2. Components of a
Bank Balance sheet
Liabilities Assets
1. Capital
2. Reserve & Surplus
3. Deposits
4. Borrowings
5. Other Liabilities
1. Cash & Balances with
RBI
2. Bal. With Banks &
Money at Call and
Short Notices
3. Investments
4. Advances
5. Fixed Assets
6. Other Assets
Contingent Liabilities
3. Components of Liabilities
1.Capital:
Capital represents owner’s
contribution/stake in the bank.
- It serves as a cushion for depositors and
creditors.
- It is considered to be a long term sources
for the bank.
4. Components of Liabilities
2. Reserves & Surplus
Components under this head includes:
I. Statutory Reserves
II. Capital Reserves
III. Investment Fluctuation Reserve
IV. Revenue and Other Reserves
V. Balance in Profit and Loss Account
5. Components of Liabilities
3. Deposits
This is the main source of bank’s funds. The deposits are
classified as deposits payable on ‘demand’ and ‘time’. They
are reflected in balance sheet as under:
I. Demand Deposits
II. Savings Bank Deposits
III. Term Deposits
6. Components of Liabilities
4. Borrowings
(Borrowings include Refinance / Borrowings from RBI,
Inter-bank & other institutions)
I. Borrowings in India
i) Reserve Bank of India
ii) Other Banks
iii) Other Institutions & Agencies
II. Borrowings outside India
7. Components of Liabilities
5. Other Liabilities & Provisions
It is grouped as under:
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)
8. Components of Assets
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
9. Components of Assets
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
10. Components of Assets
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
11. Components of Assets
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
12. Components of Assets
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
13. Contingent Liability
Bank’s obligations under LCs, Guarantees, Acceptances on
behalf of constituents and Bills accepted by the bank are
reflected under this heads.
14. Banks Profit & Loss Account
A bank’s profit & Loss Account has the following
components:
I. Income:This includes Interest Income and Other
Income.
II. Expenses:This includes Interest Expended, Operating
Expenses and Provisions & contingencies.
15. Components of Income
1. INTEREST EARNED
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
16. Components of Income
2. OTHER INCOME
I. Commission, Exchange and Brokerage
II. Profit on sale of Investments (Net)
III. Profit/(Loss) on Revaluation of Investments
IV. Profit on sale of land, buildings and other
assets (Net)
V. Profit on exchange transactions (Net)
VI. Income earned by way of dividends etc. from
subsidiaries and Associates abroad/in India
VII. Miscellaneous Income
17. Components of Expenses
1. INTEREST EXPENDED
I. Interest on Deposits
II. Interest on Reserve Bank of India / Inter-Bank
borrowings
III. Others
18. Components of Expenses
2. OPERATING EXPENSES
I. Payments to and Provisions for employees
II. Rent, Taxes and Lighting
III. Printing and Stationery
IV. Advertisement and Publicity
V. Depreciation on Bank's property
VI. Directors' Fees, Allowances and Expenses
VII. Auditors' Fees and Expenses (including Branch Auditors)
VIII.Law Charges
IX. Postages, Telegrams, Telephones etc.
X. Repairs and Maintenance
XI. Insurance
XII. Other Expenditure
19. Assets Liability Management
It is a dynamic process of Planning,
Organizing & Controlling of Assets
& Liabilities- their volumes, mixes,
maturities, yields and costs in order
to maintain liquidity and NII.
21. 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:
1. Net Interest Income (NII)
2. Net Interest Margin (NIM)
3. Economic Equity Ratio
22. RBI DIRECTIVES
• Issued draft guidelines on 10th
Sept’98.
• Final guidelines issued on 10th
Feb’99 for
implementation of ALM w.e.f. 01.04.99.
• To begin with 60% of asset &liabilities will be covered;
100% from 01.04.2000.
• Initially Gap Analysis to be applied in the first stage of
implementation.
• Disclosure to Balance Sheet on maturity pattern on
Deposits, Borrowings, Investment & Advances w.e.f.
31.03.01
23. Liquidity Management
Bank’s liquidity management is the process of generating
funds to meet contractual or relationship obligations at
reasonable prices at all times.
New loan demands, existing commitments, and deposit
withdrawals are the basic contractual or relationship
obligations that a bank must meet.
24. Adequacy of liquidity position for a
bank
Analysis of following factors throw light on a
bank’s adequacy of liquidity position:
a. Historical Funding requirement
b. Current liquidity position
c. Anticipated future funding needs
d. Sources of funds
e. Options for reducing funding needs
f. Present and anticipated asset quality
g. Present and future earning capacity and
h. Present and planned capital position
25. Funding Avenues
To satisfy funding needs, a bank must perform one or a
combination of the following:
a. Dispose off liquid assets
b. Increase short term borrowings
c. Decrease holding of less liquid assets
d. Increase liability of a term nature
e. Increase Capital funds
26. Types of Liquidity Risk
• Liquidity Exposure can stem from both internally and
externally.
• External liquidity risks can be geographic, systemic or
instrument specific.
• Internal liquidity risk relates largely to perceptions of an
institution in its various markets: local, regional, national
or international
27. Other categories of liquidity risk
• Funding Risk
- Need to replace net outflows due to unanticipated
withdrawals/non-renewal
• Time Risk
- Need to compensate for non-receipt of expected
inflows of funds
• Call Risk
- Crystallization of contingent liability
28. Statement of Structural Liquidity
All Assets & Liabilities to be reported as per
their maturity profile into 8 maturity Buckets:
i. 1 to 14 days
ii. 15 to 28 days
iii. 29 days and up to 3 months
iv. Over 3 months 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
29. 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.
30. ADDRESSING THE MISMATCHES
• Mismatches can be positive or negative
• Positive Mismatch: M.A.>M.L. and Negative
Mismatch M.L.>M.A.
• In case of +ve mismatch, excess liquidity can be
deployed in money market instruments, creating
new assets & investment swaps etc.
• For –ve mismatch,it can be financed from
market borrowings (Call/Term), Bills
rediscounting, Repos & deployment of foreign
currency converted into rupee.
31. STRATEGIES…
•To meet the mismatch in any maturity
bucket, the bank has to look into
taking deposit and invest it suitably
so as to mature in time bucket with
negative mismatch.
•The bank can raise fresh deposits of
Rs 300 crore over 5 years maturities
and invest it in securities of 1-29 days
of Rs 200 crores and rest matching
with other out flows.
32. Maturity Pattern of Select Assets & Liabilities of A Bank
Liability/Assets Rupees
(In Cr)
In Percentage
I. Deposits
a. Up to 1 year
b. Over 1 yr to 3 yrs
c. Over 3 yrs to 5 yrs
d. Over 5 years
15200
8000
6700
230
270
100
52.63
44.08
1.51
1.78
II. Borrowings
a. Up to 1 year
b. Over 1 yr to 3 yrs
c. Over 3 yrs to 5 yrs
d. Over 5 years
450
180
00
150
120
100
40.00
0.00
33.33
26.67
III. Loans & Advances
a. Up to 1 year
b. Over 1 yr to 3 yrs
c. Over 3 yrs to 5 yrs
d. Over 5 years
8800
3400
3000
400
2000
100
38.64
34.09
4.55
22.72
Iv. Investment
a. Up to 1 year
b. Over 1 yr to 3 yrs
c. Over 3 yrs to 5 yrs
d. Over 5 years
5800
1300
300
900
3300
100
22.41
5.17
15.52
56.90
33. STATEMENT OF
INTEREST RATE SENSITIVITY
• Generated by grouping RSA,RSL & OFF-Balance sheet items
in to various (8)time buckets.
RSA:
• MONEY AT CALL
• ADVANCES ( BPLR LINKED )
• INVESTMENT
RSL
• DEPOSITS EXCLUDING CD
• BORROWINGS
35. 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.
36. 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.
37. Interest Rate Risk
• Interest rate risk refers to volatility in Net Interest Income
(NII) or variations in Net Interest Margin(NIM).
• Therefore, an effective risk management process that
maintains interest rate risk within prudent levels is
essential to safety and soundness of the bank.
38. Sources of Interest Rate Risk
• Interest rate risk mainly arises from:
• Gap Risk
• Basis Risk
• Net Interest Position Risk
• Embedded Option Risk
• Yield Curve Risk
• Price Risk
• Reinvestment Risk
39. Measurement of Interest Rate Risk
• Gap Analysis- Simple maturity/re-pricing
Schedules can be used to generate simple
indicators of interest rate risk sensitivity of both
earnings and economic value to changing interest
rates.
- If a negative gap occurs (RSA<RSL) in given time
band, an increase in market interest rates could
cause a decline in NII.
- conversely, a positive gap (RSA>RSL) in a given
time band, an decrease in market interest rates
could cause a decline in NII.
40. Measurement of Interest Rate Risk
• Duration Analysis: Duration is a measure of the
percentage change in the economic value of a position
that occur given a small change in level of interest rate.
