ALM and Fund Management

*College of Agricultural Banking, RBI, PUNE ALM and Fund ManagementJyoti Kumar PandeyDeputy General Manager&Member of FacultyCollege of Agricultural Banking, Pune

College of Agricultural Banking, RBI, PUNE

*College of Agricultural Banking, RBI, PUNE What is BankingSection 5(b) defines banking Accepting for the purpose of lending or investment of deposits or money repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwiseRisk taking is an inherent functionof banking - Allan Greenspan


*College of Agricultural Banking, RBI, PUNE Banks get affected byActions of Central BanksActions of the GovernmentDomestic and International DisturbancesInflation


*College of Agricultural Banking, RBI, PUNE DeregulationBanks are now operating in a fairly deregulated environment and are required to determine on their own, interest rates on deposits and advances Intense competition for business involving both the assets and liabilities together with increasing volatility in the interest rates has brought pressure on the management of banks to maintain a good balance among spreads


*College of Agricultural Banking, RBI, PUNE Risks Faced by BanksCredit RiskMarket Risk Liquidity RiskInterest Rate RiskOperational Risk


*College of Agricultural Banking, RBI, PUNE Effects of Risk FactorsLoss of Market Value Loss of ReservesLoss of stakeholders confidence


*College of Agricultural Banking, RBI, PUNE ALMThe ALM guidelines issued by RBI has been formulated to serve as a benchmark for banks which lack a formal ALM systemThose who already have their existing system may fine tune their information and reporting system


*College of Agricultural Banking, RBI, PUNE Purpose of ALMCapture the maturity structure of the cash flows (inflows and outflows) in the Statement of Structural LiquidityTolerance levels for various maturities may be fixed by the bank keeping in view banks ALM profile, extent of stable deposit base, nature of cash flows etc.


*College of Agricultural Banking, RBI, PUNE ALMALM is about managing market risk and liquidity risk togetherCapital market exposure of banks is smallExchange risk is highly specializedHence ALM is an integrated risk management approach for managing liquidity risk, interest rate risk


*College of Agricultural Banking, RBI, PUNE The problem of mismatchMismatches in maturityMismatches in interest rateHow does bank makes the spread?Borrow short and lend long and keep the spreadMaturity mismatch is the basis of profitabilityRisk management does not eliminate mismatch merely manages them


*College of Agricultural Banking, RBI, PUNE The problem of mismatchInterest Rate Risk Affects profitabilityLiquidity Risk May lead to liquidationGeneral StrategyEliminate Liquidity Risk (not the mismatch)Manage Interest Rate RiskConsciously create gaps


*College of Agricultural Banking, RBI, PUNE Asset Liability TransformationBanks are exposed to credit and market risks in view of the asset-liability transformationWith liberalisation, banks operations have become complex and large , requiring strategic management


*College of Agricultural Banking, RBI, PUNE ALM PillarsALM Information SystemsALM OrganisationALM ProcessApplicable to Scheduled UCBs and Tier II UCBsFor Tier II UCBs effective date is December 2008


*College of Agricultural Banking, RBI, PUNE ALM Pillars (Contd.)ALM Information systemsMISInformation availabilityAccuracyAdequacyExpediency


*College of Agricultural Banking, RBI, PUNE ALM Pillars (Contd.)ALM Organisation Structure and responsibilitiesLevel of top management involvement


*College of Agricultural Banking, RBI, PUNE ALM Pillars (Contd.)ALM ProcessRisk ParametersRisk IdentificationRisk MeasurementRisk ManagementRisk Policies and Procedures, prudential limits and auditing, reporting and review


*College of Agricultural Banking, RBI, PUNE ALM Information SystemsALM framework built on sound methodology with necessary information system back-upALM to be supported by management philosophy and clearly states risk policies and procedures / prudential limitsBanks may utlilise Gap Analysis or SimulationImportant to have availability of timely, adequate and accurate information


*College of Agricultural Banking, RBI, PUNE ALM Information Systems (Contd.)ALM Data could be developed by following approach, in case UCBs do not have requisite informationAnalyse behaviour of asset and liability products in sample branches that account for significant business (60-70 per cent)Based on this make rational assumption for the other branches

UCBs have limited area of operations and hence it would be easierfor them to make such assumptions and better access to data


*College of Agricultural Banking, RBI, PUNE ALM OrganisationBoard should have overall responsibility for management of riskBoard should decide risk management policy and procedure, set prudential limits, auditing, reporting and review mechanism in respect of liquidity, interest rate and forex riskALCOConsisiting of banks senior management including CEO Responsible for adherence to the polices and limits set by BoardResponsible for deciding business strategies (on asset liability side) in line with banks business and risk objectivesALM Support GroupConsisting of operating staffResponsible for analysing, monitoring and reporting risk profiles to ALCOPrepare forecasts showing effects of various possible changes in market conditions affecting balance sheet and suggesting action to adhere to banks internal limits


*College of Agricultural Banking, RBI, PUNE ALM Organisation (Contd.)ALCO decision making unit responsible for Balance Sheet planning from risk-return perspective which includes management of liquidity, interest rate and forex risksPricing of deposits and advances, desired maturity profile etc.Monitoring the risk levels of the bankReview of the results and progress of implementation of decisions made in previous meetingFuture business strategies based on banks current view on interest ratesTo decide on source and mix of liabilities or sale of assetsTo develop future direction of interest rate movementsTo decide on funding mix between fixed and floating rate funds, wholesale vs. retails deposits, short term vs. long term deposits etc.


*College of Agricultural Banking, RBI, PUNE ALM Organisation (Contd.)ALCO size would be dependent on the size of the UCBMay comprise of CEO or Secretary Chief of Investment / Treasury including those of forex, credit, planning etc.Head of IT if a separate division existsUCBs may at their discretion may have Sub-committees and Support Groups


*College of Agricultural Banking, RBI, PUNE ALM ProcessScope is Liquidity Risk ManagementInterest Rate Risk ManagementTrading (Price) risk ManagementFunding and Capital Management Profit Planning and business ProjectionsUCBs, generally, are not exposed to forex risk


*College of Agricultural Banking, RBI, PUNE Liquidity Risk

Interest Rate Risk

ALM


*College of Agricultural Banking, RBI, PUNE Liquidity RiskArising due to Over extension of creditHigh level of NPAsPoor asset qualityMismanagementHot MoneyNon recognition of embedded option riskReliance on few wholesale depositorsLarge undrawn loan commitmentsLack of appropriate liquidity policy and contingent plan


*College of Agricultural Banking, RBI, PUNE Liquidity vs. EarningsBank must be in a position to:-Balance their need for liquidity with their need for earningsMore liquid assets tend to provide lower return than do less liquid assets


*College of Agricultural Banking, RBI, PUNE Assessing Liquidity PositionAssessing a banks liquidity position can be challengingAn adequate position for one bank may not be sufficient for anotherA position considered adequate for a bank in one time period may not be so in anotherBANK SPECIFIC & DYNAMIC


*College of Agricultural Banking, RBI, PUNE Liquidity risk-ManifestationFunding riskNeed to replace net outflows due to unanticipated withdrawal/non-renewal of deposits

Time RiskNeed to compensate for non-receipt of expected inflows of funds-performing assets turning into non-performing assets


*College of Agricultural Banking, RBI, PUNE Liquidity Risk (Contd.)Regulatory RequirementsCRR / SLRCall Money Borrowings prescriptions / limitsALM GuidelinesHost country prescriptionsOverseas Offices of Indian Banks


*College of Agricultural Banking, RBI, PUNE Factors Reducing Liquidity RiskAvailability of RefinanceLAF FacilityOpen Market OperationsCBLO


*College of Agricultural Banking, RBI, PUNE Liquidity Risk - SymptomsOffering higher rate of interest on depositsDelayed payment of matured proceedsDelayed disbursement to borrowers against committed lines of creditDeteriorating asset qualityLarge contingent liabilitiesNet deposit drain


*College of Agricultural Banking, RBI, PUNE Liquidity Risk - MeasurementTwo methods are employed:Stock approach - Employing ratiosFlow approach - Time bucket analysis


*College of Agricultural Banking, RBI, PUNE Liquidity Risk - MeasurementLiquidity RatiosVolatile Liability Dependence RatioVolatile Liabilities minus Temporary Investments to Earning Assets net of Temporary InvestmentsShows the extent to which banks reliance on volatile funds to support Long Term assetswhere volatile liabilities represent wholesale deposits which are market sensitive and temporary investments are those maturing within one year and those investments which are held in the trading book and are readily sold in the marketGrowth in Core Deposits to growth in assetsHigher the ratio the better


*College of Agricultural Banking, RBI, PUNE Liquidity Risk Measurement (Contd.)Purchased Funds to Total Assetswhere purchased funds include the entire inter-bank and other money market borrowings, including Certificate of Deposits and institutional depositsLoan Losses to Net LoansLoans to core deposits


*College of Agricultural Banking, RBI, PUNE Liquidity Risk Measurement (Contd.)Does not lead to proper assessment of liquidity gaps due to:Illiquidity of liquid assetsTheir ready marketabilityDifficulty to convert easily into liquid cash with least loss of value from the previously quoted market rates


*College of Agricultural Banking, RBI, PUNE Liquid Assets to Total AssetsLiquid Assets to Total AssetsShow the percentage of liquid assets in the asset structure of the bank - 18-20%Liquid assets generally are cash balances with RBI + balances with other banks + investments available for sale + money market instruments


*College of Agricultural Banking, RBI, PUNE Liquid Assets to Total DepositsLiquid Assets to Total DepositsThis ratio indicates extent of liquidity maintained by a bank for meeting the demand made by the depositors-Sometimes taken as a measure of bank liquidity-20-22%


*College of Agricultural Banking, RBI, PUNE Loans to DepositsLoans to DepositsLoans to deposits ratio indicates the degree to which the bank has already used up its available resources to accommodate the credit needs of the customersA high loan deposit ratio indicates that a bank will have comparatively low liquidity


*College of Agricultural Banking, RBI, PUNE Loans to AssetsLoans to AssetsThis ratio indicates the percentage of illiquid assets to total assetsA rise in this ratio would indicate lower liquidity


*College of Agricultural Banking, RBI, PUNE Loans to Core DepositsLoans to Core DepositsThose deposits which are not subject to any large volatilityAverage level of previous years deposit is generally taken as core depositsThis ratio helps in assessing level of deployment of core portion of deposits


*College of Agricultural Banking, RBI, PUNE Loans to InvestmentsLoans to InvestmentsWhile loans provide higher returns compared to investments, these suffer from credit risk and are more illiquid than investmentsA proper mix of loans and investments keeping in view liquidity and yield considerations need to be fixed


*College of Agricultural Banking, RBI, PUNE Cash Flow ApproachPreparing a structural liquidity by taking into account balance sheet on particular date and place in maturity ladder according to time bucketsIdentify the liquidity needs - to evolve methods to meet itNegative gaps in individual time buckets indicate the need. The need could be controlled by prudential limits as also by regulating the basis of business structure/financial flexibility of banksRegulatory Limit of 20% on outflows in first two time buckets


*College of Agricultural Banking, RBI, PUNE RBI Guidelines on Liquidity RiskMethodology prescribed in ALM System- Structural Liquidity Statement & Dynamic Liquidity Ladder are simple Need to make assumptions and trend analysis- Behavioural maturity analysisVariance Analysis at least once in six months and assumptions fine-tunedTrack the impact of exercise of options & potential liquidity needsCap on inter-bank borrowings & Call money


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


College of Agricultural Banking, RBI, PUNE Structural Liquidity Statement Sch. UCBs (Contd.)

Heads of AccountClassification into time bandsOutflows1.Capital, Reserves and SurplusOver 5 year band2. Demand Deposits (Current & Savings)Volatile and Core Deposits. Savings (10%) and Current (15%) are withdrawable on demand generally and hence volatile. Volatile portion in 1 day, 2 7 days and 8 14 days, depending upon the experience and estimates of the banks and rest (core portion) in over 1-3 years time band.It is only a benchmark if the system is better developed can classify based on behavioral instead of contractual maturity3. Term DepositsRespective maturity bucketsAppropriate time bands can be given based on behavioral instead of contractual maturity. However, wholesale deposits (Deposits over Rs. 15 lakh should be shown in respective residual time band)4. CDsRespective maturity buckets5. Other Liabilitiesi. Bills payableCore component which could be estimated on the basis of past data and behavioral pattern in over 1 3 years time bucket. Balance in Day 1, 2 7 days and 8 14 days time bandiii. Provisions other than for loan loss and dep. On investmentsRespective time bands. Items not representing cash payables (Guarantees fees received in advance etc.) may be placed in over 5 years time band6. Export Refinance AvailedRespective Time bands of underlying assets


College of Agricultural Banking, RBI, PUNE Structural Liquidity Statement Sch. UCBs (Contd.)

Heads of AccountClassification into time bandsB. InflowsCashDay 1 bucket2. Balance with RBI / PSU banks / SCBs and DCCBs etc.Excess balance over required CRR / SLR under Day 1 bucket. The statutory balances distributed in different time bands corresponding to the maturity profile of DTL with 14 days time lag3.Balances with other banksCurrent AccountMoney at Call & Short NoticeNon-withdrawable portion on stipulation of minimum balance in 1-3 years band and remaining balance in Day 1 bucket band.Respective residual maturity bands4. InvestmentsApproved Securities

PSU Bonds, CDs and CPs, Units of UTI (Close ended) etc.Equities of All India FIs etc.

Units of mutual fundsSecurities in trading books

Investment in subsidiariesRespective Residual time bands except amount required to be reinvested for maintaining SLR / CRRResidual maturity. Investment classified as NPAs in 3-5 years band (substandard) and over 5 years (doubtful)

Listed shares in 2 7 days bucket with haircut of 50 %. Other shares in over 5 years bucketDay 1 bucketDay 1 bucket, 2-7days, 8-14 days, 15-28 days and 29 90 days according to defeasance period Over 5 years bucket


*College of Agricultural Banking, RBI, PUNE Structural Liquidity Statement Sch. UCBs (Contd.)

6. NPAsSubstandardDoubtful and Loss3-5 years bandOver 5 years band7. Fixed AssetsOver 5 years band8. Other AssetsIntangible assets Intangible assets and assets not representing cash flows may be shown in over 5 years bucket9. Contingent liabilities -LCs / Guarantees (outflows)Assets created out of developments may be shown under respective maturity bucket on the basis of probable date of recovery10. Lines of credit committed Lines of credit committed to / from institutions and Export RefinanceUnavailed portion of cash credit / overdraft etc. Day 1 bucket

Based on behavioral pattern and seasonal pattern arrive at potential availments and put under relevant maturity bucket up to 12 monthsRepo etc.Based on respective residual time bandsInterest PayableRespective Time Band


*College of Agricultural Banking, RBI, PUNE Structural Liquidity Statement Sch. UCBs (Contd.)Liability on account of event cash flows CRR / SLR shortfall, wage settlement and any other contingency under respective maturity bandsAll overdue liabilities in Day 1, 2 7 days and 8 14 days bucket based on behavioral estimates Interest and installments from advances and investments which are due for less than one month 1-6 months time bandInterest and installments from advances and investments which are over due for less than one month may be placed in Day 1, 2-7 days and 8 14 days based on behavioral pattern. Further, interest and installments due (before classification as NPAs may be placed in 29 days 3 months bucket if the earlier receivables remain uncollected


*College of Agricultural Banking, RBI, PUNE Liquidity Risk Management for Tier 1 UCBsBasic guidelines for liquidity management issued on September 17, 2008Banks advised to prepare Statement of Structural Liquidity and Statement of Short Term Dynamic LiquidityTo be prepared as on the last reporting Friday of March / June / September / December and submit to the Board within one month from the last reporting FridayFirst such submission to be made to the Board as on last reporting Friday of December 2008


*College of Agricultural Banking, RBI, PUNE Liquidity Risk Management for Tier 1 UCBs (contd.)Maturity profile of SSL into 8 buckets1-14 days15-28 days29 and up to 3 monthsOver 3months and up to 6 monthsOver 6 months and up to 1 yearOver 1 year and up to 3 yearsOver 3 years and up to 5 yearsOver 5 yearsMismatches (negative gaps) during 1-14 and 15-28 days time bands in normal course should not exceed 20 % of the cash flows in each time band


*College of Agricultural Banking, RBI, PUNE Liquidity Risk Management for Tier 1 UCBs (contd.)Short Term Dynamic Liquidity Statement1-14 days15-28 days29-90 daysSTDL required for securities in the trading bookSLR investments / securities are generally not very liquid and lack depth and are therefore shown in the residual maturity bands corresponding to residual maturity


*College of Agricultural Banking, RBI, PUNE Liquidity Risk Management for Tier 1 UCBs (contd.)Holding period not to exceed 90 daysCut loss limit is prescribedDefeasance periods are prescribed Time taken to liquidate the position on the basis of liquidity in the secondary market are prescribedMarking to market on a weekly basis


*College of Agricultural Banking, RBI, PUNE Trading BookMaintained distinctly from those required for complying with Statutory Reserve RequirementsSubject to preconditionsComposition and volume clearly definedMaximum maturity / Duration of the portfolio restrictedHolding period not exceeding 90 daysCut Loss prescribedMarked to market on a weekly basis


College of Agricultural Banking, RBI, PUNE Maturity Profile Liquidity for Tier 1 UCBs

Heads of AccountClassification into time bandsOutflows1.Capital, Reserves and SurplusOver 5 year band2. Demand Deposits (Current & Savings)Volatile and Core Deposits. Savings (10%) and Current (15%) are withdrawable on demand generally and hence volatile. Volatile portion in 1-14 days and rest in over 1-3 years time band.It is only a benchmark if the system is better developed can classify based on behavioral instead of contractual maturity3. Term DepositsRespective residual time bandsAppropriate time bands can be given based on behavioral instead of contractual maturity. However, wholesale deposits (Deposits over Rs. 15 lakh should be shown in respective residual time band)4. CDsRespective Residual Time Bands5. Other Liabilitiesi. Bills payable1-14 days time bandii. Branch AdjustmentsNet credit balance in 1-14 days time bandiii. Provisions other than for loan loss and dep. On investmentsRespective time bands. Items not representing cash payables (Guarantees fees received in advance etc.) may be placed in over 5 years time band6. Export Refinance AvailedRespective Time bands of underlying assets


College of Agricultural Banking, RBI, PUNE Maturity Profile Liquidity for Tier 1 UCBs (contd.)

Heads of AccountClassification into time bandsB. InflowsCash1-14days time band2. Balance with RBI / PSU banks / SCBs and DCCBs etc.Excess balance over required CRR / SLR under 1-14 days band. The statutory balances distributed in different time bands corresponding to the maturity profile of DTL with 28 days time lag3.Balances with other banksCurrent AccountMoney at Call & Short NoticeNon-withdrawable portion on stipulation of minimum balance in 14-3 year band and remaining balance in 1-14 days band.Respective residual maturity bands4. InvestmentsApproved Securities

PSU Bonds, CDs and CPs, Units of UTI (Close ended) etc.Equities of All India FIs etc.

Securities in trading booksRespective Residual time bands except amount required to be reinvested for maintaining SLR / CRRResidual maturity. Investment classified as NPAs in 3-5 years band (substandard) and over 5 years (doubtful)

Over 5 year band

1-14, 15-28 and 29-90 days time bands


*College of Agricultural Banking, RBI, PUNE Maturity Profile Liquidity for Tier 1 UCBs (contd.)

6. NPAsSubstandardDoubtful and Loss3-5 years bandOver 5 years band7. Fixed AssetsOver 5 years band8. Other AssetsBranch AdjustmentsLeased AssetsNet debit balance in 1-14 days band. Intangible assets and assets not representing cash receivables in 5 years time bandInterim cash flows under residual maturity time bandsContingent liabilities -i. Unavailed portion of Cash Credit / Overdraft / Demand Loan component of working capitalii. Export Refinance Unavailed (inflow)Under residual maturity time bands within 12 months based on behavioral and seasonal patterns

1-14 days bandLCBased on past historyRepo etc.Based on respective residual time bandsInterest PayableRespective Time Band


*College of Agricultural Banking, RBI, PUNE ALM for Tier II UCBsSimilar to what prescribed to Scheduled UCBsInitially at least 60% of assets and liabilities to be covered and remaining 40% on assessment basis only100% coverage by April 01, 2010Statements required to be preparedStatement of Structural LiquidityStatement of Interest Rate SensitivityShort-Term Dynamic Liquidity Statement


*College of Agricultural Banking, RBI, PUNE ALM for Tier II UCBs SSL To be prepared, to start with, as on last reporting Friday of March / June / September / DecemberTo be put up to the ALCO / Top Management within a month from the close of the last reporting FridayReporting on a fortnightly basis from December 2008 (intended)Maturity profile of SSL into 8 buckets1-14 days15-28 days29 and up to 3 monthsOver 3months and up to 6 monthsOver 6 months and up to 1 yearOver 1 year and up to 3 yearsOver 3 years and up to 5 yearsOver 5 years


*College of Agricultural Banking, RBI, PUNE ALM for Tier II UCBs SSL (contd.) Mismatches in cash flows to be kept at minimumInitially for 1-14 and 15-28 days it may not exceed 20% normallyIn case banks wishes to operate on a higher limit, it could be done with approval of the Board / ManagementObjective of RBI is to enforce tolerance level strictly with effect from April 01, 2010


*College of Agricultural Banking, RBI, PUNE ALM for Tier II UCBs SIRS Only rupee assets, liabilities and off-balance sheet positions to be reportedStatement to be prepared as on last Friday of March / June / September / DecemberTo be submitted to ALCO / Top Management within one month of reporting FridayTo be placed before the Board in its next meetingBanks expected to move over to monthly reporting system from April 01, 2010


*College of Agricultural Banking, RBI, PUNE ALM for Tier II UCBs SIRS (contd.) Maturity profile of SIRS into 7 time bandsUp to 3 monthsOver 3months and up to 6 monthsOver 6 months and up to 1 yearOver 1 year and up to 3 yearsOver 3 years and up to 5 yearsOver 5 yearsNon-sensitiveGap is the difference between Rate Sensitive Assets (RSA) and Rate Sensitive Liabilities (RSL)If RSA > RSL = +ve Gap Bank benefits if interest rate goes upIf RSA < RSL or RSL > RSA = -ve Gap Bank benefits if interest rate goes down


*College of Agricultural Banking, RBI, PUNE ALM for Tier II UCBs SIRS (contd.) Banks to set prudential limits on individual gaps with the approval of the BoardThe prudential limits should have a bearing on the Total Assets, Earning Assets or EquityBanks need to work out Earnings at Risk (EaR) i.e. 20 30% of the last years NII or Net Interest Margin based on their views of interest rate movementsAfter sufficient experience is gained by the UCB in ALM, RBI may consider introduce capital adequacy for market risk


*College of Agricultural Banking, RBI, PUNE ALM for Tier II UCBs STDS To be prepared as on each reporting Friday To be put up to the ALCO / Top Management within 2-3 days from the close of the reporting Friday


*College of Agricultural Banking, RBI, PUNE ALM for Tier II UCBs Other Issues SSL and SIRS could be reported through OSS Communication to be issuedAll the three ALM Statements may be put up to the ALCO as on last Friday of December 2008


*College of Agricultural Banking, RBI, PUNE Some pointsBreak the beyond 5 year bucket into financial and non-financialThe sum of all the gaps in the structural liquidity may or may not be zeroThe cumulative gaps also called forward payment structureWhy is the forward payment structure significant?Stress testing


*College of Agricultural Banking, RBI, PUNE Cumulative GapsForward Payment Structure indicates future liquidity positionLong term strategic approach needed to correct an increasingly negative FPS


*College of Agricultural Banking, RBI, PUNE Dynamic Liquidity Gap AnalysisTracking cash flow on a short term time horizon- changes on account of fresh business are interpolated in the projections

RBI has asked banks to monitor short term liquidity on a dynamic basis over time horizon spanning from 1-90 days


*College of Agricultural Banking, RBI, PUNE Short-Term Dynamic Liquidity StatementMain focus on short term mismatches1-14days15-28 days29-90 days


*College of Agricultural Banking, RBI, PUNE Dynamic Liquidity Analysis(Amount Rs. Crore)

OUTFLOWS1-90 daysNet increase in loans and advances950Net increase in investments275TOTAL OUTFLOWS1225INFLOWSNet cash position50Net increase in deposits(less CRR)619Refinance60Total Inflows729Mismatch(Inflows-Outflows)(-)496Mismatch as a % of Total Outflows(-)40.49%


*College of Agricultural Banking, RBI, PUNE Interest Rate RiskChanges in yield curve of G-SecsChanges in administered rate of interestChanges in forward exchange ratesChanges in prices of other assets and inflation rates


*College of Agricultural Banking, RBI, PUNE Reasons for Interest Rate RiskOn account of asset transformation Many deposits are used for one big loanPeriodical review of assets and liabilitiesDue to mismatches between maturity / repricing dates as well as maturity amounts between assets and liabilitiesDepositors and borrowers may pre-close their accounts


*College of Agricultural Banking, RBI, PUNE RSA and RSLRate Sensitive Assets (RSA) Assets whose value is dependent on current interest rateRisk Sensitive Liabilities (RSL) Liabilities whose value is dependent on current interest rate


*College of Agricultural Banking, RBI, PUNE Gap / Mismatch RiskArises on account of holding RSA and RSL with different principal amounts, maturity / repricing ratesEven though maturity dates are same, if there is a mismatch between amount of assets and liabilities it causes interest rate risk and affects NIM


*College of Agricultural Banking, RBI, PUNE Interest Rate RiskAssessed by Gap Report Gaps between RSA and RSLAsset / Liabilities are rate sensitive if:Within the time interval under consideration there is a Cash FlowRepayment of term loansInterest rate resets / reprices Change in interest rate in CC account, Term Loans before maturityRBI changes interest ratesInterest on Savings Bank Deposits, CRR balance etc.


*College of Agricultural Banking, RBI, PUNE Interest Rate Risk (contd.)Assessed by Gap Report Gaps between RSA and RSLGaps may be identified in the following time bands:Upto 3 monthsOver 3 months and upto 6 monthsOver 6 months and upto 1 yearOver 1 year and upto 3 yearsOver 3 years and upto 5 yearsOver 5 yearsNon-sensitive


*College of Agricultural Banking, RBI, PUNE Interest Rate Risk (contd.) Immediate impact of changes is on banks profit by change in its spread NIINII gives the earning perspectiveLong term impact is change in its MVE or Net WorthAs marked to market value of banks asset liabilities, off-balance sheet positions get affectedGives the economic value perspective


*College of Agricultural Banking, RBI, PUNE Interest Rate Risk (contd.)Each bank to set its prudential limits on individual gaps with approval of BoardPrudential limits set with respect to bearing on Total Assets, Earning Assets or EquityBanks may work out their Earnings at Risk 20-30% of last years NII or NIM


College of Agricultural Banking, RBI, PUNE Interest Rate Sensitivity (Contd.)

Heads of AccountClassification into time bandsLiabilities1.Capital, Reserves and SurplusNon Sensitive2. Current Deposits Non Sensitive3. Savings Bank DepositsSensitive to the extent of interest paying (core) portion. Include in 3-6 months time band. Non interest part in non-sensitive band4. Term Deposits and CDsSensitive. In different time bands based on residual term of maturity5. Borrowings FixedSensitive. In different time bands based on residual term of maturity6. Borrowings FloatingSensitive. Distributed to appropriate time bands that refers to resetting dates7. Borrowings Zero CouponSensitive. In different time bands based on respective maturity band8. Borrowings from RBIUpto 3 months time band9. Refinance from other AgenciesFixed Rate As per maturityFloating Rate Reprices when interest rate is reset10. Other Liabilities & ProvisionBills payable, Branch Adjustments, Provisions, OthersNon-Sensitive11. Repos / Bill Rediscounted Sensitive. Reprices on maturity and should be distributed to respective maturity bands



Heads of AccountClassification into time bandsB. Assets1.CashNon Sensitive2. Balance with RBIInterest portion in 3-6 months time band. Balance is non sensitive3. Balance with other banksCurrent AccountsMoney at Call and Short Notice, Term Deposits and other placementsNon sensitiveSensitive on maturity. Amount distributed in different time bands4. Investments (performing)Fixed Rate / Zero CouponFloating RateSensitive on maturitySensitive at next repricing date5. Share of All India FIs, other cooperatives / Units of UTINon Sensitive6. Advancers (performing)Bills purchased and discountedCash Credits / Overdrafts / Loans repayable on demand and Term LoansSensitive on maturitySensitive may be shown in 3+6 months band



Heads of AccountClassification into time bands7. NPAs (Advances & Investments)SubstandardDoubtful and Loss

Over 3-5 years time bandOver 5 year time band8. Fixed AssetsNon Sensitive9. Other AssetsInter-Office AdjustmentsLeased AssetsOthersNon SensitiveSensitive on cash flows. Distributed in respective maturity bands corresponding to cash flow datesNon Sensitive10. Reverse Repos, Swaps, BillsRediscountedSensitive on maturity11. Other products (InterestRate)SwapsOther

Sensitive. Should be distributed under different bands with reference to maturityShould be suitably classified as and when introduced


*College of Agricultural Banking, RBI, PUNE GistScheduled UCBS and Tier II UCBsHave 3 pillars I n placeALM Information SystemsALM OrganisationALM ProcessPrepare 3 statementsStatement of Structural Liquidity (quarterly)Short Term Dynamic Liquidity Statement (fortnightly)Statement of Interest Rate Sensitivity (quarterly)Review of Statements by ALCO / Top ManagementTo report from last reporting Friday of December 2008SIRS to be moved to monthly reporting by April 01, 2010SSL to be fortnightly basis from December 2008


*College of Agricultural Banking, RBI, PUNE Gist (contd.)Scheduled UCBs already reporting SSL and SIRS through OSS For Tier II UCBs separate communication to follow


*College of Agricultural Banking, RBI, PUNE Gist (contd.)Tier I UCBsPrepare 2 StatementsStatement of Structural Liquidity (quarterly)Statement of Short Term Dynamic Liquidity (quarterly)To be put up to the Board as on last Friday of December 2008For reporting through OSS separate communication to follow


*College of Agricultural Banking, RBI, PUNE Thank You


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ALM and Fund Management