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The importance of managing the asset-liability mix in the Indian financial markets has emerged from the
increased volatility in the domestic interest rates as well as foreign exchange rates that has evolved after
liberalization. The deregulated interest rate environment has brought pressure on the management of banks
to maintain a good balance among spreads, profitability and long-term viability. Over the last few years,
theire has been an intense competition and banks have been required to take up strategic planning as an
exercise for asset-liability management in order to survive and grow in the ever increasingly competitive
and risky environment. The paper presents a case study of four banks- Citi bank, ICICI bank, IDBI bank and
SBI and studies how Asset Liability Management can be used as an important tool for managing liquidity
risk and interest rate risk.
INTRODUCTION
50 Vij
SECTION I
SECTION 2
GAP MODEL
The most basic interest rate risk exposure measurement
technique that is employed by banks and financial
institutions is GAP analysis. This method requires a
preparation of a re-pricing gap report that distributes rate
sensitive assets, rate sensitive liabilities and off-balance
sheet positions into different time buckets according to
their residual maturity or time remaining to their next repricing, whichever is earlier. The assets and liabilities
that do not have contractual re-pricing intervals or
maturities are assigned to maturity buckets based on
statistical analysis or judgment. Interest rate risk is
measured by calculating gaps over different maturity
buckets. The GAP is defined as the absolute difference
52 Vij
Thus:
NII = RSAs x rA- RSL x rl
Where
rA = change in interest rate on RSAs
rl = change in interest rate on RSLs
If rA= rl r i.e. changes in interest rate on RSAs
and RSLs is the same for the time period chosen then the
change in net interest income can be written as
NII = (RSAs - RSLs) x r
Since GAP was earlier expressed as a difference
between RSAs and RSLs, a relationship can be
expressed between a change in interest rates and a
change in the banks net interest income.
NII = GAP x r
It is thus evident that a bank can immunize its net
interest income over a given planning horizon by
eliminating its funding Gap or when its RSAs are equal
to its RSLs.
Active Gap management requires the monitoring of
all markets within which the institution operates plus the
willingness to use interest rate forecasts as the basis for
active asset/liability management. If the bank management
wants to completely insulate the balance sheet from
changes in interest rates, the Gap would be set near to zero
so that changes in asset return would be counterbalanced
by changes in liability costs, irrespective of the direction of
interest rates. If a decline in interest rate was forecasted, the
asset/ liability strategy would try to narrow the Gap, so that
the proportion of rate sensitive assets is reduced. In case a
rise in interest rate is anticipated, the opposite strategy,
increasing the size of the Gap would be attempted. In
addition to the direction of interest rates, Gap
management strategies also depend upon the volatility
of interest rates. In periods of high interest rate volatility,
aggressive positioning with respect to the direction of
interest rates is generally not advisable as the accuracy
of interest rate forecasts are subject to a high degree of
prediction error.
SECTION 3
LIQUIDITY RISK ANALYSIS
Measuring and managing liquidity risk is an important
dimension of ALM. Mismatch in the maturity profile of
assets and liabilities exposes the balance sheet to
liquidity risk. As per the RBI guidelines, while the
1-14
days
15-28
Days
29 days3 months
3 Months6 Months
6 Months1 year
1 Year 3 Years
3 Years 5 Years
Over
5 Years
Total
83120
78570
379250
328760
308120
737950
143160
313150
2372080
253040
361440
177160
535960
794600
89470
9550
265632
Gap
-351980
-174470
17810
151600
-227840
-56650
53690
303600
-284240
Cumulative Gap
-351980
-526450 -508640
-357040
-584880
-641530
-587840
-284240
501054
243119
562548
377923
908924
2765223
1149263
2393820
175457
929205
546822
1658648
3451506
458115
Gap
67662
-366657
-168899
-749724
-686283
691148
9918
77580
-289077
-457976
-1207700 -1893983
49028
28235
108377
55266
45140
159789
38143
61717
141503
67496
55227
232729
5980
Gap
-126227
-33482
-33426
-12230
-10087
-72940
32163
232721
Cumulative Gap
-126227
-159709 -193135
-205365
-215452
-288392
-256229
-23508
5285432
1127020 2357926
1615916
1488729
5696274
4375088
9348806
31292191
308022
834014
891609
934937
29943177
Gap
818998
1523912
724307
8413869
1349014
1495909 2314907
3838819
4563126
-7064855
1349014
Citi Bank
Rate Sensitive Assets
ICICI Bank
Rate Sensitive Assets
9918
Cumulative Gap
8901874
8247173
2393820
1190985
-1202835
1190985
232721
716699
IDBI Bank
Rate Sensitive Assets
750470
-23508
SBI Bank
Rate Sensitive Assets
Cumulative Gap
1495909
1922033 -8464463
54 Vij
1-14
days
15-28
Days
29 days3 months
1 Year 3 Years
3 Years 5 Years
Over
5 Years
Total
-1518
1421.2
1759.9
872.35
-89.05
-758
1139.2
283.25
-268.45
ICICI
-49.58
-338.3
1833.28
844.48
3748.62
3431.4
-3455.74
IDBI
631.12
167.42
167.12
61.14
50.44
364.7
-160.8
SBI
-7479.54
-4094.98
-7619.56
-3621.52
13205.46
Citi
1759.9
2632.25
2543.2
1785.2
2924.4
3207.65
2939.2
1421.2
ICICI
-49.58
-387.88
1445.4
2289.88
6038.5
9469.9
6014.16
-5954.94
IDBI
631.12
798.54
965.66
1026.8
1077.24
1441.94
1281.14
117.54
SBI
-7479.54
-22815.6
-9610.14
42322.34
35324.3
-6745.04
3036
51932.48 -6998.04
-11969.1 -5954.94
-1163.6
117.54
-42069.3 -6745.04
Cumulative
-11574.52 -19194.08
-3519.8
-1744.7
178.1
1516
-2278.4
-566.5
536.9
ICICI
99.18
676.62
-3666.57
-1688.99
-7497.24
-6862.83
6911.48
23938.2 11909.85
IDBI
-1262.27
-334.82
-334.26
-122.3
-100.87
-729.4
321.63
2327.21
SBI
14959.09
8189.98
15239.12
7243.07
-26410.9
-103865
-3519.8
-5264.5
-5086.4
-3570.4
-5848.8
-6415.3
ICICI
99.18
775.8
-2890.77
-4579.76
-12077
IDBI
-1262.27
-1597.09
-1931.35
-2053.65
-2154.52
-2883.92
SBI
14959.09
23149.07 38388.19
45631.26
19220.33
-235.08
Cumulative
Citi
-2842.4
-5878.4
-2842.4
-235.08
56 Vij
Table 3: Comparative Analysis among Banks, 2003
Rs. Lakhs
Time Bucket
1-14
days
15-28
Days
29 days3 months
3 Months6 Months
6 Months1 year
1 Year 3 Years
3 Years 5 Years
Over
5 Years
0.70%
-3.43%
-4.21%
4.05%
6.00%
-1.58%
-1.54%
1.92%
-9.03%
-7.01%
-1.27%
-7.03%
-2.24%
-6.42%
-9.19%
-27.63%
2.12%
6.47%
4.05%
3.72%
12.02%
22.41%
29.35%
22.38%
-20.15%
-2.71%
-24.35%
10.21%
-14.15%
-4.29%
-25.89%
12.13%
-23.18%
-11.30%
-27.16%
5.10%
-25.42%
-17.72%
-36.35%
-22.53%
-23.30%
-11.25%
-32.30%
-18.81%
-11.28%
11.16%
-2.95%
3.57%
-1.17%
-0.6
0.35%
0.82%
0.67%
-0.76
0.90%
0.98%
-3.43%
-0.64
0.29%
0.00%
3.38%
0.06
-0.96%
-1.02%
0.28%
-0.14
0.05%
0.29%
0.00%
0.94
-0.92%
0.11%
-6.33%
-0.5
0.64%
2.94%
-5.66%
-1.26
1.54%
3.92%
-9.09%
-1.9
1.83%
3.92%
-5.71%
-1.84
0.87%
2.90%
-5.43%
-1.98
0.92%
3.19%
-5.43%
-1.04
0.00%
3.30%
0.00%
0.02%
0.02%
-0.02%
-0.03%
0.01%
0.01%
-0.01%
0.04%
0.04%
-0.01%
0.04%
0.01%
0.03%
0.04%
0.14%
-0.01%
-0.03%
-0.02%
-0.02%
-0.06%
-0.12%
-0.15%
-0.11%
0.10%
0.02%
0.12%
-0.05%
0.07%
0.03%
0.13%
-0.06%
0.11%
0.07%
0.12%
-0.02%
0.12%
0.10%
0.16%
0.12%
0.11%
0.07%
0.14%
0.10%
0.05%
-0.05%
-0.01%
-0.01%
0
-0.03%
-0.04%
0.04%
0.06%
-0.01%
-0.02%
0.02%
-0.09%
-0.07%
-0.01%
-0.07%
-0.02%
-0.06%
-0.09%
-0.27%
0.02%
0.06%
0.04%
0.03%
0.12%
0.22%
0.29%
0.22%
-0.21%
-0.03%
-0.24%
0.10%
-0.15%
-0.04%
-0.26%
0.12%
-0.24%
-0.11%
-0.27%
0.05%
-0.26%
-0.17%
-0.36%
-0.22%
-0.24%
-0.11%
-0.32%
-0.19%
-0.12%
0.11%
-0.03%
0.03%
COMPARATIVE ANALYSIS
CONCLUSIONS
58 Vij
REFERENCES
Balino, Tomas, J. and Ubide, Angel (2000), The New World of
Banking, Finance and Development, June.
Byrne, Jim (2000), Bringing Banking Risk Up To Date,
Balance Sheet, Bradford: 2000. Vol. 8, No. 6
Farin, Tom (2001), Developing a Dynamic Interest Rate Risk
Management Program, Journal of Finance, May-June.
Moynihan, G.Purushothaman, P. McLeod, M. and Nichols, G.
(2002), DSSALM: A Decision Support System for Asset
and Liability Management.
Madhu Vij, Ph.D. (dramadhuvij@hotmail.com) is an Associate Professor at the Faculty of Management Studies, (FMS),
University of Delhi where she teaches International and Corporate Finance. Her specialization includes: International
Financial Management, Management of Financial Services, Management of Financial Institutions, Financial and
Management Accounting. She has recently completed a project sanctioned by the UGC on Asset Liability Management in
Banks and Financial Institutions.Currently, she is working on a project sanctioned by ICSSR on Capital Flows in a
Globally Competitive Environment: Implications of Changing Country Risk Rating. Dr Vij is the author of four books and
has contributed several articles in management journals in the field of banking and finance. She has also presented a number
of papers in national and international conferences. She is actively involved with a number of training programme
conducted by FMS and is currently the Management Science Association and Placement advisor at FMS.