ASSET LIABILITY MANAGEMENT - IMPORTANT KEY POINTS
Essential for All Upcoming Banking Examination
Asset – Liability Management (ALM) was implemented in India on 1st April, 1999 is a comprehensive and dynamic framework for monitoring, measuring and managing the mark risk of a bank. It is the arrangement of structure of balance sheet (liabilities and assets) maximize that net earnings from interest within the overall risk- bias (present and future) of the institutions.
Scope of ALM:
The ALM functions extend market risk management liquidity risk and interest rate risk, funding and capital planning and profit planning and growth projection.
It is the time period which particular asset or liability will still take to mature i.e. become due for payment (once at a time, in case of term deposit or in installments, say case of term loan).
These are different type intervals (10 for the time being, namely; Next day, 2-7 days, 8-14 days, 15-28, 29-90, 91-180-,181-365 days, 1-3 years, 3-5 and above 5 years), in which the value of a particular asset or liability is placed depending upon its resident maturity.
When in a particular maturity bucket, the amount of maturing liabilities or assets done not match, such position is called a mismatch position, which creates liquidity surplus or liquidity shortfall position. Depending upon the interest rate movement, such situation may turn out to be risky for the bank.
Role of Asset Liability Committee (ALCO):
Asset Liability Committee (ALCO) is the top most committee to oversee implementation of ALM system, to be headed by Chairman and Managing Director (CMD) or Executive Director (ED). It considers product pricing for both advances and deposits the desired maturity profile of the increment assets and liabilities in addition to monitoring the risk levels of the bank. It will have no articulate current interest rates view of the bank and base its decisions for future business strategy on the view.
Benefits of ALM:
It is an instrument that enables bank managements to take business decisions in a more informed skeleton. It is an integrated approach to financial management, requiring simultaneous decisions about the types of amount of financial assets and liabilities - both mix and volume – with the complexities of the financial markets in which the intuition operates.