CAIIB Super Notes: Bank Financial Management: Module D: Balance Sheet Management: Components of Assets and Liabilities in Bank’s Balance Sheet and their Management

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

CAIIB – SUPER NOTES
Bank Financial Management: Components of Assets and Liabilities in
Bank’s Balance Sheet and their Management

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

COMPONENTS OF A BANK’S
BALANCE SHEET
1.

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

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

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

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

Borrowings
• Refinance obtained from:
– RBI
– Other Commercial Banks
– Other Institutions and Agencies like IDBI, EXIM Bank of India, NABARD
etc.

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.

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

Investments
• Investments in
– Govt. Securities
– Approved Securities
– Shares
– Debentures and Bonds
– Subsidiaries and/or Joint Ventures
– Other investments

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

Fixed Assets
• Immovable properties
• Premises
• Furniture and Fixtures
• Hardware
• Motor Vehicles etc

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.

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.

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

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

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

WHAT IS ASSET LIABILITY MANAGEMENT?
2.

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

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

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

SIGNIFICANCE OF ASSET LIABILITY
MANAGEMENT
3.

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

PURPOSE AND OBJECTIVES OF
ASSET LIABILITY MANAGEMENT
4.

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

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

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

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

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

Objectives… another perspective
• Spread Management
• Loan Quality
• Generating Fee Income and Service Charges
• Control of Non-Interest Operating Expenses
• Tax Management
• Capital Adequacy

ALM AS CO-ORDINATED BALANCE
SHEET MANAGEMENT
5.

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

Do you have any questions or queries or some feedback to give?
Just mark an email to super.msahluwalia@yahoo.com

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

CAIIB Super Notes: Bank Financial Management: Module D: Balance Sheet Management: Components of Assets and Liabilities in Bank’s Balance Sheet and their Management

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

Viewers also liked

Viewers also liked (20)

Similar to CAIIB Super Notes: Bank Financial Management: Module D: Balance Sheet Management: Components of Assets and Liabilities in Bank’s Balance Sheet and their Management

Similar to CAIIB Super Notes: Bank Financial Management: Module D: Balance Sheet Management: Components of Assets and Liabilities in Bank’s Balance Sheet and their Management (20)

More from PsychoTech Services

More from PsychoTech Services (20)

Recently uploaded

Recently uploaded (20)

CAIIB Super Notes: Bank Financial Management: Module D: Balance Sheet Management: Components of Assets and Liabilities in Bank’s Balance Sheet and their Management