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Components of a
Bank Balance sheet
Liabilities Assets
Capital Cash & Balances with RBI
Reserve & Surplus Bal. With Banks & Money at
Fixed Assets
6. Other Assets
Liabilities in more details
1.Capital:
I. Bills Payable
II. Inter Office Adjustments (Net)
III. Interest Accrued
IV. Unsecured Redeemable Bonds
(Subordinated Debt for Tier-II Capital)
V. Others(including provisions)
assets in more details
1 . Cash & Bank Balances with
RBI
I. Cash in hand
(including foreign currency notes)
II. Balances with Reserve Bank of India
In Current Accounts
In Other Accounts
assets in more details
2. BALANCES WITH BANKS AND MONEY AT
CALL & SHORT NOTICE
I. In India
i) Balances with Banks
a) In Current Accounts
b) In Other Deposit Accounts
ii) Money at Call and Short Notice
a) With Banks
b) With Other Institutions
II. Outside India
a) In Current Accounts
b) In Other Deposit Accounts
c) Money at Call & Short Notice
assets in more details
3 . Investments
A major asset item in the bank’s balance
sheet. Reflected under 6 buckets as under:
I. Investments in India in : *
i) Government Securities
ii) Other approved Securities
iii) Shares
iv) Debentures and Bonds
v) Subsidiaries and Sponsored Institutions
vi) Others (UTI Shares , Commercial Papers, COD &
Mutual Fund Units etc.)
II. Investments outside India in **
Subsidiaries and/or Associates abroad
assets in more details
4 . Advances
The most important assets for a bank.
A. i) Bills Purchased and Discounted
ii) Cash Credits, Overdrafts & Loans
repayable on demand
iii) Term Loans
B. Particulars of Advances :
i) Secured by tangible assets
(including advances against Book Debts)
ii) Covered by Bank/ Government Guarantees
iii) Unsecured
assets in more details
5. Fixed Asset
I. Premises
II. Other Fixed Assets (Including furniture and fixtures)
6. Other Assets
I. Interest accrued
II. Tax paid in advance/tax deducted at source
(Net of Provisions)
III. Stationery and Stamps
IV. Non-banking assets acquired in satisfaction of
claims
V. Deferred Tax Asset (Net)
VI. Others
Contingnt liability
1. INTEREST EARNED
2.
I. Interest/Discount on Advances / Bills
II. Income on Investments
III. Interest on balances with Reserve Bank
of India and other inter-bank funds
IV. Others
Components of Income
2. OTHER INCOME
1. INTEREST EXPENDED
2.
I. Interest on Deposits
II. Interest on Reserve Bank of India / Inter-Bank
borrowings
III.
Others
Components of Expenses
2. OPERATING EXPENSES
It is a d y n a m ic p ro ce ss o f
P la n n in g , O rg a n izin g &
C o n tro llin g o f A sse ts &
L ia b ilitie s - th e ir v o lu m e s ,
m ix e s , m a tu ritie s , y ie ld s
a n d co sts in o rd e r to
m a in ta in liq u id ity a n d N II.
Significance of ALM
Volatility
Product Innovations & Complexities
Regulatory Environment
Management Recognition
Purpose & Objective of ALM
An effective Asset Liability Management
Technique aims to manage the volume, mix,
maturity, rate sensitivity, quality and liquidity of
assets and liabilities as a whole so as to attain a
predetermined acceptable risk/reward ration.
It is aimed to stabilize short-term profits, long-
term earnings and long-term substance of the
bank. The parameters for stabilizing ALM system
are:
i. 1 day
ii. 2 to 7 days
iii. 8 to 14 days
iv . 15 to 28 days
v . 29 days and up to 3 months
vi. Over 3 months and up to 6 months
vii. Over 6 months and up to 1 year
viii. Over 1 year and up to 3 years
ix . Over 3 years and up to 5 years
x . Over 5 years
STATEMENT OF
STRUCTURAL LIQUIDITY
Places 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
Shows the structure as of a particular date
Banks can fix higher tolerance level for other
maturity buckets.
An Example of Structural Liquidity
Statement
15-28 30 Days- 3 Mths - 6 Mths - 1Year - 3 3 Years - Over 5
1-14Days Days 3 Month 6 Mths 1Year Years 5 Years Years Total
DEPOSITS EXCLUDING CD
BORROWINGS
MATURITY GAP METHOD
(IRS)
THREE OPTIONS:
A) RSA>RSL= Positive
Gap
B) RSL>RSA= Negative
Gap
C) RSL=RSA= Zero Gap
SUCCESS OF ALM IN BANKS :
PRE - CONDITIONS
1.Awareness for ALM in the Bank staff at all
levels–supportive Management & dedicated
Teams.
2.Method of reporting data from Branches/ other
Departments. (Strong MIS).
3.Computerization-Full computerization,
networking.
4.Insight into the banking operations, economic
forecasting, computerization, investment,
credit.
5. Linking up ALM to future Risk Management
Strategies.
Interest Rate Risk Management
Interest Rate risk is the exposure of
a bank’s financial conditions to
adverse movements of interest
rates.
Though this is normal part of
banking business, excessive
interest rate risk can pose a
significant threat to a bank’s
earnings and capital base.
Changes in interest rates also affect
the underlying value of the bank’s
assets, liabilities and off-balance-
sheet item.
Interest Rate Risk
Securitised Debt
Institutional Arrangements with RBI
Central Government
Trends in Centre’s Budget Deficit
Three Phases
Ø1991-92 to 1996-97: Sharp Fiscal
Correction
Ø1997-98 to 2001-02: Deterioration
Ø2002-03 onwards: Fiscal Correction
Resumed
1990- 1991- 1995- 2000- 2001- 2002- 2003- 2004- 2005- 2006-
91 92 96 01 02 03 04 05 06 07
(RE) (BE)
Gross Fiscal 7.85 5.56 5.07 5.64 6.18 5.92 4.47 4.01 4.14 3.76
Deficit
Revenue Deficit 3.26 2.49 2.50 4.01 4.39 4.40 3.56 2.51 2.60 2.14
Gross Primary 4.07 1.49 0.86 0.93 1.47 1.11 -0.03 -0.06 0.46 0.22
Deficit
Financing Pattern of Centre’s
Gross Fiscal Deficit
Low Share of External Borrowings
Substantial Increase in Share of
Domestic Open Market Borrowings
1990- 1991- 1995- 2000- 2001- 2002- 2003- 2004- 2005- 2006-
91 92 96 01 02 03 04 05 06 07
(RE) (BE)
External 7.1 14.9 0.5 6.3 4.0 -8.2 -10.9 11.8 5.1 5.6
Finance
Market 17.9 20.7 56.4 61.8 64.4 71.8 72.1 40.7 69.2 76.5
Borrowing
Others 49.5 45.5 26.8 32.9 32.7 35.2 42.0 54.0 15.4 17.9
Borrowing
Trends in Government Debt-GDP Ratio
Similar to the Trends in Budget Deficit
90
80
70
60
Per cent
50
40
30
20
10
0
1980-81 1990-91 1996-97 2000-01 2004.05 2006-07
(BE)
Impact
Preemption of Financial Savings
No possibility of Price Discovery
Reforms in the Central G-Sec Market
Three Phases
First Phase (1992-95)
Creation of Enabling Environment
Elimination of Automatic Monetisation
Introduction of Auctions
SLR reduced
Short-Sale
10
8
6
4
2
0
1996-97
1998-99
1999-00
2000-01
2002-03
1995-96
1997-98
2001-02
2003-04
2004-05
2005-06
Weighted Average Yield (per cent) Weighted Average Maturity (years)
Yield Curve
Development of a Smooth Yield Curve
16
14
12
10
Per cent
8
6
4
2
0
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
M aturity (Years)
10% 5%
0% Com
mercia
l Ba
nks
13% 25%
LifeIn
sura
nceCorporationof In
dia#
Un
itTru
stofIn
dia
NABARD
Em
ploye
esProvide
ntFu
ndSch
eme
Coa
l Min
esProv
ide
ntFu
ndSch
eme
Prim
aryde
ale
rs
56%
Oth
ers
Employees Provident
20%
FundScheme
53% Coal Mines Provident
FundScheme
Primarydealers
Others
External Borrowings
Low Share of External Debt
External Borrowings only from
Multilateral and Bilateral Sources
100.0
80.0
Per cent
60.0
40.0
20.0
0.0
1950-51 1980-81 1990-91 2000-01 2006-07
(BE)
R evenue D eficit 0.93 0.87 0.69 2.54 2.59 2.25 2.22 1.17 0.49 0.05
G ross P rim ary 1.78 1.22 0.8 0.09 -0.15 -0.61 -0.75 -1.65 -2.03 -2.47
D eficit
Financing Pattern of Fiscal Deficit
Share of Central Loans has reduced
Share of Market Loans has increased
since early 1990s
NSSF continues to predominate
1990 - 1991 - 1995 - 2000 - 2001 - 2002 - 2003 - 2004 - 2005 - 2006 -
91 92 96 01 02 03 04 05 06 07
(RE) (BE)
Loan Fro m 53.1 49.6 47.1 9.4 11.4 -0.9 11.5 -15.1 2.3 4.8
Central Gov.
Market 12.0 17.5 18.7 14.0 18.0 27.9 38.4 30.1 15.7 21.0
Borrowing
Others 33.3 32.9 34.2 40.2 33.5 21.9 33. 2 18.5 17.0 20.7
Fiscal Reforms
Twelfth Finance Commission
ØFiscal Restructuring Plan: Fiscal Discipline
ØIncentivised Enactment of FRL through Debt
Consolidation and Relief Facility (DCRF)
ØFinancial Disintermediation by Centre
Experience
ØFRL Enactment – 24 States
ØRD to be nearly eliminated and GFD-GDP ratio
to decline to 2.7% in 2006-07
Market Borrowings of State Governments
rediscounting facilities.
Capital Management and Profit
Planning
Prudential Norms- Capital Adequacy-Basel II-
Asset Classification-provisioning
Profit and Profitability-Historical Perspective of
the Approach of Banks to profitability-Effects
of NPA on profitability-A profitability Model-
Share holders value Maximization & EVA-
Profit Planning-Measures to improve
profitability
RISK MANAGEMENT
-Treasury Management
Treasury Products
Treasury Risk Management
Derivative Products
Integrated Treasury
Integrated Treasury refers to integration of
money market, securities market and
foreign exchange operations.
-Meeting reserve requirements
-Efficient merchant services
-Global cash management
-Optimizing profit by exploiting market
opportunities in forex market, money market
and securities market
-Risk management
-Assisting bank management in ALM
Treasury
Function Responsible for
settlement
MIS
Treasury
SLR
SLR is to be maintained in the form of
the following assets:
Cash balances (excluding balances
maintained for CRR)
Gold (valued at price not exceeding
current market price)
Approved securities valued as per norms
prescribed by RBI.
Principles
Direct Quotation: Buy Low, Sell High:
The prime motive of any trader is to make profit. By
purchasing the commodity at lower price and
selling it at a higher price a trader earns the profit.
In foreign exchange, the banker buys the foreign
currency at a lesser price and sells it at a higher
price.
Indirect Quotation: Buy High, Sell Low:
A trader for a fixed amount of investment would
acquire more units of the commodity when he
purchases and for the same amount he would part
with lesser units of the commodity when he sells.
Spot and Forward
Transactions
Oct
[a] Spot Rate USD = Rs.45.8500/8600
Forward Premium
September 0.2950/3000
October 0.5400/5450
November 0.7600/7650
Gain
Net interest cost LIBOR- .5%