Asset-Liability Management (ALM) Policy

Asset-Liability Management (ALM) is one of the important tools of risk management in
commercial banks of India. Indian banking industry is exposed to number of risk prevailed in the market such as market risk, financial risk, interest rate risk etc. The net income of the banks is very sensitive to these factors or risk. For this purpose Reserve bank of India (RBI), regulator of Indian banking industry evolved the tool known as ALM.

ALM-CONCEPT

ALM is a comprehensive and dynamic framework for measuring, monitoring and managing the market risk of a bank. It is the management of structure of balance sheet (liabilities and assets) in such a way that the net earnings from interest is maximized within the overall risk-preference (present and future) of the institutions. The ALM functions extend to liquidly risk management, management of market risk, trading risk management, funding and capital planning and profit planning and growth projection.

The concept of ALM is of recent origin in India. It has been introduced in Indian Banking industry w.e.f. 1st April, 1999. ALM is concerned with risk management and provides a comprehensive and dynamic framework for measuring, monitoring and managing liquidity, interest rate, foreign exchange and equity and commodity price risks of a bank that needs to be closely integrated with the banks’ business strategy.

Asset-liability management basically refers to the process by which an institution manages its balance sheet in order to allow for alternative interest rate and liquidity scenarios.

SIGNIFICANCE OF ALM

• Volatility
• Product Innovations & Complexities
• Regulatory Environment
• Management Recognition

ALM-PROCESS

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The ALM process rests on three pillars:

i. ALM Information Systems

o Management Information Systems
o Information availability, accuracy, adequacy and expediency

ii. ALM Organization

o Structure and responsibilities
o Level of top management involvement

iii. ALM Process

o Risk parameters
o Risk identification

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Raja Raja Cholan
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