PROJECT WORK ON ASSET AND LIABILITY MANAGEMENT AT STATE BANK OF HYDERABAD

Presented by P.B.Kavya MBA-C 1225510102

WHAT IS ALM?
An attempt to match: Assets and Liabilities

In terms of: Maturities and Interest Rates Sensitivities

To minimize: Interest Rate Risk and Liquidity Risk DEFINITION ALM is continuously arranging and rearranging the assets and liabilities of the bank without infringing the liquidity and safety of the bank and with the purpose of maximizing the banks profits. ALM can be termed as a risk management technique designed to earn an adequate return while maintaining a comfortable surplus of assets beyond liabilities.
Com Bkg 2008 ALM 2008 2

Risks
What is RISK? It is the potential that events expected or unexpected, may have an adverse effect on a financial institutions capital or earnings.

Risk Management
ALM Objectives Liquidity Risk Management. Interest Rate Risk Management. Currency Risks Management. ALM Projection. Com Bkg 2008 Planning and Growth 2008 Profit

ALM PROCESS
The ALM process rests on Three Pillars:

1.

ALM Information Systems

2. ALM Organisation 3. ALM Process The scope of ALM function can be described as follows: Liquidity Risk Management Management of Market Risks Trading Risk Management Funding and Capital Planning Profit Planning and Growth Projection
Com Bkg 2008 ALM 2008 4

Asset Liability management philosophy of the State Bank of Hyderabad is aimed at accomplishing its mission of profit with growth

ASSET LIABILITY MANAGEMENT POLICY IN SBH:

The Risk Management Committee of the Board of Directors (RMCOB)will over see the implementation of the system for ALM and review its functioning quarterly and provide direction. The ALM policy will operate through the Asset Liability Management Committee (ALCO)

ALCO will therefore have the responsibilities of monitoring and control of the risks and returns funding and deployment, setting banks lending and deposit rates, and directing the investment activities of the bank. FUNCTIONS OF ALCO POLICY OBJECTIVES
The primary objective of Asset Liability Management (ALM)is to manage the liquidity and market risks ALM INFORMATION SYSTEM An ALM information system consists of network and business of State Bank of Hyderabad. In Jan 2006, SBH has implemented Core Banking System (CBS) in all branches.

ALM department prepares ALM policy by spelling out the objectives and tolerance limits and is to be duly approved by ALCO of the banks central office. ALM department prepares the following statements with reference to Liquidity Risk Structural Liquidity Statements at fortnightly intervals Contingency plan and reviewed at Quarterly intervals Ratio analysis at Fortnightly The ALM statements are to be submitted to ALCO at fortnightly intervals Executive committee at monthly Risk Management Committee of the Board at quarterly interval The Board at annual intervals The DSB returns are submitted to the RBI at monthly intervals. ALM REPORTING IN SBH Guarding the bank against Liquidity Risks Meeting RBI Stipulations Pricing of Deposits Preparation of Statutory Returns and doing Pre-requisite studies

ALM PROCESS IN SBH

What is liquidity risk?

Liquidity risk refers to the risk that the institution might not be able to generate sufficient cash flow to meet its financial obligations

Factors affecting liquidity risk Over extension of credit High level of NPAs Poor asset quality Mismanagement Non recognition of embedded option risk Reliance on a few wholesale depositors Large undrawn loan commitments Lack of appropriate liquidity policy & contingent plan

STATEMENT OF STRUCTURAL LIQUIDITY

Placed all cash inflows and outflows in the maturity ladder as per residual maturity Maturing Liability: cash outflow Maturing Assets : Cash Inflow Classified in to 8 time buckets Mismatches in the first two buckets not to exceed 20% of outflows Banks can fix higher tolerance level for other maturity buckets.

Liquidity Risk Management

Measuring and managing liquidity needs are vital for effective operation of banks. By assuring an bank's ability to meet its liabilities as they become due, liquidity management can reduce the probability of an adverse situation developing. Statement of Structural Liquidity Under this statement, all the Assets and Liabilities of the bank are grouped into inflows and outflows respectively. Liquidity has to be tracked through maturity or cash flow mismatches. Broadly of three types: Funding Risk: Due to withdrawal/non-renewal of deposits Time Risk: Non-receipt of inflows on account of assets(loan installments) Call Risk: contingent liabilities & new demand for loans Dynamic liquidity is done to measure the liquidity risks

Statement of Structural Liquidity as on 31-03-2008

Over 3 29day month s and s and up to up to 3 6 month month s s Over 6 month s and up to 1 year Over 1 year and up to 3 years Over 3 years and up to 5 years

Summary Of Liquidity Statement

A

Day 1

2 to 7 days

8 to 14 days

15 to 28 days

Over 5 years

Total

TOTAL OUTFLOWS ( LIABILITIES ) TOTAL INFLOWS ASSETS ) MISMATCH (B - A) (

714.91

1959.80

2906.13

840.77

10188.00

7594.75

11500.40

7838.43

5600.35

19437.10

68580.64

4165.30

1740.36

2187.97

1787.68

5874.98

7213.92

7328.66

13373.67

9855.74

16579.93

70108.21

C
3450.39 -219.44 -718.16 946.91 -4313.02 -380.83 -4171.74 5535.24 4255.39 -2857.17 1527.57

Cumulative Outflows
E

714.91

2674.71

5580.84

6421.61

16609.61

24204.36

35704.76

43543.19

49143.54

65580.60

0.00

Cumulative Inflows
F

4165.30

5905.66

8093.63

9881.31

15756.29

22970.21

30298.87

43672.54

53528.28

70108.21

Cumulative Mismatch
G

3450.39

3230.95

2512.79

3459.70

-853.32

-1234.15

-5405.89

129.35

4384.74

1527.57

0.00

Cumulative Gap

Negative
482.63% 120.80% 45.03% 53.88% -5.14% -5.10% -15.14% 0.30% 8.92% 2.33%

Net cumulative negative mismatches during the next

482.63%

120.80%

45.03%

53.88%

Summary Of Liquidity Statement as on 31-032009

Day 1

2 to 7 days

8 to 14 days

15 to 28 days

29days 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 Over and up 5 to 5 years years

Total

TOTAL OUTFLOWS ( LIABILITIES )

264.63

2151.56

3784.99

3174.80

7781.59

6314.02

12390.77

7625.17

6056.34

20567.57

70111.44

TOTAL INFLOWS ASSETS ) MISMATCH(B-A)

4560.68

2319.67

2852.80

809.11

5320.61

6734.84

7955.51

12904.13

9189.27

15930.97

68577.59

4296.05

168.11

-932.19

-2365.69

-2460.98

420.82

-4435.26

5278.96

3132.93

-4636.60

-1533.85

Cumulative Outflows

264.63

2416.19

6201.18

9375.98

17157.57

23471.59

35862.36

43487.53

49543.87

70111.44

0.00

Cumulative Inflows Cumulative Mismatch

4560.68

6880.35

9733.15

10542.20

15862.81

22597.65

30553.16

43457.29

52646.56

68577.53

4296.05

4464.16

3531.97

1166.28

-1294.70

-873.88

-5309.14

-30.18

3102.75

-1533.85

0.00

G H

Cumulative Negative Gap Net cumulative negative mismatches

1623.42% 1623.42%

184.76% 184.76%

56.96% 56.96%

12.44% 12.44%

-7.55%

-3.72%

-14.80%

-0.07%

6.26%

-2.19%

Liquidity Ratio Analysis:

Particulars

Tolerance Limit

As on 31- As on Remarks 03-2008 31-03-2009 (%) 54%

76% 174%

Loans to Total Assets

Greater than 50%

56%
77% 180%

Loans to Core Deposits Greater than 55% Loans to Investments Greater than 100%

Time Deposits to Total Less than 75% Deposits Special Rate Deposits to Total Deposits Liquid Assets to Total Deposits (Form-X) Less than 30%

66%

64%

The ratio increased by 2% due to increase in loans by Rs.1731.97 cr. The ratio increased by 1% due to increase in loans by Rs.1731.97 cr. The ratio increased by 6% due to increase in loans by Rs. 1731.97cr. The ratio decreased by 2% due to decrease in time deposits by Rs.1187.84 cr The ratio decreased by 5% due to decrease in special rate deposits by Rs.2336.83 cr. The ratio decreased by 5% due to decrease in Money Market Lending by Rs.932.89 cr. . The ratio decreased by 1% due to increase in Long Term Liabilities by Rs.1130.49 crores.
The ratio increased by 1% due to increase in Long-Term investments by Rs.298.71 crores.

32%

27%

Not Less than 15% 16%

11%

Long Term Assets to Long Term Liabilities

Long-Term Investments to Total Investments

Not less than 50%

82%

81%

Not to exceed 65% 39%

40%

ADDRESSING TO MISMATCHES
Mismatches can be positive or negative In case of +ve mismatch, excess liquidity can be deployed in money market instruments, creating new assets & investment swaps etc. For ve mismatch, it can be financed from market borrowings(call/Term),Bills rediscounting, repos & deployment of foreign currency converted into rupee.

Tackling the liquidity problem

A sound liquidity policy Funding strategies Contingency funding strategies Liquidity planning under alternate scenarios Measurement of mismatches through gap statements

FINDINGS
ALCO-ALM structure in SBH is well established which is in accordance with the stipulate by RBI.SBH has implemented the market risk management successfully. ALM information system in SBH is adequate, reliable as bank implemented core banking solution in all its branches and is timely available within 24 hours from all the banks covering 100% of required information. The bank has been able to maintain the liquidity risk and interest rate risk within the prescribed limits of the RBI guidelines

SUGGESTIONS
The bank is suggested to tune the MIS so as to alter their systems as per new ALM guidelines.

The risk management committees including ALCO are suggested to have a free and smooth network with all other committees.
The ALM system may also be appropriate for Finance Companies, Leasing Companies, Insurance Companies and others.

CONCLUSION
ALM process in SBH is presently measuring market risk by using traditional GAP analysis, Duration GAP analysis and ratio analysis
ALCO is regulating fortnightly and once in 15 days taking decision in liquidity risk management and interest rate management. Since years SBH never failed to submit statutory returns to departments of supervision-RBI.

BIBLIOGRAPHY:
http://www.sbhyd.com/aboutus.asp http://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?pri d=42 http://www.riskglossary.com/ http://www.adb.org/documents/books/rising_to_the_challenge /india/india_bnk.pdf http://www.kannanpersonal.com/inbank/risk-alm/list.html Ravi Kumar, 2000, Asset Liability Management, Publisher: Vision Books, New Delhi. Moorad Chouhdary, 2007, Asset Liability Management, Publisher: John Wiley and Sons, Singapore.

THANK YOU