Asset-Liability Management in Banks
Authors: M Jayanthia and Dr. R Umarani
Number of views: 295
Since financial sector reforms in India, banks are now operating in a fairly deregulated
environment and are required to determine on their own, interest rates on deposits and
advances. Intense competition coupled with increasing volatility in the interest rates exposed
the banks to several major risks in the course of their business viz, credit risk, interest rate
risk, foreign exchange risk, equity/ commodity price risk, liquidity risk and operational risks.
The banks need to be precisely aware of the risks to which they are exposed, and the tools
that are available for managing such risks. For a bank the risk management process primarily
involves Asset-Liability Management (ALM). ALM is an attempt to match the assets and
liabilities in terms of their maturities and interest rates sensitivities so that the risk arising
from such mismatches – mainly interest rate risk and liquidity risk- can be contained within
the desired limit. It is the task of ALM not to avoid risk, but to manage it, to keep different
types of risk within acceptable levels, whilst to sustain profitability. The objective behind all
these measures is to make banks fully prepared to face the emerging challenges.