Integrated Approach to develop Asset Liability management process

Asset Liability Management (ALM) is an integral part of the financial management process of any bank. ALM is concerned with strategic balance sheet management involving risks caused by changes in the interest rates, exchange rates and the liquidity position of the bank. While managing these three risks forms the crux of Asset Liability Management, credit risk and contingency risk also form a part of the Asset Liability Management. The Indian financial markets have witnessed wide reaching changes at an unprecedented pace over the last five years. Intense competition for business on the assets and liabilities sides combined with increasing volatility in both domestic interest rates as well as foreign exchange rates is putting pressure on the management of banks and financial institutions to maintain spreads, profitability and long-term viability.

Asset Liability Management has been described as ‘a continuous process of planning, organizing and controlling Asset and Liability volumes, maturities, rates and yields.’ In the present environment it is aptly defined as the process of adjusting bank liabilities to meet loan demands, liquidity needs and safety requirements. As the business environment has become more volatile over the past few decades, innovative financial intermediaries have identified elements of the older functional management perspective as the cause of their business problems and have changed their mode of operation in ways that reflect the newer integrated asset-liability management perspective. For a financial intermediary that is implementing technical aspects of integrated ALM for management of a product or business line, the obvious organizational corollary is to establish a group that integrates staff from several functional areas and appoint a group manager that is responsible for all decisions related to that product or business line. It is the responsibility of that group and its manager to use the technical simulation and optimization tools in a way that internalizes the interdependencies of all the
decisions.

Challenges of integrated ALM.

The adoption of elements of the integrated ALM perspective by innovativefinancial intermediaries indicates that some top managers believe that, allthings considered, it is likely to produce better results than would the olderfunctional management perspective. While judged better, it is not perfectin the sense that that there are no problems or challenges associated withintegrated ALM. It has been chosen because its problems have been judged
less difficult to live with than the problems associated with the functionalmanagement perspective. This section concludes with list of some of thechallenges facing top managers who decide to implement changes inspiredby the integrated asset-liability management perspective.

Significance of Integrated Asset Liability Management.

The following are the main reasons for the growing significance of assets liability management

·         Volatility

·         Product innovations

·         Regulatory environment and;

·         Enhanced awareness of top management

The post-reform banking scenario in India was marked by interest rate deregulation, entry of new private banks, and gamut of new products along with greater use of information technology. To cope with these pressures investment banks were required to evolve strategies rather than ad hoc solutions. Recognizing the need of Asset Liability management to develop a strong and sound banking system,

 

Author’s Bio

Fish Y Bond takes a vivid look at what asset liability management is all about with the challenges facing it. The author also looks at the relevance of investment banking in India in relation to asset liability companies.