RBI asks banks to set up ALCOs

The scope of the ALM process has been divided into five broad segments and includes liquidity risk management, management of market risks, funding and capital planning, profit planning and growth projection and trade risk management. The central bank has said that it wants tointroduce modern techniques of interest rate risk measurement like Duration Gap Analysis, Simulation and Value at Risk in due course when banks acquire sufficient expertise and sophistication in MIS.

The RBI has also suggested that banks should set up a group under the charge of the general manager (funds management/treasury) with senior officers drawn from investments, foreign exchange, credit and MIS departments and entrust them with the task of preparing the ground work for implementation of the ALM system.

It has further directed banks that they should constitute a professional managerial and supervisory committee of three to four directors which will oversee the implementation of the system and review ins functioning. The board will have overall responsibility for management of risks and will decide the risk management policy of the bank and set limits for liquidity, interest rate, foreign exchange and equity price risks.

The ALCO, the guidelines say, would consider product pricing for bothdeposits and advances, the desired maturity profile of the incremental assets and liabilities in addition to monitoring the risk levels of the bank, the RBI has said. The ALCO will also have to articulate the current interest rate view of the bank and base its decisions for future business strategy on this view.

Further, the central bank has also suggested that time buckets should be framed for advances. "While interest rates on term deposits are fixed during their currency, the advances portfolio of the banking system is basically floating. The interest rates on advances could be repriced on any number of occasions corresponding to the changes in the PLR", the RBI letter says.

"The Gap report should be generated by grouping rate-sensitive liabilities assets and off-balance sheet positions into time buckets according to residual maturity or next repricing period, whichever is earlier," the RBI says.