Module: 5 (contd) - Asset Liability Management System in Selected Banks

State Bank of India

The Bank has started the process of computerizing risk management using modern software. It has already created the Institutional framework for managing different risk. These are described by the Bank as under:

The primary responsibility for management of risks vests with the Central Board of the Bank, who approves the risk management policies and structure of risk management. An Integrated Risk Management Committee (IRMC) has been constituted at the apex level to provide direction on the issues to all types of risks.

The management of credit risks pertaining to domestic loans is the responsibility of the Credit Policy & Procedures Committee/Chief Credit Officer. Management of market risks is the responsibility of Asset & Liability Management Committee/Chief Financial Officer. The forex risks and international exposures are looked after by the Group Executive (International Banking). Operational risks are the responsibility of Operational Risk Management Committee headed by Deputy Managing Director (I & MA).

The Bank implements the guidelines issued by the RBI, and places periodical progress report to the Bank’s Board and the RBI. The Bank initiated steps to switch over to Riskbased Supervision (RBS), as introduced by the RBI. To oversee implementation of change management in the Bank in the context of moving towards RBS, a Change Management Team was formed.

The Bank’s credit risk management comprises integrated framework for charting/categorizing various types of loans, to determine implications on quality.

The Bank manages the portfolio of loan assets to limit concentration in terms of risk quality, geography, industry, product, maturity and large exposure aggregates, by providing a centralized focus to its credit portfolio and instituting a suitable monitoring mechanism therefor.

The Asset Liability Management Committee at the Corporate Centre is engaged in identification, measurement and management of market risks. The committee actively manages and controls the structure of assets and liabilities and interest rate sensitivity with a view to optimising profits. It also ensures capital adequacy and sufficient liquidity.

During the financial year, substantial efforts were made to improve and fine tune the Management Information System for market risk management. The Bank is also in the process of augmenting its market risk management capability by harnessing the potential of Information Technology and has commenced implementation of Asset Liability Management Software Solution during the year. The implementation of the Treasury Solution is aimed at further strengthening the real time market risk management capabilities.

The Treasury Mid Office is engaged in the management and control of market and operational risks inherent in treasury operations. Substantial efforts, including appointment of consultants, have been made to strengthen the Mid Office.

Management of operational risks has been receiving focus and attention in the light of the Basel Committee proposal to prescribe a capital charge for operational risks. The various aspects of operational risks are looked into by various group heads in the corporate office and an Operational Risk Management Committee (ORMC) has been constituted to oversee this function. Country Risk and Bank Exposure The year witnessed slowdown in many large economies including the US, Japan and the Eurozone. At the same time, economic growth in Russia, Malaysia, South Korea and China opened up new business opportunities. A large number of restructuring and mergers also took place in the international banking environment. Against this backdrop, the Bank ensured prudent exposure risk management based on reports and database of international agencies, international media reports and the assessment of the Bank’s foreign offices. Different types of prudential exposure limits were set up for more than 350 banks worldwide, covering 187 countries, to ensure safety of the Bank’s international exposure

The Bank describes its risk management strategy as under:

As a financial intermediary, ICICI Bank is exposed to risks that are particular to its lending and trading businesses and the environment within which it operates. ICICI Bank’s goal in risk management is to ensure that it understands, measures and monitors the various risks that arise and that the organization adheres strictly to the policies and procedures, which are established to address these risks. As a financial intermediary, ICICI Bank is primarily exposed to credit risk, market risk, liquidity risk, operational risk and legal risk. ICICI Bank has a central Risk, Compliance and Audit Group with a mandate to identify, assess, monitor and manage all of ICICI Bank’s principal risks in accordance with well-defined policies and procedures. The Head of the Risk, Compliance and Audit Group reports to the Executive Director responsible for the Corporate Center, which does not include any business groups, and is thus independent from ICICI Bank’s business units. The Risk, Compliance and Audit Group coordinates with representatives of the business units to implement ICICI Bank’s risk methodologies. Committees of the board of directors have been constituted to oversee the various risk management activities. The Audit Committee of ICICI Bank’s board of directors provides direction to and also monitors the quality of the internal audit function. The Risk Committee of ICICI Bank’s board of directors reviews risk management policies in relation to various risks including portfolio, liquidity, interest rate, off-balance sheet and operational risks, investment policies and strategy, and regulatory and compliance issues in relation thereto. The Credit Committee of ICICI Bank’s board of directors reviews developments in key industrial sectors and ICICI Bank’s exposure to these sectors.

The Asset Liability Management Committee of ICICI Bank’s board of directors is responsible for managing the balance sheet and reviewing

To strengthen the IT capabilities of the Bank, ICICI Infotech Services Ltd., the IT subsidiary of ICICI Ltd has acquired 100% of the equity of Ajax Software Solutions Ltd. This acquisition is another step by ICICI Infotech towards becoming a major player in the financial services software industry. Ajax Software, set-up in 1998 with the help of venture funding from Marigold Capital Management Ltd., is a company promoted by professionals with an impressive track record in the banking product arena. The company specialises in developing software solutions for managing treasury operations of banks, corporates and other financial organisations. Its products offer complete integration of front-office, mid-office and back-office treasury operations, asset-liability management solutions etc.

The Bank is in the process of inter-connecting its offices, when completed it can use computer software for ALM. In the meantime the Bank has made the preparatory work. Efforts so far made are explained by the Bank as under:

The Punjab National Bank (PNB) has made the mandatory asset-liability management (ALM) system operational as per the revised Reserve Bank of India (RBI) guidelines, a top bank official said on Wednesday.

PNB has achieved around 65 per cent coverage of its assets and liabilities under the ALM system as against the stipulated 60 per cent and we are confident of a 100 per cent coverage by the April 1, 2000 deadline.

As per the Bank Risk management is inherent to banking operations. The present deregulated interest rate regime and competitive environment for banks' has resulted in pressure on banks' to maintain a good balance between spreads, profitability and long-term viability. ALM is a tool which provides a comprehensive framework for measuring, monitoring and managing risks faced by a bank, he said adding banks' could alter their asset-liability portfolio enabling more dynamic risk management.

ALM, which has to be put in place by all banks except RRB's by April 1, 1999, is a strategic risk management tool to help banks' have a coordinated approach to their balance sheet to allow for alternative interest rate, liquidity, and prepayment scenarios. ALM also categorises the various inflows (assets) and outflows (liabilities) of a bank according to their residual maturity.

Tolerance levels for various maturities may be fixed by a bank's top management depending upon its asset-liability profile, extent of stable deposit base and the nature of cash flows, and enforced by April 1, 2000, according to the latest RBI directive.

PNB has an asset-liability committee (Alco) in place, comprising of the bank's top management headed by the CMD, as per the RBI directive for implementing the ALM.

The bank has four sub-committees working under Alco, one each for liability, investment, credit and forex management. The Alco is responsible for balance sheet planning from risk-return perspective including strategic management of interest rate and liquidity risks.

The RBI in its latest directive to banks has said that among the issues that an Alco could consider, inter alia, will include product pricing for both deposits and advances, desired maturity profile and their incremental assets and liabilities.

Also, the ALCO will have to develop a view on future interest rate movements and decide on funding mixes between fixed Vs floating rate funds, wholesale vs. retail deposits, money market vs. capital market funding and domestic vs. foreign currency funding.