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