What is asset and liability management and what methods do they follow?

1
What is asset and liability management and what
methods do they follow?
www.avendus.com/india
2
Asset and liability management
For any business to grow, they need take certain
risks from time to time. These risks are either
in terms of expansion or in terms of some new
product line or service that they maybe
introducing. To be able to do this, it is
important that they have a good backup of capital
with them and good back up of assets as well.
That is when asset and liability management come
into picture. In simple terms, it is the
management of balance sheet the size and its
quality. It also involves taking some risk and
well thought decision to tackle the imbalance in
asset liability ratio (if liabilities are
higher).
www.avendus.com/india
3
Focus on interest margin
When it comes to asset and liability management,
there is no denying that its core focus lies in
managing the overall interest margin. In this, it
is crucial that there is a very integrated
approach followed in deciding the type of assets
to be invested in and the size of assets being
invested in. there should also be a well-thought
mix of asset types. What makes asset and
liability management a success is that the assets
and liabilities need to match in terms of rate
and maturity in order to get good yield.
www.avendus.com/india
4
Different methods
This function is also provided by certain
investment banking companies in India. To be able
to provide proper asset and liability management
service, there are certain tools that the asset
managers usually use. They are namely, gap
analysis, duration analysis, value-at-risk
method, and ultimately risk management. The tools
help the wealth managers in addressing the risk
factors caused as a result of mismatch within the
liabilities and the assets.
www.avendus.com/india
5
Duration method and gap analysis
The gap that we refer to here is actually the
excess of assets that are interest sensitive over
the liabilities that are interest sensitive or
the other way around. When these liabilities and
assets become equal, the gap amounts to zero. In
the duration analysis, the effect of the changes
in the interest rate over the values of the
assets and liabilities is analyzed. This analysis
is usually done in terms of cash flow and average
maturity.
www.avendus.com/india
6
Risk management and value at risk
The next we see is the value at risk method, in
which the practice of market to market selling is
approved. This approval is given on the basis of
yield to maturity ratio. In risk management, the
risk profile pertaining to all the said assets
and liabilities are analyzed to make sure that
they fall in the proper risk levels. This risk
management is made possible with the help of
certain hedging mechanisms available. The RBI has
laid out certain guidelines that all banks need
to follow.
www.avendus.com/india
7
Thank You
www.avendus.com/india