ALM and Fund Management

ALM and Fund Management
Jyoti Kumar Pandey Deputy General Manager & Member of Faculty College of Agricultural Banking, Pune 4/13/2017 College of Agricultural Banking, RBI, PUNE

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 4/13/2017 College of Agricultural Banking, RBI, PUNE

Banks get affected by Actions of Central Banks Actions of the Government Domestic and International Disturbances Inflation 4/13/2017 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 4/13/2017 College of Agricultural Banking, RBI, PUNE

Risks Faced by Banks Credit Risk Market Risk Liquidity Risk Interest Rate Risk Operational Risk 4/13/2017 College of Agricultural Banking, RBI, PUNE

Effects of Risk Factors
Loss of Market Value Loss of Reserves Loss of stakeholders confidence 4/13/2017 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 4/13/2017 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. 4/13/2017 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 4/13/2017 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 4/13/2017 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 4/13/2017 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 4/13/2017 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 4/13/2017 College of Agricultural Banking, RBI, PUNE

ALM Pillars (Contd.) ALM Information systems MIS Information availability Accuracy Adequacy Expediency 4/13/2017 College of Agricultural Banking, RBI, PUNE

ALM Pillars (Contd.) ALM Organisation Structure and responsibilities Level of top management involvement 4/13/2017 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 4/13/2017 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 4/13/2017 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 4/13/2017 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 4/13/2017 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. 4/13/2017 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 4/13/2017 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 4/13/2017 College of Agricultural Banking, RBI, PUNE

ALM Liquidity Risk Interest Rate Risk 4/13/2017 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 4/13/2017 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 4/13/2017 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 4/13/2017 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 4/13/2017 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 4/13/2017 College of Agricultural Banking, RBI, PUNE

Factors Reducing Liquidity Risk
Availability of Refinance LAF Facility Open Market Operations CBLO 4/13/2017 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 4/13/2017 College of Agricultural Banking, RBI, PUNE

Liquidity Risk - Measurement
Two methods are employed: Stock approach - Employing ratios Flow approach - Time bucket analysis 4/13/2017 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 4/13/2017 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 4/13/2017 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 4/13/2017 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 4/13/2017 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-20-22% 4/13/2017 College of Agricultural Banking, RBI, PUNE

Loans to Deposits 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 4/13/2017 College of Agricultural Banking, RBI, PUNE

Loans to Assets Loans to Assets This ratio indicates the percentage of illiquid assets to total assets A rise in this ratio would indicate lower liquidity 4/13/2017 College of Agricultural Banking, RBI, PUNE

Loans to Core Deposits 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 4/13/2017 College of Agricultural Banking, RBI, PUNE

Loans to Investments 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 4/13/2017 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 4/13/2017 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 4/13/2017 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 4/13/2017 College of Agricultural Banking, RBI, PUNE

Structural Liquidity Statement – Sch. UCBs (Contd.)
Heads of Account Classification into time bands Outflows 1.Capital, Reserves and Surplus Over 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 Deposits Respective 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. CDs 5. Other Liabilities i. Bills payable Core 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 – Availed Respective Time bands of underlying assets College of Agricultural Banking, RBI, PUNE

Heads of Account Classification into time bands B. Inflows Cash Day 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 Current Account 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 Approved Securities PSU Bonds, CDs and CPs, Units of UTI (Close ended) etc. Equities of All India FIs etc. Units of mutual funds Securities in trading books 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, 2-7days, 8-14 days, days and 29 – 90 days according to defeasance period Over 5 years bucket College of Agricultural Banking, RBI, PUNE

6. NPAs Substandard Doubtful and Loss 3-5 years band Over 5 years band 7. Fixed Assets 8. Other Assets Intangible assets Intangible 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 Lines of credit committed to / from institutions and Export Refinance 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 Payable Respective Time Band 4/13/2017 College of Agricultural Banking, RBI, PUNE

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 4/13/2017 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 4/13/2017 College of Agricultural Banking, RBI, PUNE

Liquidity Risk Management for Tier 1 UCBs (contd.)
Maturity profile of SSL into 8 buckets 1-14 days 15-28 days 29 and up to 3 months Over 3months 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 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 4/13/2017 College of Agricultural Banking, RBI, PUNE

Short Term Dynamic Liquidity Statement 1-14 days 15-28 days 29-90 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 4/13/2017 College of Agricultural Banking, RBI, PUNE

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 4/13/2017 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 4/13/2017 College of Agricultural Banking, RBI, PUNE

Maturity Profile Liquidity for Tier 1 UCBs
Heads of Account Classification into time bands Outflows 1.Capital, Reserves and Surplus Over 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 Deposits Respective 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. CDs Respective Residual Time Bands 5. Other Liabilities i. Bills payable 1-14 days time band ii. Branch Adjustments Net 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 – Availed Respective Time bands of underlying assets College of Agricultural Banking, RBI, PUNE

Maturity Profile Liquidity for Tier 1 UCBs (contd.)
Heads of Account Classification into time bands B. Inflows Cash 1-14days 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 Current Account 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 Approved Securities PSU Bonds, CDs and CPs, Units of UTI (Close ended) etc. Equities of All India FIs etc. 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 College of Agricultural Banking, RBI, PUNE

Maturity Profile Liquidity for Tier 1 UCBs (contd.)
6. NPAs Substandard Doubtful and Loss 3-5 years band Over 5 years band 7. Fixed Assets 8. Other Assets Branch Adjustments 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 LC Based on past history Repo etc. Based on respective residual time bands Interest Payable Respective Time Band 4/13/2017 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 4/13/2017 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 1-14 days 15-28 days 29 and up to 3 months Over 3months 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 Over 5 years 4/13/2017 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 4/13/2017 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 4/13/2017 College of Agricultural Banking, RBI, PUNE

ALM for Tier II UCBs – SIRS (contd.)
Maturity profile of SIRS into 7 time bands Up to 3 months Over 3months 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 Over 5 years 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 < RSL or RSL > RSA = -ve Gap – Bank benefits if interest rate goes down 4/13/2017 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 4/13/2017 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 4/13/2017 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 4/13/2017 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 4/13/2017 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 4/13/2017 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 4/13/2017 College of Agricultural Banking, RBI, PUNE

Short-Term Dynamic Liquidity Statement
Main focus on short term mismatches 1-14days 15-28 days 29-90 days 4/13/2017 College of Agricultural Banking, RBI, PUNE

Dynamic Liquidity Analysis (Amount Rs. Crore)
OUTFLOWS 1-90 days Net increase in loans and advances 950 Net increase in investments 275 TOTAL OUTFLOWS 1225 INFLOWS Net cash position 50 Net increase in deposits(less CRR) 619 Refinance 60 Total Inflows 729 Mismatch(Inflows-Outflows) (-)496 Mismatch as a % of Total Outflows (-)40.49% 4/13/2017 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 4/13/2017 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 4/13/2017 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 4/13/2017 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 4/13/2017 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. 4/13/2017 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 4/13/2017 College of Agricultural Banking, RBI, PUNE

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 4/13/2017 College of Agricultural Banking, RBI, PUNE

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 – 20-30% of last year’s NII or NIM 4/13/2017 College of Agricultural Banking, RBI, PUNE

Interest Rate Sensitivity (Contd.)
Heads of Account Classification into time bands Liabilities 1.Capital, Reserves and Surplus Non Sensitive 2. Current Deposits 3. Savings Bank Deposits Sensitive 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 CDs Sensitive. In different time bands based on residual term of maturity 5. Borrowings – Fixed 6. Borrowings – Floating Sensitive. Distributed to appropriate time bands that refers to resetting dates 7. Borrowings – Zero Coupon Sensitive. In different time bands based on respective maturity band 8. Borrowings from RBI Upto 3 months time band 9. Refinance from other Agencies Fixed 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 Rediscounted Sensitive. Reprices on maturity and should be distributed to respective maturity bands College of Agricultural Banking, RBI, PUNE

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

Heads of Account Classification into time bands 7. NPAs (Advances & Investments) Substandard Doubtful and Loss Over 3-5 years time band Over 5 year time band 8. Fixed Assets Non Sensitive 9. Other Assets Inter-Office Adjustments Leased Assets Others Sensitive on cash flows. Distributed in respective maturity bands corresponding to cash flow dates 10. Reverse Repos, Swaps, Bills Rediscounted Sensitive on maturity 11. Other products (Interest Rate) Swaps Other Sensitive. Should be distributed under different bands with reference to maturity Should be suitably classified as and when introduced 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 4/13/2017 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 4/13/2017 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 4/13/2017 College of Agricultural Banking, RBI, PUNE

Thank You 4/13/2017 College of Agricultural Banking, RBI, PUNE

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