Asset-Liability Management Of Bank:

Asset-Liability Management (ALM) is a comprehensive and dynamic techniques used by banks with strategic balance sheet for measuring, monitoring , managing and minimising exposure to the financial risks associated whilst achieving its profit objectives with the changing interest rates, foreign exchange rates and other factors that can affect the liquidity position of bank. Asset Liability Management (ALM) is the act of planning, acquiring, and directing the flow of funds through an organization and is all about interest rate risk, liquidity risk and foreign currency risk and for banks with forex operations, currency risk.

Through ALM banks and financial institutions try to figure out the assets and liabilities in terms of maturities and interest rates sensitivities so as to minimize the interest rate risk and liquidity risk and currency risk

Parameters of ALM:
  • Gap :- Total assets-Total liability
  • Net Interest Income:- Interest Income-Interest Expenses
  • Net Interest Margin:- Net Interest Income/ Average Assets
  • Equity Economic Ratio:- Owner'sfund / Total assets
Objectives ALM:
  1. Interest Rate -Impact on earnings and net worth from potential short- and long-term changes in interest rates
  2. Liquidity - Sufficiency of funds available to respond to the needs of savers and borrowers and to access unanticipated earnings enhancement opportunities
  3. Net Worth - Adequacy relative to regulatory and internal guidelines as well as impact on asset size and resultant earnings capacity
  4. Credit - Implications of asset quality relative to net worth and earnings
  5. Call - Reinvestment of cash flows at lower yields due to early principal payments on mortgage loans and certain types of investments
  6. Operations - Possibility of loss due to deficiencies in information systems or internal controls
  7. Legal - Contracts are not legally enforceable or documented correctly
  8. Compliance - Risk of violations and non-compliance with applicable laws and regulations resulting in fines, penalties, payment, or damages
  9. Event - Changes in laws, regulations, or other external factors may adversely impact the organization
  10. Strategic - Risk of adverse business decisions through management's actions or inactions
  11. Reputation - Negative public opinion or perception leading to a loss of confidence or severance of relationships.

An effective Asset-Liabilities Management technique aims to manage the volume, mix, maturity, and rate sensitivity, quality of assets and liabilities as a whole so as to attain a predetermined acceptable risk/reward ratio.

It can be concluded that ALM is an important tool for monitoring, measuring and managing the interest rate risk, liquidity risk and foreign currency risk of a bank. With the deregulation of interest regime in India, the banking industry has been exposed to interest rate risk or market risk. Hence to manage such risk, ALM needs to be formulated and used so that the management is able to assess the risks and cover some of these by taking appropriate decisions.