Presentation is loading. Please wait.

Presentation is loading. Please wait.

5/1/2015 College of Agricultural Banking, RBI, PUNE ALM and Fund Management Jyoti Kumar Pandey Deputy General Manager & Member of Faculty College of Agricultural.

Similar presentations


Presentation on theme: "5/1/2015 College of Agricultural Banking, RBI, PUNE ALM and Fund Management Jyoti Kumar Pandey Deputy General Manager & Member of Faculty College of Agricultural."— Presentation transcript:

1 5/1/2015 College of Agricultural Banking, RBI, PUNE ALM and Fund Management Jyoti Kumar Pandey Deputy General Manager & Member of Faculty College of Agricultural Banking, Pune

2 5/1/2015 College of Agricultural Banking, RBI, PUNE What is Banking Section 5(b) defines banking ‘Accepting for the purpose of lending or investment of deposits or money repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwise’ Risk taking is an inherent function of banking - Allan Greenspan

3 5/1/2015 College of Agricultural Banking, RBI, PUNE Banks get affected by Actions of Central Banks Actions of the Government Domestic and International Disturbances Inflation

4 5/1/2015 College of Agricultural Banking, RBI, PUNE Deregulation Banks are now operating in a fairly deregulated environment and are required to determine on their own, interest rates on deposits and advances Intense competition for business involving both the assets and liabilities together with increasing volatility in the interest rates has brought pressure on the management of banks to maintain a good balance among spreads

5 5/1/2015 College of Agricultural Banking, RBI, PUNE Risks Faced by Banks Credit Risk Market Risk  Liquidity Risk  Interest Rate Risk Operational Risk

6 5/1/2015 College of Agricultural Banking, RBI, PUNE Effects of Risk Factors Loss of Market Value Loss of Reserves Loss of stakeholders confidence

7 5/1/2015 College of Agricultural Banking, RBI, PUNE ALM The ALM guidelines issued by RBI has been formulated to serve as a benchmark for banks which lack a formal ALM system Those who already have their existing system may fine tune their information and reporting system

8 5/1/2015 College of Agricultural Banking, RBI, PUNE Purpose of ALM Capture the maturity structure of the cash flows (inflows and outflows) in the Statement of Structural Liquidity Tolerance levels for various maturities may be fixed by the bank keeping in view bank’s ALM profile, extent of stable deposit base, nature of cash flows etc.

9 5/1/2015 College of Agricultural Banking, RBI, PUNE ALM ALM is about managing market risk and liquidity risk together Capital market exposure of banks is small Exchange risk is highly specialized Hence ALM is an integrated risk management approach for managing liquidity risk, interest rate risk

10 5/1/2015 College of Agricultural Banking, RBI, PUNE The problem of mismatch Mismatches in maturity Mismatches in interest rate How does bank makes the spread? Borrow short and lend long and keep the spread Maturity mismatch is the basis of profitability Risk management does not eliminate mismatch – merely manages them

11 5/1/2015 College of Agricultural Banking, RBI, PUNE The problem of mismatch Interest Rate Risk  Affects profitability Liquidity Risk  May lead to liquidation General Strategy  Eliminate Liquidity Risk (not the mismatch)  Manage Interest Rate Risk  Consciously create gaps

12 5/1/2015 College of Agricultural Banking, RBI, PUNE Asset Liability Transformation Banks are exposed to credit and market risks in view of the asset-liability transformation With liberalisation, banks’ operations have become complex and large, requiring strategic management

13 5/1/2015 College of Agricultural Banking, RBI, PUNE ALM Pillars ALM Information Systems ALM Organisation ALM Process Applicable to Scheduled UCBs and Tier II UCBs For Tier II UCBs – effective date is December 2008

14 5/1/2015 College of Agricultural Banking, RBI, PUNE ALM Pillars (Contd.) ALM Information systems  MIS  Information availability  Accuracy  Adequacy  Expediency

15 5/1/2015 College of Agricultural Banking, RBI, PUNE ALM Pillars (Contd.) ALM Organisation  Structure and responsibilities  Level of top management involvement

16 5/1/2015 College of Agricultural Banking, RBI, PUNE ALM Pillars (Contd.) ALM Process Risk Parameters Risk Identification Risk Measurement Risk Management Risk Policies and Procedures, prudential limits and auditing, reporting and review

17 5/1/2015 College of Agricultural Banking, RBI, PUNE ALM Information Systems ALM framework built on sound methodology with necessary information system back-up ALM to be supported by management philosophy and clearly states risk policies and procedures / prudential limits Banks may utlilise ‘Gap Analysis’ or ‘Simulation’ Important to have availability of timely, adequate and accurate information

18 5/1/2015 College of Agricultural Banking, RBI, PUNE ALM Information Systems (Contd.) ALM Data could be developed by following approach, in case UCBs do not have requisite information  Analyse behaviour of asset and liability products in sample branches that account for significant business (60-70 per cent)  Based on this make rational assumption for the other branches UCBs have limited area of operations and hence it would be easier for them to make such assumptions and better access to data

19 5/1/2015 College of Agricultural Banking, RBI, PUNE ALM Organisation Board should have overall responsibility for management of risk  Board should decide risk management policy and procedure, set prudential limits, auditing, reporting and review mechanism in respect of liquidity, interest rate and forex risk ALCO  Consisiting of bank’s senior management including CEO  Responsible for adherence to the polices and limits set by Board  Responsible for deciding business strategies (on asset liability side) in line with bank’s business and risk objectives ALM Support Group  Consisting of operating staff  Responsible for analysing, monitoring and reporting risk profiles to ALCO  Prepare forecasts showing effects of various possible changes in market conditions affecting balance sheet and suggesting action to adhere to bank’s internal limits

20 5/1/2015 College of Agricultural Banking, RBI, PUNE ALM Organisation (Contd.) ALCO decision making unit responsible for  Balance Sheet planning from risk-return perspective which includes management of liquidity, interest rate and forex risks  Pricing of deposits and advances, desired maturity profile etc.  Monitoring the risk levels of the bank  Review of the results and progress of implementation of decisions made in previous meeting  Future business strategies based on bank’s current view on interest rates  To decide on source and mix of liabilities or sale of assets  To develop future direction of interest rate movements  To decide on funding mix between fixed and floating rate funds, wholesale vs. retails deposits, short term vs. long term deposits etc.

21 5/1/2015 College of Agricultural Banking, RBI, PUNE ALM Organisation (Contd.) ALCO size would be dependent on the size of the UCB May comprise of  CEO or Secretary  Chief of Investment / Treasury including those of forex, credit, planning etc.  Head of IT if a separate division exists UCBs may at their discretion may have Sub- committees and Support Groups

22 5/1/2015 College of Agricultural Banking, RBI, PUNE ALM Process Scope is  Liquidity Risk Management  Interest Rate Risk Management  Trading (Price) risk Management  Funding and Capital Management  Profit Planning and business Projections UCBs, generally, are not exposed to forex risk

23 5/1/2015 College of Agricultural Banking, RBI, PUNE Liquidity Risk Interest Rate Risk ALM

24 5/1/2015 College of Agricultural Banking, RBI, PUNE Liquidity Risk Arising due to  Over extension of credit  High level of NPAs  Poor asset quality  Mismanagement  Hot Money  Non recognition of embedded option risk  Reliance on few wholesale depositors  Large undrawn loan commitments  Lack of appropriate liquidity policy and contingent plan

25 5/1/2015 College of Agricultural Banking, RBI, PUNE Liquidity vs. Earnings Bank must be in a position to:-  Balance their need for liquidity with their need for earnings  More liquid assets tend to provide lower return than do less liquid assets

26 5/1/2015 College of Agricultural Banking, RBI, PUNE Assessing Liquidity Position Assessing a bank’s liquidity position can be challenging An adequate position for one bank may not be sufficient for another A position considered adequate for a bank in one time period may not be so in another BANK SPECIFIC & DYNAMIC

27 5/1/2015 College of Agricultural Banking, RBI, PUNE Liquidity risk-Manifestation Funding risk  Need to replace net outflows due to unanticipated withdrawal/non-renewal of deposits Time Risk  Need to compensate for non-receipt of expected inflows of funds-performing assets turning into non-performing assets

28 5/1/2015 College of Agricultural Banking, RBI, PUNE Liquidity Risk (Contd.) Regulatory Requirements  CRR / SLR  Call Money Borrowings prescriptions / limits  ALM Guidelines  Host country prescriptions  Overseas Offices of Indian Banks

29 5/1/2015 College of Agricultural Banking, RBI, PUNE Factors Reducing Liquidity Risk Availability of Refinance LAF Facility Open Market Operations CBLO

30 5/1/2015 College of Agricultural Banking, RBI, PUNE Liquidity Risk - Symptoms Offering higher rate of interest on deposits Delayed payment of matured proceeds Delayed disbursement to borrowers against committed lines of credit Deteriorating asset quality Large contingent liabilities Net deposit drain

31 5/1/2015 College of Agricultural Banking, RBI, PUNE Liquidity Risk - Measurement Two methods are employed:  Stock approach - Employing ratios  Flow approach - Time bucket analysis

32 5/1/2015 College of Agricultural Banking, RBI, PUNE Liquidity Risk - Measurement Liquidity Ratios  Volatile Liability Dependence Ratio  Volatile Liabilities minus Temporary Investments to Earning Assets net of Temporary Investments  Shows the extent to which bank’s reliance on volatile funds to support Long Term assets –where volatile liabilities represent wholesale deposits which are market sensitive and temporary investments are those maturing within one year and those investments which are held in the trading book and are readily sold in the market  Growth in Core Deposits to growth in assets  Higher the ratio the better

33 5/1/2015 College of Agricultural Banking, RBI, PUNE Liquidity Risk – Measurement (Contd.) Purchased Funds to Total Assets  where purchased funds include the entire inter-bank and other money market borrowings, including Certificate of Deposits and institutional deposits Loan Losses to Net Loans Loans to core deposits

34 5/1/2015 College of Agricultural Banking, RBI, PUNE Liquidity Risk – Measurement (Contd.) Does not lead to proper assessment of liquidity gaps due to:  Illiquidity of liquid assets  Their ready marketability  Difficulty to convert easily into liquid cash with least loss of value from the previously quoted market rates

35 5/1/2015 College of Agricultural Banking, RBI, PUNE Liquid Assets to Total Assets  Show the percentage of liquid assets in the asset structure of the bank % Liquid assets generally are cash balances with RBI + balances with other banks + investments available for sale + money market instruments

36 5/1/2015 College of Agricultural Banking, RBI, PUNE Liquid Assets to Total Deposits  This ratio indicates extent of liquidity maintained by a bank for meeting the demand made by the depositors- Sometimes taken as a measure of bank liquidity %

37 5/1/2015 College of Agricultural Banking, RBI, PUNE Loans to Deposits  Loans to deposits ratio indicates the degree to which the bank has already used up its available resources to accommodate the credit needs of the customers  A high loan deposit ratio indicates that a bank will have comparatively low liquidity

38 5/1/2015 College of Agricultural Banking, RBI, PUNE Loans to Assets  This ratio indicates the percentage of illiquid assets to total assets  A rise in this ratio would indicate lower liquidity

39 5/1/2015 College of Agricultural Banking, RBI, PUNE Loans to Core Deposits  Those deposits which are not subject to any large volatility  Average level of previous years deposit is generally taken as core deposits  This ratio helps in assessing level of deployment of core portion of deposits

40 5/1/2015 College of Agricultural Banking, RBI, PUNE Loans to Investments  While loans provide higher returns compared to investments, these suffer from credit risk and are more illiquid than investments  A proper mix of loans and investments keeping in view liquidity and yield considerations need to be fixed

41 5/1/2015 College of Agricultural Banking, RBI, PUNE Cash Flow Approach Preparing a structural liquidity by taking into account balance sheet on particular date and place in maturity ladder according to time buckets Identify the liquidity needs - to evolve methods to meet it Negative gaps in individual time buckets indicate the need. The need could be controlled by  prudential limits  as also by regulating the basis of business structure/financial flexibility of banks Regulatory Limit of 20% on outflows in first two time buckets

42 5/1/2015 College of Agricultural Banking, RBI, PUNE RBI Guidelines on Liquidity Risk Methodology prescribed in ALM System- Structural Liquidity Statement & Dynamic Liquidity Ladder are simple Need to make assumptions and trend analysis- Behavioural maturity analysis Variance Analysis at least once in six months and assumptions fine-tuned Track the impact of exercise of options & potential liquidity needs Cap on inter-bank borrowings & Call money

43 5/1/2015 College of Agricultural Banking, RBI, PUNE Structural Liquidity Statement – Sch. UCBs SSL Layout Circular Sept. 17, 2008 for Scheduled UCBs More granular approach adopted – by splitting first bucket of 1 – 14 days in SSL into Next Day, 2-7 days and 8 – 14 days Net cumulative negative mismatches during the Next Day, 2 – 7 days, 8 – 14 days and 15 – 28 days bucket should not exceed 5%, 10%, 15% and 20% of the cumulative cash outflows in the respective buckets Banks may undertake dynamic liquidity management and should prepare the SSL on daily basis to Top Management / ALCO SSL may be reported to RBI at fortnightly intervals within 10 days of the reporting Friday Revised format would be applicable from January 01, 2009 UCBs in Tier II are also covered Scheduled UCBs to report structural liquidity position and interest rate sensitivity to RBI as part of OSS data

44 College of Agricultural Banking, RBI, PUNE Structural Liquidity Statement – Sch. UCBs (Contd.) Heads of AccountClassification into time bands A.Outflows 1.Capital, Reserves and SurplusOver 5 year band 2. Demand Deposits (Current & Savings) Volatile and Core Deposits. Savings (10%) and Current (15%) are withdrawable on demand generally and hence volatile. Volatile portion in 1 day, 2 – 7 days and 8 – 14 days, depending upon the experience and estimates of the banks and rest (core portion) in over 1-3 years time band. It is only a benchmark if the system is better developed can classify based on behavioral instead of contractual maturity 3. Term DepositsRespective maturity buckets Appropriate time bands can be given based on behavioral instead of contractual maturity. However, wholesale deposits (Deposits over Rs. 15 lakh should be shown in respective residual time band) 4. CDsRespective maturity buckets 5. Other Liabilities i. Bills payableCore component which could be estimated on the basis of past data and behavioral pattern in ‘over 1 – 3 years’ time bucket. Balance in Day 1, 2 – 7 days and 8 – 14 days time band iii. Provisions other than for loan loss and dep. On investments Respective time bands. Items not representing cash payables (Guarantees fees received in advance etc.) may be placed in over 5 years time band 6. Export Refinance – AvailedRespective Time bands of underlying assets

45 College of Agricultural Banking, RBI, PUNE Structural Liquidity Statement – Sch. UCBs (Contd.) Heads of AccountClassification into time bands B. Inflows 1.CashDay 1 bucket 2. Balance with RBI / PSU banks / SCBs and DCCBs etc. Excess balance over required CRR / SLR under Day 1 bucket. The statutory balances distributed in different time bands corresponding to the maturity profile of DTL with 14 days time lag 3.Balances with other banks i.Current Account ii.Money at Call & Short Notice Non-withdrawable portion on stipulation of minimum balance in 1-3 years band and remaining balance in Day 1 bucket band. Respective residual maturity bands 4. Investments i.Approved Securities i.PSU Bonds, CDs and CPs, Units of UTI (Close ended) etc. ii.Equities of All India FIs etc. iii.Units of mutual funds iv.Securities in trading books v.Investment in subsidiaries Respective Residual time bands except amount required to be reinvested for maintaining SLR / CRR Residual maturity. Investment classified as NPAs in 3-5 years band (substandard) and over 5 years (doubtful) Listed shares in 2 – 7 days bucket with haircut of 50 %. Other shares in over 5 years bucket Day 1 bucket Day 1 bucket, 2-7days, 8-14 days, days and 29 – 90 days according to defeasance period Over 5 years bucket

46 5/1/2015 College of Agricultural Banking, RBI, PUNE Structural Liquidity Statement – Sch. UCBs (Contd.) 6. NPAs i.Substandard ii.Doubtful and Loss 3-5 years band Over 5 years band 7. Fixed AssetsOver 5 years band 8. Other Assets i.Intangible assetsIntangible assets and assets not representing cash flows may be shown in over 5 years bucket 9. Contingent liabilities - LCs / Guarantees (outflows) Assets created out of developments may be shown under respective maturity bucket on the basis of probable date of recovery 10. Lines of credit committed i.Lines of credit committed to / from institutions and Export Refinance ii.Unavailed portion of cash credit / overdraft etc. Day 1 bucket Based on behavioral pattern and seasonal pattern arrive at potential availments and put under relevant maturity bucket up to 12 months Repo etc.Based on respective residual time bands Interest PayableRespective Time Band

47 5/1/2015 College of Agricultural Banking, RBI, PUNE Structural Liquidity Statement – Sch. UCBs (Contd.) Liability on account of event cash flows – CRR / SLR shortfall, wage settlement and any other contingency under respective maturity bands All overdue liabilities in Day 1, 2 – 7 days and 8 – 14 days bucket based on behavioral estimates Interest and installments from advances and investments which are due for less than one month – 1-6 months time band Interest and installments from advances and investments which are over due for less than one month may be placed in Day 1, 2-7 days and 8 – 14 days based on behavioral pattern. Further, interest and installments due (before classification as NPAs may be placed in 29 days – 3 months bucket if the earlier receivables remain uncollected

48 5/1/2015 College of Agricultural Banking, RBI, PUNE Liquidity Risk Management for Tier 1 UCBs Basic guidelines for liquidity management issued on September 17, 2008 Banks advised to prepare  Statement of Structural Liquidity and  Statement of Short Term Dynamic Liquidity To be prepared as on the last reporting Friday of March / June / September / December and submit to the Board within one month from the last reporting Friday First such submission to be made to the Board as on last reporting Friday of December 2008

49 5/1/2015 College of Agricultural Banking, RBI, PUNE Liquidity Risk Management for Tier 1 UCBs (contd.) Maturity profile of SSL into 8 buckets i.1-14 days ii days iii.29 and up to 3 months iv.Over 3months and up to 6 months v.Over 6 months and up to 1 year vi.Over 1 year and up to 3 years vii.Over 3 years and up to 5 years viii.Over 5 years Mismatches (negative gaps) during 1-14 and days time bands in normal course should not exceed 20 % of the cash flows in each time band

50 5/1/2015 College of Agricultural Banking, RBI, PUNE Liquidity Risk Management for Tier 1 UCBs (contd.) Short Term Dynamic Liquidity Statement i.1-14 days ii days iii days STDL required for securities in the trading book SLR investments / securities are generally not very liquid and lack depth and are therefore shown in the residual maturity bands corresponding to residual maturity

51 5/1/2015 College of Agricultural Banking, RBI, PUNE Liquidity Risk Management for Tier 1 UCBs (contd.) Holding period not to exceed 90 days Cut loss limit is prescribed Defeasance periods are prescribed – Time taken to liquidate the position on the basis of liquidity in the secondary market are prescribed Marking to market on a weekly basis

52 5/1/2015 College of Agricultural Banking, RBI, PUNE Trading Book Maintained distinctly from those required for complying with Statutory Reserve Requirements Subject to preconditions  Composition and volume clearly defined  Maximum maturity / Duration of the portfolio restricted  Holding period not exceeding 90 days  Cut Loss prescribed  Marked to market on a weekly basis

53 College of Agricultural Banking, RBI, PUNE Maturity Profile Liquidity for Tier 1 UCBs Heads of AccountClassification into time bands A.Outflows 1.Capital, Reserves and SurplusOver 5 year band 2. Demand Deposits (Current & Savings) Volatile and Core Deposits. Savings (10%) and Current (15%) are withdrawable on demand generally and hence volatile. Volatile portion in 1-14 days and rest in over 1-3 years time band. It is only a benchmark if the system is better developed can classify based on behavioral instead of contractual maturity 3. Term DepositsRespective residual time bands Appropriate time bands can be given based on behavioral instead of contractual maturity. However, wholesale deposits (Deposits over Rs. 15 lakh should be shown in respective residual time band) 4. CDsRespective Residual Time Bands 5. Other Liabilities i. Bills payable1-14 days time band ii. Branch AdjustmentsNet credit balance in 1-14 days time band iii. Provisions other than for loan loss and dep. On investments Respective time bands. Items not representing cash payables (Guarantees fees received in advance etc.) may be placed in over 5 years time band 6. Export Refinance – AvailedRespective Time bands of underlying assets

54 College of Agricultural Banking, RBI, PUNE Maturity Profile Liquidity for Tier 1 UCBs (contd.) Heads of AccountClassification into time bands B. Inflows 1.Cash1-14days time band 2. Balance with RBI / PSU banks / SCBs and DCCBs etc. Excess balance over required CRR / SLR under 1-14 days band. The statutory balances distributed in different time bands corresponding to the maturity profile of DTL with 28 days time lag 3.Balances with other banks i.Current Account ii.Money at Call & Short Notice Non-withdrawable portion on stipulation of minimum balance in 14-3 year band and remaining balance in 1-14 days band. Respective residual maturity bands 4. Investments i.Approved Securities i.PSU Bonds, CDs and CPs, Units of UTI (Close ended) etc. ii.Equities of All India FIs etc. iii.Securities in trading books Respective Residual time bands except amount required to be reinvested for maintaining SLR / CRR Residual maturity. Investment classified as NPAs in 3-5 years band (substandard) and over 5 years (doubtful) Over 5 year band 1-14, and days time bands

55 5/1/2015 College of Agricultural Banking, RBI, PUNE Maturity Profile Liquidity for Tier 1 UCBs (contd.) 6. NPAs i.Substandard ii.Doubtful and Loss 3-5 years band Over 5 years band 7. Fixed AssetsOver 5 years band 8. Other Assets i.Branch Adjustments ii.Leased Assets Net debit balance in 1-14 days band. Intangible assets and assets not representing cash receivables in 5 years time band Interim cash flows under residual maturity time bands Contingent liabilities - i. Unavailed portion of Cash Credit / Overdraft / Demand Loan component of working capital ii. Export Refinance – Unavailed (inflow) Under residual maturity time bands within 12 months based on behavioral and seasonal patterns 1-14 days band LCBased on past history Repo etc.Based on respective residual time bands Interest PayableRespective Time Band

56 5/1/2015 College of Agricultural Banking, RBI, PUNE ALM for Tier II UCBs Similar to what prescribed to Scheduled UCBs Initially at least 60% of assets and liabilities to be covered and remaining 40% on assessment basis only 100% coverage by April 01, 2010 Statements required to be prepared  Statement of Structural Liquidity  Statement of Interest Rate Sensitivity  Short-Term Dynamic Liquidity Statement

57 5/1/2015 College of Agricultural Banking, RBI, PUNE ALM for Tier II UCBs – SSL To be prepared, to start with, as on last reporting Friday of March / June / September / December To be put up to the ALCO / Top Management within a month from the close of the last reporting Friday Reporting on a fortnightly basis from December 2008 (intended) Maturity profile of SSL into 8 buckets i.1-14 days ii days iii.29 and up to 3 months iv.Over 3months and up to 6 months v.Over 6 months and up to 1 year vi.Over 1 year and up to 3 years vii.Over 3 years and up to 5 years viii.Over 5 years

58 5/1/2015 College of Agricultural Banking, RBI, PUNE ALM for Tier II UCBs – SSL (contd.) Mismatches in cash flows to be kept at minimum Initially for 1-14 and days it may not exceed 20% normally In case banks wishes to operate on a higher limit, it could be done with approval of the Board / Management Objective of RBI is to enforce tolerance level strictly with effect from April 01, 2010

59 5/1/2015 College of Agricultural Banking, RBI, PUNE ALM for Tier II UCBs – SIRS Only rupee assets, liabilities and off-balance sheet positions to be reported Statement to be prepared as on last Friday of March / June / September / December To be submitted to ALCO / Top Management within one month of reporting Friday To be placed before the Board in its next meeting Banks expected to move over to monthly reporting system from April 01, 2010

60 5/1/2015 College of Agricultural Banking, RBI, PUNE ALM for Tier II UCBs – SIRS (contd.) Maturity profile of SIRS into 7 time bands i.Up to 3 months ii.Over 3months and up to 6 months iii.Over 6 months and up to 1 year iv.Over 1 year and up to 3 years v.Over 3 years and up to 5 years vi.Over 5 years vii.Non-sensitive Gap is the difference between Rate Sensitive Assets (RSA) and Rate Sensitive Liabilities (RSL) If RSA > RSL = +ve Gap – Bank benefits if interest rate goes up If RSA RSA = -ve Gap – Bank benefits if interest rate goes down

61 5/1/2015 College of Agricultural Banking, RBI, PUNE ALM for Tier II UCBs – SIRS (contd.) Banks to set prudential limits on individual gaps with the approval of the Board The prudential limits should have a bearing on the Total Assets, Earning Assets or Equity Banks need to work out Earnings at Risk (EaR) i.e. 20 – 30% of the last years NII or Net Interest Margin – based on their views of interest rate movements After sufficient experience is gained by the UCB in ALM, RBI may consider introduce capital adequacy for market risk

62 5/1/2015 College of Agricultural Banking, RBI, PUNE ALM for Tier II UCBs – STDS To be prepared as on each reporting Friday To be put up to the ALCO / Top Management within 2-3 days from the close of the reporting Friday

63 5/1/2015 College of Agricultural Banking, RBI, PUNE ALM for Tier II UCBs – Other Issues SSL and SIRS could be reported through OSS  Communication to be issued All the three ALM Statements may be put up to the ALCO as on last Friday of December 2008

64 5/1/2015 College of Agricultural Banking, RBI, PUNE Some points Break the beyond 5 year bucket into financial and non-financial The sum of all the gaps in the structural liquidity may or may not be zero The cumulative gaps – also called forward payment structure Why is the forward payment structure significant? Stress testing

65 5/1/2015 College of Agricultural Banking, RBI, PUNE Cumulative Gaps Forward Payment Structure indicates future liquidity position Long term strategic approach needed to correct an increasingly negative FPS

66 5/1/2015 College of Agricultural Banking, RBI, PUNE Dynamic Liquidity Gap Analysis Tracking cash flow on a short term time horizon- changes on account of fresh business are interpolated in the projections RBI has asked banks to monitor short term liquidity on a dynamic basis over time horizon spanning from 1-90 days

67 5/1/2015 College of Agricultural Banking, RBI, PUNE Short-Term Dynamic Liquidity Statement Main focus on short term mismatches  1-14days  days  days

68 5/1/2015 College of Agricultural Banking, RBI, PUNE Dynamic Liquidity Analysis Dynamic Liquidity Analysis (Amount Rs. Crore) Dynamic Liquidity Analysis OUTFLOWS1-90 days Net increase in loans and advances950 Net increase in investments275 TOTAL OUTFLOWS1225 INFLOWS Net cash position50 Net increase in deposits(less CRR)619 Refinance60 Total Inflows729 Mismatch(Inflows-Outflows)(-)496 Mismatch as a % of Total Outflows(-)40.49%

69 5/1/2015 College of Agricultural Banking, RBI, PUNE Interest Rate Risk Changes in yield curve of G-Secs Changes in administered rate of interest Changes in forward exchange rates Changes in prices of other assets and inflation rates

70 5/1/2015 College of Agricultural Banking, RBI, PUNE Reasons for Interest Rate Risk On account of asset transformation  Many deposits are used for one big loan Periodical review of assets and liabilities Due to mismatches between maturity / repricing dates as well as maturity amounts between assets and liabilities Depositors and borrowers may pre-close their accounts

71 5/1/2015 College of Agricultural Banking, RBI, PUNE RSA and RSL Rate Sensitive Assets (RSA) – Assets whose value is dependent on current interest rate Risk Sensitive Liabilities (RSL) – Liabilities whose value is dependent on current interest rate

72 5/1/2015 College of Agricultural Banking, RBI, PUNE Gap / Mismatch Risk Arises on account of holding RSA and RSL with different principal amounts, maturity / repricing rates Even though maturity dates are same, if there is a mismatch between amount of assets and liabilities it causes interest rate risk and affects NIM

73 5/1/2015 College of Agricultural Banking, RBI, PUNE Interest Rate Risk Assessed by Gap Report – Gaps between RSA and RSL Asset / Liabilities are rate sensitive if:  Within the time interval under consideration there is a Cash Flow  Repayment of term loans  Interest rate resets / reprices  Change in interest rate in CC account, Term Loans before maturity  RBI changes interest rates  Interest on Savings Bank Deposits, CRR balance etc.

74 5/1/2015 College of Agricultural Banking, RBI, PUNE Interest Rate Risk (contd.) Assessed by Gap Report – Gaps between RSA and RSL Gaps may be identified in the following time bands:  Upto 3 months  Over 3 months and upto 6 months  Over 6 months and upto 1 year  Over 1 year and upto 3 years  Over 3 years and upto 5 years  Over 5 years  Non-sensitive

75 5/1/2015 College of Agricultural Banking, RBI, PUNE Interest Rate Risk (contd.) Immediate impact of changes is on bank’s profit by change in its spread – NII  NII gives the earning perspective Long term impact is change in its MVE or Net Worth  As marked to market value of bank’s asset – liabilities, off-balance sheet positions get affected  Gives the economic value perspective

76 5/1/2015 College of Agricultural Banking, RBI, PUNE Interest Rate Risk (contd.) Each bank to set its prudential limits on individual gaps with approval of Board Prudential limits set with respect to bearing on Total Assets, Earning Assets or Equity Bank’s may work out their Earnings at Risk – % of last year’s NII or NIM

77 College of Agricultural Banking, RBI, PUNE Interest Rate Sensitivity Interest Rate Sensitivity (Contd.) Interest Rate Sensitivity Heads of AccountClassification into time bands A.Liabilities 1.Capital, Reserves and SurplusNon Sensitive 2. Current DepositsNon Sensitive 3. Savings Bank DepositsSensitive to the extent of interest paying (core) portion. Include in 3-6 months time band. Non interest part in non-sensitive band 4. Term Deposits and CDsSensitive. In different time bands based on residual term of maturity 5. Borrowings – FixedSensitive. In different time bands based on residual term of maturity 6. Borrowings – FloatingSensitive. Distributed to appropriate time bands that refers to resetting dates 7. Borrowings – Zero CouponSensitive. In different time bands based on respective maturity band 8. Borrowings from RBIUpto 3 months time band 9. Refinance from other AgenciesFixed Rate – As per maturity Floating Rate – Reprices when interest rate is reset 10. Other Liabilities & Provision Bills payable, Branch Adjustments, Provisions, Others Non-Sensitive 11. Repos / Bill RediscountedSensitive. Reprices on maturity and should be distributed to respective maturity bands

78 College of Agricultural Banking, RBI, PUNE Interest Rate Sensitivity (Contd.) Heads of AccountClassification into time bands B. Assets 1.CashNon Sensitive 2. Balance with RBIInterest portion in 3-6 months time band. Balance is non sensitive 3. Balance with other banks i.Current Accounts ii.Money at Call and Short Notice, Term Deposits and other placements i.Non sensitive ii.Sensitive on maturity. Amount distributed in different time bands 4. Investments (performing) i.Fixed Rate / Zero Coupon ii.Floating Rate i.Sensitive on maturity ii.Sensitive at next repricing date 5. Share of All India FIs, other cooperatives / Units of UTI Non Sensitive 6. Advancers (performing) i.Bills purchased and discounted ii.Cash Credits / Overdrafts / Loans repayable on demand and Term Loans i.Sensitive on maturity ii.Sensitive may be shown in 3+6 months band

79 College of Agricultural Banking, RBI, PUNE Interest Rate Sensitivity (Contd.) Heads of AccountClassification into time bands 7. NPAs (Advances & Investments) i.Substandard ii.Doubtful and Loss i.Over 3-5 years time band ii.Over 5 year time band 8. Fixed AssetsNon Sensitive 9. Other Assets i.Inter-Office Adjustments ii.Leased Assets iii.Others i.Non Sensitive ii.Sensitive on cash flows. Distributed in respective maturity bands corresponding to cash flow dates iii.Non Sensitive 10. Reverse Repos, Swaps, Bills Rediscounted Sensitive on maturity 11. Other products (Interest Rate) i.Swaps ii.Other i.Sensitive. Should be distributed under different bands with reference to maturity ii.Should be suitably classified as and when introduced

80 5/1/2015 College of Agricultural Banking, RBI, PUNE Gist Scheduled UCBS and Tier II UCBs  Have 3 pillars I n place  ALM Information Systems  ALM Organisation  ALM Process  Prepare 3 statements  Statement of Structural Liquidity (quarterly)  Short Term Dynamic Liquidity Statement (fortnightly)  Statement of Interest Rate Sensitivity (quarterly)  Review of Statements by ALCO / Top Management  To report from last reporting Friday of December 2008  SIRS to be moved to monthly reporting by April 01, 2010  SSL to be fortnightly basis from December 2008

81 5/1/2015 College of Agricultural Banking, RBI, PUNE Gist (contd.)  Scheduled UCBs already reporting SSL and SIRS through OSS  For Tier II UCBs separate communication to follow

82 5/1/2015 College of Agricultural Banking, RBI, PUNE Gist (contd.) Tier I UCBs  Prepare 2 Statements  Statement of Structural Liquidity (quarterly)  Statement of Short Term Dynamic Liquidity (quarterly)  To be put up to the Board as on last Friday of December 2008  For reporting through OSS separate communication to follow

83 5/1/2015 College of Agricultural Banking, RBI, PUNE Thank You


Download ppt "5/1/2015 College of Agricultural Banking, RBI, PUNE ALM and Fund Management Jyoti Kumar Pandey Deputy General Manager & Member of Faculty College of Agricultural."

Similar presentations


Ads by Google