A Study on Asset Liability Management in Yes Bank

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A study on asset liability management in yes bank

Asset & Liability Management is a dynamic process of planning, Organizing &

Controlling of Assets & Liabilities and their volume, mixes, maturities, yields and

costs in order to maintain liquidity and NIINet Interest Income.

ALM is continuously arranging and rearing the assets and liabilities of the bank

without infringing the liquidity and safety of the bank and with the purpose of

maximizing the banks profit. The process of ALM depends upon the availability,

accuracy, adequacy data and understanding the balance sheet.

ALM is a risk management technique which is designed to earn an adequate return

while maintaining a comfortable surplus of assets beyond liabilities. It takes in to

consideration interest rates, earning power and degree of willingness to take on debt.

It is also called Surplus Management.

In today Banking Industry the responsibility of Assets and Liability Management is to

manage the financial risk which arises due to:

Mismatch between Assets and Liabilities

Interest Rate Risk

Liquidity Risk

Forex risk

Asset ManagementBanks follows Asset management tool for proper control over

the composition of banks assets to provide adequate liquidity and earnings and meet

other goals of the bank. It says how liquid are the assets of the Bank.

Liability ManagementBanks follows Liability management tool for proper control

over the composition of bank liabilities to provide adequate liquidity and to meet

other goals. It says how easily can the bank generate loans from market.

The objective of the ALM is to manage:


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Mismatch between Assets & Liabilities -

Asset-Liability mismatches can occur in different areas. A bank could have substantial

short-term liabilities (such as deposits), long-term assets (such as fixed rate

mortgages), these can be measured by the duration gap. This measure sometimes alsocalled a maturity mismatch. A bank could have all of its liabilities as floating interest

rate bonds, but assets as fixed rate instruments.

To measure the direction and extent between AssetLiability by using GAP

Analysis. This GAP Analysis derives the difference between the amounts of RSA

Rate Sensitive Asset and RSLRate Sensitive Liabilities.

Mismatches can be Positive or Negative.

+ve mismatch - excess liquidity can be deployed in money market instruments,

creating new assets & investment swaps etc.

-ve mismatch - it can be finance from market borrowings, Bills rediscounting, Repos

& deployment of foreign currency converted into rupee.

Interest Rate Risk

Banks follow this method to know what is the impact on a banks future earnings andthe market value of its equity due to changes in interest rates by RBI or changes in the

Market interest rates.

Liquidity Risk

Banks follow this method to know whether they are having sufficient assets to meet

the liabilities at a given time.

Forex Risk -

Banks follow this method to know the impact or to know the risk in foreign exchange

assets and liabilities due to changes in exchange rates among Multi-currencies.


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COMPONENTS OF ASSETS & LIABILITIES IN BANKS

BALANCE SHEET & MANAGEMENT:

Bank Liabilities:-

The sources of fund for lending and investments activities constitute liabilities side of

balance sheet.

Capital

Reserves and Surplus

Deposits

Borrowings

Other Liabilities and Provisions

Contingent Liabilities

Banks Assets:-

Funds mobilized by bank through various sources.

Cash and Bank balances with RBI

Balances with other banks

Money at Call & Short notice

Investments

Advances

Fixed Assets

Other AssetsBanking business involves the identifying, measuring, accepting and managing the

risk. One of the most important risk-management functions in banking is Assets

Liability Management.


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7th October 1999, Risk management to manage Interest rate risk, Liquidity risk,

Foreign exchange risk & Operational risk.

December 2000, Capital Adequacy Guidelines to manage credit and market risk.

-ve Gap in bucket rates i.e. 114 days and 1528 days should not exceed 20% of thecash flows.

Initially Gap Analysis to apply in the first stage of implementation & to indicate the

financing gaps.

Disclosure to Balance sheet on maturity pattern on Deposits, Borrowings, Investments

& Advances w.e.f 31.03.01

Purpose of Assets Liability Management in Banks:

An effective Asset Liability Management Technique aims to manage the volume, mix,

maturity, rate sensitivity, quality and liquidity of assets and liabilities as a whole so as

to attain a predetermined acceptable risk/reward ratio.

Review the interest rate structure and compare the same to the interest/product pricing

of both assets and liabilities.

Examine the loan and investment portfolios in the light of the foreign exchange risk

and liquidity risk that might arise.

Examine the credit risk and contingency risk that may originate either due to rate

fluctuations or otherwise and assess the quality of assets.

Review, the actual performance against the projections made and analyse the reasons

for any effect on spreads.

Aim is to stabilize the short-term profits, long-term earnings and Long-term substance

of the bank. The parameters that are selected for the purpose of stabilizing asset

liability management of banks are:

Net Interest Income (NII)

Net Interest Margin (NIM)

Economic Equity Ratio (EER)

Managing the banks response to changing interest rates


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Banks int. revenues Bank int. costs Mkt value of bank assets Mkt value of bank

libilitys

Banks Net Interest Margin Banks Net worth (equity)

Banks investment value, profitability, and riskCOMPANY

PROFILE

INTRODUCTION:

YES BANK is an outcome of the professional entrepreneurship of its Founder, Rana

kapoor and the support of his highly competent top management team. Rana Kapoor

has proven track record as a professional entrepreneur in successfully establishing and

managing Rabo India Finance private Limited, a Joint venture with Rabo Bank,

Netherlands. YES BANK has received the only Greenfield license awarded by the

RBI in the last 14 years.

YES BANK won the prestigious Emerging Markets Sustainable Bank of the Year

Award at the Financial Times /IFC, Washington Sustainable Banking Awards held on

June 3, 2008 in London. YES BANK was the only Indian Bank to have won this

award out of 182 entries from 129 institutions across 54 countries.

YES BANK was awarded the Financial Insights Innovation Award (FIIA) for the

Most Innovative e-Payments solution on February 29, 2008, in Singapore. YES

BANK was the only Indian Bank to receive this accolade from amongst 150

nominations across Asia pacific.

YES BANK has been ranked overall #1 amongst 56 banks on the key parameter of

Credit Quality and overall THIRD among New Private Sectors Banks, in the Financial

ExpressE&Y Survey of Indias Best Banks of 2007, announced on March 31, 2008.The Bank also has been ranked #1 on Growth in its category (overall#1 on Growth).

YES BANK has also been ranked SECOND among Medium Size Banks and the

Fastes Growing Bank in its category, at the Business TodayKPMG Survey of

Indias Best Banks of 2007.


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Earlier, YES BANK was ranked # 2 among NEW Private Sector Banks, at the

Financial Awards for Indias Best Bank for 2006, and ranked # 3 the Business world

survey of Indias Best Listed Public and Private Banks for 2006, while emerging #1

on Growth, Efficiency and Safety. The Bank has also been selected as a FoundingMember of the Community of Global Growth Companies at the World Economic

Forum, Davos. Further, the Bank has been included as Chairmans Circle member of

the US-India Business Council (USIBC). YES BANK us the first and only Indian

signatory to the Carbon Disclosure Project (CDP) to address the highly pertinent issue

of Climate Change.

The Bank completed it maiden IPO of 70 million shares in July 2005 raising INR

3,150 million of capital at a price of INR 45 per share. The additional shares offered

represented 25.93% of the Banks paid-up capital. The paid-up capital of the Bank

currently stands at INR 2,967 million

The total net worth of the Bank as at June 30, 2008 is INR 13,742 million.

Key Highlights & Milestones:

Nov 03 Incorporation of YES BANK Limited.

June 05 Maiden Public offering of equity shares by the Bank.

Nov 05 Rana Kapoor, MD & CEO adjudged Start-up Entrepreneur of the

Year at the E & Y Entrepreneur Award 2005.

Sept 06 Foreign currency loan agreement with Wachovia Bank, N.A.

Dec 05 Ranked No.3 in the Business world survey of Indias Best Listed

Banks, including public and private banks.

Feb 07 Won the RASBIC Award for Innovative recruitment and staffing

Programme and the Global HR Excellence Award for Innovative

HR Practices at the Asia Pacific HRM Congress 2007.

Apr 07 Launch of Demat Account Services.

June07 Launch of Business BankingFinancial Advisory division to

provide complete end-to-end financial advisory services to


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Emerging Corporates and Business Bankingcustomers

Aug 07 Launch of YESInternational Banking.

Sep 07 Received licenses to open 57 new branches nationally and 125

offsite ATMs in Mumbai & NCR Taking the total licensednetwork to 117 branches and 200 offsite ATMs.

Jan 08 60 Operational branches across 52 locations nationally and 75

offsite ATMs in Mumbai and NCR.

Feb 08 YES BANK was ranked as the Top Deal Maker in the Life

Sciences sector by Merger market, a leading global news serice.

YES Bank was also ranked 8th overall by value of deals.

Apr 08 67 Operational branches across 57 locations nationally and 75

offsite ATMs & 2 National Operations Centers in Mumbai &

NCR.

June 08 Awarded the Emerging markets Sustainable Bank of the year

Award at the Financial Times/ IFC, Washington Sustainable Banking Awards.

July 08 101 operational branches across 82 locations nationally, 81 offsite

ATM and 2 National Operations Centres.BUSINESS STRATEGY:

Knowledge Banking & Responsible Banking

Knowledge Banking: One of the strengths and differentiating features of YES BANK

is its Knowledge Banking approach. The Bank has identified certain focus sectors

based on the following parameters:

Potential to add value in providing banking products

Recognition and appreciation fo knowledge as a differentiator

Growth potential of the sector

Opportunities for banking products and competitor activity

Indias competitive position internationally, in the sector.


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The ability of a bank to fulfill its obligations and after doing so having enough cash

left to do its normal daily banking business. Control over a banks liabilities (Usually

through changes in interest rates offered) to provide the bank with adequate liquidity

and meet other goals.Liquidity management helps the bank in case of process of generating funds to meet

contractual or relationship obligations in all times. It demonstrates the whether the

bank is safe or not and whether the bank is capable of repaying its borrowings.

It enables the bank to meet its loan commitments, whether formal or informal.

It enables the bank to avoid the unprofitable sale of assets.

It demonstrates the bank when to lower the size of the default-risk premium the need

to pay for the funds.

The objective of the Liquidity Management in bank is to meet its fund requirements

and to acquire funds and use them profitably, especially to meet loan demand and

focuses on a expansion of banks asset.

Liquidity Management Measures:

Cashflow approach: Compare Cash Inflows and Outflows for a shorter period say

30 to 45 days, which provides cashflow measure of bank liquidity.By observing net cash flows on a day by day basis we can find the liquidity risk.

Largeliability dependence: Need to calculate LLDLarge Liability Dependence.

This ratio demonstrates the extent to which money supports the banks basic earning

assets.

LLD = Large liabilitiesTemporary investments

Earning assetsTemporary investments

Temporary investmentsInterest bearing balances which are due from depository

institutions, Security purchased, etc.

Liquidity risk is financial risk arise due to uncertain liquidity. If credit ratings fall then

a bank might lose its liquidity, liquidity risk take place due to unexpected cash

outflows.


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Liquidity risk refers to the risk that the institution might not be able to generate

sufficient cash flow to meet its financial obligations.

Liquidity management helps the organization to accommodate the decreases in

Liabilities and the increase funds in Assets. It plays a very important role in allorganizations to compensate for expected and unexpected fluctuations in the Balance

Sheet and to provide funds for the growth.

Liquidity of an institution depends on the institutionshort term need for cash, cash

in hand, available lines of credit, the liquidity of the institutions assets, the institutions

reputation in the marketplace, credit rating

Banks need to maintain liquidity to meet its deposit withdrawal and to fund loan

demands.

The difference between loans and deposits determine banks liquidity needs. It

represents the ability to decreases in liability and to fund increases in assets.

It demonstrates the market place that the bank is safe and to know whether they are in

position of repaying its borrowings.

It enables bank to meet its prior loan commitments, whether formal or informal.

It helps to smooth the maturity profile and to avoid bunching of debt services.2005-2006

2006-2007

2007-2008

2008-2009

(Rs. In thousands)

(Rs. In thousands)

(Rs. In thousands)

(Rs. In thousands)

Financing Gap

Loans - Deposits

979,445


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(5,032,852)

(19,306,562)

(38,428,884)

Loans & Advances7,609,790

24,070,924

62,897,348

94,302,704

Deposits

6,630,345

29,103,776

82,203,910

132,731,588

This formula says about the Gap between the Loans and Deposits. By observing the

above calculation we can understand that in the beginning there were less deposits and

more loans and later stages deposits are more than loans and advance. It seems than

bank has more liquidity, bank can use these additional deposits to fund more loans toSMEs and other Big organizations and bank has more liquidity but at the same time

they have more risk.

Financing Requirement

Financing Gap + Liquid Assets

9,616,108

22,744,010

60,287,993

79,445,528

Financing Gap

979,445

(5,032,852)


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(19,306,562)

(38,428,884)

Liquid Assets

8,636,66327,776,862

79,594,555

117,874,412

cash&bal. with RBI

413,366

881,734

3,897,645

9,592,359

Balance with banks, Money at call & Short notice

116,930

1,274,077

9,030,755

6,683,301Advances

7,609,790

24,070,924

62,897,348

94,301,704

other assets

496,577

1,550,127

3,768,807

7,297,048


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2005-2006

2006-2007

2007-2008

2008-2009(Rs. In thousands)

(Rs. In thousands)

(Rs. In thousands)

(Rs. In thousands)

Loans / Deposits

1.14772157

0.8270722

0.765138155

0.710469191

Loans & Advances

7,609,790

24,070,924

62,897,34894,301,704

Deposits

6,630,345

29,103,776

82,203,910

132,731,588

2005-2006

2006-2007

2007-2008

2008-2009

(Rs. In thousands)


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(Rs. In thousands)

(Rs. In thousands)

(Rs. In thousands)

Volatile Liabilities / Tot. Assets0.83022641

0.8624181

0.929116044

0.922336067

Volatile Liabilities

10,611,729

35,898,621

103,163,928

156,634,970

Total Assets

12,781,729

41,625,543

111,034,492169,824,184

volatile liabilities

Deposits

6,630,345

29,103,776

82,203,919

132,731,588

Borrowings

3,697,411

4,647,633

8,673,249


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9,862,091

Other liabilities and provisions

283,973

2,147,21212,286,760

14,041,291

2005-2006

2006-2007

2007-2008

2008-2009

(Rs. In thousands)

(Rs. In thousands)

(Rs. In thousands)

(Rs. In thousands)

Liquid assets / Total Assets

0.67570381

0.66730330.716845311

0.694096737

Liquid assets

8,636,663

27,776,862

79,594,555

117,874,412

Total Assets

12,781,729

41,625,543

111,034,492


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169,824,184

Assets can be sold and payback the debts in case of Liquidity Position. The greater

the liquid assets ratio the less liquidity. The liquidity position of YES Bank is good.

ASSET MANAGEMENT:

Control of the composition of a banks assets to provide adequate liquidity and

earnings and meet other goals.

Many banks tend to have little influence over the size of their total assets. Liquid

assets enable a bank to provide funds to satisfy increased demand for loans. But

banks, which rely solely on asset management, concentrate on adjusting the price and

availability of credit and the level of liquid assets.

Asset Management includes

Treasury bills, Federal agency securities, repurchase agreements, bankers

acceptances, negotiable certificates of deposits and Commercial paper.

Asset management is an attempt to earn the highest possible return on assets while

minimizing the risk. By doing:-

To get borrowers with low default risk, paying high interest rates

Buy securities with high return, low risk.

Diversify

Manage liquidity

Assets Quality

Rs. In Crores

Rs. In Crores

Rs. In Crores

Loans / Total Assets

INR 24,070,924.00

INR 62,879,348.00

INR 94,302,704.00

INR 41,625,543.00


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INR 111,034,492.00

INR 169,824,184.00

Loans / Total Assets

617203.17951612290.974

2418018.051

( Rs. In Thousands)

(Rs. In Thousands)

(Rs. In Thousands)

Non-performing loans / Total Loans

Nil

Nil

INR 126,699.00

Nil

Nil

INR 94,302,704.00

Non-perform loans/Total loans

Nil

Nil

0.001343535


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Reserve for NPL

Nil

NilINR 24,370.00

Non-Performing Loans

Nil

Nil

INR 126,699.00

Reserve for NPL / NPL

Nil

Nil

0.192345638

(Rs. In Thousands)

(Rs. In Thousands)

(Rs. In Thousands)

Interest Earning assets

INR 39,728,622.00

INR 106,556,989.00

INR 161,515,426.00

Total assets

INR 41,625,543.00

INR 111,034,492.00


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INR 169,824,184.00

Int earning assets/Total assets

0.954428919

0.9596746660.951074353

Non-Int Earning AssetsINR 1,896,921.00

INR 4,477,503.00

INR 8,308,758.00

Total Assets

INR 41,625,543.00

INR 111,034,492.00

INR 169,824,184.00

Non-Int.Earg Asts / Total Assets

0.045571081

0.040325334

0.048925647

INTEREST RATE RISK MANAGEMENT:

Interest rate risk is the risk borne by an interest-bearing asset, which takes place due to

changes in the interest rates. In general, as rates rise, the price of fixed rate bond will

fall, and vice versa.


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299,787

1,901,800

5,876,094

13,108,257Intrest Expended

118,489

997,390

9,741,086

4,162,566

Net Interest Income

Interest Earned - Interest Expended

181,298

904,410

(3,864,992)

8,945,691

Interest Earned

Interest/discount on advances/bills231,147

1,361,194

4,226,396

9,303,666

Income on investments

62,430

475,269

1,510,449

3,668,225

Int. on balances with RBI

5,236


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45,213

105,639

105,232

Other974

20,124

33,610

31,134

299,787

1,901,800

5,876,094

13,108,257

Interest Expended

Int. on deposits

88,994

850,838

3,293,037

8,540,083

Int. on RBI borrowings

29,495

188,852

669,435

594,801

Others-

7,462

200,094

606,202


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118,489

1,047,152

4,162,566

9,741,086

Interest rates paid on liabilities is lesser than interest rates earned on assets.

Interest rates on Interest earning assets and bearing liabilities will not move at the

same speed as market interest rates.

The greater the potential earningsthe greater is the amount of risk for bank.

When ever the market interest rise the bank income will decline.

As per ALM technique, NIINet Interest Income of the Bank is the early stages is at

decreasing stage and became negative, but at the end it recovered and becamepositive. The contribution from Interest/discount on advances/bills is more in

converting the Negative NII to Positive NII

Gap Analysis

RSARSL

1,347,606

5,095,036

43,948,283

52,694,030

RSA - Rate sensitive Assets

11,675,362

38,846,445

134,825,451

195,287,709Money at call

116,930

1,274,077

9,030,755


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6,683,301

Advances

7,609,790

24,070,92462,897,348

94,301,704

Investments

3,948,642

13,501,444

62,897,348

94,302,704

RSL - Rate sensitive Liabilities

10,327,756

33,751,409

90,877,168

142,593,679

Deposits6,630,345

29,103,776

82,203,919

132,731,588

Borrowings

3,697,411

4,647,633

8,673,249

9,862,091

Positive Gapwhich indicates a bank has more rate sensitive assets than liabilities,

and increase in rates increases NII.


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Negative Gapwhich indicates a bank has more rate sensitive liabilities than assets,

and increases in rates decreases NII.

The size of the GAP determines the size of change in Interest Rate that would drive

Net worth to zero or vice versa.MANAGEMENT FO EXCHANGE RATE RISK:

Foreign exchange riskRisk arising out of adverse exchange rate movements during

a period in which it has open position in an individual foreign currency.

Transaction exposure:- Change in the foreign exchange rate between the time the

transaction is executed and the time it is settled.

ForwardsAgreement to buy or sell forex for a predetermined amount, at a

predetermined rate on a predetermined date.

Open position: - The extent to which outstanding contracts to purchase a currency

exceed liabilities plus outstanding contracts to sell the currency & vice versa.

Overnight position: - A limit on the maximum open position lift overnight, in all

major currencies.

Daylight position:- A limit on maximum open position in all major currencies at

any point of time during day. Such limits are generally larger than overnight positions.

LIMITATIONS:

I have done project on ALM in YES BANK Ltd. Begumpetthis branch deals with

only Retail Banking & Wealth Management. Only current assets but not all assets of

bank.

I have collected the Information from Bank Annual Reports & Quarterly reports and

some information from the website of Bank.

No information available on the Bank Assets Management & Bank Liability

Management.

I have collected Annual reports only for last five years because it incorporated in the

year 2004.


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I have collected information by discussion with 34 employees of the bank and

known about their experience with the Bank.

Observations:

Not the value of assets might fall or that the value of liabilities might rise. It was thatcapital might be depleted by narrowing of the difference between assets and liabilities.

Percentage changes in assets or liabilities can result into large percentage changes in

capital.

The assets & liabilities change only slightly, but those slight changes dramatically

reduce the companys capital

ALM can manage both risks and increase economic value.

ALM Promotes identification and control of risks

ALM Improves capital and liquidity management

ALM Enhance internal and external communication

SUGGESTIONS:

Bank has to manage its debt in order to raise the required amount or resources subject

to the lowest possible medium / long term cost and consistent with a prudent degree of

risk.

To Increase short term deposit.

To reduce the interest rate on Long term loans

To open new branches

To Go for Advertisements - there are very less advertisements and they are

advertising only in Business News channels, so I suggest them to advertise in the

regional channels as well and to look for IMC tools in case of advertising.

CONCLUSION:

The operating income and cost of sales has been increase by 833.06 crs & 107.82 crs

in the year 2008-2009 due to increase in the interest rate and continuous increase in

the Interest Income from 926.06-2008 to 1,492.14-2009.


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The net income interest has been increased in the year 2008-2009 by Rs.511.18 crs to

Income tax paid by Yes bank and in the year 2008-2009 is Rs. 162.07 crs net surplus

Rs. 243.60 crs has been increased due to decrease in the expenditure Rs. 107.82 crs of

the yes bank.By increasing the reserve size, the opportunity cost will increase and the interest

margin will also increase.

Asset and Liability Management not only debt collection and controlling overdraft.

Managing assets and liabilities means influencing the financial position of the bank. It

improves operations as resources are released from Non-performing assets are not

committed to settled unnecessary liabilities.

Abbreviations:

ALMAssets Liabilities Management

NIINet Interest Income

NIMNet Interest Margin

RSARate Sensitive Assets

RSLRate Sensitive Liabilities

VaRValue at Risk

EEREconomic Equity Ratio

SLPStructural Liquidity Profile

IRSInterest Rate Sensitivity

MAPMaturity and Position

SLRStatutory Liquidity Ratio

IRRInterest Rate Risk

CRRCredit Reserve Ratio

IMC toolsIntegrated Marketing Communication tools

A Study on Asset Liability Management in Yes Bank

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Transcript of A Study on Asset Liability Management in Yes Bank