ganeshan vanamamalai

7/30/2019 Ganeshan Vanamamalai

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Asset Liability Management

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INDEX

SR NO. TOPIC Page No.

1. EXECUTIVE SUMMARY 3

2. METHODOLOGY 4

3.INTRODUCTION TO INDIAN FINANCIAL

SYSTEM5

4. INTRODUCTION TO FINANCIAL MARKETS 6

5. INTRODUCTION TO FINANCIAL INSTRUMENTS 7

6. INTRODUCTION TO FINANCIAL SERVICES 8

7. INTRODUCTION TO FINANCIAL INSTITUTION 9

8. BACKGROUND OF CANARA BANK 10-13

9.INTRODUCTION TO ASSET LIABILITY

MANAGEMENT14

10. MEANING OF ASSET LIABILITY MANAGEMENT 15

11. THEORETICAL DEVELOPMENT 16-19

12. ALM PROCESS 20-24

13. ADMINISTRATION OF ALM 25

14. POLICY GUIDELINES 26-37


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15. TABULATION AND ANALYSIS OF DATA 38-39

16.

EMPIRICAL ANALYSIS OF ASSET LIABILITY

MANAGEMENT OF MUTUAL TRUST BANK

LTD

40-50

17.FINDINGS OF ASSET /LIABILITY

MANAGEMENT51

18. LIABILITY MANAGEMENT AND ITS IMPACTON PROFITABILITY

52-54

19. CONCLUSION 55

20. RECOMMENDATION 56

21. BIBLIOGRAPHY 57


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EXECUTIVE SUMMARY

Asset liability management (ALM) is an overall risk management technique

forpension funds. ALM requires the board to formulate guidelines for its strategy

on contribution and indexing levels, and its attitude to risk. ALM is based on

stochastic simulation and is used as a basis for decisions on the distribution of

future contributions, funding, and indexing levels. Practicing ALM requires an

assets and liabilities committee (ALCO). An ALCO consists of seniorpensionfund management, with the chief risk officer as chairman. The committee converts

the guidelines into formal proposals on the investment strategy and the

contributions and indexing policies.

ALM does not predict the future, but it gives insight into the possible risks

a pension fund is exposed to and how to handle them.

An ALM model should be as parsimonious and uncomplicated as possible. The

purpose of such models is to act as a tool to help management understand what is

really going on, and how to reach responsible and internally consistent decisions.
http://www.qfinance.com/dictionary/liability-managementhttp://www.qfinance.com/dictionary/risk-managementhttp://www.qfinance.com/dictionary/pension-fundhttp://www.qfinance.com/dictionary/pension-fundhttp://www.qfinance.com/dictionary/pension-fundhttp://www.qfinance.com/dictionary/pension-fundhttp://www.qfinance.com/dictionary/pension-fundhttp://www.qfinance.com/dictionary/pension-fundhttp://www.qfinance.com/dictionary/pension-fundhttp://www.qfinance.com/dictionary/pension-fundhttp://www.qfinance.com/dictionary/risk-managementhttp://www.qfinance.com/dictionary/liability-management


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METHODOLOGY

PRIMARY DATA

I have not collected any primary data for this project.

SECONDARY DATA

I have collected secondary data for the project from the books which are

provided by the Library and from the websites related to the Mutual Funds and

SBI Mutual Funds.


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INTRODUCTION TO INDIAN FINANCIAL SYSTEM

The economic development of a nation is reflected by the progress of the

various economic units, broadly classified into corporate sector, government

and household sector. While performing their activities these units will be

placed in a surplus/deficit/balanced budgetary situations.

There are areas or people with surplus funds and there are those with adeficit.A

financial system or financial sector functions as an intermediary and facilitates

the flow of funds from the areas of surplus to the areas of deficit. A Financial

System is a composition of various institutions, markets, regulations and laws,practices, money manager, analysts, transactions and claims and liabilities.

Financial System;

The word "system", in the term "financial system", implies a set of complex and

closely connected or interlined institutions, agents, practices, markets,transactions, claims, and liabilities in the economy. The financial system is

concerned about money, credit and finance-the three terms are intimately related

yet are somewhat different from each other. Indian financial system consists of

financial market, financial instruments and financial intermediation.


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INTRODUCTION TO FINANCIAL MARKETS

A Financial Market can be defined as the market in which financial assets are

created or transferred. As against a real transaction that involves exchange of

money for real goods or services, a financial transaction involves creation or

transfer of a financial asset. Financial Assets or Financial Instruments represents

a claim to the payment of a sum of money sometime in the future and /or

periodic payment in the form of interest or dividend.

Money Market

The money market ifs a wholesale debt market for low-risk, highly-liquid,

short-term instrument. Funds are available in this market for periods ranging

from a single day up to a year. This market is dominated mostly by government,

banks and financial institutions.

Capital Market

The capital market is designed to finance the long-term investments. The

transactions taking place in this market will be for periods over a year.

Forex Market

The Forex market deals with the multicurrency requirements, which are met

by the exchange of currencies. Depending on the exchange rate that is

applicable, the transfer of funds takes place in this market. This is one of the

most developed and integrated market across the globe.


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INTRODUCTION TO FINANCIAL INSTRUMENTS

A financial instrument is a trad-able asset of any kind, either cash; evidence of

an ownership interest in an entity; or a contractual right to receive, or deliver,

cash or another financial instrument.

According to IAS 32 and 39, it is defined as 'any contract that gives rise to a

financial asset of one entity and a financial liability or equity instrument of

another entity'.

Financial instruments can be categorized by form depending on whether theyare cash instruments or derivative instruments:

Cash instruments are financial instruments whose value is determineddirectly by markets. They can be divided into securities, which are readily

transferable, and other cash instruments such as loans and deposits, where

both borrower and lender have to agree on a transfer.

Derivative instruments are financial instruments which derive their valuefrom the value and characteristics of one or more underlying entities such as

an asset, index, or interest rate. They can be divided into exchange-traded

derivatives and over-the-counter (OTC) derivatives.

Alternatively, financial instruments can be categorized by "asset class"

depending on whether they are equity based (reflecting ownership of the issuing

entity) or debt based (reflecting a loan the investor has made to the issuing

entity). If it is debt, it can be further categorized into short term (less than one

year) or long term.

Foreign Exchange instruments and transactions are neither debt nor equity

based and belong in their own category.
http://en.wikipedia.org/wiki/International_Accounting_Standardshttp://en.wikipedia.org/wiki/IAS_39http://en.wikipedia.org/wiki/Security_(finance)http://en.wikipedia.org/wiki/Loanshttp://en.wikipedia.org/wiki/Depositshttp://en.wikipedia.org/wiki/Derivative_(finance)http://en.wikipedia.org/wiki/Derivative_(finance)#OTC_and_exchange-tradedhttp://en.wikipedia.org/wiki/Derivative_(finance)#OTC_and_exchange-tradedhttp://en.wikipedia.org/wiki/Derivative_(finance)#OTC_and_exchange-tradedhttp://en.wikipedia.org/wiki/Ownershiphttp://en.wikipedia.org/w/index.php?title=Foreign_Exchange_instruments&action=edit&redlink=1http://en.wikipedia.org/w/index.php?title=Foreign_Exchange_instruments&action=edit&redlink=1http://en.wikipedia.org/wiki/Ownershiphttp://en.wikipedia.org/wiki/Derivative_(finance)#OTC_and_exchange-tradedhttp://en.wikipedia.org/wiki/Derivative_(finance)#OTC_and_exchange-tradedhttp://en.wikipedia.org/wiki/Derivative_(finance)#OTC_and_exchange-tradedhttp://en.wikipedia.org/wiki/Derivative_(finance)http://en.wikipedia.org/wiki/Depositshttp://en.wikipedia.org/wiki/Loanshttp://en.wikipedia.org/wiki/Security_(finance)http://en.wikipedia.org/wiki/IAS_39http://en.wikipedia.org/wiki/International_Accounting_Standards


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INTRODUCTION TO FINANCIAL SERVICES

The financial services sector in India has witnessed a fundamental

transformation since the country was liberalized. India, in the last few years, has

emerged as the one of the most rapidly growing economies across the globe.

The financial services market is growing rapidly, and there is significant

potential for further growth.

The financial services sector includes broking firms, investment services,

national banks, private banks, mutual funds, car and home loans, and equity

market

Financial Services in India - Key Drivers

Indias high savings rate offers significant opportunity to put resources into the

financial markets. The country has a favourable demographic profile with a

large segment of the population under 30 years. The Census 2011 shows that

56.9 per cent of Indias total population comes in the age group 15-59 years.

The country will witness a sharp decline in the dependency ratio over the next

thirty yearswhich will be a great dividend. As the dividend begins to pay off,

with the working age-group population rising disproportionately over the next

two decades, the savings rate is likely to rise further, according to Mr Pranab

Mukherjee, Union Finance Minister

A large, untapped domestic market, with a huge growth potential Presence of financial and capital market mechanisms A large and continuously growing intellectual capital Healthy rate of economic growth


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INTRODUCTION TO FINANCIAL INSTITUTION

The need for setting aside adequate long term funding to finance industrial

development was felt when India embarked on its model of planned growth

with ambitious growth targets. It was perceived that the banks would not be able

to set aside such quantum of long term funding as they were mainly financed by

short-term deposits. Moreover, specialized financial institutions would be able

to develop expertise in project financing, which was lacking among the banks.

The banks were to concentrate on working capital financing.

National and state financial institutions were set up to provide such funding to

large, medium and small industry. Further a number of specialized institutions

were also set up to take care of specific areas or sectors. These institutions were

provided access to low cost long-term funds from the banking system for this

purpose. The specialized financial institutions mainly act as refinancing

institutions in those particular sectors.

Banks and financial institutions in case of large loans generally resort to

collective lending. Collective funding takes the form of consortium lending or

credit syndication. Both types of funding are similar with small differences. One

of the main differences being the terms and conditions under which the loan is

sanctioned. In consortium lending the terms and conditions are the same for all

participating institutions whereas in the case of credit syndication each

participating institution can stipulate its own terms and conditions


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BACKGROUND OF CANARA BANK

Canara Bank is a state-owned financial services company in India. It was

established in 1906, making it one of the oldest banks in the country. As on

2009 November, the bank had a network of 3057 branches, spread

across India. The bank also has offices abroad in London, Hong Kong, Moscow,

Shanghai, Doha, and Dubai. Ammembal Subba Rao Pai, a philanthropist,

established the Canara Hindu Permanent Fund in Mangalore, India, on 1 July

1906. The bank changed its name to Canara Bank Limited in 1910 when it

incorporated. The Government of India nationalized Canara Bank, along with

13 other major commercial banks of India, on 19 July 1969. In 1976, Canara

Bank inaugurated its 1000th branch. In 1983, Canara Bank opened its first

overseas office, a branch in London. In 1985, Canara Bank acquired Lakshmi

Commercial Bank in a rescue. In 1985, Canara Bank established a subsidiary in

Hong Kong, Indo Hong Kong International Finance. In 1996 Canara Bank

became the first Indian Bank to get ISO certification for Total Branch

Banking for its Seshadripuram branch in Bangalore. Canara Bank has now

stopped opting for ISO certification of Branches. In 2008-9, Canara Bank

opened its third foreign operation, this one a branch in Shanghai.


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INTRODUCTION

Widely known for customer centricity, Canara Bank was founded by Shri

Ammembal Subba Rao Pai, a great visionary and philanthropist, in July 1906, at

Mangalore, then a small port in Karnataka. The Bank has gone through the

various phases of its growth trajectory over hundred years of its existence. Over

the years, the Bank has been scaling up its market position to emerge as a major

'Financial Conglomerate' with as many as nine subsidiaries/sponsored

institutions/joint ventures in India and abroad.

As at March 2011, the Bank has further expanded its domestic presence, with

3253 branches spread across all geographical segments. Keeping customer

convenience at the forefront, the Bank provides a wide array of alternative

delivery channels that include 2216 ATMs, covering 846 centers. With 100%

CBs, the Bank offers technology banking, such as, Internet Banking and Funds

Transfer through NEFT and RTGS across all branches The Bank has further

enhanced its basket of new tech-products for customer convenience like CanaraGift Cards, Canara Campus Card, Canara Platinum Card, Bills Desk for utility

bills payment, Cash withdrawal at Point of Sale (POS) machines at Merchant

Establishments, VISA money transfer and the ASBA (Application Supported by

Blocked Amount) facility during FY11.


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OBJECTIVES

The main objective of Canara Bank is to serve as the apex institution for term

Finance for industry in India. Its objectives include To emerge as a Best

Practices Bank by pursuing global benchmarks in profitability, operational

efficiency, asset quality, risk management and expanding the global reach.

To provide quality banking services with enhanced customer orientation, higher

value creation for stakeholders and to continue as a responsive corporate social

citizen by effectively blending commercial pursuits with social banking.

FUNCTION

The Canara Bank has been established to perform the following functions- To

grant loans and advances to IFCI, SFCs or any other financial institution by

way of refinancing of loans granted by such institutions which are repayable

within 25 year? To grant loans and advances to scheduled banks or state co-

operative banks by way of refinancing of loans granted by such institutions

which are repayable in 15 years? To grant loans and advances to IFCI, SFCs,

other institutions, scheduled banks, state co-operative banks by way of

refinancing of loans granted by such institution to industrial concerns for

exports. To discount or rediscount bills of industrial concerns. To underwrite or

to subscribe to shares or debentures of industrial concerns. To subscribe to or

purchase stock, shares, bonds and debentures of other financial institutions. To

grant line of credit or loans and advances to other financial institutions such as

IFCI, SFCs, etc. To grant loans to any industrial concern. To guarantee deferred

payment due from any industrial concern. To provide consultancy and merchant

banking services in or outside India.


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Subsidiaries

The following are the subsidiaries of Canara Bank.

Can fin Homes Limited

Can bank Factors Limited

Can bank Venture Capital Fund Limited

Can bank Computer Services Limited

Canara Bank Securities Limited

Canara Robeco Asset Management Company Limited

Can bank Financial Services Limited

Canara HSBC Oriental Life Insurance Company Limited

Capital Structure and Operations

As on March 31, 2011, the authorized Capital of Canara bank is Rs.3000crores.

Issued, subscribed and paid up share capital was Rs.443 crores.Reserves were

Rs.17941 crores.

Branch Network

Canara Bank has a strong pan India presence with 3253 branches and 2216

ATMs,catering to all segments of an ever growing clientele base of about 3.87

crore. Across the borders the Bank has 4 branches, one each at London, Hong

Kong, Shanghai and Leicester. Canara Bank is recognized as a leading financial

conglomerate in India, with as many as nine subsidiaries/sponsored

institutions/joint ventures in India and abroad.


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INTRODUCTION TO ASSET LIABILITY MANAGEMENTAsset Liability management is very much importance for a bank. Banks are

making profit from various services provided to their customers. Banks profit is

functions of revenue earned form the assets and the cost incurred for the liability

that has occurred for acquiring funds for financing the assets. Proper

management of bank assets and liabilities can increase the profitability of the

bank. The fuming of these loans and advances and investments comes from

liability. So the earnings of a bank ultimately depend on liabilities. Banks have

to incur costs for its liability. For example, they have to give interest to the

public and also to the lending institutions. So banks liability is not cost free.

Efficient use of liabilities depends on effective liability management. Effective

liability management indicates that the cost of the liability will be less and also

it will less volatile. But less cost and less volatility is inversely related. If we

give our concentration only to less cost fund, then the funds will be volatile.

ALM has mainly two components. One is asset management and the other is

liability management. Asset management deals with how a manager can

appropriately handle the assets of the bank and efficiently use the profitable

opportunities. On the other hand, liability management deals with the liability

side of the balance sheet. A banks earning or spread is the difference between

the revenue generated mainly from the asset side of the business and expense

generated mainly from the liability side of the business. The foal of liability

management is to gain control over the banks funds sources.


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MEANING OF ASSET LIABILITY MANAGEMENT

Asset-liability management (ALM) is a term whose meaning has evolved. It is

used in slightly different ways in different contexts. ALM was pioneered by

financial institutions, but corporations now also apply ALM techniques.

Traditionally, banks and insurance companies used accrual accounting for

essentially all their assets and liabilities. They would take on liabilities, such as

deposits, life insurance policies or annuities. They would invest the proceeds

from these liabilities in assets such as loans, bonds or real estate. All assets and

liabilities were held at book value. Doing so disguised possible risks arising

from how the assets and liabilities were structured.


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THEORETICAL DEVELOPMENT

1. ASSET LIABILITY MANAGEMENT POLICY:

Asset Liability Management (ALM) is an integral part of Bank Management;

and so, it is essential to have a structured and systematic process for manage the

Balance Sheet. Banks must have a committee comprising of the senior

management of the bank to make important decisions related to the Balance

Sheet of the Bank. The committee, typically called the Asset Liability

Committee (ALCO), should meet at least once every month to analysis, review

and formulate strategy to manage the balance sheet. In every ALCO meeting,

the key points of the discussion should be minted and the action points should

be highlighted to better position the banks balance sheet.

Asset Liability management is one of the pillars of banking- in fact the concept

of Asset Liability management is at the core of financial business. The

importance of appropriate and effective Asset Liability management has always

been outlined by regulators, market operatives and individuals and yet we hear

of instances of failures in Asset Liability management mechanism- the most

notable amongst them the Barings Bank and Long Term Capital Management.

The Asset Liability Risk Management system essentially focuses on risks that

arise out of liquidity and interest rate mismatches and management of Capital

Adequacy. This aspect of risk management has become increasingly important

due to volatility that arises from a deregulated market- driven environment.

Here to the policy guideline, outlines all the areas that are required to be

covered through preciously laid down statement on Capital Adequacy,


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borrowing limits commitment limits, loan deposit ratios and medium term

funding ratio. The organization structure and job responsibilities are also

outlined and the globally accepted ALCO or The Asset Liability Committee

process is detailed. The ALCO process ensures that the management is

constantly apprised of the risks arising out of liquidity and interest rate

mismatch and step can be taken through this continuous monitoring of risk to

manage it effectively.

2. ASSET LIABILITY MANAGEMENT POLICY EFFICIENT

FRONTIER:

The five step ALMEF process:

1. Economic evaluation of the balance sheet which considers the ongoing nature

of the business.

2. Evaluation of capital markets employing a stochastic economic simulation

model,

3. Surplus optimization utilizing a multi-time period non-linear optimization

model which develops efficient frontier portfolios that explicitly consider the

liability cash flows and characteristics, as well as being dynamically linked to

changing capital market scenarios.

4. Sensitivity testing of key asset, liability and capital market factors. And


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5. A performance measurement system that culminates in a liability benchmark

index. The process loops back to step one at various stages and is reevaluated

on an ongoing basis. A diagram of the process is provided below. The result is a

prospective investment policy and strategy that considers not only the liability

profile for the existing balance, but also how the balance sheet will look going

forward.

Over the last few years the Bangladeshs financial markets have witnessed wide

ranging changes at fast pace. Intense competition for business involving both

the assets and liabilities, together with increasing volatility in the domestic

interest rates as well as foreign exchange rates, has brought pressure on the

management of banks to maintain a good balance among spreads, profitability

and long-term viability. These pressures call for structured and comprehensive

measures and not just ad hoc action. The Management of banks has to base their

business decisions on a dynamic and integrated risk management system and


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process, driven by corporate strategy. Banks are exposed to several major risks

in the course of their business - credit risk, interest rate risk, foreign exchange

risk, equity / commodity price risk, liquidity risk and operational risks.


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ALM PROCESS

The scope of ALM function can be described as follows:

Liquidity risk management Management of market risks (Including Interest Rate Risk) Funding and capital planning Profit planning and growth projection

Trading risk managementThe guidelines given in this note mainly address Liquidity and Interest Rate

risks. The Asset Liability Committee (ALCO) is responsible for balance sheet

(asset liability) risk management. Managing the asset liability is the most

important responsibility of a bank as it runs the risks for not only the bank, but

also the thousands of depositors who put money into it.

The responsibility of Asset liability Management is on the Treasury Department

of the bank. Specifically, the Asset liability Management (ALM) desk of the

Treasury Department manages the balance sheet. The results of balance sheet

analysis along with recommendation is placed in the ALCO meeting by the

Treasurer where important decisions are made to minimize risk and maximize

returns. Typically, the organizational structure looks like the following:


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ASSET LIABILITY STRUCTURE OF A BANK:

To understand how a bank operates, first we examine the bank balance sheet,

which lists its assets and liabilities. As the name implies, this list balance, that

is, it has the characteristics that:-

Total Assets = Total Liabilities + Capital

Furthermore, a banks balance sheet lists sources of banks funds (liabilities)

and uses to which they are pit (assets). Banks obtain funds by borrowing and byissuing other liabilities such as deposits. They then use these funds to acquire

assets such as securities and loans. The revenue that banks receive from their

holdings of securities and loans covers the expenses of issuing liabilities and

ideally yields a profit.

Asset Securitization:

Against the backing of the secured assets banks issue security paper to raise

funds. Securitizing assets requires a bank to set aside a group of income earning

assets such as mortgages or consumer loans and to sell securities against

those assets in the open market. For example, a bank disbursed loan for two

years, so for two years these loans are illiquid. Bank can issue stock for thatamount and for two years. The result is that they raise funds. The important

issues are that

Loans have to be good loans. Not deposit collection is necessary for that purpose. Banks loan and revenues can be increased.


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So, we can say, securitization is the transformation of illiquid assets into

security that is tradable and further liquid. The important aspects are

Here the institution has to be rated by the credit rating company. Securitization has to be done from similar loans.

When banks are offering security, they offer return to investor less than their

loan interest but higher than the deposit return.

4.2 Benefits of Securitization:

Additional sources of fund: Bank raises funds other than deposit andnon-deposit items.

Positive effect on balance sheet: Due to of security backed by goodloans bank raises funds, part of which is kept as cash balance and most of

which is disbursed further as loan for good loan request and for further

transformation. So banks risk weighted assets as well as capital adequacy

requirements decrease. The result is that banks earning increases.

No opportunity cost of fund: Bank does not need to incur anything suchas borrowing or deposit collection for raising the funds. So there does not

involve any cost.

Multiple effects for the development of the economy: Bysecuritization, a bank can raise funds without gong to deposit and non

deposit sources. This increases the banks liquidity and profitability. By

this process, bank can fund various prospective investment opportunities.

It increases more opportunity for the community and helps in increasing

the per capita income. Security will not only increase liquidity and reduce

pressure on the balance sheet of the bank, but also help to increase the

supply of good scripts in the security market. Thus, it ensures the

financial development of the country.


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Risk Involved:

If backed assets become bad loans then banks will loss those loans as well as

has to pay principal and interest tot the investors who bought the security.

Any loans pledged behind these securities must be held on the banks balance

sheet until the security papers reach maturity, which decreases the overall

liquidity of the banks loan portfolio. Moreover, with these loans remaining on

its balance sheet the bank must meet the regulatory imposed capital

requirements to back the loans.

Loan Selling:

It is the selling of some loan to some other intuitions or individuals. It generates

cash but it does not require issuing new security paper.

Loan selling is both with recourse i.e. if the buyer of the loan become unable to

get the money back from the borrower then the seller of the loan will be liable.It may be without recourse i.e. the buyer of the loan will not get protection in

case of being unable to collect the loan. The advantages of loan selling are it

reduces risk and reduces the pressure on loan. The disadvantage of the loan

selling is that due to market pressure; if one sells the good loans, then it will

create adverse impact on the financial position of the bank. Loan selling is of

following types

(a) Loan participation:

First the bank is giving loan and then asks some other parties to participate in

the process. The participator must the outsider. The participator does not

involve in the disbursement of the loan. The buyer of participation will face a

substantial loss if the selling institution or the borrower fails.


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(b) Loan striping:

A loan strip is short dated pieces of a longer-term loan and often matures

quicklya few days or weeks. It is striping some parentage of the loan and sells

it to some other institutions. The purchasing institution will be liable for the

collection of that portion of the loan. The difference between participation and

striping is that in striping a relationship between the buyer of the loan and the

borrower creates.

(c) Standby Letter of Credit:

It is a financial guarantee in the form of letter of credit. It is mainly practiced in

the North American countries. It is made of r two purposes. Performance bond

guarantee: in the developed market, nobody will purchase the security paper of

any institution without guarantee given by bank.

(d) Default Guarantee:

Through it, banks are giving guarantee that if its customer defaults, then the

bank will repay the money.

This note lays down broad guidelines in respect of interest rate and liquidity

risks management systems in banks which form part of the Asset-Liability

Management (ALM) function. The initial focus of the ALM function would be

to enforce the risk management discipline viz. managing business after

assessing the risks involved. The objective of good risk management

programmes should be that these programmes will evolve into a strategic tool

for bank manageme


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ADMINISTRATION OF ALMThere is a separate department to manage asset and liability. The treasury

department maintains asset and liability of a bank.

1 ORGANIZATIONAL STRUCTURE:

CEO / MANAGING

DIRECTOR

Head of

Consumer

Banking

Head of

Consumer

Banking

Head of

Treasury

Head of

Corporate

Banking

Head of

Finance

Head of

Credit

Head of

Operations

Head of Asset

Liability Mgt

(ALM)

Money Market

Dealers

Treasury: Responsible for ALM


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POLICY GUIDELINES:

1 Responsibility of the Board of Directors:

The overall responsibility of establishing broad business strategy,significant policies and understanding significant risks of the bank rests

with the Board of Directors.

Through the establishment of Audit Committee the Board of Directorscan monitor the effectiveness of internal control system. Bangladesh

Bank has already instructed the banks to establish Audit Committee.

The internal as well as external audit reports will be sent to the boardwithout any intervention of the bank management and ensure that the

management takes timely and necessary actions as per the

recommendations

Have periodic review meetings with the senior management to discuss theeffectiveness of the internal control system of the bank and ensure that

the management has taken appropriate actions as per the

recommendations of the auditors and internal control.


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2 Responsibility of the Senior Management:

In setting out a strong internal control framework within the organizationthe role of Managing Director is very important. He/she will establish a

Management Committee (MANCOM), which will be responsible for the

overall management of the Bank

With governance & guidance from the Board of Directors the MANCOMwill put in place policies and procedures to identify, measure, monitor

and control these risks.

The MANCOM will put in place an internal control structure in thebanking organization, which will assign clear responsibility, authority and

reporting relationship.

The MANCOM will monitor the adequacy and effectiveness of theinternal control system based on the banks established policy &

procedure.

The MANCOM will review on a yearly basis the overall effectiveness ofthe control system of the organization and provide a certification on a

yearly basis to the Board of Directors on the effectiveness of Internal

Control policy, practice and procedure


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3 ALCO & Asset Liability Management (ALM):

The banks asset liability management is monitored through ALCO. The

information flow in the ALCO can be diagramed as below:

The Committee:

As the Treasury Department is primarily responsible for Asset Liability

Management, ideally the Treasurer (or the CEO) is the Chairman of the ALCO

committee. The committee consists of the following key personnel of a bank:

- Chief Executive Officer / Managing Director

- Head of Treasury / Central Accounts Department

- Head of Finance


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- Head of Corporate Banking

- Head of Consumer Banking

- Head of Credit

- Chief Operating Officer / Head of Operations

The committee calls for a meeting once every month to set and review strategies

on ALM.

Key Agendas:

ALCO attends the following issues while managing Balance Sheet Risks:

i) Review of actions taken in previous ALCO.

ii) Economic and Market Status and Outlook.

iii) Liquidity Risk related to the Balance Sheet.

iv) Review of the price / interest rate structure.

v) Actions to be taken.


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4 Policy Recognition and Assessment:

An effective internal control system continually recognizes and assessesall of the material risks that could adversely affect the achievement of the

banks goals.

Effective risk assessment must identify and consider both internal andexternal factors. Internal factors include complexity of the organization

structure, the nature of the Banks activities, the quality of personnel,

organization changes and also employee turnover. External factors

include fluctuating economic conditions, changes in the industry, socio-

political realities and technological advances.

Risk assessment by Internal Control System differs from the business riskmanagement process, which typically focuses more on the review of

business strategies developed to maximize the risk/reward trade-off

within the different areas of the bank. The risk assessment by Internal

Control focuses more on compliance with regulatory requirements, social,

ethical and environmental risks those affect the banking industry.

5 ALCO Paper:

An ALCO paper is produced every month (usually by the Finance Department)

which covers various issues related to Balance Sheet risk management. The

ALCO paper is prepared before the ALCO meeting as the committee reviews

the ALCO paper to set strategies. An ALCO paper typically covers the

following:


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6 The ALCO Process:

The ALCO process or the ALCO meeting reviews the ALCO paper along with

the prescribed agendas. The Chairman of the committee, that is the Treasurer or

the CEO, raises issues related to the balance sheet. Treasurer suggests whether

the interest rates need to be reprised, whether the bank needs deposits or

advance growth, whether growth of deposits and advances should be on short or

longer term, what would be the transfer price of funds among the divisions,

what kind of interbank dependency the bank should have etc. In short, all issues

related to liquidity and market risk are covered. Based on the analysis and views

of the Treasurer, the committee takes decisions to reduce balance sheet risk

while maximizing profits.

7 Action Points:

The ALCO takes decisions for implementation of any/all of the following

issues:

Need for appropriate Deposit mobilization or Asset growth in rightbuckets to optimize asset-liability mismatch.

Cash flow (long/short) plan based on market interest rates and liquidity. Need for change in Fund Transfer Pricing (FTP) &/or customer rates in

line with strategy adapted.

Address to the limits that are in breach (if any) or are in line of breachand provide detailed plan to bring all limits under control.

Address to all regulatory issues that are under threat to non-compliance.


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8 Special ALCO Meeting:

Apart from the regular monthly meeting, ALCO meeting is also called as and

when any contingent situations arise. A very good example may be, during the

Eid period. At those times, market liquidity dries out and overnight rates shoot

up. Banks who are net borrowers from the market may be exposed to huge

interest expense the high rates in the market. This is an ideal time for a special

ALCO meeting, where the committee may take critical decisions for deposit

mobilization on an urgent basis for reducing dependency from the market.

9 Control Activities and Segregation of Duties:

Effective internal control system requires that an appropriate controlstructure is set up with control activities defined at every business level,

i.e. top level review; appropriate activity controls for different

departments or divisions; physical controls; checks for compliance with

exposure limits and follow-up on non-compliance; a system for approvals

and authorizations and system pf verification and reconciliation.

Control activities involve two steps: (1) the establishment of controlpolicies and procedures and (2) verification that the control policies and

procedures are being complied with.

Senior management should ensure that adequate control activities are anintegral part of the daily functions of all relevant personnel; this enables

quick response to changing conditions and avoids unnecessary costs.

Control activities are most effective when they are viewed by


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management and all other personnel as an integral part of daily activities

rather than an addition to it.

One of the most important aspects of internal control system requires thatthere is appropriate segregation of duties and personnel are not assigned

conflicting responsibilities.

Furthermore the employees must also be provided with necessaryauthority, which will enforce segregations of duties.

For employees to carry out their responsibilities properly each employeeshould have appropriate job description

Areas of potential conflicts of interest should be identified, minimized and

subject to careful independent monitoring

10 Establishment of a Compliance Culture:

A bank is said to have strong compliance culture when throughout theorganization employees are encouraged to comply with policies,

procedures and regulation. Even an individual at the lowest echelon

should be empowered to speak up without the fear of reprisal if she/he

identifies something non-compliant.


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The board of directors and the senior management must establish acompliance culture within the banking organization that emphasizes and

demonstrates to all levels of personnel the importance of internal control.

In order to establish a compliance culture the board of directors andsenior management must promote a high ethical and integrity standard.

In reinforcing ethical values the banking organization should avoidpolicies and practices that provide inadvertent incentive for inappropriate

activities. Examples of such policies and practices include undue

emphasis on performance targets or operational results, particularly short

term ones that ignore long term risks and compensation schemes that

overly depend on short term performance. The board of directors and the

senior management may establish a Code of Ethics that all levels of

personnel must sign and adhere to.

The policy statement of Asset Liability Management:

The policy statement of Asset Liability Management is laid out for the

followings and annual review would be carried out taking into the conclusion of

changes in Balance Sheet and market dynamics.


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a) Advance Deposit Ratio (AD):

The bank shall maintain Advance deposit ratio in the following manner:

Advance Deposit ratio should be fixed as per guidelines and norms set bythe Central Bank of the country. At present the Advance Deposit ratio is

84 %.

However, the Loan Deposit ratio of the bank should go up to 110% as perguidelines set in managing core risks in banking, Asset Liability

Management. (ALM)

To calculate the Advance Deposit ratio, The formula given by the CentralBank to be followed

The Loan Deposit ratio = Loan/(Deposit + Capital + Funded Reserve)

b) Wholesale Borrowing Guidelines (WBG):

To borrow from wholesale market (or interbank market), the capacity and

amount to be determined considering the following factors.

The size and turnover of the local market; our share of that market The credit limits imposed by our counter parties.

Beside these, the following factors are also to be considered at the time of fixing

the amount of borrowing.

Balance sheet size of the bank. Historical trend of market liquidity.


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Credit Rating of the bank (to understand counter party banks limits onthe concerned bank).

Stability of liquidity and interest rates of the market.

c) Commitments:

A register regarding sanction of loans to be introduced. A clause to be inserted in the sanction advice stating the time of taking

disbursement. Failing to avail the loan within disbursement time, loan

automatically cancelled.

During the continuation of time for disbursement, undrawn disbursementamount to be calculated which will be trend as commitment.

Commitment amount to be considered for raising funds for the bankalong with other factors.

d) Medium Term Funding Ratio (MTF):

Central banks guidelines regarding Medium term Funding (MTF) to befollowed.

Medium term funding ratio to be maintain in conformity with Bangladeshbanks directives.

e) Maximum Cumulative Outflow (MCO):

Maximum cumulative out flow to be maintained as per Central banks

directives and guidelines.


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f) Liquidity Contingency Plan:

Liquidity is to be maintained as per Central Banks directives. However, the

bank will place the following percentage of its customer deposits with the

central bank.

CRR 4.5% of average Time and Demand as at two Months prior period

(Interest free)

SLR 13.5% of average Time and Demand deposits as at two months prior

period

Foreign currency balance held with central bank will not qualify for CRR.

g) Capital Adequacy Ratio:

The bank will maintain a minimum capital on its risk-weighted assets. At

present, the minimum capital requirement is at 9 %.


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TABULATION AND ANALYSIS OF DATA:The collected data have been tabulated after collection. Through tabulation data

are condensed into necessary tables. After tabulation data are used for betteranalysis.

Formula Used in Empirical Analysis of Asset Liability Management:

Total Assets = Total Liabilities + Capital The Loan Deposit ratio = Loan/(Deposit + Capital + Funded Reserve) Net interest income (NII) = Interest incomeinterest Expense Net interest Margin (NIM) =Net Interest Income

Earning Assets

Rate sensitive Assets (RSA) = Rate Sensitive Liabilities (RSL) Interest sensitive gap = interest sensitive assets interest sensitive

liabilities

GAP=RSA- RSL Relative Gap (RG) = Gap

Total Asset

NW = AL NW = A L Positive duration gap =Asset durationLiability duration>0 Negative duration gap =Asset durationLiability duration


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Return on Equity (ROE) = Net Income / Equity (NI/E) Return on Earning Assets (ROEA) = Net Income / Earning Assets

(NI/EA)

Return on Loans (ROL) = Interest Income / Loans (II/L) Interest Income / Earning Assets (II/EA) Net Interest Income / Earning Assets (NII/EA) Interest Margin (IM) = Return on Fund - Cost of Fund (IM)


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EMPIRICAL ANALYSIS OF ASSET LIABILITY

MANAGEMENT OF MUTUAL TRUST BANK LTD.

To analyze the asset liability management I have analyzed of a banks Net

Interest Income, Net Interest Margin (Nim), Gap, Duration, Interest Sensitivity

Ratio, Liquidity Ratio. And tried to compare with banks profitability to find

that whether there have any relations or not.

Analysis is given below:

(a) NET INTEREST INCOME (NII):

We know: Net interest income (NII) = Interest incomeInterest Expense

Table I: Net Interest Income (Taka in

Millions)

YearInterest

Income

(-) Interest

ExpenseNII

2008 1686.87 1258.70 430.17

2007 1139.96 820.68 319.27

2006 723.09 447.70 245.38

2005 457.84 330.72 127.12

(Sources: Annual Report of MTBL)


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Here NII is increasing day by day because increase in interest rates earned on

asset, otherwise increase in interest paid on funding will decrease NII.

(b) NET INTEREST MARGIN (NIM):

We Know: Net interest Margin (NIM) =Net Interest Income

Earning Assets

Table 2: Net Interest Margin (Taka in

Millions)

Year Net Interest Income Earning Assets NIM

2008 430.17 17419.05 2.46%

2007 319.27 14779.16 2.16%

2006 245.38 8300.61 2.95%

2005 127.12 5369.61 2.36%



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Here NIM was highest in 2006, after that gone down in 2007 and again

increased in 2008. So we can say that NIMs were on an average sequence and

ALM is going on moderate way.

(c) GAP ANALYSIS:

Gap management techniques require management to perform an analysis of the

maturities and re-pricing opportunities associated with the banks interest

sensitive assets, deposits and money market borrowings. A bank can hedge

itself by making sure for each time period that

Rate Sensitive Assets (RSA) = Rate Sensitive Liabilities (RSL)

The most familiar example of re-pricing assets is loans that are about to mature

or are coming up for renewal. If interest rate have risen since these loans were

first make, the bank will renew them only if it can get an expected yield that

approximates the higher yields currently expected on other financial instruments


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of comparable quality. Re-pricing liabilities include CDs about to mature or be

renewed, floating rate deposits, and money market borrowings.

Interest Sensitive Gap:

A gap exists between these interest sensitive assets and interest sensitive

liabilities whenInterest Sensitive Gap = Interest Sensitive Assets

Interest Sensitive Liabilities.

If interest sensitive assets in each planning period exceed (= >0) the volume of

interest sensitive liabilities, the bank is said to have a positive gap and to be

asset sensitive. In this situation if interest rate rises, the banks net interest

margin will increase because the interest revenues generated by the banks

assets will increase more than the cost of borrowed funds and vice-versa. The

banks with positive gap will reduce if interest rate falls. In the opposite situation

the bank has a negative gap and is said to be liability sensitive. Liability

sensitive (negative) gap = interest sensitive assets interest sensitive liabilities

< 0. In that case, rising interest rate will lower the banks net interest margin,

because the rising cost associate with interest sensitive liabilities will exceed

increase in interest revenue from the banks earning assets and vice -versa. Only

if interest sensitive assets and liabilities are equal is a bank relatively insulated

from interest rate risk. As a practical matter, however, a zero gap does not

eliminate all interest rate risk, because the interest rate attached to bank assets

and liabilities are not perfectly correlated in the real world. Loan interest rate,

for example, tends to lag behind interest rates on money market borrowings. In

practical world, zero gaps are also impossible.


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Maturity Gap:

The total effect of interest rate change can be summarized by its maturity gap, is

the difference between interest Rate Sensitive Assets (RSA) and the interest

Rate Sensitive Liabilities (RSL)

Rate Sensitive Assets (RSA) of the Bank is-

Money call at short notice Investment (in shares and securities) Short Term Loan and Advance Non-Banking Asset

Rate Sensitive Liabilities (RSL) of the Bank is-

Borrowing from other banks, financial institutions and agents Deposit and other accounts (except fixed deposits) Total share Holders Equity

Relative Gap:

Relative Gap (RG) =Gap

Total Asset

Table 4: Relative Gap (Taka in

Millions)

Year GAP Total Asset Relative Gap Ratio

2008 -29776.14 19306.99 -1.54

2007 -24713.06 15931.03 -1.55

2006 -13587.83 9037.53 -1.50

2006 -9903.66 5832.10 -1.69



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Here relative gap is negative but has reduced over the time. It is somehow good

sign that they tried to cover-up this Gap.

(d) DURATION ANALYSIS:

Duration is a value and time weighted measure of maturity that considers the

timing of all cash flows from earning assets and all cash outflows associated

with liabilities. In effect, duration measures the average time needed to recover

the funds committed to an investment. The net worth (NW) of any bank is equal

to the value of its assets (A) less the value of its liability (L):

NW = AL

As interest rates changes, the value of both a banks assets and liabilities will

change, resulting in a change in net worth:

NW = A L


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Portfolio Theory of Finance Told That

1. A rise in market rates of interest will cause the market value (price) ofboth bank fixed-rate assets and liabilities to decline.

2. The longer the maturity of a banks assets and liabilities, the more they inthe market value (price) when market interest rates rise.

Duration analysis can be used to stabilize the market value of a banks net worth

(NW). It measures the sensitivity of the market value of financial instruments to

changes in interest rates. The interest rate risk of financial instruments isdirectly proportional to their duration.

Positive Duration Gap = Asset DurationLiability Duration > 0

Negative Duration Gap = Asset DurationLiability Duration < 0

With liability having a longer duration than the banks assets, a parallel change

in all interest rates will generate a larger change in liability values than assets

values. If interest rates fall, the banks liabilities will increase more in value

than its assets and net worth will decline. If interest rates rise, however, liability

values will decrease faster than assets value and banks net worth position will

increases in value.

This method of measuring interest rate risk examines the sensitivity of the

market value of the banks total assets and liabilities to changes interest rates.

Duration is a useful concept because it provides a good approximation of the

sensitivity of a securitys market value to a change in its interest rates.

% in Market Value of Security = - (% in Interest Rate)* Duration in

Year.


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Duration analysis involves comparing the average duration of the banks assets

to the average duration of its liabilities. Let us suppose that the average duration

of HYPO BANKS assets is 5 years, while the average duration of its liabilities

is 3years. With a 5% increase in interest rates, the market value of the banks

assets fall by 25% = (5%*5 years) and the market value of the liabilities

declined by 15%(= - 5%*3 years). The net result is that the net worth has

declined by 10% of the total asset value.

The interest sensitive gap is interest sensitive assets minus the interest sensitive

liabilities, where interest sensitive assets and liabilities are those items on a

banks balance sheet that mature or whose interest rate can be changed during a

given interval of time. A bank, which is asset sensitive, will suffer a decline in

its net interest margin if market interest rates fall. A bank that is liability

sensitive will experience decrease in its met margin if interest rates rise. One of

the most popular methods of neutralizing these gap risks is to buy or sell

financial futures contracts. A financial futures contract is an agreement between

a buyer and a seller reached today that call for the delivery of a particular

security in exchange for cash at some future date. The market of futures contract

changes daily as the market price of the security to be exchanged moves over

time.

The financial futures market are designed to shift the risk of interest rate

fluctuations from risk averse investors, such as commercial bank, to speculators

willing to accept and possibly profit from such risks. When a bank contracts an

exchange broker and offers to sell futures contract, this means it is promising to

deliver securities of a certain kind and quality to the buyer of those contracts on

a stipulated date at predetermined price. Conversely, a bank may enter the


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future markets as a buyer of futures contracts, agreeing to accept delivery of a

particular security named in each contract or to pay cash to the exchange-

clearing house the day the contacts mature, based on their price at that time.

A futures hedge against interest rate changes generally requires a bank to take

an opposite position in the futures market from its current position in the cash

market. Thus, a bank planning to buy bond contracts (go long) in the cash

market today may try o to protect the bonds value by selling bond contracts (go

short) in the futures market. Then, if bond prices fall in the cash market therewill be an offsetting profit in the futures market, minimizing the loss due to

changing interest rates

(e) INTEREST SENSITIVITY RATIO:

Interest Sensitivity Ratio =

RSA

RSL

Table 5: Interest Sensitivity Ration (Taka

in Millions)

Year RSA RSL ISR

2008 2420.93 32197.08 0.075

2007 1585.18 26328.25 0.060

2006 739.51 14327.34 0.050

2005 412.54 1036.21 0.039

(Source Annual Report of MTBL)


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Here is seen interest sensitivity ratio is always less than 1,

A financial institution at a given time asset or liability sensitive, If the financial

institution is asset sensitive it will be positive gap, Positive relative gap, Interest

sensitivity ratio is greater than 1. If financial institution is liability sensitive it

will be negative gap, negative relative gap, and interest sensitivity ratio is less

than 1.

Here in Mutual Trust Bank Gap is Negative, relative Gap is Negative; Interest

Sensitivity Ratio is less than


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LIQUIDITY RATIO:

Landing Deposit Ratio =Loan

DepositX 100

Table Six: Liquidity Ratio (Taka in

Millions)

Year Loan Deposit LD Ratio

2008 14373.26 16098.54 89.28%

2007 11692.97 13164.13 88.82%

2006 5904.18 7163.67 82.42%

2005 3437.13 5158.11 66.64%


Liquidity Ratio should be 80% to 85% for a Bank. But here is 64% to 89%. So

we can say that they can use their deposits bitterly to earn more profit.


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FINDINGS OF ASSET /LIABILITY MANAGEMENT (ALM):

Here NII is increasing day by day because increase in interest ratesearned on asset, otherwise. Increase in interest paid on funding will

decrease NII.

NIM is here is similar sequence up to 2% that ALM is going onmoderately.

Here Gap is negative Here Relative Gap is also negative Here is seen Interest sensitivity ratio is always less than 1, Liquidity Ratio should be 80% to 85% for a Bank. But here is 64% to

89%. So we can say that they can use their deposits bitterly to earn

more profit.

A financial institution at a given time asset or liability sensitive, if the financial

institution is asset sensitive it will be positive gap, positive relative gap, interest

sensitivity ratio is greater than 1. If financial institution is liability sensitive it

will be negative gap, negative relative gap, and interest sensitivity ratio is less

than 1

Here in Mutual Trust Bank Gap is Negative, relative Gap is Negative; Interest

Sensitivity Ratio is less than 1. So it is a Liability Sensitive FinancialInstitution.


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LIABILITY MANAGEMENT AND ITS IMPACT ON

PROFITABILITY

It is already mentioned that effective liability management depends on less cost

and less volatile fund. It also depends on the effective utilization of the collected

funds. From the analysis, it is already clear that current deposit is the least

costly source of deposited funds whereas fixed deposit is the most costly source

of deposited funds. But current deposit is the most volatile sources in nature and

fixed deposit is the stable nature. Term deposit is consists of savings and fixed

deposit. So, for getting an appropriate liability structure, bank management

must make a balance between current and term deposit. It can also use money

market borrowing because it is less costly and flexible compared to deposit. A

bank can also rely on various off-balance sheet items for funding to its needs.

Liability management also depends on the effective use of the collected funds.

Improper use makes the collected funds burden for the bank. In this part,

various ratios are analyzed both in the context of interest cost of the funds and

their effective utilization.


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Profitability Ratios of Mutual Trust Bank Limited:

Ratios 2008 2007 2006 2005

Return on Assets (ROA) 1.74 1.55 2.106 1.68

Return on Equity (ROE) 21.72 20.30 19.61 30.74

Operating Profit Margin 19.90 21.68 26.32 21.51

Net Interest Margin (NIM) 2.47 2.16 2.95 2.37

Net Profit (tk in Millions) 336.17 247.19 259.23 187.52

Earnings per Shares (tk) 21.07 14.80 16.12 12.38

Price Earnings Ratio (Times) 15.18 40.30 14.32 12.56

The value of ROA and ROE depends on the volume of net income after tax. So,

if banks use heavily deposits, especially term deposits as sources of fund then

ultimately the interest cost will be increased. As a result values of the mentioned

ratios will be decreased.

The value of ROA has decreasing trend. The ROA of Mutual Trust Bank Ltd. is

growing over the first two years. After 2006 it has increased again. It indicates

that the management is somehow able to achieve consistent growth in the

banks spread through close control over the banks earning assets and the

pursuit of the cheapest sources of funding.

If we see only net interest margin (NIM) then the impact of liability

management can be realized directly. Because interest expense depends on

liability portion but the income portion depends on how one can utilize the

funds in an efficient and profitable way. In this case the ratio of net non-interest


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margin and net operating margin can explain the impact of liability on

profitability.

The vulnerable trend of Earning Spread of Mutual Trust Bank Ltd. reflects the

low efficiency of its intermediation functions and its strong position in the

competition. A liability structure will be effective only if the bank can earn

profit by using it. And the liability will give profit only if it is stable and less

costly. In all respect Mutual Trust Bank failed to manage its liability. As Mutual

Trust Bank is a service oriented private bank, it cannot say no to the public

regarding the acceptance of deposits. The bank has to accept a huge amount of

term loan every year. But it does not have the much opportunity to invest those

loans. The bank is suffering from bad loans. So, interest revenue from the

earning assets is becoming due in every year. It affects the banks net interest

margin. In case of investment, Mutual Trust bank invested majority of its funds

to advances. It enhances the default risk. The next major portion in the use of

fund is money market lending sector. The bank also has to maintain the required

provision for classified loans that places an adverse impact on the profit as well

as on the capital of the bank.


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CONCLUSION

Mutual Trust bank should have a strong Asset-Liability Management

Committee (ALCO) which will develop investment policy guidelines, developthe desired risk-return trade-off, will give decision regarding which types of

deposit will be accepted and which type of assets will be financed by which

type of liability.

Mutual Trust bank should have a clear ALM Policy. In the study it is found that

Mutual Trust is utilizing their collected funds properly. Improper use of funds

will increase the cost of the liability. Again a bank can make profit even by

accepting funds at high cost if it can use the funds properly.

The non-interest expense of the bank should be reduced.

The bank should accept funds according to the potentiality of investing them. If

a bank cannot invest its funds, it will increase the real cost of the fund Strong

Money Market should be developed in this country. If strong money market is

developed, then a bank can borrow funds from the market as and when required.

It will reduce the dependency of the bank on the deposit. As the money market

borrowing is less costly compared to deposited funds, it will reduce the banks

cost of fund.

Mutual Trust Bank should go for new off-balance sheet sources for getting the

required funds. It can securitize its assets when it needs funds. Again it can sell

the loan to other banks when funds are needed. Other off-balance sheet sources

can be used according to their nature.


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RECOMMENDATION

Bank should invest a significant amount in human resources development so

that they can form strong human capitals that ultimately contribute to ensureprofitability in future.

Bank should invest a significant amount in research and developments so that it

can identify the appropriate source of funned according to the nature of

investment.

Bank should have a strong monitoring cell so that the investment cannot be a

bad one. In this respect, the cell can give advice to the borrower in technical,

financial and other related issues that will ensure the efficient use of funds by

the borrower.

Mutual Trust Bank should give its customer a greater amount of ancillary

service. No funds are involved in providing ancillary services. It will reduce the

dependency of the bank on funds, which in turn will increase the fee earnings of

the bank.

Government must take necessary steps in the development of strong money

market in the country.


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BIBLIOGRAPHY

BOOKS:

Financial Markets & Services- Gordon- Natarajan

Web Sites:

www.wikipedia.com www.canara bank.com www.google.com www.ask.com

ganeshan vanamamalai

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