Functioning of Asset-Liability Management Committee
RBI has issued guidelines on ALM system vide circular no BP.BC.8/21.04.098/99 dated February 10, 1999 advising banks to give adequate attention to put in place an effective ALM system. Bank should set up an internal Asset-Liability Committee, headed by CEO/CMD or ED. The Management Committee or any specific Committee of the Board should oversee the implementation of the system and review its functioning periodically. The auditor should ensure whether the bank has a policy on Asset-Liability Management and whether the same complies with the RBI guidelines. As per the RBI guidelines the ALM process rests on three pillars:
ALM Information Systems
Management Information Systems
Information availability, accuracy, adequacy and expediency
ALM Organisation
Structure and responsibilities
Level of top Management involvement
ALM Process
Risk parameters
Risk identification
Risk measurement
Risk Management
Risk policies and tolerance level The auditor should also report whether the ALM policy is regularly monitored.
As per the circular No.BP.BC.8/21.04.098/99 dated February 10, 1999 Asset Liability Management Committee consists of the bank’s senior Management ncluding CEO. This committee should be responsible for ensuring adherence to the limits set by the Board as well as deciding the business strategy of the bank (on the asset-liability sides) in line with the bank’s budget and decided risks, Management objectives. As per the circular, each bank is supposed to decide on the role of its Asset Liability Committee, its responsibility as also the decisions to be taken by it. The auditor should ensure and report whether the committee is functioning as per the decisions formed by the bank. The functioning of the committee should be useful and helpful to the Bank.
Structural liquidity at periodical intervals.
The final guidelines issued in circular no BP.BC.8/21.04.098/99 dated February 10, 1999 suggest the bank to prepare Statements of Structural Liquidity by placing all cash inflows and outflows in the maturity ladder according to expected timing of cash flows. As a measure of liquidity banks are required to monitor their cumulative mismatches across all time buckets in their Statement of Structural Liquidity by establishing internal prudential limits with the approval of the Board/ Management Committee. As per the guidelines, the mismatches (negative gap) during the time buckets of 1-14 days and 15-28 days in the normal course, are not to exceed 20% of the cash outflows in the respective time buckets. The RBI has issued “Guidelines on Asset-Liability Management (ALM) system – amendments” (DBOD. No. BP.BC. 38/21.04.098/2007-08) dated October 24, 2007 wherein the time buckets for preparation of Statement of Structural Liquidity has been revised. The banks are required to adopt a more granular approach to measurement of liquidity risk by splitting the first time bucket in to three time buckets viz., next day, 2-7 days and 8-14 days. Accordingly, format of Statement of Structural Liquidity has been revised and also guidance for slotting the future cash flows of banks in the revised time buckets has also been suitably modified. However, the frequency of supervisory reporting of the Structural Liquidity position shall be fortnightly, with effect from the fortnight beginning April 1, 2008. In this regard, RBI, vide its circular on “Guidelines on Asset Liability Management (ALM) System (DBOD.No.BP.BC.68/21.04.098/2007-08 dated April 9, 2008), has advised banks to submit the Statement of Structural Liquidity as on the first and third Wednesday of every month to RBI. The auditor is required to report whether the bank is preparing the Statement on Structural Liquidity at the prescribed periodical intervals.