9/28/13

What is Asset Liability Mismatch CONCEPT OF ASSET LIABILITY MANAGEMENT and CONSEQUENCES | ASSET LIABILITY MANAGEMENT| CONC

Understanding Asset Liability Mismatch

Asset Liability Mismatch or ALM is considered to be a comprehensive and dynamical framework for measure ment, monitoring and managing the market risk of the Banks.

ASSET LIABILITY MISMATCH ARISES IN THE:

FOLLOWING SITUATION:
The Primary source of funds for the banks is deposits, and most deposts have a short- to medium-term maturi t ies, thus need to be paid back to the investor in 3-5 years. In comparison, the banks usually provide loans for a longer period to borrowers. Out of them, the home loans and Infrastructure projects loans are of longest maturity. So when a bankprovides the long term loans from much shorter maturity funds, the situation is called asset-liabili t y mismatch. ALM creates Risk and Risk has to be managed. This is called Asset Liability Management.

What is Asset Liability Mismatch CONCEPT OF ASSET LIABILITY MANAGEMENT and CONSEQUENCES

CONSEQUENCES OF THE ASSET LIABILITY MISMATCH

aaptgyan.com/asset-liability-mismatch-concept-management-consequences 1/2

9/28/13

What is Asset Liability Mismatch CONCEPT OF ASSET LIABILITY MANAGEMENT and CONSEQUENCES | ASSET LIABILITY MANAGEMENT| CONC

The Interest rate risks (due to fluctuation) and Liquidity Risk (due to long maturity of loans) are two typical conse quences of Asset Liability Mismatch. 1. Interest Rate Risk: The banks would require to reprice the deposits faster than the loans and during this process if the bank has to pay a higher rate, the adjust ment is difficult. 2. Liquidity Risk: The banks would have to repay the depositors when their funds mature. But when they repay, the cannot recall their loans. In this situation, bank would require the new deposits. This may create a acute situa t ion if there are no deposits available. In some cases, the bank may also need to be paying higher interests on new deposits.

CONCEPT OF ASSET LIABILITY MANAGEMENT (ALM)

This is basically management of the structure of the balance sheet (which comprises the assets and liabilities) in such a way that interest gain is maximized and risk is minimized. Most of the banks have an elaborate institu t ional arrangement to manage the Asset liability Mismatch. They manage the above as follows: 1. Pricing large percentage of loans at variable (Floating Rate Regime) interest rates which actually move in tandem with the markets. 2. Pricing the fixed interest rate loans at a huge markup, this is usually done so that borrower is enticed to go for floating rate regime. The above two generally take care of the Asset liabili t y mismatch situation.

ALM LATEST DEVELOPMENTS :

In April 2010, the RBI has expressed a deep concern over the asset-liability mismatches (ALMs) in banks which mainly arising out of lending to the infrastructure- projects. According to bankers present in a meeting, the main concern of the regulator is the huge pipeline of sanctions

BANKING AWARENESS
an which banks are sitting, mostly for core sector projects. Infrastructure loans are of 10-15 years duration, while most bank deposits have a tenure of one-two years .. ln the last financial year, not much disbursement took place,-and now every bank is sitting on huge sanctions waiting to be disbursed. This is going to create a major problem, as banks wont have deposits of equal maturity.

aaptgyan.com/asset-liability-mismatch-concept-management-consequences

2/2