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CAIIB Super Notes: Bank Financial Management: Module D: Balance Sheet Management: Components of Assets and Liabilities in Bank’s Balance Sheet and their Management
The document provides an in-depth analysis of a bank's balance sheet components, covering aspects such as assets, liabilities, and their management through Asset Liability Management (ALM). It highlights the significance of ALM in stabilizing profits and enhancing asset quality while addressing risks associated with interest rate fluctuations and economic conditions. Additionally, it outlines the objectives and processes involved in effectively managing a bank's balance sheet to ensure financial stability and profitability.
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Explains the components of a bank's balance sheet including assets, liabilities, and balance sheet management.
Describes various components such as capital, reserves, deposits, borrowings, and other liabilities.
Covers management of cash, balances, investments, advances, fixed assets, and other assets.
Defines contingent liabilities and discusses the bank's Profit & Loss statement including income and expenses.
Introduces Asset Liability Management which deals with risks arising from interest rates and liquidity.
Discusses the significance of ALM in mitigating volatility, and adapting to regulatory frameworks and product innovations.
Outlines the purpose and objectives of ALM, focusing on risk quantification, stability of profits, and liquidity.
Explains a two-stage approach to balance sheet management encompassing asset and liability management functions.
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CAIIB Super Notes: Bank Financial Management: Module D: Balance Sheet Management: Components of Assets and Liabilities in Bank’s Balance Sheet and their Management
- 1. CAIIB – Super-Notes©M S Ahluwalia Sirf Business Components of Assets and Liabilities in Bank’s Balance Sheet and their Management Module D: Balance Sheet Management
- 2. CAIIB – Super-Notes©M S Ahluwalia Sirf Business CAIIB – SUPER NOTES Bank Financial Management: Components of Assets and Liabilities in Bank’s Balance Sheet and their Management
- 3. CAIIB – Super-Notes©M S Ahluwalia Sirf Business Contents Coverage: 1. Components of a Bank’s Balance Sheet 2. What is Asset Liability Management? 3. Significance of Asset Liability Management 4. Purpose and Objectives of Asset Liability Management 5. ALM as co-ordinated Balance Sheet Management
- 4. CAIIB – Super-Notes©M S Ahluwalia Sirf Business COMPONENTS OF A BANK’S BALANCE SHEET 1.
- 5. CAIIB – Super-Notes©M S Ahluwalia Sirf Business Components of Balance Sheet Sources of Funds/LiabilitiesSources of Funds/Liabilities • Capital • Reserves and Surplus • Deposits • Borrowings • Other liabilities and Provisions Application of Funds/AssetsApplication of Funds/Assets • Cash in Hand and Balance with RBI • Balances with Banks and Money at Call and Short Notice • Investments • Advance • Fixed Assets • Other Assets
- 6. CAIIB – Super-Notes©M S Ahluwalia Sirf Business Capital • Represents owner’s stake • Cushion for depositors and creditors in case of losses • Long Term source of funds • Prescribed by RBI Authorised Capital Authorised Capital Issued Capital Issued Capital Subscribed Capital Subscribed Capital Paid-up Capital Paid-up Capital
- 7. CAIIB – Super-Notes©M S Ahluwalia Sirf Business Reserves and Surplus • Statutory Reserves • Capital Reserve • Revenue Reserve • Issue of Shares at Premium • Other Reserves ReservesReserves • The credit balance in profit and loss account SurplusSurplus
- 8. CAIIB – Super-Notes©M S Ahluwalia Sirf Business Deposits • Main source of funds for the banks DepositsDeposits Deposits Payable on Demand Deposits Payable on Demand Current Deposits Current Deposits Overdue Deposits Overdue Deposits Call DepositsCall Deposits Savings Bank Deposits Savings Bank Deposits Term Deposits Term Deposits Fixed Deposits Fixed Deposits Short Deposits Short Deposits Recurring Deposits Recurring Deposits
- 9. CAIIB – Super-Notes©M S Ahluwalia Sirf Business Borrowings • Refinance obtained from: – RBI – Other Commercial Banks – Other Institutions and Agencies like IDBI, EXIM Bank of India, NABARD etc.
- 10. CAIIB – Super-Notes©M S Ahluwalia Sirf Business Other Liabilities and Provisions Bills PayableBills Payable • Includes drafts, telegraphic transfers, travellers cheques, mail transfers payable, payslips, banker’s cheques and other miscellaneous items Inter-Office Adjustments Inter-Office Adjustments • Credit balance of the net inter-office adjustments Interest AccruedInterest Accrued • Interest accrued but not due on deposits and borrowings OthersOthers • Income Tax • TDS • Interest Tax • Provisions etc.
- 11. CAIIB – Super-Notes©M S Ahluwalia Sirf Business Cash and Balances with RBI • Includes • Foreign Currency Notes • Cash Balances in the overseas branches Cash in HandCash in Hand • In order to meet statutory cash reserve requirements (CRR) Balances with RBIBalances with RBI • Balance in Current Accounts and Term Deposits with other banks • All loans made in the interbank call money market repayable within 15 days notice. Balances with Banks and money at Call and Short NoticeBalances with Banks and money at Call and Short Notice
- 12. CAIIB – Super-Notes©M S Ahluwalia Sirf Business Investments • Investments in – Govt. Securities – Approved Securities – Shares – Debentures and Bonds – Subsidiaries and/or Joint Ventures – Other investments
- 13. CAIIB – Super-Notes©M S Ahluwalia Sirf Business Advances • Form major part of assets for all the banks Advances Repayable on Demand Advances Repayable on Demand Cash Credits Overdrafts Loans repayable on Demand Advances with Specific Due Date Advances with Specific Due Date Term Loans Bills Purchased/Discounted Bills Purchased/Discounted Clean or Documentary Domestic or Foreign Secured/Unsecured Advances Secured/Unsecured Advances Secured by Tangible Assets Covered by Bank/Government Guarantees Unsecured Advances
- 14. CAIIB – Super-Notes©M S Ahluwalia Sirf Business Fixed Assets • Immovable properties • Premises • Furniture and Fixtures • Hardware • Motor Vehicles etc
- 15. CAIIB – Super-Notes©M S Ahluwalia Sirf Business Other/Miscellaneous Assets Inter-Office Adjustments Inter-Office Adjustments Interest AccruedInterest Accrued Tax Paid in Advance/Tax Deducted at Source Tax Paid in Advance/Tax Deducted at Source Stationery and Stamps Stationery and Stamps Non Banking Assets acquired in Satisfaction of claims Non Banking Assets acquired in Satisfaction of claims OthersOthers Other items primarily include claims in the form of clearing items, unadjusted debit balances representing additions to assets and deductions from liabilities and advances provided to the employees of the bank.
- 16. CAIIB – Super-Notes©M S Ahluwalia Sirf Business Contingent Liabilities • Banks obligations under issuance of Letters of Credit, Guarantees and acceptances on behalf of constituents and bills accepted by the bank on behalf of its customers • Claims against the bank not acknowledged as debts • Liability for partly paid-up investments • Liability on account of outstanding ForEx contracts • Other items like Arrears of Cumulative dividends, bills rediscounted, underwriting commitments, estimated amount of contracts remaining to be executed on capital account and not provided for etc.
- 17. CAIIB – Super-Notes©M S Ahluwalia Sirf Business Bank’s P&L Statement Profit and Loss Statement Profit and Loss Statement IncomeIncome Interest Income Interest Income Other IncomeOther Income ExpensesExpenses Interest Expended Interest Expended Operating Expenses Operating Expenses Provisions and Contingencies Provisions and Contingencies
- 18. CAIIB – Super-Notes©M S Ahluwalia Sirf Business Income Interest Income Interest Income Interest/Discount on Advances/Bills Income on Investments Interest on balances with RBI and Other Interbank Funds Others Other Income Other Income Commission, Exchange and brokerage Profit on Sale or Investments Profit on Revaluation of Investment Profit on Sale of Land, Building and Other Assets Profit on Exchange Transactions Income earned by way of dividends etc Miscellaneous Income
- 19. CAIIB – Super-Notes©M S Ahluwalia Sirf Business Expenses Interest ExpendedInterest Expended Interest on Deposits Interest on RBI/Interbank Borrowings Others Operating ExpensesOperating Expenses Payments to and Provisions for Employees Rent. Taxes and Lighting Printing and Stationery Advertisement and Publicity Depreciation on Bank’s Property Director’s fees, Allowances and Expenses Auditor’s Fees and Expenses Law Charges Postage Repairs and Maintenance Insurance Other Expenditure Provisions and Contingencies Provisions and Contingencies
- 20. CAIIB – Super-Notes©M S Ahluwalia Sirf Business WHAT IS ASSET LIABILITY MANAGEMENT? 2.
- 21. CAIIB – Super-Notes©M S Ahluwalia Sirf Business Asset Liability Management • Concerned with Strategic Balance Sheet Management involving risks caused by changes in Rates of Interest, exchange rate, credit risk, and liquidity position of bank • Integrated Balance Sheet Management: All components of balance sheet and its different maturity mix would be looked at from the profit angle of the bank • ALM is the act of Planning, Acquiring and directing the flow of funds through an organisation to generate adequate and stable earnings to steadily build an organisation’s equity over time while taking reasonable and measured business risks
- 22. CAIIB – Super-Notes©M S Ahluwalia Sirf Business Asset Liability Management • The management of the Net Interest Margin (NIM) to ensure its level and riskiness are compatible with risk/return objectives of the bank • Co-ordinated management of a bank’s balance sheet to allow for alternative interest rate, liquidity and prepayment summaries • Views the financial institutions as a set of inter relationships that must be identified, coordinated and managed as an integral system • To match the assets and liabilities and minimise liquidity as well as market risk. • Per liability basis: Matching a specific asset to support each liability
- 23. CAIIB – Super-Notes©M S Ahluwalia Sirf Business Balance Sheet Restructuring • The strategy of actively managing the composition and mix of assets and liabilities portfolios • Efforts are made to adjust and readjust the portfolios in response to corporate objectives, economic conditions and future interest rate scenario to prevent undesirable imbalance between asset and liability maturities
- 24. CAIIB – Super-Notes©M S Ahluwalia Sirf Business SIGNIFICANCE OF ASSET LIABILITY MANAGEMENT 3.
- 25. CAIIB – Super-Notes©M S Ahluwalia Sirf Business Significance of Asset Liability Management VolatilityVolatility • Rate fluctuations affect the market value, yields, costs of assets and liabilities Product Innovation Product Innovation • New financial products have an impact on the risk profile of the bank Regulatory Environment Regulatory Environment • Central Banks issue framework and guidelines to deal with ALM policies Management Recognition Management Recognition • Increasing awareness of the change in risk scenario and need for ALM
- 26. CAIIB – Super-Notes©M S Ahluwalia Sirf Business PURPOSE AND OBJECTIVES OF ASSET LIABILITY MANAGEMENT 4.
- 27. CAIIB – Super-Notes©M S Ahluwalia Sirf Business Purpose • Purpose is to: – Enhance the asset quality – Quantify risks associated with assets and liabilities – Manage the risks identified above • Aims to stabilise: – Short Term profits – Long Term Earnings – Long Term Substance of the Bank
- 28. CAIIB – Super-Notes©M S Ahluwalia Sirf Business Process Review the interest rate structure and compare the same to the interest/product pricing of both assets and liabilities Review the interest rate structure and compare the same to the interest/product pricing of both assets and liabilities Examine the loan and investment portfolios in the light of the foreign exchange risk and the liquidity that might arise Examine the loan and investment portfolios in the light of the foreign exchange risk and the liquidity that might arise Examine the credit risk and contingency risk that may originate either due to rate fluctuations or otherwise and assess the quality of assets Examine the credit risk and contingency risk that may originate either due to rate fluctuations or otherwise and assess the quality of assets Review the actual performance against the projections made and analyse the reasons for any effect on the spreads Review the actual performance against the projections made and analyse the reasons for any effect on the spreads
- 29. CAIIB – Super-Notes©M S Ahluwalia Sirf Business Parameters for purpose of stabilising ALM • NII = Interest Income – Interest Expenses • Measures impact of volatility on Short Term Profit • NII fluctuation needs to be minimised to stabilise Short Term Profits Net Interest Income (NII)Net Interest Income (NII) • NIM= NII/Average Total Assets • ‘Spread’ on the earning assets Net Interest Margin (NIM)Net Interest Margin (NIM) • Shareholder’s Funds/Total Assets • Measures the shift between owned and total funds • Assesses the sustenance capacity Economic Equity RatioEconomic Equity Ratio
- 30. CAIIB – Super-Notes©M S Ahluwalia Sirf Business Objectives Macro Level Macro Level Formulation of critical business policies Efficient allocation of Capital Designing of Products with efficient pricing strategies Micro LevelMicro Level Profitability through Price Matching Liquidity by Maturity Matching
- 31. CAIIB – Super-Notes©M S Ahluwalia Sirf Business Micro Level Objectives • Aims to maintain spreads by ensuring deployment of liabilities at rate higher than costs • Indicates whether institution can benefit from: • Rising interest rates by positive gap (Assets > Liabilities) • Declining interest rates by negative gap (Liabilities>Assets) Price MatchingPrice Matching • Grouping Assets and Liabilities based on their maturity profiles • Gap assessed to identify future financing requirements Liquidity MatchingLiquidity Matching
- 32. CAIIB – Super-Notes©M S Ahluwalia Sirf Business Objectives… another perspective • Spread Management • Loan Quality • Generating Fee Income and Service Charges • Control of Non-Interest Operating Expenses • Tax Management • Capital Adequacy
- 33. CAIIB – Super-Notes©M S Ahluwalia Sirf Business ALM AS CO-ORDINATED BALANCE SHEET MANAGEMENT 5.
- 34. CAIIB – Super-Notes©M S Ahluwalia Sirf Business Two Stage Approach BalanceSheet Management BalanceSheet Management Stage 1: Specific Balance Sheet Management Functions Stage 1: Specific Balance Sheet Management Functions Asset Side ManagementAsset Side Management Reserve Position ManagementReserve Position Management Liquidity ManagementLiquidity Management Investment/Security Management Investment/Security Management Loan ManagementLoan Management Fixed Assets ManagementFixed Assets Management Liability Side ManagementLiability Side Management Liability ManagementLiability Management Reserve Position ManagementReserve Position Management Long-Term Management (Notes and Debentures) Long-Term Management (Notes and Debentures) Capital ManagementCapital ManagementStage 2: Income- Expense Function Stage 2: Income- Expense Function Profit = Interest Income – Interest Expense – Provision for Loan Loss + Non-Interest Revenue – Non-Interest Expense - Taxes Profit = Interest Income – Interest Expense – Provision for Loan Loss + Non-Interest Revenue – Non-Interest Expense - Taxes
- 35. CAIIB – Super-Notes©M S Ahluwalia Sirf Business Do you have any questions or queries or some feedback to give? Just mark an email to [email protected]
- 36. CAIIB – Super-Notes©M S Ahluwalia Sirf Business For more Super-Notes: Click Here M S Ahluwalia, amongst other things, is a visual artist, blogger, blog designer and of course an MBA and Banker from New Delhi, India. To know more about him you may visit his blog-site: Estudiante De La Vida