Components of Assets and Liabilities in Banks
Balance Sheet and their Management
Module D: Balance Sheet Management
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Bank Financial Management: Components of Assets and Liabilities in
Banks Balance Sheet and their Management
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Contents
Coverage:
1.
Components of a Banks Balance Sheet
2.
What is Asset Liability Management?
3.
Significance
of
Asset
Liability
Management
4.
Purpose and Objectives of Asset
Liability Management
5.
ALM as co-ordinated Balance Sheet
Management
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1.
COMPONENTS OF A BANKS
BALANCE SHEET
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Components of Balance Sheet
Sources of Funds/Liabilities
Capital
Reserves and Surplus
Deposits
Borrowings
Other liabilities and
Provisions
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Application of Funds/Assets
Cash in Hand and Balance
with RBI
Balances with Banks and
Money at Call and Short
Notice
Investments
Advance
Fixed Assets
Other Assets
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Capital
Represents owners stake
Cushion for depositors and creditors in case of losses
Long Term source of funds
Prescribed by RBI
Authorised
Capital
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Issued
Capital
Subscribed
Capital
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Paid-up
Capital
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Reserves and Surplus
Reserves
Statutory Reserves
Capital Reserve
Revenue Reserve
Issue of Shares at Premium
Other Reserves
Surplus
The credit balance in profit and loss account
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Deposits
Main source of funds for the banks
Deposits
Current
Deposits
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Deposits
Payable on
Demand
Savings Bank
Deposits
Overdue
Deposits
Call Deposits
Term
Deposits
Fixed
Deposits
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Short
Deposits
Recurring
Deposits
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Borrowings
Refinance obtained from:
RBI
Other Commercial Banks
Other Institutions and Agencies like IDBI, EXIM Bank of India, NABARD
etc.
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Other Liabilities and Provisions
Bills Payable
Includes drafts,
telegraphic
transfers,
travellers
cheques, mail
transfers
payable,
payslips,
bankers
cheques and
other
miscellaneous
items
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Inter-Office
Adjustments
Credit balance
of the net
inter-office
adjustments
Interest Accrued
Interest
accrued but
not due on
deposits and
borrowings
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Others
Income Tax
TDS
Interest Tax
Provisions etc.
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Cash and Balances with RBI
Cash in Hand
Includes
Foreign Currency Notes
Cash Balances in the overseas branches
Balances with RBI
In order to meet statutory cash reserve requirements (CRR)
Balances with Banks and money at Call and Short Notice
Balance in Current Accounts and Term Deposits with other banks
All loans made in the interbank call money market repayable within 15
days notice.
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Investments
Investments in
Govt. Securities
Approved Securities
Shares
Debentures and Bonds
Subsidiaries and/or Joint Ventures
Other investments
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Advances
Form major part of assets for all the banks
Advances Repayable on
Demand
Cash Credits
Advances with Specific
Due Date
Bills
Purchased/Discounted
Term Loans
Overdrafts
Loans repayable
on Demand
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Secured/Unsecured
Advances
Clean or
Documentary
Secured by
Tangible Assets
Domestic or
Foreign
Covered by
Bank/Government
Guarantees
Unsecured
Advances
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Fixed Assets
Immovable properties
Premises
Furniture and Fixtures
Hardware
Motor Vehicles etc
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Other/Miscellaneous Assets
Inter-Office
Adjustments
Interest Accrued
Tax Paid in
Advance/Tax
Deducted at
Source
Stationery and
Stamps
Non Banking
Assets acquired in
Satisfaction of
claims
Others
Other items primarily include claims in the form of clearing items, unadjusted debit balances
representing additions to assets and deductions from liabilities and advances provided to the
employees of the bank.
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Contingent Liabilities
Banks obligations under issuance of Letters of Credit, Guarantees and
acceptances on behalf of constituents and bills accepted by the bank on
behalf of its customers
Claims against the bank not acknowledged as debts
Liability for partly paid-up investments
Liability on account of outstanding ForEx contracts
Other items like Arrears of Cumulative dividends, bills rediscounted,
underwriting commitments, estimated amount of contracts remaining to
be executed on capital account and not provided for etc.
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Banks P&L Statement
Profit and Loss
Statement
Income
Expenses
Interest
Income
Interest
Expended
Other Income
Operating
Expenses
Provisions and
Contingencies
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Income
Interest
Income
Other
Income
Interest/Discount on
Advances/Bills
Commission, Exchange and
brokerage
Income on Investments
Profit on Sale or Investments
Interest on balances with RBI
and Other Interbank Funds
Profit on Revaluation of
Investment
Others
Profit on Sale of Land, Building
and Other Assets
Profit on Exchange Transactions
Income earned by way of
dividends etc
Miscellaneous Income
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Expenses
Interest Expended
Provisions and
Contingencies
Operating Expenses
Payments to and Provisions for Employees
Interest on Deposits
Rent. Taxes and Lighting
Interest on RBI/Interbank Borrowings
Printing and Stationery
Others
Advertisement and Publicity
Depreciation on Banks Property
Directors fees, Allowances and Expenses
Auditors Fees and Expenses
Law Charges
Postage
Repairs and Maintenance
Insurance
Other Expenditure
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2.
WHAT IS ASSET LIABILITY MANAGEMENT?
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Asset Liability Management
Concerned with Strategic Balance Sheet Management involving risks
caused by changes in Rates of Interest, exchange rate, credit risk, and
liquidity position of bank
Integrated Balance Sheet Management: All components of balance sheet
and its different maturity mix would be looked at from the profit angle of
the bank
ALM is the act of Planning, Acquiring and directing the flow of funds
through an organisation to generate adequate and stable earnings to
steadily build an organisations equity over time while taking reasonable
and measured business risks
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Asset Liability Management
The management of the Net Interest Margin (NIM) to ensure its level and
riskiness are compatible with risk/return objectives of the bank
Co-ordinated management of a banks balance sheet to allow for
alternative interest rate, liquidity and prepayment summaries
Views the financial institutions as a set of inter relationships that must be
identified, coordinated and managed as an integral system
To match the assets and liabilities and minimise liquidity as well as market
risk.
Per liability basis: Matching a specific asset to support each liability
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Balance Sheet Restructuring
The strategy of actively managing the composition and mix of
assets and liabilities portfolios
Efforts are made to adjust and readjust the portfolios in
response to corporate objectives, economic conditions and
future interest rate scenario to prevent undesirable imbalance
between asset and liability maturities
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3.
SIGNIFICANCE OF ASSET LIABILITY
MANAGEMENT
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Significance of Asset Liability Management
Volatility
Product
Innovation
Regulatory
Environment
Management
Recognition
Rate
fluctuations
affect the
market
value, yields,
costs of
assets and
liabilities
New
financial
products
have an
impact on
the risk
profile of the
bank
Central
Banks issue
framework
and
guidelines to
deal with
ALM policies
Increasing
awareness of
the change
in risk
scenario and
need for
ALM
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4.
PURPOSE AND OBJECTIVES OF
ASSET LIABILITY MANAGEMENT
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Purpose
Purpose is to:
Enhance the asset quality
Quantify risks associated with assets and liabilities
Manage the risks identified above
Aims to stabilise:
Short Term profits
Long Term Earnings
Long Term Substance of the Bank
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Process
Review the interest rate structure and compare the
same to the interest/product pricing of both assets and
liabilities
Examine the loan and investment portfolios in the light
of the foreign exchange risk and the liquidity that might
arise
Examine the credit risk and contingency risk that may
originate either due to rate fluctuations or otherwise
and assess the quality of assets
Review the actual performance against the projections
made and analyse the reasons for any effect on the
spreads
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Parameters for purpose of stabilising ALM
Net Interest Income (NII)
NII = Interest Income Interest Expenses
Measures impact of volatility on Short Term Profit
NII fluctuation needs to be minimised to stabilise Short Term Profits
Net Interest Margin (NIM)
NIM= NII/Average Total Assets
Spread on the earning assets
Economic Equity Ratio
Shareholders Funds/Total Assets
Measures the shift between owned and total funds
Assesses the sustenance capacity
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Objectives
Macro
Level
Micro Level
Formulation of
critical business
policies
Profitability
through Price
Matching
Efficient
allocation of
Capital
Liquidity by
Maturity
Matching
Designing of
Products with
efficient pricing
strategies
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Micro Level Objectives
Price Matching
Aims to maintain spreads by ensuring deployment of
liabilities at rate higher than costs
Indicates whether institution can benefit from:
Rising interest rates by positive gap (Assets > Liabilities)
Declining interest rates by negative gap (Liabilities>Assets)
Liquidity Matching
Grouping Assets and Liabilities based on their maturity
profiles
Gap assessed to identify future financing requirements
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Objectives another perspective
Spread Management
Loan Quality
Generating Fee Income and Service Charges
Control of Non-Interest Operating Expenses
Tax Management
Capital Adequacy
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5.
ALM AS CO-ORDINATED BALANCE
SHEET MANAGEMENT
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Two Stage Approach
Reserve Position Management
Liquidity Management
Asset Side Management
Investment/Security
Management
Loan Management
Balance Sheet
Management
Stage 1: Specific
Balance Sheet
Management
Functions
Fixed Assets Management
Liability Management
Reserve Position Management
Liability Side Management
Stage 2: IncomeExpense
Function
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Profit = Interest Income
Interest Expense Provision for
Loan Loss + Non-Interest
Revenue Non-Interest Expense
- Taxes
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Long-Term Management
(Notes and Debentures)
Capital Management
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Do you have any questions or queries or some feedback to give?
Just mark an email to super.msahluwalia@yahoo.com
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CAIIB Super-Notes
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M S Ahluwalia, amongst other things, is a visual artist, blogger,
blog designer and of course an MBA and Banker from New
Delhi, India.
To know more about him you may visit his blog-site: Estudiante De La Vida
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