1.

Objective of study:

To understand about different types of risk arising to a bank and how the banks manage and try to hedge their risks.

1.1 Justification of objectives: To analyze the risk management of banks with the help of Asset-Liability Management (ALM) practices adopted by different banks with respect to Duration GAP Analysis. 1.2 Scope: ALM practices lead to liquidity risk management of banks where the risk mostly arises due to over extension of credit, poor asset quality and mismanagement which ultimately leads to high level of NPA. ALM practices also manages interest rate risk of the banks which is caused due to changes in yield curve of G-Secs, changes in forward exchange rates and changes in prices of other assets and inflation rates.

1.3 Limitations: GAP Analysis does not capture investment risk, does not incorporate future growth and does not account for the time value of money.

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2. Methodology of study:

2.1

SOURCES OF DATA:

The study is entirely based on secondary data. The various sources of data will include statistical tables relating to banks in India, Annual reports of the sample banks, websites of RBI and other banks. 2.2 SAMPLE:

Four Banks will be chosen for sample, two each from private sector and public sector. IDBI. 2.3 JUSTIFICATION OF SAMPLE: Private sector banks chosen will be HDFC and ICICI while the Public sector banks will be Bank of Baroda (BOB) and

Sample should be such which can be easily compared. The banks chosen for sample from private and public sector fall in the same category in terms of their size. 2.4 TOOLS FOR DATA ANALYSIS:

Data Analysis would be evaluated by using the Duration GAP Analysis since it efficiently represents the management of risk by using ALM Practices adopted by banks. .

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3. Literature Review:

Rajendran (2007), mentions in his abstract about derivative use by

banks in India. It has been found that the Indian private sector banks have a high exposure of risk and have externalized their risk management process. Foreign banks operating in India have a low risk exposure level, but still they have moderately externalized their risk management practices. Indian public sector banks have a large deposit base and high risk exposure but are still internalizing their risk management through ALM. Indian Banks have long used risk management activities such as duration and gap analysis. Risk management through derivative securities has been another avenue for banks to refine risk management practices. Similar to other international markets, price and interest rate volatility in Indian financial markets is high; hence the implications of not hedging the bank portfolio may prove to be disastrous. Derivatives give banks an opportunity to manage their risk exposure and to generate revenue beyond that available from traditional bank operations. The research objectives framed to reiterate the importance of risk management practices through derivatives are to examine the derivative exposures in banks and to determine the influence of derivative exposure on banks intermediation role.
Nandi and Choudhary (2011) states in their article about the credit

risk management of loans in Indian banks. They studied how banks assess the creditworthiness of their borrowers and how can they identify the potential defaulters so as to improve their credit evaluation. For this purpose, Altman Z-Score is used to arrive at an equation of the Z-Score,
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which helps the banks to predict future defaulters and take necessary action accordingly. Altman (2000) used Altman Z-Score model to examine the unique characteristics of business failure in order to specify and quantify the variables which are effective indicators and predictors of corporate distress. Mitchell and Roy (2007) have used Altman Z-Score model in ranking the firms and in the design of internal rating systems. Since exposure to credit risk continues to be the leading source of problems in banks worldwide, banks and their supervisors should be able to portray valuable lessons from past experiences. Therefore, in this paper, an attempt is made to understand how banks assess the creditworthiness of borrowers. We realize that banks consider, among other factors, the current and prospective profitability, the borrowers past performance, its industrial sector and how the borrower is placed in it. For this purpose, Altman Z-Score model is used. The present study has been undertaken primarily to examine the framework of credit risk management of Scheduled Commercial Banks (SCBs) in India.
Singh (2011), states that credit risk management is a very important

area for the banking sector and there are wide prospects of growth and other financial institutions also face problems which are financial in nature. Also, banking professionals have to maintain a balance between the risks and the returns. For a large customer base banks need to have a variety of loan products. If bank lowers the interest rates for the loans it offers, it will suffer. Credit risk management is risk assessment that comes in an investment. Risk often comes in investing and in the allocation of capital. The risks must be assessed so as to derive a sound investment decision. The greater the bank is exposed to risks, the greater the amount of capital must be when it comes to its reserves, so as to maintain its solvency and stability. For assessing the risk, banks should plan certain estimates, conduct monitoring, and perform reviews of the performance of the bank. They should also do Loan reviews and portfolio
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analysis in order to determine risk involved. Banks must be active in managing the risks in various securities and derivatives. Still progress has to be made for analyzing the credits and determining the probability of defaults and risks of losses. So credit risk management becomes a very important tool for the survival of banks.

Chakraborty and Mohapatra (2009), states that in the present day,

Asset Liability Management (ALM) has become the buzzword in the banking world. It is a part of the overall risk management system in banks. ALM implies examination of all the assets and liabilities simultaneously on a continuous basis with a view to ensure a proper balance between fund mobilization and their deployment. ALM is basically a hedging response to the risk in financial intermediation. The ALM approach in banks can help the managers to see their banks current market risk profiles and evaluate the impact of alternative decisions on the future risk profiles. Thus, ALM process for any bank aims at managing the spread income and controlling the risks associated with generating the spread.ALM, among other functions, is primarily concerned with risk management and provides a comprehensive and dynamic framework for measuring, monitoring and managing the risks associated. In the process, it assesses various types of risks and alters the asset-liability portfolio in a dynamic way in order to manage risks. ALM policies are intended to keep those risks at an acceptable level given the expectations of future market/interest rates. Most of the Indian banks, unlike foreign banks, are liability-managed banks because they all borrow from money market to meet their maturing liabilities.

Michael Thompson( 2010) observed that banks must alter forecasting

approach to cope up with Basel-III nuances. Following the announcement

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of new Basel III capital reforms last month, financial markets were largely unfazed by the headline that banks will have to increase their global minimum capital to 7% of their risk-weighted assets, up from 2%.What was less obvious in the Basel III announcement, and however, was the impact that the new regulations will have on forecasting. Forecasting is always a precarious activity because it assumes we can predict the future. This allows market participants to create a framework of expected return against which they can then assess the risks to attaining that return. The main fissure in the current approach to forecasting is that it is overly precise, often condensed down to one outcome based on one scenario. However, in a post-Basel III market, that range of potential outcomes will be essential to determine an appropriate capital buffer. Even if these scenarios are unlikely, they provide the framework for what could happen in during a counter-cyclical, rogue event. Ultimately, this means adopting a more rigorous approach to stress testing and including stress-testing transparency everywhere a forecast is made. Thus, the forecast can be measured and easily compared to the range of the stress test outcomes.

Caroline Binham (2012) has pointed out that the largest banks and

insurers are at least two decades behind their peers in the aviation industry in managing risks. The majority of Financial Institutions are also reactive waiting for an incident to occur or for the regulator to take interest in a particular issue. As compared to the aviation industry, where superior decisions can be challenged by the subordinates, subordinated in banks fear they will lose their jobs if they challenge their boss.

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4. Risk in Banking An Overview 4.1 Introduction: Banks are said to be in the business of making money by providing services to customers and taking risks. In general, if a bank takes more risk it can expect to make more money, but greater risk also increases the danger that the bank could lose badly and be forced out of business. Banks run their business with two goals in mind: to generate profit and to stay in business. Banks therefore try to ensure that their risk taking is informed and prudent. The control of that gambling is the business of risk management. Risk refers to the possibility that the actual outcome of an investment will differ from its expected outcome. Risk management is the continuing
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process to identify, analyze, evaluate, and treat loss exposures and monitor risk control and financial resources to mitigate the adverse effects of loss. Risk management has become a very important component of bank recently. With the increasing volume of business and complexity in financial transactions, the depth in risk faced and their management, have considerably increased. Risk management was relatively easy in stable environments and under predictable circumstances of interest rates and forex rates. However, with the increased volatility in world markets, in view of the changing interest rate regimes and more flow of capital across borders, risk management has become much more complex. Risks in banks may increase if proper transparency in deals is not there or proper regulations are not in place. Another concern for risk managers is the operational risks. Increased use of mobile banking and Net banking and ATMs have made it necessary to have better technologically enhanced safeguards against hacking and other data theft and misuse. Apart from sophistication in instruments and products, sophistication in technology also calls for a robust safeguard for possible operational risks. Banks should give due weight for operational risks along with credit risk and market risk to ensure the smooth functioning of the banks. The new Basel Accord on banking regulations has been formed to evolve an international standard for banking practices, especially in terms of risk management. The Indian banks are in the process of building a comprehensive risk management system. With stringent adherence to the guidelines and proper adoption of best practices, banks will be able to maintain a healthy riskreturn profile in the future. The Government is committed to keep all the PSBs financially sound and healthy so as to ensure that the growing credit needs of our economy are adequately met. To meet the credit requirement of the economy, banks would require capital funds commensurate to the increase in their Risk
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Weighted Assets (RWAs). Implementation of Basel III Capital Regulations enhances requirement of core equity capital by banks due to higher capital ratios. Risk Management is a discipline at the core of every financial institution and encompasses all the activities that affect its risk profile. It involves identification, measurement, monitoring and controlling risks. Risk management as commonly perceived does not mean minimizing risk; rather the goal of risk management is to optimize risk-reward trade -off.

4.2

Risk Management framework:

A risk management framework encompasses the scope of risks to be managed, the process/systems and procedures to manage risk and the roles and responsibilities of individuals involved in risk management. The framework should be comprehensive enough to capture all risks a bank is exposed to and have flexibility to accommodate any change in business activities. An effective risk management framework includes: a) Clearly defined risk management policies and procedures covering risk identification, acceptance, measurement, monitoring, reporting and control.
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b) A well constituted organizational structure defining clearly roles and responsibilities of individuals involved in risk taking as well as managing it. Banks, in addition to risk management functions for various risk categories may institute a setup that supervises overall risk management at the bank. Such a setup could be in the form of a separate department or banks Risk Management Committee (RMC) could perform such function. The structure should be such that ensures effective monitoring and control over risks being taken. The individuals responsible for review function (Risk review, internal audit, compliance etc) should be independent from risk taking units and report directly to board or senior management who are also not involved in risk taking. c) There should be an effective management information system that ensures flow of information from operational level to top management and a system to address any exceptions observed. There should be an explicit procedure regarding measures to be taken to address such deviations.

4.3

TYPES OF RISKS IN BANKS:

OPERATIONAL RISKS: Operational risk may be defined as the risk of monetary losses resulting from inadequate or failed internal processes, people and systems or from external events. Operational risk refers to the malfunctioning of information and/or reporting system and of internal monitoring mechanism. Technical level operational risk arises due to deficiency or malfunctioning of information

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system. It relates to breakdown in internal controls/corporate governance, error, fraud and failure to perform in a timely manner.

CREDIT RISKS: Credit Risk occurs when customers default or fail to comply with their obligation to service debt, triggering a total or partial loss. Components of credit risk are individual loans, market conditions and geographical/industry/group concentrations. Risk issues get reflected in loan losses, rising NPA and concentrations.

LIQUIDITY RISKS: Liquidity risk is when the bank is unable to meet a financial commitment arising out of a variety of situations. These include: usage of non-funded credit line, maturing liabilities (withdrawal or non-renewal of deposits) or disbursement to customers.

INTEREST-RATE RISKS: Interest rate risk occurs due to movements in interest rates. Interest rate risk is the possibility that assets or liabilities have to be re-priced on account of changes in the market rates and its impact on the income of the bank.
FOREIGN EXCHANGE RISKS:

The movements in the currencies give rise to forex risk. Responsibilities lies with dealers, back-office functionaries and supervisory staff to ensure that specified forex risks in banks is addressed to.

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 MARKET RISKS:

Market risk signifies the adverse movement in the market value of trading portfolio during the period required to liquidate the transaction. Assessment of market risk is made with reference to instability or volatility of market parameters like interest rates, stock exchange indices, exchange rates. Market risks pose a significant threat to banks as those customers of banks which are exposed to stock market have a higher chance of defaulting.

5. CREDIT RISK:

5.1

Meaning of Credit Risk

The Reserve Bank of India has defined Credit Risk as the possibility of the loss that stems from outright default due to inability or unwillingness of a customer or counter party to meet their commitments in relation to lending,
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trading, settlement and other financial transactions. If the probability of loss is high, the credit risk involved is also high and vice-versa. 5.2 Bifurcation of Credit Risk

The study of credit risk can be bifurcated to facilitate better cognition of the concept.

Overall Credit Risk

Firm Credit risk

Portfolio Credit Risk

A single borrower/obligor exposure is generally known as Firm Credit Risk while the credit exposure to a group of similar borrowers , is called portfolio Credit Risk This bifurcation is important for the proper understanding and management of credit risk as the ultimate reasons for failure to pay can be traced to economic, industry, or customer specific factors. While risk decides the fate of overall portfolio, portfolio risk in turn determines the quantum of capital cushion required. Both firm credit risk and portfolio credit risk are impacted or triggered by systematic and unsystematic risks.

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Firm Credit Risk

Portfolio Credit Risk

Credit risk

Systematic Risk Socio-political Risks Economic Risks Other Exogenous Risks

Unsystematic Risk Business Risks

Financial Risks

External forces that affect all business and households in the country or economic system are called systematic risks and are considered as uncontrollable. The second type of credit risks is unsystematic risks and is controllable risks. They do not affect the entire economy or all business enterprises/households. Such risks are largely industry-specific and /or firm specific. A creditor can diversify these risks by extending credit to a range of customers.

5.3

Sources of Credit Risk:

Credit related losses can occur in the following ways:

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 A customer fails to repay money that was lent by the bank A customer enters into a derivative contract with the bank in which the payments are based on market prices, and then the market moves so that the customer owes money, but customer fails to pay. The bank holds a debt security (e.g. a bond or a loan) and the credit quality of the security issuer falls, causing the value of the security to fall. Here, a default has not occurred, but the increased possibility of a default makes the security less valuable. The bank holds a debt security and the markets price for risk changes. For example, the price for all BB-rated bonds may fall because the market is less wiling to take risks. In this case, there is no credit event, just a change in market sentiment. This risk is therefore typically treated as market risk

5.4

Need for Credit Risk Analysis

Much of importance has been attached to credit risk analysis, especially by banks and other financial intermediaries with significant credit exposure. The main reasons are as follows:
Prudence : It is the responsibility of the supplier of the credit to

ensure that their actions are prudent, because excessive credit will prove destructive to everyone involved as has been evidenced by the demise of many banks in Japan during the past decade, as the result of over lending in the late 1980s. Usually everyone is very confident during the heightened pace of economic activity, and financial institutions are no exceptions. Lending during the boom- phase is highly challenging and so is providing credit during a recession period.

Increase in bankruptcies: Recessionary phases are common in the

economy, although the timing and causes may be different for

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different countries. In 2002/2003, the US economy went through massive job losses and sluggish growth and was almost on the verge of an economic slowdown. Given the fact that the incidence of bankruptcies during recession is high, the role of accurate credit analysis is very important

Disintermediation: With the expansion of the secondary capital and

debt markets, many good credit-worthy customers, especially the larger ones access and raise funds directly from public. Since credit rating is compulsory for raising debt from the public market, the firms that are not able to fulfill this requirement approach financial intermediaries, including banks. This can result in the lowering of the quality of the credit asset portfolio. Hence, a more vigilant approach by the lenders is necessary.

Increase in Competition: he banking business is witnessing more

competition with the advent of the new generation banks and liberalization policies pursued by governments. With the increase in the competition, naturally pricing is under pressure. In other words, as your returns become lower, technically your risk level should also reduce. So tighter credit risk analysis is necessary.

Volatility of collateral/asset values: Gone are the days, when

collaterals offered comfort. While it is no longer easy to insist on collateral security in view of the increasing competition in the market. The land and houses that are as collateral security with the bank against the loan issued by the bank to customer may touch all time high during boom period but during recession it may not quote even half the value of the credit extended during boom periods.
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 Poor Asset Quality: Banks in India and abroad face the problem of

non-performing assets (NPA), i.e. credit assets that are on the verge of becoming credit losses. In other words, they display high risk tendencies to become bad debts. NPA management is a major challenge for banks. Credit Risk analysis helps to keep check on NPA.

High impact of Credit Losses: It is a common perception that a

small percentage of bad debts is acceptable and wont do much damage. However, unfortunately this is not true. Even a small credit facility turning bad will hurt business, especially for banks and other financial intermediaries operating in a highly competitive sector. Credit Risk Analysis helps in minimizing credit loss which is a best option rather than attempting to book 20, 25 or 50 times the business volumes, to ensure adequate returns to shareholders.

5.5

Why Measure Credit Risk?

There are three main sets of decisions for which it is important to measure credit risk such as: Origination, Portfolio optimization, and Capitalization
1. Supporting Origination Decisions: The most basic decision is whether

to accept a new asset into the portfolio. The origination decision can be framed in two possible ways: Given the risk and a fixed price, is the asset worth taking? This is the type of decision made when dealing with a large volume of retail customers. It is a more rigid approach where there is little opportunity to modify the price, and therefore the decision becomes yes/no Given the risk, what price is required to make the asset worth buying?
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This approach is typically used in a flexible, liquid trading environment, or in negotiating rates and fees for a corporate loan

2. Supporting Portfolio Optimization: In optimizing a portfolio, the

manager seeks to minimize the ratio of risk to return. To reduce the portfolios risk, the manager must know where there are concentrations of risk and how the risk can be diversified. Quantifying credit risks with the help of appropriate credit-portfolio model helps the bank manager to identify risk concentrations in the given portfolio and allow the manager to try what- if analyses to test strategies for diversifying the portfolio.

3. Supporting Capital Management: Quantification of credit risks helps

to set the provisions for expected losses over the next year, and the reserves, in case losses are unusually bad. Credit risk measurement also helps to ensure whether the total economic capital available is sufficient to maintain the banks target credit rating given the risks or not. If it is insufficient, the bank must raise more capital, reduce the risk or expect to be downgraded.

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5.6

Types of Credit Structure

Credit risk can arise in many ways, from granting loans to trading derivatives. The amount of credit risk depends largely on the structure of the agreement between the bank and its customers. An agreement between a bank and a customer that creates credit exposure is often called a credit structure or a credit facility.

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Credit Exposure 1.Credit Exposure To Large Corporations Personal Loans Commercial loans Commercial Lines Letter Of Credit & Gurantees Leases Credit derivatives Credit Exposures In Trading Operations Credit Structur e Credit cards Car Loans Leases and hirepurchase agreements Mortgages Home-equity lines of credit To Retail Customers

Bonds Asset-backed securities Securities lending and repos Margin accounts Credit exposure for derivatives

5.7

Credit Exposure to Large Corporations:

Commercial Loans: Typically, commercial loans have fixed structure for

disbursements from the bank to the company and have a fixed schedule of repayments, including interest payments. There may also be a fee paid by the company at the initiation of the loan. The loan may be
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secured (collateralized) or unsecured. If it is secured, then in the event of default, the bank will take legal possession of some specified asset and be able to sell this to reduce the loss. An unsecured loan is a general obligation of the company and in the case of default; the bank will just get its share of the residual value of the company. The loan may also be classified as senior or Subordinated(also called junior).When a company liquidates, it pays off the senior loans first; then if there are any remaining assets, it pays off the subordinated loans. As senior loans always get paid before subordinated loans, they have lower loss in the event of default. For credit risk measurement, the most important loan features are the collateral type, the level of seniority, the term or maturity and the scheduled amounts that are expected to be outstanding (i.e. the amount that the company owes the bank at any given time)

Commercial Lines: In a standard loan, the pattern of disbursements and

repayments is set on the day of closing deal. For a line of credit (also known as revolver or a commitment), only a maximum amount is set in advance. The company then draws on the line according to its needs and repays it when it wishes. With a line of credit, the bank faces the possibility of loss on both the drawn and undrawn amounts, and should therefore set aside capital for each.

Letters of Credit: There are two primary types of letters of credit (LC):

Trade LC and Backup LC. Trade LC is tied to specific export transactions. A trade LC guarantees payment from a local importer to an overseas exporter; if the importer fails to pay, the bank will pay, and then try to reclaim the amount from the importer. For the bank, this creates a short-term exposure to the local importer. A backup letter of credit is a
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general form of guarantee or credit enhancement in which the bank agrees to make payments to a third party if the banks customer fails. This is used to lower the cost of the customers getting credit from the third party, because the third party now only faces the risk of a bank default. He bank faces the full default risk from its customer and has the same risk as if it had given the customer a direct loan.

Leases: Leases are form of collateralized loan, but with different tax

treatment in certain situations. In an equipment lease, the equipment is given to the customer, and n return, the customer makes rental payments. After sufficient payments, the customer may keep the equipment. In terms of credit risk, this is equivalent to giving the customer a loan, having them buy the equipment, and pledging the equipment as collateral to secure the loan. In both the cases, if the customer stops making payments, the bank ends up owing the equipment.

Credit Derivatives: In almost all cases, the calculation of the risk for credit

derivatives can be based on the analysis that would be used for the underlying loan.

As a simple example, consider a derivative in which one bank agrees to pay an initial amount, and in return, a second bank agrees to make payments equal to all the payments they receive from a particular corporate loan. For the first bank, if the corporation defaults, the bank will receive less money and will therefore make a loss. For the second bank, if the corporation defaults, the bank will receive less money from the corporations, but it will also need to pay less to the first bank. The changes in payments therefore cancel each other out, and they make no

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loss. Through this agreement, the economic risk of the loan has been transferred from the second bank to the first. In measuring the risk for the first bank, we would treat this credit derivative as if it were just a loan to the corporation.

5.8

Credit Exposure to Retail Customers:

Personal Loans: Personal loans are typically unsecured and may be

used by the customer for any purpose. They are generally structured to have a fixed time for repayment. The interest charges may be fixed at the time of origination, or may float according to the banks published prime rate, which the bank may change at its discretion.

Credit Cards: Credit cards are again generally unsecured by collateral,

but they have no fixed time for repayment. The interest-rate is typically 10% to 15% above the floating prime rate, to compensate for the very heavy default rates experienced on credit cards.

Car Loans: Car loans are same as personal loans except that they are

for a specific purpose and have the car as collateral. They tend to have a lower loss given default than personal loans because of the collateral, and they have a lower probability of default because the customer is unwilling to lose the car.

Leases and Hire-Purchase Agreements: In a lease, the customer is

allowed to use a physical asset (such as a car) that is owned by the bank. Leases are typically structured so that at the end of a finite period, the asset will be returned to the bank. The customer makes regular payments to cover the interest that would have been required
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to purchase the asset and to cover depreciation. The customer typically has the option to buy the asset outright at the end of the lease for a prespecified lump sum. Hire- purchase agreements are similar to leases except that the payments include the full value of the asset, and the customer is certain to own the asset at the end of the agreement Leases and hire-purchase agreements are similar to car loans in that they are secured by the physical asset that has been purchased. Leases are structured such that the bank continues to own the physical asset legally until all lease payments have been made. This makes repossession easier and reduces the loss given default.

Mortgages: Mortgages use the customers home as collateral. This

minimizes the probability of default. Furthermore, banks generally ensure that the loan to value ratio is less than 90%, so even if the property value drops by 10%, the bank will still have a loss given default of 0.

Home-Equity Lines of credit: A home-equity line of credit (HELOC) is

like a credit card but secured by the customers house. This ensures a low probability of default.

5.9

Credit Exposures in Trading Operations

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 Bonds: Bonds credit risk depends on the level of seniority and whether

it is secured with collateral or not.

Asset- Backed Securities: Asset- backed securitization is used with

retail assets, such as credit cards and mortgages. In an asset-backed security, the payments from many uniform assets are bundled together to form a pool. This pool is then used to make payments to several sets of bonds. The analysis of the credit risk of an asset-backed security is the same as the analysis of a portfolio of loans. In this case, we calculate the probability distribution of the payments from the pool of underlying assets and use this to estimate the probability that the pool will sufficient to pay the bonds. The calculation of the probability distribution depends on the risk of the individual assets and the correlation between them.

Securities lending and Repurchase Agreements: Sec lending and repos

agreements are common functions in banks trading operations. From credit-risk perspective, both sec lending and repos are short-term collateralized loans. In sec lending, counterparty asks to borrow a security from the bank for a limited period of time. The security is typically a share or bond. To minimize the credit risk, the counterparty gives collateral to the bank that is worth slightly more than the borrowed security. The collateral is typically in the form of cash. At the end of the trade, the counterparty returns the security and the bank returns the cash, less a small amount as a fee. Repos are very similar to securities lending except that they are used to gain funding. In a repo, a security is sold by the bank with a guarantee from the bank to repurchase it at a fixed price and date. At the time of sale, the bank receives cash. At the time of repurchase, the bank sends the cash to the counterparty, plus a small additional amount, which is effectively an interest payment for the loan.
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In both the cases, the bank could make a credit loss if the counterparty defaults and the value of the security have risen to be higher than the amount of cash that the bank was expecting to pay to get the security back. The expected exposure at default will be the average amount by which the value of the security can be expected to exceed the cash.

Margin Accounts: A margin account is another form of collateralized

loan. In a margin account, a customer takes a loan from the bank, and then with the loan and his own funds, purchases a security. The security is then held by the bank as collateral against the loan. The pledging of the security as collateral by the customer to the bank is called hypothecation. It is also possible for the bank to pledge the security to another bank to get a loan. This is called rehypothecation. Margin accounts are used by customers who want to leverage their positions and increase their potential returns. As an example, consider a customer who has %10000 and takes a loan for $10000. Thus customer now has $20000 which he can use to buy securities worth $20000. If the price rises by 10% to $22,000 and the customer sells these securities, then after paying back the loan with interest, the customer has a little less than $12,000, a nearly 20%gain, conversely , if the price falls by 10%, the customer makes a 20% loss. Typically, retail customers are allowed to borrow only up to half the value of the securities that own. If the value of the securities falls, the bank will ask the customer for more cash to maintain the 50% ratio; this is called a margin call. If the customer does not respond, the bank will sell all or part of the shares. After paying off the, any residual value is given back to the customer. If the securities lost more than 50% of their value before they are liquidated, and the customer failed to make up the difference, the bank would suffer credit loss.

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5.10

Credit Risk and Basel Accords

The Basel Committee on Banking Supervision was established in the mid 1980s. It is a committee of national banking regulators, such as the Bank of England and the Federal Reserve Board. The purpose of the committee is to set common standards for banking regulations and to improve the stability of the international banking system. Basel Accords helps the banks in managing credit risk and as well as other risks. 1998 Basel Accord: The 1998 accord was motivated largely by low amount of available capital kept by Japanese banks in relation to the risks in their lending portfolios. This low ratio was believed to allow the Japanese banks to make loans at unfairly low rates. The 1998 accord required that all banks should hold available capital equal to atleast 8% of their risk-weighted assets (RWA) .The first accord has two basic principals: 1. To ensure adequate level of capital in the international banking system. 2. To create more level playing field in competitive terms so that banks could no longer build business volume without adequate capital backing. The prescribed formula is given below:

Tier1 + Tier 2 Capital Risk Weighted Assets Capital: While tier 1 capital consists of paid-up share capital and disclosed reserves. Tier 2 capital comprises undisclosed reserves, asset revaluation
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reserves, hybrid capital instruments (such as mandatory convertible debt) and subordinated debt. Also, the tier 1 capital should be at least 50% of the total capital.

Risk Weighted Assets: Assets in the balance sheet of a bank have been differentiated, based on the risks. While central government/Central bank obligations carry nil (0%) risk, those of the private business sector carry full risk (100%).The portfolio approach is adopted to measure risk with assets classified into four buckets(0%,20%,50%,and 100%). This distinction, depending upon counter parties, gives a unique perspective to the capital adequacy of a banking institution. If a bank has more counter parties having nil (or lower) risk, it needs to hold less capital than a bank which has parties with 100% risk weight.

Basel 2 (New) Accord: The suggested form of new Accord was published in January 2001 to obtain comments from the banking industry. The final Accord will be effective from 2006 2007. The new Accord retains the same concepts of EWA and Tier 1 and Tier 2 available capital, but it changes the method for calculating RWA. The new Accord has three pillars: i) Minimum requirement of Capital ii) Role of supervisory review process iii) Market discipline The measurement of minimum requirement of capital gives many formulas to replace the simple calculations of the 1998 Accord. The supervisory review pillar requires regulators to ensure that the bank has
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effective risk management, and requires the regulators to increase the required capital if they think that the risks are not being adequately measured. The market discipline pillar requires banks to disclose large amounts of information so that depositors and investors can decide for themselves the risk of the bank and require commensurately high interestrates and return on capital. 6. Market Risk: Banks are exposed to market risk via their trading activities and their balance sheets. The measurement of trading risk is probably the most advanced of the three main types of risks faced by banks.

6.1

Meaning of Market Risk:

It is the risk that the value of on and off-balance sheet positions of a financial institution will be adversely affected by movements in market rates or prices such as interest rates, foreign exchange rates, equity prices, credit spreads and/or commodity prices resulting in a loss to earnings and capital. 6.2 Three Main factors of Market risk are:

Interest rate risk: Interest rate risk arises when there is a mismatch between positions, which are subject to interest rate adjustment within a specified period. The banks lending, funding and investment activities give rise to interest rate risk. The immediate impact of variation in interest rate is on banks net interest income, while a long term impact is on banks net worth since the economic value of banks assets, liabilities and off-balance sheet exposures are affected. Consequently there are two common perspectives for the assessment of interest rate risk

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a) Earning perspective: In earning perspective, the focus of analysis is the impact of variation in interest rates on accrual or reported earnings. This is a traditional approach to interest rate risk assessment and obtained by measuring the changes in the Net Interest Income (NII) or Net Interest Margin (NIM) i.e. the difference between the total interest income and the total interest expense. b) Economic Value perspective: It reflects the impact of fluctuation in the interest rates on economic value of a financial institution. Economic value of the bank can be viewed as the present value of future cash flows. In this respect economic value is affected both by changes in future cash flows and discount rate used for determining present value. Economic value perspective considers the potential longer-term impact of interest rates on an institution. Sources of interest rate risks: Interest rate risk occurs due to (1) Differences between the timing of rate changes and the timing of cash flows (re-pricing risk); (2) Changing rate relationships among different yield curves effecting bank activities (basis risk); (3) Changing rate relationships across the range of maturities (yield curve risk); (4) interest-related options embedded in bank products (options risk).

Foreign Exchange Risk: It is the current or prospective risk to earnings and capital arising from adverse movements in currency exchange rates. It refers to the impact of
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adverse movement in currency exchange rates on the value of open foreign currency position. The banks are also exposed to interest rate risk, which arises from the maturity mismatching of foreign currency positions. Even in cases where spot and forward positions in individual currencies are balanced, the maturity pattern of forward transactions may produce mismatches. As a result, banks may suffer losses due to changes in discounts of the currencies concerned. In the foreign exchange business, banks also face the risk of default of the counter parties or settlement risk. While such type of risk crystallization does not cause principal loss, banks may have to undertake fresh transactions in the cash/spot market for replacing the failed transactions. Thus, banks may incur replacement cost, which depends upon the currency rate movements. Banks also face another risk called time-zone risk, which arises out of time lags in settlement of one currency in one center and the settlement of another currency in another time zone. The Forex transactions with counter parties situated outside Pakistan also involve sovereign or country risk.

Liquidity risk Liquidity risk is potential outcome of the inability of the banks to generate cash to cope up with the decline in the deposits or increase in the assets, to the large extent it is an outcome of the mismatch in the maturity patterns of the assets & liabilities. Liquidity risk is considered a major risk for institutions. It arises when the cushion provided by the liquid assets are not sufficient enough to meet its obligation. In such a situation, institutions often meet their liquidity requirements from the market. However, conditions of funding through market depend upon liquidity in the market and borrowing institutions liquidity. Accordingly, an institution short of liquidity may have to undertake transactions at heavy cost resulting in loss of earnings or in worst case
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scenario, the liquidity risk could result in bankruptcy of the institution if it is unable to undertake transactions even at current market prices. Possible needs for the liquidity are manifold they can be classified into 4 broad categories 1. Funding risk: - the need to replace the outflows of the funds. e.g. non renewal of the wholesale funds 2. Time risk: - the need to compensate for the no receipt of the expected inflow of the funds e.g. when the borrower fails to meet his commitment. 3. Call risk:- the need to find new funds when contingent liability becomes due e.g. a sudden surge in the borrowing under ATMs 4. The need to undertake new transactions when desirable, e.g. a request for the imp client.

6.3

Market Risk Management

6.3.1 Board and senior Management Oversight. Likewise other risks, the concern for management of Market risk must start from the top management. Effective board and senior management oversight of the banks overall market risk exposure is cornerstone of risk management process. For its part, the board of directors has following responsibilities. a) Delineate banks overall risk tolerance in relation to market risk. b) Ensure that banks overall market risk exposure is maintained at prudent levels and consistent with the available capital. c) Ensure that top management as well as individuals responsible for market risk management possess sound expertise and knowledge to accomplish the risk management function.
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d) Ensure that the bank implements sound fundamental principles that facilitate the identification, measurement, monitoring and control of market risk. e) Ensure that adequate resources (technical as well as human) are devoted to market risk management.

Accordingly, senior management is responsible to: a) Develop and implement procedures that translate business policy and strategic direction set by BOD into operating standards that are well understood by banks personnel. b) Ensure adherence to the lines of authority and responsibility that board has established for measuring, managing, and reporting market risk. c) Oversee the implementation and maintenance of Management Information System that identify, measure, monitor, and control banks market risk. d) Establish effective internal controls to monitor and control market risk.

The institutions should formulate market risk management policies which are approved by board. The policy should clearly delineate the lines of authority and the responsibilities of the Board of Directors, senior management and other personnel responsible for managing market risk; set out the risk management structure and scope of activities; and identify risk management

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issues, such as market risk control limits, delegation of approving authority for market risk control limit setting and limit excesses.

6.3.2 Organizational Structure for Market Risk Management The organizational structure used to manage market risk vary depending upon the nature size and scope of business activities of the institution, however, any structure does not absolve the directors of their fiduciary responsibilities of ensuring safety and soundness of institution. While the structure varies depending upon the size, scope and complexity of business, at a minimum it should take into account following aspect. a) The structure should conform to the overall strategy and risk policy set by the BOD. b) Those who take risk (front office) must know the organizations risk profile, products that they are allowed to trade, and the approved limits. c) The risk management function should be independent, reporting directly to senior management or BOD. d) The structure should be reinforced by a strong MIS for controlling, monitoring and reporting market risk, including transactions between an institution and its affiliates.

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Besides the role of Board as discussed earlier a typical organization set up for Market Risk Management should include: The Risk Management Committee The Asset-Liability Management Committee (ALCO) The Middle Office.

Risk Management Committee: It is generally a board level subcommittee constituted to supervise overall risk management functions of the bank. The structure of the committee may vary in banks depending upon the size and volume of the business. Generally it could include heads of Credit, Market and operational risk Management Committees. It will decide the policy and strategy for integrated risk management containing various risk exposures of the bank including the market risk. The responsibilities of Risk Management Committee with regard to market risk management aspects include: a) Devise policies and guidelines for identification, measurement, monitoring and control for all major risk categories. b) The committee also ensures that resources allocated for risk management are adequate given the size nature and volume of the business and the managers and staffs that take, monitor and control risk possess sufficient knowledge and expertise. c) The bank has clear, comprehensive and well-documented policies and procedural guidelines relating to risk management and the relevant staff fully understands those policies. d) Reviewing and approving market risk limits, including triggers or stop losses for traded and accrual portfolios.
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e) Ensuring robustness of financial models and the effectiveness of all systems used to calculate market risk. f) The bank has robust Management information system relating to risk reporting.

Asset-Liability

Committee:

Popularly

known

as

ALCO,

is

senior

management level committee responsible for supervision / management of Market Risk (mainly interest rate and Liquidity risks). The committee generally comprises of senior managers from treasury, Chief Financial Officer, business heads generating and using the funds of the bank, credit, and individuals from the departments having direct link with interest rate and liquidity risks. The CEO or some senior person nominated by CEO should be head of the committee. The size as well as composition of ALCO could depend on the size of each institution, business mix and organizational complexity. To be effective ALCO should have members from each area of the bank that significantly influences liquidity risk. In addition, the head of the Information system Department (if any) may be an invitee for building up of MIS and related computerization. Major responsibilities of the committee include: a) To keep an eye on the structure /composition of banks assets and liabilities and decide about product pricing for deposits and advances. b) Decide on required maturity profile and mix of incremental assets and liabilities. c) Articulate interest rate view of the bank and deciding on the future business strategy. d) Review and articulate funding policy. e) Decide the transfer pricing policy of the bank.
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f) Evaluate market risk involved in launching of new products. ALCO should ensure that risk management is not confined to collection of data. Rather, it will ensure that detailed analysis of assets and liabilities is carried out so as to assess the overall balance sheet structure and risk profile of the bank. The ALCO should cover the entire balance sheet/business of the bank while carrying out the periodic analysis.

Middle Office:

The risk management functions relating to treasury

operations are mainly performed by middle office. The concept of middle office has recently been introduced so as to independently monitor measure and analyze risks inherent in treasury operations of banks. Besides the unit also prepares report for the information of senior management as well as banks ALCO. Basically the middle office performs risk review function of dayto-day activities. Being a highly specialized function, it should be staffed by people who have relevant expertise and knowledge. The methodology of analysis and reporting may vary from bank to bank depending on their degree of sophistication and exposure to market risks. These same criteria will govern the reporting requirements demanded of the Middle Office, which may vary from simple gap analysis to computerized VaR modeling. Middle Office staff may prepare forecasts (simulations) showing the effects of various possible changes in market conditions related to risk exposures. Banks using VaR or modeling methodologies should ensure that its ALCO is aware of and understand the nature of the output, how it is derived, assumptions and variables used in generating the outcome and any shortcomings of the methodology employed. Segregation of duties should be

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evident in the middle office, which must report to ALCO independently of the treasury function.

6. Operational Risk:

The management of specific operational risks is not a new practice; it has always been important for banks to try to prevent fraud, maintain the integrity of internal controls, and reduce errors in transactions processing, and so on. However, what is relatively new is the view of operational risk management as a comprehensive practice comparable to the management of credit and market risks in principle.

7.1 Meaning of Operational Risk:

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Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and system or from external events. Operational risk is associated with human error, system failures and inadequate procedures and controls. It is the risk of loss arising from the potential that inadequate information system; technology failures, breaches in internal controls, fraud, unforeseen catastrophes, or other operational problems may result in unexpected losses or reputation problems. Operational risk exists in all products and business activities.

7.2 Operational Risk Management Principles There are 6 fundamental principles that all institutions, regardless of their size or complexity, should address in their approach to operational risk management. a) Ultimate accountability for operational risk management rests with the board, and the level of risk that the organization accepts, together with the basis for managing those risks, is driven from the top down by those charged with overall responsibility for running the business. b) The board and executive management should ensure that there is an effective, integrated operational risk management framework. This should incorporate a clearly defined organizational structure, with defined roles and responsibilities for all aspects of operational risk management/monitoring and appropriate tools that support the identification, assessment, control and reporting of key risks. c) Board and executive management should recognize, understand and have defined all categories of operational risk applicable to the institution.

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Furthermore, they should ensure that their operational risk management framework adequately covers all of these categories of operational risk, including those that do not readily lend themselves to measurement. d) Operational risk policies and procedures that clearly define the way in which all aspects of operational risk are managed should be documented and communicated. These operational risk management policies and procedures should be aligned to the overall business strategy and should support the continuous improvement of risk management. e) All business and support functions should be an integral part of the overall operational risk management framework in order to enable the institution to manage effectively the key operational risks facing the institution. f) Line management should establish processes for the identification, assessment, mitigation, monitoring and reporting of operational risks that are appropriate to the needs of the institution, easy to implement, operate consistently over time and support an organizational view of operational risks and material failures.

7.3

Operational Risk Management and Measurement

Board and senior managements oversight Likewise other risks, the ultimate responsibility of operational risk management rests with the board of directors. Both the board and senior management should establish an organizational culture that places a high priority on effective operational risk management and adherence to sound
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operating controls. The board should establish tolerance level and set strategic direction in relation to operational risk. Such a strategy should be based on the requirements and obligation to the stakeholders of the institution. Senior management should transform the strategic direction given by the board through operational risk management policy. Although the Board may delegate the management of this process, it must ensure that its requirements are being executed. The policy should include: a) The strategy given by the board of the bank. b) The systems and procedures to institute effective operational risk management framework. c) The structure of operational risk management function and the roles and responsibilities of individuals involved. The policy should establish a process to ensure that any new or changed activity, such as new products or systems conversions, will be evaluated for operational risk prior to going online. It should be approved by the board and documented. The management should ensure that it is communicated and understood throughout in the institution. The management also needs to place proper monitoring and control processes in order to have effective implementation of the policy. The policy should be regularly reviewed and updated, to ensure it continue to reflect the environment within which the institution operates.

Operational Risk Function A separate function independent of internal audit should be established for effective management of operational risks in the bank. Such a functional set up would assist management to understand and effectively manage operational risk. The function would assess, monitor and report operational
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risks as a whole and ensure that the management of operational risk in the bank is carried out as per strategy and policy. To accomplish the task the function would help establish policies and standards and coordinate various risk management activities. Besides, it should also provide guidance relating to various risk management tools, monitors and handle incidents and prepare reports for management and BOD.

Operational Risk Assessment and Quantification Banks should identify and assess the operational risk inherent in all material products, activities, processes and systems and its vulnerability to these risks. Risk Identification is paramount for the subsequent development of a viable operational risk monitoring and control system. Banks should also ensure that before new products, activities, processes and Systems are introduced or undertaken, the operational risk inherent in them is subject to adequate assessment procedures. While a number of techniques are evolving, operating risk remains the most difficult risk category to quantify. In addition to identifying the most potentially adverse risks ,banking institutions should assess their vulnerability to these risks.It would not be feasible at the moment to expect banks to develop such measures. 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.
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However the banks could systematically track and record frequency, severity and other information on individual loss events. Such a data could provide meaningful information for assessing the banks exposure to operational risk and developing a policy to mitigate / control that risk. An effective monitoring process is essential for adequately managing operational risk. Regular monitoring activities can offer the advantage of quickly detecting and correcting deficiencies in the policies, processes and procedures for managing operational risk. Promptly detecting and addressing these deficiencies can reduce the potential frequency and/or severity of a loss event.

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8.

Asset-Liability Management (ALM)

With increased competition and removal of entry barriers, banks today are confronted with the question of survival. There is an increasing need for greater innovation on the deposit mobilization front and simultaneously to invest greater capital in speedier money transfer mechanisms, innovative products and hedging instruments. The Asset-Liability Management (ALM) provides solutions to a number of problems encountered by banks. Some of the reasons for the increased importance of ALM in banks are financial volatility, introduction of new financial products such as interest-rate swaps, options and futures, regulatory initiatives and heightened awareness of top management. The successful negotiation and implementation of Basel-II Accord is likely to lead to an even sharper focus on the risk measurement and risk management at the institutional level. The ALM function indicates to the manager the current market risk profile of the bank and the impact that various alternative business decisions would have on the future risk profile. ALM is a critical function for any bank and determines the efficiency with which a bank is able to structure its balance sheet in order to influence net income, return on equity and return on assets. The entire mechanism of ALM centers on the efficient handling and mitigation of various risks faced by banks. Today, the scope for ALM activities has greatly widened. ALM departments are addressing foreign exchange risks as well as other risks. Also, the ALM technique is now applies to the non-financial firms. Corporations have adopted ALM techniques to address interest-rate exposures, liquidity risk and foreign exchange risk. Thus, it can be said that, ALM as a technique will continue to grow in future and an efficient ALM technique will go a long way in managing volume, maturity, rate sensitivity, quality and liquidity of the assets and liabilities so as to earn a sufficient and acceptable return on the portfolio. ALM Practices of banks can be examined

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through the tool of Duration GAP Analysis by looking at the interest rate statements of the banks.

Assets and Liabilities Committee (ALCO) An ALCO is an risk-management committee in a bank or other lending institution that generally comprises the senior-management levels of the institution. The ALCO's primary goal is to evaluate, monitor and approve practices relating to risk due to imbalances in the capital structure. The purposes and tasks of ALCO are:

formation of an optimal structure of the Banks balance sheet to provide the maximum profitability, limiting the possible risk level;

control over the capital adequacy and risk diversification; execution of the uniform interest policy; determination of the Banks liquidity management policy; control over the state of the current liquidity ratio and resources of the Bank;

formation of the Banks capital markets policy; control over dynamics of size and yield of trading transactions (purchase/sale of currency, state and corporate securities, shares, derivatives for such instruments) as well as extent of diversification thereof;

control over dynamics of the basic performance indicators (ROE, ROA, etc.) as prescribed in the Bank's policy.

The ALCO is appointed by a resolution of the Bank Executive Board and includes no less than 7 members with the right to vote for a one-year period.
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ALCO is headed by the ALCO Chairman, who is appointed by the Bank Executive Board. The ALCO members without the right to vote are appointed upon presentation of the ALCO Chairman by Order of the Bank Executive Board from among Bank specialists and managers of the Bank for a one-year period. ALCO meetings are generally held every two weeks. If necessary, additional meetings may be convened. All ALCO members with the right to vote have equal rights. ALCO has the authority to resolve any matters submitted to it for consideration if more than a half of the committee members with the right to vote are present at the committee meeting. A resolution is deemed passed if more than half of ALCO members with the right to vote being present at the meeting voted for such resolution. The ALCOs resolutions are binding on all Bank employees.

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ALM Process: 1. Liquidity Risk Management Measure and manage liquidity needs Assure ability to meet liabilities Measure on ongoing basis and evolve future liquidity requirements Tracked through maturity or cash flow mismatches

2. Currency Risk Volatility due to managed floating exchange rate arrangement Increased capital flows across free economies, deregulation as also large cross border flows made FIs' balance sheets vulnerable to exchange rate movements.

3. Interest Rate Risk (IRR) Changes in market interest rates adversely affect interest rates in FI balance sheet Impacts FI's earnings (i.e. reported profits) by changing its Net Interest Income (NII)
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Many analytical techniques for measurement and management of Interest Rate Risk.

9. GAP ANALYSIS:
Based on the sensitivity of the assets and liabilities to the interest rate fluctuations, they are classified into different maturity buckets. The GAP or mismatch risk, can be measured by calculating GAPs over different time intervals as at a given date. GAP analysis measures mismatches between rate sensitive assets (RSA)and rate sensitive liabilities (RSL) (including offbalance sheet positions). An asset or liability is normally classified as rate sensitive if: Within the time interval under consideration, there is a cash flow The interest rate resets/reprices contractually during the interval It is dependent on the changes in the Bank Rate by RBI It is contractually pre-payable or withdrawal before the stated maturities.

GAP= RSA- RSL GAP can be positive or negative. The positive GAP indicates it has more RSAs than RSLs, whereas the negative GAP indicates that it has more RSLs than RSAs. 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 it is in a position to benefit from declining interest rates by a negative Gap (RSL > RSA). The Gap can, therefore, be used as a measure of interest rate
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sensitivity. However, the GAP analysis is subject to limitations. GAP analysis does not capture basis risk or investment risk, is generally based on parallel shifts in the yield curve, does not incorporate future growth or changes in the mix of business and does not account for the time value of money. The GAPs have been identified in the following time buckets: Day 1 2 to 7 days 8 to 14 days 15 to 28 days 29 days and up to 3 months Over 3 months and up to 6 months Over 6 months and up to 1 year Over 1 year and up to 3 years Over 3 years and up to 5 years Above 5 years

Reasons for Mismatch or a GAP in RSA and RSL: ASSETS 1. High Investments The bank is focusing on generating income from non core activities like investment High cost of capital Attractive avenues outside India
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2. Cash and balance with bank Less confidence in asset quality

3. Cash and balance with RBI Attractive rate from reverse repo window

4. Loans and advances To be competitive in market High demand for loans

LIABILITIES 1. Deposits 1. Safe place to park fund 2. Non availability of other attractive avenues 2. Borrowing 1. The borrowing might be high due to liquidity crunch 2. The bank might be borrowing to meet policy compliance 3. Other liability and provision.

CONCLUSION: A GAP arises from assets and liabilities and off-balance sheet items with different principal amounts and maturity dates thereby creating exposure to unexpected changes in the level of market interest rates. The acceptable GAP as % of outflow is 20-25% beyond which the GAP value be it positive or
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negative implies that banks are not managing their assets and liabilities properly. Thus there is a need to manage risk.

10.

DATA ANALYSIS:

Duration GAP analysis with different maturity buckets is chosen for the purpose of data analysis as it is the only tool for measuring the ALM practices adopted by banks. For the purpose of Data analysis, four banks are taken with two banks each from Private sector and Public sector. Private sector banks taken are HDFC Bank and ICICI Bank while the Public sector Banks chosen are IDBI Bank and Bank of Baroda (BOB). The Banks chosen for the Purpose of Duration GAP analysis are selected on a random basis keeping in view that they fall in the same category in terms of their size. the purpose of analysis. The Data is taken from the Annual report of the respective banks for the year ended 2012 for

GAP/Mismatch = RSA-RSL = (Loans and Advances + Investments) - (Deposits and borrowings) GAP as % of Outflows= GAP/ (Deposits + Borrowings)

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10.1

HDFC BANK:

The Housing Development Finance Corporation Limited (HDFC) was amongst the first to receive an 'in principle' approval from the Reserve Bank of India (RBI) to set up a bank in the private sector, as part of the RBI's liberalisation of the Indian Banking Industry in 1994. The bank was incorporated in August 1994 in the name of 'HDFC Bank Limited', with its registered office in Mumbai, India. HDFC Bank commenced operations as a Scheduled Commercial Bank in January 1995. Promoter: Since its inception in 1977, the Corporation has maintained a consistent and healthy growth in its operations to remain the market leader in mortgages. Its outstanding loan portfolio covers well over a million dwelling units. HDFC has developed significant expertise in retail mortgage loans to different market segments and also has a large corporate client base for its housing related credit facilities. Amalgamation: On May 23, 2008, the amalgamation of Centurion Bank of Punjab with HDFC Bank was formally approved by Reserve Bank of India to complete the statutory and regulatory approval process. As per the scheme of amalgamation, shareholders of CBoP received 1 share of HDFC Bank for every 29 shares of CBoP. In a milestone transaction in the Indian banking industry, Times Bank Limited (another new private sector bank promoted by Bennett, Coleman & Co. / Times Group) was merged with HDFC Bank Ltd., effective February 26, 2000. This was the first merger of two private banks in the New Generation Private Sector Banks. As per the scheme of amalgamation approved by the shareholders of both banks and the Reserve Bank of India, shareholders of Times Bank received 1 share of HDFC Bank for every 5.75 shares of Times Bank. Distribution network: As on March 31, 2012, the Bank has a network of 2,776 branches in 1,568 cities across India. All branches are linked on an online real-time basis. Customers in over 800 locations are also serviced through Telephone Banking. The Bank also has a network of 10,490 ATMs across India. Businesses: HDFC Bank caters to a wide range of banking services covering commercial and investment banking on the wholesale side and transactional / branch banking on the retail side. The bank has three key business segments:
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Wholesale Banking The Bank's target market is primarily large, blue-chip manufacturing companies in the Indian corporate sector and to a lesser extent, small & mid-sized corporates and agri-based businesses. It is also recognised as a leading provider of cash management and transactional banking solutions to corporate customers, mutual funds, stock exchange members and banks. Retail Banking The objective of the Retail Bank is to provide its target market customers a full range of financial products and banking services, giving the customer a one-stop window for all his/her banking requirements. The products are backed by worldclass service and delivered to customers through the growing branch network, as well as through alternative delivery channels like ATMs, Phone Banking, NetBanking and Mobile Banking. HDFC Bank was the first bank in India to launch an International Debit Card in association with VISA (VISA Electron) and issues the MasterCard Maestro debit card as well. The Bank launched its credit card business in late 2001. By March 2012, the bank had a total card base (debit and credit cards) of over 19.71 million. The Bank is also one of the leading players in the "merchant acquiring" business with over 180,000 Point-of-sale (POS) terminals for debit / credit cards acceptance at merchant establishments. The Bank is well positioned as a leader in various net based B2C opportunities including a wide range of internet banking services for Fixed Deposits, Loans, Bill Payments, etc. Treasury Within this business, the bank has three main product areas - Foreign Exchange and Derivatives, Local Currency Money Market & Debt Securities, and Equities. To comply with statutory reserve requirements, the bank is required to hold 25% of its deposits in government securities. The Treasury business is responsible for managing the returns and market risk on this investment portfolio. Capital structure: As on 31st March, 2012 the authorized share capital of the Bank is Rs. 550 crore. The paid-up capital as on the said date is Rs. 469,33,76,540 (234,66,88,270 equity shares of Rs. 2/- each). The HDFC Group holds 23.15% of the Bank's equity and about 17.29 % of the equity is held by the ADS / GDR Depositories (in respect of the bank's American Depository Shares (ADS) and Global Depository Receipts (GDR) Issues). 30.68 % of the equity is held by Foreign Institutional Investors (FIIs) and the Bank has 4,47,924 shareholders. The shares are listed on the Bombay Stock Exchange Limited and The National Stock Exchange of India Limited. The Bank's American Depository Shares (ADS) are listed on the New York Stock Exchange (NYSE) under the symbol 'HDB' and the Bank's Global Depository Receipts (GDRs) are listed on Luxembourg Stock Exchange under ISIN No US40415F2002.

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(GAP ANALYSIS 2012):

Maturity Basket Loans & Advances Investments Deposits Borrowings Mismatch / GAP Cumulative GAP GAP as % of outflows Day 1 459086.00 1915121.00 242580.00 134040.00 1,997,587.00 1,997,587.00 530%

(Figures in lakhs)
2 to 7 days 8 to 14 days 15 to 28 days 389712.00 343629.00 560293.00 274712.00 153168.00 212047.00 581052.00 703217.00 670756.00 152896.00 21157.00 16803.00 -69,524.00 -227,577.00 84,781.00 1,928,063.00 1,700,486.00 1,785,267.00 -9% -31% 12%

Maturity Basket Loans & Advances Investments Deposits Borrowings Mismatch / GAP Cumulative GAP GAP as % of outflows

29 to 3 months 3 to 6 months 6 months to 1 year 2168900.00 1567994.00 2110235.00 458917.00 611801.00 540405.00 2119210.00 1981310.00 962367.00 462394.00 173601.00 101750.00 46,213.00 24,884.00 1,586,523.00 1,831,480.00 1,856,364.00 3,442,887.00 2% 1% 149%

Maturity Basket Loans & Advances Investments Deposits Borrowings Mismatch / GAP Cumulative GAP GAP as % of outflows

1 year to 3 year 3 year to 5 year Above 5 years TOTAL 19542003.00 8773625.00 1508702.00 1659827.00 9748291.00 3028324.00 382234.00 2171562.00 24670645.00 10996596.00 86461.00 6327096.00 2384651.00 247443.00 250192.00 824375.00 557,910.00 1,554,283.00 -3,320,082.00 4,000,797.00 5,555,080.00 2,234,998.00 5% 462% -46%

ANALYSIS: As it can be clearly seen that the GAP on Day 1 is tremendously high at Rs 19, 97,587 and as a result GAP as % of Outflows is also high at 530% which shows that HDFC Bank is over-utilizing its assets. Investments of HDFC Bank is clearly very high which shows that bank is focused on generating income from non-core activities since the bank may be getting attractive avenues or rate of interest outside India. Same is the case with extremely high GAP in
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Time-bucket of 3-5 years and 6 months to 1 year. However, in this cases the Loans and Advances is much higher than the Investments which shows that either the demand for the loans may have increased during this period or in order to remain competitive in market the Bank may have slashed the interest-rates for loans in the Long-run. Rest all other GAP as % of Outflows mostly falls under normal allowable of 20-25%.

10.2

ICICI BANK:

ICICI Bank is India's second-largest bank with total assets of Rs. 4,736.47 billion (US$ 93 billion) at March 31, 2012 and profit after tax Rs. 64.65 billion (US$ 1,271 million) for the year ended March 31, 2012. The Bank has a network of 2,899 branches and 10,021 ATMs in India, and has a presence in 19 countries, including India. ICICI Bank offers a wide range of banking products and financial services to corporate and retail customers through a variety of delivery channels and through its specialised subsidiaries in the areas of investment banking, life and non-life insurance, venture capital and asset management. The Bank currently has subsidiaries in the United Kingdom, Russia and Canada, branches in United States, Singapore, Bahrain, Hong Kong, Sri Lanka, Qatar and Dubai International Finance Centre and representative offices in United Arab Emirates, China, South Africa, Bangladesh, Thailand, Malaysia and Indonesia. Our UK subsidiary has established branches in Belgium and Germany. ICICI Bank's equity shares are listed in India on Bombay Stock Exchange and the National Stock Exchange of India Limited and its American Depositary Receipts (ADRs) are listed on the New York Stock Exchange (NYSE). ICICI Bank was originally promoted in 1994 by ICICI Limited, an Indian financial institution, and was its wholly-owned subsidiary. ICICI's shareholding in ICICI Bank was reduced to 46% through a public offering of shares in India in fiscal 1998, an equity offering in the form of ADRs listed on the NYSE in fiscal 2000, ICICI Bank's acquisition of Bank of Madura Limited in an all-stock amalgamation in fiscal 2001, and secondary market sales by ICICI to institutional investors in fiscal 2001 and fiscal 2002. ICICI was formed in 1955 at the initiative of the World Bank, the Government of India and representatives of Indian industry. The principal objective was to create a development financial institution for providing mediumterm and long-term project financing to Indian businesses. In the 1990s, ICICI transformed its business from a development financial institution offering only project finance to a diversified financial services group offering a wide variety of products and services, both directly and through a number of subsidiaries and affiliates like ICICI Bank. In 1999, ICICI become the
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first Indian company and the first bank or financial institution from non-Japan Asia to be listed on the NYSE. In October 2001, the Boards of Directors of ICICI and ICICI Bank approved the merger of ICICI and two of its wholly-owned retail finance subsidiaries, ICICI Personal Financial Services Limited and ICICI Capital Services Limited, with ICICI Bank. The merger was approved by shareholders of ICICI and ICICI Bank in January 2002, by the High Court of Gujarat at Ahmedabad in March 2002, and by the High Court of Judicature at Mumbai and the Reserve Bank of India in April 2002. Consequent to the merger, the ICICI group's financing and banking operations, both wholesale and retail, have been integrated in a single entity. ICICI Bank disseminates information on its operations and initiatives on a regular basis. The ICICI Bank website serves as a key investor awareness facility, allowing stakeholders to access information on ICICI Bank at their convenience. ICICI Bank's Cash Management Services offer a full range of receivable and payable services to meet your complex cash management needs. Payments received from your dealers/ distributors and made to your suppliers are efficiently processed to optimise your cash flow position and to ensure effective management of the operations of your business. ICICI Bank provides a gamut of products and services, ensuring that all the business requirements of the corporations are met under one roof. Further, ICICI Bank constantly innovates and improves its product offerings in order to improve client servicing. ICICI Bank offers a wide range of collection products to meet the specific requirements of the clients like local cheque collections, upcountry cheque collections, cash collections and electronic collections. With a wide network, customised MIS and multiple channels for delivery of MIS, ICICI Bank renders quick and effective management of receivables.

GAP ANALYSIS (2012):

Maturity Basket Loans & Advances Investments Deposits Borrowings Mismatch / GAP Cumulative GAP GAP as % of outflows Day 1
7,738.50 35,284.90 19,792.90 0

(Figures in million)
2 to 7 days
13,041.40 217,729.60 44,612.60 174,543.10

8 to 14 days
13,191.00 49,505.70 54,744.20 2,543.60

15 to 28 days
39,001.70 95,723.50 97,134.40 26,841.40

23230.5 23230.5 117%

1 ,6 5 0 1 1 .3 34,845.80 5%

5 8 .9 ,4 0 0 40,326.70 9 %

1 ,7 9 0 0 4 .4 51,076.10 9 %

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Maturity Basket Loans & Advances Investments Deposits Borrowings Mismatch / GAP Cumulative GAP GAP as % of outflows

29 days to 3 months
142,209.30 77,392.40 273,131.80 80,937.60

3 months to 6 months
188,828.50 87,627.90 288,254.60 141,606.50

6 months to 1 year
336,379.40 149,466.70 452,112.80 223,622.40

-1 4 6 .7 3 ,4 7 0 -83,391.60 -3 % 8

-1 3 0 .7 5 ,4 4 0 -236,796.30 -2 9 9%

-1 9 8 .1 8 ,8 9 0 -426,685.40 -2 % 8

Maturity Basket Loans & Advances Investments Deposits Borrowings Mismatch / GAP Cumulative GAP GAP as % of outflows

1 year to 3 year
1,043,883.50 245,244.20 690,126.60 173,520.50

3 year to 5 year
388,469.10 152,923.00 228,550.30 197,146.00

Above 5 years
364,534.20 484,702.50 406,539.40 380,888.00

TOTAL 2,537,276.60 1,595,600.40 2,554,999.60 1,401,649.10

4 5 8 .6 2 ,4 0 0 -1,204.80 4% 9

1 5 9 .8 1 ,6 5 0 114,491.00 2% 7

6 ,8 9 0 1 0 .3 176,300.30 8 %

ANALYSIS: GAP for most of the Time-buckets is positive which shows that ICICI Bank is effective in utilizing its assets. However, on Day 1, GAP as % of Outflows is very high at 117% than the normal allowable rate of 20-25% due to high Investments and also due to NIL borrowings. Loans and Advances is particularly low on Day1 and the bank should increase that in order to minimize the GAP especially when the borrowing is NIL by providing loans at cheap rate of interest. Also, GAP as % of Outflows is extremely high at 299% on Time-bucket of 3-6 months especially due to high deposits and even due to borrowings. The Bank should increase Investments over this period since
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it is low as compared to other figures. Rest almost all the GAP as % of Outflows is mostly around allowable limits of 20-25%.

10.3

IDBI BANK:

Industrial Development bank of India (IDBI) was constituted under Industrial Development bank of India Act, 1964 as a Development Financial Institution and came into being as on July 01, 1964 vide GoI notification dated June 22, 1964. It continued to serve as a DFI for 40 years till the year 2004 when it was transformed into a Bank. In order that the name of the Bank truly reflects the functions it is carrying on, the name of the Bank was changed from IDBI Ltd to IDBI Bank Limited and the new name became effective from May 07, 2008 upon issue of the Fresh Certificate of Incorporation by Registrar of Companies, Maharashtra. The Bank has been accordingly functioning in its present name of IDBI Bank Limited. IDBI Bank Ltd. is today one of India's largest commercial Banks. On October 1, 2004, the erstwhile IDBI converted into a Banking company (as Industrial Development Bank of India Limited) to undertake the entire gamut of Banking activities while continuing to play its secular DFI role. Post the mergers of the erstwhile IDBI Bank with its parent company (IDBI Ltd.) on April 2, 2005 (appointed date: October 1, 2004) and the subsequent merger of the erstwhile United Western Bank Ltd. with IDBI Bank on October 3, 2006, the tech-savvy, new generation Bank with majority Government shareholding today touches the lives of millions of Indians through an array of corporate, retail, SME and Agri products and services. IDBI Bank Ltd. is a Universal Bank with its operations driven by a cutting edge core Banking IT platform. The Bank offers personalized banking and financial solutions to its clients in the retail and corporate banking arena through its large network of Branches and ATMs, spread across length and breadth of India. We have also set up an overseas branch at Dubai and have plans to open representative offices in various other parts of the Globe, for encashing emerging global opportunities. Our experience of financial markets will help us to effectively cope with challenges and capitalize on the
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emerging opportunities by participating effectively in our countrys growth process. As on March 31, 2012, IDBI Bank has a balance sheet of Rs.2.91 lakh crore and business size (deposits plus advances) of Rs.3.92 lakh crore. As an Universal Bank, IDBI Bank, besides its core banking and project finance domain, has an established presence in associated financial sector businesses like Capital Market, Investment Banking and Mutual Fund Business. Going forward, IDBI Bank is strongly committed to work towards emerging as the 'Bank of choice' and 'the most valued financial conglomerate', besides generating wealth and value to all its stakeholders. IDBI upholds the highest standards of corporate governance in its operations. The responsibility for maintaining these high standards of governance lies with its Board of Directors. Two Committees of the Board viz. the Executive Committee and the Audit Committee are adequately empowered to monitor implementation of good corporate governance practices and making necessary disclosures within the framework of legal provisions and banking conventions.

GAP ANALYSIS (2012):

(Figures in crores)

M tu ityb s e a r ak t L a da dA v n e on n dacs In e tm n v s e ts Dps e o its B r o in s or w g M m tc /G P is a h A C m la iv G P u u t e A G Pa %o o tflo s A s f u w

D y1 a 1 0 .8 30 7 0 2 .5 3 1 .7 13 4 1 7 .6 -1 1 .0 84 2 -1 1 .0 84 2 -5 % 8

2to7d y as 2 7 .0 76 1 1 ,9 7 6 9 8 .0 5 6 .6 31 8 45 8 0 .9 1 ,9 5 1 6 9 .4 1 ,1 1 9 5 8 .3 25 9%

8t 1 d y o 4 as 2 1 .8 87 3 20 9 5 .6 113 4 0 8 .7 43 4 5 .2 -7 6 .4 58 6 7 1 .9 ,6 2 3 -7 % 1

1 to2 d y 5 8 as 4 4 .8 63 4 2 .8 4 4 9 2 .9 62 6 1 1 .7 81 9 -6 6 .0 76 7 86 6 4 .8 -5 % 9

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M tu ityb s e a r ak t L a da dA v n e on n dacs In e tm n v s e ts Dp s e o its B r o in s or w g M m tc /G P is a h A C m la eG P u u tiv A G Pa %o o tflo s A s f u w

2 d y to3m n s 9 as o th 9 2 .6 38 8 3 6 .9 13 5 290 4 8 3 .1 2 3 .7 61 8 -1 0 9 9 9 6 .2 -1 ,2 2 3 8 2 .4 -6 % 0

3m n sto6m n s o th o th 1 ,2 9 5 0 8 .2 68 9 0 .7 249 3 1 6 .8 3 6 .8 82 4 -1 ,4 4 3 4 3 .6 -3 ,6 7 6 2 5 .0 -5 % 7

6m n sto1y a o th er 1 ,2 3 7 4 5 .4 1 5 .0 62 2 4 ,0 4 8 6 5 .3 7 1 .0 27 6 -3 ,3 5 5 7 6 .9 -7 ,0 3 1 0 2 .0 -7 % 0

M tu b s e a rity a k t L a da dA v n e on n dac s In e tm n v s e ts Dps e o its Br w g o ro in s M m tc /G P is a h A C m la eG P u u tiv A G Pa %o o tflo s A s f u w

1y a to3y a s er er 7 ,8 6 7 6 9 .5 6 3 .3 69 7 610 7 4 9 .7 183 6 1 9 .7 7 5 .4 ,4 1 1 -6 ,5 1 0 2 7 .6 1% 0

3y a sto5y a s er er 2 ,0 3 9 3 1 .6 9 7 .6 59 2 7 6 .9 87 9 1 ,0 2 9 0 7 .8 1 ,6 2 3 4 5 .4 -4 ,9 9 7 7 1 .1 8% 2

A o e5y a s bv er

TTL OA

3 ,8 8 2 1 1 5 .4 5 3 .2 ,8 ,1 8 3 428 1 6 .5 8 ,1 5 6 3 7 .3 167 3 3 9 .3 2 0 9 .5 1 ,4 2 6 116 3 5 2 .6 5 ,4 7 4 3 7 .6 4 ,2 2 6 8 8 .7 33 9 6 .5 18 6%

ANALYSIS: The GAP as % of Outflows for most of the Time-buckets is extremely negative than the normal desirable limit up to 20-25% due to high deposits which shows that IDBI is exposed to more liabilities. Hence, they should focus more on Investments and provide attractive rate of interest to make Loans more attractive. However, the positive GAP is also extremely high during Time-bucket of 2-7 days at 295% due to high Investments and also Above 5 year period due to increased Loans and Advances. IDBI Bank needs to maintain effective balance between Risk-sensitive Assets and Risksensitive Liabilities for all the Time-buckets in order to effectively manage its Assets and Liabilities.

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10.4

BANK OF BARODA:

Bank of Baroda was incorporated on 20th July 1908, under the Companies Act of 1897, and with a paid up capital of Rs 10 Lacs .The bank, along with 13 other major commercial banks of India, was nationalised on 19 July 1969, by the Government of India. Bank of Baroda (BoB) is the highest profitmaking public sector undertaking (PSU) bank in India and the second largest PSU bank in terms of number of total business in India . BoB has total assets in excess of Rs. 3.58 lack crores or Rs. 3,583 billion, a network of 4007 branches (out of which 3914 branches are in India) and offices, and over 2000 ATMs. Its total global business was Rs. 7,003.30 billion as of 30 Sep 2012. Its headquarter is in Vadodara and corporate headquarter is in Bandra Kurla Complex,Mumbai. Among the Bank of Barodas overseas branches are ones in the worlds major financial centers such as New York, London, Dubai, Hong Kong, Brussels and Singapore as well as number in other countries. The tagline of Bank of Baroda is "India's International Bank". Bank of Baroda is a pioneer in various customer centric initiatives in the Indian banking sector. The initiatives include setting up of specialized NRI Branches, Gen-Next Branches and Retail Loan Factories/ SME Loan Factories with an assembly line approach of processing loans for speedy disbursal of loans. The major ongoing initiatives of the Bank are detailed below: Business Process Reengineering (BPR) Bank had initiated a major Business Process Reengineering to give a big boost to sales growth by enhancing customer satisfaction and by making possible alternate channel migration thus reinventing itself to challenges of the 21st century. Banks BPR project known as Project- Navnirmaan has altogether 18 activities covering both the BPR and organisational restructuring, aimed at transforming the Banks branches into modern sales & service outlets.
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New Technology Platform Bank has made substantial progress in its end-to-end business and IT strategy project covering the Banks domestic, overseas and subsidiary operations. All Branches, Extension Counters in India, overseas business and five sponsored Regional Rural Banks are on the Core Banking Solution (CBS) platform. Bank has been providing to its customers Internet Banking, viz., Baroda Connect and other facilities such as online payment of direct and indirect taxes and certain State Government taxes, utility bills, rail tickets, online shopping, donation to temples and institutional fee payment. Bank has a wide network of ATMs across the country and has also launched mobile ATMs in select cities. Initiatives have been taken to provide corporate customers with facilities like direct salary upload, trade finance and State Tax payments etc. Bank has introduced Mobile Banking (Baroda M-connect) and prepaid gift cards. Corporate Social Responsibility (CSR) Initiatives Bank has always upheld inclusive growth high on its agenda. Bank has established 36 Baroda Swarojgar Vikas Sansthan (Baroda R-SETI) for imparting training to unemployed youth, free of cost for gainful self employment & entrepreneurship skill development and 52 Baroda Gramin Paramarsh Kendra and for knowledge sharing, problem solving and credit counseling for rural masses across the country, as on 31.03.2011. Bank has also established 18 Financial Literacy and Credit Counseling Centres (FLCC) in order to spread awareness among the rural masses on various financial and banking services and to speed up the process of Financial Inclusion, as on 31.03.2011.

GAP ANALYSIS (2012):

(Figures in crores)

M tu b s e a rity a k t L a da dA v n es on n dac In e tm n v s e ts Dps e o its Br w g o ro in s M m tc /G P is a h A C m la eG P u u tiv A G Pa %o o tflo s A s f u w

D y1 a

2to7d y 8to1 d y 1 to2 d y as 4 as 5 8 as 8 6 .2 28 3 20 3 9 .3 103 9 1 0 .6 3 .3 9 2 -2 8 .4 44 5 -1 3 2 5 7 8 .1 -2 % 2 6 6 .2 79 8 74 1 6 .5 139 4 2 .7 2 .4 5 4 -6 2 .3 81 5 -2 2 3 4 0 .5 -4 % 8

2 1 .7 29 6 6 1 .7 00 2 49 5 1 .6 1 8 .9 16 3 2 2 .1 95 9 229 4 1 3 .7 6 .0 1 3 58 0 .8 -3 6 1 -1 5 0 9 4 .8 4 5 .8 -3 6 1 -1 8 7 4 .8 4 9 .7 -1 % 2 -6 % 7

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M tu ityb s e a r ak t L a da dA v n e on n dac s In e tm n v s e ts Dps e o its B rr w g o o in s M m tc /G P is a h A C m la eG P u u tiv A G Pa %o o tflo s A s f u w

2 d y to3m n s 9 as o th 399 9 7 6 .9 5 3 .4 77 1 554 8 7 2 .9 1 5 .0 71 6 -1 5 8 4 5 6 .6 -3 ,7 2 4 9 7 .1 -2 % 6

3m n s 6m n s o th to o th 328 1 1 3 .2 1 3 .4 21 9 489 7 6 9 .6 2 8 .0 37 2 -1 8 6 9 6 1 .9 -5 5 9 3 6 8 .1 -3 % 4

6m n sto1y a o th er 399 8 0 0 .2 1 3 .1 63 1 1 8 .0 016 9 2 4 .7 02 7 -7 6 6 8 0 8 .4 -1 7 7 .6 225 1 -6 % 8

M tu ityb s e a r ak t L a da dA v n e on n dacs In e tm n v s e ts Dps e o its B r o in s or w g M m tc /G P is a h A C m la iv G P u u t e A G Pa %o o tflo s A s f u w

1y a to3y a er e rs 850 9 5 .2 188 7 2 2 .2 672 9 8 .9 1 9 .6 39 6 315 1 1 9 .9 -9 ,0 9 0 6 7 .7 4% 4

3y a sto5y a s er er 328 6 1 9 .2 153 5 0 9 .2 140 1 4 8 .8 4 2 .6 79 9 261 1 2 8 .0 -7 3 8 9 3 9 .6 18 1%

A o e5y a s bv er 413 7 3 4 .3 454 7 8 2 .4 448 3 5 9 .3 168 6 0 2 .2 351 5 5 4 .2 -3 8 7 4 7 5 .4 6% 3

TTL OA 2 7 7 .2 837 9 829 3 0 .4 3 4 7 .1 881 1 253 5 3 7 .0

ANALYSIS: Leaving the last 3 Time-buckets, GAP as % of Outflows of all the other Timebuckets is negative which clearly shows that BOB is more exposed to Liabilities and the Bank should focus on improving its GAP by providing the Loans at more attractive rate of interest. Even the positive GAP is much more than the rather acceptable level of 20-25% which is not a good sign and it also shows that BOB is not maintaining proportionate balance of its Assets and Liabilities in all the Time-buckets because of which earlier Timebucket shows negative GAP and the last 3 Time-bucket show positive GAP.

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10.5

COMPARATIVE ANALYSIS:

HDFC Bank Vs IDBI Bank:

On DAY 1, HDFC Bank showed an extremely high GAP as % of Outflows

of 530% as contrasting to -58% of IDBI Bank which shows that both these banks have adopted different approaches. While the Investments of HDFC bank is very high, IDBI Bank in contrast have deposits on their higher side which suggests that HDFC bank focused on earning revenue from short- term point of view such as lending at overnight call or money rates.

On Time-bucket of 2-7 days, the scenario got reversed where HDFC

bank showed negative GAP as % of Outflows of -9% while IDBI bank shows positive figure of 295%. In this Time-bucket, the Investments of IDBI bank is greater than their liabilities while HDFC bank has more deposits than their Investment and Advances resulting in their negative GAP.

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 Again, on the Time-bucket of 6 months to 1 year, HDFC bank showed

positive GAP as % of Outflows of 149% due to their higher lending of Advances as contrast to IDBI bank which shows negative figure of -70% since their deposits are much higher than their Advances which suggests that customer are more inclined to deposit in IDBI bank during this Timebucket.

Finally, for the Time-bucket of Above 5 years, HDFC bank showed

negative GAP as % of Outflows of -46% due to their extremely high deposits as against their Advances while IDBI bank showed contrasting figure of 168% since their Advances itself was higher than both their Deposits and Borrowings which suggests that IDBI focuses on lending from long-term point of view to earn more revenues.

Conclusion: Looking at the above comparison, it can be concluded that HDFC is effective in utilizing its assets in the short term while IDBI bank is effective in utilizing its assets in the long term.

ICICI Bank Vs Bank of Baroda:

On Day 1 of maturity Time-bucket, ICICI bank showed positive GAP

as % of Outflows of 117% due to extremely high Investments as compared to deposits, while on the other hand, Bank of Baroda showed negative figure of -12% due to a bit of higher deposits than Advances. However, this figure is within the normal allowable GAP of
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20-25% hence the bank was successful in maintaining GAP within normal limits. ICICI bank should reduce their Investments and utilize such funds for deposits.

For the Time-bucket of 2-7 days, Bank of Baroda showed negative

GAP as % of Outflows of -67% due to their higher deposits as compared to normal allowable GAP of 5% of ICICI bank.

For the period of 3-6 months, both the banks showed negative GAP as

%of Outflows, however, this figure was much higher for ICICI bank at -299% as compared to -34% of Bank of Baroda since ICICI bank had huge deposits and borrowings which suggests that ICICI bank is not much keen in Investments in the short-term.

For the period of Above 5 years, both the banks showed positive GAP

as % of Outflows. However, the difference was more at 63% for Bank of Baroda as compared to normal 8% within allowable limits for ICICI bank.

Conclusion: From the above comparison, it can be concluded that ICICI bank is effective in utilizing its assets in short as well as long-term except for the time-bucket of 3-6 months where it was negative at -299%, while Bank of Baroda in only effective in utilizing its assets in the long-term while it has more liabilities in the short-term.

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Overall, it can be concluded that Private sector banks effectively utilizes its assets in the short-term while Public sector banks utilizes its assets efficiently in the long-term.

11.

CONCLUSION:

ALM was developed in the 1980s to help financial institutions control a sharp increase in interest rate risk. Subsequently, it evolved into a set of techniques that enable financial institutions to manage a much broader set of risks. ALM is likely to play a growing role in financial institutions going forward. In the future, the management of interest rate risk will be more important to the performance of financial institutions. However, as observed by RBI, the highest amount of focus in any commercial banks is on credit risk, since it accounts for more than 95% of total risk. Managing credit risk is crucial because of the default of principal itself. Banks have to appropriately price their loan products on the basis of risk models. Apart from these, banks have to follow exposure limit norms, credit structure given by the RBI. If a sound risk management governance and disclosure practices is followed with competence and integrity, only then the credit system of bank will grow stronger.

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12.

RECOMMENDATIONS:

The two types of banks balance sheet risks include interest rate risk and liquidity risks. So their regular monitoring and managing is the need of the hour. While increasing the size of the balance sheet, the degree of asset liability mismatch should be kept in control. Because, the excessive mismatch would result in volatility in earnings. Banks can also use sensitivity analysis for risk management purpose. It is found that the all bank are exposed to interest rate risk. RBI has issued detailed guidelines in October 1999 for implementation of risk management in banking covering methodologies for measurement, monitoring and control of credit, provisioning of NPAs, etc so that the banks are required to follow these guidelines with necessary flexibility of their operations.

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 Banks are required to adopt suitable infrastructure supported by appropriate technological back up, complete automation of their operations to rate the level of risk in a credit proposal. The framework of credit risk management should be implemented with utmost deliberation. It means that there should be meetings at regular intervals and in turn, top officials of the bank should organize risk management meetings with RBI, so that supervision review process role of Basel Accord (Third Pillar) will be discharged smoothly. Officers of the banks should be provided with proper training and development and these officers should work as a team to handle the tools and techniques of modern risk management, which has the ultimate aim to achieve bank growth. Banks should incorporate international best practices which can add further strength to our existing framework of Credit Risk Management (CRM). Banks should maintain continuous dialogue with peer organizations, banking associations and international institutions.

Bibliography for References: 1. Annual report of HDFC, ICICI, IDBI and BANK of Baroda for the year ended March, 2012.
2. www.rbi.org.in 3. http://www.bharatbasha.com 4. http://pages.stern.nyu.edu/~ealtman/Zscores.pdf.

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5. http://web.ebscohost.com/ehost/pdfviewer/pdfviewer?

vid=5&sid=840da896-2547-4efc-913e6dd6ccfd9c28@sessionmgr111&hid=127. 6. Allen, F. & A.M.Santomero (2001). What do financial intermediaries do? Journal of Banking and Finance, 25(12), 271-294.

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