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Asset Liability Management Essay

1565 words - 7 pages


Submitted by:
Arpit Sharma
Roll No. 141
Sec- C

Article discusses the issues in asset liability management and elaborates on various categories of risk that need to be managed. It also examines strategies for asset-liability management from the asset side as well as the liability side, particularly in the Indian context. It also discusses the specificity of financial institutions in India and the new information technology initiatives that beneficially affect asset-liability management. The rise in conglomerate financial ...view middle of the document...

It has been introduced in Indian Banking industry w.e.f. 1st April, 1999. ALM is concerned with risk management and provides a comprehensive and dynamic framework for measuring, monitoring and managing liquidity, interest rate, foreign exchange and equity and commodity price risks of a bank that needs to be closely integrated with the banks’ business strategy. Therefore, ALM is considered as an important tool for monitoring, measuring and managing the market risk of a bank. With the deregulation of interest regime in India, the Banking industry has been exposed to the market risks. To manage such risks, ALM is used so that the management is able to assess the risks and cover some of these by taking appropriate decisions.


CREDIT RISK: The risk of counter party failure in meeting the payment obligation on the
specific date is known as credit risk. Credit risk management is an important challenge for
financial institutions and failure on this front may lead to failure of banks.

CAPITAL RISK: One of the sound aspects of the banking practice is the maintenance of
adequate capital on a continuous basis. Capital adequacy focuses on the weighted average risk of lending and to that extent, banks are in a position to realign their portfolios between more risky and less risky assets.

MARKET RISK: Market risk is related to the financial condition, which results from adverse
movement in market prices. This will be more pronounced when financial information has to be
provided on a marked-to-market basis since significant fluctuations in asset holdings could
adversely affect the balance sheet of banks. In the Indian context, the problem is accentuated
because many financial institutions acquire bonds and hold it till maturity. When there is a
significant increase in the term structure of interest rates, or violent fluctuations in the rate
structure, one finds substantial erosion of the value of the securities held.

INTEREST RATE RISK: The terms for which interest rates were fixed on deposits differed from those for which they fixed on assets, banks incurred interest rate risk i.e., they stood to make gains or losses with every change in the level of interest rates.

LIQUIDITY RISK: potential inability to generate adequate cash to cope with a decline in deposits or increase in assets. To a large extent, it is an outcome of the mismatch in the maturity patterns of assets and liabilities.
The assets and liabilities of the bank’s balance sheet are nothing but future cash inflows or outflows. With a view to measure the liquidity and interest rate risk, banks use of maturity ladder and then calculate cumulative surplus or deficit of funds in different time slots on the basis of statutory reserve cycle, which are termed as time buckets.
As a measure of liquidity management, banks are required to monitor their cumulative mismatches across all time buckets in their Statement of Structural Liquidity by establishing...

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