INTRODUCTION

In the developing countries including India the regulatory regime, on operations and
control of banks and financial institutions, did not allow much competition in the financial
system. The interest rates were by and large controlled by the Central bank, the Reserve bank of
India (RBI). The balance sheet management did not pose many problems as the income was
accounted for on accrual basis. Off balance sheet exposure for banks was minimum. It was only
after liberalization process implemented in 1991, the banking sector had undergone the following
major changes:

1. De-regulation of interest rates.

2. Non – recognition of Income on a accrual basis.
3. Growth of forward contracts in foreign transactions and therefore higher off balance
sheet exposure.
4. Diversification of banking products.
5. Growth of healthy competitions in banking sector.

The situation in pre liberalization era was that competitions in the banks were negligible as the
major business was handled by public sector. Therefore liabilities to the bank in terms of
deposits did not pose many problems. Banks used to have major focus on asset management. But
in the changing context after liberalization, liability management also assumed significant
importance. This is advocated by Peter and Sylvia (2010) confronted with fluctuating interest
rates and intense competition for funds the bankers and many of their competitors began to
devote greater attention to opening up new sources of funding and monitoring the mix and cost
of their deposit and non-deposit liabilities.

In the changing global scenario, banks have been facing several risks in their business operations
viz., credit risk, interest rate risk, exchange risk, liquidity risk and operational risk. While all
these risks could manifest in more than one form, the banks are more concerned about liquidity
risk and interest rates risk. The significance being former effects the bank’s commitment for
meeting its liabilities in time impacting reputational risk while the later impacts the profitability
of a bank. Milir Venkatesh and Bhargav (2008) focused on price matching and maintaining
spreads.
Taking one step ahead, the banks now focus on integrated balance-sheet management where all
the relevant factors which effect an appropriate balance sheet composition deserve consideration.
Therefore various components of balance sheet are analyzed keeping in view the strengths of a
bank. The earlier approach of managing certain deposits, loans and advances has no much
relevance. The basic difference in earlier approach and dynamic approach can be described in
term of focus on value addition, analysis of different scenarios, comprehensive risk and dynamic
approach of balance sheet evaluation in the present ALM system.

The ALM is defined as "managing both assets and liabilities simultaneously for the purpose of
minimizing the adverse impact of interest rate movement, providing liquidity and enhancing the
market value of equity. It is also defined as “planning procedure which accounts for all assets
and liabilities of a bank by rate, amount and maturity."
Banks now focus on funds management approach to manage liability management and
Interest rates risk. The features of this approach are:
a. It focuses more control on volume, mix and return / cost of both assets and
Liabilities.
b. Effective coordination on both, the assets and liabilities, to maximize the spread,
and
c. Revenues and costs affect both sides of the balance sheet. Therefore this approach
Suggests maximize returns and minimize costs.

The Process of ALM:

Broadly, the process of ALM rests on the following three important pillars:
i. ALM information system: This comprises of availability of information accuracy and its
sufficiency.
ii. ALM organization: Setting up of asset liability management committee and
organizational set up at different levels.
iii. ALM process: Management of liquidity risk, interest rate risk, market risk, trading risk,
capital planning and profit planning
ALM implementation process:

The Asset Liability Management (ALM) process involves management of liquidity risk, interest
rate risk, market risk, trading risks etc. For this purpose each bank has set up Assets Liability
Committee (ALCO) comprising top level management to attend the following functions:
1. Decide on interest rate and product pricing on both assets and liabilities and to optimize
Net Interest Margin (NIM) / Net Interest Income (NII) and mix of incremental Assets and
Liabilities.
2. Measure and monitor liquidity risks, interest rate risk, currency risks, operational/trading
risks and equity price risk.
3. Decide on the funding mix (Fixed or floating rate funds, wholesale or retail deposits,
money market or capital market funding, domestic or foreign currency funding).
4. To decide maturity profile of assets and liabilities.
5. To permit and monitor the use of derivative instruments to manage risks, in accordance
with applicable regulatory norms and guidelines.
 REVIEW OF LITERATURE AND RESEARCH DESIGN
1. How does assets-liabilities management affects the profitability of
banks?

By TRENCA
JEL classification numbers: G20 G21.
According the Researcher the economic crisis has affected the stability of the financial
institutions (banks) and the instability from the banking sector affected the real economy. Some
banks were affected more than others and in this paper the researcher analyze the stability and
profitability of banks from the point of the asset-liability management. Assets-liabilities
management (ALM) is the management of risk at bank level, the structure of the assets and
liabilities of the banks may show the differences between the "good banks" and "bad banks".
The Researcher main goal of this paper is to analyze the asset-liability management in banks for
the 2004-2011 periods, using a panel of over 30 banks. The analysis is carried using the
canonical correlations (Hostelling, 1936), while in the case of the simple correlation we test for a
linear dependency between two variables, canonical correlation test the interdependence between
two sets of variables (the structure of assets and liabilities.

2. A Study of the Impact of Asset-Liability Management on the

Profitability of Banks in India
By Mihir Dash
According to the Researcher the Asset-liability management in banks is
the strategic management of assets and liabilities aimed to optimize profitability, while ensuring
liquidity, and protecting against different risks. The Researcher study examines the impact of
asset-liability management on the banks’ profitability for a sample of thirty-five public and
private sector Indian banks. The results of the study indicate that most of the banks are exposed
to short term risk, with negative maturity mismatches in the 1-90 days bracket, and more so for
public sector banks. However, the regression results indicate that there is an incentive to
maintain negative maturity mismatch in the short-term, as this improves profitability.
 3. Asset Liability Management in Banks and Financial Institution
By Madhu Vij

According to the Researcher ALM as a concept is gradually gaining importance in the Indian
conditions. It is the art of ensuring that the maturity profiles of assets match that of liabilities and
combines the techniques of asset management, liability management and spread management
into a cohesive process leading to an integrated management of the total balance sheet. The
Researcher is examine process of ALM will differ from bank to bank and the success of the
technique depends upon how effectively banks are able to forecast and manage the risks they
carry and are exposed to. Efficient liquidity and interest rate management are the two important
activities of the banks and financial institutions in maximizing their income while controlling the
risk exposure. The Researcher objective of ALM at IDBI is to ensure adequate funding for each
product at the most attractive available cost and to manage the currency composition, maturity
profile and interest rate sensitivity characteristics of the portfolio of liabilities supporting each
product within the prescribed risk parameters.

4. What is Asset Liability Management or what is ALM?

By Rajesh Goyal

The Researcher aims to examine Asset liability management (ALM) can be defined as
the comprehensive and dynamic framework for measuring, monitoring and managing the
financial risks associated with changing interest rates, foreign exchange rates and other factors
that can affect the organisation’s liquidity.
According to the Researcher’s ALM relates to management of structure of balance sheet
(liabilities and assets) in such a way that the net earnings from interest is maximised within the
overall risk-preference (present and future) of the institutions.
The Researcher’s article discusses some of the most popular ALM functions includes the tools
adopted to mitigating liquidly risk, management of interest rate risk / market risk and trading
risk management. In short, ALM is the sum of the financial risk management of any financial
institution

In other words, ALM is all about managing three central risks:

o Interest Rate Risk
 o Liquidity Risk
o Foreign currency risk
 For banks with forex operations, it also includes managing
o Currency risk

Through ALM banks try to match the assets and liabilities in terms of Maturities and Interest
Rates Sensitivities so as to minimize the interest rate risk and liquidity risk.

5. An Empirical Study of Asset Liability Management Approach by

Indian Banks by Subhalaxmi Mohapatra the Icfai Business school

The researcher aims to examine about banking scenario in India in the 1980s and now,
presents a perfect study of contrast. Due to several reforms, banks are now moving away from
the traditional lines of service and in the process, are exposed to more risks. One of the ways for
managing the risks is Asset Liability Management. ALM is an attempt to match the assets and
liabilities in terms of their maturities and interest rate sensitivities so that the risk arising from
such mismatches mainly - interest rate risk and liquidity risk - can be contained within the
desired limit. As far as ALM in Indian banking system is concerned, it is still in a nascent stage.
Against this backdrop, the objective researcher of this paper is to study and analyze the status of
ALM approach in the Indian banking system. For this purpose, a sample consisting of
nationalized, private, and foreign banks operating in the Indian environment was taken and the
multivariate statistical technique, canonical correlation has been done to capture the nature and
strength of relationship between the assets and liabilities in these banks. From the study of
researcher analysis, it is derived that a majority of banks have a good ALM framework in place.
The study also indicates a strong relationship between fixed assets and net worth for all groups of
banks.

6. Asset Liability Management: A Driving Force in Indian Banks

by Jyoti Gupta
According to the Researcher after the Liberalization, Globalization and Privatization in 1990,
Indian financial sector came into the purview of different types of risk which requires proper risk
management. Credit Risk, Interest Rate Risk, Liquidity crunch, threat to working capital is
various sorts of risks which require an effective solution. The Researcher aims to examine Indian
banks are exposed to the threat of asset liability mismatch as they are still following traditional
methodology of book entry. Reserve Bank of India came up with several recommendations and
suggestions for reducing this mismatch and banks were also benefitted from it. This paper will
try to identify and scrutinize those steps and strategies that were taken by banks to reduce the
mismatch in asset liability management and will also try to determine that how much effective
these tools were in increasing the profit graph of Indian Banks.

7. Management of Interest Rate Risk in Indian Banking

By Vigneswar Swamy

JEL Classification: E40, E43, E44, G20

The researcher aimed to examine in a move towards effective management of interest rate
risk in Indian banking, in addition to the existing return on Interest Rate Sensitivity under
Traditional Gap Analysis, a new return is being introduced to monitor the interest rate risk using
Duration Gap Analysis (DGA), called Interest Rate Sensitivity under Duration Gap Analysis
(IRSD). The DGA involves bucketing of all Risk Sensitive Assets (RSA) and Risk Sensitive
Liabilities (RSL) as per residual maturity/re-pricing dates in various time bands and computing
the Modified Duration Gap (MDG). One of the important things to note is that the RSA and RSL
include the rate-sensitive off-balance sheet assets and liabilities as well. MDG can be used to
evaluate the impact on the Market Value of Equity (MVE) of the bank under different interest
rate scenarios. The past few years have seen banks’ foray into financing long-term assets, such as
home loans and infrastructure projects. Banks have been allowed to raise funds through long-
term bonds with a minimum maturity of five years to the extent of their exposure of residual
maturity of more than five years to the infrastructural sector. The Researcher article attempts to
illustrate the significance of interest rate risk management and approaches towards its
management in the Indian context.
 8. ASSET - LIABILTY MANAGEMENT IN INDIAN BANKING
INDUSTRY by MS. PRIYANKA TANDON

This research paper reports Asset-Liability Management (ALM) is one of the important
tools of risk management in commercial banks of India. Indian banking industry is exposed to
number of risk prevailed in the market such as market risk, financial risk, interest rate risk etc.
The net income of the banks is very sensitive to these factors or risk. For this purpose Reserve
bank of India (RBI), regulator of Indian banking industry evolved the tool known as ALM. This
research paper discusses issues in asset liability management and elaborates on various
categories of risk that require to be managed. The researcher’s examines strategies for asset-
liability management from the asset side as well as the liability side, particularly in the Indian
context. The Researcher also discusses the specificity of financial institutions in India and the
new information technology initiatives that beneficially affect asset-liability management. The
emerging contours of conglomerate financial services and their implications for asset-liability
management are also described. The Researcher objective of the study is to describe the concept
and application of ALM technique. The research article is descriptive in nature. The Researcher
data had been collected from the secondary sources such as RBI guidelines, reports etc. It has
been found in the study that ALM is a successful tool for risk management.

9. Risk management of assets and liabilities in commercial banks

based on gravity model by Chen jingyuan

As per researcher the limitations of commercial banks in asset-liability management, there

exists the prevalent status quo of mismatch on maturities of assets and liabilities, which may lead
to a series of liquidity risk. Diamond and Dybvig (1983) show that while demand-deposit
contracts let banks provide liquidity, they expose them to panic-based bank runs. But their model
does not provide ways to regulate and control the bank-run situation. In this Researcher paper,
based upon different types of commercial bank assets and liabilities, the gravitational model of
assets and liabilities is established to help solve the problem of mismatch of maturity and thus
reducing its risk to the largest extent.
 10.Asset-Liability Management among Commercial Banks in India a
Canonical Correlation Analysis by P.K. Jain

The Researcher studies Compatibility between asset and liability structures of a bank is
necessary to maintain adequate liquidity, enhance profitability, and control risk within acceptable
limits. Coordinated management of the two has assumed special significance with growing
competition, complexity and risk in the banking sector. The Researcher objective of this study is
to examine and explore the nature and strength of relationship between various assets and
liabilities of 68 commercial banks operating in India for eight consecutive years, 1992–2000.
The special emphasis is on the performance of banks grouped by their ownership structure and
size. The portfolio-matching behavior has been examined using canonical correlation analysis –
a multivariate statistical technique used for evaluating the relationship between two sets of
variables. The Researcher study reveals that most of the banks, in general, show prudent
matching of assets and liabilities. The most prominent relationship is between short term deposits
and SLR securities. However, there are substantial inter-group and inter-period differences.

11.ASSET-LIABILITY MANAGEMENT MODELS IN DECISION

MAKING

This research paper reports the asset-liability management model to solve multi-period
investment problems. The model aims to maximize the overall revenue and deal with
uncertainties as well as with risks. The assumption of a linear utility function may lead to
allocation of the wealth to one asset. This paper sheds some light on this issue by showing that
the linear function can be a risky choice. For this purpose to solve multi-period investment
problem we used two ways: first, using a piecewise linear function; and second using a non-
linear utility function. The results show that the non-linear function outperform the piecewise
linear function and generates better asset allocation. The problem is formulated by using the
Wolfram Mathematical Programming System.
 12.Asset-liability management: Issues and trends in Indian context

By R.VAIDYANATHAN

In this paper the Researcher as discussed about Asset-liability management basically

refers to the process by which an institution manages its balance sheet in order to allow for
alternative interest rate and liquidity scenarios. Banks and other financial institutions provide
services which expose them to various kinds of risks like credit risk, interest risk, and liquidity
risk. Asset liability management is an approach that provides institutions with protection that
makes such risk acceptable. Asset-liability management models enable institutions to measure
and monitor risk, and provide suitable strategies for their management. It is therefore appropriate
for institutions (banks, finance companies, leasing companies, insurance companies, and others)
to focus on asset-liability management when they face financial risks of different types. Asset-
liability management includes not only a formalization of this understanding, but also a way to
quantify and manage these risks. Further, even in the absence of a formal asset-liability
management program, the understanding of these concepts is of value to an institution as it
provides a truer picture of the risk/reward trade-off in which the institution is engaged (Fabozzi
& Kanishi, 1991), Asset-liability management is a first step in the long-term strategic planning
process. Therefore, it can be considered as a planning function for an intermediate term. In a
sense, the various aspects of balance sheet management deal with planning as well as direction
and control of the levels, changes and mixes of assets, liabilities, and capital

13.Assets and Liabilities Management – Concept and Optimal

Organization by Ciobotea Adina
According to the Researcher the Asset-liability management (ALM) is a term whose
meaning has evolved. It is used in slightly different ways in different contexts. ALM was
pioneered by financial institutions, but corporations now also apply ALM techniques. In
banking, asset and liability management is the practice of managing risks that arise due to
mismatches between the assets and liabilities (debts and assets) of the bank. This can also be
seen in insurance. Banks face several risks such as the liquidity risk, interest rate risk, credit risk
and operational risk. Asset Liability management (ALM) is a strategic management tool to
manage interest rate risk and liquidity risk faced by banks, other financial services companies
and corporations. ALM is defined as "the process of decision making to control risks of
existence, stability and growth of a system through the dynamic balances of its assets and
liabilities."

14.Asset and liability management in the developing countries: modern

financial techniques - a primer By Toshiya

As per the Researcher the increased volatility of exchange rates, interest rates, and
primary commodity prices over the past two decades has highlighted the importance for
developing countries of managing these risks. Asset and liability management - a risk-
management technique to systematically control price risks with market-based financial
instruments - has been developed and broadly used in the industrial countries. However, its
applications to developing countries have been limited. The purpose of this paper is to provide a
primer of: 1) a concept of asset and liability management applicable to a country, and 2) modern
financial instruments and hedging activities with these instruments. To illustrate practical
applications of these instruments, several examples of developing country risk-management
activities are presented later in the paper. The Researcher also discusses some factors that limit
the developing countries ‘use of modern financial tools and considers ways to remove these
factors. It concludes with a description of the World Bank's assistance programs in this area.
Objectives:

1 To analysis risk management technique designed by the bank to earn an adequate return.
2 To know how banks are eliminating the difference between amount of rate sensitivity
asset and rate sensitivity liability with gap analysis.
3 To know how monetary policy affects the assets and liabilities in banks
4 To study the overall asset liability management at Bank

Sources of data

Primary data – The primary data for the above study being gathered from interacting
with Andhra bank Branch manager & staff

Secondary data – the secondary data collected from using internet, websites, and
articles. The same being published data is used for making meaningful analysis with
slight changes.

Scope of study:

The scope of the study on the title “A study on Asset and Liability management in Andhra bank”
is done with aim of analysis Risk management Systems with the ultimate purpose protecting the
Interest of deposits & stakeholders.

Limitation study:
1. The study I have conducted in Andhra Bank (Branch) at available material in the
branch says that the Information is restricted to the above center only.
2. The study was conducted within a period of stipulated time.
INDUSTRY PROFILE AND COMPANY PROFILE

INDUSTRY PROFILE:

Introduction

As per the Reserve Bank of India (RBI), India’s banking sector is sufficiently capitalised
and well-regulated. The financial and economic conditions in the country are far superior to any
other country in the world. Credit, market and liquidity risk studies suggest that Indian banks are
generally resilient and have withstood the global downturn well.
Indian banking industry is expected to witness better growth prospects in 2015 as a sense of
optimism stems from the Government’s measures towards revitalizing the industrial growth in
the country. In addition, RBI’s new measures may go a long way in helping the restructuring of
the domestic banking industry.

Market Size

The Indian banking system consists of 26 public sector banks, 25 private sector banks, 43
foreign banks, 56 regional rural banks, 1,589 urban cooperative banks and 93,550 rural
cooperative banks, in addition to cooperative credit institutions. Public-sector banks control
nearly 80 percent of the market, thereby leaving comparatively much smaller shares for its
private peers.
As of November 11, 2015, 192.1 million accounts had been opened under Pradhan Mantri Jan
Dhan Yojna (PMJDY) and 165.1 million RuPay debit cards were issued. These new accounts
have mustered deposits worth Rs 26,819 crore (US$ 4 billion).
Standard & Poor’s estimates that credit growth in India’s banking sector would improve to 12-13
per cent in FY16 from less than 10 per cent in the second half of CY14.
Investments/developments
In the past few months, there have been many investments and developments in the Indian
banking sector
 Global rating agency Moody's has upgraded its outlook for the Indian banking system to
stable from negative based on its assessment of five drivers including improvement in
operating environment and stable asset risk and capital scenario.
 Lok Capital, a private equity investor backed by US-based non-profit organisation
Rockefeller Foundation, plans to invest up to US$ 15 million in two proposed small
finance banks in India over the next one year.
 The Reserve Bank of India (RBI) has granted in-principle licences to 10 applicants to
open small finance banks, which will help expanding access to financial services in rural
and semi-urban areas.
 IDFC Bank has become the latest new bank to start operations with 23 branches,
including 15 branches in rural areas of Madhya Pradesh.
 The RBI has given in-principle approval to 11 applicants to establish payment banks.
These banks can accept deposits and remittances, but are not allowed to extend any loans.
 The Bank of Tokyo-Mitsubishi (BTMU), a Japanese financial services group, aims to
double its branch count in India to 10 over the next three years and also target a 10 per
cent credit growth during FY16.
 State Bank of India has tied up with e-commerce portal Snapdeal and payment gateway
Paypal to finance MSME businesses.
 The United Economic Forum (UEF), an organisation that works to improve socio-
economic status of the minority community in India, has signed a memorandum of
understanding (MoU) with Indian Overseas Bank (IOB) for financing entrepreneurs from
backward communities to set up businesses in Tamil Nadu
 The RBI has allowed third-party white label automated teller machines (ATM) to accept
international cards, including international prepaid cards, and said white label ATMs can
now tie up with any commercial bank for cash supply.
 The RBI has allowed Indian alternative investment funds (AIFs), to invest abroad, in
order to increase the investment opportunities for these funds.
  In order to boost the infrastructure sector and the banks financing long gestation projects,
the RBI has extended its flexible refinancing and repayment option for long-term
infrastructure projects to existing ones where the total exposure of lenders is more than
Rs 500 crore (US$ 75.1 million).
 RBI governor Mr Raghuram Rajan and European Central Bank President Mr Mario
Draghi have signed an MoU on cooperation in central banking. “The memorandum of
understanding provides a framework for regular exchange of information, policy dialogue
and technical cooperation between the two institutions. Technical cooperation may take
the form of joint seminars and workshops in areas of mutual interest in the field of central
banking,” RBI said on its website.
 RBL Bank informed that it would be the anchor investor in Trifecta Capital’s Venture
Debt Fund, the first alternative investment fund (AIF) in India with a commitment of Rs
50 crore (US$ 7.51 million). This move provides RBL Bank the opportunity to support
the emerging venture debt market in India.
 Bandhan Financial Services raised Rs 1,600 crore (US$ 240.2 million) from two
international institutional investors to help convert its microfinance business into a full
service bank. Bandhan, one of the two entities to get a banking licence along with IDFC,
launched its banking operations in August 2015.


Government Initiatives
The government and the regulator have undertaken several measures to strengthen the Indian
banking sector.
 The Government of India is looking to set up a special fund, as a part of National
Investment and Infrastructure Fund (NIIF), to deal with stressed assets of banks. The
special fund will potentially take over assets which are viable but don’t have additional
fresh equity from promoters coming in to complete the project.
 The Reserve Bank of India (RBI) plans to soon come out with guidelines, such as
common risk-based know-your-customer (KYC) norms, to reinforce protection for
consumers, especially since a large number of Indians have now been financially
included post the government’s massive drive to open a bank account for each household.
 To provide relief to the state electricity distribution companies, Government of India has
proposed to their lenders that 75 per cent of their loans be converted to state government
bonds in two phases by March 2017. This will help several banks, especially public
sector banks, to offload credit to state electricity distribution companies from their loan
book, thereby improving their asset quality.
 The Reserve Bank of India (RBI), the Department of Industrial Policy & Promotion
(DIPP) and the Finance Ministry are planning to raise the Foreign Direct Investment
(FDI) limit in private banks sector to 100 per cent from 74 per cent.
 Government of India aims to extend insurance, pension and credit facilities to those
excluded from these benefits under the Pradhan Mantri Jan Dhan Yojana (PMJDY).<
 The Government of India announced a capital infusion of Rs 6,990 crore (US$ 1.05
billion) in nine state run banks, including State Bank of India (SBI) and Punjab National
Bank (PNB). However, the new efficiency parameters would include return on assets and
return on equity. According to the finance ministry, “This year, the Government of India
has adopted new criteria in which the banks which are more efficient would only be
rewarded with extra capital for their equity so that they can further strengthen their
position."
 To facilitate an easy access to finance by Micro and Small Enterprises (MSEs), the
Government/RBI has launched Credit Guarantee Fund Scheme to provide guarantee
cover for collateral free credit facilities extended to MSEs upto Rs 1 Crore (US$ 0.15
million). Moreover, Micro Units Development & Refinance Agency (MUDRA) Ltd. was
also established to refinance all Micro-finance Institutions (MFIs), which are in the
business of lending to micro / small business entities engaged in manufacturing, trading
and services activities upto Rs 10 lakh (US$ 0.015 million).
 The central government has come out with draft proposals to encourage electronic
transactions, including income tax benefits for payments made through debit or credit
cards.
 The Union cabinet has approved the establishment of the US$ 100 billion New
Development Bank (NDB) envisaged by the five-member BRICS group as well as the
BRICS “contingent reserve arrangement” (CRA).
  The government has plans to set up a fund that will provide surety to banks against loans
given to students for higher education.

Road Ahead

The Indian economy is on the brink of a major transformation, with several policy
initiatives set to be implemented shortly. Positive business sentiments, improved consumer
confidence and more controlled inflation are likely to prop-up the country’s the economic
growth. Enhanced spending on infrastructure, speedy implementation of projects and
continuation of reforms are expected to provide further impetus to growth. All these factors
suggest that India’s banking sector is also poised for robust growth as the rapidly growing
business would turn to banks for their credit needs.
Also, the advancements in technology have brought the mobile and internet banking services to
the fore. The banking sector is laying greater emphasis on providing improved services to their
clients and also upgrading their technology infrastructure, in order to enhance the customer’s
overall experience as well as give banks a competitive edge.
Many banks, including HDFC, ICICI and AXIS are exploring the option to launch contact-less
credit and debit cards in the market shortly. The cards, which use near field communication
(NFC) mechanism, will allow customers to transact without having to insert or swipe.
Exchange Rate Used: INR 1 = US$ 0.0151 as on November 15, 2015

Adoption of banking technology

The IT [ revolution has had a great impact on the Indian banking system. The use of
computers has led to the introduction of online banking in India. The use of computers in the
banking sector in India has increased many fold after the economic liberalisation of 1991 as the
country's banking sector has been exposed to the world's market. Indian banks were finding it
difficult to compete with the international banks in terms of customer service, without the use of
information technology.

The RBI set up a number of committees to define and co-ordinate banking technology. These
have included:
 In 1984 was formed the Committee on Mechanisation in the Banking Industry
(1984)[27] whose chairman was Dr. C Rangarajan, Deputy Governor, Reserve Bank of India.
The major recommendations of this committee were introducing MICR technology in all the
banks in the metropolises in India.[28] This provided for the use of standardized cheque forms
and encoders.
 In 1988, the RBI set up the Committee on Computerisation in Banks (1988)[29] headed by Dr.
C Rangarajan. It emphasised that settlement operation must be computerised in the clearing
houses of RBI in Bhubaneshwar, Guwahati, Jaipur, Patna andThiruvananthapuram. It further
stated that there should be National Clearing of inter-
city cheques at Kolkata, Mumbai, Delhi, Chennai and MICR should be made operational. It
also focused on computerisation of branches and increasing connectivity among branches
through computers. It also suggested modalities for implementing on-line banking. The
committee submitted its reports in 1989 and computerisation began from 1993 with the
settlement between IBA and bank employees' associations.[30]
 In 1994, the Committee on Technology Issues relating to Payment systems, Cheque
Clearing and Securities Settlement in the Banking Industry (1994)[31] was set up under
Chairman W S Saraf. It emphasised Electronic Funds Transfer (EFT) system, with the
BANKNET communications network as its carrier. It also said that MICR clearing should be
set up in all branches of all those banks with more than 100 branches.
 In 1995, the Committee for proposing Legislation on Electronic Funds Transfer and other
Electronic Payments (1995)[32] again emphasised EFT syst
COMPANY PROFILE:

"Andhra Bank" was founded by the eminent freedom fighter and a multifaceted
genius, Dr.Bhogaraju Pattabhi Sitaramayya. The Bank was registered on 20th November 1923
and commenced business on 28th November 1923 with a paid up capital of Rs 1.00 lakh and an
authorized capital of Rs 10.00 lakes The Bank crossed many milestones and the Bank's Total
Business 178.68 billion (US$2.6 billion) for the fiscal year ended 31 March 2015

The Bank is rendering services through a network of 2507 branches, 15 extension counters, 38
satellite offices and 2232 automated teller machines (ATMs) as on 31 Mar 2015 and planning to
open 300+ branches by 31 March 2016.[1]

During 2011–12, the bank entered the states of Tripura and Himachal Pradesh. The bank now
operates in 25 states and three Union Territories. Andhra Bank has its Headquarters in
Hyderabad, India.

The Government of India owns 58% of its share capital and is going to increase it to 62.14% by
infusing 2 billion (US$30 million) in capital. The state owned Life Insurance Corporation of
India holds 10% of the shares. The bank has done a total business of 2230 billion (US$33 billion)
for the fiscal year ended 31 March 2013.

Andhra Bank is 100% CBS as on date. This will benefit the customers, who will have access to
banking and financial services anytime, anywhere through multiple delivery channels. Andhra
Bank is a pioneer in introducing Credit Cards in the country in 1981.

Andhra Bank has ranked No.1 in terms of number of Life Insurance Policies mobilised amongst
all the agency banks dealing with the Life Insurance Corporation of India. The bank also has tie-
up with United India Insurance Company Limited under Bancassurance (Non-Life)

The products and services which are provided by the bank are mainly categorised into businesses
of Retail, Corporate, NRI, MSME, and Agricultural industries. Under the Retail Business, the
bank offers deposits, loans, cards, DMAT services, P payment services, insurance, and mutual
funds to individual customers. Under the Corporate Business, the bank offers loans & advances,
project appraisals, and loan syndication. Under the NRI business segment, the bank offers
Deposit schemes, loans, remittance services, and investment services to the non-resident Indians.
Under the MSME business segment, the bank offers different schemes that aimed at providing
loan and transaction services to Micro Small and Medium Enterprises (MSME). Some of the
MSME schemes available are OTS Scheme, Composite loan scheme, Open cash credit (OCC),
Artisans Credit Card (ACC), AB Laghu Udhyami Credit Card (LUCC), AB Power Tools
(Shakti), Technology upgradation fund scheme (TUFs), Credit guarantee fund trust for small
industries (CGTSI), AB Doctor Plus...etc. Under the Agriculture business segment, bank
provides different credit schemes to farmers, Women Empowerment schemes, and Andhra Bank
Rural Development Trust (ABRDT) helps Rural Self Employment Training Institutes (RSETIs).

Andhra Bank introduced Internet Banking Facility (AB INFI-net) to all customers of cluster
linked branches. Rail Ticket Booking Facility is made available to all debit card holders as well
as to internet banking customers through IRCTC Website through a separate gateway. Corporate
Website is available in English, Hindi and Telugu Languages communicating Bank's image and
information. Bank has been given 'BEST BANK AWARD' a banking technology award by
IDRBT, Hyderabad for extensive use of IT in Semi Urban and Rural Areas on 2 September
2006.[4] IBA Jointly with TFCI has conferred the Joint Runner-up Award to the Bank in the Best
Payments initiativecategory[5] in recognition of outstanding achievement of the Bank in
promoting ATM Channel. Bank successfully conducted " Bancon 2006", a two-day event at
Hyderabad, deliberating on Inclusive Growth – A New Challenge. Kiddy Bank Scheme, with
insurance benefits, was relaunched to inculcate savings habit among the children. Bank has
mobilised nearly 90000 new accounts during 2007–08.

International expansion

Andhra Bank opened a representative office in Dubai in May 2006 and another at Jersey
City, New Jersey (USA), in June 2009. A foothold in New Jersey is strategic for the bank as the
state has a large number of Indians from Andhra Pradesh.

In 2010 Malaysia awarded a commercial banking license to a locally incorporated bank to be

jointly owned by Baroda, Indian and Andhra Bank. The new bank, India BIA Bank (Malaysia),
will have its headquarters in Kuala Lumpur, which has a large population of Indians. Andhra
Bank will hold a 25% stake in the joint-venture. Bank of Baroda will own 40% and IOB the
remaining 35%.

Community involvement

Andhra Bank entered MoU with Bank of Baroda and Legal & General Group of UK to
form a joint venture life insurance company IndiaFirst Life Insurance Company. The
shareholders' agreement has already been signed and necessary formalities are being completed
for setting up of the company. The JV Company is already incorporated in June'08 and is in the
process of filing for approvals from IRDA etc. IndiaFirst has commenced operations.

Andhra Bank, along with A P State Government, NABARD, Canara Bank, Indian Bank, IOB
and SBH sponsored the Andhra Pradesh Banker's Institute of Entrepreneurship Development,
which will offer training to unemployed youth for improving their skills in Andhra Pradesh.

Andhra Bank adopted Gundugolanu village, West Godavari District, Andhra Pradesh – the
birthplace of its founder, Dr.Bhogaraju Pattabhi Sitaramayya. A comprehensive budget with an
outlay of ₹55.5 million (US$820,000) is finalised for improving health, sanitation, education and
social service facilities in the village.

Corporate Identity

('Togetherness ') is the theme of the logo of Andhra Bank where the world of banking
services meets the realm of ever changing customer needs and establishes a link that is like a
chain, inseparable.

The logo also denotes a bank that's prepared to do anything, to go to any lengths, for the
customer. The blue pointer on the top represents the philosophy of a bank that's always looking
for growth and newer, and challenging, more promising directions .The keyhole indicates safety
and security. The colures red and blue represent fusion of dynamism and solidity. At a time when
the performance of the bank, the prospects of the bank, and even the perceptions of the bank are
vibrantly different, and poised as we are at the threshold of a new millennium, this modernized
logo is a tribute to the Andhra Bankers who are the true creators of the image of the bank.
Founder

Dr Bhogaraju Pattabhi Sitaramayya

(November 24, 1880 – December 17, 1959) was born in Gundugolanu village, Krishna
district (now part of West Godavari district) in Andhra Pradesh. was an Indian independence
activist and political leader in the state of Andhra Pradesh.

Pattabhi graduated from the prestigious Madras Christian College, fulfilled his ambition to
become a medical practitioner by securing a M.B.C.M. degree. He started his practice as a doctor
in the coastal town of Machilipatnam, headquarters of Krishna District and the political centre of
Andhra. He left his lucrative practice to join the freedom fighting movement. During the years
1912-13, when there was a great controversy over the desirability of forming a separate province
for Andhra, he wrote a number of articles in "The Hindu" and other journals explaining the need
for immediate formation of linguistic provinces.

At the Lucknow session of the Congress in 1916, he demanded the formation of separate
Congress circle for Andhra. The demand was opposed by Mahatma Gandhi, but
as Tilak supported Pattabhi, the Andhra Congress Committee came into existence in 1918. He
was a member of the Working Committee of the Congress for a number of years and the
President of Andhra Provincial Congress Committee during the years 1937-40.

He ran for the presidency of the Indian National Congress as the candidate closest to Mohandas
Gandhi, against the more-radical Netaji Subashchandra Bose in Tripuri Session of 1939. He lost
owing to Netaji's rising popularity and the belief that Pattabhi favoured the inclusion of Tamil-
majority districts in a future Telugu state in independent India.
Shri Suresh N Patel - MD & CEO

Shri Suresh N Patel, Managing Director & CEO, assumed charge on 02nd November
2015.He is a graduate in Science and Law. He is also a certified member of Indian Institute of
Bankers.

Prior to the elevation to the present cadre in Andhra Bank, he was Executive Director in Oriental
Bank of Commerce since 01.01.2014. Having worked in various assignments, he has over three
decades of rich banking experience.

He started his career as Agriculture Officer with Dena Bank in 1981. He was promoted as
General Manager on 01.02.2011 and assumed operational responsibility of Gujarat State and 3
Union Territories comprising of 597 branches (inclusive of 47 Satellite Offices) in 8 Zones,
having total business mix of more than Rs.50,000.00 crore. He also acted as the Convenor of
SLBC in the state of Gujarat and also of Union Territory Level Banker’s Committee (UTLBC)
for Dadra Nagar Haveli, Diu and Daman
SRI S K Kalra- Executive Director

Mr Satish Kumar Kalra has been appointed as Executive Director of Andhra Bank and has taken
charge on 05.10.2012. Prior to taking over as Executive Director of Andhra Bank, Mr Satish
Kumar Kalra has served in Allahabad Bank for over three decades.

Mr Satish Kumar Kalra, General Manager of Allahabad Bank has joined the Bank in the year
1981 and started his career as Probationary Officer. He served in various capacities in different
centres. He is having good exposure in various fields like Operations, Corporate credit and
headed Industrial Finance branches and Internatinal and Industrial Finance branch. He also
served as Zonal Head of various zones and has good credit exposure. He has been heading
Treasury branch of Allahabad Bank since 18.12.2008 in the capacity of General Manager,
Treasury.

Mr Satish Kumar Kalra is a post graduate in M.Sc , MBA [Finance] with CAIIB.

Mr Satish Kumar Kalra has attended several Senior Executives programmes and various training
programmes in Management, Credit & Risk Management.
Vision & Mission of Andhra Bank:-

Vision:

Andhra Bank is committed to create a customer centric organization with a deep sense of
social responsibility and to continuously leverage technology to attain world class standards of
performance.

Mission:

Beside the core activity of banking. Andhra bank will venture into a spectrum of financial
into spectrum of financial services. Utmost concern will be accorded to customer satisfaction by
offering innovative and need-based financial products and services technology.

Awards and Rewards

Ranked 458 among Top 1000 Banks in the World

The prestigious 'The Banker' - a Financial Times Limited Business Publication, July 2012
Issue published from London has ranked Andhra Bank as the ‘458th Largest Bank Globally', out
of the Top 1000 World Banks' Annual Rankings.

National Payments Excellence Awards 2015 was felicitated to Andhra Bank under Midsize
category as Winner for IMPS and joint runner up for National Automated Clearing House
(NACH). The award was received by Sri A K Rath , Executive Director, Andhra Bank.

Andhra Bank No.1

BEST BANK MID-SIZE
Andhra Bank has emerged as BEST BANK MID-SIZE, with Rank 1, Size of Balance
Sheet Rs.90,380 Crore, Net Profit Rs.1,050 Crore in Businessworld - Pricewaterhousecoopers
Survey for India's Best Banks 2010. Among the winners, HDFC Bank is Best Large Bank,
Karur Vysya Bank is Best Small Bank, State Bank of India is Most Socially - responsible Bank.
Editorial Board Roll of Honour
Andhra Bank has been awarded Editorial Board Roll of Honour in the Mid-sized Banks
Category in the CNBC TV18 Best Bank and Financial Institution Awards for the year 2011

Beating the Blues

Two years after the financial cataclysm rocked the global banking system, the banking
sector in India is back in the reckoning. The performances of the banks for FY 2009-10, as "The
Analyst" Banking Special show, reaffirm the belief that it pays to be conservative.
The annual survey of The Analyst Banking Special, which enters its seventh edition this year,
aims to analyze the remarkable resilience that Indian Banking Sector has shown even amidst the
worst crisis in modern times, individual bank's performances, the strategies and the vital
takeaways. Using the highly acclaimed CAMEL Methodology, this study gauges performances
of state-owned banks, private sector banks and foreign banks on the key parameters like Capital
Adequacy, Asset Quality, Management, Earnings Quality and Liquidity.
The annual survey highlights that the year clearly belonged to the minnows of the banking
world : the Hyderabad based Andhra Bank tops the list in the Public Sector
Banks category, while Tamilnad Mercantile Bank, another South India based bank, which
emerged triumphant in the private sector banks. Among foreign banks, Shinhan Bank takes
the top honors this year.

Andhra Bank Won The Best Public Sector Award

Andhra Bank has won the Banking Excellence Award for the Best Public Sector Bank ,
instituted by the State Forum of Bankers Clubs Kerala on 13.11.2010 Andhra Bank, South

Indian Bank and Yes Bank have won the top award as the best banks in the categories
of Public Sector, Old Private Sector and Private New Generation Banks, at the Banking

Excellence Awards instituted by the States Forum of Bankers' Clubs.

MSME National Award

Andhra Bank received the MSME National Award for the year 2009-10
for Andhra Bank's outstanding performance in PMEGP Scheme in National
Awards Presentation Function, New Delhi on 31.08.2010
ANDHRA BANK breaks into Top 500 Global List

Andhra Bank with a brand value of $ 134 million, has been listed as one the Top 500 Global
Financial Services Brands by UK based Brand Finance co. Andhra Bank is ranked 461 in
the Brand Finance @ Global Banking 500, an annual international ranking, the bank is one of
the Top 20 Indian Banks in the global league for this year

AWARD RECEIVED FOR THE YEAR 2009

Best Bank award

Sri R S Reddy, Chairman and Managing Director of Andhra Bank received the Best Bank
award on 26.11.2009 in Mumbai.Andhra Bank has been adjudged the BEST BANK for the
year 2009 on Quality of Assets by the BUSINESS TODAY-KPMG Study. Among all
classes of Banks in India-Public, Private or foreign, Andhra Bank has the best percentage
of performing assets. Net NPA is 0.16% as against an industry average of 1.50%, with
delinquency ratio of just 0.23%.

ANDHRA PRADESH AWARD for MSME 2007-'08

Sri R S Reddy, Chariman and Managing Director of Andhra Bank received the ANDHRA
PRADESH STATE AWARD for bank's outstanding contribution to Micro &
Small Enterprises Development 2007-2008 from Sri K Rosaiah, Chief Minister
of Andhra Pradesh on 02.11.2009.

MILESTONES ACHIEVED AND AWARDS RECEIVED DURING 2005-06

FINTECH Asia 2006 Award For "Any Branch Banking (ABB)"

Andhra Bank has bagged the FINTECH Asia 2006 Award for its initiatives under "Any Branch
Banking (ABB)" service across the Country. Andhra Bank is the only Bank in the Country to
receive one of the six Awards announced by the Financial Insights (USA), an IDC Company,
which is a Subsidiary of IDG, the World's leading IT Media, Research and Exposition Company.

2nd Highest Mover in the World having climbed 277 places over previous year
Andhra Bank also happened to be the 'Second highest mover in the World and highest mover
compared to any other Bank in Asia' having climbed 277 places in the Top 1000 Banks'
Rankings based on Tier-I Capital.

Ranked as the Top Number 1 Bank in Asia under the "Return on Capital"

'The Banker' Magazine went on to Rank 'Andhra Bank as the Top Number 1 Bank in Asia' under
the "Return on Capital" among all the Asian Banks - Rankings being based on Tier-I Capital
Business Parameter.

Adjudged Best Bank by Analyst Magazine - An ICFAI Publication

Our Bank has been adjudged as the "Best Bank under Large Banks Category" by "The Analyst"
Magazine - An ICFAI Publication, in its Performance Analysis of Select Indian Banks for 2004-
05.

The Best Bank as per the Business Standard Annual Banking Survey, 2004-05
The "Best Bank" Status was conferred on our Bank by the Business Standard in its Annual
Banking Survey for 2004-05 in terms of Productivity, Profitability, Growth, Safety and
Efficiency.

Best Bank Rating from Business Today Magazine

The Business Today Survey of the Best Banks in India has Ranked Andhra Bank at 5th Place
under Largest Banks Category compared to last year where the Bank was Ranked at 15th Place
in terms of Size and Strength, Operations, Productivity and Efficiency, Quality of Earnings,
Capital Adequacy and Asset Quality. The Bank has also been Ranked No.5 under Slowest NPA
Growth Category and Ranked No.2 under Return on Capital Employed Category.

ICRA Rating for Corporate Governance

Our demonstrated commitment to vigilant Corporate Governance has been rewarded by ICRA,
which assigned us a Corporate Governance Rating of "CGR-2". This denotes high level of
assurance on the quality of Corporate Governance.
Award of Institute of Chartered Accountants of India for excellence in Financial Reporting
The Institute of Chartered Accountants of India (ICAI) has recently awarded our Bank the
"Silver Shield" under the category of Banking, Insurance and Financial Institutions, given for
excellence in financial reporting in published accounts for the year, 2004-05. Our Bank is the
only Public Sector Bank to receive an Award from ICAI.
IBA Technology Award
Andhra Bank has been conferred the "Runner-Up" Award under "Best Payment Initiative" at the
Indian Banks' Association (IBA) Banking Technology Awards, 2005 for having wide ATM
Network and highest number of hits per day.

Awards for SLBC, as Convenor Bank in the State of AP

State Level Bankers' Committee (SLBC) of A.P. (Convenor Bank : Andhra Bank) has been
awarded for ensuring excellent performance by all Banks for Kharif 2005.
Andhra Bank as the Convenor Bank for the State Level Bankers' Committee (SLBC) of AP has
been presented an Award for its excellent coordinating efforts in implementation of Rajiv
Yuvashakti Scheme.

Awards for Best Performance under Kharif Loans

Andhra Bank was awarded by the Government of Andhra Pradesh for Best Performance in
exceeding Targets under disbursement of Kharif during 2005.

Best Bank in lending to Agriculture

Government of Andhra Pradesh has instituted for the first time Awards for Best Farmers and
Best Bankers at the State Level and District Level. Andhra Bank has bagged the Best Banker
Award at the State Level for its overall performance.

Best Banker in lending to Unemployed Youth under Rajiv Yuva Sakthi

Andhra Bank has been given the Best Banker Award for its performance during the Year,
2005-06 for achieving Targets under the Rajiv Yuva Sakthi Scheme.
Overwhelming Response for Bank's Follow-on Public Issue (FPO)

The Bank's 2nd Public Issue (FPO) in January 2006 received overwhelming response and
the Follow-on Public Issue was oversubscribed by 11 times.
 ANALYSIS AND INTERPRETATION

Meaning of Analysis:

An assessment and appraisal of relevant information to select the best course of action from
various alternatives, It is a systematic examination and assessment of data or information, by
breaking it into its constituent parts to uncover their inter relationships. An examination of data
and facts to uncover and understand cause-effect relationships, thus providing basis for problem
solving and decision making. The process of evaluation data using systematic and logical
reasoning to examine each component of the data provided. This form of analysis is just one of
the many steps that must be completed when undertaking a research experiment. Data from
various sources is gathered, reviewed, and then analyzed some sort of findings and suggestions
with conclusion. Assets and liability management in Andhra bank involves three analyses.

They are as follows:

1. Risk Analysis and Risk Management
2. Gap Analysis
3. overall asset liability management Analysis

RISK ANALYSIS

Risk analysis is the systematic study of uncertainties and risks we encounter in business,
engineering, public policy, and many other areas. Risk analysts seek to identify the risks faced by an
institution or business unit, understand how and when they arise, and estimate the impact (financial or
otherwise) of adverse outcomes. Risk managers start with risk analysis, then seek to take actions that
will mitigate or hedge these risks.

Some institutions, such as banks and investment management firms, are in the business of taking risks
every day. Risk analysis and management is clearly crucial for these institutions. One of the roles
of risk management in these firms is to quantify the financial risks involved in each investment, trading,
or other business activity, and allocate a risk budget across these activities. Banks in particular are
required by their regulators to identify and quantify their risks, often computing measures such as Value
at Risk (VaR), and ensure that they have adequate capital to maintain solvency should the worst (or
near-worst) outcomes occur.
Definition of Risk

Risk implies future uncertainty about deviation from expected earnings or expected
outcome. Risk measures the uncertainty that an investor is willing to take to realize a gain from
an investment.

Risk management

Risk management is the process of identification, analysis and either acceptance or

mitigation of uncertainty in investment decision-making. Essentially, risk management occurs
anytime an investor or fund manager analyzes and attempts to quantify the potential for losses in
an investment and then takes the appropriate action (or inaction) given their investment and risk
tolerance. Inadequate risk management can result in severe consequences for companies as well
as individuals.

Definition of risk Management

In the world of finance, risk management refers to the practice of identifying potential
risks in advance, analyzing them and taking precautionary steps to reduce/curb the risk.

Interpretation

The bank has a comprehensive “integrated Risk management policy” for management of
Credit risk, and Operational risk as per the guidance notes or guidelines issued by the Reserve
Bank of India. Accordingly, all the risk Management functions, Viz., Credit Risk, Asset liability
Management (ALM), Mid-office of the Treasury and Operational risk factions have been
integrated. The “integrated Risk Management policy” of the Bank is being reviewed every year
in tune with the regulatory guideline.

Types of Risk:

1. Credit Risk

2. Operational Risk

3. Market Risk

4. Liquidity Risk
1. Credit Risk:

Credit risk is, perhaps, the most obvious of the risks. Banks must do their best to
determine the likelihood that a customer will pay back what is loaned to them. In light of the
recent lending crisis, the modern bank is looking more closely at credit risk before lending to
consumers.

Your bank will have to determine how much of a credit risk you are willing to take on a
particular consumer. This is a question that you will have to answer for your individual situation.
Each bank will have specific terms and conditions that it is willing to operate under, but you will
need to determine what those are, and then stick with them as you bring on new credit customers.

Credit Risk: How to Calculate Expected Loss & Unexpected Loss

When measuring and managing credit risk, It is important to have a clear understanding of
common terms such as expected loss and unexpected loss. As stated in Credit Risk Assessment,
credit risk is defined as “the potential that a bank borrower or counterparty will fail to meet its
obligations in accordance with agreed terms. It explains the calculations for expected loss (EL)
and unexpected loss (UL), for both an individual asset and for a portfolio. Additionally, risk
contribution (RC) will be defined.
To begin, let’s review the common terminology used in these calculations:

Terminology

 Probability of Default (PD) – is the likelihood that a loan will not be repaid and will fall
into default. It must be calculated for each borrower. The credit history of the borrower
and the nature of the investment must be taken into consideration when calculating PD.
External ratings agencies such as Standard & Poors or Moody’s may be used to get a PD;
however, banks can also use internal rating methods. PD can range from 0% to 100%. If
a borrower has 15% PD it is considered a less risky company vs. a company with a 30%
PD.

 Adjusted Exposure (AE) – is equal to outstanding loan amount (OS) plus the percentage
of unused loan commitment (COM) drawn-down by the borrower; known as the usage
given default (UGD). AE is calculated as follows:

AE = OS + (COM – OS) * (UGD)

 Recovery Rate (RR) – the proportion of a bad debt that can be recovered.

 Loss Given Default (LGD) – the credit loss incurred if an obligor of the bank
defaults. LGD = 1- RR

 Expected Default Frequency (EDF) – refer to Probability of Default

 Expected Loss (EL) – referring back to Expected Loss Calculation, EL is the loss that can
be incurred as a result of lending to a company that may default. It is the average loss in
value over a specified period.

 Unexpected Loss (UL) – it is known as the variation in expected loss. UL is typically

larger than EL but they are both equal to zero when PD is zero.

Expected Loss (EL)

EL for a single asset is calculated by using the following formula:

EL = AE * LGD * EDF
To calculate EL for a portfolio we must add the expected losses of the individual assets; formula
below:

ELP = ∑ELi

Unexpected Loss (UL)

UL for a single asset is calculated by using the following formula:

UL = AE * SQRT [(EDF * σ²LGD) + (LGD² * σ²EDF)]

To calculate the UL for a portfolio, we need to use a more complex formula. Below is the
formula for a 2 asset portfolio:

ULP = SQRT [ULi² + ULj² + 2 (ρi,j) (ULi) (ULj)]

Note: The UL of the portfolio will be less than the sum of the ULs for the individual assets due
to diversification benefit

Managing the credit risk:

The first step in effective credit risk management is to gain a complete understanding of a bank’s
overall credit risk by viewing risk at the individual, customer and portfolio levels.

While banks strive for an integrated understanding of their risk profiles, much information is
often scattered among business units. Without a thorough risk assessment, banks have no way of
knowing if capital reserves accurately reflect risks or if loan loss reserves adequately cover
potential short-term credit losses. Vulnerable banks are targets for close scrutiny by regulators
and investors, as well as debilitating losses.

The key to reducing loan losses – and ensuring that capital reserves appropriately reflect the risk
profile – is to implement an integrated, quantitative credit risk solution. This solution should get
banks up and running quickly with simple portfolio measures. It should also accommodate a path
to more sophisticated credit risk management measures as needs evolve. The solution should
include:
 Better model management that spans the entire modeling life cycle.

 Real-time scoring and limits monitoring.

 Robust stress-testing capabilities.

 Data visualization capabilities and business intelligence tools that get important information into
the hands of those who need it, when they need it.

Interpretation
The credit Risk management committee is responsible for implementation of the Credit policies
approved by the Board and RMC (R).

The Bank has a well defined ‘loan policy’ duly approved by the board prescribing standards for
presentation of credit proposals, financial covenants, rating standard and benchmarks, delegation
of credit approving powers, prudential limits on large credit exposures, asset concentrations,
standards for loan collateral, portfolio management, loan review mechanism, risk concentrations,
risk monitoring and evolution, pricing of loans, provisioning, regulatory/legal compliance, etc

2. Operational Risk:

Operational risk is the risk that comes from within. These are the decisions you,
as a bank, make internally that mess up yourself, and those employee decisions made on a day-
to-day basis that can create problems for your organization. Inadequate internal controls and
employee accountability can lead to serious risks for your bank.

How can you avoid this? The answer is easy to state, but hard to implement. Adding more
internal rules and accountability may be the answer, but, unfortunately, the bending of internal
rules is far too common in the banking industry. Fostering a sense of unity among your team
members can be a helpful place to start. When everyone has a vested interest in seeing your bank
succeed, the temptation to bend rules is lessened. Also, adding monitoring programs to help
identify risky behaviour and put a stop to it can help limit this type of risk.
Operational risk is defined as the risk of loss resulting from inadequate or failed internal
processes, people and systems or from external events. This definition includes legal risk, but
excludes strategic and reputational risk.

Measurement Approaches

1. The framework outlined below presents three methods for calculating operational risk
capital charges in a continuum of increasing sophistication and risk sensitivity: (i) the
Basic Indicator Approach; (ii) the Standardized Approach; and (iii) Advanced
Measurement Approaches (AMA).

2. Banks are encouraged to move along the spectrum of available approaches as they
develop more sophisticated operational risk measurement systems and practices.
Qualifying criteria for the Standardized Approach and AMA are presented below.

3. Internationally active banks and banks with significant operational risk exposures (for
example, specialized processing banks) are expected to use an approach that is more
sophisticated than the Basic Indicator Approach and that is appropriate for the risk
profile of the institution. A bank will be permitted to use the Basic Indicator or
Standardized Approach for some parts of its operations and an AMA for others provided
certain minimum criteria are met,

4. A bank will not be allowed to choose to revert to a simpler approach once it has been
approved for a more advanced approach without supervisory approval. However, if a
supervisor determines that a bank using a more advanced approach no longer meets the
qualifying criteria for this approach, it may require the bank to revert to a simpler
approach for some or all of its operations, until it meets the conditions specified by the
supervisor for returning to a more advanced approach.
 The Basic Indicator Approach

Banks using the Basic Indicator Approach must hold capital for operational risk equal to the
average over the previous three years of a fixed percentage (denoted alpha) of positive annual
gross income. Figures for any year in which annual gross income is negative or zero should be
excluded from both the numerator and denominator when calculating the average. The charge
may be expressed as follows:

KBIA = [∑(GI1...n × α)]/n

Where

KBIA

= the capital charge under the Basic Indicator Approach

GI

= annual gross income, where positive, over the previous three years

= number of the previous three years for which gross income is positive

= 15%, which is set by the Committee, relating the industry wide level of required
capital to the industry wide level of the indicator.

The Standardized Approach

1. In the Standardized Approach, banks' activities are divided into eight business lines:
corporate finance, trading & sales, retail banking, commercial banking, payment &
settlement, agency services, asset management, and retail brokerage. The business
lines are defined in detail in Appendix 8-1. [BCBS June 2006 par 652]

2. Within each business line, gross income is a broad indicator that serves as a proxy
for the scale of business operations and thus the likely scale of operational risk
exposure within each of these business lines. The capital charge for each business
 line is calculated by multiplying gross income by a factor (denoted beta) assigned to
that business line. Beta serves as a proxy for the industry-wide relationship between
the operational risk loss experience for a given business line and the aggregate level
of gross income for that business line. It should be noted that in the Standardized
Approach gross income is measured for each business line, not the whole
institution, i.e. in corporate finance, the indicator is the gross income generated in
the corporate finance business line.

3. The total capital charge is calculated as the three-year average of the simple
summation of the regulatory capital charges across each of the business lines in each
year. In any given year, negative capital charges (resulting from negative gross
income) in any business line may offset positive capital charges in other business
lines without limit. However, where the aggregate capital charge across all business
lines within a given year is negative, then the input to the numerator for that year
will be zero. The total capital charge may be expressed as:

KTSA = {∑years 1-3 max[∑(GI1-8 × Β1-8),0]}/3

Where:

KTSA

= the capital charge under the Standardized Approach

GI1-8

= annual gross income in a given year, as defined above in the Basic Indicator
Approach, for each of the eight business lines

Β1-8

= a fixed percentage, set by the Committee, relating the level of required capital to the
level of the gross income for each of the eight business lines. The values of the betas
are detailed below.
 Business Lines Beta Factors

Corporate finance (Β1) 18%

Trading and sales (Β2) 18%

Retail banking (Β3) 12%

Commercial banking (Β4) 15%

Payment and settlement (Β5) 18%

Agency services (Β6) 15%

Asset management (Β7) 12%

Retail brokerage (Β8) 12%

Advanced Measurement Approaches (AMA)

1. Under the AMA, the regulatory capital requirement will equal the risk measure
generated by the bank's internal operational risk measurement system using the
quantitative and qualitative criteria for the AMA discussed below. Use of the AMA
is subject to supervisory approval. [BCBS June 2006 par 655]
 2. A bank adopting the AMA may, with the approval of its host supervisors and the
support of its home supervisor, use an allocation mechanism for the purpose of
determining the regulatory capital requirement for internationally active banking
subsidiaries that are not deemed to be significant relative to the overall banking
group but are themselves subject to this Framework in accordance with Part 1.
Supervisory approval would be conditional on the bank demonstrating to the
satisfaction of the relevant supervisors that the allocation mechanism for these
subsidiaries is appropriate and can be supported empirically. The board of directors
and senior management of each subsidiary are responsible for conducting their own
assessment of the subsidiary's operational risks and controls and ensuring the
subsidiary is adequately capitalized in respect of those risks.

Interpretation
Management of operational risk is a part of the integrated risk management policy and the bank
has a focused attention for management of the Operational risk, in the light of reserve bank of
India guidelines. Operational risk management activities of the bank and these include building
an understanding of the risk profile implementing tolls related to operational risk management
and working towards the goals of improved controls and lower risk. Operational risk
management and working towards the goals of improved controls and lower risk. Operational
risk management committee ensures implementation and compliance of the operational risk
Policies and reports to Board/ risk Management committee.

3. Market Risk:

Banks are at the whims of the markets. When the markets do not behave properly,
banks lose money on their assets. Managing market risk is essential for today’s banks, especially
with the volatile nature of the current markets.

Managing market risk is not something new to the modern bank, it’s just newly pressing because
of recent market years. The best strategy, for managing market risk, is one of diversification.
Ensuring that assets are held in a wide range of investment options will help limit this type of
risk.
 Measurement Approaches

In measuring their market risks, institutions may choose between two broad
methodologies: the standardized approach or internal models

Standardized approach

The standardized methodology uses a "building-block" approach. The capital charge for
each risk category is determined separately. Within the interest rate and equity position risk
categories, separate capital charges for specific risk and the general market risk arising from
debt and equity positions are calculated. Specific risk is defined as the risk of loss caused by
an adverse price movement of a debt instrument or security due principally to factors related
to the issuer. General market risk is defined as the risk of loss arising from adverse changes in
market prices. For commodities and foreign exchange, there is only a general market risk
capital requirement.

The standardized approach is described in section 9.10. The first four parts of that
section deal with interest rate, equity position, foreign exchange and commodities
risk. The fifth part sets out two possible methods for measuring the market risk in
options of all kinds.

Internal models

1. The focus of most internal models is an institution's general market risk exposure,
leaving specific risk to be measured through separate component measurement
systems. Institutions using models are subject to capital charges for the specific
risk not captured by their models.

2. Institutions using their own internal risk management models to calculate the
capital charge(s) must meet seven sets of conditions, which are described in detail
in section 9.11. The conditions include:

1. certain general criteria concerning the adequacy of the risk management

system,
 2. qualitative standards for internal oversight of the use of models, notably by
management,

3. guidelines for specifying an appropriate set of market risk factors (i.e., the
market rates and prices that affect the value of institutions' positions),

4. quantitative standards setting out the use of common minimum statistical

parameters for measuring risk,

5. guidelines for stress testing and back testing,

6. validation procedures for external oversight of the use of models, and

7. Rules for institutions that use a mixture of models and the standardized
approach.

Interpretation
The Bank has well-define market risk management policy and an
organizational structure for market risk management functions. The bank
manages market risk through ‘Asset-liability management policy and
‘investments/forex policy.

Bank is using the Standardized Duration method for computing capital share
for market risk (investments in HFT and AFS categories) as per RBI
guidelines
4. Liquidity Risk:

Liquidity risk management is a key banking function and an integral part of

the asset and liability management process.The fundamental role of banks is the maturity
transformation of short-term deposits (liabilities) into long-term loans (assets) and this makes
banks inherently vulnerable to liquidity risk. The transformation process creates asset and
liability maturity mismatches on a banks balance sheet that must be actively managed with
available liquidity. This is the process known as liquidity risk management.

The availability of liquidity either internally or externally is thus paramount in the management
of these maturity mismatches. The effective management of liquidity allows a bank to fund
increases in its assets (loans and investments) and to meet obligations as they come due
(withdrawal of deposits).

A failure in liquidity risk management may result in a bank becoming unable to meet its
obligations. This scenario if played out, could easily cause a bank to fail.

A bank can continue to meet its uncertain cash flow obligations and stay healthy by managing
liquidity risk prudently.

How should liquidity risk be managed?

A banks liquidity risk management policies should be set down clearly and communicated to key
decision makers in the bank.

The risk management process should make up the following broad minimum requirements.

 The risk must be managed within a defined risk management framework (decision-
making)
 A clear liquidity risk management and funding strategy must be agreed at an executive
and non-executive board level
 Operating limits to liquidity risk exposures must be set and adhered to
  Procedures for liquidity planning under alternative scenarios must be agreed, including
crisis situations

Some common failures have been identified in banks liquidity risk management processes,
which have contributed to serious sustainability issues.

 A weak liquidity risk management framework that did not account for the risks posed by
products and business lines
 Business incentives that were misaligned with the risk tolerance level of the bank
 Misjudging unexpected contingent obligations and the liquidity that would be required by
the bank to meet these obligations
 The belief that prolonged liquidity disruptions as experienced during the financial market
crisis, were improbable
 Stress tests that failed to account for possible market wide global strain or the severity
and duration of disruptions

Some regulatory wisdom

In September 2008, the Basel Committee on Banking Supervision revised their document
“Principles for Sound Liquidity Risk Management and Supervision”, by providing more
guidance on the following.

 Liquidity risk tolerance

 Maintaining adequate levels of liquidity
 Allocating liquidity costs, benefits and risks to business
 Identification and measurement of contingent liquidity risks
 Design and use of severe stress test scenarios
 A contingency funding plan
 Intraday liquidity risk and collateral
 Public disclosure in promoting market discipline

This paper arranged around seventeen principles that set out guidance to bank regulators on best
practice liquidity risk management in banks. Because of the importance of managing liquidity
risks in banks, the principles proposed are valuable and may be found useful regardless of what
financial market sector your business is in.

Interpretation

It is inability of Bank to generate cash to cope with decline in deposit and increase in Asset .The
ability in fund increase in Asset and meet obligations as and when due is crucial to the viability
of the banking organization hence managing liquidity is most important activity conducted by
the Bank. It is the outcome of mismatch in the maturity pattern of asset and liability .The
liquidity can be classified

under the following broad category.

1. The need to replace new outflow of funds whether due

To withdrawal of deposit or non renewal of whole sale

Funds

2. Need to compensate for the non receipt of the expected inflow of funds i.e.
borrowed fails to meet the commitment
3. Need to find new funds when contingent liability becomes due
4. The need to undertake new transaction when required i.e. request for fund
from important client.

Interest Rate Risk

Interest rate risk is the risk where changes in market interest rates might adversely
affect a bank’s financial condition.‖

The immediate impact of changes in interest rates is on the Net Interest Income (NII). A long
term impact of changing interest rates is on the bank‘s net worth since the economic value of a
bank‘s assets, liabilities and off-balance sheet positions get affected due to variation in market
interest rates. The interest rate risk when viewed from these two perspectives is known as
earnings perspective‘ and ‗economic value‘ perspective, respectively.
As specified, changes in market interest rates have dual impact for a bank: on its Net Interest
Income (NII) and on its net-worth. Management of interest rate risk aims at capturing the risks
arising from the maturity and re-pricing mismatches and is measured both from the earnings and
economic value perspective.

 Earnings perspective: involves analyzing the impact of changes in interest rates

on accrual or reported earnings in the near term. This is measured by measuring
the changes in the Net Interest Income (NII) or Net Interest Margin (NIM) i.e. the
difference between the total interest income and the total interest expenditure.

Economic Value perspective: involves analyzing the changes of impact of interest on the
expected cash flows on assets minus the expected cash flows on liabilities plus the net cash flows
on off-balance sheet items. It focuses on the risk to net-worth arising from all re-pricing
mismatches and other interest rate sensitive positions. The economic value perspective identifies
risk arising from long-term interest rate gaps.

In interest rate risk changes in market interest rates might adversely affect a bank‘s financial
condition. Changes in interest rates affect both the current earnings (earnings perspective) as also
the net worth of the bank (economic value perspective). The risk from the earnings' perspective
can be measured as changes in the Net Interest Income (Nil) or Net Interest Margin (NIM). The
risk from the economic value perspective can be measured as changes in the Market Value
Equity (MVE)

Earrings Measured by using

perspective (changes GAP analysis
Interest rate in NII/NIM) method
risk
Economic value Measured by using
perspective(changes Duration GAP
in MVE) analysis method
Diagram showing methods used for different perspectives in interest rate risk.
Classification of assets and liabilities in banks (referred from Asset -
Liability Management System in banks – Guidelines by RBI)
OUTFLOWS:
 Capital
 Reserves and surplus
 Deposits

i. Current deposits
ii. Savings bank deposits
iii. Term deposits
iv. Certificates of deposits

 Borrowings
i. Call and short notice
ii. Interbank(term)
iii. Refinances
iv. Others

 Other liabilities and provisions

i. Bills payable
ii. Inter office adjustments
iii. Provisions for depreciation and unrecoverable loans etc
iv. Others
 Lines of credit committed to
i. Institutions
ii. Customers

 Letters of credit/ guarantees (contingent liabilities)

 Repos
 Bills rediscounted
 Swaps (buy/sell) /maturing forwards
 Interest payable
INFLOWS:
 Cash
 Balances with RBI—for CRR
 Balances with other banks
i. Current account
ii. Money at call and short notice, term deposits etc

 Investments
i. Approved securities
ii. Corporate debentures and bonds, CDs, redeemable preference shares, units of
mutual funds
iii. Investments in subsidiaries/ joint ventures
 Advances (performing)
i. Bills Purchased and Discounted (including bills under DUPN)
ii. Cash Credit/Overdraft (including TOD) and Demand Loan component of Working
Capital.
iii. Term Loans
 NPAs
i. Sub-standard
ii. Doubtful and Loss
 Fixed Assets
 Other Assets
i. Inter-office Adjustment
ii. Others
 Reverse repo
 Interest receivable
 Swaps (sell/buy)/ maturing forwards
 Committed lines of credit
 Bills rediscounted(DUPN)
 Others
TIME BUCKETS:

RBI was divided future cash flows into different time buckets. While preparing structural
liquidity statement and interest rate sensitivity statement cash flows were placed in different time
buckets based on their maturity period or repricing period.
i) 1 to 14 days
ii) 15 to 28 days
iii) 29 days and upto 3 months
iv) Over 3 months and upto 6 months
v) Over 6 months and upto 12 months
vi) Over 1 year and upto 2 years
vii) Over 2 years and upto 5 years
viii) Over 5 years
The first time bucket (1-14 days at present) is further divided into three time buckets for more
granular approach to measurement of risk.
i. Next day

ii. 2-7 days

iii. 8-14 days

Interpretation:

The Bank will measuring the Interest rate risk to earn the returns of the bank and referred
from Asset - Liability Management System in banks Guidelines by RBI. The RBI referred
different time buckets. While preparing structural liquidity statement and interest rate sensitivity
statement.
Introduction to GAP analysis

Gap analysis measures mismatches between rate sensitive liabilities and rate sensitive assets
(including off-balance sheet positions). The Gap Report should be generated by grouping rate
sensitive liabilities, assets and off-balance sheet positions into time buckets according to residual
maturity or next repricing period, whichever is earlier. The difficult task in Gap analysis is
determining rate sensitivity. An asset or liability is normally classified as rate sensitive if:
1. Within the time interval under consideration, there is a cash flow.
2. The interest rate resets/reprices contractually during the interval.
3. RBI changes the interest rates (i.e. interest rates on Savings Bank Deposits, advances up
to Rs.2 lakhs, DRI advances, Export credit, Refinance, CRR balance, etc.) in cases
where interest rates are administered.
4. It is contractually pre-payable or withdraw able before the stated maturities.

All investments, advances, deposits, borrowings, purchased funds etc. that mature/reprice within
a specified timeframe are interest rate sensitive. Similarly, any principal repayment of loan is
also rate sensitive if the bank expects to receive it within the time horizon. This includes final
principal payment and interim instalments. Certain assets and liabilities receive/pay rates that
vary with a reference rate. These assets and liabilities are repriced at pre-determined intervals
and are rate sensitive at the time of repricing. While the interest rates on term deposits are fixed
during their currency, the advances portfolio of the banking system is basically floating. The
interest rates on advances could be repriced any number of occasions, corresponding to the
changes in PLR.
The Gap is the difference between Rate Sensitive Assets (RSA) and Rate Sensitive Liabilities
(RSL) for each time bucket. The positive Gap indicates that it has more RSAs than RSLs
whereas the negative Gap indicates that it has more RSLs.

GAP(t) = RSA(t)-RSL(t)
  RSA
Those assets which are mature or reprice in a given time period (t)

 RSL
Those liabilities which are mature or reprice in a given time period (t)

Gap Cause Interest Rate Profit(NII)

Positive RSA>RSL Rise Rise
(Asset) Fall Fall
Negative RSA>RSL Rise Fall
(Liability) Fall Rise
Zero RSA=RSL Rise No effect
Fall No effect

Table showing relationship between gap, interest rate and NII.

Net Interest Income (NII): It is the difference between interest income and interest expenditure.

NII=Interest income –interest expenditure

Net Interest Margin (NIM): It is a measure of the difference between the interest income
generated by banks and the amount of interest paid out to their lenders (for example, deposits),
relative to the amount of their (interest-earning) assets.

NIM=NII/RSA*100
MONETARY POLICY

Monetary policy is the macroeconomic policy laid down by the central bank. It involves
management of money supply and interest rate and is the demand side economic policy used by
the government of a country to achieve macroeconomic objectives like inflation, consumption,
growth and liquidity. In India, monetary policy of the Reserve Bank of India is aimed at
managing the quantity of money in order to meet the requirements of different sectors of the
economy and to increase the pace of economic growth. The RBI implements the monetary policy
through open market operations, bank rate policy, reserve system, credit control policy, and
moral persuasion and through many other instruments. Using any of these instruments will lead
to changes in the interest rate, or the money supply in the economy. Monetary policy can be
expansionary and contractionary in nature. Increasing money supply and reducing interest rates
indicate an expansionary policy. The reverse of this is a contractionary monetary policy. For
instance, liquidity is important for an economy to spur growth. To maintain liquidity, the RBI is
dependent on the monetary policy. By purchasing bonds through open market operations, the
RBI introduces money in the system and reduces the interest rate.

Objectives of the monetary policy of India, as stated by RBI, are:

Price Stability: Price Stability implies promoting economic development with considerable
emphasis on price stability. The centre of focus is to facilitate the environment which is
favorable to the architecture that enables the developmental projects to run swiftly while also
maintaining reasonable price stability.

Controlled Expansion of Bank Credit: One of the important functions of RBI is the
controlled expansion of bank credit and money supply with special attention to seasonal
requirement for credit without affecting the output.

Promotion of Fixed Investment: The aim here is to increase the productivity of

investment by restraining non essential fixed investment.

Restriction of Inventories and stocks: Overfilling of stocks and products becoming

outdated due to excess of stock often results in sickness of the unit. To avoid this problem the
central monetary authority carries out this essential function of restricting the inventories. The
main objective of this policy is to avoid over-stocking and idle money in the organization

Promotion of Exports and Food Procurement Operations: Monetary policy pays

special attention in order to boost exports and facilitate the trade. It is an independent objective
of monetary policy.

Desired Distribution of Credit: Monetary authority has control over the decisions
regarding the allocation of credit to priority sector and small borrowers. This policy decides over
the specified percentage of credit that is to be allocated to priority sector and small borrowers.

Equitable Distribution of Credit: The policy of Reserve Bank aims equitable distribution
to all sectors of the economy and all social and economic class of people

To Promote Efficiency: It is another essential aspect where the central banks pay a lot of
attention. It tries to increase the efficiency in the financial system and tries to incorporate
structural changes such as deregulating interest rates, ease operational constraints in the credit
delivery system, to introduce new money market instruments etc.

Reducing the Rigidity: RBI tries to bring about the flexibilities in the operations which
provide a considerable autonomy. It encourages more competitive environment and
diversification. It maintains its control over financial system whenever and wherever necessary
to maintain the discipline and prudence in operations of the financial system.
Table showing Major Monetary policy rates and reserve requirements - Bank
rate, (Repo, Reverse Repo & MSF) rates, CRR & SLR

Fix Range LAF

Rates
Bank Rate Repo Reverse Cash Marginal Statutory
Reserve Standing Liquidity

Effective Date Ratio Facility Ratio

Present Rates 7.00 6.50 6.00 4.00 7.00 21.25

02/06/2015 8.50 7.50 6.50 4.00 8.50 21.50
09/08/2014 - - - - - 22
29/10/2013 8.75 7.75 6.75 - 8.75 -
03/11/2012 - - - 4.25 - -
25/10/2011 - 8.5 7.5 - 9.5 -
18/12/2010 - - - - - 24
07/11/2009 - - - - - 25
08/12/2008 - 6.5 5 - - -
10/11/2007 - - - 7.5 - -
23/12/2006 - - - 5.25 - -
26/10/2005 - 6.25 5.25 - - -
27/10/2004 - - 4.75 - - -
Analysis

As per above 10 years monitory policy review the Reserve Bank of India (RBI) keep on
changing Bank Rate, Repo, Reverse Repo, Cash Reserve Ratio, Statutory Reserve Ratio and
Marginal Standing Facility on the basis of demand & supply, inflation, government policies and
fiscal policy etc. Whenever the banks have any shortage of funds they can borrow it from RBI.
Repo rate is the rate at which our banks borrow rupees from RBI. A reduction in the repo rate
will help banks to get money at a cheaper rate. When the repo rate increases borrowing from RBI
becomes more expensive.

Reverse Repo rate is the rate at which Reserve Bank of India (RBI) borrows money from
banks. Banks are always happy to lend money to RBI since their money is in safe hands with a
good interest. An increase in Reverse repo rate can cause the banks to transfer more funds to RBI
due to attractive interest rates. It can cause the money to be drawn out of the banking system.
RBI, using its tools of CRR, Bank Rate, Repo Rate and Reverse Repo rate our banks adjust their
lending or investment rates for common man. When CRR rate decreases banks will get more
money to lend vice versa.

Monetary Policy Effects on Interest Rates:

Monetary Policy Instruments used by Reserve Bank of India to control

interest rates
Cash Reserve Ratio (CRR) - Banks in India are required to hold a certain proportion of
their deposits in the form of cash. This minimum ratio (that is the part of the total deposits to be
held as cash) is stipulated by the RBI and is known as the CRR or Cash Reserve Ratio. This
gives the power to RBI to reduce the lendable amount in the banking system by increasing the
CRR. Thus, it is a tool used by RBI to control liquidity in the banking system. Currently CRR is
at 4%
Statutory Liquidity Ratio (SLR) - Apart from CRR, every bank is required to maintain at
the close of business every day, a minimum proportion of their Net Demand and Time Liabilities
(NDTL) as liquid assets in Government Securities (G-Sec). The ratio of liquid assets to demand
and time liabilities is known as Statutory Liquidity Ratio (SLR). An increase in SLR also
restricts the bank’s leverage position to pump more money into the economy. Currently SLR is at
23%

Repo and Reverse Repo - Repo rate is the rate at which RBI lends to commercial banks
generally against government securities. Reverse Repo rate is the rate at which RBI borrows
money from the commercial banks. Reduction in Repo rate helps the commercial banks to get
money at a cheaper rate and increase in Repo rate discourages the commercial banks to get
money as the rate increases and becomes expensive. The increase in the Repo rate will increase
the cost of borrowing and lending of the banks which will discourage the public to borrow
money and will encourage them to deposit. As the rates are high the availability of credit and
demand decreases resulting to decrease in inflation. This increase in Repo Rate and Reverse
Repo Rate is a symbol of tightening of the policy. Currently Repo is at 7.25% and Revere repo is
at 6.25%.

Marginal Standing Facility(MSF): MSF is the rate at which banks can borrow overnight
from RBI. This was introduced in the monetary policy of RBI for the year 2011-2012. Banks can
borrow funds through MSF when there is a considerable shortfall of liquidity. This measure has
been introduced by RBI to regulate short-term asset liability mismatches more effectively.
Recently, RBI has hiked the MSF rate from 8.25% to 10.25%.

Open Market Operations (OMO) - An open market operation is an instrument of

monetary policy which involves buying or selling of government securities from or to the public
and banks. This mechanism influences the reserve position of the banks, yield on government
securities and cost of bank credit. The RBI sells government securities to contract the flow of
credit and buys government securities to increase credit flow. Open market operation makes
bank rate policy effective and maintains stability in government securities market.
Interpretation

The bank has fallowing the RBI guidelines Changes in the Monetary polices. The Bank has keep
Cash Reserve Ratio (CRR) at 4% With the RBI are required to hold a certain proportion of their
deposits in the form of cash. Apart from CRR. Bank is required to maintain at the close of
business every day, Statutory Liquidity Ratio (SLR). An increase in SLR also restricts the bank’s
leverage position to pump more money into the economy. Currently SLR is at 23%. The Bank
has fallowing The Monetary Policy Instruments used by Reserve Bank of India to control interest
rates.

HOW ASSET LIABILITY MANAGEMENT IS IMPLEMENTED

IN ANDHRA BANK

The implementation of Asset Liability management is ensured through an exclusively constituted

Alco committee consisting of top functionaries in bank as its Member .The committee
undertakes the responsibility of identifying Bank Wise and its quantification drafting, risk
management strategy and developing alternative in scenario selecting a right model after
selecting MONTO CARLO simulation and monetary earning spread and initiating mid course
correction if any to achieve targeted profit to make Asset Liability management more effective
and big Bank have constituted three sub committee each assigned with specific responsibility as
under.

THE BROAD OBJECTIVES OF ASSET LIABILITY SYSTEM

IN ANDHRA BANK

1. To control violability of Net Interest Income from changes in Interest rates

2. Optimization of profits by ensuring acceptable balance between profitability, growth and
risk.
3. Funding of bank operation through capital planning
 4. Product planning and introduction of new product.
5. To control violability of market value of capital from market risk.
6. Suitable period of planning say 1,2 or 3 months ahead
7. Choosing a model that yields a stable net interest income consistently while ensuring
liquidity.

Role of ALCO

Banks are required to determine on their own, interest rates on deposits and advances in both
domestic and foreign currencies on a dynamic basis. The interest rates on banks’ investments in
government and other securities are also market driven. Intense competition for business
involving both the assets and liabilities, together with volatility in the interest rates as well as
foreign exchange rates, brings pressure on the management of banks to maintain a good balance
amongst spreads, profitability and long-term viability. careless liquidity management can put
banks’ earnings and reputation at great risk. These pressures call for structured and
comprehensive measures and not just one off action.

As banks are exposed to several major risks in the course of their business, it becomes important
for banks to manage interest rate, currency and liquidity risks. Banks need to address these risks
in a structured manner by Asset-Liability Management (ALM) practices. ALM provides a
comprehensive and dynamic framework for measuring, monitoring and managing liquidity,
interest rate, foreign exchange and equity risks of a bank that needs to be closely integrated with
the banks’ business strategy. It also involves altering the asset-liability portfolio in a dynamic
way in order to manage risk.

ALCO is a decision-making unit responsible for balance sheet planning and management from
risk-return perspective and also responsible for the strategic management of interest rate and
liquidity risks.
Functions of ALCO

The ALCO functions with objectives at a macro level and micro level.

At the macro level, this unit is responsible for:

1. Devising critical Business policies.
2. Appropriate pricing strategies
At the micro level, it aims at:
1. Profitability through Price matching
2. Ensuring Liquidity through maturity matching.
The micro level objectives serve the macro level objectives.

Generally the Asset & Liability Committee (ALCO) will ensure that the country balance sheet is
managed well according to banks own internal policies and complies with applicable regulatory
requirements.

Following are some Specific functions of ALCO:

1. To ensure the efficient implementation of balance sheet management policies as directed by

GALCO (Group ALCO) and RALCO (Regional ALCO).
2. To receive and review reports on liquidity, market risk and capital management.
3. To identify balance sheet management issues that are leading to under-performance and
refer those that cannot be resolved locally to Regional ALCO.
4. To review deposit-pricing strategy for the local market.
5. Ensures sustainable funding for the balance sheet.
6. Giving directions to the ALM team on the interest rate risk.
ALCO delegates the daily management of liquidity risk and interest rate risk to ALM.

Below is the broad hierarchy of ALCO in a bank

In carrying out its duties, ALCO should pay particular attention to the following points:
Liquidity
1. Ensure compliance with banks Group policy and regulatory requirements.
2. Set local targets and review assumptions used for forecasting cashflows.
3. Review and approve contingency plans for liquidity and realisability assumptions.
4. Review and manage concentration risk arising from both borrowers and depositors.
5. Ensure business activity is consistent with the structural integrity of the balance sheet,
including capital consumption.
6. Ensure that risks inherent in local payment systems are evaluated, quantified and managed.
Market Risk
1. Review requirements set by external regulators both locally and on a Group basis (bank).
2. Establish a rate setting mechanism for all published rates on assets and liabilities with the
objective of ensuring that rate risk is effectively transferred to banks treasury units wherever
possible.
3. Review Price risk profiles of the balance sheet, especially exposures relating to nil rate or
administered rate products that give rise to basis risk.
4. Review hedging of remittable profits.
Interpretation

1. Meeting of Alco is held regularly on a fortnightly and monthly basis

2. They collect asset liability management data on regular or Fortnightly basis
3. Many Bank are conducting behavioral study of saving bank deposit and current bank
deposit at a core and volatile proportion
4. Bank are measuring both mismatch risk and basic risk to measure Net interest income
5. Bank are pricing deposit and advance using asset liability system

REVELANCE OF BASEL II IN ASSET LIABILITY OF BANK

1. Basel accord on capital adequacy aims at stregentning the financial health of the bank
2. The accord is in the direction of further strengthening of capital
3. The prime motto is “less capital for safe loans and more capital for risky loans”.
4. It hopes to create the regulator system and promote rewarding Bank for managing risks
better
5. There is no adequate differentiation of credit risk

6. No recognitions to credit risk mitigation technique

1. Maturity structure of credit exposure did not have any relevance

2. No capital charged for operational risks
3. Economic capital allocation allows Bank to have better Understanding of risk and
better loans pricing the proposed adequacy framework contains refined proposals for
three pillar of new accord that is namely

1. Minimum capital requirements

2. Supervisory review

3. Market discipline

To strengthen the Asset Liability system in Bank the liquidity

Profile internal rate requirements namely duration VaR, Stimulation Model, forex risk
requirements ect should be sound the management information system mechanism should
be Strengthened the technology is to be introduced to make the

information available .In such a situation as per BASEL II the

Pricing of the Bank products can be made competitive using

Asset Liability system.

ASSET LIABILITY INFORMATION SYSTEM

In the Indian context Asset Liability Management refers to management of deposits,

loans and advances, investments borrowings forex reserves and capital, keeping in mind
the capital adequacy norms lay down by the regulators authority. It can facilitate
decision on following issues.

1. Data warehousing system with the help of online analytical processing system
that is Microsoft analysis services and Microsoft SQL server which are used in
analyzing asset liability across various dimension namely branch wise, zone wise,
branch category wise, general ledger group wise, size wise, contractual period wise,

residual period wise, interest rate wise.

2. Estimating the main source of funds namely core deposit, certificate of deposit and
call borrowings.

3. Reducing the GAP between the rate sensitivity asset and rate sensitivity liability.

4. Reducing maturity mismatch to avoid liquidity problem.

5. Managing the fund with respect to critical factors like size

duration.

6. This system enables the top management to identify the margin and
profitability and risk associated with each of the product. With all these precautions
effective Management of Asset and liability can be achieved very soon.
 REGULATORS DIRECTIVE TO BANK

The BASEL COMMITTEE of banking supervision is a committee of banking supervisory

authority which was established by the Central Bank governors a group of 10 countries in the
year, 1975. It consist of senior representative of Bank supervisory authority and central Bank
from Belgium, France, Canada, Germany, Italy, Luxembourg, Netherlands, Sweden,
Switzerland, United Kingdom and United States. It meets at the Bank of international settlement
[BIS] in Basel where the permanent document on principles of management and supervision of
interest rate risk accordingly another four principles are added to the earlier principles of
management and supervision of interest rate risk then above principles are base for forming
Asset Liability Management guidelines for Central Bank all over the globe accordingly RBI
issued guidelines to Bank and asked them to implement the Asset Liability Management system
from 1 April 1999.As per these guidelines Bank are required to submit the maturity pattern of
Asset Liability in prescribed format. Asset liability Management statement are drawn as under

1. Maturity structure of cash inflow and cash outflow .It is called as statement of structure
liquidity.
2. Statement of interest rate sensitivity.
3. Statement of short term dynamic liquid to monitor liquidity on dynamic basis over a time
horizons spanning from 1 to 90 days.
4. As per BASEL II norms and as per RBI guidelines Indian Bank will require to have
analytical system, model and tools in place for risk management, measurement and
control.
 PROPOSED ARCHITECTURE OF ASSET LIABILITY OF BANK

Due to various emerging risk and drastic variation in factors affecting risk in modern
technology driven environment Bank and financial needs and in-depth analysis of Asset
Liability Management problems like globe financial system in general and Bank in particular
are facing increased risk from various sector both internal and external therefore there is a
need to use sophisacated analytical tool effectively using the Consolidated data that helps in
making decision to improve the overall Growth of the Bank. The Indian Bank have large
number of branches scattered throughout the country. Earlier entire banking business
including management the control of branches used to be manual due to advent of technology
Bank are slowly getting connected to the network thus converging to a completely connected
network of all branches of the Bank. The process of asset liability can be divided into
following modules they are.

1. Data collection
2. Consolidation
3. Reporting
4. Analysis
5. Decision making
6. Reviewing
7. Feedback
8. Monitoring and control
To prepare an Asset Liability management statement maturity pattern of asset liability as
financial year ends branched maintain due date and dairy of both deposit and advances from
these dairy branches has to be complete and calculate type wise calculation of deposit and
advances and tally with grand total figure so as to arrive at branch wise position of inflow and
out flow of funds as per the Performa and send it to the regional office/ zonal office. At head
office all the regional zonal statement are completed and consolidated. To arrive at whole picture
of other Bank thus complete process normally takes 45 days to arrive at the final figure of the
balance sheet and profit and loss statement to be presented to board of directors and shareholders
CONCLUSION

The Andhra Bank require sophisticated analytical tool for in depth analysis of asset
Liability management which helps in managing their asset and liability. There are number of
models for doing analysis for effective results. As per Alco recommendations, Bank have to
decide which model helps them based on the architecture of their branches .It is recommended
that analysis be done based on basic model that is gap analysis as the start up for Analyzing the
position of Bank .As expertise go one can adopt high end Models like SP models for analyzing
the uncertainty factors and validate to suit there goals. The braches which provide the database
for asset liability management should be provided with feedback for the statement generated at
the head office for better results and performance. The Efficient performance of every branch is
important for the overall asset Liability management of the entire Bank. Avoiding the gap in
literal terms may not be possible for all the Bank. Given the constraints of the Bank that they
operate at, Bank could manage to effectively minimize the Gap.
 BIBLIOGRAPHY

1. Asset liability in Andhra bank

2. risk measurement in bank

3. treasury management

4. www. Indianinfoline.com

5. Andhra bank website

6. Annual report 2014- 2015 of Andhra bank