ARTICLE REVIEW SESSION

PRESENTED BY

APHIDALIN SYIEMLIEH
B3-02
An Empirical Study of Asset Liability
Management Approach by
Indian Banks

Author:
Suman Chakraborty
And
Subhalaxmi Mohapatra
CONTENTS
 Introduction
 Functions
 Needs for ALM in banks
 Objectives
 Sample to be Analyze
 Data Analysis and Observations
 Findings
 Bibliography
 Learnings
 Introduction
 ALM has become the buzzword in the banking world.

 ALM is apart of the overall risk management system in banks.

 ALM implies examination of all assets and liabilities

simultaneously on a continuous basis with a view to ensure a proper
fund mobilization and their deployment with respect to their:-
Maturity Profile, Cost , Yields, Risk Exposure, etc.

 ALM includes product pricing for deposits as well as advances and

the desired maturity profile of assets and liabilities.
 Functions
 ALM provides a degree of protection to the institution from
intermediation risk and makes such risk acceptable.

 ALM provides the necessary framework to define, measure,

monitor, modify and manage risks.

 ALM also provides opportunities for enhancing net worth.

Needs For ALM in Banks
 Banks need to introduce effective risk management that address
the underlying issues.

 Banks need to address these risks in a structured manner by

upgrading their risk management and adopting more
comprehensive ALM practices.
 Objectives
 To study the correlation between Assets and Liabilities of the
Indian Banks in terms of understanding the nature and strengths.

 To determine the components of assets explaining variance in

liability and vice versa.

 To study the impact of ownership over ALM in banks.

Sample To Be Analyzed
 All the scheduled commercial banks were taken as the sample to
be analyzed and they were classified into four different groups
based on their ownership structure:
 Nationalized Banks
 SBI and its Associates
 Private Banks
 Foreign Banks
Table 1 Classification of Assets
Fixed Assets Fixed Assets
Liquid Assets Cash in hand, balances with RBI, balances with other banks, money at
call and short notice.

Term Loans Term Loans

Short-Term Loans Advances not in term loans, bills purchased and discounted, cash credits,
overdrafts and loans.

Investment Other than SLR like shares, debentures, bonds, etc.

SLR Securities Government securities and other approved securities.

Table 2 Classification of Liabilities

Net Worth Capital, Reserves and Surplus

Short-Term Deposits Saving bank deposits and demand deposits

Long-Term Deposits Deposits not included in short-term

Borrowings From RBI, other banks, other financial institutions both from India and
abroad.
In order to understand the relationship, it is pertinent to study the nature and
strength existing between the assets and liabilities, and to access the
relationship, the Canonical Correlation is considered to be appropriate. The
Canonical Correlation is the correlation between two latent variables, where
one represents a set of independent variables and the other represents a set of
dependent variables. Canonical Correlation is used to study many-to-many
relationship. It produces an output that shows the strength of relationship
between two variables as well as individual variables accounting for variance
in other set.
 
A= As1 * (Liquid Assets) + As2 * (SLR Securities) + As3 * (Investments) +
As4 * (Term Loans) + As5 * (Short-Term Loans) + As6 * (Fixed Assets)
 
L= Li1 * (Net Worth) + Li2 * (Borrowings) + Li3 * (Short-Term Deposits) +
Li4 * (Long-Term Deposits)
 
A and L are assume to be unknown and the canonical correlation technique is
used to compute the values As and Li in such a way that the covariance
between A and L is the maximum.
 
Data Analysis And Observations
Table 3 Canonical Correlation Analysis
SBI and its
It can be observe from the
Foreign Banks Private Banks Nationalized
Banks
Associates table that different banks
Banks
have different degrees of
R2 0.918 0.967 0.977 0.998
Canonical Loadings association among
ASSETS constituents of assets and
Liquid Assets 0.234 0.696 -0.046 0.217
SLR Securities 0.068 0.792 -0.328 0.724
liabilities and among the
Investments 0.294 -0.467 -0.662 0.838 banks, SBI and its associates
Term Loans
Short-Term Loans
-0.469
0.248
-0.464
0.441
0.168
0.727
0.548
-0.880
have the best asset-liability
Fixed Assets -0.093 -0.945 -0.728 0.624 maturity pattern. The banks
LIABILITIES
have arranged as follows in
Net Worth -0.064 -0.948 -0.885 0.811
Borrowings 0.151 -0.523 0.593 -0.830 terms of decreasing order of
Short-Term
Deposits
0.478 0.962 0.106 0.437 correlation:-
Long-Term -0.255 -0.201 0.007 0.944
SBI and its Associates
Deposits
Private Banks
Redundancy
Assets 0.192 0.406 0.259 0.556
Nationalized Banks
Liabilities 0.176 0.519 0.268 0.609 Foreign Banks
 Table 4 Cause-Effect Relationship

Banks Independent Set Dependent Set

Foreign Liability Asset

Private Asset Liability

Nationalized Asset Liability

SBI and its Associates Asset Liability

The table shows the redundant factors which indicate how redundant one set of variables is
given the other set of variables. This gives an idea about independent and dependent sets
and also identifies whether the banks is asset managed or liability manage. Therefore it can
be observe that three groups of banks, that is private, nationalized, SBI and its Associates
have assets as their independent set, except for foreign banks which have liability as
independent set. It indicates that these banks were actively managing assets and liabilities
and were dependent on how well the assets are managed. Here, it needs to be stated that
during this period, interest rates were coming down and banks were busy in parking their
assets in different avenues from where they could get maximum returns. Moveover, the
liquidity in the market was quite higher, thereby the banks especially the bigger ones, were
not concerned about the liability as they could always borrow from active money market to
manage their liabilities.
 Findings
 Ownership and structure of the banks do have a major bearing in
the ALM procedure.

 SBI and its Associates have the best correlation, thereby indicating
the best asset-liability maturity pattern.

 Most of the Indian banks, are liability-managed banks because they

all borrow from money market to meet their maturing liabilities.

 Private banks are highly aggressive for profit generation and use
the short-term funds for long-term investments.
Contd.
 The interest rate and liquidity risks are the significant risks
that affect the bank’s balance sheet and, therefore they
should be regularly evaluated and managed.

 Private banks use a risky strategy in case of problems arising

from the significant risks as has been mentioned above.

 The nationalized banks along with SBI and its Associates are
excessively concerned about liquidity and in the process,
they use long-term funds as well as medium and short-term
loans.
Learnings
 The conceptual framework of ALM.

 Correlation between assets and liabilities.

 How the ALM strategy differs with the organization objectives.