Asset Liability Management

Asset Liability Management (ALM) is a term pertaining to the managing and balancing the risks arising out of a bank’s assets viz. loans and liabilities viz. deposits. Various kinds of risks that banks have to manage include credit risks, market risks — which include interest rates — and liquidity risk management. In India, the banks have to follow the guidelines prescribed by the Reserve Bank of India for Asset Liability Management. The RBI rules, in turn, are based on the norms followed globally as prescribed by the Bank for International Settlements, a body of central banks from across the world.

Accordingly, there are three pillars of ALM as follows:

  1. Information systems
  2. Organization
  3. Processes

The Reserve Bank of India has mandated that the board of a commercial bank should have the overall responsibility for management of risks and should decide on the risk management policy of the bank and set limits for liquidity, interest rate, foreign exchange and equity price risks. For this, the banks are required to make a decision-making unit responsible for balance sheet planning from risks — return perspective, including the strategic management of interest rate and liquidity risks. This is called asset liability committee or ALCO, which includes the chief executive of the bank. ALCO considers the product pricing for both deposits and advances, desired maturity profile of the incremental assets and liabilities. ALCO is mandated to articulate the current interest rate view of the bank and bases its decisions for future business strategy on this view.

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