Research Paper

International Journal of Advanced Research in Management (IJARM)
Volume 6, Issue 3, Sep-Dec (2015), pp. 122-134, Article ID: 10220150603017

Available online at
http://www.iaeme.com/issue.asp?JType=IJARM&VType=6&IType=3
ISSN Print: 0976 - 6324 and ISSN Online: 0976 - 6332
© IAEME Publication
___________________________________________________________________________
ASSEST LIABILITY MANAGEMENT IN

INDIAN BANKING INDUSTRY - WITH
SPECIAL REFERENCE TO INTEREST
RATE RISK MANAGEMENT IN VIJAYA
BANK
Dr. Shivakumar Deene
Assistant Professor of Commerce, Central University of Karnataka
Kadaganchi, Aland Road, Gulbarga-585311, Karnataka, India
Key words: Risk Management, Vijaya Bank and Banking Industry
Cite This Article: Dr. Shivakumar Deene. Assest Liability Management in
Indian Banking Industry - with Special Reference to Interest Rate Risk
Management in Vijaya Bank. International Journal of Advanced Research in
Management, 6(3), 2015, pp. 122-134.
http:// http://www.iaeme.com/issue.asp?JType=IJARM&VType=6&IType=3
1. INTRODUCTION
Banks work as facilitators or intermediately agencies of public money. A bank has an
obligation to pay the liabilities when demanded, but cannot liquidate the same
quantum of assets as certain intrinsic conditions are built in them. Similarly, banks
face challenges when there is a change in the economic and political scenario either
locally or internationally. This leads to credit risk, operation risk, and market risk i.e.
interest rate risk and liquidity risk, all this risk revolve around assets and liabilities,
irrespective of their nature and treatment.
These risks are not recent developments. They have been defined since the
inception of the banking industry. Even in the late 1970s bankers began to recognize
the importance managing both assets and liabilities for the purpose of mitigating
liquidity risk and interest rate risk and simultaneously increasing the market value of
their banks. It is here that asset liability management (ALM) helps in proper planning,
directing, controlling the flow, level, mix and rates on the assets and liabilities can be
made with the changing scenario.
There are various tools, which can be employed for detecting and assessing the
extent of miss match in ALM. For assessing the interest rate risk, the present study
uses the GAP analysis, which is a tool for managing the interest rate risk. Based on
the sensitivity of the assets and liabilities to the interest rate fluctuations, they are
classified in to different maturity buckets. The GAP or mismatch risk can be
measured by calculating GAPs over different times intervals as at a given date. GAP
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Assest Liability Management in Indian Banking Industry - with Special Reference to Interest
Rate Risk Management in Vijaya Bank
analysis measures the mismatches between rate sensitive liabilities (including off-
balance sheet positions). An asset or liability is normally classified as rate sensitive if:
 Within the time interval under consideration, there is a cash flow;
 The interest rate resets/reprises contractually during the interval;
 RBI changes the interest rates (i.e. interest rate on savings bank deposits, DRI
advances, export credit refinance, and CRR balance) in cases where interest rates
administered; and
 It is contractually pre-payable or withdrawal before the stated maturities.
The GAP is the difference between Rate Sensitivity Assets (RSA) and Rate
Sensitive Liabilities (RSL) for each time bucket. The positive GAP indicates that it
has more RSAs than RSLs, whereas the negative GAP indicates that it has more
RSLs. The GAP reports indicates whether the institution is in a position to benefits
from rising interest rates by having positive GAP (RSA>RSL) or whether it is in a
position to be benefit from declining interest rates by a negative GAP (RSL>RSA).
The GAP can, therefore, be used as a measure of interest rate sensitivity. The GAP
analysis is subject to limitations. GAP analysis does not capture basis risk or
investment risk, is generally based on parallel shifts in the yield curve, does not
incorporate future growth in the mix of business, and does not account for the time
value of money.
The GAPs have been identified in the following time buckets:
 1-28 Days
 Between 29 Days to 3 Months
 Over 3 Months and up to 6 Moths
 Over 6 Moths and up to 1 Year
 Over 1 Year and up to 3 year
 Over 3 Years and up to 5 Years
 Over 5 Years, and
 Non sensitive
The positive GAP indicates that has more RSAs than RSLs, whereas the negative
GAP indicates that it has more RSLs. Symbolically:
RSAs>RSLs Positive GAP
RSAs <RSLs Negative GAP
The GAP reports indicates whether the institution is in a position to benefit from
rising interest rates by having a positive GAP or whether it is in a position to benefit
from declining interest rates by a negative GAP. The GAP can, therefore, be used as a
measure of interest rate sensitivity. Traditionally, banks in India have not been
following this maturity structure. They had been only reflecting total assets and total
liabilities from which it is difficult to say that if there is any liquidity mismatch giving
rise to liquidity risk or GAP between RSAs and RSLs giving rise to interest rate risk.
GAP and the Net Interest Income (NII)
If the bank wants to keep its NII immune from changes in interest rates it must
closely monitor and manage its GAP carefully, Net Interest Income and interest
expenses.
NII = Interest income-Interest expenses

Changes in interest rates only affect the RSAs and RSLs over the planning
horizon. The fixed rate assets and liabilities are not affected by the changes in interest
rate. Thus,
NII = (RSAs-RSLs)* r
Where,
R= Changes in interest rate
Since GAP has been earlier expressed as a difference between RSAs and RSLs,
NII can be expressed as:
NII=GAP* r
A negative or liability-sensitive GAP occurs when interest-bearing liabilities
exceed interest-earning assets for a specific or cumulative maturity period, that is,
more liabilities re price than assets. In this situation, a decrease in interest rates should
improve the net interest spread in the short-term, as deposits are rolled over at lower
rates before the corresponding assets. On the other hand, an increase in interest rates
lowers earning by narrowing or eliminating the interest spread. A positive are asset-
sensitive GAP occurs when interest –earning assets exceed interest-bearing liabilities
for a specific or cumulative maturity period, i.e. more assets re price than liabilities. In
these situations, a decline in the interest rates should lower or eliminate the net
interest rates spread in the short- term; assets are rolled over at lower rates before the
corresponding liabilities. An increase in interest rates should increase the net interest
period.
2. OBJECTIVES OF THE STUDY:

It seeks to examine how Asset-Liability Management can be used as an important tool
& technique to improve net interest income/interest spread by managing market risks
i.e., Interest Rate Risk and to draw the conclusions stemming from the study so as to
manage the liquidity of the bank effectively and efficiently.
3. METHODOLOGY
The present study is an analytical and empirical presentation of research and as such it
relies on published data and opinions of top management team of the bank with regard
to asset liability management practices, its corporate governance practices and
regulatory provisions prescribed by RBI. Therefore, the present study uses primary
data and secondary data in the analysis of the topic.
4. SCOPE OF THE STUDY

The present study is confined to the Vijaya Bank only.
5. TIME SPAN
For the effective examination of Asset Liability Management policies, practices and
systems in Vijaya Bank, the data for a period of nine years starting from 2010 to 2014
is utilized for the purpose of the present study. Further the period of the study is also
influenced by availability of data in few cases.
6. TOOLS & TECHNIQUES OF ANALYSIS

For the effective examination of Asset Liability Management in Banking sector,
various techniques such as trend analysis using various ratios, are being employed.

6.1. Interest RATE RISK Management with special reference to Vijaya

Bank
The table 9 to 13 presents the results of the interest rate sensitivity of the bank through
GAP analysis for the 5 years period starting from 2009-2010 to 2013- 2014.
Table 1 Statement of interEst rate sensitivity as on 31-03-2010 (Rs. In Crores)

Risk Risk Gap as a
Cumulative
Maturity patterns sensitive sensitive Gap % of
gap
assets liabilities outflows
1 Day 1326.58 270.41 1056.17 1056.17 390.58
2-7 Days 319.34 1155.35 -836.01 -220.16 -72.36
8-14 Days 583.01 2373.81 -1790.8 -2010.96 -75.44
15 Days to 28 Days 693.23 2,654.05 -1,960.82 -3971.78 -73.88
29 Days to 3 Months 2,621.51 7,188.77 -4,567.26 -8,539.04 -63.53
Over 3 to 6 Months 2,202.72 9,977.93 -7,775.21 -16,314.25 -77.92
Over 6 Months to 1 Yr 2,713.85 17,600.11 -14,886.26 -31,200.5 -84.88
1 Year to 3 Years 25,306.89 20,355.91 4,950.98 -26,249.52 24.32
3 Years to 5 Years 16,243.82 800.29 15,443.53 -10,805.99 1929.74
Over 5 Years 38,301.7 1,803.19 36,498.51 26,132.7 2024.11
TOTAL 90,312.65 64,179.95 26,132.7
Source: Annual Reports
As shown in Table No.1, the bank has a positive gap in the time buckets of 1 day
and 1 year to three years time bucket, which signifies that the Rate Sensitive Assets
are more than the Rate Sensitive Liabilities. This implies that if there is a change in
the interest rates, it will have a positive impact on the bank’s earnings.
The bank has a negative gap in the time buckets of 2 – 7 Days, 8-14 Days, 15-28
Days, 29 Days to 3 Months, Over 3 to 6 Months, 6 Months to1 Year and 1 Year to 3
Years meaning which signifies that the Rate Sensitive Liabilities are more than Rate
Sensitive Assets in the short run to medium term, this implies that if required, the
bank will have to meet its short term liabilities with the long-term assets.
The GAP as a percentage of outflows which was a negative for all most except
Day -1, the trend continued up to 6 months to 1 year and thereafter turned positive
from 1 year to 3 years time buckets. The average negative GAP in the short-term is
68.31 percent. This situation demand the effective risk management practices of the
banking keeping view liquidity profile, scenario analysis of liquidity risk and
preparing contingency plans to meet the liquidity requirements in unforeseen
circumstances.
It can be concluded that the bank has a negative GAP in the time buckets of 2-7
Days,8-14 Days,15-28 Days, 29 Days to 3 Months, Over 3 to 6 Months, 6 months to 1
year and 1 year to 3 years which signifies that the Rate Sensitive Liabilities are more
than Rate Sensitive Assets in the short run to medium term. This implies that if
required, the bank will have to meet its short-term liabilities with the long-term assets.

50000
40000
30000
20000
Rs. in Crores
10000
-10000
-20000
-30000
-40000 15 Days 29 Days Over 6 3 Years

Over 3 to 1 Year to Over 5
1 Day 2-7 Days 8-14 Days to 28 to 3 Months to 5
6 Months 3 Years Years
Days Months to 1 Yr Years
Risk sensitive assets 1326.58 319.34 583.01 693.23 2,621.51 2,202.72 2,713.85 25,306.89 16,243.82 38,301.70
Risk sensitive liabilities 270.41 1155.35 2373.81 2,654.05 7,188.77 9,977.93 17,600.11 20,355.91 800.29 1,803.19
Gap 1056.17 -836.01 -1790.8 -1,960.82 -4,567.26 -7,775.21 -14,886.26 4,950.98 15,443.53 36,498.51
Cumulative gap 1056.17 -220.16 -2010.96 -3971.78 -8,539.04 -16,314.25 -31,200.50 -26,249.52 -10,805.99 26,132.70
Maturity Patterns
Risk sensitive assets Risk sensitive liabilities Gap Cumulative gap
Graph 1 Statement of interEst rate sensitivity as on 31-03-2010
Table 2 Statement of interst rate sensitivity ason 31-03-2011 (Rs. In Crores)

Risk Risk Gap As
Cumulative
Maturity patterns Sensitive Sensitive Gap a % of
Gap
Assets Liabilities Outflow
1 Day 413.16 734.70 -321.54 -321.54 -43.76
2-7 Days 1393.22 3441.91 -2048.69 -2370.23 -59.52
8-14 Days 398.87 3172.03 -2773.16 -5143.39 -87.42
15 to 28 Days 767.91 4,755.16 -3,987.25 -9,130.64 -83.85
29 Days to 3 Months 3,274.81 14,262.09 - -20,117.99 -77.04
10,987.28
Over 3 to 6 Months 2,541.66 2,109.02 432.64 -19,685.28 20.51
Over 6 Months to 1 Year 4,840.23 13,756.22 -8,915.99 -28,601.27 -64.81
1 to 3 years 30,103.29 24,364.17 5,738.72 -22,862.55 23.55
3 to 5 years 24,445.48 822.31 23,623.17 760.62 2,872.78
Over 5 years 18,480.54 1,714.51 16,766.03 17,526.65 977.89
Total 86,659.17 69,439.4 17526.65
As shown in Table No.2, the bank has a negative GAP in the time buckets of 1
Day, 2-7 Days, 8-14 Days, 15 to 28 Days, 29 Days to 3 Months and 6 Months to 1
Year meaning which signifies that the Rate Sensitive Liabilities are more than Rate
Sensitive Assets in the short run to medium term (except for the time bucket of Over 3
to 6 Months). This implies that if required, the bank will have to meet its short-term
liabilities with the long-term assets.

The bank has positive GAP in the time buckets of 3 Years to 5 Years and over 5
Years, which signifies that the Rate Sensitive Assets are more than Rate Sensitive
Liabilities in the long run. This implies that the bank gives more long term loans and
advances as compared to long-run deposits.
The cumulative GAP of the bank has a negative GAP throughout in all time
buckets (except in the time buckets 1-3 years, 3-5 years and over 5 years time
buckets) which signifies that bank is expecting a decline in the interest rates to have
positive impact on the banks earnings.
The GAP as a percentage of outflows which was a negative in the short run in all
time buckets except in one case, and this trend continued up to 6months year to year
time bucket and thereafter turned positive in 1 year to 3 years, 3 to 5 years and over 5
year time buckets. This situation demands the effective risk management practices of
the banking keeping in view liquidity profile, scenario analysis of liquidity risk and
preparing contingency plans to meet the liquidity requirements in unforeseen
circumstances.
It can be concluded that the bank has a negative GAP in the time buckets of 1Day,
2-7 Days, 8-14 Days, 15 to 28 Days, 29 Days to 3 Months and 6 months to 1 year
which signifies that the Rate Sensitive Liabilities are more than Rate Sensitive Asse ts
in the short run to medium term. This implies that if required, the bank will have to
meet its short-term liabilities with the long-term assets.
40000
30000
20000
10000
Rs. in Crores
-10000
-20000
-30000
-40000 29 Days Over 6

8-14 15 to 28 Over 3 to 1 to 3 3 to 5 Over 5
1 Day 2-7 Days to 3 Months
Days Days 6 Months years years years
Months to 1 Year
Risk Sensitive Assets 413.16 1393.22 398.87 767.91 3,274.81 2,541.66 4,840.23 30,103.29 24,445.48 18,480.54
Risk Sensitive Liabilities 734.7 3441.91 3172.03 4,755.16 14,262.09 2,109.02 13,756.22 24,364.17 822.31 1,714.51
Gap -321.54 -2048.69 -2773.16 -3,987.25 -10,987.28 432.64 -8,915.99 5,738.72 23,623.17 16,766.03
Cumulative Gap -321.54 -2370.23 -5143.39 -9,130.64 -20,117.99 -19,685.28 -28,601.27 -22,862.55 760.62 17,526.65
Maturity Patterns
Risk Sensitive Assets Risk Sensitive Liabilities Gap Cumulative Gap
Graph 2 Statement of interst rate sensitivity as on 31-03-2011

Table 3 Statement of interst rate sensitivity as on 31-03-2012 (Rs. In Crores)
Risk Risk Cumulative Gap As a

Maturity patterns Sensitive Sensitive Gap % of
Assets Liabilities Gap Outflow
1Day 555.65 918.53 -362.88 -362.88 -39.51
2-7 Days 977.77 6622.87 -5645.1 -6007.98 -85.24
8-14 Days 402.55 1516.66 -1114.11 -7122.09 -73.46
15 to 28 Days 783.89 3,033.35 -2,249.46 -9,371.55 -74.15
29 Days to 3 Months 3,821 11,604.18 -7,783.18 -17,154.73 -67.07
Over 3 to 6 Months 2,922.19 6,663.24 -3,741.05 -20,895.78 -56.14
Over 6 Months to 1 4,423.9 29,820.76 -25,396.86 -46292.64 -85.16
Year
1 to 3 years 38,171.09 9,688.05 28,483.04 -17,809.6 294.00
3 to 5 years 13,498.75 18,031.24 -4,532.49 -22,342.09 -25.13
Over 5 years 21,762.01 1,281.13 20,480.88 -1,861.21 1,598.66
Total 87,253.46 89,179.83 -1,861.21
The above table mentions that the bank has negative GAP in the time buckets of 1
Day, 2- 7 Days, 8-14 days, 15 days to 28 days, 29 days to 3 months, Over 3 to 6
Months, over 6 months to 1 year and 3 years to 5 years meaning which signifies that
the rate sensitive Liabilities are more than Rate Sensitive Assets in the short run to
medium term, this implies that if requires, the bank will have to meet it short-term
liabilities with the long-term assets.
The bank has positive GAP in the time buckets of 1 year to 3 years and over 5
years which signifies that the Rate Sensitive Assets are more than Rate Sensitive
Liabilities in these two long run buckets. This implies that the bank gives more long
term loans and advances as compared to long-run deposits in this period of time. The
cumulative gap of the bank has a negative GAP in all time buckets which signifies
that the bank is expecting a decline in the interest rates to have positive impact on the
banks earnings.
The GAP as a percentage of outflows which was a lso negative for all most all
time buckets except for the time bucket of 1 year to 3 years and over 5 years.
The average negative GAP in the short-term is 72.37 percent. This situation
demands the effective risk management practice of the banking keeping in view
liquidity profile, scenario analysis of liquidity profile, scenario analysis of liquidity
risk and preparing contingency plans to meet the liquidity requirements in unforeseen
It can be concluded that The bank has negative GAP in the time buckets of 1 Day,
2-7 Days, 8-14 days, 15 days to 28 days, 29 days to 3 months, Over 3 to 6 Months,
over 6 months to 1 year and 3 years to 5 years meaning which signifies that the rate
sensitive Liabilities are more than Rate Sensitive Assets in the short run to medium
term, this implies that if requires, the bank will have to meet it short-term liabilities
with the long-term assets.

50000
40000
30000
20000
10000
Rs. in Crores
0
-10000
-20000
-30000
-40000
-50000
-60000 29 Days Over 6
Months to 1 Year
Risk Sensitive Assets 555.65 977.77 402.55 783.89 3,821 2,922.19 4,423.90 38,171.09 13,498.75 21,762.01
Risk Sensitive Liabilities 918.53 6622.87 1516.66 3,033.35 11,604.18 6,663.24 29,820.76 9,688.05 18,031.24 1,281.13
Gap -362.88 -5645.1 -1114.11 -2,249.46 -7,783.18 -3,741.05 -25,396.86 28,483.04 -4,532.49 20,480.88
Cumulative Gap -362.88 -6007.98 -7122.09 -9,371.55 -17,154.73 -20,895.78 -46292.64 -17,809.60 -22,342.09 -1,861.21
Maturity Patterns
Risk Sensitive Assets Risk Sensitive Liabilities Gap Cumulative Gap

Cumulative
Risk Risk Cumulative
Liquidity Gap As a
Maturity patterns Sensitive Sensitive Liquidity
Gap % of
Assets Liabilities Gap
Outflow
1 Day 470.06 1070.27-600.21 -600.21 -56.08
2-7 Days 560.03 8163.12
-7603.09 -8203.3 -93.14
8-14 Days 450.25 1856.94
-1406.69 -9609.99 -75.75
15 to28 Days 1,007.81 2,456.53
-1,448.68 -11,058.67 -58.97
-
29 Days to 3 Months 3,952.47 20,515.52 -27,981.72 -82.48
16,923.05
Over 3 to 6 Months 3,681.31 9,334.54 -5,653.23 -33,634.95 -60.56
Over 6 Months to 1
5,215.05 31,820.05 -26,605 -60,239.95 -83.61
Year
1 to 3 years 47,720.1 7,386.31 40,333.79 -19,906.16 546.06
3 to 5 years 15,567.66 20,195.23 -4,627.57 -24,533.73 -22.91
Over 5 years 23,343.94 1,168.25 22,175.69 -2358.04 1898.20
Total 1,01,608.72 1,03,966.76 -2358.04
As shown in Table No.4 the bank has a negative GAP in the time buckets of 1
Day, 2-7 Days, 8-14 Days, 15 days to 28 days, 29 Days to 3 Months, Over 3 to 6
Months and 6 Months to 1 year meaning which signifies that the Rate Sensitive
Liabilities are more than Rate Sensitive Assets in the short run to medium term. This

implies that if required, the bank will have to meet its short-term liabilities with the
long-term assets.
The bank has positive GAP in the time buckets of 1 year to 3 years and over 5
years which signifies that the Rate Sensitive Assets are more than Rate Sensitive
Liabilities in the long run. This implies that the bank gives more long term loans and
advances as compared to long-run deposits.
The cumulative GAP of the bank has a negative GAP throughout in all time
buckets which signifies that bank is expecting a decline in the interest rates to have
positive impact on the banks earnings.
The GAP as a percentage of outflows which was negative in the short run in all
time buckets went positive in the time bucket of 1 year to 3 years but again shoot
negative after that. The average negative GAP in the short run is 74.45 percent. The
situation demands the effective risk management practices of the banking keeping in
view liquidity profile, scenario analysis of liquidity risk and preparing contingency
plans to meet the liquidity requirements in unforeseen circumstances.
It can be concluded that the bank has a negative GAP in the time buckets of 1
Months and 6 Months to 1 year meaning which signifies that the Rate Sensitive
long-term assets.
60000
40000
20000
Rs. in Crores
-20000
-40000
-60000
-80000 29 Days Over 6

8-14 15 to28 Over 3 to 1 to 3 3 to 5 Over 5
Months to 1 Year
Risk Sensitive Assets 470.06 560.03 450.25 1,007.81 3,952.47 3,681.31 5,215.05 47,720.10 15,567.66 23,343.94
Liquidity Gap -600.21 -7603.09 -1406.69 -1,448.68 -16,923.05 -5,653.23 -26,605 40,333.79 -4,627.57 22,175.69
Cumulative Liquidity Gap -600.21 -8203.3 -9609.99 -11,058.67 -27,981.72 -33,634.95 -60,239.95 -19,906.16 -24,533.73 -2358.04
Maturity Patterns

Risk Risk Gap As

Liquidity
Maturity patterns Sensitive Sensitive Gap a % of
Gap
Assets Liabilities Outflow
1 Day 1072.08 1554.25 -482.17 -482.17 -31
2-7 Days 2722.86 6591.07 -3868.21 -4350.38 -164.86
8-14 Days 834.3 2346.29 -1511.99 -5862.37 -64.44
15 to 28 Days 2,012.39 3,784.09 -1,771.7 -7634.07 -46.82
29 Days to 3 Months 7,393.49 26,292.27 -18,898.78 -26532.85 -71.88
Over 3 to 6 Months 5,297.5 11,103.95 -5,806.45 -32339.3 -52.29
Over 6 Months to 1 7,290.39 44,197.93 -36,907.54 -69246.84 -83.50
Yr
1 to 3 years 50,628.29 9,884.52 40,743.77 -28503.07 412.19
3 to 5 years 9,513.18 22,820.69 -13,307.51 -41810.58 -58.31
Over 5 years 28,250.82 1,391.78 26,859.04 -14951.54 1,929.83
Total 1,25,015.3 1,29,966.84 -14951.54
As shown in Table No.5 the bank has a negative GAP in the time buckets of 1
Months and over 6 Months to 1 Year meaning which signifies that the Rate Sensitive
long-term assets.
The bank has positive GAP in the long run time buckets of 1 year to 3 years and
over 5 years, which signifies that the Rate Sensitive Assets are more than Rate
Sensitive Liabilities in the long run. This implies that the bank gives more long term
loans and advances as compared to long-run deposits. This indicates that if there is a
change in the interest rate, it will have a positive impact on the bank ’s earnings. The
cumulative GAP of the bank has a negative GAP throughout in all time buckets which
signifies that bank is expecting a decline in the interest rates to have positive impact
on the banks earnings.
The GAP as a percentage of outflows which was a negative in short term time
bucket, continued up to over 5 years time bucket (except for the time bucket of 1 year
to 3 years). The average negative GAP in the short term is 62.07 per cent. This
situation demand the effective risk management of the banking keeping in view
liquidity profile, scenario analysis of liquidity risk and contingency plans to meet the
liquidity requirements in un foreseen circumstances.
It can be concluded that the bank has a negative GAP in the time buckets of 1Day,
2-7 Days,8-14 Days, 15 days to 28 days, 29 Days to 3 Months, Over 3 to 6 Months
and over 6 Months to 1 Year meaning which signifies that the Rate Sensitive
long-term assets.

60000
40000
20000
Rs. in Crores
-20000
-40000
-60000
-80000 29 Days Over 6

Months to 1 Yr
Risk Sensitive Assets 1072.08 2722.86 834.3 2,012.39 7,393.49 5,297.50 7,290.39 50,628.29 9,513.18 28,250.82
Gap -482.17 -3868.21 -1511.99 -1,771.70 -18,898.78 -5,806.45 -36,907.54 40,743.77 -13,307.51 26,859.04
Liquidity Gap -482.17 -4350.38 -5862.37 -7634.07 -26532.85 -32339.3 -69246.84 -28503.07 -41810.58 -14951.54
Maturity Patterns
7. SUGGESTIONS
7.1. Management of Interest Rate Risk
Measuring interest rate risk; It is suggested that the bank’s interest rate risk should be
identified and quantified before it could be managed. Therefore, it is essential that
quantum of interest rate risk in the balance sheet is identified. It is difficult to measure
the degree of risks to which bank is exposed and it is equally difficult to develop
effective risk management strategies/hedging techniques without being able to
understand the correct risk position of the bank.
The IRR measurement system should address all material sources of interest rate
risk including gap or mismatch, basis, embedded option, yield curve, price,
reinvestment and net interest position risks exposures. The IRR measurement system
should also take into account the specific characteristics of each individual interest
rate sensitive position and should capture in detail the full range of potential
movement in interest rates.
There are different techniques for measurement of interest rate risk, ranging from
the traditional Maturity Gap Analysis (to measure the interest rate sensitivity of
earnings), Duration (to measure interest rate sensitivity of capital). Simulation and
Value at Risk, therefore, it is suggested that bank may use them in combination or use
hybrid methods that combine features of all the techniques.
The general approach towards measurement and hedging of IRR varies with the
segmentation of the balance sheet. Therefore, the bank should broadly position with
balance sheet into Trading and Investment or Banking Books. While the assets in the
trading book are held primarily for generating profit on short-term differences in
prices/yields, the banking book comprises assets and liabilities, which are contracted

basically on account of relationship or steady income and statutory obligations and are
generally held till maturity.
Trading Book; The top management of the bank should lay down policies with
regard to volume, maximum maturity, holding period, duration, stop loss, defeasance
period, rating standards etc. for classifying securities in the trading book. Therefore, it
is suggested that while the securities held in the trading book should ideally be
marked to market on a daily basis, the potential price risk to changes in the market
risk factors should be estimated through internally developed Value at Risk (VaR)
models. If in an environment where VaR is difficult to estimate for lace of data, non-
statistical concepts such as stop loss and gross/net positions can be used.
Banking Book; The changes in market interest rates have earnings and economic
value impacts on the banks banking book. This, given the complexity and range of
balance sheet products, bank should have IRR measurement system that assesses the
effects of the rate changes on both earnings and economic value. The variety of
techniques ranges from simple maturity and re-pricing to static simulation, based on
current on and off balance sheet positions, to highly sophisticated dynamic modelling
techniques that incorporate assumptions on behavioural pattern of assets, liabilities
and off-balance sheet items and can easily capture the full range of exposures against
basic risk, embedded option risk, yield curve risk, etc.
REFERENCES
[1] Sharma, Kapil and P.R. Kulakarni(2006), “Asset Liability Management
Approach in Indian banks: A Review and Suggestions”, The journal of
Accounting and Finance, Vol. 20, No. 2, April-September 2006, pp.3-14.
[2] Slyer, Veena (2006), “Strategy- Performance-Return Relationship in the Indian
Banking Industry”, IIMB Management Review, Vo1.18, No.4, December 2006,
pp.327 -338.
[3] Suryachandra Rao, D. (2006), “Reforms in Indian Banking sector: An evaluative
study of the performance of commercial banks”, Department of Commerce,
AndhraUniversity.
[4] Athma, Pramadwara. (2006), “Prudential ‘norms and their effect on commercial
banks profits: A case study of Andhra Bank, Dept. ofCommerce, Osmania
University.
[5] Sharma, Kapil. “An Insight into Value-at-Risk”, Asset Liability Management in
Banks: Emerging Challenges, Icfaian Books, 2007, pp.19-35.
[6] Vaidya, Pramod and Arvind Shahi, “Asset Liability Management in Indian
Banks”, Asset Liability Management in Banks: Emerging Challenges, Icfaian
Books, 2007, pp.91-104.
[7] Sy, Amadou. “Managing the Interest Rate Risk of Indian Bank’s Government
Securities Holdings”, Asset Liability Management in Banks Emerging
Challenges, Icfaian Books, 2007, pp.105-123.
[8] Ranjan, Rahul and Rahu Nallari, “Study of Asset Liability in Indian Banks:
Canonical Correlation Analysis”, Asset Liability Management in Banks :
Emerging Challenges, Icfaian Books, 2007, pp.124-135.
[9] Metz, Pia Kronistedt. “The Swedish Market for Balancing Liquidity”, Asset
Liability Management in Banks: Emerging Challenges, Icfaian Books, 2007,
pp.136-161.

[10] Martin, Antoine. “Recent Evolution of Large-Value Payment Systems:Balancing

Liquidity and Risk”, Asset Liability Management in Banks: Emerging
Challenges, Icfaian Books, 2007, pp. 162-185.
[11] Tektas, Arzu E Nur Ozkan-Gunay and Gokhan Gunay, “Asset and Liability
Management in Financial Crisis”, Asset Liability Management in Banks:
Emerging Challenges, Icfaian Books, 2007, pp.185-205.
[12] Pathak, Ajay. “Taming Liquidity Risk - Lesson to be learnt by Indian Banks from
crisis in Japanese Banks”, Asset Liability Management in Banks: Emerging
Challenges, ICFAI an Books, 2007, pp.206-216.
[13] Arora, Parvinder Ajay Garg and Bhavan Ranjan, “The ALM Practices in
Commercial Banks in India”, The ICFAI Journal of Applied Finance, Vol.13
No.10, 2007, pp.79-96.
[14] Mohan, Rakesh. (2007), “Reforms, Productivity and Efficiency in Banking: The
Indian Experience”, Economic Development in India, Vol. 101, pp.65-95.
[15] Srivastava, R.M. and Divya Nigam, “Management of Indian Financial
Institutions”, Himalaya Publishing House, 2008, pp.385 – 398.
[16] Madan; Mohan. (2007) “Asset liabilities management in commercial banks in
India”, Department of Commerce, Kurukshetra University.

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International Journal of Advanced Research in Management (IJARM)

Volume 6, Issue 3, Sep-Dec (2015), pp. 122-134, Article ID: 10220150603017

ASSEST LIABILITY MANAGEMENT IN

http://www.iaeme.com/ijarm.asp 122 editor@iaeme.com

http://www.iaeme.com/ijarm.asp 123 editor@iaeme.com

2. OBJECTIVES OF THE STUDY:

4. SCOPE OF THE STUDY

6. TOOLS & TECHNIQUES OF ANALYSIS

http://www.iaeme.com/ijarm.asp 124 editor@iaeme.com

6.1. Interest RATE RISK Management with special reference to Vijaya

Table 1 Statement of interEst rate sensitivity as on 31-03-2010 (Rs. In Crores)

http://www.iaeme.com/ijarm.asp 125 editor@iaeme.com

-40000 15 Days 29 Days Over 6 3 Years

Graph 1 Statement of interEst rate sensitivity as on 31-03-2010

Table 2 Statement of interst rate sensitivity ason 31-03-2011 (Rs. In Crores)

http://www.iaeme.com/ijarm.asp 126 editor@iaeme.com

-40000 29 Days Over 6

Graph 2 Statement of interst rate sensitivity as on 31-03-2011

http://www.iaeme.com/ijarm.asp 127 editor@iaeme.com

Table 3 Statement of interst rate sensitivity as on 31-03-2012 (Rs. In Crores)

Risk Risk Cumulative Gap As a

http://www.iaeme.com/ijarm.asp 128 editor@iaeme.com

Graph 3 Statement of interst rate sensitivity as on 31-03-2012

Table 4 Statement of interst rate sensitivity as on 31-03-2013 (Rs. In Crores)

http://www.iaeme.com/ijarm.asp 129 editor@iaeme.com

-80000 29 Days Over 6

Graph 4 Statement of interst rate sensitivity as on 31-03-2013

http://www.iaeme.com/ijarm.asp 130 editor@iaeme.com

Table 5 Statement of interst rate sensitivity as on 31-03-2014 (Rs. In Crores)

Risk Risk Gap As

http://www.iaeme.com/ijarm.asp 131 editor@iaeme.com

-80000 29 Days Over 6

Graph 5 Statement of interst rate sensitivity as on 31-03-2014

http://www.iaeme.com/ijarm.asp 132 editor@iaeme.com

http://www.iaeme.com/ijarm.asp 133 editor@iaeme.com

[10] Martin, Antoine. “Recent Evolution of Large-Value Payment Systems:Balancing

http://www.iaeme.com/ijarm.asp 134 editor@iaeme.com

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