Tuesday, May 19, 2020

Asset Liabilities Management (ALM) | Objectives, Functions, Process & Neplease Context



Asset Liability Management (ALM) in Banks
Bank always tries to maintain a proper balance between the assets (cash, loan/advances) and liability (deposit) in such a way that ensures the optimum profitability of the bank thereby maintaining risk at an acceptable level. This is termed as Asset Liability Management.

Asset and liability management (ALM), in the banking content, is “the continuous process of planning, organizing and controlling the assets liability volumes, maturities, rates and yields.”

ALM refers to a mechanism to address the risk faced by a bank due to mismatch between assets and liability either due to liquidity of change in interest.



Objective of Asset Liability Management (ALM)
The objective of ALM is to manage assets and liability of bank to protect/enhance the solvency position of bank by way:
     I.            Net interest income
  II.            Net interest margin spread
III.            Market value of net worth of bank

ALM functions:
A) Primary functions
1) Interest rate risk management
2) Maturity risk management
3) Foreign enhance risk or currency risk management

B) Other functions
1) Funding of capital management
2) Profit planning and growth
3) Credit risk management

Risk managed by ALM
1) Interest rate risk
2) Liquidity risk
3) Foreign enhance risk

ALM organization
1) Risk management committee/department
2) Asset liability management committee



ALM in Neplease content
NRB has issued unified directive No. 5 regarding minimization of risk associated with transaction of BFIS. Some of provisions are: The risk related to the transaction of BFI should be classified as under:
a)  Liquidity risk
b) Interest rate risk
c)   Foreign enhance risk
d) Credit and investment risk
e)  Operation risk

NRB has issued risk management guideline for enabling banks effectively manage risk. NRB has issued stress testing guideline for regularly testing the stress on BFI due to several factors.

ALM process
1) Liquidity risk management
2) Management of market risks (interest rate risk)
3) Funding and capital planning
4) Profit planning and growth projection
5) Trading risk management


0 comments:

Post a Comment