----------------------------------------------------------

TFEM PROJECT REPORT

Asset Liability Management
-------------------------------------------------------------------------

Submitted To: Submitted By: GROUP 4

Prof. Deepak Tandon Aishwarya Chauhan (18PGDMBFS05)

Akansha Gupta (18PGDMBFS06)

Pravesh Pandey (18PGDMBFS30)

Shashank Balooni (18PGDMBFS41)

 ACKNOWLEDGEMENT

Apart from the efforts made by the group, the success of any project report depends largely on the encouragement
and guidelines of many others. We take this opportunity to express our gratitude to the people who have been
instrumental in the successful completion of this project report.

We would like to express our sincere gratitude to our faculty, Prof Deepak Tandon for his exemplary guidance,
monitoring and constant encouragement throughout the course of this subject. We were privileged to experience,
sustained enthusiastic and involved interest from his side throughout the course.

We wish to thank our parents for their undivided support and interest, who inspired and encou raged us to go our own
way, without whom we would have been unable to complete our project. Last but not the least we want to thank our
friends who appreciated us for our work and motivated us.

Thank You.

1|Page
 INTRODUCTION

The Asset liability management(ALM) is defined as a dynamic and inclusive framework that measures, monitors and
manages the various financial risks that are linked with the fluctuating foreign exchange rates, varying interest rates, and
additional such factors that can possibly affect a company’s or a bank’s liquidity.

It is a continuous process that involves planning, organizing and controlling of volumes and maturities of securities, interest
rates and yields of bonds.

ALM involves managing the structure of a company’s/bank’s balance sheet i.e. assets and liabilities, in a way such that
maximization of the net earnings from interest within the whole risk-preference (present and future) takes place.

Objectives of ALM:

The functions of asset liability management comprises the tools that assist to carry out the following:

- Mitigate the liquidly risk

- Manage the interest rate risk as well as the market risk & management of trading risk
- ALM is the sum of the financial risk management of any financial institution
- Bank would like to protect/enhance the Net Interest Income or Net Income Margin (Spread)
- Enhance the net worth of Market Value of bank (Market Capitalization)
- Equal the assets with the liabilities in terms of their time period or maturities, and
- Interest Rates Sensitivities in order to lessen the interest rate risk along with the liquidity risk

In short, ALM is responsible for managing the three primary risks:

1) Liquidity Risk
2) Interest Rate Risk
3) Foreign currency risk

Asset Liability Mismatches:

2|Page
The Assets and Liabilities in the balance sheet of a bank are the upcoming cash inflows and cash outflows. Using the Asset
Liability Management, the cash inflows and cash outflows are clustered and put into 10 different buckets based on
time. Further, each bucket of assets is then mapped with the matching bucket of liability. Then the difference between assets
and liabilities are calculated in each bucket. These differences are known as ‘mismatches’ of ‘gaps’.

Indian Banking System: Progression of Asset Liability Management

India till the early 1990s, had a regulated environment such that there wasn’t any interest rate risk as they were regulated
and suggested by the Reserve Bank of India. The differences between borrowing rates and lending rates were huge. Also,
the banks did not manage their balance sheet themselves as the regulatory authority and the Indian government were
managing them through prescriptions. Eventually, as deregulation took place, banks were given the freedom to manage
their interest rates and hence it became a mandate to introduce them with the necessary guidelines of asset liability
management in order to prevent them from incurring huge losses due to the mismatch.

The Reserve Bank of India came out with the first ever Guiding principles in February 1999. These guidelines included:

- Measurement of interest rate risk along with liquidity risk

- The mandatory reporting outline and provident limits
- Mismatch/gap statements are supposed to be organized by placing all the different assets and liabilities with respect
to the maturity date or the re-pricing date
- The Assets and Liabilities can be classified into be 8 maturity buckets as per the norms of RBI (1-14 days; 15-28
days; 29-90 days; 91-180 days; 181-365 days, 1-3 years and 3-5 years and above 5 years), based on the remaining
period to their maturity (also called residual maturity)

NOTE: The liabilities are to be measured as outflows whereas the assets are taken as inflows.

In order to calculate bank’s liquidity management, they are needed to observe their cumulative gaps through all the eight
time buckets by setting internal practical parameters with the support of the management committees. According to the
mentioned guidelines, in normal situation, the negative gaps in the buckets: 1-14 days and 15-28 days shouldn’t exceed
twenty per cent of the cash outflows in the corresponding time buckets

Further, it was made mandatory by the RBI for all banks to constitute ALCO or Asset Liability Committee to track, monitor
and account for the Asset Liability Management.

In September, 2007, RBI fine-tuned the norms and it was asked that the banks adopt a granular methodology towards
calculation of liquidity risk by dividing the 1st bucket (1-14 days at present) into three buckets namely, 1 day (called next
day) , 2-7 days and 8-14 days. Hence, banks were to divide their maturing assets & liabilities into 10 time buckets.

“Thus as per October 2007 RBI guidelines, banks were advised that the net cumulative negative mismatches during the
next day, 2-7 days, 8-14 days and 15-28 days should not exceed 5%, 10%, 15% and 20% of the cumulative outflows,
respectively, in order to recognize the cumulative impact on liquidity. Banks were also advised to undertake dynamic
liquidity management and prepare the statement of structural liquidity on a daily basis. In the absence of a fully networked
environment, banks were allowed to compile the statement on best available data coverage initially but were advised to
make conscious efforts to attain 100 per cent data coverage in a timely manner. Similarly, the statement of structural liquidity
was to be reported to the Reserve Bank, once a month, as on the third Wednesday of every month. The frequency of

3|Page
supervisory reporting of the structural liquidity position was increased to

ASSET- LIABILITY MANAGEMENT TECHNIQUES:

ALM techniques differ from bank to bank, and it is up to their own discretion the type of method to use. Some of bank have
a similar approach, some differ. Some of the approaches are:-

Gap Analysis: Under this technique of Asset- Liability Management, the main aim is to measure interest rate risk or
liquidity risks. It indicates the difference between Risk sensitive assets and Risk weighted liabilities at any point of time.
The difference is called Gaps. It is done by grouping them into different Time buckets as per their outstanding maturity.
The asset/ liability will be rate sensitive if:-

1. If cash flow is under consideration

2. During time bucketing, interest rate resets/reprises
3. Administered rates are transformed
4. If the asset/liability is eligible for advance payment or withdrawal before maturity.

Therefore; ALM GAP = RSA - RSL

GAP Ratio = RSA – RSL

There are bound to be mismatch between Risk sensitive assets and liabilities:

• There can be positive or negative mismatches

• Positive Mismatch: M.A.>M.L. and vice-versa for Negative Mismatch
• In case of positive mismatch, excess liquidity can be deployed in money market instruments, creating new assets &
investment swaps etc.
• For negative mismatch, it can be financed from market borrowings (call/Term), Bills rediscounting, repos &
deployment of foreign currency converted into rupee.

4|Page
The table below illustrates the impact a positive or negative gap would have on NII in situations where there is an upward
or downward movement of interest rates:

Gap Interest rate Change Impact on NII

Positive Increases Positive

Positive Decreases Negative

Negative Increases Negative

Negative Decreases Positive

Scenario Analysis:

Scenario analysis entails taking in consideration various interest rate scenarios and its projections for next 5- 10 years. They
can be scenarios where interest rates fluctuate or simply rise or fall. Different scenarios will have different yield curve, some
flat, some upward sloping, some downward, or in some cases even inverse! Scenarios up to 20 will be needed to make
holistic assessment of the scenarios. Assumptions can be made about the asset/liabilities performances, prepayment of
mortgages or insurance premium due. Based on assumptions, different scenarios can be made. If any any scenario the
performance is poor, the assumptions can be adjusted. But One big drawback of this approach is that it is very much
dependent on the assumptions the maker takes, and the scenario created thereupon.

The following pages contains the ALM calculations for following Indian Banks:

1. ICICI Bank
2. HDFC Bank
3. SBI Bank
4. Bank Of Baroda

5|Page
ICICI bank is an international banking and financial services company headquartered in Mumbai India. It is the second
largest bank in India in terms of assets and market capitalization.

As discussed earlier, the following pages contains GAP calculations and analysis for ICICI bank and it ends with
recommendations regarding management of interest rate risks that the company might face.

All the data have been taken from the annual report of ICICI bank for the financial year 2019.

The summary of GAPs based on 11 time buckets is displayed here.

GAP Analysis - ICICI Bank

800,000.00

600,000.00

400,000.00
GAP = RSA - RSL

200,000.00

0.00
Day 1 2 to 7 8 to 14 15 to 30 31 days 2 to 3 3 to 6 6 months 1 to 3 3 to 5 Above 5
-200,000.00 days days days to 2 months months to 1 year years years years
months

-400,000.00

-600,000.00

-800,000.00
TIME BUCKETS

As is clearly visible from the above summary chart, ICICI bank has more of negative GAPs distributed among various time
buckets as compared to the positive GAPs. This suggests that ICICI takes an aggressive approach when it comes to doing
business in the banking domain.

The exact components that have been considered for calculating the RSA (Risk Sensitive Assets) and RSL (Risk Sensitive
Liabilities) have been shown in the next page. Further calculations and analysis will be used to determine the nature of
approach that ICICI bank follows in regards to Asset Liability Management.

6|Page
Below table shows the calculation of GAP and GAP Ratio for ICICI Bank:

31
As on March 3 to 6
8 to 15 to days 2 to 3 Abov
31st, 2019 (all 2 to 7 6 month 1 to 3 3 to 5
Day 1 14 30 to 2 month e5
values in INR days mont s to 1 years years
days days month s years
Million) hs year
s
Loans & 18074. 42903. 44478. 15305 21589 22953 4768 67318 15440 10368 14315
Advances 7 4 6 4.5 7.3 4.3 84.4 0.7 31.3 48.4 78.2
Investment 32719 13533 62223. 89610. 51194. 48940. 1008 21294 23744 33279 47877
securities 7.8 8.6 9 7 8 1 62.9 2.9 2.3 8.6 4.2
11205 44375 16249 14054 21008 17118 3356 72250 65301 17956 17822
Deposits
2.1 1.3 9 2.6 1.1 9.6 22.8 5.4 9 81.7 52.1
74566. 53488. 13014 1648 25633 33624 31478 27583
Borrowings - 1116.9 45880
7 3 7.6 02 1.1 6.3 6.8 4
Total foreign 23578 12434 16749. 89126. 81016. 1366 12797 12980 84077. 14015
65936
currency assets 7.1 4.4 6 2 6 78.8 1.4 9.1 9 9.2
Total foreign
19645. 52279. 14289 1775 28566 20665 10904 11557
currency 3566.6 8186.2 54264
1 6 7.9 12.8 3.2 5.1 8.7 0.4
liabilities

Risk Sensitive
Assets (RSA)
Loans & 18074. 42903. 44478. 15305 21589 22953 4768 67318 15440 10368 14315
Advances 7 4 6 4.5 7.3 4.3 84.4 0.7 31.3 48.4 78.2
Investment 32719 13533 62223. 89610. 51194. 48940. 1008 21294 23744 33279 47877
securities 7.8 8.6 9 7 8 1 62.9 2.9 2.3 8.6 4.2
Total foreign 23578 12434 16749. 89126. 81016. 1366 12797 12980 84077. 14015
65936
currency assets 7.1 4.4 6 2 6 78.8 1.4 9.1 9 9.2
58105 30258 12345 30860 35621 35949 7144 10140 19112 14537 20505
Total RSA
9.6 6.4 2.1 1.2 8.3 1 26.1 95 82.7 24.9 11.6
Risk Sensitive
Liability (RSL)
11205 44375 16249 14054 21008 17118 3356 72250 65301 17956 17822
Deposits
2.1 1.3 9 2.6 1.1 9.6 22.8 5.4 9 81.7 52.1
74566. 53488. 13014 1648 25633 33624 31478 27583
Borrowings - 1116.9 45880
7 3 7.6 02 1.1 6.3 6.8 4
Total foreign
19645. 52279. 14289 1775 28566 20665 10904 11557
currency 3566.6 8186.2 54264
1 6 7.9 12.8 3.2 5.1 8.7 0.4
liabilities
11561 53796 17180 24631 48312 27133 6779 12644 11959 22195 21736
Total RSL
8.7 3.1 2.1 0.5 6.6 3.6 37.6 99.7 20.4 17.2 56.5
- - - - - -
GAP = RSA - 465,44 235,37 48,350 62,290 126,90 88,157 36,48 250,40 715,36 765,79 123,1
RSL 0.90 6.70 .00 .70 8.30 .40 8.50 4.70 2.30 2.30 44.90
-
182,23
Overall GAP 7.10
5.0256 0.5624 0.7185 1.2528 0.7373 1.3249 1.053 0.8019 1.5981 0.6549 0.943
GAP Ratio
54155 66831 71542 95025 18748 04103 8228 73302 68825 73478 34666

7|Page
As can be seen from the table shown on previous page, the risk sensitive liabilities are more than the risk sensitive assets
and hence the overall gap comes out to be negative. What this essentially means is that the bank is exposed to the risk of
increase in interest rates.

Hence, if the interest rates rise in such case, the liabilities will increase more than the assets will and this will increase the
negative gap even more. This could be a reason of worry for some banks in cases of urgent liquidation required by the
creditors.

The above scenario has been illustrated in the tables shown below. As we can see, an increase in interest rate by 1% has
increased the gap by 0.9901%. In other words, the net worth of the bank has reduced by INR 1822.37 Million.

Change in
interest 1.00%
rates

EFFECT OF INTEREST RATE CHANGE ON GAP

31
6
8 to 15 to days to 2 to 3 3 to 6
Time 2 to 7 month 1 to 3 3 to 5 Above
Day 1 14 30 2 mont mont
Buckets days s to 1 years years 5 years
days days month hs hs
year
s
- - 629 - 890 368 - 722 - -
4700 237730 4883 13.60 128177 38.97 53.38 252908 515.92 773450 124376
New GAP 95.309 .467 3.5 7 .383 4 5 .747 3 .223 .349
-
New 184059
Overall GAP .471
-
Change in 0.9901
overall GAP %

However, this does not mean that a negative gap is entirely upsetting for a bank. If we look at the NII (Net Interest Income)
for ICICI bank, we find that even when the GAP is negative, NII is positive. This means that whatsoever is the amount of
assets available to the bank, it is generating sufficient income to cover the interest payment requirements of the risk
sensitive liabilities.

Also, even when the GAP is increasing because of an increase in the interest rate, the NII is also increasing by a factor of
INR 2.7015 Billion. Below are the tables showing the same.

8|Page
Hence, in case of ICICI where NII is positive and increasing with an increase in the interest rates, it is not so much a cause
of worry for the bank. This supports the aggressive nature of ICICI’s way of doing business.

If we take the case where interest rates falls, this will be a favorable situation given the negative GAP displayed by the
bank. The GAP will reduce and so will the NII. However, the NII will still remain positive as can be seen in the sheet, and
the risk of greater liabilities will reduce by a factor of 1.01% (change in overall GAP)

A summary of impact of interest rate changes on GAP and NII has been shown by means of graphs below:

Taking all the factors into account, in case of Negative GAP, if the expectation is of interest rates falling, below are the
suitable managerial actions recommended for the bank:

1. Increase Risk sensitive liabilities and/or reduce risk sensitive assets.

2. Extend the maturity of risk sensitive liabilities and/or reduce the maturity of risk sensitive assets.

In case of interest rates increasing,

1. Increase Risk sensitive assets and/or reduce risk sensitive liabilities.

2. Extend the maturity of risk sensitive assets and/or reduce the maturity of risk sensitive liabilities.

9|Page
10 | P a g e
ANALYSIS:

As can be seen from the above table, the risk sensitive assets are more than the risk sensitive liabilities and hence the overall
gap comes out to be positive. What this essentially means is that the bank is not much exposed to the risk of increase in
interest rates.

Hence, if the interest rates rise in such case, the assets will increase more than the liabilities will and this will increase the
positive gap even more. The above scenario has been illustrated in the tables shown above. In case of positive mismatch,
HDFC bank can use this excess liquidity by deploying it in money market instruments, creating new assets & investment
swaps etc.

11 | P a g e
 Over 3
31 Days - 2 Over 2 M - 3 Over 3 M - up Over 6 M - up Over 1 Yr - up years -
BUCKETS 1 day 2-7 days 8-14 Days 15- 30days Over 5 years
Months Months to 6M to 12 M to 3 years Upto 5
years
Deposits 7,995.10 20,117.41 11,969.02 17,813.19 30,103.28 34,978.54 64,330.90 98,994.46 1,83,272.25 33,701.91 1,35,413.65
Advances 18,523.36 10,111.87 7,608.12 26,607.86 12,593.76 16,387.51 20,905.57 25,938.28 1,94,884.47 50,899.77 84,358.17
Borrowings 153.72 1,581.82 236.22 1,405.67 983.9 3,696.54 5,225.05 7,432.81 32,851.10 26,469.65 1,02,261.59
Investments 1,573.24 14,428.61 15,700.00 0 2,472.51 538.04 10,488.65 8,376.75 7,361.20 6,262.31 0.00
Foreign currency assets 43,276.72 7,471.07 6,041.67 12,468.40 13,146.82 14,596.61 19,231.42 13,874.88 22,665.46 20,210.13 9,438.90
Foreign currency liabilities 9,189.86 24,612.43 3,696.62 10,485.28 24,889.29 13,865.04 32,449.24 34,881.80 29,425.19 9,827.41 1,287.37

RISK SENSITIVE ASSETS

BUCKETS 1 day 2-7 days 8-14 Days 15- 30days 31 Days - 2 Months
Over 2 M - 3 Months
Over 3 M - up toOver
6M 6 M - up toOver
12 M1 Yr - up toOver
3 years
3 years -Over
Upto5 5years
years
Advances 18,523.36 10,111.87 7,608.12 26,607.86 12,593.76 16,387.51 20,905.57 25,938.28 1,94,884.47 50,899.77 84,358.17
Investments 1,573.24 14,428.61 15,700.00 0 2,472.51 538.04 10,488.65 8,376.75 7,361.20 6,262.31 0.00
Foreign currency assets 43,276.72 7,471.07 6,041.67 12,468.40 13,146.82 14,596.61 19,231.42 13,874.88 22,665.46 20,210.13 9,438.90
TOTAL 63,373.32 32,011.55 29,349.79 39,076.26 28,213.09 31,522.16 50,625.64 48,189.91 2,24,911.13 77,372.21 93,797.07

RISK SENSITIVE LIABILITIES

BUCKETS 1 day 2-7 days 8-14 Days 15- 30days 31 Days - 2 Months
Over 2 M - 3 Months
Over 3 M - up toOver
6M 6 M - up toOver
12 M1 Yr - up toOver
3 years
3 years -Over
Upto5 5years
years
Deposits 7,995.10 20,117.41 11,969.02 17,813.19 30,103.28 34,978.54 64,330.90 98,994.46 1,83,272.25 33,701.91 1,35,413.65
Borrowings 153.72 1,581.82 236.22 1,405.67 983.9 3,696.54 5,225.05 7,432.81 32,851.10 26,469.65 1,02,261.59
Foreign currency liabilities 9,189.86 24,612.43 3,696.62 10,485.28 24,889.29 13,865.04 32,449.24 34,881.80 29,425.19 9,827.41 1,287.37
TOTAL 17,338.68 46,311.66 15,901.86 29,704.14 55,976.47 52,540.12 1,02,005.19 1,41,309.07 2,45,548.54 69,998.97 2,38,962.61

ALM GAP(RSA-RSL) 46,034.64 -14,300.11 13,447.93 9,372.12 -27,763.38 -21,017.96 -51,379.55 -93,119.16 -20,637.41 7,373.24 -1,45,165.54
NET GAP -2,97,155.18
ALM RATIO 3.655025642 0.691220094 1.845682832 1.31551561 0.504016956 0.599963609 0.496304551 0.34102489 0.915953848 1.10533355 0.392517767

NET INTEREST INCOME

Interest Earned 49,974.10
Interest Expended 31,290.30
Net Interest Income (NII) 18,683.80

Scenario A Scenario B
Change in NII -1% 1%

12 | P a g e
 SCENARIO A
Change in overall GAP
15 to 30 31 days to 2 6 months to 1
Time Buckets Day 1 2 to 7 days 8 to 14 days 2 to 3 months 3 to 6 months 1 to 3 years 3 to 5 years Above 5 years
days months year
New GAP 45574.2936 -14157.1089 13313.4507 9278.3988 -27485.7462 -20807.7804 -50865.7545 -92187.9684 -20431.0359 7299.5076 -143713.8846
New Overall GAP -294183.6282
Previous GAP -2,97,155.18
Change in overall GAP 1.0101%

EFFECT ON NII
Value (In INR
NET INTEREST INCOME
Billion)
Previous NII 18,683.80
New NII for FY 2019 (in INR Billion)
18496.962
% Change 1.0101%

SCENARIO B
Change in overall GAP
15 to 30 31 days to 2 6 months to 1
Time Buckets Day 1 2 to 7 days 8 to 14 days 2 to 3 months 3 to 6 months 1 to 3 years 3 to 5 years Above 5 years
days months year
New GAP 46494.9864 -14443.1111 13582.4093 9465.8412 -28041.0138 -21228.1396 -51893.3455 -94050.3516 -20843.7841 7446.9724 -146617.1954
New Overall GAP -300126.7318
Previous GAP -2,97,155.18
Change in overall GAP -0.9901%

EFFECT ON NII
Value (In INR
NET INTEREST INCOME
Billion)
Previous NII 18,683.80
New NII for FY 2019 (in INR Billion)
18870.638
% Change -0.9901%

GRAPHICAL REPRESENTATION

IMPACT ON NII IMPACT ON GAP

18900 -290000
18800 18870.63 -292000
8 -294000
18700
-296000
18600 18683.8 -298000
18500 -300000
18496.96 -302000
18400 Initial
2 A B
18300 scenario
A Initial scenario B -294183.6282 -297155.18 -300126.7318

ANALYSIS:

As can be seen from the above table, the risk sensitive liabilities are more than the risk sensitive assets and hence the overall
gap comes out to be negative. What this essentially means is that the bank is exposed to the risk of increase in interest rates.

Hence, if the interest rates rise in such case, the liabilities will increase more than the assets will and this will increase the
negative gap even more.

As we can see that there is a change in NII as well as ALM Gap in both the scenarios. Interestingly we notice that when
there is negative change in Interest rates, even though the NII declines, the Gap situation improves. At the same time if the
Interest rates increases, the NII increases, while the Gap also widens. The reason for this is that in our balance sheet our risk
sensitive liabilities are more and hence, as interest rates increase, the income for them increases, but the risk in our balance
sheet increases.

13 | P a g e
 Gap Analysis - SBI Bank

100,000.00

50,000.00

0.00
GAP = RSA - RSL

Day 1 2 to 7 8 to 14 15 to 30 31 days 2 to 3 3 to 6 6 months 1 to 3 3 to 5 Above 5

days days days to 2 months months to 1 year years years years
-50,000.00 months

-100,000.00

-150,000.00

-200,000.00
TIME BUCKETS

The graph shows us there are many negative gaps in the multiple time buckets. This shows that the gap necessarily is
negative when it comes to risk sensitivity.

A detailed analysis of the gap is given in the table below –

31
6
8 to 15 to days 2 to 3 3 to 6 Above
As on March 2 to 7 month 1 to 3 3 to 5
Day 1 14 30 to 2 month mont 5
31st, 2019 days s to 1 years years
days days mont s hs years
year
hs
Loans & 23,33 13,259 10,239 38,815 31,39 33,817 69,80 1,00,2 10,91, 2,90,2 4,82,8
Advances 8.39 .37 .57 .39 0.31 .93 5.47 65.25 890.56 20.65 34.03
Investment 6,432. 2,525. 13,582 8,105. 22,921 25,09 42,890 1,66,7 1,81,5 4,97,1
securities 22.36 46 26 .82 72 .96 9.70 .15 58.51 38.37 44.64
20,80 67,397 38,395 70,124 1,09,1 1,04,2 2,80,6 5,56,9 5,31,6 3,03,6 8,28,3
Deposits
1.66 .57 .92 .55 12.89 90.94 13.69 65.57 71.81 30.51 80.90
16,67 89,536 3,684. 20,965 57,77 20,810 27,68 34,911 47,258 28,896 54,821
Borrowings
9.67 .61 07 .35 3.72 .07 1.37 .01 .20 .05 .00
Total foreign 43,19 3,268. 3,451. 10,523 18,23 16,732 35,57 41,045 95,815 83,623 39,988
currency assets 0.02 05 22 .17 6.76 .11 6.40 .46 .96 .23 .32
Total foreign
currency 24,25 17,027 4,671. 29,440 23,76 29,231 40,98 65,749 59,114 47,839 15,742
liabilities 5.18 .04 82 .95 7.03 .40 6.24 .56 .18 .17 .68

14 | P a g e
 Risk Sensitive
Assets (RSA)
Loans & 23,33 13,259 10,239 38,815 31,39 33,817 69,80 1,00,2 10,91, 2,90,2 4,82,8
Advances 8.39 .37 .57 .39 0.31 .93 5.47 65.25 890.56 20.65 34.03
Investment 6,432. 2,525. 13,582 8,105. 22,921 25,09 42,890 1,66,7 1,81,5 4,97,1
securities 22.36 46 26 .82 72 .96 9.70 .15 58.51 38.37 44.64
Total foreign 43,19 3,268. 3,451. 10,523 18,23 16,732 35,57 41,045 95,815 83,623 39,988
currency assets 0.02 05 22 .17 6.76 .11 6.40 .46 .96 .23 .32
66550 22959. 16216. 62921. 57732 13048 83935. 95815. 83623. 39988.
Total RSA 73472
.77 88 05 38 .79 1.57 61 96 23 32
Risk Sensitive
Liability (RSL)
20,80 67,397 38,395 70,124 1,09,1 1,04,2 2,80,6 5,56,9 5,31,6 3,03,6 8,28,3
Deposits
1.66 .57 .92 .55 12.89 90.94 13.69 65.57 71.81 30.51 80.90
16,67 89,536 3,684. 20,965 57,77 20,810 27,68 34,911 47,258 28,896 54,821
Borrowings
9.67 .61 07 .35 3.72 .07 1.37 .01 .20 .05 .00
Total foreign
currency 24,25 17,027 4,671. 29,440 23,76 29,231 40,98 65,749 59,114 47,839 15,742
liabilities 5.18 .04 82 .95 7.03 .40 6.24 .56 .18 .17 .68
61736 17396 46751. 12053 81540 50041. 68667 10066 10637 76735. 70563.
Total RSL
.51 1.22 81 0.85 .75 47 .61 0.57 2.38 22 68
- - - - - - -
GAP = RSA - 4,814. 1,51,0 30,535 57,609 23,80 23,430 61,81 16,724 10,556 6,888. 30,575
RSL 26 01.34 .76 .47 7.96 .53 3.96 .96 .42 01 .36
-
2,23,8
Overall GAP 64.51
1.077 0.1319 0.3468 0.5220 0.708 1.4682 1.900 0.8338 0.9007 1.0897 0.5666
GAP Ratio
98076 82749 53951 35479 02378 22256 19093 47951 59765 63345 98335

This shows that the overall gap is negative. This shows that the risk sensitive liabilities are more than the risk sensitive
assets. This is not a bad thing and may work in the favor of the bank when interest rates rise.

A study of the affect of the risk sensitive gap on Net Interest Income is shown in the tables below.

Value
NET INTEREST
(In INR
INCOME
Billion)
2428.6
Interest Income
8
Interest
1545.2
Expenses
NII for FY
2019 (in INR
Billion) 883.48

Change in
-1.00%
interest rates

15 | P a g e
 EFFECT OF INTEREST RATE CHANGE ON GAP
31
6
8 to 15 to days 2 to 3 3 to 6 Above
2 to 7 month 1 to 3 3 to 5
Time Buckets Day 1 14 30 to 2 mont mont 5
days s to 1 years years
days days month hs hs years
year
s
- - - - 231 611 - - 68 -
476 14949 30230 57033 23569 96.22 95.82 16557 10450 19.12 30269
New GAP 6.1174 1.3266 .4024 .3753 .8804 47 04 .7104 .8558 99 .6064
-
New Overall 22162
GAP 5.8649
Change in 1.01
overall GAP 01%

EFFECT ON NII
Value
NET INTEREST
(In INR
INCOME
Billion)
New NII for
874.64
FY 2019 (in INR
52
Billion)
1.0101
% Change
%

The Above tables show that when the interest rates fall by one percent the Gap increases by 1.01%. The GAP now stands
at 221625.86 on the negative side. While this may look dismal the net effect on the Net interest income is seen to be an
increase of 1.01% with the net interest income rising to 874.64 billion. The reverse will happen once the interest rates rise.
The net interest income will still be positive though it will fall marginally.

Impact on NII Impact on GAP (Values to be taken

as negative)
900
890 -218000
880 -220000 1% increase Original Gap 1% Decrease
in interest in interest
870 -222000
rate rate
860 -224000
1% increase in Original NII 1% Decrease in -226000
interest rate interest rate -228000

16 | P a g e
 CONCLUSION:

We can conclude to say 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/market risk. Hence, to manage such risks, ALM needs to be used so that the management
is able to assess the risks and cover some of these by taking appropriate decisions.

17 | P a g e