An Analysis of Asset-Liability Management in Indian Banks

Abstract

Asset-Liability Management (ALM) is concerned with strategic management of assets (uses of funds) and liabilities (sources of funds) of banks, against risks caused by changes in the liquidity position of the bank, interest rates, and exchange rates, and against credit risk and contingency risk. An effective ALM technique aims to manage the volume, mix, maturity, rate sensitivity, quality and liquidity of the assets and liabilities as a whole so as to attain a predetermined acceptable risk/reward ratio. The purpose of ALM is to enhance the asset quality, quantify the risks associated with the assets and liabilities and further manage them, in order to stabilize the short-term profits, the long-term earnings and the long-run sustenance of the bank.

The Reserve Bank of India (RBI) has implemented the Basel II norms for the regulation of Indian banks, providing a framework for banks to develop ALM policies. The present study analyses asset-liability management in banks operating in India using the asset-liability guidelines provided by the Reserve Bank of India. The primary objective of the study was to compare the maturity gaps in public, private and foreign banks in the Indian banking industry.

Keywords: asset-liability management, Basel II, Reserve Bank of India, maturity gaps

JEL Classification: G21