Commercial banks – Liability management(2)
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Transcript of Commercial banks – Liability management(2)
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COMMERCIAL BANKS LIABILITY MANAGEMENT
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Commercial banks
Financial Intermediary
Business banking
Investment banking Retail banking
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Functions
i) Primary functions:
a) accepting deposits and
b) granting loans and advances ii) Secondary functions:
a) Issuing letters of credit, travellers cheques,
b) safe custody of valuables,
c) facilities of foreign exchange,
d) Issuing demand drafts,
e) Transferring money from one place to another
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List of commercial banks
Axis Bank
State Bank of India
Bank of Rajasthan
Catholic Syrian Bank City Union Bank
Development Credit Bank
Dhanalakshmi Bank
Federal Bank
HDFC Bank ICICI Bank
IndusInd Bank
Dena Bank
IDBI Bank Ltd.
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Liability management
Depositors money
Funds secured from other institutions
When Banks manage these above mentioned points,
it is called liability management of bank.
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Components of a
Bank Balance sheet
Liabilities Assets
1. Capital
2. Reserve & Surplus
3. Deposits
4. Borrowings
5. Other Liabilities
1. Cash & Balances with
RBI
2. Bal. With Banks &
Money at Call and Short
Notices
3. Investments
4. Advances
5. Fixed Assets
6. Other Assets
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Components of Liabilities
1. Capital:
Capital represents owners
contribution/stake in the bank.
- It serves as a cushion for depositors and
creditors.
- It is considered to be a long term sources for the
bank.
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Components of Liabilities
2. Reserves & SurplusComponents under this head includes:
I. Statutory ReservesII. Capital Reserves
III. Investment Fluctuation Reserve
IV. Revenue and Other ReservesV. Balance in Profit and Loss Account
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Components of Liabilities
3. Deposits
This is the main source of banks funds. The deposits
are classified as deposits payable on demand and
time. They are reflected in balance sheet as under:
I. Demand Deposits
II. Savings Bank Deposits
III. Term Deposits
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Components of Liabilities
4. Borrowings
(Borrowings include Refinance / Borrowings from
RBI, Inter-bank & other institutions)
I. Borrowings in India
i) Reserve Bank of India
ii) Other Banks
iii) Other Institutions & Agencies
II. Borrowings outside India
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Components of Liabilities
5. Other Liabilities & Provisions
It is grouped as under:
I. Bills Payable
II. Inter Office Adjustments (Net)
III. Interest Accrued
IV. Unsecured Redeemable Bonds(Subordinated Debt for Tier-II Capital)
V. Others(including provisions)
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How Commercial Banks
Create Credit or Money
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Deposits
The liability owed by the bank to its depositor.
How commercial banks deal with deposits?
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Capital
How commercial banks
acquire capital ?
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Success of ALM in banks:
Pre - conditions
Awareness for ALM in the Bank staff at all levelssupportive Management & dedicated Teams.
Method of reporting data from Branches/ other
Departments. (Strong MIS). Computerization-Full computerization, networking.
Insight into the banking operations, economicforecasting, computerization, investment, credit.
Linking up ALM to future Risk ManagementStrategies.
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Interest Rate Risk Management
Interest Rate risk is the exposure of a banksfinancial conditions to adverse movements ofinterest rates.
Though this is normal part of banking business,excessive interest rate risk can pose a significantthreat to a banks earnings and capital base.
Changes in interest rates also affect the underlying
value of the banks assets, liabilities and off-balance-sheet item.
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Interest Rate Risk
Interest rate risk refers to volatility in Net Interest
Income (NII) or variations in Net Interest
Margin(NIM).
Therefore, an effective risk management process
that maintains interest rate risk within prudent levels
is essential to safety and soundness of the bank.
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Sources of Interest Rate Risk
Interest rate risk mainly arises from:
Gap Risk
Basis Risk
Net Interest Position Risk Embedded Option Risk
Yield Curve Risk
Price Risk
Reinvestment Risk
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Measurement of Interest Rate Risk
Gap Analysis- Simple maturity/re-pricingSchedules can be used to generate simpleindicators of interest rate risk sensitivity of bothearnings and economic value to changing interestrates.
- If a negative gap occurs (RSARSL) in a giventime band, an decrease in market interest ratescould cause a decline in NIM.
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Measurement of Interest Rate Risk
Duration Analysis: Duration is a measure of the
percentage change in the economic value of a
position that occur given a small change in level of
interest rate.
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Thank you
Vatsal Jariwala, 31
Shailesh Kalantry, 35
Nitin Sarawagi, 53 Nikhil Adesara, 1
Punit Kamdar, 36
Apar Rustagi, 52
Sujit Daga, 10