International Journal of Advanced Research in Management (IJARM) Volume 6, Issue 3, Sep-Dec (2015), pp. 122-134, Article ID: 10220150603017 Available online at http://www.iaeme.com/issue.asp?JType=IJARM&VType=6&IType=3 ISSN Print: 0976 - 6324 and ISSN Online: 0976 - 6332 © IAEME Publication ___________________________________________________________________________

ASSEST LIABILITY MANAGEMENT IN INDIAN BANKING INDUSTRY - WITH SPECIAL REFERENCE TO INTEREST RATE RISK MANAGEMENT IN VIJAYA BANK Dr. Shivakumar Deene Assistant Professor of Commerce, Central University of Karnataka Kadaganchi, Aland Road, Gulbarga-585311, Karnataka, India Key words: Risk Management, Vijaya Bank and Banking Industry Cite This Article: Dr. Shivakumar Deene. Assest Liability Management in Indian Banking Industry - with Special Reference to Interest Rate Risk Management in Vijaya Bank. International Journal of Advanced Research in Management, 6(3), 2015, pp. 122-134. http:// http://www.iaeme.com/issue.asp?JType=IJARM&VType=6&IType=3

1. INTRODUCTION Banks work as facilitators or intermediately agencies of public money. A bank has an obligation to pay the liabilities when demanded, but cannot liquidate the same quantum of assets as certain intrinsic conditions are built in them. Similarly, banks face challenges when there is a change in the economic and political scenario either locally or internationally. This leads to credit risk, operation risk, and market risk i.e. interest rate risk and liquidity risk, all this risk revolve around assets and liabilities, irrespective of their nature and treatment. These risks are not recent developments. They have been defined since the inception of the banking industry. Even in the late 1970s bankers began to recognize the importance managing both assets and liabilities for the purpose of mitigating liquidity risk and interest rate risk and simultaneously increasing the market value of their banks. It is here that asset liability management (ALM) helps in proper planning, directing, controlling the flow, level, mix and rates on the assets and liabilities can be made with the changing scenario. There are various tools, which can be employed for detecting and assessing the extent of miss match in ALM. For assessing the interest rate risk, the present study uses the GAP analysis, which is a tool for managing the interest rate risk. Based on the sensitivity of the assets and liabilities to the interest rate fluctuations, they are classified in to different maturity buckets. The GAP or mismatch risk can be measured by calculating GAPs over different times intervals as at a given date. GAP http://www.iaeme.com/ijarm.asp

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Assest Liability Management in Indian Banking Industry - with Special Reference to Interest Rate Risk Management in Vijaya Bank

analysis measures the mismatches between rate sensitive liabilities (including offbalance sheet positions). An asset or liability is normally classified as rate sensitive if: 

Within the time interval under consideration, there is a cash flow;

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The interest rate resets/reprises contractually during the interval;

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RBI changes the interest rates (i.e. interest rate on savings bank deposits, DRI advances, export credit refinance, and CRR balance) in cases where interest rates administered; and

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It is contractually pre-payable or withdrawal before the stated maturities.

The GAP is the difference between Rate Sensitivity Assets (RSA) and Rate Sensitive Liabilities (RSL) for each time bucket. The positive GAP indicates that it has more RSAs than RSLs, whereas the negative GAP indicates that it has more RSLs. The GAP reports indicates whether the institution is in a position to benefits from rising interest rates by having positive GAP (RSA>RSL) or whether it is in a position to be benefit from declining interest rates by a negative GAP (RSL>RSA). The GAP can, therefore, be used as a measure of interest rate sensitivity. The GAP analysis is subject to limitations. GAP analysis does not capture basis risk or investment risk, is generally based on parallel shifts in the yield curve, does not incorporate future growth in the mix of business, and does not account for the time value of money. The GAPs have been identified in the following time buckets: 

1-28 Days

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Between 29 Days to 3 Months

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Over 3 Months and up to 6 Moths

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Over 6 Moths and up to 1 Year

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Over 1 Year and up to 3 year

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Over 3 Years and up to 5 Years

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Over 5 Years, and

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Non sensitive

The positive GAP indicates that has more RSAs than RSLs, whereas the negative GAP indicates that it has more RSLs. Symbolically: RSAs>RSLs Positive GAP RSAs