Asset and Liability Management (ALM)

In banking, asset and liability management (ALM) is used to manage the risks that arise due to mismatches between the assets and liabilities (debts and assets) of the bank. Banks face several risks like liquidity risk, market risk, interest rate risk, credit risk, and operational risk. Asset Liability Management (ALM) is a strategic management tool to manage interest rate risk and liquidity risk faced by banks, other financial services companies, and corporations. Banks manage the risks of Asset liability mismatch by matching the assets and liabilities according to the maturity pattern or matching the duration, by hedging and by securitization.

Asset and liability management remain high-priority areas for bank regulators, with an emphasis on the management of market risk, liquidity risk, and credit risk.… Read the rest

Ethical Issues in the Banking Industry

Over the years, banks have undergone tremendous growth in many aspects of their operations, starting with the type of customers they deal with to the manner in which information is received, recorded, transformed, and finally used. Ultimately, banks have unraveled the whole mystery of discrimination as to what customers to offer services to or not by categorizing their clients in terms of their income structure. This classifying of customers is meant to assist in the decision making process as to what customer receives what treatment, but it is also meant to assist the banks in understanding the type of customers to offer better services to.… Read the rest

Different Types of Risks Faced by Banks Today

All companies which have a profit maximizing objective hold a certain degree of risk whether through microeconomic or macroeconomic factors. Banks also face a number of risks atypical of non financial companies due to the payment and intermediary function which they perform. Recent changes in the banking environment has lead to an increased pressure to maximize shareholder value, this means that banks take on a higher risk in order to gain a higher return. It is due to this increased pressure and market volatility that banking risk needs such effective management to ensure the banks continued solvency. Risk can be defined as an “exposure to uncertainty of outcome” measured by the volatility (standard deviation) of net cash flow within the firm.… Read the rest

Customer Relationship Management (CRM) in Indian Banking Sector

In recent years, a rapid revolution is transforming the banking industry around the world. In early 1990s, banks and other financial intermediaries have been affected by greater risk and sharp competition due the wave of deregulation in India. Due to cross-border flows and entry of new players and products, banks are forced to adjust the product-mix and modify their processes and operations to remain competitive. Also, better tracking and fulfillment of commitments, multiple delivery channels for customers and faster resolution of incoordination is possible due to extensive use of technology.

Today banks are market driven and market responsive and every bank’s CEO is more concerned about how to increase or at least maintain the market share in every line of business against the backdrop of sharp competition.… Read the rest

Dynamic Provisioning in Indian Banking

Dynamic Provisioning:  The Basel II Framework is approaching dynamic provisioning by clearly requiring banks to separately measure EL(Expected Loss) and UL(Unexpected Loss). EL-based provisioning has forward-looking element as it is capable of incorporating through the cycle view of probability of default. The recent financial crisis has provided a still further fillip to the search for a forward-looking provisioning approach due to pro-cyclical considerations.

Inadequacy of the Current Provisioning Policy in India:  In normal provisioning policies, specific provisions are made ex-post based on some estimation of the level of impairment. The general provisions are normally made ex-ante as determined by regulatory authorities or bank management based on their subjective judgment.… Read the rest

Reasons for Liquidity Fluctuations in Indian Banking System

Liquidity risk is inherent in bank’s core business because banking organizations employ a significant amount of leverage in their business activities and need to meet contractual obligations in order to maintain the confidence of customers and fund providers. The first step in measuring and managing liquidity risk is the identification of the most important sources of risk.

In the Indian context of banking, unexpected liquidity fluctuations are driven mainly by the following items:

  • Behavior of non-maturity deposits: A large fraction of deposits, in an Indian bank, consists of low-cost current and savings deposits which do not have any contractual maturity. Moreover, the depositor has the option to introduce or withdraw funds at any point of time.
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