Objective:

Background:

Asset and Liability Management is the process of managing the structure of a bank’s balance sheet in such a way that interest earnings are maximized within the expected risk level undertaken during the course of business. It manages various types of risks associated with assets and liabilities of a bank.

With liberalization in financial markets over the past many decades and integration of domestic market with external markets, bank’s operations have become more complex. Banks have the freedom to determine their own interest rates on deposits (FCY &LCY) and credit. Even the interest rates in Government securities and other tradable securities are also market-determined. Increasing volatility in market variables (such as interest rates, foreign exchange rates) and intensive competition among the financial institutions, financial markets and the consumers of financial services are becoming extremely sophisticated. It has resulted in greater uncertainties, in profitability and solvency of the bank. In the course of business, banks are exposed to several major risks, like – credit risk, interest rate risk, foreign exchange risk, liquidity risk and operational risk. These risk factors impose pressure on bank management in their endeavor to maintain an optimum balance among interest spread, profitability and liquidity of the bank. Banks are required to become much more selective in allocating available resources to their customers and selecting the products offered by the markets.

To effectively address the aforementioned risks, banks have to introduce a dynamic risk management system. Asset Liability Management is concerned with risk management. It provides a comprehensive and dynamic framework for measuring, monitoring and managing interest rate, foreign exchange and liquidity risk. It involves the assessment of various types of risks and altering the asset-liability portfolio in a systematic way in order to manage these risks.