Asset Liability Management

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 ALM, credit risk and contingency risk also form a part of the ALM. The significance of ALM to the financial sector is further highlighted due to dramatic changes that have occurred in recent years in the assets (uses of funds) and liabilities (sources of funds) of banks. Thus a comprehensive ALM process aims on profitability and long term viability. The process of ALM has to be carried out against many balance sheet constraints, which amongst others include maintaining credit quality, meeting liquidity needs and acquiring required capital.

In India, the post liberalization witnessed a rapid industrial growth, which has further stimulated the growth in the fund raising activities. With the rise in the demand for funds, there has also been a remarkable shift in the features of the sources and uses of funds of the banks. However in the deregulated environment, competition has narrowed down the spread of banks. This not only has led to the introduction of discriminate pricing policies, but has also highlighted the need to match the maturities of the assets and liabilities. The changes in the profile of the sources and uses of funds are reflected in the borrowers’ profile, the industry profile and the exposure limits for the same, interest rate structure for deposits and advances, etc. The developments that have taken place since liberalization have led to a remarkable transition in the risk profile of the financial intermediaries.