capital)
? V. Others (including provisions)
COMPONENTS OF ASSETS
? 1) Cash & Bank Balances with RBI
? 2) Balances with Banks and Money at Call &
Short Notice
? 3)Investments
? 4)Advances
? 5) Fixed assets
? 6) Other Assets
COMPONENTS OF ASSETS
? 1) Cash & Bank Balances with RBI
? I. Cash in hand
? (Including foreign currency notes)
? II. Balances with Reserve Bank of India
? In Current Accounts
? In Other Accounts
? Balances with Banks and Money at Call & Short Notice
I. In India
i) Balances with Banks
a) In Current Accounts
b) In Other Deposit Accounts
ii) Money at Call and Short Notice
a) With Banks
b) With Other Institutions
II. outside India
a) In Current Accounts
b) In Other Deposit Accounts
c) Money at Call & Short Notice
2) Investments
A major asset item in the bank?s balance sheet.
Reflected under 6 buckets as under:
I. Investments in India in:
? i) Government Securities
? ii) Other approved Securities
? iii) Shares
? iv) Debentures and Bonds
? v) Subsidiaries and Sponsored Institutions
? vi) Others (UTI Shares, Commercial Papers, COD &
Mutual Fund Units etc.)
II. Investments outside India in
? Subsidiaries and/or Associates abroad
3) Advances
The most important assets for a bank.
? A. i) Bills Purchased and Discounted
ii) Cash Credits, Overdrafts & Loans repayable on
demand
iii) Term Loans
? B. Particulars of Advances:
i) Secured by tangible assets (including advances against
Book Debts)
ii) Covered by Bank/ Government Guarantees
iii) Unsecured
4) Fixed Asset
? I. Premises
? II. Other Fixed Assets (Including furniture and
fixtures)
5) Other Assets
I. Interest accrued
II. Tax paid in advance/tax deducted at source
(Net of Provisions)
III. Stationery and Stamps
IV. Non-banking assets acquired in satisfaction
of claims
V. Deferred Tax Asset (Net)
VI. Others
Significance of Asset Liability Management
? Liquidity risk
? Interest rate risk
? Currency risk management
? Funding and capital management:
? Profit planning and growth.
Purpose and objectives of ALM
? An effective Asset Liability Management
Technique aims to manage the volume, mix,
maturity, rate sensitivity, quality and liquidity of
assets and liabilities as a whole so as to attain a
predetermined acceptable risk/reward ratio.
? It is aimed to stabilize short-term profits, long-
term earnings and long-term subsistance of the
bank.
Prerequisites for ALM
? 1. Awareness for ALM in the Bank staff at all levels?
supportive Management & dedicated Teams.
? 2. Method of reporting data from Branches/ other
Departments. (Strong MIS).
? 3. Computerization-Full computerization, networking.
? 4. Insight into the banking operations, economic
forecasting, computerization, investment, credit.
? 5. Linking up ALM to future Risk Management Strategies.
Assets and Liabilities Committee (ALCO)
? ALCO, consisting of the bank's senior management (including
CEO) should be responsible for ensuring adherence to the
limits set by the Board Is responsible for balance sheet
planning from risk - return perspective including the strategic
management of interest rate and liquidity risks.
? The role of ALCO includes product pricing for both deposits
and advances, desired maturity profile of the incremental
assets and liabilities, It will have to develop a view on future
direction of interest rate movements and decide on a funding
mix between fixed Vs. floating rate funds, wholesale vs. retail
deposits, money market Vs. capital market funding, domestic
vs. foreign currency funding.
? It should review the results of and progress in implementation
of the decisions made in the previous meetings.
Activities of ALCO
1. ALCO decision making unit- Responsible for balance
sheet planning from risk return perspective.
2. Monitoring the market risk levels by ensuring adherence
to the various risk limits set by the bank.
3. Articulating the current interest rate view and a view on
future direction of interest rate movements.
4. Deciding the business strategy of the bank, consistent
with the interest rate view, budget and pre-determined
risk management objectives.
??.continued
Activities of ALCO
5. Determining the desired maturity profile and mix of
assets and liabilities.
6. Product pricing for both assets and liabilities side.
7. Deciding the funding strategy i.e. source and mix of
liabilities or sale of assets.
8.Reviewing implementation of decisions made in the
previous meeting.
IMPORTANT QUESTIONS
? 1. What is ALM? June/July 2016 (3 marks)
? 2. Discuss the components of liabilities and assets in
banks balance sheet. June/July 2016 (10 marks)
? 3. Discuss in detail: ALCO Dec.15/Jan16 (10 marks)
? 4. Explain the significance of ALM Dec.15/Jan16 (7 marks)
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This post was last modified on 18 February 2020