Professional Documents
Culture Documents
INTRODUCTION
INTRODUCTION
ASSET LIABILITY MANAGEMENT
Banks should introduce the proposed ASSET LIABILITY MANAGAENT
(ALM) system positively by April 1 st 1999. The introduction of such procedure is
necessary to the mismatches in the assets and liabilities of the banks, which are
increasingly seen in the past. Banks are exposed to several major risks in the course of
their business. Sum of them are credit risk , interest risk , foreign exchange risk , price
risk , liquidity risk and operational risk. It is the risk with respect to interest rate and
liquidity that are sought to be hedged and managed by Asset Liability Management.
The RBI and ALM propose to divide assets into different time buckets depending
on the maturity and category of the assets. The time buckets are supposed to be used for
identifying cumulative mismatches and establishing internal prudential limits with in the
banks the mismatches that exists after such and exercises should be reported to the RBI
periodically.
The rational for accessing risk on a continuing basis is also to ensure that each
bank has enough at all times to cover the risks they incur, including those arising from
interest rate risk. Till now, bank have only focused on maintaining a prudent capital to
risk-weighted assets ratio(CAR), BUT LENDING risk is not only risk. Banks have to
ensure that their capital covers all risks including interest rate and liquidity risks.
Thus, these institutions have to bring their level in manageable proportions, while
not severely reducing their incomes. Restructuring their balance sheet can only do this.
Thus, the activity of asset liability management has received tremendous importance.
Risk in modern parlance is generally thought to be "the danger of loss". It is generally
associated with the downside and not the upside of a transaction. In finance theory,
however, risk is defined as dispersion of unexpected outcomes due to movements in
financial variables. Risk is measured by the standard deviation of unexpected outcomes
or sigma. Also called volatility.
RESEARCH METHODOLOGY:
PRIMARY SOURCE:
SECONDARY SOURCE:
ALM is the management of structure of Balance sheet in such a way that the
net earnings from interest in particular are maximized with overall risk preference
of the institutions"
CHAPTER -II
REVIEW OF LITERATURE
ASSET-LIABILITY MANAGEMENT:
Risk Management and Asset Liability Management (ALM) are the buzzwords
now in the world of financial institutions and banks especially in India for the last 5
years. In case the readings all around tend to give a feeling as if the entire financial
system is subjected to interest rate risk only now, do not be carried away. The
framework of ALM broadly covers the area of interest rate risk, and credit risk. The
level of awareness about the nature and impact of risks is at a very low level for
historical reasons. RBI has formally issued guidelines to all banks regarding interest
rate sensitivity and liquidity aspect of ALM. Arguably, it is in their own interest banks
should look at ALM, but it is perhaps appropriate for RRI to give instructions in this
regard since bank have been used to carry out RBI instructions for almost 30 years
with little proactive policies. While it is premature to state that banks will now be able
to manage risks, this is definitely a step in the right direction.
The deregulation of domestic interest rates, volatility in the domestic debt and
foreign exchange markets and introduction of new financial instruments has posed a
question of efficient liquidity and interest rate risk management with in banks. Banks
ability to contain and manage these risks obviously has an impact on the bottom line.
In a bank, however, there are endless specific entries on the liability side and also on
the assets side. The aggregation therefore, then presents a complete picture of banks
9
ALM is the management of structure of balance in such a way that the net
earning from interest in particular are maximized with over all risk-preference
of the institutions.
It
need
to
be
noted
that
ALM
is
an
integrated
approach
to
aggregate, the maturity of the assets is longer than the maturity of the
liabilities. This would expose to bank to interest rate risk as the interest rate
can increase and decrease. Thus the interest income can suffer in the
process .This has to be set right either by reducing the maturity of assets or
increasing the maturity of the liabilities.
Adjusted bank's liabilities to meet loan demands, liquidity needs and the safety
requirements with a focus on profit and long term operating viability.
Directing and controlling the flow, the means, the cost and the yield of the
consolidated funds of the bank with the eye on profit and long-term liability.
Management of total balance sheet liabilities with regards to its size and
quality.
Managing the net interest margin with in the overall risk bearing
ALM helps bankers in successfully matching the assets and liabilities in terms
of rate and maturity with a view to obtain optimum yield to survive in the deregulated
and competitive environment.
11
Faced deregulation.
New player.
New instruments.
New products at competitive rates.
12
In the light of the above development and to maintain and improve the bottom-lines,
there has to be some system in place which should help to achieve the organizational
objectives.
Asset liability management is one such effective and important tool. Thus, ALM is a
risk management tool through which market risk associated with the business are
identified, measured and monitored to maintain/optimize profits by re-aligning/re
-structuring asset and liabilities.
13
are also known to provide liquidity demanded by the market and to an extent, also
provide certain amount of insulation from credit risk. However, while providing these
services, intermediaries are subjected to interest rate risk since the value of the short-term
liabilities and the long-term assets change differentially in response to interest rate
moves. And being highly leveraged, they are exposed to significant interest rate risk and
losses could at time, be catastrophic if not managed properly.
Spread Management
Liquidity Management
Capital Management
Gap Management
14
Credit Risk.
Interest Rate Risk.
Liquidity Risk,
Market Risk.
Capital Risk.
15
Successful implementation of ALM involves 1. Choosing a suitable length of planning horizon- one, two, three months ahead.
1. Working out estimates of return and risk that might result from pursuing
alternative programmers, and
2. Finally, choosing a model that yields a stable regardless of the level or
movement consistently. The task of generation of desired net interest revenues
regardless of the level or movement of interest rates is achieved primarily
WHAT IS RISK?
16
The risk is nothing but a possible loss or damage going to occur. It has to be
managed and cannot be eliminated to earn maximum profits. There are three types of
important risks involved in the banking activity.
Credit risk.
Market risk.
Operation risk.
and long-term horizons. Based on this, they are to assess their vulnerability to adverse
changes, and. therefore, protect them in advance.
Interestingly, in the international market, the regulator dose not monitors the ALM
function of the banks under its charges. It is internally motivated and not regulated.
Managing risk is the inherent function of a bank, hut banks have ignored house. Although
some front line banks have ALM system in place, there are several banks that do not have
sophistication of making mismatches in assets and liabilities.
The RBI is trying to assist these banks by providing them with an educative
guideline of managing assets and liability. Liquidity risk is the risk of a bank suddenly
finding itself strapped for cash. This arises if the maturity profiles of assets and liabilities
do not match. The objective of ALM is to ensure that the bank is liquid enough to meet
all its liabilities.
The RBI is trying to ensure that the short-term liability should not be used to meet
long-term assets. The RBI wanted to discourage banks from borrowing short and
investing long. Some banks were borrowing from the call money market and investing in
90-days commercial papers.
17
Obviously, given that the total basket of assets and liabilities is made up of diverse
interest-bearing securities any change in the interest rate scenario impact banks
differentially. According to a study paper prepared by the Basle Committee
on bank supervision, although this risk is a normal part of banking, 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
instruments because the present value of future cash flows changes when the interest rate
structure changes.
maintain their interest rate risk with in prudent levels, said the banks analysts.
A comprehensive ALM policy framework focuses on bank profitability and longterm viability by targeting a net interest margin (NIM) ratio subject to some balance sheet
constrains. Significant among these constraints are maintaining credit quality, meeting
liquidity needs and obtaining sufficient capital. Minimizing the burden also gets
integrated to meet the overall bank objectives. A successful ALM requires a
comprehensive deregulation of interest rates coupled with a market-driven asset-liability
allocation and a favorable regulatory attitude. The latter, prerequisite has come in, but
then coming in to operation of an active and well-developed secondary market for the
bank liabilities and assets is still far from complete.
18
On the myriad balance-sheet risks that bank face today credit and interest rate risks
mostly accounts for their business risks. These and other risks expose a bank's business to
certain potential losses. These losses are of three types viz., expected, unexpected and
stress loss. The expected loss is always insurable by the myriad hedges and therefore,
forms part of banks cost of operation. There is the unexpected loss under adverse
conditions, which cannot be predicted. It is unexpected loss that is defined as value at risk
(VAR). Then there is also a third type of loss the bank may be prepared to face under
extreme conditions which occurs rarely but possibly. It is called as stress loss.
VALUE AT RISK
Value at risk technically is defined as the "loss amount, accumulated over a certain
period that is not exceeding in more than a certain percentage of all time". VAR (99%, 1
week) is equal to the loss amount, accumulated over one week, which is not exceeding in
more than one week, and which is not exceeding more than 1% of all lime. For measuring
VAR one relics on a model of random changes in the price of underlying instrumentsinterest rate changes, changes in foreign exchange rates etc. and a model for computing
sensitivity of derivatives price relative to the price of underlying instrument. In all these,
one has to remember that a VAR measures is merely a benchmark for relative judgments,
such as the risk of one portfolio relates to another, etc., even if accurate, comparison such
19
as these are specific to a time horizon and the confidence level with which VAR is
chosen.
EARNING AT RISK
Earning at risk (EaR) models capture the period of profit or loss in terms of the
realized profit or loss as per the cost method used currently. It consists of three
components viz., funds profit or loss + redemption profit or loss + sales gain or loss.
EXPANDED VaR
It measures Ear and adjusts it for movement in market valuation as part of the period
profit or loss. It is equal to EaR + change in valuation gain or loss.
CAPITAL AT RISK
Capital at risk (CaR) measures risk as transportation from VaR. it is a surrogate of
VaR viewed from the angle of solvency of the bank. It is equivalent to the unexpected
losses since expected losses are taken care of by way of provisions. So long as the
expected plus unexpected losses stay with in the limits of confidence then the bank is said
to stay solvent.
poses a problem to bank's interest income and hence profitability. It arises because bank's
assets and liabilities generally have their interest rates reset at different times. Changes in
interest rates can significantly alter a bank's net interest incomes (Nil) depending on the
extent or mismatch between the times when asset and liability interest rates are reset.
Changes in interest rates do also affect the market value of bank's equity. A method
of managing IRR first requires a bank to specify goals for either the book value or the
market value of Nil. In the former case, the focus will be on the current value of Nil and
in the latter case; the focus is on the market value of equity. In either case the bank as to
measure the risk exposure and formulate strategies to minimize or migrate the risk. The
bank goals and strategies in doing so normally reflect the management's policy
concurrence.
The Gaps of interest rate sensitive may be identifying in the following time buckets:
1. 1-7 days
2. 8-14 days
3. 15-29 days
4. 1 month to 3 months
5. Over 3 months to 6 months
6. Over 6 months to 12 months
7. Over 1 year to 3 years
8. Over 3 years to 5 years
9. Above 5 years
10.
Non-sensitive.
21
All relatively non-sensitivity assets and liability items like intangibles, fixed assets,
capital etc. are taken out and the rest are put in to time buckets according to their
remaining maturity as opposed to original maturity.
Table: Maturity profile (Rs in Crores)
Time bucket
Liabilities
Assets
3 months
6 months
9 months
1 year
260.00
600.00
500.00
1000.00
350.00
500.00
450.00
1200.00
This information affords comparison of assets and liabilities within each maturity
range. The identified mismatch indicates the future needs for funds and help in planning
future borrowings.
address the issue pertaining to credit risk. Every year the committee will lay down the
norms for lending policy, which contains several measures like prudential norms,
sartorial deployment of funds, assessment of risk associated with the loan proposal by
way of customer credit rating etc. for entire loan amount with the limit of over Rs 2 laces
have been covered under credit audit, which helps to improve its quality of pre-sanction
appraisal and post-sanction monitoring.
MARKET RISK
If the income that is Nil or NIM is affected due to change in the interest rate/price in
the market, such risk are called market risks.
24
deciding the business strategy of the bank in line with bank's budget and laid down risk
management objectives.
The CEO/CMD should head the committee. The chiefs of investment, credit funds
Management/treasury, international banking and Economic Research can be member of
the committee.
ALCO reviews the status of liquidity and interest rate risk \is-a-sis tolerance
limits.
RBI advice all the bank's to distribute all the maturing assets and liabilities in to
Time buckets ranging from 1-7 days, 7-14 days, and 14-29 days. 29- days to 3 months. 3
to 6 months, 6-12 months, 1-3 years, 3-5 years, and above 5 years and ascertain the risk
in each time bucket and take steps to over come the risk Rate sensitive Assets and
Liabilities: Any Asset/Liability gets reprised and get changed their value with a chance in
interest/price i9n the market during the period of study they are called rate sensitive Asset
and Liabilities.
NTI: Net Interest Income means difference between interest income and interest
expenditure. NIM; Net Interest Margin means Nil divided by Earning Assets of the Bank
Earning Assets: Any Asset, which is affected due to changes in market value, they are
called Earning Assets. NON-BARN ING Assets are nothing but those Assets,
25
Which do not get affected due to change in the interest rate or price e.g. NPA's, cash on
hand etc,
The RBI expects bank to take a view on future interest rate movements. That is,
project for themselves have interest rates, will move in the future-over both short OBS
position in to a certain number of pre-determined time bands according to their maturity.
These schedules can be used to generate simple indicators of the interest rate risk
sensitivity of both earnings and economic value to changing interest rates. This gap
analysis i.e. the size of the gap for a given time band gives an indication of the banks repricing risk exposure. The interest rate sensitive assets minus interest rate sensitive
liabilities in each time band can be multiplied by an assumed change in interest rate to
yield an approximation of change in net interest income that is likely to result from such
interest rate movements.
Mathematically, rate sensitive gaps (RSG) is defined as ratio of rate sensitive assets
(RSA) to rate sensitive liability (RSL) occurring during a particular maturity period. A
26
negative or liability sensitive gap occurs when liabilities exceeds assets in a given time
band. It means as increase in market interest rates could cause a decline in net interest
income. Conversely, a positive or asset sensitive gap implies that banks net interest
income could decline as a result of a decrease in the level of interest rates.
GAP=RSAs-RSLs
When interest rates change the bank's nil changes based on the following
Interrelationships:
Changes in NIIRSAs changes in average interest rate on RSAs = (Delta rl)-RSLs change
in average interest rate paid on RSLs = (Delta r2)
(1) Delta NII=RSAs Delta RSLs Delta r2
(2) For simplicity, assume for a while that Delta rl-Delta r2 = Delta r. that is both the
Average interest paid on liabilities change to the same extent, though not always true
in reality. The (2) becomes
Delta NI1= (RSAs-RSLs) Delta r
Delta NIIKJAP Delta r
(3) It is evident that not only changes in the market interest rates, but also changes in the
relationship between the bank asset and liability costs and in the composition of the
volumes of outstanding and incremental assets and liability affect NIL the actual
change in the direction and amount anticipated by them. The Gap relationship suggests
that a bank that either can or does not choose to speculation on future interest rates can
only reduce IRR by targeting a zero Gap.
27
All those bank assets and liabilities that are Interest insensitive from cash-How
standpoint also experiences large fluctuation in value due to movements in interest rates.
Even if the Gap is zero, the bank may still be subject to substantial IRR. However, with
the duration GAP (DGAP) approach, it is possible to offset the undesirable effects of
funding GAP by a carefully orchestrated position in non-rate sensitive assets and
liabilities. DGAP recognizes that IRR arise when timing of cash inflows and outflows
differs even if the assets and liabilities are categorized as rate intensive as per the
conventional GAP technique. Interest rate risk is measured in DGAP by a comparison of
the weighted duration of liabilities. The funding GAP technique matches cash flow by
structuring the short-term maturity buckets. On the other hand, the DGAP hedges against
IRR by structuring the portfolios of assets and liabilities to change equally in value
whenever interest rates change. The timing and magnitude of aggregate cash flow on
assets and liabilities are matched in such a way that the market value of equity remains
unchanged in a perfect hedge. Duration is defined as average life of financial instrument.
It equals the average time necessary to recover the initial cost. It also provides an
approximate measure of market value interest elastically. The DGAP is computed as the
difference between the composite duration of bank assets and a marked down composite
duration of its liabilities.
DGAP = DA-KDL (7)
K= %of assets funded by liability.
Thus, a bank can immunize the market value of its equity by setting DGAP=0.
28
However, in reality if a bank wants to perfectly hedge value, it has to set its asset duration
slightly less than its liability duration to maintain positive equity. For DGAP to equal
zero
is,
less
than
one.
One
can approximately
estimate the expected change in the market value of a bank for given change in the
interest rates. Change in Market Value of Equity/Total Assets = DGAP Approximate
change in interest rate (8)
From this it is clear that if DGAP is close to zero then the market value of bank
equity will not change and accordingly become immunized for any changes in the interest
rates.
The DGAP measure has several merits. It is more scientific, more realistic but
more sophisticated and complex in approach. A basic precondition for the use of this tool
as a hedge mechanism is that all the assets and liabilities of banks have to position as
marked to market. Therefore, at the present junction, the DGAP tool exists more for
adoring its scientific merits than for its applicability in its immunization of a bank's
balance sheet.
Basic Duration formula (Macaulay)
D= (C(I+Y) + C*2/(l+Y)2 +(C+P)N/(1+Y)N/Price
Where C = Periodic Coupon.
Y = Yield (YTM)
P = Principal Amount
N = total number of years.
Very simple assumption is required to habilitate the conventional gap from bank
equity immunization. One is that the bank adopts a constant dividend rate policy and the
other is that almost all the net income of the bank is Nil. Now the strong assumption is
that if the banks have more or less the same Nil for at least more than one year, then the
equity of a bank can be written as the present value of its future dividend payments.
C-(d*NII)/r
(9)
Where c = capital (equity) of the bank. By simple calculus and substitution one can arrive
at Change in C - (d * GAP - c)/ (change in r/r)
Delta c - (d * GAP - c)/ (Delta r/r)
(10)
Now for Delta C - 0 which is equivalent to immunizing market value of equity from
fluctuation, what is required as a strategy is to maintain.
GAP = (C/D)
(11)
The implications of (11) are several. If it requires for the bank to maintain a positive gap
for immunization equity, simultaneously the bank cannot keep its Nil and NIM
unchanged. But in an environment of decline interests rates, the bank have to scarifies
some Nil and hence NIM for the sake of immunizing its equity. Looking at it from
another angle, for GAP to be zero, the bank equity has to fluctuate whenever interest rates
changes as per the following relationship.
Change in C = - (change in r/r) * C
Delta C (GAP - 0) = - (Delta r/r) * C
(12)
It is obvious from (12), when GAP = 0, decline in interest rates causes "C" to
increase and vice-a-versa.
30
SIMULATION TECHNIQUE
31
CHAPTER-III
COMPANY PROFILE
32
array of alternative delivery channels that include over 1900 ATMs- covering 680 centers,
1157 branches providing Internet and Mobile Banking (IMB) services and 1833 branches
offering 'Anywhere Banking' services. Under advanced payment and settlement system,
1693 branches of the Bank offer Real Time Gross Settlement (RTGS) and National
Electronic funds Transfer (NEFT).
Canara Bank has made a distinctive mark in various corporate social
responsibilities, namely, serving national priorities, promoting rural development,
enhancing rural self-employment through several training institutes, spearheading
financial inclusion objective etc. Promoting an inclusive growth strategy, which forms the
basic plank of national policy agenda today, is in fact deeply rooted in the Bank's
founding principles. "A good bank is not only the financial heart of the community, but
also one with an obligation of helping in every possible manner to improve the economic
conditions of the common people". These insightful words of our founder continue to
resonate
even
today
in
serving
the
society
with
purpose.
The growth story of Canara Bank in its first century was due, among others, to the
continued patronage of its valued customers, stakeholders, committed staff and uncanny
leadership ability demonstrated by its leaders at the helm of affairs. We strongly believe
that the next century is going to be equally rewarding and eventful not only in service of
the nation but also in helping the Bank emerge as a "Global Bank with Best Practices".
This justifiable belief is founded on strong fundamentals, customer centricity, enlightened
leadership and a family like work culture.
Significant Milestones
Canara Hindu Permanent Fund Ltd. formally registered with a capital of 2000
1st July 1906 shares of Rs.50/- each, with 4 employees.
1910
Canara Hindu Permanent Fund renamed as Canara Bank Limited
1969
1976
1983
1984
1985
1987
1989
1989-90
1992-93
1995-96
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
Became the first Bank to articulate and adopt the directive principles of Good
Banking.
Became the first Bank to be conferred with ISO 9002 certification for one of its
branches in Bangalore
Opened a 'Mahila Banking Branch', first of its kind at Bangalore, for catering
exclusively to the financial requirements of women clientele.
Maiden IPO of the Bank
Launched Internet & Mobile Banking Services
100% Branch computerization
Entered 100th Year in Banking Service
Launched Core Banking Solution in select branches
Number One Position in Aggregate Business among Nationalized Banks
Notched up the highest ever net profit since its inception
Retained Number One Position in Aggregate Business among Nationalized Banks
Singed MoUs for Commissioning Two JVs in Insurance and Asset Management
with international majors.
As at march 2007 the total business of the bank was over Rs.2, 40,000 crores
ORGANISATION STRUCTURE
35
BALANCE SHEET
36
37
CHAPTER IV
DATA ANALYSIS AND
INTERPRETATION
DATA ANALYSIS
Outflows
CANARA BANK
Statement of Structural Liquidity 31st March 2013-14
Rs. in crores
38
Over 3
15 to 28
1 to 14 'days
days'
1
2
3
8
'
Over 3
Over
years
and
years
upto5 years
Total
Capital
1725
17.25
Reserves 8 Surplus
1 748 40
1746 AC
Deposits
Current Deposits
i. Savings Bank Deposits
iji.~Term Deposits
iv. Certificate Of Deoosils Borrowings
i. From SBI/ other bank
ii. Inter-Bank (Term)
iii. Refinances
IV, ATM Withdraw! A/C
29days and
.Over 6 .
Oyer.1
months
months and Year and
upto
and upto
upto 1 year
3 years
3months
6months
478.21
760.86
45465
20.45
0.00
0.30
46.25
43925
1334.20
1262.47
45OS6
1753.42
3935 06
1-102.15
19611 03
1308.68
5-134.73
1892 78
4415.41
2257.05
586.30
8511.31
1 3390 96
0.00
00.00
000
0.00
000
20.45
0.00
0.00
235
1 15
1 40
054
0.25
0.08
6.47
0.00
000
000
000
000
0.00
0.00
4625
1202 86
232.15
1485.01
0.00
0.00
59.22
118 10
4684
9351
000
187.50
0.O0
507.17
5.16
0.00
000
000
12500
18604
45 63
430 O0
18685
124.56
1401
324
2330
4.92
5.68
0.95
0.03
0.01
53 15
508.92
14.01
1029.5C
57356
1069.23
O.OC
0.00
000
321 4 2.1
810
449
16.90
21.81
39.25
64.4 2
2299
17 13
197 10
Misc. items
Total Outflows
2904.07
653.05
2532.02
2549.32
6096.09
6 4 09 .3 7
3249.69
372.63
13962.04
372.53
38518.57
Cumulallva Outflows
290407
3557.12
614914
8 7 98. 46
14894. 55
2130 3.93
24553. 83
33515.57
2.00
68.17
260 O0
260.00
498.27
809 64
12
13
36.97
36.97
Table.1
39
Rs. in Crores
29 and
upto 3
Over6
Over 3
months
year
1to 14 15 to
months
INFLOWS
and
days
28 days
and upto
upto 1
6 months
Year
1
2
Cash
Balances with other
RBI
Over3
year
and
upto 5
Over 3 Over 5
years years
and
upto 5
years
72.85
72. 85
0.00
O.O0
26690
207.99
416.26 238.60
0.06
90 04
48.08 1317.66
100.97
77500
200.00 35500
3577
75.82
52534
26913
4434
308.5 1
1330.00
500.46
30656
31. 58 0 18
636.27
1726
99
2278.
38
53
50
064
025
1 73
84
1452872
676.45
432.24 1524
24
2053
7479
Investments
0.75
29.93
fixed Assess
40
95.32
30. 6
2
172.26 172.26
Other Assets
i.
Inter
adjustments
ii Others
office
404. 56
82.00 000
Reverse Repos;
10 Swaps (sell/buy) 534.00 14.34
11 Bills Rediscounted
(DUPN)
12 Interest Receivable
13
Lines
of
Credit
Committed to
Institutions
Custom BIS
0.00
12.84
28.32
10624
1153.98 735.18
5173
2.25
133239 0.00
o.oo
o.oo
000
443.76 30.91
404.65
706.82
0.00 0.00
3770.42
0.00 0.00
51.73
14 Others (Specify)
Unvaried Export 29.47
Refinance
Devolvement /
Invocations
Overdue
installments
Accrued Interest 6707
on Investments
Unavailed
Portion
of
Misc. items
TOTAL INFLOWS
29.47
76 SO
133.7
40.59
4.92
43.06
131.24
67.65
402
435.99
373.70
5.65
0.95
004
52.18
174.29
0.00
0.00 0.00
351 .31
809.69
0.00
Table.2
41
CANARA BANK
Statement of structural liquidity 31st March 2014
1 to 14 15 to 28
days
days
29days
Over
3
Over 6 Over 1 year Over3
and
and upto 3 months and months and and upto 3 years
upto 5 years Over
months
upto
6 upto 1 year
years
( LIABILITIES )
( ASSETS)}
D. Cumulative Outflows
E Cumulative Mows
F Cumulative Mismatch
5 Total
year
months
A. TOTAL OUTFLOWS
B. TOTAL INFLOWS
C. MISMATCH (B- A)
Rs. in Crores
2904.07 653.05
4445. 1 6
1541.09 799.25
2592.02 2649.32
3054.67 2519.45
462.64 -129.88
609609 6409.37
3108.25
-2987.84 168.31
3249.60
38515.57
5973.87 11384.1 38515.57
2724.27 38515.57
0.00
....
0.00
2904.07
4445.16
1541.09
39.68
31.31
23.30
H
As per RBI stipulation-in First Two buckets the 53.07
Negative Gap as % to Outflows of respective Bucket (A)
should not be > 20%
122.39
17.85
-4.90
-2.16 -0.69
-49.00
2.63
ADDITIONAL INFORMATION
1
SPECIAL
RATE
DEPOSITS
5555.45
5555.45
The totals of constituent Items may not tally due lo rounding off
INCRORES
34922.2
9
9.50 O.O0
83.83 -18.48
0.00
8798,46
15755.06
13962.04
38515.57
Rs in Crores
11471.57
15659,80
11384.19
38515,57
+2673.11
- 95.26
- 2577.85
1. Liquidity Risk:
43
Mismatch (Negative Gap) may not exceed 20% of cash outflows in each of the
Our Position:
As on 31st Bucket March 2014 2"d Bucket
(31-03-2014 to
14-04-2014) 53.07
As on 18 February 2014
1st Bucket
(15-04-2014 to
28-04-2014)12239
(18-02-2014to
2nd Bucket
(04-03-2014to
INTERPRETATION:
From the above, we can observe that the gaps are within the prudential limits
prescribed by RBI in the first two time buckets Remarks:
1.
The positive gap (32.78%) in the first bucket as on 18-02-2014 has increased to
53.07% as on 31-03-2014, due to more inflows in Term Loans.
2.
The positive gap (66.74%) in the second bucket as on 18-02-2014 has increased
to 122.39% as on 31-03-2014 mainly due to increase in inflows on account of
Term Money and other Investments maturing in this bucket.
44
RBI, have not prescribed any other benchmarks for mismatches other than the
first two time buckets. They have, however, left it to the individual banks to establish
prudential gap limits for other buckets based on their risk appetite and risk return profile.
Accordingly, the Bank's Board at their meeting held on 16-01-2014 has approved
the following prudential limits.
BUCKET
1-14
Days
15-28
Days
Inflows
4445.16 1452.30
Outflows
Mismatch
Cumulative
Inflows
Cumulative
Outflows
Cumulative
Mismatches
CumMismatches as
% to Cuminflows
29(14.07
1541.09
29 days to 3 to 6
6 to 12
3 Months Months
Months
2519.45
3054.67
3108.25
1year
to
3
Years
6577.68
2649.32
653.05
799.25
2592.02
462.64
-129.88
6096.09
2987.84
14579.72 21157.50
4445.16 5897.46
8952.13
11471. 7
2904.07 3557.12
6149.14
8798.4 6 14894.55
1541.09 2340.34
2802.99
34.67%
(22.97)
31.31%
(16.23)
39.68%
(26.75)
2673. 1
1
23.30%
(19.55)
-314.73
-2.16%
(2.41)
6409.37
168.31
3 to 5
Years
Over 5
Years
5973.87
11384.19
3249.60
13962.04
2724.27
i
27131.38
-2577.85
i
38515.57
2577.85
0
I 9.50% 0%
(0)
(5.71)
Table.3
I.
The Cumulative Mismatch (Cumulative Negative Gap) should not be more than 25%
of Cumulative Inflows of the respective time buckets up to 1-year time bucket and should not
be more than 35% of cumulative inflows of respective time buckets from above I -year time
bucket.
45
As on. 31-03-2014
-0.90%
As on..18-02-2014
+1.13%
The cumulative mismatch in "6 months to 1 year" time bucket: Rs. -314.73 cr.
46
RATIO ANALYSIS
RBI has not prescribed any threshold limits for liquidity measurement through ratio
analysis but our ALM policy has prescribed various threshold limits for liquidity
measurement .through ratio analysis. The detailed analysis of various ratios and their
movement over the last month is furnished in Armexure -II.
The ratio analysis indicates that, the following ratios were below/above the
benchmark:
12.62%
11.26%
16.09%
13.29%
61.78%
67.23%
18.77%
47
5.41 %
REMARKS:
a) The decrease in the ratio was on account of increase in Total Assets (Rs. 1019.51
cr) and decrease in Liquid Assets (Rs. 347.73 cr).
b) The decrease in the ratio was on account of increase in Deposits (Rs. 2985.78 cr)
and decrease in Liquid Assets (Rs. 347.73 cr).
c) The increase in the ratio was on account of more increase in Loans (Rs. 1431.77
cr) than Core Deposits (Rs. 216.20 cr).
a)
The ratio has decreased by t .69% due to decrease in deposits by Rs. 112.27 cr.
b)
The increase in the ratio was mainly due to increase in T-Bills by Rs. 505.50 cr
48
Scenario 1:
Scenario 2:
49
Volatility Index
Rs- in crores
OUTFLOWS
Current Account Balances
12%ofRs.3985.06cr
I3%ofRs.5434.73 cr
Normal conditions
478.21
760.86
Term Deposits
2228. 10
3 1 .49
Borrowings
69.35
Invocations/Devolvements of BGs/LCs
Innex90day4
40.59
In next 90 days'
311.41
Total Outflows
3920.01
INFLOWS
Loans sanctioned against Term Deposits
648.00
NET OUTFLOWS
3272.01
The outflows on account of volatility in various components of Assets and Liabilities
under normal conditions has been arrived by using the standard deviation method/polynomial
method available in MS Excel as mentioned below
50
Table.4
OUTFLOWS
12%ofC/A Balances+ addl 25% of Rs. 478.21 cr
13% SB Balances + addl 25% of Rs 760.86 cr
TDRs Maturing in next 90 days + 25% of 2228.10
cr
TDIP Maturing m next 90 days + 25% of 3 ) .49 cr
39.36
816.17
Invocations/Devolvements of BGs/LCs
40.59
1358.75
1358.75
2101.22
2101.22
200.00
Total Outflows
5690.05
3659.97
INFLOWS
Loans sanctioned against Term Deposits
648.00
NET OUTFLOWS
'
8042.05
i
3659.97
Table.5
Crisis event may also trigger outflows on account of commitments made for potential
loans, drawings under Cash Credit/Loans and also committed reciprocal lines granted, if any
to the local banks. While the Bank has not placed any reciprocal line at the disposal of local
banks, drawings from Cash Credit/Loan accounts and outflows from committed lines cannot
51
be ruled out. As a matter of prudence we have reckoned 25% of the out standings under Cash
Credit and Term Loan accounts as undrawn lines of credit and are vulnerable for withdrawal
52
1. The ALM programme plays crucial role in ensuring adequate liquidity in the bank by
assessing liquidity needs of the bank and managing simultaneously assets and
liabilities of the bank.
2. The significance of ALM increases further when there is volatility of interest rates
and forex market
3. ALM programme is costly and involves direct costs in the form of cost of developing
a software model, acquiring hardware and personnel cost of the ALM staff.
4. We can observe that the gaps are within the prudential limits prescribed by RBI in the
first two time buckets Remarks.
5. Preferably book Medium-Term & Long- Term Liabilities on fixed rate and
existing rates.
53
Stage I
Surpluses available
Rs.Cr
72.851
Way of cash
CRR
Balance
(excess)
Balances with other Banks
Call Lendings
Sub-Total
Stage II
Investments - Coupon receipts
for Rs. 100 crores per month
Treasury Bills - sale
100.97
200
373.82
300.00
CP S
0.00
640.60
412.41
Shares 4742.54
5795.55
5795.55
8042.05
Rs. Crores
72.85
|
'
0
100.97
200
373.82
300.00
CP S
1572.00
0.00
0.68
1872.68
1572.00
0.00
0.68
1872.68
0.00
640.60
412.41
Shares
4742.54
5795.55
5795.55
8042.05
Table.6
Reno Facility
It may be desirable to seek Repos facilities on reciprocal basis. This would be a
contingency arrangement. SBI and other nationalized banks could be considered for the
purpose.
55
ARCIL
The Bank may consider selling of Non Performing Assets (NPAs) to Asset
Reconstruction Corporation of India Limited (ARCIL) to improve liquidity position if need
arises.
Liability management
The Bank should have a strong and regular relationship with lenders and large
liability holders during the periods of relative calm, the Bank will be in a better position to
secure sources of funds during emergencies.
56
CANARA BANK
Statement of Interest Rate Sensitivity 31st March 2014
1-2B
days
LIABILITIES
15 to 29 days
and
28
days upto 3
months
1-14
days
1. Capital
2. Reserves 6, Surplus
0.00
0.00
0.00
0.00
3. Depots
0.00
0.00
Over 3
months
and
uplc 6
month
s
Over 6
months
and
upto 1
year
Over 1
Over3
year
years
Ovar5
and
upto 3 and upto Years
5 years
years
3985.06 3385.06
434779
1708.00 95.78 754.3 2320 37 313925 6282.61 435595 1355.97 725.61
3
0.00
0.00 0.00
0.00
0.00
0.00
____
0.00
.000
10.00
4. Certificate of Deposes
Iterm deposits
ii. Call and Short Notice
0.00
000
2045 20. 00
0.00
0.00
000
iv Refinances
0.30 030
0.00
235
1.15
46.25 45.25
0.00
0.00
0.00 0.00 .
0.00
0.00
0.00
0.00
0.00
000 0.00
0.00
0.00 00.0
00.45
000
0.00 0.00
0.00
1.40
0.94
0.25 0.00
6.47
0.00
0.00
000
46.25
0.00
0.00
0.00
000
iii Provisions
108695 5434.73
0.00 19890.95
000
Inter-Office Adjustments
0.00
148501 1435.01
0.00 0.00
Iv Others
50717 507,17
0.00
Tolal
17.25 17.25
1748 40 174-8.40
i. Current Deposits
ii
Nonsensitive
of
260.00 26000
15635 000
000
0.00
0.00
18685 124 56
0.00
0.00
0.00
0.00
0.00
498.27
12500
0.00
0.00
150.00
155.00 30.00
0.00 000
0.00 0.00
0.00
260.00
809 68
52 I8 52.11
9. Repos
0.00
0.00
52293 50892
14.01
1029 50 573 55
0.00 000
0.00
000
12.59 8.10
4.49
18.90
36.37
21 31
1039.23
0.00
0.00 0.00
3215.24
0.00
0.00
000
36.97
3925
6442
0.00
2289 17.13
197.10
misc. iterns
2557.38
TOTAL LIABILITIES
959.58 3495.67 8120.55
1797.8.
The Totals of constituent items may not tally
due to rounding
S
57
742.8Z"!
372 63 372.63
38515.57
ASSETS
1 Cash
2 Balance with RBI
3 Balance with Other
i Current Account
ii. Money at Call short
notice
term deposit and
other placements
975.00 775.OO 200.00
06.39
33.77
76762
4.Investments
5. Advances
i. Bills
3 3 3 . 4 6 289.13 44.34
ii. Cash Credit
iii Term Loans
NAP7
639.91
0.00
0.00
0.00
0.00
0.00
0.00
355.00
525 34
000
0.00
492.51 296 16
7285
79072
72.85
1317.B6
I00 07
100.97
0.00
0.00
0.00
1726.99 2254.3 778640 64060
1330.00
14528.72
676.45
305.61
31.58 0.18
0.64
0.25
1.73
4656.53
15.08 39.50
49.20
11.37
8.51
747.65
230.21
5269.
13.44
117.05
0.00
0.00
0.00
0.00
0.00
0.02
0.00
0.00
0.00 000
0.00
000
0.00
o.oo
000
548.38
53404
1434
1153.00
0.00
0.00
__
Total
2053
0.75
0.00
13.69
_259.95 7479I
0.00
735.18
51.73
1332 89
0.00
000
0.00
O.OD
000
5434.99
8404.87
95.32
30.58
172.26
2993
172.26
40466
705 32
3.54
6. NAP
i. Advances
ii. Investments
7.Fixed assets
8. Other Assets
Inter Office adjustments
ii. Other
9.Reverse Repos
10. Swaps
636.27
527.14
Nonsensitiv
e
000
o.oo
000
0.00
o.oo
0.00
404.66
706.82
000
3770.43
0.00
51.71
.
0.00
14. Other
Unavailabed Export
Developments
Overdue Installments
0.00
0.00
0.00
o.oo
145.87
67.07
0.00
o o0
0.00
000
0.00
0.00
0.00
0.00
0.00
000
0.00
0.00
0.00
0.00
1921.03
2524.4S
1517.44
8161.32
ooo
78.80
0.00
0.00
133.77
43.06
67.65
131.24
402
0.OO
0 .00
0.00
1455.94
12454.84
1931.64
o.oo
Accurate Interest
Unavailed portion of CC
0
Misc. Items
0.00
o.oo
000
29.47
52.18
809.69
0.00
o.oa
5.210.71
3754.77
Table.7
58
3794.11
000
O.DO
29.47
52.18
174.29
151.31
809.69
0.00
0.00
38515.57
1 to 28 days
1 to 14 days 15 to 28 29 to
days
months
2557.38
5210.70
2455.33
2453.33
47.08%
1797.80
959.58
3495.67
8120.55
7910.96
GAP(B-A)
Cumulative
GAP
2453.33
C
as
%
of
B
47.08%
PRUDENTIAL
LIMITS : Individual Bucket
7.03%
Gap in Individual Buckets shall not exceed +/-22% of
Gross Assets across all time buckets except in 'Over 5
years' time bucket in which it shall riot exceed +/32% to Total Assets.
PRUDENTIAL LIMITS : Cumulative Mismatch
Cumulative Gap upto 12 months should not exceed +/-1 8%
of Total Assets
% to Total Earning Assets Rs.24756 07
Earning at Risk
5.60%
959.58
1455.94
496.33
2453.3
34.09%
3495.67
1245.84
8959.17
11412.5
71.93%
1.42%
25.65%
Over 3 Over
months to 6 months
year
months
8120.55
1931.64
-6188.92
5223.57
-320.40
17.72%
-
6 Over
1 Over 3 year Over 5 year
1 year to 3 to 5 year
Total
year
7910.96
1921.03
-2021.84
-2788.09
-80.09%
1535.21
2517.44
985.23
-802.96
39.14%
17.15%
2.19%
742.82
8161.32
7418.54
5615.54
90.90%
3.45%
Total assets
The totals of constituent items may not tally due to rounding off
0.00
0.00 -
0.00
3.45%
'REST
INCOME
AFFECTS
38515.57
38515.57
0.00
0.00
0.00%
-2.19%
H
Interest income
Interest Expenditure
NIMS IN 000
Total
34922.29earning income
Average
9409.82
3794.11
-5615.55
0.00
148.90%
2011- march
2325.09
1362.09
Assets 962.72
3.45%
202709.92
1216.92
862.98
3.48%
34922.29
C
h
i
Table..8
59
Stipulation:
The gap not to exceed +/- 22% of Total Assets across all time buckets except in "Over
5 years' time bucket in which it shall not exceed +/- 32% of Total Assets,
60
Our Position.
BUCKET
29 days
to
3
months
1-28
days
3 to 6
months
Rs. in Crores
6 to 12
months
Ito3
years
1931.64
1921.03
2524.4S
2517.44 8161.3
8120.55
7910.96
454631
1532.21
742.8
-5989.93
-2021.84
985.23
7418.5
-2788.19
521071
2757.38
245333
Cumulative Gap
245333
11412.50
-766.35
7.03%
(3.08)
25.65%
(-4.64)
1245484
3495.67
8959.17
-6 88. 92
over
years
3 to 5
years
1802.96 5615.52.82%
(2.91)
21.24%
(21.80)
Table.9
The Total Assets/Working Funds of the Bank; Rs.34922.29 cr. The gap in the
individual time buckets was well within the ceilings prescribed by the ALM policy
except in second time bucket.
As on 31-03-2014
(-) 2.19%
61
As on 18-02-2014
(-) 4.16%
Cumulative Rate Sensitive Gap upto l year: Rs. (-) 766 35 Crores.
The Total Assets/Working Funds of the Bank: Rs. 34922.29 Cr. The gap as well as
within the prescribed prudential norms
III.
NIM is to be kept at a minimum of 4.00% within the time horizon of the next re- pricing dale.
Our Position:
3.45%
3.41%
As at the end of March 2013, the Bank's NIM stood at 4.45% (annualized).
Earnings at Risk
While assuming a set of interest rate scenarios (given the static gap position as on
31st March 2014), an assessment of their impact on the Net Interest Income (Nil) has been
made. For the purpose of the impact assessment, it has further been assumed that the average
remaining maturity of all assets and liabilities were in the halfway points of their respective
time bands. The impact of these gaps on the Nil in a time horizon of 1 year is given below"
Change
in Total Impact on Nil (up to 1
Interest Rate year) (Rs. in crores)
in Liabilities
+100 bp
+ 44.52 +170.60
No change
+100 bp
-126.09
-100 bp
+126.09
No change
-170.60
-100 bp
-44.52
I
63
The impact of changes on Nil was rather high at Rs. 170.60 crores in a scenario
where the lending rate changes 100 bp in either direction without a corresponding change in
deposit rates. On a closer examination, it was observed that the incidence of the impact was
high due to concentration of balances in Cash Credit account and Term Loans which get repriced in the bucket of "29 days and up to 3 months" of the maturity ladder and continues till
the rest of the year.
RBI have suggested that though Interest Rate Risk exposure may be calculated using
the gap method initially, a gradual shift to duration gap analysis of assets and liabilities may
be carried out at a later stage. We have commenced duration analysis of the fixed income
securities at monthly intervals and duration gap analysis for entire balance sheet items at halfyearly.
64
CHAPTER V
FINDINGS, SUGGESTIONS &
CONCLUSION
65
FINDINGS
ALM technique is aimed to tackle the market risk. Its objective is to
stabilize/ improve the NIL Although implementation of A.L.M as a risk management
tool is done using gap analysis it is essential that banks strengthen their Management
Information System (MIS) and computer processing capabilities for accurate
measurement of interest rate risk in their banking books, which impact, in the shortterm, their net interest income (Nil) or net interest margin (NIM) and in the long-term,
the economic value of the bank-which involves up gradation of existing system and
application software to attain better and improvised levels
It is also essential that a bank remains alert to the events that affect its
operating environment and react accordingly in order to avoid any undesirable risks.
ALM in this context presents a disciplined decision making framework for banks
while at the same time guarding the risk levels.
66
SUGGESTIONS
The Bank should have a strong and regular relationship with both
depositors and borrowers and trade-off relationship with some
customers according to their importance to the Bank for liquidity to
survive when crisis increases.
The Bank should have a strong and regular relationship with
lenders and large liability holders during the periods of relative calm,
the Bank will be in a better position to secure sources of funds during
emergencies.
67
CONCLUSION
It should reduce the outstanding in Reports about 620 Cr. may be used to
create Short-Term & Medium-Term Assets on floating rate, especially loans and
advances.
In the current scenario, to compete with private banks, foreign banks and
non-banking financial institutions, CANARA BANK requires efficient human and
technological infrastructure which will further lead to smooth integration of the risk
management process with the bank's business strategies. .
68
BIBILOGRAPHY
Prasanna Chandra, Financial Management Theory and Practice, 2008.
6th Edition, Tata McGraw Hill.
I.M. Pandey : Financial Management, Vikas Publishers.
E.F. Brigham, and M.C Ehrhardt.., 2006, Financial Management Theory and
Practice, 10th Edition, Thomson South-Western.
M.Y.Khan and P.K, Jain. Management Accounting, 2009, IV edition, Tata Mc
Graw Hill, New Delhi.
Websites :
www.google.com
www.Canara Bank.com
www.wickipedia.com
69