CKPIM Business Review

16

Authors: M Jayanthia and Dr. R Umarani

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.