credit rate risk management in banks-b.v.raghunandan
DESCRIPTION
Risk management techniques adopted in the banks in the light of floating rates of interestTRANSCRIPT
Unit 7
RBI Guideline on ALM
A Statement of Structural Liquidity
to capture maturity structure of the cash inflows and outflows
A Statement of Short-term Dynamic Liquidity
A Statement of Interest Rate Sensitivity
Credit Risk Rating CRR is a systematic classification of loans and
investments into standardized grades on the basis of the risk involved in each loan or investment.
risk in loan and investment portfolios alphabetical (A, B, C) numerical (a grading scale of 1 to10) alphanumerical (A1, A2, A3) mathematical signs of + and minus (A+, A-, B, B+,
B++) comprehensible, widely used and widely popular
Three Pillars of ALM Process
ALM Information Systems
ALM Organisation
ALM Process
ALM Information Systems
Management Information Systems Information Availability Accuracy Adequacy Expediency
ALM Organisation Structure ResponsibilitiesLevel of Top-Management Involvement.
ALM Process
Risk Parameters Risk Identification Risk Measurement Risk Management Risk Policies and
Tolerance levels
Liquidity Risk Management Maturity Profile as given in Appendix-1for measuring
the future cash flows of banks in different time buckets
-main focus should be on the short-term mismatches, viz., 1-14 days and 15-28 days
-mismatches upto one year would be relevant since these provide early warning signals of impending liquidity problems
-The mismatches (negative gap) during 1-14 days and 15-28 days in normal course may not exceed 20% of the cash outflows in each time bucket
Interest Rate Risks The Gap or Mismatch risk Gap analysis measures mismatches between
rate sensitive liabilities and rate sensitive assets An asset or liability is normally classified as rate
sensitive within the time interval under consideration, if there is a cash flow or
The interest rate resets/reprices contractually during the interval, it is contractually pre-payable or withdrawal before the stated maturities.
Objectives of Credit Risk Rating
internal parameters third party credit
rating enabling analysis at
two levels
At micro-level, evaluating every single loan
At the macro-level, determining, the risk-weighted capital as per Basel Norms
Interest Rate Risks..contd The Gap Reports should be generated
by grouping rate sensitive liabilities, assets and off balance sheet positions into time buckets
The Gap is the difference between Rate Sensitive Assets (RSA) and Rate Sensitive Liabilities (RSL) for each time bucket
Interest Rate Risks contd….The positive Gap indicates that it has
more RSAs than RSLs negative gap indicates that it has more
RSLs having a positive Gap (RSA>RSL)
benefits from rising interest ratesnegative Gap (RSL>RSA) benefits from
declining interest rates
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CRR Methodology
Developing the SystemWorking out operational Details Post Rating Functions
Credit Rate Portfolio Management Credit Rate Portfolio management involves
designing, operating, monitoring and churning the portfolio (of a bank or any other entity) of investment or loans on the basis of credit rating tagged on to the products contained in the portfolio.
managing the portfolio on the basis of credit rating assigned
credit rating should help in determining the asset quality
credit rating is dynamic standard deviation and correlation analysis
Asset – Liability Management in Banks
Information Infrastructure for ALMAsset Liability Management
Committee
-top-level committee operating under the Board of Directors with the CEO as a Member
Asset Liability Management Committee senior level management compositions and the size of the ALCO depend
upon the organisation Executive Chief heading ALCO major role in balance sheet planning setting the risk- return matrix and profile of the
organization determining the interest rates on deposits and loans determining the interest rates on deposits and loans
the sale of investments or purchase of securities.
Components of a Bank’s Balance Sheet Bank’s Liabilities Capital Reserves and
surplus Deposits Borrowings other Liabilities,
Provisions & Contingencies
Bank’s Assets Cash and Balances with
RBI Balances with other
Banks Money at Call and at
Short Notice Investments Advances Fixed Assets other Assets