Unit 3: Asset-liability and risk management

ALM is managing the bank's balance sheet to control liquidity and interest rate risk while achieving profitability.

Credit risk

Risk that a borrower fails to repay. Management: credit appraisal (5 Cs), credit rating models, exposure limits (single and group borrower limits — Large Exposures Framework), collateral, covenants, diversification, loan review, provisioning, credit derivatives.

Liquidity risk

Risk of not having enough cash to meet withdrawals and obligations.

• Basel III ratios: Liquidity Coverage Ratio (LCR) — high-quality liquid assets ≥ net cash outflows over 30 days (100%); Net Stable Funding Ratio (NSFR) — available stable funding ≥ required stable funding (100%).
• Structural liquidity statements by maturity buckets; contingency funding plans; access to RBI's LAF and MSF.

Operational risk

Risk of loss from failed internal processes, people, systems or external events — fraud, IT failures, cyber-attacks, legal risk.

• Management: internal controls, segregation of duties, audit, business continuity plans, insurance, KYC, cyber security; capital under Basel (basic indicator, standardised approaches).

Market risk

Risk of losses from movements in market prices — interest rates, equity prices, exchange rates, commodity prices — on the bank's trading book.

• Measurement: Value at Risk (VaR), stress testing; limits on positions; hedging with derivatives.

• Bank treasury functions: managing CRR/SLR, money market borrowing and lending, investment portfolio (G-secs, corporate bonds), forex dealing, derivatives, ALM support, transfer pricing of funds.
• Organisation: front office (dealing), mid-office (risk monitoring, limits), back office (settlement, accounting) — segregation of duties.

• Bank for International Settlements (BIS), Basel, Switzerland (1930) — the "central bank of central banks"; hosts the Basel Committee on Banking Supervision (BCBS).

• India: RBI requires CRAR of 9%, CET1 5.5%, CCB 2.5% — stricter than Basel minimums; leverage ratio 4% for D-SIBs, 3.5% for others.

• Assignment (Section 130, TP Act): transfer of actionable claims — book debts, life insurance policies, receivables — to the bank as security, by written instrument.
• Lien (general lien of banker), set-off and guarantees are other forms of security.
• Registration of charges with ROC (companies) and CERSAI.
• Documentation: loan application, sanction letter, loan agreement, demand promissory note, hypothecation/pledge deeds, mortgage deeds, guarantees, letters of continuity; stamped as per state laws; registration of charge with ROC and CERSAI; periodic revival letters to avoid limitation (3 years).

• NPA definition: interest or instalment overdue for more than 90 days (term loans); cash credit/overdraft out of order for 90 days; bills overdue for 90 days; agricultural loans overdue for two crop seasons (short duration) or one season (long duration).
• Expected credit loss (ECL) framework to replace incurred-loss provisioning (RBI draft, from 2027).
• Recovery channels: compromise settlements, Lok Adalats (up to ₹20 lakh), DRTs (₹20 lakh and above), SARFAESI, IBC, sale to ARCs.

• Investment management: SLR securities, non-SLR (bonds, CPs, shares), classification under RBI's 2024 framework — HTM, AFS, FVTPL; valuation norms; limits on exposures; interest rate risk monitoring.
• Financial inclusion: PMJDY, business correspondents, payments banks, SHG–bank linkage, PMJJBY/PMSBY/APY, UPI; financial literacy — RBI's National Strategy for Financial Education (2020–25), Financial Literacy Centres, Financial Literacy Week, NCFE.