Asset Liabil. Managemnt Hdfc

7/31/2019 Asset Liabil. Managemnt Hdfc

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INDEX

SL.NO

CHAPTER PAGENO

1. INTRODUCTION OF ALM 3

2. REVIEW OF LITERATURE 9

3. COMPANY PROFILE 36

4. ALM IN BAJAJ 56

5.DATA ANALYSIS &INTERPRETATION

58

6. CONCLUSIONS & FINDINGS 70

7. SUGGESTIONS 71

8. GLOSSARY 72

9. BIBLIOGRAPHY 73


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INTRODUCTION


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Introduction of ALM

The Crux

The Scope of ALM

In Sight View

The Objectives of the Study

Need of the Study

Methodology

Limitations of the Study


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INTRODUCTION

The composition of assets and liabilities largely

decide the solvency, liquidity and profitability of a

corporate entity, more so that of a financial institution.

The components of the liabilities determine the cost of

funds. The mix of the assets influences the return on

investment. Therefore the asset liability management

assumes great importance; also, it is absolutely necessary

to prevent the Asset - liability mismatch, both in term of

maturity (tenure) and relative costs (minimum or interest

differential) particularly in the control of increasing

pressure on margins. In the case of state financialcorporation, the instrumentality of Business Plan and

Resources Forecast (BPRF), and effective treasury

management techniques can be, gainfully utilized to make

correction in the existing imbalances in the resource mix

and the avoidable misalignments between the profile or

liabilities and the portfolio of assets. While BPRF is

introduced at the instance of IDBI & SIDBI.


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THE CRUX :

The Asset - Liability management broadly deals with

both sides of the balance sheet. It is primarily concernedwith the market risk that arises from a financial

institutions structural position. These are interest rate and

liquidity risks. The interest rate risk arises from the

possibility of change in profits caused by fluctuations in

interest rank. The delay in recoveries, a principle cause of

liquidity risk, leads to possibility.


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Opportunities and damage due to honoring payment

commitments. Both these risks are obviously the result of

mismatch between the Financial Institutions / Banks as

Assets and Liabilities. In case of banks of Financial

Institutions, the ALM positions are relatively liquid. Usually

the banking institutions hold the assets and liabilities until

they mature. This practice of course is changing of late. It

is increasingly becoming to bundle banking products such

as loans into marketable securities and then sell them or

trade them with other banks as well as other traditional

and new players in the financial markets.

This is especially true of asset-based securities i.e.,

mortgage loans, securitization is a new phenomenon in

the Indian context. But it has a vast scope. It can make ormm the future of a financial institution. The stability,

profitability, growth and image of Financial Institutions

largely depend upon the ability and skill with which it can

conduct its ALM.


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THE SCOPE :

ALM in relation of SFCs covers a wide amount of both

sources and applications of funds. The drying up of some

of the conventional sources, the choice of the basket,rising cost of funds available and the associated stringent

conditions, growing competition for the access to the

sources and the need for arresting the erosion of net

worth are the main challenges in managing the liabilities.

On the assets side, the key issues are the resource

allocation, the assets portfolio-mix, the yields, the

recoveries, NPA management, writes off policies and

above all the market and credit risk management.


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INSIGHT (Capacity of Understanding Hidden Truth)

It is true in all cases, simply based on common sense,

no profound wisdom is necessary to know and appreciatethis fundamental principle of financial science. However,

wisdom lies in understanding the inter-relationship

between categories of assets and their interface with

liabilities. It is desirable to synchronize the profiles of

assets with the counterparts among liabilities. True

balancing involves intelligence matching risk in mapping

and contingency arrangements.


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OBECTIVES OF THE STUDY:

1. To know how ALM is done at APSFC.

2. To study the procedure adopted for managing ALM in

APSFC.

3. To understand the problems involved in maintaining

and managing ALM.

4. To learn the liquidity risk management and analysis.

5. To learn the-interest rate risk analysis and

management.

6. To get know various schemes and activities of APSFC.


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NEED FOR THE STUDY:

In the event of highly volatile interest rates and

liquidity crisis, Financial Institutions/banks face the

problem of real valuation of their assets and liabilities.

This Mismatch of assets and liabilities may produced an

effect on calculation of real worth of the business. There

are some methods adopted by banks/financial institutions

in order to cover the problems of liquidity mismatch and

interest rate risk. The present study focused such


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measures taken by APSFC for its Asset - Liability

management.


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METHODOLOGY OF THE STUDY:

The study of liquidity risk analysis and interest rate risk

analysis and management is based on:

1. Primary Data Collection

2. Secondary Data Collection

PRIMARY DATA COLLECTION

The sources of primary data collection has been

gathered by interacting with -

Chief Manager of ALM Cell

Resource Person, of ALM Cell

Chief Manager of Finance & Accounting

Department

SECONDARY DATA COLLECTION

It was collected from books regarding journals,

banking, and magazines containing relevant information

about ALM. The secondary data collected was to

understand how effectively APSFC carries out ALM


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management.

The other main sources of Secondary Data:

Annual reports of APSFC

Brochures of APSFC

RBI guidelines for ALM management

Indian Financial System By 'M. Y.KHAN'

Asset Liabilities management by different authors

LIMITATIONS OFTHE STUDY

In spite of utmost care taken for the smooth conduct of

study while preparing this project; this report suffers from

certain setbacks.

1. This is the study conducted with in short period, so it

may not be covering all the aspects in detail.

2.The study has made an attempt for evaluating the


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performance of APSFC in managing liquidity risk

management and interest rate risk management.

3.Due to limitations of the sources the data collection

could not be adequate.


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REVIEW OF

LITERATURE


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Review of Literature

ALM

ALM Pillars

ALM Process

ALM Information System

Composition of ALCo

Committee of Directors

Definition of Risk

Identification of Risk

Risk Analysis

Components of Risk Management

Control Risk

Risk in Financial Institutions

Management of Liquidity Risk

Management of Interest Risk

Analysis


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Gap Analysis

Duration Analysis

Trend Analysis

Ratio Analysis

Limitations of Analysis

REVIEW OF LITERATURE

ASSETS LIABILITY MANAGEMENT (ALM)

Asset - liability management practices which effect fromApril I, 1999. While guidelines on management of credit

risk, market risk and operational risk will be issued later

on. The RBI has issued guidelines for the introduction of

Asset - liability management (ALM) as a part of the risk

management and control system in banks. They are

intended to form the basis for initiating collection,

compilations and analysis of dates required tu support the

ALM System.


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Over the last few years, the Indian Financial System

markets have witnessed vide ranging changes at a fast

pace. Intense competition for business involving both the

assets and liabilities together with increasing volatility in

the domestic interest rates as well as foreign exchange

rates, has brought pressure on the management of banks

to maintain a good balance among measures. The bank

management has to base their business decision on a

dynamic and integrated risk management system and

process, driven by corporate strategy. The banks are

exposed to several major risks in the course of the

business credit risk, interest rate risk, foreign exchange

risk, and equity/commodity price risk. Liquidity and

Operational risks. It is against this background that the

RBI guidelines relating to AL:!v1 focus on interest rate and

liquidity risk-management system in banks, which form

part: of the ALM function. The initial thrust of the ALM

function would be to enforce the risk management

discipline that is, managing offer assessing the risk

involved. The objective of good risk Management

programs should be that their programs evolve into a

strategy tool for bank management. In the normal course,

Financial Institutions are exposed to credit and market


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risks in view of the asset liability transformation. With

liberalization in Indian Financial markets, over the last four

years and growing integration of domestic markets and

the entry of MNC's for meeting the credit needs of not

only the corporate but also the retail segments, the risks

associated with Financial Institutions operations have

become complex and large, requiring


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strategic management. Financial Institutions are now

operating in a fairly deregulate 1. environment and are

required to determine interest rates on deposits, they can

also offer deposits prescribe by the R 131: they can also

offer advances on dynamic basis. The interest rates on

investments of 1:1 in government and other securities

are also now market related. Intense competition for

business involving both assets and liabilities has brought

pressure on the management of Financial Institutions to

maintain a good balance among spreads, profitability and

long-term liability. Imprudent liquidity management can

put Financial Institutions earnings and reputation at great

risk. The management of Financial Institutions have to

base their business decisions on a dynamic and integrated

risk management system and process driven by'

corporate strategy, Financial Institutions are exposed to

several major risks in the course of their business; credit

risk, interest rate risk, equity/commodity price risk,

liquidity risk and operational risk. It is, therefore,

important that Financial Institutions introduce effective

risk measure management systems that address the

issues relating to interest rate and liquidity risks.

Financial institutions need to address these risks in a


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structural manner by upgrading their risk management and

adopting more comprehensive asset-liability management

(ALM) practices than has been done hitherto. ALM, among

other functions, is also concerned with risk management and

provides a comprehensive and dynamic framework for

measuring, monitoring and managing liquidity and interest

rates and equity and commodity price risks of major

operators in the financial system, which needs to be closely

integrated with the Financial Institutions business strategy. It

involves assessment of various types of risks and altering the

asset-liability portfolio in a dynamic order to manage risks.

The RBI guidelines relate to interest rate and liquidity risks

management system in Financial Institutions, which form

parts of the Asset -liability management (ALM) function. The

initial focus of the ALM function would be to enforce the risk

management discipline that is managing business after

assessing the risks involved. The objective of good risk

management systems should be that these systems would

evolve into a strategic tool for financial institution management.


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The ALM Process rests in these pillars

1. ALM Information System

A.Management Information Systems

B.Information availability, accuracy. adequacy and

expediency

2. ALM Organization

A.Structure and Responsibilities

B. Level of top Management involvement

3. ALM Process

A.Risk Parameters

B.Risk identification

C.Risk Measurement

D.Risk Management

E. Risk policies and tolerance levels.

ALM INFORMATION SYSTEM

ALM has to support by a management philosophy that


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clearly specifies the risk policies and tolerance limits. This

framework needs to be built on sound technology with the

necessary information system as backup. Thus

information is the key to the ALM process. It however,

recognized that varied business profiles of Financial

Institutions in the public and private sectors do not make

the adoption on a uniform ALM system for all Financial

Institutions feasible.


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These are various method prevalent worldwide for

measuring risks. These range from the simple gap

statement to extremely sophisticated and dam intensiverisk adjusted profitability measurement methods.

However, though the central element for die entire ALM

exercise, is- the availability of adequate and accurate

information with expedience and the systems existing

some of the major Financial Institutions do not generate

information in the manner required for ALM. Collecting

accurate data in a timely manner would be the biggest

challenge before the NBFC's particularly those lacking full-

scale computerization. However, the introduction of a

base information system of risk management, risk

measurement and monitoring has to be addressed

urgently.

Financial Institutions have heterogeneous organization

structures, capital base, asset size, management profiles,

business activities and geographical spread. Some of

them have a large number of branches and

agents/brokers, where as some have unitary offices.

Considering the large number of branches and the lack of

adequate support system to collect information requires


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for the ALM. Which analysis information on the basis of

residual maturity and reprising pattern of liabilities and

assets, it would take time for Financial Institutions in the

present state, to get the requisite information. With

respect to investment portfolio and funds management, in

view of the centralized nature of the functions, it would

refined overtime as the Financial Institutions management

gains experience of conduction business within an ALM

framework the spread of computerization will also help

Financial Institutions in accessing data.

The business issues than ALCO would consider, inter,

should include product pricing for both deposits and

advances, desired maturity profile and mix of the

incremental assets and liabilities, prevailing interest ratesoffered by other peer NBFCs for similar services/products

and so on. In addition to monitoring the risk levels, the

ALCO should review the result of and progress in

implementation of the decision made in the previous

meeting. The ALCO should also articulate the current

interest rate view of the Frs and base its decision for

future business strategy on this view. With respect tothe

funding policy, for instance, its responsibility would be to

decide on the source and mix of liabilities or sale of


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assets. Towards this end, it should develop a view

regarding the future direction of interest rate movements

and decide on funding mixes between fixes vs. floating

rate funds, wholesale vs. retail deposits, money markets

vs. capital markets, funding domestic vs. foreign currency

funding, and so on. Individual Financial Institutions should

decide the frequency of holding their ALCO meetings.

COMPOSITION OF ALCO

The size (number of members) of ALCO would depend

on the size of the each institution, business mix and

organizational complexity. To ensure commitment of the

Top management and timely response to market:

dynamics the CEO/CMD/President/Director should head

the committee. The chief of investment, credit resources

management/planning funds management/treasury.

International Business and Economics research can be

members of the committee. In addition, the head of the

technology division should also be an invitee building up

of MIS and related computerization. Large FI may even

have sub-committee and support groups.


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COMMITTEE OF DIRECTORS

The management committee or any other specific

committee constituted by the board of directors shouldoversee the implementation of the system and review its

function periodically.


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The scope of the ALM functions can be described as

follows:

1. Liquidity risk management

2. Management of market risks

3. Funding and capital planning

4. Profit planning and growth projection and

5. Forecasting and analyzing 'what if scenario' and

preparation of contingency plans.

DEFINITION OF RISK

Risk is the potential loss of an asset due to different

factors.

IDENTIFICATION OF RISK

ALM in a commercial bank of Financial Institutions is to

decide what should be the risk measurement parameters

that the management would need to focus on. The

appropriateness of risk management parameters depends


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upon the degree of volatility in the operating

environment, availability of supporting data and expertise

within bank/Financial Institutions and the expected market

and business developments. Generally, these are two

major parameters, which banks/Financial Institutions all

over the world employ to measure their balance sheet

risks viz., risk to the net interest income and market value

portfolio equity.

While the former seeks to measure the risk to the

immediate profits that emanate from cash flow

mismatches occurring in the accounting years, the latter

measures the risk arising out of the maturity mismatches

in its assets and liabilities over the future years. These

two parameters together attend to

MEASURING THE RISK

Due to difficulty in measuring interest rate risk and also

the complexes the present in the understanding of the

concept measurement of interest rate risk assumes

greater importance in the ALM function. It has observed

that banks risk exposure depends upon the volatility of

interest rates and asset prices in the financial market, the

Financial Institutions maturity/gaps, the duration to


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measure and interest rate elasticity of its assets and

liabilities and the liability of the management to measure

and control the exposure. In the management of Financial

Institutions assets and liabilities, interest risk

management lays the foundation for a good ALM.

RISK ANALYSIS

Interest rate risk can be analyzed in the following four

methods.

1. Gap Analysis

2. Duration Analysis

3. Value at risk

4.Simulation

Gap analysis is the most important basic technique

used in analyzing interest rate risk. It measures the

difference between financial institution assets and

liabilities and off balance sheet position which will be repriced or will mature within a predetermine period. (Gap is

the difference between rate sensitive assets minus rate

sensitive liabilities)


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COMPONENTS OF RISK MANAGEMENT

Risk management may be defined as the process of

identifying and controlling risk. It is also described at times as

the responsibility of the management to identify measure,

monitor and control various items of risk associated with

Financial Institutions position and transaction. The process of

risk management has three clearly identifiable steps, viz., riskidentification, risk measurement and risk control.

CONTROL RISK

After identification and assessment of risk factor, the

next step involved is risk control, the major alternatives

available in risk control are

1.Avoid the exposure

2. Reduce the impact by deducing frequency of

severity

3. Avoid concentration in risky area

4. Transfer the risk to another party

5.Employ risk management instruments to cover the

risks


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RISK IN FINANCIAL INSTITUTIONS

Risks in financial institutions are many and a broadly

classifies into three categories

They are as follows:

1. Balance sheet risks

2. Transaction risks

3. Operating and liquidity risk


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I. BALANCE SHEET RISK

The balance sheet generally arise out of the mismatch

between currency, maturity and interest rate structure ofassets and liabilities resulting in

1. Interest rate mismatch risk

2. Liquidity risk

3. Foreign exchange risk

1. INTEREST RATE MISMATCH RISK

It is the impact of the change in interest rate on the net

interest income of the bank and value of the assets and

liabilities. For example,

(a) When fixed deposits are accepted on the fixed rate

basis and the amount is lent on floating rate basis,

any download revision of interest rate on advances

will result in the reduction of income stream for the

bank Financial Institutions. But interest rate on

deposits can be changed only when they fall due or

pre closed by the depositor.

(b) A bonds (investments asset of the bank) price falls

down as interest rate rise.


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2. LIQUIDITY RISK

Liquidity is the potential inability to meet the

banks/Financial Institutions as they become due. It riseswhen Financial Institutions are unable to generate cash to

cope with the declines in deposits or increase in loans. It

originates the mismatches in the maturity of assets and

liabilities as well as uncertainty of future cash flows.

3.FOREIGN EXCHANGE RISK

The risk that a long (over bought) or short (over sold)

position in the foreign

II. TRANSACTIONS RISKS

The transaction risk essentially involves two types of risks.

They are

1.Credit risk

2.Price Risk

l. MARKET RISK

Market risk may be defined as the possibility of the loss

to financial institution caused by changes in market

variables. The financial institution defines market risk as

the risk that the value on and off balance sheet position


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will be adversely affected by movements in the equity and

interest rate of markets, currency, exchange rate and

Commodity prices.

2. ISSUER-RISK

The financial strength and standing of the

institute/sovereign that has issued the instrument can

affect price as well as reliability. The risk involved with the

instruments issued by corporate bodies would be an idealexample.

3. INSTRUMENT RISK

The nature of instrument creates risks for the investor.

With many hybrid instruments in the market and with

fluctuations in market conditions, the prices of various

instruments ma react differently form one another.


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MANAGEMENT OF LIQUIDITY RISK AND INTEREST

RATE RISK

LIQUIDITY RISK

Measuring and managing liquidity needs are vital for

the effective operations of financial institution. By

ensuring a Financial Institutions ability to meet its

liabilities as then become due liquidity management can

reduce the probability of an adverse situation developing.The institution of liquidity transcends individual

institutions, as liquidity shortfall in one institution can

have repercussion on the entire system. The Financial

Institutions management should measure not only the

liquidity position of Financial Institutions 011 an ongoing

basis but also examine how liquidity requirements are

likely to evolve under different assumptions. Experience

show that assets commonly considered as liquid, like

government securities and other money market

instrument, could also become liquid when the market

and players are unidirectional. Therefore, liquidity has totracked through, the use of the maturity or cash flow

mismatches. For measuring and managing net funding

requirements, the use 01' maturity ladder and calculation


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of cumulative surplus or deficit of funds at selected

maturity dates are adopted as a standard tool.

The time buckets are distributed as under:

Less than one month

Over 1 month to 3 months

Over 3 months to 6 months


Less than or equal to 1 year

More than 1 year and up to 3 years

More than 3 years and up to 5 years




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Financial Institution holding public deposits are required

to invest up to a prescribed percentage (15 % as on date)of their public deposits in approval securities, in terms of

the liquid asset requirements of sections 45-IB of the RBI

Act, 1934. Financial Institutions ,Fi' required to invest up

to 80 percent of their deposit in the manner prescribed in

the RB 1 directors issued under the act, as detailed in an

earlier section. There is no such requirement for Financial

Institutions that are not holding public deposit~. Thus

various Financial Institutions including SFCs would be

holding in their investment portfolio, securities that could

be broadly classifiable as 'mandatory securities' (under

obligation of law) and' non-mandate securities'. In case ofFinancial Institutions not holding public deposits, all the

investment and in GISC.

Financial Institutions holding public deposits, the

surplus securities would fall in the category of non

mandatory securities.

Financial Institutions holding public deposits may place

mandatory securities in any time bucket suitable to

them. The listed non-mandatory securities may be placed


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in any of the less than one month, over 1 month to 3

months, "Over 3 months to 6 months" and "over () months

to 12 months" buckets, depending upon the defeasance

period proposed b Financial Institutions.

Unlisted non-mandatory securities (e.g., equity shares,

securities without a fixed term of maturity and so on) may be

placed in the "more than 10 years" buckets, where as

unlisted non-mandatory securities having a fixed term of

maturity may be placed in the relevant time bucket, as per

residual maturity. The mandatory securities and listed

securities may be marked to market for the purpose of the

ALM System. Unlisted securities may be valued as per RBIs

prudential norms directions. The statements of structural

liquidity may be prepared by placing all cash inflows andoutflows in the maturity ladder according to the expected

timing of cash flows. A maturity liability is cash outflows while

a maturity asset is a cash inflow while

Liquidity Problems may be created due to any of the

fallowing reasons:

a) Funding Risk:

Failure to replace net outflow of funds weather due to

withdrawal of retail deposits on non-renewal of wholesale


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deposits.

b) Time Risk:

Non-receipt of expected inflow of funds e.g. Where

borrowers fails to meet their commitments besides

irregularly in advances which present delay in fulfilling

commitments by borrowers the growth of non-performing

assets also leads to immediate liquidity problem. Non-

performing assets cut into profitability as well. ALMprocess if it fails to take NPA problems cannot succeed.

c) Call Risk:

It represents sudden demand for money owing to

contingent become due. If contingent liabilities start

developing the may create huge drain on liquidity.

d) Opportunity Risk:

A Financial Institution can only grow if its customers are

also prospering (succeeding) request for funds from

important and valuable clients can only be profitably

serviced if adequate liquidity is available.


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Approaches to control Liquidity

1. Maintenance of adequate liquidity remains sinquonon

for banks are other financial institutions.

2. Once maturity of assets exceeds those of liabilities

there is inevitable liquidity risk.

3. Minimum criteria to remain liquid is the ability both to

meet commitments when due and to undertake new

transactions when desirable.

4. Confidence to rise, mobilize or, roll over the deposits

from existing clients. This confidence may be found to

be misplaced when liquidity prevails as existing

clients at that stage may be in the grip of liquidity

crisis.

5. To avail of Export Refinance Facility (ERF) and

Collateralized Lending Facility (CLF) and the

Additional Collateralized Lending Facility (ACLF).

6. Financial Institutions should make a number of

assumptions according to their Asset -liability profiles,

while determining the tolerance levels. Financial

Institutions may take into accounts all relevant

factors based on their asset-liability base, nature of


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business future strategy and so on. The tolerance

levels should be determines keeping all necessary

factors in view and further refined with experience

gained in liquidity management.


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Currency Risk:

Floating exchange rate arrangement has brought in its

wake pronounced volatility, adding a new dimension tothe risk profile of Financial Institutions balance sheets

having foreign assets and liabilities. The increased capital

flows across free economics, following deregulation, have

contributed to increase in the volume of transactions large

cross border flows together with volatility has rendered

Financial Institutions balance sheet unable to exchange

rates.

Interest Rate Risk:

Deregulation of interest rates and the operational flexibility,

given to financial institution in pricing most of the assets and

liabilities imply the need for the financial system to hedge the

interest rate risk, defined as the risk where changes in market

interest rates might adversely affects on Financial Institutions

financial condition. The change in interest rates affects

Financial Institutions in a larger way. The immediate impact of

changes in interest rates is on Financial Institutions earnings

(i.e., reported profits), by changing its net interest income

(NIT). A long term impact of changing interest rates is in

Financial Institutions market the of Equity (MVE) or net worth,


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as the economic value of Financial Institutions assets, liabilities

and off balance sheet positions yet affected due to various

variations in market interest rates. The interest rare risk when

viewed form thee tow perspectives is known as the "earning

perspective" and "economic value perspective" respectively.

The risk from the earnings perspective can be measured as

changes in the net interest income (NIT) or net interest margin

(NIM). These are many analytical techniques for measurement

and management or interest rate risk, to begin with the

traditional gap analysis is considered as a suitable method to

measure the interest rate risk. It is the intention of the RBI to

move over to modem techniques. Financial Institutions should

make a number if assumptions according to their asset liability

profiles. While determining the tolerance levels, Financial

Institutions may take into account all factors based on their

asset liability base nature of business, future strategy and so

on The tolerance levels should be determined keeping all

necessary factors in view and further refined with experience


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In order to enable Financial Institutions to monitor their

short-term liquidity on a dynamic basic over tine horizon

spanning from less than one month, over 1 to 3 months

Financial Institutions should estimate their Short term

liquidity profiles on the basis of business projects and

other commitments for planning purpose.

Interest rate risk gaps in time buckets:









More than 10 years


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The gaps or mismatch risk can be measured by

calculation gaps over different time interval, as on a given

data. Gap analysis measures mismatch between interest

rate sensitive liabilities and rate sensitive assets

(including off-balance sheet position).


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Asset and Liabilities is normally classified as

interest sensitive if:

1. With in the time interval under considerations, thereis a cash flow.

2. The interest rate resets/reprises contractually during

the interval.

3. Dependent on the RBI changes in interest rate/bank

rates.

4. It is contractually pre payable or withdrawn before

the state maturities.

5. Grouping rate sensitive assets and liabilities and of

the-balance sheet positions into time bucket

according to residual maturity or next pricing period

should regenerate the gap report.

6. The gap is the difference between the rate sensitive

assets (RSA) and rate sensitive liabilities (RSL) for

each time bucket. The positive gap indicates that is

has more RS than RSL where as the negative gap

indicates that I has more RSL than RSA.

7. The gap reports indicate the whether the institution is

in a position 'LO benefit rising interest rates by having


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a position gap (rs3>rsl) or weather it is in position to

benefit from declining interest rates by negative gap

(rsl>rsa). The gap a therefore be used as a measure

of interest rate sensitive.


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Sources of Interest Rate Risk:

As financial intermediaries, financial institutions

encounter interest rate risk in several ways. These can bedescribed as follows:

a)Re-Pricing Risk: This risk arises from holding assets

and liabilities with different principal amounts, maturity or

re-pricing dates, there by creating exposure to

unexpected changes in the interest rates.

b)Yield Curve Risk: Re-pricing mismatches can also

expose a bank to changes in the slope and shape of the

yield curve. Yield curve risk arises when unanticipated

shifts of the yield curve adverse effects on a banks

income or underlying economic value. For instance, the

underlying economic value of a long position in 10 years

government bonds hedged by a short position in 5 years

government notes could declare sharply if the yield curve

steepens, even if the position is hedged against parallel

movements in the yield curve.

c) Basis Risk: Another important source of interest rate


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risk (commonly referred as basis risk) arises from

imperfect correlation in the adjustment of the rates and

paid on different instruments with otherwise similar re-

pricing characteristics. When interest rates change, thee

differences can give risk to unexpected changes in the

cash flows arid earnings spread between assets and

liabilities.

d)Option Risk: An additional and increasingly important

source of interest rate risk arises from the option

embedded in many Financial Institutions assets and

liabilities. Formally, an option provides the holder that

right, but not the obligation, to buy or sell in some manner

after the cash flow of an instrument of financial contract.


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GENERAL

The classification of various assets and liabilities into

different time - bucket for preparation of gap reports(liquidity and interest rate sensitive) Financial Institutions

that are better equipped to reasonably estimated the

behavioral pattern of various components of assets and

liabilities, on the basis of the past data/empirical studies

could classify them in the appropriate time-buckets,

subject to approval from the ALCO board of directors. A

copy of the note approved by the ALCO may be sent to

the registered office of the company is located. These

notes may contain 'what if scenario' analysis wider various

assumed conditions and the contingency plans to face

various adverse developments.

The present framework does not capture the impact of

premature closures of deposits and prepayments of loans

and advances on the liquidity and interest rate risk profile

on Financial Institutions. The magnitude of premature

withdrawal of deposits at times of volatility in marketinterest rate is quite substantial. Financial Institution

should therefore evolve a suitable mechanism supported

by empirical studies and behavioral analysis to estimate


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the further behavioral of assets, liabilities and off-balance

sheet items to changes in market variable and estimate

the probabilities of the options. A scientifically evolved

internal transfer pricing model of assigning values on the

basis of current markets rates to funds provided and funds

used is an important component for effective

implementation of the ALM system. The transfer price

mechanism can enhance the management of margin, that

is lending or credit spread.

The funding or liability spread and mismatch spread. It

also helps centralizing interest rate risk at one place.

Which facilities effective control and management of

interest rate risk. A well defined transfer pricing system

also provides a nominal framework for pricing of assetsand liabilities.


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There are four different types of analysis:

1. Gap Analysis"

2. Duration Analysis

3. Trend Analysis

4. Ratio Analysis

l. GAP ANALYSIS:

Maturity/pre-pricing schedules can be used to generate

simple indicators of the interest rate risk sensitivity of

both earnings and economic value to changing interest

rates. When this approach is used to asses the interest

rate risk of current earnings. It is typically referred to as

gap analysis. Gap analysis was one of the first methods

developed to measure Financial Institutions interest rate

risk exposure and continues to be widely used by

Financial Institutions. To evaluate earnings, interest rate

sensitive liabilities in each time band are sub traced from

the corresponding interest rate sensitive asset to produce

are pricing gap for that time band. This gap can be

multiplied by as assume change in interest rate to yield an

approximation of the change in the interest rate income


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that would result from such as interest rate movement.

The size of the interest rate movement used in the

analysis can be used on a variety of factors, including

historical experience. Simulation of potential future

interest rate movements and the judgment of bank

management. A negative or liability sensitive gap occurs

when liabilities exceeds assets (including off-balance

sheet positions) in a given time band.

This means that an increase in market interest rates

could cause a decline in net interest income. Conversely,

a positive or assets-sensitive. Gap implies that the

Financial Institutions net interest rate income could

decline as a result of decrease in the levels of the interest

rates.


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LIMITATIONS OF GAP ANALYSIS:

Although gap analysis is a very commonly used

approach to assessing interest rate risk exposure, it has a

number of shortcomings. First, gap analysis does not take

it account of variation in the characteristics of different

position with a time band. In particulars all positions with

in a given time band are assumed to mature or reprise

simultaneously a simplification that is likely to have

greater impact on the precision of the estimates as the

degree of aggregation with in a time band increases,

moreover gap analysis ignore differences in spreads

between interest rates that could arise as the level of the

market interest rates changes. In addition, it does not

take into account any changes in the timing of paymentsthat might occur as a result of changes in the interest rate

environment. Thus, it fails to account for differences in the

sensitivity of income that may arise form option-related

positions, for these reasons gap analysis provides only a

rough approximation to the actual change in net interest

income would result from the chosen change in the

pattern of interest rates. Finally gap analysis fail to

capture variability in non interest revenues and expenses,

potentiality important sources of risk of the current


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income.

2. CURRENT ANALYSIS

A maturity/re-pricing schedule can also used to evaluate

the effects of changing interest rates on Financial

Institutions economic value by applying sensitivity weights

to each time band. Typically, such weights are based on

estimates of the duration of the assets and liabilities thatfall into each time and duration give a small change in the

level of interest rates. Duration may also be defined as

the weighted average of the time until expected cash

flows from a security will be receive, relative to the

current price of the security. The weights are the present

values of each cash flow divided by the current price. In

its simples form, duration measures changes in economic

value resulting from a percentage change of interest rates

under the simplifying assumptions that changes in value

are proportional to changes in the level


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of interest rates and that the timing of payments is fixed.

Modified duration is standard duration divided by 1+r,

where the level of market interest rate is is elasticity. As

such, it ref1ects the percentage change in the economic

value of the instrument fora given percentage change inthe economic value of the instrument for a givenpercentage change in 1+r. as with simple duration, it

assumes a linear relationship between percentages

changes in value and percentage changes in interest rates

/ in other words, modified duration = Macaulay duration/Cl

+r), where Macaulay duration = cft(t)/(l+r) /cft/(l+r) to the

power t

left = rupee value of cash flow at time t

T = number of periods of time until the cash flow payment

Y = periodic yield to maturity of the security generating

cash flow and

K = the number of cash flows.

3. TREND ANALYSIS

This is a statistical tool with his we can find out the

position of anything in financial institution, I did the trend


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analysis of "cumulative mismatch of last one year as

percentage to working funds", by this, it is possible to

know thathow that fluctuation in funds take place in the

one year mismatches.

4. RATIO ANALYSIS

The liquidity ratios are very useful in the liquidity risk

management analysis. Because with the ratios we can

analyze "the liquidity positions for the company by taking

the past data and we can interpreter the findings. Here in

financial institution, we should also given by the RBI on

the bank, by observing the limits and of findings we can

analyze as Financial Institutions is with in the limits or not.

The ratios, which are used in financial institutions, are


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Current assets/current

liabilities

Total loans/ total assets

Total assets/ total

liabilities

Total advances/total

liabilities

Quick ratio

The ratios, which helps to find out liquidity position of all

financial institution.

Liquidity and Interest rate analysis:

This is the only tool, which is used in the ALM process to

manage the liquidity risk, by doing the gap analysis,

Financial Institutions ,can avoid risks and can earn more

profits, and this is used to analyze the gaps in between

the inflows and outflows of the statement for every

fortnight. By doing the gap, analysis the Financial

Institutions can know about in which bucket the risk. This

gap raised due to the changes in the values of the assets


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and liabilities and changes in their interest rates. For

measuring and managing net funding requirements the

use of maturity ladder and calculation of cumulative

surplus / deficit of funds at selected maturity data is

suggested for adoption by FI. The maturity profile is used

to measure the future cash flows of banks different

buckets.


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Value At Risk (VOR).

VOR is defined as an estimate of potential loss in

position or asset/liability or portfolio of assets liabilities

over a given holding period at a given level of certainty or

unexpected happening the probability of suffering a loss.

BUCKETING:

The time columns used in the below statement, are

called as the time buckets. These buckets are mainlydivided in to three types short - term, medium - term and

long term. Allocating the items of inflows and outflows in

this column is called as bucketing.










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More than 10 years

To analyze the statement a person should have to get

grip on the various items or liquidity statement. Various

items are covered in the statement under the inflow and

out flows.


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Methods to bucket:

The nature of the each item is different with others. So

few models are used to find out under which bucket it willcome like residual maturity, behaviouralization.

Residual Maturity:

This is the type where the item due date is taken as a

base to bucket. Based on maturity date and the starting

date of the item time period is calculated. Statements

preparation data should also be considered.

Behaviourlization:

This is the another model which also used for the

statement preparation, behaviourlizaiton means finding

out the behavior in the future based in the past data, For

this, statistical tools should be used like regression

analysis methods, moving averages, trend analysis and

various methods are used. In financial institution,

behaviorlizaiton is used to various item in them cash

credit is in item.


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COMPANY

PROFILE


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The HDFC Bank was incorporated on August 1994 by the

name of 'HDFC Bank Limited', with its registered office in Mumbai,

India. HDFC Bank commenced operations as a Scheduled

Commercial Bank in January 1995. The Housing Development

Finance Corporation (HDFC) was amongst the first to receive an

'in principle' approval from the Reserve Bank of India (RBI) to set

up a bank in the private sector, as part of the RBI's liberalization of

the Indian Banking Industry in 1994.

HDFC Bank is headquartered in Mumbai. The Bank

at present has an enviable network of over 1416 branches spread

over 550 cities across India. All branches are linked on an online

real-time basis. Customers in over 500 locations are also serviced

through Telephone Banking. The Bank also has a network of

about over 3382 networked ATMs across these cities.

The promoter of the company HDFC was

incepted in 1977 is India's premier housing finance company and

enjoys an impeccable track record in India as well as in

international markets. HDFC has developed significant expertise in

retail mortgage loans to different market segments and also has a

large corporate client base for its housing related credit facilities.

With its experience in the financial markets, a strong market

reputation, large shareholder base and unique consumerfranchise, HDFC was ideally positioned to promote a bank in the

Indian environment.

The shares are listed on the Bombay Stock Exchange Limited and

The National Stock Exchange of India Limited. The Bank's


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American Depository Shares ( ADS ) are listed on the New York

Stock Exchange (NYSE) under the symbol 'HDB' and the Bank's

Global Depository Receipts (GDRs) are listed on Luxembourg

Stock Exchange.

On May 23, 2008, the amalgamation of Centurion Bank of Punjab

with HDFC Bank was formally approved by Reserve Bank of India

to complete the statutory and regulatory approval process. As per

the scheme of amalgamation, shareholders of CBoP received 1

share of HDFC Bank for every 29 shares of CBoP.

The merged entity now holds a strong deposit base of around Rs.1,22,000 crore and net advances of around Rs. 89,000 crore. The

balance sheet size of the combined entity would be over Rs. 1,63,

000 crore. The amalgamation added significant value to HDFC

Bank in terms of increased branch network, geographic reach, and

customer base, and a bigger pool of skilled manpower.

In a milestone transaction in the Indian banking industry, Times

Bank Limited (another new private sector bank promoted by

Bennett, Coleman & Co. / Times Group) was merged with HDFC

Bank Ltd., effective February 26, 2000. This was the first merger of

two private banks in the New Generation Private Sector Banks. As

per the scheme of amalgamation approved by the shareholders of

both banks and the Reserve Bank of India, shareholders of Times

Bank received 1 share of HDFC Bank for every 5.75 shares of

Times Bank.

HDFC Bank offers a wide range of commercial and transactional

banking services and treasury products to wholesale and retail

customers. The bank has three key business segments:


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Wholesale Banking Services - The Bank's target market ranges

from large, blue-chip manufacturing companies in the Indian

corporate to small & mid-sized corporate and agri-based

businesses.

Retail Banking Services - The objective of the Retail Bank is to

provide its target market customers a full range of financial

products and banking services, giving the customer a one-stop

window for all his/her banking requirements.

Treasury - Within this business, the bank has three main product

areas - Foreign Exchange and Derivatives, Local Currency MoneyMarket & Debt Securities, and Equities. The Treasury business is

responsible for managing the returns and market risk on this

investment portfolio.

HDFC Securities (HSL) and HDB Financial Services (HDBFSL)

are its subsidiaries.

Services offered by the company:

Personal Banking

Accounts & Deposits

Loans

Cards

Forex

Investments & Insurance

NRI Banking

Accounts & Deposits

Remittances


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Investments & Insurance Loans Payment Services

Wholesale Banking

Corporate Small & Medium Enterprises

Financial Institutions & Trusts

Government Sector

Achievements/ recognition:-

HDFC Bank was the first bank in India to launch an International

Debit Card in association with VISA (VISA Electron) and issuesthe MasterCard Maestro debit card as well.

2011

Financial Express Best Bank Survey 2010-11 - Best in

Strength and Soundness and 2nd Best in the Private Sector

CNBC TV18's Best Bank & Financial Institution Awards -

Best Bank and Mr. Aditya Puri, for outstanding finance

professional

Dun & Bradstreet Banking Awards 2011 - Best private sector

bank - SME Financing

ISACA 2011 award for IT Governance - Best practices in IT

Governance and IT Security

IBA Productivity Excellence Awards 2011 - New Channel

Adopter (Private Sector) DSCI (Data Security Council of India) Excellence Awards

2011 - Security in bank

FINANCE ASIA Country Awards 2011: India - Best bank,

best cash management bank and best trade finance bank


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Asian Banker - Strongest bank in Asia Pacific

Bloomberg UTV's Financial Leadership Awards 2011 - Best

bank

IBA Banking Technology Awards 2010 - Technology bank ofthe year, best online bank, best customer initiative, best use

of business intelligence, best risk management system and

runners up - best financial inclusion

IDC FIIA Awards 2011 - Excellence in customer experience

2010

Outlook Money 2010 Awards - Best Bank Business world Best Bank Awards 2010 - Best Bank (Large)

Teacher's Achievement Awards 2010 (Business) - Mr. Aditya

Puri

The Banker and PWM 2010 Global Private Banking Awards -

Best Private Bank in India

Economic Times Awards for Corporate Excellence 2010 -

Business Leader of the Year - Mr. Aditya Puri

Forbes Asia - Fab 50 Companies - 5th year in a row

NDTV Business Leadership Awards 2010 - Best private

sector bank

The Banker Magazine - World's Top 1,000 Banks

MIS Asia IT Excellence Award 2010 - BEST BOTTOM-LINE

I.T. Category

Dun & Bradstreet Banking Awards 2010 - Overall best bank,

Best private sector bank, Best private sector bank in SME

Financing

Institutional Investor Magazine Poll - HDFC Bank MD, Mr.

Aditya Puri among Asian Captains of Finance 2010


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IDRBT Technology 2009 Awards - IT Infrastructure, Use of IT

within the Bank and Runners-up - IT Governance (Large

Banks)

ACI Excellence Awards 2010 - Highly Commended - AsiaPacific HDFC Bank

FE-EVI Green Business Leadership Award - Best performer

in the banking category

Celent's 2010 Banking Innovation Award - Model bank Award

Avaya Global Connect 2010 - Customer Responsiveness

Award - Banking & Financial Services category

Forbes Top 2000 Companies - HDFC Bank at 632nd position

and among 130 global high performers

Financial Express - Ernst & Young Survey 2009-10 - Best

new private sector bank, Best in growth and Best in strength

Asian Banker Excellence Awards 2010 - Best retail bank in

India, Excellence in automobile lending, Best M&A integration

and technology implementation

The Asset Triple A Awards - Best cash management bank in

India

Euro money Private Banking and Wealth Management Poll

2010 - Best local bank in India (second year in a row), Best

private banking services overall (moved up from No. 2 last

year)

Financial Insights Innovation Awards 2010 - Innovation in

branch operations - server consolidation project

Global Finance Award - Best trade finance provider in Indiafor 2010

2 Banking Technology Awards 2009 - Best risk management

initiative and Best use of business intelligence

SPJIMR Marketing Impact Awards (SMIA) 2010


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Business Today Best Employer Survey - Listed in top 10 best

employers in the country

2009

Business Standard Best Banker Award - Mr. Aditya Puri, MD,

HDFC Bank

Fe Best Bank Awards 2009 - Best Innovator of the year

award for its MD Mr. Aditya Puri - Second Best Private Bank

in India - Best in Strength and Soundness Award

Euro money Awards 2009 - 'Best Bank in India'

Economic Times Brand Equity & Nielsen Research annualsurvey 2009 - Most Trusted Brand - Runner Up

Asia Money 2009 Awards - 'Best Domestic Bank in India'

IBA Banking Technology Awards 2009 - 'Best IT Governance

Award - Runner up'

Global Finance Award - 'Best Trade Finance Bank in India

for 2009

IDRBT Banking Technology Excellence Award 2008 - 'Best

IT Governance and Value Delivery'

Asian Banker Excellence in Retail Financial Services - 'Asian

Banker Best Retail Bank in India Award 2009 '

2008

Finance Asia Country Awards for Achievement 2008 - 'Best

Bank and Best Cash Management Bank' CNN-IBN - 'Indian of the Year (Business)'

Nasscom IT User Award 2008 - 'Best IT Adoption in the

Banking Sector'

Business India - 'Best Bank 2008'

Forbes Asia - Fab 50 companies in Asia Pacific


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Asian Banker Excellence in Retail Financial Services - Best

Retail Bank 2008

Asiamoney - Best local Cash Management Bank Award

voted by Corporates Microsoft & Indian Express Group - Security Strategist

Award 2008

World Trade Center Award of honour - For outstanding

contribution to international trade services.

Business Today-Monitor Group survey - One of India's 'Most

Innovative Companies'

Financial Express-Ernst & Young Award - Best Bank Award

in the Private Sector category

Global HR Excellence Awards - Asia Pacific HRM Congress:

- 'Employer Brand of the Year 2007 -2008' Award - First

Runner up, & many more

Business Today - 'Best Bank' Award

2007

Dun & Bradstreet American Express Corporate Best Bank

Award 2007 - 'Corporate Best Bank' Award

The Bombay Stock Exchange and Nasscom Foundation's

Business for Social Responsibility Awards 2007 - 'Best

Corporate Social Responsibility Practice' Award

Outlook Money & NDTV Profit - Best Bank Award in the

Private sector category.

The Asian Banker Excellence in Retail Financial Services

Awards - Best Retail Bank in India

Asian Banker - Its Managing Director Aditya Puri wins the

Leadership Achievement Award for India


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CHAPTER-4


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DATA ANALYSIS AND

INTERPRETATION

SELECTED AMC S -BRIEF INTRODUCTION


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Reliance Mutual Fund

Reliance Mutual Fund (RMF) has been established as a trust under

the Indian Trusts Act, 1882 with Reliance Capital Limited (RCL), as the

Settler/Sponsor and Reliance Capital Trustee Co. Limited

(RCTCL),astheTrustee.

RMF has been registered with the Securities & Exchange Board of India

(SEBI) vide registration number MF/022/95/1 dated June 30, 1995. The

name of Reliance Capital Mutual Fund has been changed to Reliance

Mutual Fund effective 11th. March 2004 vide SEBI's letter no.

IMD/PSP/4958/2004 date 11th. March 2004. Reliance Mutual Fund was

formed to launch various schemes under which units are issued to the

Public with a view to contribute to the capital market and to provide

investors the opportunities to make investments in diversified securities.

The main objectives of the Trust are:

To carry on the activity of a Mutual Fund as may be

permitted at law and formulate and devise variouscollective Schemes of savings and investments for

people in India and abroad and also ensure liquidity

of investments for the Unit holders;


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To deploy Funds thus raised so as to help the Unit

holders earn reasonable returns on their savings and

To take such steps as may be necessary from time to time to realize

the effects

Key Personnel

Mr. Kana dashy (Chairman),

Mr. Aintab jhunjhunwala (MD)

Ms sushi methane (Joint M.D).

UTI MUTUAL FUND.

UTI Mutual Fund is managed by UTI Asset Management

Company Private Limited (Est.: Jan 14, 2003) who has been appointed by

the UTI Trustee Company Private Limited for managing the schemes of

UTI Mutual Fund and the schemes transferred / migrated from UTI

Mutual Fund.

The UTI Asset Management Company has its registered office at :

UTI Tower, Gnu Block, Bandar - Karla Complex, Bandar (East),

Mumbai - 400 051 will provide professionally managed back officesupport for all business services of UTI Mutual Fund (excluding fund

management) in accordance with the provisions of the Investment

Management Agreement, the Trust Deed, the SEBI (Mutual Funds)


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Regulations and the objectives of the schemes. State-of-the-art systems

and communications are in place to ensure a seamless flow across the

various activities undertaken by UTI AMC.

UTI AMC is a registered portfolio manager under the SEBI

(Portfolio Managers) Regulations, 1993 on February 3 2004, for

undertaking portfolio management services and also acts as the manager

and marketer to offshore funds through its 100 % subsidiary, UTI

International Limited, registered in Guernsey, Channel Islands.

UTI Mutual Fund has come into existence with effect from 1st

February 2003. UTI Asset Management Company presently manages a

corpus of over Rs.20000 Core.

UTI Mutual Fund has a track record of managing a variety of schemes

catering to the needs of every class of citizenry. It has a nationwide

network consisting 56 UTI Financial Centers (Fuss) and representativeoffices in Dubai and London. With a view to reach to common investors

at district level, 11 satellite offices have also been opened in select towns

and districts. It has a well-qualified, professional fund management team,

who has been highly empowered to manage funds with greater efficiency

and accountability in the sole interest of unit holders. The fund managers

are also ably supported with a strong in-house equity research

department. To ensure better management of funds, a risk management

department is also in operation.


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It has reset and upgraded transparency standards for the

mutual funds industry. All the branches, UFCs and registrar offices are

connected on a robust IT network to ensure cost-effective quick and

efficient service. All these have evolved UTI Mutual Fund to position as

a dynamic, responsive, restructured, efficient, and transparent and SEBI

compliant entity

Key Personnel

Mr. U.K Sinhala (Chairman& M.D),

Mr. D.S R Murthy (Executive Director),

Mr. Intaiyazul Bahaman (Chief Finance Officer).

HDFC ASSET MANAGEMENTCOMPANYPVT. LTD

HDFC Asset Management Company Ltd (AMC) was

incorporated under the Companies Act, 1956, onDecember 10, 1999, and was approved to act as an Asset

Management Company for the HDFC Mutual Fund by SEBI

on June 30, 2000.


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The registered office of the AMC is situated at Ramon House, 3rd

Floor, H.T. Parekh Margi, 169, Back bay Reclamation, Church gate,

Mumbai - 400 020.

In terms of the Investment Management Agreement, the Trustee has

appointed the AMC to manage the Mutual Fund.

As per the terms of the Investment Management

Agreement, the AMC will conduct the operations of the

Mutual Fund and manage assets of the schemes, including

the schemes launched from time to time

Key Personnel

Mr. Deepak Parikh (Chairman),

Mr. .NET Stench ( C E O)

Mr. Mar Connolly (Executive Director).

TEMPLETON ASSET MANAGEMENT (INDIA) PVT.

LTD.


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Templeton Asset Management Company, a company

incorporated under the Companies Act, 1956, is a part of

the Franklin Templeton Group. The sponsor of the Fund

Templeton International Inc., is a wholly owned subsidiary

of Templeton Worldwide Inc., which in turn is a wholly

owned subsidiary of Franklin Resources Inc. The Franklin

Templeton Group is one of the world s largest Investment

Management Companies. It has over 50 years of

experience in International Investment Management with

34 offices in over 23 countries, which service over 10

million unit holders. Templeton started operations in

Mumbai, India in January 1996.Templeton in India has 8

different funds. Templeton has eleven offices including

Mumbai, Delhi, Calcutta, Pune, Chennai, Bangalore,

Cochin and Hyderabad.

Key Personnel

Ravi Amphora (Chairman),

Deepak Catwalk (MD - Asia),

B. Swami Nathan (Director & COO).


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SBI MUTUAL FUND.

SBI Mutual Fund draws strength from India's premier and largest

bank; the State Bank of India. Set up on July 1, 1955, the State Bank

of India is the largest banking operation in the country.

Through years of commitment to service and national development,

SBI has grown into an instrument of social change. Today, it has 9,039

branches in India (excluding 4599 branches of banking subsidiaries) and

54 offices in 28 countries spread over all time zones.

SBI entered into a Memorandum of Understanding with Society

General Asset Management (SGAM), which offers retail investors,

corporate clients and institutional investors a wide range of investment

products. SGAM is a dominant player in Global Mutual Fund arena with

presence in over 20 countries spanning Europe, United Sates, and Asia,

managing over 250 billion Euros in assets

Key Personnel

Mr. Deepak Chula (M.D),

Mr. Didier Turpin (C.E.O),

Mr. Gants N. Murthy ( Fund Manager).
http://www.statebankofindia.com/http://www.statebankofindia.com/


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PARTICULARS OF AMCS:

PARTICULARS RELIANCE UTI HDFC

SBI F&T

No. of schemes 31 15 13

25 56

No. of schemes including options 59 59 27

56 95

Equity Schemes 20 15 10 16

33

Debt Schemes 06 26 07 08

13

Short term debt Schemes 07 02 03 05

11

Equity & Debt 02 04 02 03

07

Gilt Fund 09 02 06 04

10


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PORTFOLIO MEASUREMENT METHODS:

We are interested in discovering if the management of a mutual

fund is performing well; that is, has management done better through its

selective baying and selling of securities than would have been achieved

through merely buying the market picking a large number of

securities randomly and holding them throughout the period?

The most popular ways of measuring managements performance

are

1. Sharpes Performance Measure

2. Tenors Performance Measure

3. Jensens Performance Measure

Sharpes Performance Measure (Sharpe ratio or Reward to

variability ratio)

William Sharpe has attempted to get a summary measure of

portfolio performance. His measure properly adjusts performance for

risk. The Sharpe Index is given by:

Si = rib r*

I

where Si = Sharpe Index

rib = average return on portfolio t

r* = riskless rate of interest

I = standard deviation (risk) of the returns of portfolio


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While a high and positive Sharpe ratio shows a superior risk adjusted

performance of a fund. A low and negative Sharpe ratio is an indication

of unfavorable performance.

Assumption: Sharpe assumes that the portfolio under the

consideration is whole or substantially the whole of investors total

portfolio. This mean, if any unsystematic risk is left, this cannot be

eliminated

Trey nor performance measure (Jack Trey nor):

This ratio also called neither Trey nor ratio-reward to volatility ratio.

It is concerned with systematic risk () . It is relationship between

rewards of risk premium to the volatility of return as measured by the

portfolio risk.

Risk premium r ap fro

TP = =

Portfolio persons with disability

All risk averse investors would like to maximize this value while a high

and positive trainers index shows a superior risk adjusted performance of

a fund, a low and negative trainers index is indication of unfavorable

performance.

Assumption: Portfolio is itself only as part of the total investments

portfolio. So, eliminate any unsystematic risk as his portfolio is well

diversified.


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Jensens Performance Measure (Michael):

It refers the actual return earned in portfolio and return expected out

of portfolio given its level of risk.

CAPM is used to calculate the expected return. The difference

between the expected return and act retain can be said the return earned

out of the mandatory of systematic risk.

This excess return referees the managers predictive ability and

managerial skills.

CAPM

rap = fro + (ram fro)

Differential return is calculated as follows:

p = rap - rap

p = positive > Superior returns

p=Negative > Unskilled management (worse portfolio)

p = 0 > Neutral performance

Higher alpha represents superior performance of a fund

and vice versa.


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9

2


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9

2

FINDINGS

1. ALM is a strategic approach or managing of managing

the balance sheet dynamics in such a way that the net

earnings are maximized and it ensure the level and risk

less with the risk return objectives of banks/FIs.

2. The composition of assets and liabilities largely

decides the solvency, liquidity and profitability of a

corporate entity, the components of liabilities

determines the cost of funds and it broadly with both

sides of balance sheet.

3. The reduction of liquidity risk by lengthens the

maturity of liabilities less profitability because long term

funds to be more expansive than short term funds.

4. It also implies fewer earnings opportunities fromnegative gapping.

5. The appropriate balance between liquidity and

profitability is determined by Top Managers.

6. It is found that in APSFC is strictly practicing ALM

concept.

7. To deal with the market risk ALM works.

8.ALM is the process, which is used to manage liquidity

risk and interest rate risk.


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9

2

9. The changes in the interest rate always have a effect

in the risk management.

10. Interest rate risk can influence more the business

than the liquidity risk in market.

11. Dealing with liquidity risk is earlier than dealing

with the interest rate risk.

SUGGESTIONS

1. It shall be mandatory for all state financial institutions

to introduce ALM concept for better management of

risk.

2.The methods of date acquisition for managing the

liquidity risk management and interest rate risk

management should improve.

3. The banks & financial institutions should utilize the

readily available software package for ALM and for easy

and speedy preparation of data for ALM meetings.


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9

2

GLOSSARY

ALM ASSET LIABILITIES MANAGEMENT

ALCO ASSET LIABILITIES COMMITTEE IRR &

ERF EXPORT REFINANCE FACILITY

IRR INTEREST RATE RISK

CLF COLLATERALISED LENDING FACILITY

ACLF ADDITIONAL COLLATERALISED LENDING

FACILITY

NIT NET INTEREST INCOME

MVE MARKET VALUE OF EQUITY

NIM NET INTEREST MARGIN

RSA RATE SENSITIVE ASSETS

RSL RATE SENSITIVE LIABILITIES

VAR VALUE AT RISK

RBI RESERVE BANK OF INDIA

SFC STATE FINANCIAL CORPORATION

IDB I INDUSTRIAL DEVELOPMENT BANK OF INDIA


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SIDBI SMALL INDUSTRIES DEVELOPMENT BANK OF

INDIA

APSFC ANDHRA PRADESH STATE FINANCIAL

CORPORATION


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BIBLIOGRAPHY

INDIAN FINANCIAL SYSTEM

ASSET LIABILITY MANAGEMENT

RBI GUIDELINES

APSFC ANNUAL REPORTS

www.almis.com

www.apsfc.com

M.Y.KHAN

S.K.KHURANA
http://www.almis.com/http://www.apsfc.com/http://www.almis.com/http://www.apsfc.com/

Asset Liabil. Managemnt Hdfc

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