Module: 5 - Asset Liability Management System in Selected Banks

Banks in India were operating in captive market under totally directed policies of the Finance Ministry and RBI. In the absence of a free market operating in a liberalized environment, banks did not experience the need for ALM management. However after onset of Financial and banking sector reforms in the early Nineties, and licensing of a number of new private banks the field was open for competition.

Further ALM study needed collection of data from the large number of branches for analytical study for drawing consolidated information applicable for the bank as a whole. The tools for analytical study like Duration Analysis, Scenario Analysis, and Value at Risk Analysis etc. needed multiple and complex calculations that could be conveniently compiled only through computerized software programmes, feeding all input data therein. Indian banks started computerisation of operations recently, but still many banks have not effected total connectivity of their offices/branches.

RBI as market regulator and equally responsible towards development on Indian Banking at par with global standards took the initiative and forwarded draft Guidelines for putting in place Asset-Liability Management (ALM) System in banks on September 10, 1998. The draft Guidelines have been reviewed by RBI in the light of the issues raised/suggestions made by banks in the seminars held at Bankers Training College and also at the Review Meeting of the Chairmen/Chief Executive Officers of banks held by the Governor RBI. The final Guidelines revised on the basis of the feedback received from banks are approved by RBI, for implementation by banks, effective April 1, 1999.

The guidelines of RBI arte already discussed. The common feature under the guidelines as applicable to all banks is the submission of the following standarised returns by all banks to RBI

1. Statement of Structural Liquidity (Annexure I)

2. Statement of Interest Rate Sensitivity (Annexure II)

3. The statement of Short-term Dynamic Liquidity (Annexure III)

The Statement of Structural Liquidity should be prepared in order to capture the maturity structure of the cash inflows and outflows to start with, as on the last reporting Friday of March/June/ September/December and put up to ALCO/Top Management within a month from the close of the last reporting Friday. It is the intention to make the reporting system on a fortnightly basis by April 1, 2000. The Statement of Structural Liquidity should be placed before the bank's Board in the next meeting. It would also be necessary to take into account the rupee inflows and outflows on account of previously contracted forex transactions (swaps, forwards, etc). Tolerance levels for various maturities may be fixed by the bank's Top Management depending on the bank's asset - liability profile, extent of stable deposit base, the nature of cash flows, etc. In respect of mismatches in cash flows for the 1-14 days bucket and 15-28 days bucket, it should be the endeavour of the bank's management to keep the cash flow mismatches at the minimum levels. To start with, the mismatches (negative gap) during 1-14 days and 15-28 days in normal course may not exceed 20% each of the cash outflows during these time buckets. If a bank in view of its structural mismatches needs higher limit, it could operate with higher limit with the approval of its Board/Management Committee, giving specific reasons on the need for such higher limit. The objective of RBI is to enforce the tolerance levels strictly by April 1, 2000.

The statement should be prepared as on the last reporting Friday of March/June/September/December and submitted to the ALCO / Top Management within a month from the last reporting Friday. It should also be placed before the bank's Board in the next meeting. The banks are expected to move over to monthly reporting system by April 1, 2000. The information collected in the statement would provide useful feedback on the interest rate risk faced by the bank and the Top Management/Board would have to formulate corrective measures and devise suitable strategies wherever needed

The statement of Short-term Dynamic Liquidity in order to enable the banks to monitor their liquidity on a dynamic basis over a time horizon spanning from 1-90 days. This statement should be prepared as on each reporting Friday and put up to the ALCO/Top Management within 2/3 days from the close of the reporting Friday.

Calculation of Maturity Profiles: (Appendix -I)
In addition to the above reporting system, RBI also advised common formats for all banks for capturing relevant data, which could be used for measuring the future cash flows of banks in different time buckets i.e. for calculating The Maturity Profile(Appendix I)

Calculation of Rate Sensitive Assets & Liabilities & Off Balance sheet items (Appendix II):
The various items of rate sensitive assets and liabilities and off-balance sheet items may be classified as explained in this format to be used for the Reporting Format for interest rate sensitive assets and liabilities is given in Annexure II

Details guidelines of RBI have already been discussed earlier in detail. While these are the common features, banks that have introduced total connectivity of their branches can introduce sophisticated ALM software to automate the process and to further refine the same. Such returns would then be automatically generated at the Controlling office covering data of all branches.

We will study how the four selected banks have organized the task.

The bank has introduced sophisticated software developed by Tata Consultancy Service styled "ALMITY" for Asset Liability Management System. It is a universal risk management system that provides a comprehensive framework for planning, measuring, monitoring and managing different types of risks. Helps in strategic planning of the asset liability mix and in simulation/prognosis analysis. Asset liability management is concerned with strategic balance sheet management involving all market risks. The functional features of the product have been drawn up with inputs from a number of bankers, and from the guidelines of the Reserve Bank of India and the Bank for International Settlements.

• The ALM tool is a decision support and reporting tool

• The reports in the ALM tool helps management compare the performances of different branches.

• It aids management in product analysis.

• Complex analytical techniques like 'duration gap analysis' and 'value at risk' for the management of interest rate risk.

• Use of OLAP tools makes it highly scalable, in terms of the number of products and entities, even after implementation.

• Flexible design ensures that reports can be designed on the fly. Most of the dimensions can be parameterised.

• Over 60 account categories; this demonstrates the complexity of the system.

• Planning period could be as short as a day.

• Simulation of scenarios with various interest rates.

• The tool can be used at any entity level - from a branch to the head office - with appropriate security levels.

• Hedging products: The tool has the capability of dealing in swaps and hedging instruments.

• Allows transactions and analysis in all the currencies the user deals in.

• Satisfies Reserve Bank of India requirements on liquidity risk management and interest rate risk management

• Personnel requirements being minimal, the cost of ownership is very low.

• Facility to edit variables such as amount due, interest rate, foreign exchange rate, etc, and to observe the impact of the changes.

• Facility to directly input transactions using the transaction screen.

• Simulation for understanding the effect of a transaction.

• Behavioral analysis through the use of data warehousing technology.

• Monitoring of SLR and CRR requirements.

The ALM tool provides 27 pre-formatted reports, and there is no constraint on the number of reports that can be generated, or their format, provided the data is available. The use of OLAP tools allows users to structure reports as per their requirements. Users can select various parameters, such as the product, date and time buckets, and get a report according to their specifications.

• Liquidity gap analysis,

• Interest rate sensitivity / analysis

• Currency-risk analysis

• Overdue and prepaid amount

• Contingent liabilities

• Various simulation scenarios

• Duration gap and economic value analysis

• Helps in risk planning.

• Enforces the risk-management discipline.

• Provides a comprehensive and dynamic framework for measuring, monitoring and managing different risks.

• Enables the bank management to integrate risk profiles with the business strategy.

• Helps in strategic planning of the asset-liability mix.

• Helps in budgeting and variance analysis of assets / liabilities and income / expenses.

• Helps in simulation and prognosis analysis.

• Helps in introducing a transfer-pricing mechanism and profitability analysis for profit centres and activities.

• Helps in monitoring the prudential limits laid down.