Asset Liability Management ICICI

CHAPTER -I
INTRODUCTION

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INTRODUCTION
ASSET LIABILITY MANAGEMENT
Banks should introduce the proposed ASSET LIABILITY MANAGAENT (ALM)
system positively by April 1st 1999. The introduction of such procedure is necessary to the
mismatches in the assets and liabilities of the banks, which are increasingly seen in the past.
Banks are exposed to several major risks in the course of their business. Sum of them are
credit risk , interest risk , foreign exchange risk , price risk , liquidity risk and operational
risk. It is the risk with respect to interest rate and liquidity that are sought to be hedged and
managed by Asset –Liability Management.
The RBI and ALM propose to divide assets into different time buckets depending on
the maturity and category of the assets. The time buckets are supposed to be used for
identifying cumulative mismatches and establishing internal prudential limits with in the
banks the mismatches that exists after such and exercises should be reported to the RBI
periodically.
The rational for accessing risk on a continuing basis is also to ensure that each bank
has enough at all times to cover the risks they incur, including those arising from interest rate
risk. Till now, bank have only focused on maintaining a prudent capital to risk-weighted
assets ratio(CAR), BUT LENDING risk is not only risk. Banks have to ensure that their
capital covers all risks including interest rate and liquidity risks.

Banks being financial intermediaries derive their long term profitability by effectively
and efficiently accepting investment from the public and transforming them to a relatively
safe portfolio of credit by virtue of their better access to market information and expertise in
apprising credit propositions of entrepreneurs. By offering customers the product-Deposits,

2

Credits, Investments that are in highest demand, the intermediaries earn higher profits. While
earning profits, intermediaries are also known to provide liquidity demanded by the market
and to an extent, also provide certain amount of insulation from credit risk. However, while
providing these services, intermediaries are subjected to interest rate risk since the value of
the short-term liabilities and the long-term assets change differentially in response to interest
rate moves. And being highly leveraged, they are exposed to significant interest rate risk and
losses could at time, be catastrophic if not managed properly.
It is basically a tool for liquidity and interest rate risk management. Bulk of the bank's
profit comes from net interest income and hence the paramount need to measure, control and
manage interest rate exposure. It is no exaggeration to state that many financial institutions
failed miserably by mismanaging the interest rate risk e.g. Housing finance companies of
USA. These institutes used to collect short-term deposits cheaply and lend on long term fixed
interest rate for housing. With deregulation of interest rates, the short-term deposit rates have
gone up leading to poor spread and ultimate collapse. ALM has thus become an absolute
necessity.

Directing and controlling the flow, the means, the cost and the yield of the
consolidated funds of the bank with the eye on profit and long-term liability. Management
of total balance sheet liabilities with regards to its size and quality.

Managing the net

interest margin with in the overall risk bearing capacity of the bank. It therefore, involves
quantification of risk and conscious decision-making with regard to asset liability
structure so as to maximize interest earning within the framework of perceived risk.

3

OBJECTIVES OF THE STUDY:
 To know the concept of ALM in ICICI.
 To study ALM Mechanism in Indian Banking Sector.
 To analyze and understand the ALM procedure in ICICI
 To study traditional gap analysis in managing liquidity risk & interest rate risk.
 To enhance the skills of personnel active in the Asset & Liability Management
process in banks and financial institutions
 To offer alternative ways and opportunities to learn more about banking and the
financial services industry
 To create opportunities for the exchange of experience, ideas and networking among
banking personnel internationally
 To strengthen the overall practice of Risk Management in financial institutions

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NEED FOR THE STUDY
Assets liabilities and management (ALM) is a relatively new process the world over.
Its importance was first realized in the 1980s in the USA, when a number of savings and loan
institutions, having huge asset-inability mismatch on their balance sheet, turned insolvent.
With growing competition world wide, profit margins of financial intermediaries are
reducing. This coupled with greater volatility in the international interest rates, has meant
lower income for these earning, they have adopted 'aggressive strategies, which have
increased their risk profile substantially. This led to the bankruptcy of some hanks.

Thus, these institutions have to bring their level in manageable proportions, while not
severely reducing their incomes. Restructuring their balance sheet can only do this. Thus, the
activity of asset liability management has received tremendous importance. Risk in modern
parlance is generally thought to be "the danger of loss". It is generally associated with the
downside and not the upside of a transaction. In finance theory, however, risk is defined as
dispersion of unexpected outcomes due to movements in financial variables. Risk is
measured by the standard deviation of unexpected outcomes or sigma. Also called volatility.

SCOPE OF THE STUDY:
The scope of the study is confined to Liquidity risk and Interest rate
risk.ALM in relation of banks covers a wide gamut of both sources and application
of funds. Growing competition for the access to the sources and the need for
arresting the erosion of net worth are the main challenges in managing the
liabilities.

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RESEARCH METHODOLOGY:
PRIMARY SOURCE:
Gathered information by interacting with employees of ICICI in ALM



department & referred to Bank Library books related to ALM.

SECONDARY SOURCE:

 Referred to ALM related articles form various magazines and journals like
Bank Quest,
 1CFAI analyst, ICFAI Reader etc.
 ALM related material that is being provided by ICICI.
 Various Web sites pertaining to ALM.

ALM is the management of structure of Balance sheet in such a way that the net
earnings from interest in particular are maximized with overall risk preference of the
institutions"

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LIMITATIONS OF THE STUDY:
 Information relating to the internal aspects regarding various items is not provided.
 Here is no practical exposure in calculations.
 Most of the information is from the Secondary Data.

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CHAPTER -II
REVIEW OF LITERATURE

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ASSET-LIABILITY MANAGEMENT IN THE BANK:

Risk Management and Asset Liability Management (ALM) are the buzzwords now in
the world of financial institutions and banks especially in India for the last 5 years. In
case the readings all around tend to give a feeling as if the entire financial system is
subjected to interest rate risk only now, do not be carried away. The framework of ALM
broadly covers the area of interest rate risk, and credit risk. The level of awareness about
the nature and impact of risks is at a very low level for historical reasons. RBI has
formally issued guidelines to all banks regarding interest rate sensitivity and liquidity
aspect of ALM. Arguably, it is in their own interest banks should look at ALM, but it is
perhaps appropriate for RRI to give instructions in this regard since bank have been used
to carry out RBI instructions for almost 30 years with little proactive policies. While it is
premature to state that banks will now be able to manage risks, this is definitely a step in
the right direction.

The deregulation of domestic interest rates, volatility in the domestic debt and foreign
exchange markets and introduction of new financial instruments has posed a question of
efficient liquidity and interest rate risk management with in banks. Banks ability to
contain and manage these risks obviously has an impact on the bottom line. In a bank,
however, there are endless specific entries on the liability side and also on the assets side.
The aggregation therefore, then presents a complete picture of banks mismatches. RBI
has circulated a draft of asset-liability guidelines, which, as the preamble says is intended
to make bank alive to the risks they carry. Asset-Liability Management (ALM) is the art
of ensuring that the maturity profiles of assets match that of the liabilities. A liability

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(deposit) once raised is typically funded in to the creation of an asset. The liability has to
be squared off: the depositor, for example has placed the deposit for 5 years. But the asset
may have a different maturity profile. It may have gone in to long gestation road project,
wherein the loan will be repaid after 10 years.

In a bank, however, there are endless specific entries on the asset as well as
liability side. The aggregation therefore, then, presents a complete picture of the batiks
mismatches. Therefore, the ALM system is not only a management information system,
but also an advance warning system of the banks sensitivity to adverse changes in the
environment.
WHAT IS ASSET LIABILITY MANAGAENT?

• ALM is the management of structure of balance in such a way that the net
earning from interest in particular are maximized with over all risk-preference of
the institutions.
• It need to be noted that ALM is an integrated approach to financial
management requiring simultaneous decision about the type of amount of financial
assets and liabilities, both mix and value with the complexities of the financial
markets in which the institution operates.
• Assume that the structure of the existing assets and liabilities is such that at the
aggregate, the maturity of the assets is longer than the maturity of the liabilities.
This would expose to bank to interest rate risk as the interest rate can increase and
decrease. Thus the interest income can suffer in the process .This has to be set
right either by reducing the maturity of assets or increasing the maturity of the

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liabilities.
 Adjusted bank's liabilities to meet loan demands, liquidity needs and the safety
requirements with a focus on profit and long term operating viability.
 Discretionary funds management where the focal point is to increase or
decrease interest sensitivity funds at the initiative of the bank.
 Directing and controlling the flow, the means, the cost and the yield of the
consolidated funds of the bank with the eye on profit and long-term liability.
Management of total balance sheet liabilities with regards to its size and quality.
Managing the net interest margin with in the overall risk bearing capacity of the
bank. It therefore, involves quantification of risk and conscious decision-making
with regard to asset liability structure so as to maximize interest earning within the
framework of perceived risk.

ALM helps bankers in successfully matching the assets and liabilities in terms of
rate and maturity with a view to obtain optimum yield to survive in the deregulated and
competitive environment.
WHY ASSET LIABILITY MANAGAENT
In pre-financial reforms era, banks were subjected to control measures by RBI in all
activities undertaken by them which includes:
 Regulated deposit interest rates.
 Minimum lending rates.
 Administered prime lending rates linked to borrow accounts.
 Generally fixed rates transactions, and Numbers of instruments available to the
user were also limited. All the above left the bank with widespread and helped to

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maintain there bottom-lines at respectable levels.

The reforms process brought:

 Faced deregulation.
 New player.
 New instruments.
 New products at competitive rates.

Number of risks such as credit risk, interest risk, disintermediation risk,
liquidity risk, foreign exchange risk and market risk.

In the light of the above development and to maintain and improve the bottom-lines,
there has to be some system in place which should help to achieve the organizational
objectives.
Asset liability management is one such effective and important tool. Thus, ALM is a risk
management tool through which market risk associated with the business are identified,
measured and monitored to maintain/optimize profits by re-aligning/re -structuring asset and
liabilities.

Important prerequisites successful AI.M is availability of adequate, accurate and
expediency of data. Banking is an activity where bank accept deposits for the purpose of
lending. It is also called intermediation.

 Banks do intermediation with an intention to earn profits.

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 While doing so, banks are exposed to certain type of risks.

OBJECTIVES OF ASSET LIABILITY MANAGAENT
Banks being financial intermediaries derive their long term profitability by effectively
and efficiently accepting investment from the public and transforming them to a relatively
safe portfolio of credit by virtue of their better access to market information and expertise in
apprising credit propositions of entrepreneurs. By offering customers the product-Deposits,
Credits, Investments that are in highest demand, the intermediaries earn higher profits. While
earning profits, intermediaries
are also known to provide liquidity demanded by the market and to an extent, also provide
certain amount of insulation from credit risk. However, while providing these services,
intermediaries are subjected to interest rate risk since the value of the short-term liabilities
and the long-term assets change differentially in response to interest rate moves. And being
highly leveraged, they are exposed to significant interest rate risk and losses could at time, be
catastrophic if not managed properly.

Here comes 'Asset Liability Management" as a tool providing a degree of protection
to bank from intermediation risk, thereby making risk acceptable. It helps bank inMaximization of income through-

 Spread Management
 Liquidity Management
 Capital Management
 Gap Management
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By assessing the impact and choosing optimal combination at

 Various Asset Mixes.
 Various fund combinations.
 Price/Volume relations and
 Interest rate variations.
And managing risk exposure viz.

 Credit Risk.
 Interest Rate Risk.
 Liquidity Risk,
 Market Risk.
 Capital Risk.

ASSET LIABILITY MANAGAENT:
It is basically a tool for liquidity and interest rate risk management. Bulk of the bank's
profit comes from net interest income and hence the paramount need to measure, control and
manage interest rate exposure. It is no exaggeration to state that many financial institutions
failed miserably by mismanaging the interest rate risk e.g. Housing finance companies of
USA. These institutes used to collect short-term deposits cheaply and lend on long term fixed
interest rate for housing. With deregulation of interest rates, the short-term deposit rates have

14

gone up leading to poor spread and ultimate collapse. ALM has thus become an absolute
necessity.

Pre-Requisites for successful ALM
1. Easy access to bank's liabilities for potential investors.
2. Interest rates on bank's assets and liabilities to be competitively determined.
3. Favorable regulatory factor.

HOW TO PRACTISE ASSET LIABILITY MGMT:
Successful implementation of ALM involves 1. Choosing a suitable length of planning horizon- one, two, three months ahead.
1. Working out estimates of return and risk that might result from pursuing
alternative programmers, and
2. Finally, choosing a model that yields a stable regardless of the level or
movement consistently. The task of generation of desired net interest revenues
regardless of the level or movement of interest rates is achieved primarily


Estimation

of

core

sources

of

funds,

core

deposit,

borrowings.
 Prudential management of funds in respect of size and pattern.
 Minimizing undesirable maturity mismatch; and
 Reducing the gap between rate sensitive assets and rate sensitive
 Liabilities within a risk taking capacity.

WHAT IS RISK?

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CDs

and

call

The risk is nothing but a possible loss or damage going to occur. It has to be managed
and cannot be eliminated to earn maximum profits. There are three types of important risks
involved in the banking activity.

• Credit risk.
• Market risk.
• Operation risk.

and long-term horizons. Based on this, they are to assess their vulnerability to adverse
changes, and. therefore, protect them in advance.
Interestingly, in the international market, the regulator dose not monitors the ALM
function of the banks under its charges. It is internally motivated and not regulated. Managing
risk is the inherent function of a bank, hut banks have ignored house. Although some front
line banks have ALM system in place, there are several banks that do not have sophistication
of making mismatches in assets and liabilities.

The RBI is trying to assist these banks by providing them with an educative guideline
of managing assets and liability. Liquidity risk is the risk of a bank suddenly finding itself
strapped for cash. This arises if the maturity profiles of assets and liabilities do not match.
The objective of ALM is to ensure that the bank is liquid enough to meet all its liabilities.
The RBI is trying to ensure that the short-term liability should not be used to meet longterm assets. The RBI wanted to discourage banks from borrowing short and investing long.
Some banks were borrowing from the call money market and investing in 90-days
commercial papers.

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Obviously, given that the total basket of assets and liabilities is made up of diverse
interest-bearing securities any change in the interest rate scenario impact banks differentially.
According to a study paper prepared by the Basle Committee
on bank supervision, although this risk is a normal part of banking, excessive interest rate risk
can pose a significant threat to a bank's earnings and capital base. Changes in interest rates
also affect the underlying value of the bank's assets, liabilities and off balance sheet
instruments because the present value of future cash flows changes when the interest rate
structure changes. Thus, an effective risk management processes require that bank maintain
their interest rate risk with in prudent levels, said the banks analysts.

HOW THE BANK MANAGES INTEREST RATE RISK THROUGH
ASSET LIABILITY MANAGAENT
Asset Liability Management (ALM) in banks is known as the process of adjusting the
liabilities to meet the desired loan demands, liquidity needs and safety requirements.

A comprehensive ALM policy framework focuses on bank profitability and long-term
viability by targeting a net interest margin (NIM) ratio subject to some balance sheet
constrains. Significant among these constraints are maintaining credit quality, meeting
liquidity needs and obtaining sufficient capital. Minimizing the burden also gets integrated to
meet the overall bank objectives. A successful ALM requires a comprehensive deregulation
of interest rates coupled with a market-driven asset-liability allocation and a favorable
regulatory attitude. The latter, prerequisite has come in, but then coming in to operation of an
active and well-developed secondary market for the bank liabilities and assets is still far from
complete.

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DIMENSION OF RISK MANAGEMENTS
On the myriad balance-sheet risks that bank face today credit and interest rate risks
mostly accounts for their business risks. These and other risks expose a bank's business to
certain potential losses. These losses are of three types viz., expected, unexpected and stress
loss. The expected loss is always insurable by the myriad hedges and therefore, forms part of
banks cost of operation. There is the unexpected loss under adverse conditions, which cannot
be predicted. It is unexpected loss that is defined as value at risk (VAR). Then there is also a
third type of loss the bank may be prepared to face under extreme conditions which occurs
rarely but possibly. It is called as stress loss.

VALUE AT RISK
Value at risk technically is defined as the "loss amount, accumulated over a certain
period that is not exceeding in more than a certain percentage of all time". VAR (99%, 1
week) is equal to the loss amount, accumulated over one week, which is not exceeding in
more than one week, and which is not exceeding more than 1% of all lime. For measuring
VAR one relics on a model of random changes in the price of underlying instruments- interest
rate changes, changes in foreign exchange rates etc. and a model for computing sensitivity of
derivatives price relative to the price of underlying instrument. In all these, one has to
remember that a VAR measures is merely a benchmark for relative judgments, such as the
risk of one portfolio relates to another, etc., even if accurate, comparison such as these are
specific to a time horizon and the confidence level with which VAR is chosen.

EARNING AT RISK

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Earning at risk (EaR) models capture the period of profit or loss in terms of the realized
profit or loss as per the cost method used currently. It consists of three components viz., funds
profit or loss + redemption profit or loss + sales gain or loss.

EXPANDED VaR
It measures Ear and adjusts it for movement in market valuation as part of the period
profit or loss. It is equal to EaR + change in valuation gain or loss.

CAPITAL AT RISK
Capital at risk (CaR) measures risk as transportation from VaR. it is a surrogate of VaR
viewed from the angle of solvency of the bank. It is equivalent to the unexpected losses since
expected losses are taken care of by way of provisions. So long as the expected plus
unexpected losses stay with in the limits of confidence then the bank is said to stay solvent.

INTEREST RATE RISK MANAGEMENT THE CRUX OF ALM
Market risk measures commodity, currency and interest rate risk as well. Commodity
risk is almost non-existent today for many Indian bank's and currency risk is controlled
through regulatory prescription there remains the interest rate risk (IRR) that largely poses a
problem to bank's interest income and hence profitability. It arises because bank's assets and
liabilities generally have their interest rates reset at different times. Changes in interest rates
can significantly alter a bank's net interest incomes (Nil) depending on the extent or
mismatch between the times when asset and liability interest rates are reset.

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Changes in interest rates do also affect the market value of bank's equity. A method of
managing IRR first requires a bank to specify goals for either the book value or the market
value of Nil. In the former case, the focus will be on the current value of Nil and in the latter
case; the focus is on the market value of equity. In either case the bank as to measure the risk
exposure and formulate strategies to minimize or migrate the risk. The bank goals and
strategies in doing so normally reflect the management's policy concurrence.
The Gaps of interest rate sensitive may be identifying in the following time buckets:
1. 1-7 days
2. 8-14 days
3. 15-29 days
4. 1 month to 3 months
5. Over 3 months to 6 months
6. Over 6 months to 12 months
7. Over 1 year to 3 years
8. Over 3 years to 5 years
9. Above 5 years
10.

Non-sensitive.

Measurement of Liquidity Risk (maturity profile)
All relatively non-sensitivity assets and liability items like intangibles, fixed assets,
capital etc. are taken out and the rest are put in to time buckets according to their remaining
maturity as opposed to original maturity.

Table: Maturity profile (Rs in Crores)

Time bucket

Liabilities

Assets

3 months
6 months

260.00
600.00

350.00
500.00

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9 months
1 year

500.00
1000.00

450.00
1200.00

This information affords comparison of assets and liabilities within each maturity range.
The identified mismatch indicates the future needs for funds and help in planning future
borrowings.

Liquidity always changes with reference to time. Therefore, a statement of potential
funds lows during say the next month and the next month after that can provide the potential
change in the liquidity position of a bank. It helps bank in deciphering which pattern of cash
flow is dangerous, which is not and thus plan remedial action.

Measurement of Interest Rate Risks (GAP Analysis)
The simplest technique for measuring banks interest rate risk exposure begin with a
maturity/re-pricing schedule that distributes interest sensitive asset liability and

VARIOUS TYPE OF RISK INVOLVED IN THE BANKING SECTOR
CREDIT RISK
To address, the credit risk in the bank there is a committee called credit policy
committee (CPC). Which is headed by GM with other top executives as members? They
address the issue pertaining to credit risk. Every year the committee will lay down the norms
for lending policy, which contains several measures like prudential norms, sartorial
deployment of funds, assessment of risk associated with the loan proposal by way of
customer credit rating etc. for entire loan amount with the limit of over Rs 2 laces have been
covered under credit audit, which helps to improve its quality of pre-sanction appraisal and
post-sanction monitoring.
MARKET RISK

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If the income that is Nil or NIM is affected due to change in the interest rate/price in the
market, such risk are called market risks.

KINDS OF MARKET RISKS
• Interest Rate Risk
• Currency or Forex Risk
• Equity/Commodity Price Risk.

INTEREST RATE RISK
The phased deregulation of interest rate and operational flexibility given to bank in
pricing most of the assets and liabilities has been exposed bank to interest rate risk. Interest
rate risk is the risk where changes in market interest rates might adversely affect a bank's
financial condition. Changes in the interest rates might adversely affect both the current
earnings (earning prospective) and also the net worth of the bank (economic value
perspective). The risk from earning prospective is measured as change in the net interest
income (Nil) or net interest margin (NIM).

CURRENCY OR FOREX RISKS
This risk arises out of liabilities in one currency exceeding the level of assets in the
same currency. Presently, banks re-free to set gap limits with RBI’s approval but are required
to adopt value at risk approach to measure the risk associated with forward exposures. Thus
the open position limits together with gap limits from the risk management approach to forex
operations.

EQUITY PRICE/COMMODITY PRICE RISK

Equity price/commodity price risk arises owing lo changes in the prices of
shares/commodities, where the investors or individual has invested.
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EMBEDDED OPTION RISK
• Penalty for premature payment of both deposits.
• Minimum lock in period etc.
• Buying commitment charges on non/under utilization of limits.

ASSET-LIABILITY COMMITTEE (ALCO)
The prime function of ALCO of the bank consisting of the bank's senior management
including CEO should be to ensure adherence to: the limits set by the board as well as for
deciding the business strategy of the bank in line with bank's budget and laid down risk
management objectives.

The CEO/CMD should head the committee. The chiefs of investment, credit funds
Management/treasury, international banking and Economic Research can be member of the
committee.


ALCO reviews the status of liquidity and interest rate risk \is-a-sis tolerance
limits.



ALCO articulates and decides pricing of products including PLR



ALCO examines/recommends funding options for long gestation infrastructure
projects.

Time buckets: In order to ascertain the risk associated with the bank's portfolio the
RBI advice all the bank's to distribute all the maturing assets and liabilities in to
Time buckets ranging from 1-7 days, 7-14 days, and 14-29 days. 29- days to 3 months. 3 to 6
months, 6-12 months, 1-3 years, 3-5 years, and above 5 years and ascertain the risk in each
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time bucket and take steps to over come the risk Rate sensitive Assets and Liabilities: Any
Asset/Liability gets reprised and get changed their value with a chance in interest/price i9n
the market during the period of study they are called rate sensitive Asset and Liabilities.

NTI: Net Interest Income means difference between interest income and interest expenditure.
NIM; Net Interest Margin means Nil divided by Earning Assets of the Bank Earning Assets:
Any Asset, which is affected due to changes in market value, they are called Earning Assets.
NON-BARN ING Assets are nothing but those Assets,
Which do not get affected due to change in the interest rate or price e.g. NPA's, cash on hand
etc,

MANAGEMENT-DEPTH AND QUALITY
In evaluating management, the intention is to assess the depth, quality, and operating
style to" the organization. In particular, it is important to gauge the level of risk that
management is willing to assume, its understanding of issues that are affecting its activities,
and the balance it strikes between business development and risk management. Obviously, a
full assessment of these issues can only be achieved over a lengthy period of lime after
having had the opportunity of contract with all level of the organization.

The RBI expects bank to take a view on future interest rate movements. That is, project
for themselves have interest rates, will move in the future-over both short OBS position in to
a certain number of pre-determined time bands according to their maturity. These schedules
can be used to generate simple indicators of the interest rate risk sensitivity of both earnings
and economic value to changing interest rates. This gap analysis i.e. the size of the gap for a
given time band gives an indication of the banks re-pricing risk exposure. The interest rate

24

sensitive assets minus interest rate sensitive liabilities in each time band can be multiplied by
an assumed change in interest rate to yield an approximation of change in net interest income
that is likely to result from such interest rate movements.

Mathematically, rate sensitive gaps (RSG) is defined as ratio of rate sensitive assets
(RSA) to rate sensitive liability (RSL) occurring during a particular maturity period. A
negative or liability sensitive gap occurs when liabilities exceeds assets in a given time band.
It means as increase in market interest rates could cause a decline in net interest income.
Conversely, a positive or asset sensitive gap implies that banks net interest income could
decline as a result of a decrease in the level of interest rates.
GAP=RSAs-RSLs
When interest rates change the bank's nil changes based on the following
Interrelationships:

Changes in NIIRSAs changes in average interest rate on RSAs = (Delta rl)-RSLs change in
average interest rate paid on RSLs = (Delta r2)
(1) Delta NII=RSAs Delta RSLs Delta r2
(2) For simplicity, assume for a while that Delta rl-Delta r2 = Delta r. that is both the
Average interest paid on liabilities change to the same extent, though not always true
in reality. The (2) becomes
Delta NI1= (RSAs-RSLs) Delta r
Delta NIIKJAP Delta r
(3) It is evident that not only changes in the market interest rates, but also changes in the
relationship between the bank asset and liability costs and in the composition of the volumes
of outstanding and incremental assets and liability affect NIL the actual

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change in the direction and amount anticipated by them. The Gap relationship suggests that a
bank that either can or does not choose to speculation on future interest rates can only reduce
IRR by targeting a zero Gap.

MORE ADORABLE BUT LESS APPLICABLE DURATION GAP

All those bank assets and liabilities that are Interest insensitive from cash-How
standpoint also experiences large fluctuation in value due to movements in interest rates.
Even if the Gap is zero, the bank may still be subject to substantial IRR. However, with the
duration GAP (DGAP) approach, it is possible to offset the undesirable effects of funding
GAP by a carefully orchestrated position in non-rate sensitive assets and liabilities. DGAP
recognizes that IRR arise when timing of cash inflows and outflows differs even if the assets
and liabilities are categorized as rate intensive as per the conventional GAP technique.
Interest rate risk is measured in DGAP by a comparison of the weighted duration of
liabilities. The funding GAP technique matches cash flow by structuring the short-term
maturity buckets. On the other hand, the DGAP hedges against IRR by structuring the
portfolios of assets and liabilities to change equally in value whenever interest rates change.
The timing and magnitude of aggregate cash flow on assets and liabilities are matched in
such a way that the market value of equity remains unchanged in a perfect hedge. Duration is
defined as average life of financial instrument. It equals the average time necessary to recover
the initial cost. It also provides an approximate measure of market value interest elastically.
The DGAP is computed as the difference between the composite duration of bank assets and
a marked down composite duration of its liabilities.
DGAP = DA-KDL (7)
K= %of assets funded by liability.

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Thus, a bank can immunize the market value of its equity by setting DGAP=0.
However, in reality if a bank wants to perfectly hedge value, it has to set its asset duration
slightly less than its liability duration to maintain positive equity. For DGAP to equal zero
(DA/DL) should equal which is, less than one. One can approximately estimate the
expected change in the market value of a bank for given change in the interest rates. Change
in Market Value of Equity/Total Assets = DGAP Approximate change in interest rate (8)

From this it is clear that if DGAP is close to zero then the market value of bank equity
will not change and accordingly become immunized for any changes in the interest rates.

The DGAP measure has several merits. It is more scientific, more realistic but more
sophisticated and complex in approach. A basic precondition for the use of this tool as a
hedge mechanism is that all the assets and liabilities of banks have to position as marked to
market. Therefore, at the present junction, the DGAP tool exists more for adoring its
scientific merits than for its applicability in its immunization of a bank's balance sheet.

Basic Duration formula (Macaulay)
D= (C(I+Y) + C*2/(l+Y)2 +(C+P)N/(1+Y)N/Price
Where C = Periodic Coupon.
Y = Yield (YTM)
P = Principal Amount
N = total number of years.

CAN FUNDING GAP IMMUNIZ EQUITY?

27

Very simple assumption is required to habilitate the conventional gap from bank equity
immunization. One is that the bank adopts a constant dividend rate policy and the other is that
almost all the net income of the bank is Nil. Now the strong assumption is that if the banks
have more or less the same Nil for at least more than one year, then the equity of a bank can
be written as the present value of its future dividend payments.
C-(d*NII)/r

(9)

Where c = capital (equity) of the bank. By simple calculus and substitution one can arrive at
Change in C - (d * GAP - c)/ (change in r/r)
Delta c - (d * GAP - c)/ (Delta r/r)

(10)

Now for Delta C - 0 which is equivalent to immunizing market value of equity from
fluctuation, what is required as a strategy is to maintain.
GAP = (C/D)

(11)

The implications of (11) are several. If it requires for the bank to maintain a positive gap for
immunization equity, simultaneously the bank cannot keep its Nil and NIM unchanged. But
in an environment of decline interests rates, the bank have to scarifies some Nil and hence
NIM for the sake of immunizing its equity. Looking at it from another angle, for GAP to be
zero, the bank equity has to fluctuate whenever interest rates changes as per the following
relationship.
Change in C = - (change in r/r) * C
Delta C (GAP - 0) = - (Delta r/r) * C

(12)

It is obvious from (12), when GAP = 0, decline in interest rates causes "C" to increase
and vice-a-versa.

SIMULATION TECHNIQUE

28

Simulation technique simply involves a detailed break down of various categories of
balance sheet position and assigns specific interest rate for each position and then working
out the cash in/out flows. Such simulation strategies could be either static or dynamic. In
static stimulation, cash flows arising from the banks current balance sheet position are as it is
assessed based on one or more assumed interest rate scenarios. By discounting the resulting
cash flows, over the entire expected lines of the banks holding, an estimate of the change in
the economic value of the bank can be worked out.

In a dynamic simulation approach, the simulation builds in more detailed assumptions
about the future course of interest rates and the expected change in a banks business activity
over that time. Such simulation studies afford dynamic interaction of payment stream with
interest rates and capture the effect of imbedded or explicit option

29

CHAPTER-III
INDUSTRY & COMPANY PROFILE

30

INDUSTRY PROFILE
Banking in India: originated in the last decades of the 18th century. The oldest bank in
existence in India is the State Bank of India, a government-owned bank that traces its origins
back to June 1806 and that is the largest commercial bank in the country. Central banking is
the responsibility of the Reserve Bank of India, which in 1935 formally took over these
responsibilities from the then Imperial Bank of India, relegating it to commercial banking
functions. After India's independence in 1947, the Reserve Bank was nationalized and given
broader powers. In 1969 the government nationalized the 14 largest commercial banks; the
government nationalized the six next largest in 1980.
Currently, India has 96 scheduled commercial banks (SCBs) - 27 public sector banks (that is
with the Government of India holding a stake), 31 private banks (these do not have
government stake; they may be publicly listed and traded on stock exchanges) and 38 foreign
banks. They have a combined network of over 53,000 branches and 17,000 ATMs. According
to a report by ICRA Limited, a rating agency, the public sector banks hold over 75 percent of
total assets of the banking industry, with the private and foreign banks holding 18.2% and
6.5% respectively

Early history
Banking in India originated in the last decades of the 18th century. The first banks were The
General Bank of India which started in 1786, and the Bank of Hindustan, both of which are
now defunct. The oldest bank in existence in India is the State Bank of India, which
originated in the Bank of Calcutta in June 1806, which almost immediately became the Bank
of Bengal. This was one of the three presidency banks, the other two being the Bank of
Bombay and the Bank of Madras, all three of which were established under charters from the
British East India Company. For many years the Presidency banks acted as quasi-central
banks, as did their successors. The three banks merged in 1921 to form the Imperial Bank of
India, which, upon India's independence, became the State Bank of India.

31

Indian merchants in Calcutta established the Union Bank in 1839, but it failed in 1848 as a
consequence of the economic crisis of 1848-49. The Allahabad Bank, established in 1865 and
still functioning today, is the oldest Joint Stock bank in India. It was not the first though. That
honor belongs to the Bank of Upper India, which was established in 1863, and which
survived until 1913, when it failed, with some of its assets and liabilities being transferred to
the Alliance Bank of Simla.
When the American Civil War stopped the supply of cotton to Lancashire from the
Confederate States, promoters opened banks to finance trading in Indian cotton. With large
exposure to speculative ventures, most of the banks opened in India during that period failed.
The depositors lost money and lost interest in keeping deposits with banks. Subsequently,
banking in India remained the exclusive domain of Europeans for next several decades until
the beginning of the 20th century.
Foreign banks too started to arrive, particularly in Calcutta, in the 1860s. The Comptoire
d'Escompte de Paris opened a branch in Calcutta in 1860, and another in Bombay in 1862;
branches in Madras and Pondichery, then a French colony, followed. HSBC established itself
in Bengal in 1869. Calcutta was the most active trading port in India, mainly due to the trade
of the British Empire, and so became a banking center.
The Bank of Bengal, which later became the State Bank of India.
The first entirely Indian joint stock bank was the Oudh Commercial Bank, established in
1881 in Faizabad. It failed in 1958. The next was the Punjab National Bank, established in
Lahore in 1895, which has survived to the present and is now one of the largest banks in
India.
Around the turn of the 20th Century, the Indian economy was passing through a relative
period of stability. Around five decades had elapsed since the Indian Mutiny, and the social,
industrial and other infrastructure had improved. Indians had established small banks, most of
which served particular ethnic and religious communities.
The presidency banks dominated banking in India but there were also some exchange banks
and a number of Indian joint stock banks. All these banks operated in different segments of
the economy. The exchange banks, mostly owned by Europeans, concentrated on financing

32

foreign trade. Indian joint stock banks were generally under capitalized and lacked the
experience and maturity to compete with the presidency and exchange banks. This
segmentation let Lord Curzon to observe, "In respect of banking it seems we are behind the
times. We are like some old fashioned sailing ship, divided by solid wooden bulkheads into
separate and cumbersome compartments."
The period between 1906 and 1911, saw the establishment of banks inspired by the Swadeshi
movement. The Swadeshi movement inspired local businessmen and political figures to
found banks of and for the Indian community. A number of banks established then have
survived to the present such as Bank of India, Corporation Bank, Indian Bank, Bank of
Baroda, Canara Bank and Central Bank of India.
The fervour of Swadeshi movement lead to establishing of many private banks in Dakshina
Kannada and Udupi district which were unified earlier and known by the name South
Canara ( South Kanara ) district. Four nationalised banks started in this district and also a
leading private sector bank. Hence undivided Dakshina Kannada district is known as "Cradle
of Indian Banking".

Post-independence:
The partition of India in 1947 adversely impacted the economies of Punjab and West Bengal,
paralyzing banking activities for months. India’s independence marked the end of a regime of
the Laissez-faire for the Indian banking. The government of India initiated measures to play
an active role in the economic life of the nation, and the industrial policy resolution adopted
by the government in 1948envisaged a mixed economy. This resulted in to greater
involvement of the state in different segments of the economy including banking and finance.
The major steps to regulate banking included:

33

COMPANY PROFILE
4.1 HISTORY
ICICI Bank started as a wholly owned subsidiary of ICICI Limited, an Indian financial
institution, in 1994. Four years later, when the company offered ICICI Bank's shares to the
public, ICICI's shareholding was reduced to 46%. In the year 2000, ICICI Bank offered made
an equity offering in the form of ADRs on the New York Stock Exchange (NYSE), thereby
becoming the first Indian company and the first bank or financial institution from non-Japan
Asia to be listed on the NYSE. In the next year, it acquired the Bank of Madura Limited in an
all-stock amalgamation. Later in the year and the next fiscal year, the bank made secondary
market sales to institutional investors. With a change in the corporate structure and the
budding competition in the Indian Banking industry, the management of both ICICI and
ICICI Bank were of the opinion that a merger between the two entities would prove to be an
essential step. It was in 2001 that the Boards of Directors of ICICI and ICICI Bank
sanctioned the amalgamation of ICICI and two of its wholly-owned retail finance
subsidiaries, ICICI Personal Financial Services Limited and ICICI Capital Services Limited,
with ICICI Bank. In the following year, the merger was approved by its shareholders, the
High Court of Gujarat at Ahmedabad as well as the High Court of Judicature at Mumbai and
the Reserve Bank of India.
CURRENT SCENARIO:
Financial performance:
ICICI Bank is India's second-largest bank with total assets of Rs. 3,634.00 billion (US$ 81
billion) at March 31, 2010 and profit after tax Rs. 40.25 billion (US$ 896 million) for the year
ended March 31, 2010. The Bank has a network of 2,016 branches and about 5,219 ATMs in
India and presence in 18 countries. ICICI Bank offers a wide range of banking products and
financial services to corporate and retail customers through a variety of delivery channels and
through its specialized subsidiaries in the areas of investment banking, life and non-life
34

insurance, venture capital and asset management. The Bank currently has subsidiaries in the
United Kingdom, Russia and Canada, branches in United States, Singapore, Bahrain, Hong
Kong, Sri Lanka, Qatar and Dubai International Finance Centre and representative offices in
United Arab Emirates, China, South Africa, Bangladesh, Thailand, Malaysia and Indonesia.
Our UK subsidiary has established branches in Belgium and Germany. ICICI Bank's equity
shares are listed in India on Bombay Stock Exchange and the National Stock Exchange of
India Limited and its American Depositary Receipts (ADRs) are listed on the New York
Stock Exchange (NYSE). Established in 1994, ICICI Bank is today the second largest bank in
India
and among the top 150 in the world. In less than a decade, the bank has become a
universal bank offering a well diversified portfolio of financial services. It currently has
assets of over US$ 79 billion and a market capitalization of US$ 9 billion and services over
14 million customers through a network of about 950 branches, 3300 ATM's and a 3200 seat
call center (as of 2007). The hallmark of this exponential growth is ICICI Bank‟s unwavering
focus on technology.
Branches & ATMs
ICICI Bank has a wide network both in Indian and abroad. In India alone, the bank has 1,420
branches and about 4,644 ATMs. Talking about foreign countries, ICICI Bank has made its
presence felt in 18 countries - United States, Singapore, Bahrain, Hong Kong, Sri Lanka,
Qatar and Dubai International Finance Centre and representative offices in United Arab
Emirates, China, South Africa, Bangladesh, Thailand, Malaysia and Indonesia. The Bank
proudly holds its subsidiaries in the United Kingdom, Russia and Canada out of which, the
UK subsidiary has established branches in Belgium and Germany.
PRODUCTS & SERVICES
Personal Banking

35

Deposits
Loans
Cards
Investments
Insurance
Demat Services
Wealth Management
NRI Banking
Money Transfer
Bank Accounts
Investments
Property Solutions
Insurance
Loans
Business Banking
Corporate Net Banking
Cash Management
Trade Services
FXOnline
SME Services
Online Taxes
Custodial Services
JOURNEY SO FAR
1955 : The Industrial Credit and Investment Corporation of India Limited (ICICI)
incorporated at the initiative of the World Bank, the Government of India and representatives

36

of Indian industry, with the objective of creating a development financial institution for
providing medium-term and long-term project financing to Indian businesses. Mr.
A.Ramaswami Mudaliar elected as the first Chairman of ICICI Limited. ICICI emerges as the
major source of foreign currency loans to Indian industry. Besides funding from the World
Bank and other multi-lateral agencies, ICICI was also among the first Indian companies to
raise funds from international markets.
1956: ICICI declared its first dividend of 3.5%.
1958: Mr.G.L.Mehta appointed the second Chairman of ICICI Ltd.
1960: ICICI building at 163, Backbay Reclamation, inaugurated.
1961: The first West German loan of DM 5 million from Kredianstalt obtained.
1967: ICICI made its first debenture issue for Rs.6 crore, which was oversubscribed.
1969: The first two regional offices in Calcutta and Madras set up.
1972: The second entity in India to set up merchant banking services.
: Mr. H. T. Parekh appointed the third Chairman ofICICI.
1977: ICICI sponsored the formation of Housing Development Finance Corporation.
Managed its first equity public issue
1978: Mr. James Raj appointed the fourth Chairman of ICICI.
1979: Mr.Siddharth Mehta appointed the fifth Chairman of ICICI.
1982: 1982 : ICICI became the first ever Indian borrower to raise European Currency Units.
: ICICI commences leasing business. 1984: Mr. S. Nadkarni appointed the sixth Chairman of
ICICI.
1985: Mr. N.Vaghul appointed the seventh Chairman and Managing Director of ICICI.
1986: ICICI became the first Indian institution to receive ADB Loans. : ICICI, along with
UTI, set up Credit Rating Information Services of India Limited, India's first professional
credit rating agency.

37

: ICICI promotes Shipping Credit and Investment Company of India Limited.
: The Corporation made a public issue of Swiss Franc 75 million in Switzerland, the first
public issue by any Indian entity in the Swiss Capital Market.
1987: ICICI signed a loan agreement for Sterling Pound 10 million with Commonwealth
Development Corporation (CDC), the first loan by CDC for financing projects in India.
1988: Promoted TDICI - India's first venture capital company.
1993: ICICI Securities and Finance Company Limited in joint venture with J. P. Morgan set
up. : ICICI Asset Management Company set up.
1994: ICICI Bank set up.
1996: ICICI Ltd became the first company in the Indian financial sector to raise GDR. :
SCICI merged with ICICI Ltd.
: Mr. K.V.Kamath appointed the Managing Director and CEO of ICICI Ltd
1997: ICICI Ltd was the first intermediary to move away from single prime rate to three-tier
prime rates structure and introduced yield-curve based pricing.
: The name The Industrial Credit and Investment Corporation of India Ltd changed to ICICI
Ltd. : ICICI Ltd announced the takeover of ITC Classic
Finance.
1998: Introduced the new logo symbolizing a common corporate identity for the ICICI
Group. : ICICI announced takeover of Anagram Finance.
1999: ICICI launched retail finance - car loans, house loans and loans for consumer
durables. : ICICI becomes the first Indian Company to list on the
NYSE through an issue of American Depositary Shares. 2000: ICICI Bank became the first
commercial bank from India to list its stock on NYSE.
: ICICI Bank announces merger with Bank of Madura. 2001: The Boards of ICICI Ltd and
ICICI Bank approved the merger of ICICI with ICICI Bank.

38

2002: ICICI Ltd merged with ICICI Bank Ltd to create India‟s second largest bank in terms
of assets. : ICICI assigned higher than sovereign rating by
Moody‟s. : ICICI Bank launched India‟s first CDO (Collateralized Debt Obligation) Fund
named Indian Corporate Collateralized Debt Obligation Fund (ICCDO Fund). : "E Lobby", a
self-service banking centre inaugurated in Pune. It was the first of its kind in India. : ICICI
Bank launched Private Banking.
: 1100-seat Call Centre set up in Hyderabad
: ICICI Bank Home Shoppe, the first-ever permanentaggregation and display of housing
projects in thecounty, launched in Pune,
: ATM-on-Wheels, India‟s first mobile ATM, launchedin Mumbai.
2003: The first Integrated Currency Management Centrelaunched in Pune.
: ICICI Bank announced the setting up of its first everoffshore branch in Singapore.: The first
offshore banking unit (OBU) at Seepz SpecialEconomic Zone, Mumbai, launched.: ICICI
Bank‟s representative office inaugurated inDubai.: Reresentative office set up in China. :
ICICI Bank‟sUK subsidiary launched.
: India‟s first ever "Visa Mini Credit Card", a 43%smaller credit card in dimensions
launched.
: ICICI Bank subsidiary set up in Canada.
: Temasek Holdings acquired 5.2% stake in ICICI Bank.
: ICICI Bank became the market leader in retail credit in
India.
2004: Max Money, a home loan product that offers the dual benefit of higher eligibility and
affordability to a customer, introduced.
: Mobile banking service in India launched in association with Reliance Infocomm.
: India‟s first multi-branded credit card with HPCL and Airtel launched.

39

: Kisan Loan Card and innovative, low-cost ATMs in rural India launched.
: ICICI Bank and CNBC TV 18 announced India‟s first ever awards recognizing the
achievements of SMEs, a pioneering initiative to encourage the contribution of
Small and Medium Enterprises to the growth of Indian economy.
: ICICI Bank opened its 500th branch in India.
: ICICI Bank introduced partnership model wherein
ICICI Bank would forge an alliance with existing micro finance institutions (MFIs). The MFI
would undertake the promotional role of identifying, training and
promoting the micro-finance clients and ICICI Bank would finance the clients directly on the
recommendation of the MFI.
: ICICI Bank introduced 8-8 Banking wherein all the
branches of the Bank would remain open from 8a.m. to 8 p.m. from Monday to Saturday.
: ICICI Bank introduced the concept of floating rate for home loans in India.
2005: First rural branch and ATM launched in Uttar Pradesh
at Delpandarwa, Hardoi.
: "Free for Life" credit cards launched wherein annual
fees of all ICICI Bank Credit Cards were waived off.
: ICICI Bank and Visa jointly launched mChq – a
revolutionary credit card on the mobile phone.
: Private Banking Masters 2005, a nationwide Golf
tournament for high networth clients of the private
banking division launched. This event is the largest
domestic invitation amateur golf event conducted in
India.
: First Indian company to make a simultaneous equity

40

offering of $1.8 billion in India, the United States and
Japan.
: Acquired IvestitsionnoKreditny Bank of Russia.
: ICICI Bank became the largest bank in India in terms of
its market capitalization.
: ICICI Bank became the first private entity in India to
offer a discount to retail investors for its follow-up
offer.
2006: ICICI Bank became the first Indian bank to issue hybrid
Tier-1 perpetual debt in the international markets.
: ICICI Bank subsidiary set up in Russia.

41

42

43

CHAPTER –IV
DATA ANALYSIS AND
INTERPRETATION

44

DATA ANALYSIS
Outflows

ICICI
Statement of Structural Liquidity 31st March 2014-2015
Rs. in crores
Over 3

15 to 28
1 to 14 'days
days'

1
2
3

4

7

8
'

Over 3
Over
years
and
years
upto5 years

5

Total

Capital

1725

17.25

Reserves 8 Surplus

1 748 40

1746 AC

Deposits
Current Deposits
i. Savings Bank Deposits
iji.~Term Deposits
iv. Certificate Of Deoosils Borrowings
i. From SBI/ other bank
ii. Inter-Bank (Term)
iii. Refinances
IV, ATM Withdraw! A/C

5

29days and
.Over 6 .
Oyer.1
months
months and Year and
upto
and upto
upto 1 year
3 years
3months
6months

Other Liabilities and Provisions
i Biils Payable
ii . Inter-Office Adjustments
iii. Provisions
iv. Others >
Lines of Credit Committed to
j Institutions
11. Customers
Unavailed portion of CC/ODffJUWCUL
InygcatJon/Devolvements in LC/BG
Repos

478.21
760.86
45465

20.45
0.00
0.30
46.25

43925

1334.20

1262.47

45OS6

1753.42

3935 06

1-102.15

19611 03

1308.68

5-134.73

1892 78

4415.41

2257.05

586.30

8511.31

1 3390 96

0.00

00.00

000

0.00

000

20.45
0.00

0.00

235

1 15

1 40

054

0.25

0.08

6.47

0.00

000

000

000

000

0.00

0.00

4625

1202 86

232.15

1485.01

0.00
0.00

59.22

118 10

4684

9351

000

187.50

0.O0
507.17

5.16

0.00

000

000

12500

18604

45 63

430 O0

18685

124.56

1401

324

2330

4.92

5.68

0.95

0.03

0.01

53 15

508.92

14.01

1029.5C

57356

1069.23

O.OC

0.00

000

321 4 2.1

810

449

16.90

21.81

39.25

64 .4 2

2299

17 13

197 10

Misc. items
Total Outflows

2904.07

653.05

2532.02

2549.32

6096.09

64 0 9. 37

3249.69

372.63
13962.04

372.53
38518.57

Cumulallva Outflows

290407

3557.12

614914

8 7 98. 46

14894. 55

21 303.93

24553. 83

33515.57

-

2.00
68.17

260 O0

260.00
498.27

809 64

Bills Rediscourited (DUPN)
11

12

Swaps (Buy'Se Ill/maturing forwards
interest Provisions

13

Demand Deposit Int Provision A/c
Term Deposit Int Provision A/c
Others (Specifv)

36.97

Table.1

45

36.97

ICICI 31st March 2015
Statement of Structural liquidity

Rs. in Crores

29 and
upto 3
Over6
Over 3
months
year
1to 14 15 to
months
INFLOWS
and
days
28 days
and upto
upto 1
6 months
Year

Cash
Balances with other
RBI

Over3
year
and
upto 5

Over 3 Over 5
years years
and
upto 5
years

72.85

72. 85
0.00

O.O0

26690

207.99

416.26 238.60
0.06

90 04

48.08 1317.66
100.97

Balances with Other
Banks
i. Current Account
100.31
ii. Money al call
and short notice.
iii.Term deposit
and
other
Investments
(including
those
under
Repos
but
excluding
Advances
(Performing)
i
Bills including
bills under (DUPIN)
ii. Cash Credits
Overdrafts
and
Loans
iii Term Loans

77500

200.00 35500

3577

75.82

52534

26913

4434

308.5 1

1330.00

500.46

30656

31. 58 0 18

636.27
141449 347.20 245.50 425.64

1726
99

2278.
38

53
50

064

025

1 73

84

1452872
676.45

286523 1779.4 150.03 5434.99
6
432.24 1524
24

1359.7 2451.5 8404.87
5
1

NPAs [Advances &
In vestments]
Advance

2053

7479

Investments

0.75

29.93

fixed Assess

46

95.32

30. 6
2
172.26 172.26

Other Assets
i.
Inter
adjustments
ii Others

office
404. 56
82.00 000

Reverse Repos;
10 Swaps (sell/buy) 534.00 14.34

1 Bills Rediscounted
(DUPN)
2 Interest Receivable
3
Lines
of
Credit
Committed to
Institutions
Custom BIS

0.00

12.84

28.32

1153.98 735.18

5173

o.oo

10624

2.25

133239 0.00

o.oo

000

443.76 30.91

404.65
706.82

0.00 0.00

3770.42

0.00 0.00

51.73

4 Others (Specify)
Unvaried Export 29.47
Refinance
Devolvement /
Invocations
Overdue
installments
Accrued Interest 6707
on Investments
Unavailed
Portion
of
Misc. items
TOTAL INFLOWS

29.47

76 SO

133.7

40.59

4.92

43.06

131.24

67.65

402

435.99

373.70

5.65

0.95

004

52.18
174.29

0.00

0.00 0.00

351 .31
809.69

0.00

4445.1 1452.3 3054.67 2519.45 3109.2 6577.6 5973.6 11384. 38515.5
6
0
5
8
7
19
7

Cumulative Inflows 4445.1 5397.4
6
6

89 11471.57 14579. 21157.5 27131. 38515.
52.
82
0
38
57
T

Table.2

47

ICICI
Statement of structural liquidity 31st March 2015

Summary Of Liquidity Statement

1 to 14 15 to 28
days
days

29days
Over
3
Over 6 Over 1 year Over3
and
and upto 3 months and months and and upto 3 years
upto 5 years Over
months
upto
6 upto 1 year
years

( LIABILITIES )
( ASSETS)}

D. Cumulative Outflows
E Cumulative Mows
F Cumulative Mismatch

5 Total

year

months

A. TOTAL OUTFLOWS
B. TOTAL INFLOWS
C. MISMATCH (B- A)

Rs. in Crores

2904.07 653.05
4445. 1 6
1541.09 799.25

2592.02 2649.32
3054.67 2519.45
462.64 -129.88

609609 6409.37
3108.25
-2987.84 168.31

3249.60
38515.57
5973.87 11384.1 38515.57
2724.27 38515.57
0.00
....
0.00

2904.07
4445.16
1541.09

6149.14 8798.46 14894.55 21303.93 24553.53 385 15. 0.00
8952.13 11471.57 14579.82 21157.50 27131.38 38515.5 0.00
2673.11 -314.73 -146.42
2577.85 0.00
0.00

PRUDENTIAL LIMITS : Individual Bucket

G Cum-mismatch as % to cum-inflows Of Respective 34.67
Bucket

39.68

31.31

23.30

H
As per RBI stipulation-in First Two buckets the 53.07
Negative Gap as % to Outflows of respective Bucket (A)
should not be > 20%

122.39

17.85

-4.90

-2.16 -0.69
-49.00
2.63

PRUDENTIAL LIMITS : Cumulative Mismatch

I Cumulative Mismatch upto 1 year as a % of
Working Funds it should not be more than ( -2)%
-0.90

ADDITIONAL INFORMATION
1

:

SPECIAL

RATE

DEPOSITS

5555.45
5555.45

2

TOTAL WORKING FUNDS IN CRORES

The totals of constituent Items may not tally due lo rounding off

INCRORES

34922.2
9

1

Chief Manager (ALM )
48

9.50 O.O0
83.83 -18.48

0.00

ICICI ANALYSIS OF ALM STATEMENTS
STATUTORY LIQUIDITY RISK STATEMENT:

Maturity pattern of Assets and Liabilities as on 31s1 March 2015.

Short Term (upto 6 months)
Medium Term (6 months to 5 years)
Long Term (Above 5 years)
Total

8798,46
15755.06
13962.04
38515.57

Rs in Crores
11471.57
15659,80
11384.19
38515,57

+2673.11
- 95.26
- 2577.85

1. Liquidity Risk:

Liquidity Risk is being identified, measured and controlled through.
The Traditional Gap Analysis at fortnightly intervals
The Ratio Analysis at monthly intervals
The Contingency Funding plan at quarterly intervals

The Traditional Can Analysis as on 31 -03-2015:
The gap is the difference between outflows and inflows.
To identify, measure and control liquidity risk of the Bank. RBI have stipulated the
Following benchmark for the first two lime buckets:

49

Mismatch (Negative Gap) may not exceed 20% of cash outflows in each of the

Our Position:
As on 31st Bucket March 2015 2"d Bucket

(31-03-2015 to
14-04-2015) 53.07

As on 18 February 2015

1st Bucket

(15-04-2015 to
28-04-2015)12239

(18-02-2015to

2nd Bucket
(04-03-2015to

03-03-2015) 32.78 7-03-2015) 66.74

INTERPRETATION:
From the above, we can observe that the gaps are within the prudential limits
prescribed by RBI in the first two time buckets Remarks:

1.

The positive gap (32.78%) in the first bucket as on 18-02-2015 has increased to
53.07% as on 31-03-2015, due to more inflows in Term Loans.

2.

The positive gap (66.74%) in the second bucket as on 18-02-2015 has increased
to 122.39% as on 31-03-2015 mainly due to increase in inflows on account of
Term Money and other Investments maturing in this bucket.

50

RBI, have not prescribed any other benchmarks for mismatches other than the
first two time buckets. They have, however, left it to the individual banks to establish
prudential gap limits for other buckets based on their risk appetite and risk return profile.
Accordingly, the Bank's Board at their meeting held on 16-01-2015 has approved
the following prudential limits.

BUCKET

1-14
Days

15-28
Days

Inflows

4445.16 1452.30

Outflows
Mismatch
Cumulative
Inflows
Cumulative
Outflows
Cumulative
Mismatches
CumMismatches as
% to Cuminflows

29(14.07
1541.09

29 days to 3 to 6
6 to 12
3 Months Months
Months
2519.45
3054.67
3108.25

1year
to
3
Years
6577.68

2649.32
653.05
799.25

2592.02
462.64

-129.88

6096.09
2987.84

14579.72 21157.50

4445.16 5897.46

8952.13

11471. 7

2904.07 3557.12

6149.14

8798.4 6 14894.55

1541.09 2340.34

2802.99

34.67%
(22.97)

31.31%
(16.23)

39.68%
(26.75)

2673. 1
1
23.30%
(19.55)

-314.73
-2.16%
(2.41)

6409.37
168.31

3 to 5
Years

Over 5
Years

5973.87

11384.19

3249.60

13962.04

2724.27
i
27131.38

-2577.85
i
38515.57

21303.93 24553.53 38515.57
-146.42
-0.69%
(0,12)

2577.85
0
I 9.50% 0%
(0)
(5.71)

Table.3

I.

The Cumulative Mismatch (Cumulative Negative Gap) should not be more than 25%

of Cumulative Inflows of the respective time buckets up to 1-year time bucket and should not
be more than 35% of cumulative inflows of respective time buckets from above I -year time
bucket.

51

Our Position: -Figures in brackets pertain to Februar2015:
(i). From the above, it can be observed that the mismatches were within the prudential
norms across all the time buckets.
(ii). The core portion of Current Account, Savings Bank, Cash Credit, Agricultural Cash
Credit, Demand Loan, Jewellery Loan, Overdraft and Working Capital demand Loans has
been classified into various time buckets over more than one-year time based on the
behavioral study carried out by us.
(iii). Cumulative mismatch (Negative Gap) in '6 months to 1 year' time Bucket should not be
more than (-) 2% of the working funds:
Our position:

As on. 31-03-2015
-0.90%

As on..18-02-2015
+1.13%



The cumulative mismatch in "6 months to 1 year" time bucket: Rs. -314.73 cr.



Total Assets/Working funds of the Bank: Rs. 34922.29 cr.
The cumulative mismatch (Negative Gap) in the '6 months to one year' time bucket

was well within the stipulated norm.

52

RATIO ANALYSIS
RBI has not prescribed any threshold limits for liquidity measurement through ratio
analysis but our ALM policy has prescribed various threshold limits for liquidity
measurement .through ratio analysis. The detailed analysis of various ratios and their
movement over the last month is furnished in Armexure -II.
The ratio analysis indicates that, the following ratios were below/above the
benchmark:

Below as on 18-02-2015 as on 31-03-2015
1. Liquid Assets /Total Assets (15-20%)

12.62%

11.26%

2. Liquid Assets / Deposits (20-25%)

16.09%

13.29%

3. Loans / Core Deposits (55-60%)

61.78%

67.23%

4. Special Rate Deposits / Total Deposits (<.5%) 20.46%

18.77%

5. Cash and near cash assets/Total Assets (<5%) 4.68%

53

5.41 %

REMARKS:
a) The decrease in the ratio was on account of increase in Total Assets (Rs. 1019.51
cr) and decrease in Liquid Assets (Rs. 347.73 cr).
b) The decrease in the ratio was on account of increase in Deposits (Rs. 2985.78 cr)
and decrease in Liquid Assets (Rs. 347.73 cr).
c) The increase in the ratio was on account of more increase in Loans (Rs. 1431.77
cr) than Core Deposits (Rs. 216.20 cr).
a)

The ratio has decreased by t .69% due to decrease in deposits by Rs. 112.27 cr.

b)

The increase in the ratio was mainly due to increase in T-Bills by Rs. 505.50 cr

54

CONTINGENCY PLAN AND ANALYSIS:
Contingency Funding Plan for the year 2014-2015
As per Reserve Bank of India guidelines, banks are required to formulate a
Contingency Funding Plan (Contingency Plan) under the following two crisis scenarios at
yearly intervals as part of Liquidity Plan. The plan should be reviewed by ALCO at quarterly
intervals.

Scenario 1:

A Local Liquidity Crisis

Scenario 2:

A Nationwide name problem or a downgrade in
the credit rating, if the bank is publicly rated.

Stress Test: Impact
Contingency Plans are liquidity stress tests designed to quantify the likely impact of
an event on the balance sheet and the net potential cumulative gap over say a 3 months
period. The plan also evaluates the ability of the bank to withstand a prolonged adverse
liquidity environment.
The stress tests have been done based on the Assets and Liabilities of the Bank as on
the 31st March 2014. The conclusions drawn from the studies could be considered good for
the ensuing year.

55

Volatility Index

Rs- in crores

OUTFLOWS
Current Account Balances

12%ofRs.3985.06cr

Savings Bank Balances

I3%ofRs.5434.73 cr

Normal conditions
478.21
760.86

Term Deposits

Maturing in next 90 days

2228. 10

Term Deposit Interest Payable

Maturing in next 90 days

3 1 .49

Borrowings

Maturing in next 90 days

69.35

Invocations/Devolvement’s of BGs/LCs

Innex90day4

40.59

Unveiled portion of CC/OD/WCDL

In next 90 days'

311.41

Total Outflows

3920.01

INFLOWS
Loans sanctioned against Term Deposits

648.00

NET OUTFLOWS
3272.01
The outflows on account of volatility in various components of Assets and Liabilities

under normal conditions has been arrived by using the standard deviation method/polynomial
method available in MS Excel as mentioned below
56

Table.4

We have further analyzed to ascertain
as to how the outflows in the normal
conditions will behave in the
abnormal conditions and when
national wide crisis occurs and
Nation wide
Crisis
Local
Liquidity
Crisis 597.76
_.
951.07
2785.13

OUTFLOWS
12%ofC/A Balances+ addl 25% of Rs. 478.21 cr
13% SB Balances + addl 25% of Rs 760.86 cr
TDRs Maturing in next 90 days + 25% of 2228.10
cr
TDIP Maturing m next 90 days + 25% of 3 ) .49 cr

39.36

Borrowings Entire Outs tan dings

816.17

Invocations/Devolvement’s of BGs/LCs

40.59

Cash Credit 25% of Rs. 5434.99 cr

1358.75

1358.75

Term Loans 25% of Rs. 8404.87 cr

2101.22

2101.22

Effect of hike in CRR/SLR

200.00

Total Outflows

5690.05

3659.97

INFLOWS
Loans sanctioned against Term Deposits

648.00

NET OUTFLOWS

'

8042.05

i
3659.97

Table.5
Crisis event may also trigger outflows on account of commitments made for potential
loans, drawings under Cash Credit/Loans and also committed reciprocal lines granted, if any
to the local banks. While the Bank has not placed any reciprocal line at the disposal of local
banks, drawings from Cash Credit/Loan accounts and outflows from committed lines cannot
57

be ruled out. As a matter of prudence we have reckoned 25% of the out standings under Cash
Credit and Term Loan accounts as undrawn lines of credit and are vulnerable for withdrawal

Contingency Funding: Strategies
Before we endeavour to estimate the likely impact of the local liquidity and
nationwide name crisis on the balance sheet of the Bank, it should be mentioned that ICICI
would not have to confront Local Liquidity or Nationwide Crisis because of its stature, lineage,
quality of human resources and good corporate governance. The Contingency Funding Plan
though academic has to be prepared and put in place as a prudent risk measure.
As a prudent risk measure, we have reckoned the highest of the two scenarios i.e.
Local Liquidity Crisis (Rs, 8042.05 crores) for preparation of contingency funding strategies.The
withdrawal of the above amount may not take place on a single day.
The adverse effects could spread over say three months. It is also incomprehensible to
believe that during the period there shall be no additional inflows when specially the Bank
honors all its commitments on demand. However, as a prudent risk measure the contingency
funding plan for Rs.8042.05 crores has been put up and the plan of action to meet the
contingency has been placed below has been set up for invoking in stages based on needs.

58

1. The ALM programme plays crucial role in ensuring adequate liquidity in the bank by
assessing liquidity needs of the bank and managing simultaneously assets and
liabilities of the bank.
2. The significance of ALM increases further when there is volatility of interest rates
and forex market
3. ALM programme is costly and involves direct costs in the form of cost of developing
a software model, acquiring hardware and personnel cost of the ALM staff.
4. We can observe that the gaps are within the prudential limits prescribed by RBI in the
first two time buckets Remarks.
5. Preferably book Medium-Term & Long- Term Liabilities on fixed rate and
existing rates.

59

Stage I

Surpluses available

Rs.Cr
72.851

Way of cash

CRR
Balance
(excess)
Balances with other Banks
Call Lending’s
Sub-Total
Stage II
Investments - Coupon receipts
for Rs. 100 crores per month
Treasury Bills - sale

0

j

100.97
200
373.82
300.00

CP S

Forex Swaps for 3 months (when unwinded)
Sub-Total
Stage III
Repos or Securities for Redemption within 3
due months
Shortfall to be met by sale of
Bonds/Debentures Govt. Securities Total
Stage I
Surpluses available way of Cash
by Balance (excess)
CRR
Balances with other Banks
Call Lending’s
Sub-Total
Stage II
Investments - Coupon receipts
for Rs. 100 crores per month
Treasury Bills - sale

1

i

0.00
640.60
412.41
Shares 4742.54
5795.55

j

Shortfall to be met by sale of
Bonds/Debentures Govt. Securities Total
60

5795.55
8042.05
Rs. Crores
72.85
|
'
0
100.97
200
373.82
300.00

CP S

Forex Swaps for 3 months (when unwinded)
Sub-Total
Stage III
Repos or Securities for Redemption within 3
due months

1572.00
0.00
0.68
1872.68

1

i

1572.00
0.00
0.68
1872.68
0.00

640.60
412.41
Shares
4742.54
5795.55

5795.55
8042.05

Table.6

Amount of excess SLR maintained as on 31-03-2015 is Rs.6166.6cr We have not
considered recalling of Demand Loans, Cash Credit accounts, Bill
Financing, as we may not gel the desired response. Similarly liquidity support from
RBI has not been considered Lines of credit from Foreign Banks/Indian Banks abroad
have also not been reckoned.

Contingency Funding Plan for the year 2014-2015
Analysis of Funding; Strategies
Credit Lines
The Bank has set up substantial credit lines (call & term) for other banks. The Bank
also enjoys similar reciprocal facilities from other banks and details of which are available
with Treasury Department Mumbai. These facilities can be used for tiding over the liquidity
risk, if any, in emergency situations.

Reno Facility
It may be desirable to seek Repos facilities on reciprocal basis. This would be a
contingency arrangement. SBI and other nationalized banks could be considered for the
purpose.

61

Asset Securitizations Programmed
The need for Asset Securitization has not been fell. Adequate liquidity and legal
impediments have discouraged the Bank from looking into the Asset Securitization
programme. The Banks contingency plan should however take into consideration the need to
obtain replacement funding through Asset Securitization programme.

ARCIL
The Bank may consider selling of Non Performing Assets (NPAs) to Asset
Reconstruction Corporation of India Limited (ARCIL) to improve liquidity position if need
arises.

Customer Relationship Management
The Bank should have a strong and regular relationship with both depositors and
borrowers and trade-off relationship with some customers according to their importance to
the Bank for liquidity to survive when crisis increases.

Liability management
The Bank should have a strong and regular relationship with lenders and large
liability holders during the periods of relative calm, the Bank will be in a better position to
secure sources of funds during emergencies.

62

ICICI
Statement of Interest Rate Sensitivity 31st March 2015
1-2B
days

LIABILITIES

15 to 29 days
and
28
days upto 3
months

1-14
days

1. Capital
2. Reserves 6, Surplus

0.00
0.00

0.00
0.00

3. Depots

0.00

0.00

Over 3
months
and
uplc 6
month
s

Over 6
months
and
upto 1
year

Over 1
Over3
year
years
Ovar5
and
upto 3 and upto Years
5 years
years

3985.06 3385.06

ii Saving Bank Deposits
iii..Term Deposits

434779
1708.00 95.78 754.3 2320 37 313925 6282.61 435595 1355.97 725.61
3
0.00
0.00 0.00
0.00
0.00
0.00
____
0.00
.000
10.00

4. Certificate of Deposes
Iterm deposits
ii. Call and Short Notice

0.00

000

2045 20. 00
0.00

0.00

000

iv Refinances

0.30 030

0.00

235

1.15

5. Otters Liabilities and provisions
i. Bills Payable

46.25 45.25
0.00
0.00
0.00 0.00 .

0.00

iii. inter-Rank (Term)

0.00

0.00
0.00

0.00

000 0.00
0.00

0.00 00.0

00.45

000

0.00 0.00

0.00

1.40

0.94

0.25 0.00

6.47

0.00

0.00

000

46.25

0.00

0.00
0.00
000

iii Provisions

108695 5434.73
0.00 19890.95

000

Inter-Office Adjustments
0.00

148501 1435.01
0.00 0.00

Iv Others

50717 507,17
0.00

6. Lines of Credit Committed to
i. Institutions
ii. Customers
7.
availed
portion
CC/OD/DL/WCDL
8. Innovation Development

Tolal

17.25 17.25
1748 40 174-8.40

i. Current Deposits

ii

Nonsensitive

of

260.00 26000
15635 000
000

0.00
0.00
18685 124 56

0.00

0.00

0.00
0.00

0.00
498.27

12500

0.00
0.00

150.00

155.00 30.00

0.00 000
0.00 0.00

0.00
260.00
809 68
52 I8 52.11

9. Repos

0.00

10. Bills Rediscounted DUPN

0.00

11. Swaps (Buy/Sell)
12. Interest provisions
Demand Deposit In Provision
Term Deposit Int Provision A/c
13. Others (specify)

52293 50892

14.01

1029 50 573 55

0.00 000

0.00

000

12.59 8.10

4.49

18.90

36.37
21 31

1039.23

0.00

0.00 0.00

3215.24

0.00

0.00

000

36.97

3925

6442

0.00

2289 17.13

197.10

.

misc. iterns
2557.38
TOTAL LIABILITIES
959.58 3495.67 8120.55
1797.8.
The Totals of constituent items may not tally
due to rounding

S
63

7910. 4546.31 1532.21
96

742.8Z"!

372 63 372.63
38515.57

Interest Rate Sensitivity as on 31st March 2015
Interest Rate Sensitivity
29 days Overs Over 6 Over 1 Over
3
month year
years Over5
1-14
1-26
1 5 to and
and
days
2B days upto 3 month s and and
Years
days
months s and upto 1 upto 3 upto 5
upto 6 year
years
years

ASSETS

1 Cash
2 Balance with RBI
3 Balance with Other
i Current Account
ii. Money at Call short
notice
term deposit and
other placements
975.00 775.OO 200.00
06.39
33.77
76762
4.Investments
5. Advances
i. Bills
3 3 3 . 4 6 289.13 44.34
ii. Cash Credit
iii Term Loans
NAP7

639.91

0.00
0.00
0.00

13. lines of Credit

0.00
0.00
0.00

355.00
525 34

000
0.00
492.51 296 16

7285
79072

72.85
1317.B6

I00 07

100.97

0.00
0.00
0.00
1726.99 2254.3 778640 64060

1330.00
14528.72
676.45

305.61

31.58 0.18

0.64

0.25

1.73

4656.53

15.08 39.50

49.20

11.37

8.51

747.65

230.21

5269.

13.44

117.05

0.00
0.00
0.00

0.00
0.00
0.02

0.00
0.00
0.00 000
0.00
000

0.00

o.oo

000

548.38

53404

1434

1153.00

0.00

0.00

__

Total

2053
0.75
0.00

13.69

_259.95 7479I

0.00
735.18

51.73

1332 89

0.00
000

0.00

O.OD

000

5434.99
8404.87
95.32
30.58
172.26

2993
172.26
40466
705 32

11. Bills Rediscounted
12. Interest Receivable

3.54

1761.69 1414.49 347.20

6. NAP
i. Advances
ii. Investments
7.Fixed assets
8. Other Assets
Inter Office adjustments
ii. Other
9.Reverse Repos
10. Swaps

636.27

527.14

Nonsensitiv
e

000

o.oo

000
0.00

o.oo

0.00

404.66
706.82
000

3770.43
0.00
51.71

.
0.00

14. Other
Unavailabed Export
Developments
Overdue Installments

0.00

0.00
0.00

o.oo

145.87

67.07

0.00

o o0

0.00

000

0.00

0.00
0.00
0.00
0.00

000

0.00
0.00
0.00
0.00

1921.03

2524.4S

1517.44

8161.32

ooo

78.80

0.00
0.00
133.77

43.06
67.65

131.24
402

0.OO

0 .00

0.00

1455.94

12454.84

1931.64

o.oo

Accurate Interest
Unavailed portion of CC

0
Misc. Items

0.00

o.oo
000

29.47
52.18

809.69
0.00

o.oa
5.210.71

3754.77

Net of provisions interest Suspense and claims received from ECGCOICGC

Table.7

64

3794.11

000
O.DO
29.47
52.18
174.29
151.31
809.69
0.00
0.00
38515.57

Interest Rate Sensitivity as on 31st March 2O13
Summary Of IRR Statement

TOTAL RATE SENSITIVE LIABILITIES ( RSL)
TOTAl RATE SENSITIVE ASSETS ( RSA )
GAR(B-A)
C as % of B

F

G

H

1 to 28 days

1 to 14 days 15 to 28 29 to
days
months

2557.38
5210.70
2455.33
2453.33
47.08%

1797.80
959.58
3495.67
8120.55
7910.96

GAP(B-A)
Cumulative
GAP
2453.33
C
as
%
of
B
47.08%
PRUDENTIAL
LIMITS : Individual Bucket
7.03%
Gap in Individual Buckets shall not exceed +/-22% of
Gross Assets across all time buckets except in 'Over 5
years' time bucket in which it shall riot exceed +/32% to Total Assets.
PRUDENTIAL LIMITS : Cumulative Mismatch
Cumulative Gap upto 12 months should not exceed +/-1 8%
of Total Assets
% to Total Earning Assets Rs.24756 07
Earning at Risk

5.60%

-

959.58
1455.94
496.33
2453.3
34.09%

3495.67
1245.84
8959.17
11412.5
71.93%

1.42%

25.65%

3

Over 3 Over
months to 6 months
year
months
8120.55
1931.64
-6188.92
5223.57
-320.40

17.72%
-

6 Over
1 Over 3 year Over 5 year
1 year to 3 to 5 year
Total
year

7910.96
1921.03
-2021.84
-2788.09
-80.09%

1535.21
2517.44
985.23
-802.96
39.14%

17.15%

2.19%

742.82
8161.32
7418.54
5615.54
90.90%

3.45%

Total assets
The totals of constituent items may not tally due to rounding off

0.00

0.00 -

0.00
3.45%
'REST
INCOME
AFFECTS

Net Interest Income

I

38515.57
38515.57
0.00
0.00
0.00%

-2.19%

H
Interest income
Interest Expenditure
NIMS IN 000
Total
34922.29earning income
Average

9409.82
3794.11
-5615.55
0.00
148.90%

2011- march
2325.09
1362.09
Assets 962.72
3.45%

202709.92
1216.92
862.98
3.48%

34922.29

C
h
i

I

Table..8

65

PUBLIC RELATIONS MANAGEMENT
A strong public relations management can help the Bank; avoid the spread of public
rumors that can result in significant run-offs by retail depositors and institutional investors.
The Bank should have a strong and regular relationship with the press and broadcasting
media to overcome the rumor if any.

INTEREST RATE SENSITIVITY ANALYSIS
Deposits. Bills Purchased/Discounted and Advances carrying fixed rate of interest,
have been classified into various time buckets based on their Residual Maturity Pattern. All
other advances floating rate of interest have been classified in the "29 days and upto 3
months" time bucket, with an assumption that they may get re-priced after the
announcement of Annual Credit Policy by RBI by the end of April 2015.
RBI has not stipulated any prudential norms for Interest Rate mismatches. However,
our ALM policy has stipulated the following norms.

I. Individual Gap Limits:
The Gap is the difference between Rale Sensitive Assets (RSAs) and Rate Sensitive
Liabilities (RSLs).

Stipulation:
The gap not to exceed +/- 22% of Total Assets across all time buckets except in "Over
5 years' time bucket in which it shall not exceed +/- 32% of Total Assets,

66

Our Position.

BUCKET

29 days
to
3
months

1-28
days

3 to 6
months

Rs. in Crores

6 to 12
months

Ito3
years

1931.64

1921.03

2524.4S

2517.44 8161.3

8120.55

7910.96

454631

1532.21

742.8

-5989.93

-2021.84

985.23

7418.5

-2788.19

Rate Sensitive Assets

521071

Rate Sensitive Liabilities

2757.38

Rate Sensitive Gap

245333

Cumulative Gap

245333

11412.50

-766.35

Gap as a % of Total Assets

7.03%
(3.08)

25.65%
(-4.64)

-17.72% I -17.15% -5.79%
(-6.94)

1245484
3495.67
8959.17

-6 88. 92

over
years

3 to 5
years

1802.96 5615.52.82%
(2.91)

21.24%
(21.80)

Table.9

Figures in brackets pertain to Figure 2015

The Total Assets/Working Funds of the Bank; Rs.34922.29 cr. The gap in the
individual time buckets was well within the ceilings prescribed by the ALM policy
except in second time bucket.

II. Cumulative Gap Limits;
Stipulation:
The Cumulative Rate Sensitive Gap up to 1 year should not exceed + 18% of the
Gross Assets.
Our Position:

As on 31-03-2015
(-) 2.19%
67

As on 18-02-2015
(-) 4.16%

5

 Cumulative Rate Sensitive Gap upto l year: Rs. (-) 766 35 Crores.
 The Total Assets/Working Funds of the Bank: Rs. 34922.29 Cr. The gap as well as
within the prescribed prudential norms

III.

Various components of the assets and liabilities were analyzed to understand
their significance in terms of their sensitivity- to the changes in interest rates. The
Observations are as under:
a) About 80% of the assets i.e., Rs. 9926.41 cr, which are getting reprised on maturity in
the lime bucket of 29 days and upto 3 months"' are performing advances and are
sensitive to interest rate changes. The outstandings in Cash Credit, Working Capital
Demand Loans and Term Loans are linked to BPLR.
b) About 95% of the assets i.e., Rs. 7786.40 cr. maturing in the time bucket of "'over 5
years" are Investments and are sensitive to interest rate change, in terms of value as
well as income.
c) About 54% of the liabilities i.e., Rs. 4347.79 cr. getting repriced in the time bucket of
"Over 3 months and up to 6 months" are Savings Bank deposits, which carry an
administered rate of interest. These deposits are sensitive to upward changes in
interest rates and vulnerable to shift to Term Deposits of lower maturities.
d) About 79% of liabilities i.e., Rs. 6282.81 cr. is maturing in the lime bucket of "over
6 months and up to 1 year" and about 96% of liabilities i.e., Rs. 4355.95 cr. maturing in
the time bucket of over 1 year and up to 3 years" are Term Deposits. These deposits carry
fixed rate of interest till maturity with an implied prepayment option. A behavioral
study carried out by us reveals that 7.74% of such depositors exercise the prepayment
option.
68

Net Interest Margin (N1M)

NIM is to be kept at a minimum of 4.00% within the time horizon of the next re- pricing dale.
Our Position:

At the end of March 2015

At the end of February 2014

3.45%

3.41%

As at the end of March 2014, the Bank's NIM stood at 4.45% (annualized).

Earnings at Risk

While assuming a set of interest rate scenarios (given the static gap position as on
31st March 2015), an assessment of their impact on the Net Interest Income (Nil) has been
made. For the purpose of the impact assessment, it has further been assumed that the average
remaining maturity of all assets and liabilities were in the halfway points of their respective
time bands. The impact of these gaps on the Nil in a time horizon of 1 year is given below"

Change in Interest Rate in
Assets (%)
+100 bp +100 bp
No change
No change
-100 bp
-100 bp

Change
in Total Impact on Nil (up to 1
Interest Rate year) (Rs. in crores)
in Liabilities
+100 bp
+ 44.52 +170.60
No change
+100 bp
-126.09
-100 bp
+126.09
No change
-170.60
-100 bp
-44.52
I

69

The impact of changes on Nil was rather high at Rs. 170.60 crores in a scenario
where the lending rate changes 100 bp in either direction without a corresponding change in
deposit rates. On a closer examination, it was observed that the incidence of the impact was
high due to concentration of balances in Cash Credit account and Term Loans which get repriced in the bucket of "29 days and up to 3 months" of the maturity ladder and continues till
the rest of the year.
RBI have suggested that though Interest Rate Risk exposure may be calculated using
the gap method initially, a gradual shift to duration gap analysis of assets and liabilities may
be carried out at a later stage. We have commenced duration analysis of the fixed income
securities at monthly intervals and duration gap analysis for entire balance sheet items at halfyearly.

70

CHAPTER –V
FINDINGS, SUGGESTIONS &
CONCLUSION

71

FINDINGS
ALM technique is aimed to tackle the market risk. Its objective is to
stabilize/ improve the NIL Although implementation of A.L.M as a risk management
tool is done using gap analysis it is essential that banks strengthen their Management
Information System (MIS) and computer processing capabilities for accurate
measurement of interest rate risk in their banking books, which impact, in the shortterm, their net interest income (Nil) or net interest margin (NIM) and in the long-term,
the economic value of the bank-which involves up gradation of existing system and
application software to attain better and improvised levels

It is also essential that a bank remains alert to the events that affect its
operating environment and react accordingly in order to avoid any undesirable risks.
ALM in this context presents a disciplined decision making framework for banks
while at the same time guarding the risk levels.

72

SUGGESTIONS



The Bank should have a strong and regular relationship with both
depositors and borrowers and trade-off relationship with some customers according
to their importance to the Bank for liquidity to survive when crisis increases.

 The Bank should have a strong and regular relationship with lenders and large
liability holders during the periods of relative calm, the Bank will be in a better
position to secure sources of funds during emergencies.

73

CONCLUSION

 It should reduce the outstanding in Reports about 620 Cr. may be used to create
Short-Term & Medium-Term Assets on floating rate, especially loans and
advances.
 In the current scenario, to compete with private banks, foreign banks and nonbanking financial institutions, ICICI requires efficient human and technological
infrastructure which will further lead to smooth integration of the risk management
process with the bank's business strategies. .

74

BIBILOGRAPHY
 Prasanna Chandra, Financial Management Theory and Practice, 2008.
 6th Edition, Tata McGraw Hill.
 I.M. Pandey : Financial Management, Vikas Publishers.
 E.F. Brigham, and M.C Ehrhardt.., 2006, Financial Management Theory and
Practice, 10th Edition, Thomson South-Western.
 M.Y.Khan and P.K, Jain. Management Accounting, 2009, IV edition, Tata Mc
Graw Hill, New Delhi.
Websites:
www.google.com
www.icicibank.com
www.wickipedia.com

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