Concept of Asset Liability Management (ALM)
This is basically management of the structure of the balance sheetAn accounting statement of a company’s assets and liabilities, provided for the benefit of shareholders and regulators. It gives a snapshot, at a specific point ..... (which comprises the assets and liabilitiesAny claim for money against the assets of a company, such as bills of creditors, income tax payable, debenture redemption, interest on secured and unsecured .....) in such a way that interest gain is maximized and risk is minimized. Most of the banks have an elaborate institutional arrangement to manage the Asset liability Mismatch. They manage the above as follows:
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Pricing large percentage of loans at variable (Floating Rate Regime) interest ratesWhen a person borrows some money from another person, this money comes at an interest which can also be called the "Opportunity Cost" of the ..... which actually move in tandem with the markets.
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Pricing the fixed interest rate loans at a huge markupA charge levied by a broker when selling securities from its own account to a customer. These sales as principals to a customer take place ....., this is usually done so that borrower is enticed to go for floating rate regime.
The above two generally take care of the Asset liability mismatch situation.
ALM Latest Developments:
In April 2010, the RBI has expressed a deep concern over the asset-liability mismatches (ALMs) in banks, which mainly arising out of lending to the infrastructure projects.
According to bankers present in a meeting, the main concern of the regulator is the huge pipeline of sanctions on which banks are sitting, mostly for core sector projects.
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Infrastructure loans are of 10-15 years duration, while most bank deposits have a tenure of one-two years. In the last financial year, not much disbursement took place, and now every bank is sitting on huge sanctions waiting to be disbursed. This is going to create a major problem, as banks won't have deposits of equal maturity.
