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Procedure for Examination of Asset Liability Management

In order to determine the efficacy of Asset Liability Management one has to follow a comprehensive procedure of reviewing different aspects of internal control, funds management and financial ratio analysis. Below a step-by-step approach of ALM examination in case of a bank has been outlined.

Step 1

The bank/ financial statements and internal management reports should be reviewed to assess the asset/liability mix with particular emphasis on: -

• Total liquidity position (Ratio of highly liquid assets to total assets).

• Current liquidity position (Minimum ratio of highly liquid assets to demand liabilities/deposits).

• Ratio of Non Performing Assets to Total Assets.

• Ratio of loans to deposits.

• Ratio of short-term demand deposits to total deposits.

• Ratio of long-term loans to short term demand deposits.

• Ratio of contingent liabilities for loans to total loans.

• Ratio of pledged securities to total securities.

Step 2

It is to be determined that whether bank management adequately assesses and plans its liquidity needs and whether the bank has short-term sources of funds. This should include: -

• Review of internal management reports on liquidity needs and sources of satisfying these needs.

• Assessing the bank's ability to meet liquidity needs.

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* Contributed by -
Sayonton Roy,
MBA (Finance), IMT Ghaziabad,
Currently working as Consultant - Global Financial Services (Risk and Business Solutions Group) at Ernst & Young, Mumbai.