Assets Liability Management

ASSETS LIABILITY MANAGEMENT:

Asset liability management (ALM) is the administration of policies and procedures that address financial risks associated with changing interest rates, foreign exchange rates and other factors that can affect a company's liquidity.Excess of assets over liability shown that fund is beign use efficiently. 

Number of times ALM mismatch is take place, which can be measuring by following ways:

1. Duration analysis: This is an analysis which shown sensitivity of  price of fixed income investment to a change in interest rate.If interest rate rise then bond price decline and vis- a -versa.

2.GAP analysis:In this analysis the actual performance is compare with potential or desire performance.If the organization is not use it 's resources ot technology then organization will perform below it's potential.

Asstes Liability Management (ALM) Models:

1. CAMELS Rating : It's range is between 1(best) to 5(worst)

1.1  (C)Capital Adequacy:It means amount of banks own capital from it's total capital requirement.

 1.2 (A)Assets Quality:It shown in the left hand side of bank's balance sheet.Quality of loans shown the good or bad assets quality,which affect rating.

1.3 (M) Management:Performance of bank's management is also affect rating.Efficient management increase rating of bank.

1.4 (E) Earning:It also affect banks rating.Good earning numbers increase rating.

1.5 (L) Liquidity:Better liquidity condition of any Bank increase it's rating.Increased liquidity increase the volume of business.

1.6 (S) Sensitivity to Market Risk: If the interest rate of Bank is fluctuate more frequently with market forces then the rating of bank's would affect.

2 ALTMAN'S  MODEL:

    Z = 1.2X1 + 1.4X2 + 3.3X3 + 0.6X4 + 1.0X5

 Where,

 X1 = Working capital / Total Assets ratio

 X2 = Retain Earnings / Total Assets ratio

 X3 = EBIT / Total Assets ratio

 X4 = MV of equity/ BV of long term debt ratio

 X5 = Sales / Total Assets ratio

ASSETS LIABILITY MANAGEMENT (ALM) ORGANIZATION:

1. ALM Committe consists of following:

    1.1  CEO/CMD or  the ED willbe the head of the committee.
     1.2 The Chief's of investment

     1.3 Resource management or planning

     1.4 Fund managemnt/ Treasury(forex and domestic's)

     1.5 International banking and Economic research

     1.6 Head of Technology division should be invitee

 2 Assets Liability Management Authority

3 ALM Committee od Directors

4 Some Bank may have sub commitee and sub groups

  ALM FUNCTIONS:

1.Liquidity Risk Management: ALM helps in managing the liquidity risk of Banks,which helps banks to take appropriate steps related to the liquidity after analysing ALM.

2. Management of Market risk: ALM hepls banks to manage the market risk by proper management of ALM.

3. Trading risk Management: After analysing the correct ALM,it helps banks to manage it's tading risks on currency or stock market.

4.Funding and Capital Planning: After correct management  of ALM ,it helps banks to make proper planing related to the funding of capital in bank's business.

5.Profit planning and growth projection :ALM hepls banks to make proper planning of projected  profit and growth projections of banks.

     

  Assets Liability management

1 Interest rate risk:

1.1 Immediate impact of changes in interest rate is on bank’s earnings by changing the Net Interest Margin .

1.2 A long-term impact will be on the Market Value of Equity or the Net Worth.

1.3 The interest rate risk when viewed from these two perspectives is known as earnings perspective and economic value perspective respectively.

1.4 RBI introduced guidelines on Modified Duration in 2006.

1.5 the traditional Gap analysis was considered as a suitable method to measure the Interest Rate Risk in the first.

1.6 Place the Gap or Mismatch risk can be measured by calculating Gaps over different time intervals as at a
given date.

1.7 Gap analysis measures mismatches between rate sensitive liabilities and rate sensitive assets (including off-­balance sheet positions).

2 Rate sensitive assets and Rate sensitive liabilities:

 2.1 An asset or liability is considered to be rate sensitive if,Within the time interval under consideration  there is a cash flow.

2.2 The interest rate resets/re prices contractually during the interval.

2.3 RBI changes the interest rate ( interest od saving bank deposit,export credit,Refinancing,CRR balance ect) in case the interst rate are administred.

2.4 The Gap Report should be generated by grouping rate sensitve liabilities, assets and off- ‐balance  sheet positions into time buckets according to residual maturity or next repricing period, whichever is earlier.

3 GAP analysis:

 3.1 The Gap is difference between Rate Sensitive Assets (RSA) and Rate Sensitive Liabilities (RSL) for each time bucket.

3.2 The Gap reports indicate whether the institution is in a position to benefit from rising interest
rates by having a positive Gap (RSA > RSL) or whether it is in a position to benefit from declining
interest rates by a negative Gap (RSL > RSA).