Assets And Liabilities Management In Assessment Answer

 

 

The internal factors are borne by the banks due to their administration or policies of loans, improper structure of lending limits for loans or credits, insufficiency in the evaluation of borrower’s financial position, excessive inclination on collaterals and deficient risk pricing, inexistence of mechanism for loan review, etc. This can lead to the generation of credit risk in the activities of the banks that can affect the assets and liabilities of the banks (www.bai.org, 2014).

Figure 2: Assets and Liabilities Management Process

(Source: Romanyuk, 2010)

The primary Asset Liability Management processes holds the parameter that identifies measures and manage the risk. The first stage helps in developing up the Asset Liability Management function in the banks that helps in structuring the framework of bank measurements. Therefore the management of banks can focus on the parameter of risk measurements. The appropriate specification should build upon violability in the operation environment, availability of auxiliary data, availability of the expertise in the market and expected market and industry growth, etc (Memmel and Schertler, 2011). Therefore these parameters should notice the risk on the profitability of the banks and long term growth risk. The market value of portfolio equity can be helpful in measuring the risk that is associated with balance sheet of the banks. The Net Interest Income of the banks can also measure the balance sheet risk in relation to accounting year’s profit that arises from cash flow divergence in the accounting period.

Risk Measurement Techniques

There are number of factors that are used in measuring the exposure of banks to various risks:

Gap Analysis Model

In the words of Obstfeld (2010), gap analysis is a considered as technique for managing asset and liabilities that can be applied for assessing the risk of interest rate and liquidity of the banks. Therefore, it measures the control and degree of mismatch in asset and liabilities via either maturity gap or funding. The gap analysis is evaluated for assets and liabilities of varying maturities and is estimated for a fixed time frame. As per Khoury and Chan (2008), the model of gap analysis analyzes the re-pricing gap that can occur in the interest revenue acquired by the bank’s assets and the interest funded on the liabilities of the banks over a specific time or period. Thus, it focuses on the net interest earnings exposure of the banks with accordance to modifications in the interest rates in distant bucket of maturity.

Sercu et al. (2009), discussed re-pricing gaps is evaluated for, the assets and liabilities of banks having diverse maturities. If the gap is positive then it indicates that the assets of the banks is re-priced ahead of liabilities and banks can increase the net interest income if there is increase in the future rate of interest and if the gap is negative, it indicates that before re-pricing assets, the liabilities of the banks get re-priced. Sercu et al. (2009), stated that the manager of the banks has to consider at the rate sensitivity of every assets and liability on the balance sheet. The formula that can be use by the banks is as:

Net interest Income = Interest Rates Impacting Assets and Liabilities (Book Value of Rate Sensitive Assets – Book Value of Rate Sensitive Liabilities)

Therefore, the banks can identify the change in the interest rate that can affect the net interest income of the banks. For instance, IDBI bank can be benefited if the rate sensitive assets, is greater than the rate sensitive liabilities and due to rise in the interest rate. The negative gap that arises due to high rate sensitive liabilities over rate sensitive assets can be advantageous to bank during the time of decreasing interest rate. Therefore, the IDBI can reduce their risk interest rate if the bank analyzes the gap is around zero between asset and liabilities.

Duration Model

Duration is regarded as the crucial measurement of the interest rate sensitivity of assets and liabilities as the duration takes hold of the cash flow’s period of influx and the maturity of assets and liabilities (www.econ.ucsb.edu, 2014). Duration Model, is considered as the weighted average period to maturity of the total present value of the flow of cash. Duration analysis is taken by the banks for analyzing the elasticity of the market value of the bank’s instrument in compliance with the interest rate.

As per Kohn (2010), the higher the amount of duration, the price of the assets and liabilities can be more sensitive as per the changes in the rate of interest rate. The banks can effectively concentrate on the market value of their assets and liabilities through following the duration model. Therefore, the banks can evaluate the average life of the assets and liabilities. The Duration Gap, can be calculated as:

DGAP = DA – u DL

The DGAP highlights the difference of asset and liabilities cash flows timing whereas DA, is regarded as the average duration of assets and DL, is the average span of liabilities and u indicates the ratio of assets and liabilities. Therefore, the duration gap may help the banks in knowing the effect of high interest rate on the market value of the equities and on the predicted net interest income of the banks.

Value at Risk

Rickards (2012) stated the value at risk is attributed to the maximum expected loss that a banks may have to face over a certain aimed horizon. The market risk of a portfolio of banks can be evaluated through calculating the net worth of the banks at a specific point of period so that the banks can focus on the risk that may have long-term impact. Therefore, the bank can make the decision effectively in the management of assets and liabilities so that the cash flows of the banks can be effectively managed. Thus, the market risk of the portfolio related to the assets and liabilities can be control by the banks and thus can reduce the mismatch between assets and liabilities of the banks.

Kusy and Ziemba (2010) opined that the Value at Risk can be also used by the banks in dealing with the other risks such as credit risk and operation risk. He has also mentioned that the larger the amount of value at risk, the banks can have higher risk on their number of portfolio. Therefore, the Value at Risk can be use for ranking the portfolios of risk in terms of degree of risk on each portfolio. Thus, the banks like IDBI, PNB, etc can assess their assets and liabilities for identifying there effect on the cash flows of the banks.

Simulation

In the words of Tolonen (2009), the model of simulation can help the banks in structuring a compelling aspect for analyzing the risk of interest rate and liquidity risk. The simulation technique, can productively manage the asset and liability of the banks.

Davis et al. (2011), mentioned that simulation model takes care of the following points:

1. Shift in the absolute degree of interest rate
2. Movement in the nonparallel yield curve
3. Marketing strategies of the banks are under or over attained
4. The margins earned by the banks in the previous period are not capitalized or improved
5. Alteration in the funding mix of the banks
6. Changes in the level of bad debt and prepayments

Therefore, these factors can help the banks in gaining correct information in controlling the assets and liabilities.

According to Rickards (2012), simulation model uses the power of computer to provide information about the cash flows and assets and liabilities to the management of the banks. Kohn (2010), analyzed that SBI or ICICI can generate accurate data and reliability through simulation on the prices, growth rates, reinvestments, etc under different scheme of interest rate and liquidity rate. Therefore, the banks can easily assess the possible effect of changes in the interest rate and liquidity risk on the earnings of the banks. As well as on the economic value and their affect on the cash flows.

Sercu et al. (2009), determined that the static simulation can help the banks in assessing the movement of cash that can arise independently from the current on and off balance sheet of the banks. The dynamic simulation can also assist the banks in having detailed information about the future course of action of interest rates and its affect on the liquidity position of the banks that can affect the business activity of the banks in managing assets and liabilities over the period. Therefore, the banks like PNB, Axis bank, and ICICI can use the simulation technique to balance their current earnings and potentiality of long-term earnings that can help them to maintain the adequate liquidity and interest rate risk exposures.

Internal Rating System

In the terms of Khoury and Chan (2008), the internal rating system can help the banks like SBI or Axis Bank in managing and controlling the effect of risks of interest rate, liquidity risk or credit risk. For example, the banks might be facing in their lending and other operational activities therefore, by managing and organizing the credit worthiness of the borrowers and the transactions qualities. Thus, the banks can maintain the level between assets and liabilities.

Summary

As analyzed from the study of the specific chapter, the researcher was able to acquire knowledge and details of the assets and liabilities management and the various elements of risk that can affect the assets and liabilities and cash flows of the banks. The different elements of risk like liquidity risk, credit risk and interest rate risk can their level of affect in balancing the assets and liabilities of the banks and on the earnings of the banks. The risk measurement techniques has been mentioned in this chapter that can provide assistance to the banks in lowering down the effect of risks from the bank’s asset and liabilities so that banks can manage it comprehensively. Analysis of risk helps the banks in successfully carry on with the activities of the banks. The gap analysis, duration model, value at risk and the simulation technique can be effectively evaluate by the banks for understanding the degree of impact of risk on the financial position of the banks like SBI, IDBI, PNB, ICICI and Axis Bank.

Introduction

Research Methodology as a unit helps in the evaluating and determining the most probable approach that are required to be followed to accomplish the complete and detail outcome of the course.Bryman and Bell (2011), mentioned that the theories and concepts that are endorsed in the research methodology will assist in gaining the broad and better analysis of the research topic. Employment of research methodology helps in knowing the process adopted for analyzing the appropriate research of managing assets and liabilities and the measurement of risk for balancing the assets and liabilities. However, Crouch and Pearce (2012), pointed, that the brief procedure of research methodology can also guide towards the frequent errors that may generate limits within the process of research. Aloof from that, the researcher has tried to exercise each detail procedure of research methodology that can help and assist in superior analysis of banks of India and their relation with assets and liabilities management of international banking structure.

Method outline

In the specific chapter, brief research methods for analyzing the assets and liabilities management superiorly and its affect on the various activities of the banks will be determined with reference to largest banks of India. The chosen research philosophy is positivism that can help in achieving information based on legitimate logic and evaluation. Further, deductive method will grant the researcher to develop the study based at the beginning on secondary sources that can help in describing the assets and liabilities management in the banks of SBI, ICICI, PNB, IDBI and Axis Bank. The descriptive design will guide the researcher in explaining the applied and followed concepts in the brief way that will further help in analyzing the impact of learning as well. Implementation of primary and secondary sources will provide great assistance and knowledge in a more detail manner of the research topics so that, good quality of analysis is followed.

Research Onion

Research Onion, is treated as a technique of methodology that helps in classifying the major segmentation of the research that has the capability for effectively analysing the topics. Brannen (2009), defined that the research onion is method that is helpful in doing the research process for the academic students in a structured format and by backing each segments of techniques will help in attaining results of the research process. Research onion, is grouped into six major segments that are philosophies, approaches, strategies, choices, periods, techniques and procedures.

 

Figure 3: Research Onion

(Source: Saunders et al. 2009, pp. 52)

The above figured out diagram of research onion will help in understanding the each segments of research techniques so that, quality research can be carried for effective results.

Research Philosophy

In a research methodology, implementation of research philosophy can help the researcher in identifying the correct process for acquiring the brief about the research topic. Magilvy and Thomas (2009), discussed that the philosophy of research can help in examining the assumption process that is undertaken by the researcher while performing the research topics. However, the analytical process for checking out a particular topic can differ therefore; the implementation of research philosophy has to be in a proper and definite structure. Positivism is considered as a important part of philosophy.

Positivism as a course of philosophy guides in the appliance of logic that can assist in evaluating the concealed facts and information in an appropriate manner (Toloie-Eshlaghy et al. 2011). Although, positivism is controlled by scientific method, it works to eliminate the metaphysics so that, the brief observation and knowledge is effectively collected.

Justification for election of chosen Philosophy

Positivism is followed in the current chapter that helps in better evaluation of the undisclosed facts and information that is related to the management of assets and liabilities in context to Indian Banks. Apart from that, significance of the study is time restrained because of which interpretative or realism study has not, been taken into account by the researcher. Therefore, the adoption of positivism philosophy controls the role of researcher in altering or evaluating the information that can lead to reduction of errors in the data as well.

Research Approach

An appropriate approach for the research work is needed so that, the structure required for developing the study is disclosed. A specific research topic has been follow for study under two broad categories either deductive or inductive. Inductive approach is regard as the study that helps in learning the research topic when the sufficient information on the chosen topic is not available. The early stage of inductive approach, comply with the observation that helps in generating the possible information that assists in building way for the research accordingly. However, Bergh and Ketchen (2009) stated that the inductive approach helps in structuring new theories for the related topics. Deductive approach is regarded as, the practical implementation of theories for effectively doing the research paper. Therefore, the approach of deductive aims to structure the theory in more specified and conceptualized manner.

Justification for the exercise of the selected Approach

In the are related to asset and liabilities management with the implementation of different theoretical knowledge. Models of assets and liabilities required an adoption of technique that can help in knowing in more definite and precise manner. However, as, no fresh concepts or theories has been applied by the researcher therefore, the approach of inductive tool has not been implemented in the current theory. Further, the role of assets and liabilities management in assessing the financial risk helps in understanding the nature of concepts in more structured manner.

Research Design

As per, Cameron (2009), the research design comforts in briefing the framework of the research work and related topics that will benefit in choosing the most appropriate pattern for collection and analysis. A set of approach has been followed in the process of acquiring data that, helps in proper explanation of the research design. In academic research pattern, different types of research design are applied that, are exploratory, explanatory and descriptive.

Figure 4: Types of Research Design

(Source: Crouch and Pearce, 2012)

Exploratory Design can help the researcher in addressing different varieties of thoughts and concepts that, can be used for completing the research work. In the words of Harrison and Reilly (2011), explanatory research design explains the existence of incidents or events and their effect on the research work. The last element of research design is descriptive design that, focus at generating details the reason of occurrence of events with correct description of the research topics.

Justification for the election of the selected Design

Implementation of explanatory was not taken into account as the explanatory approach focuses on the concept of longitudinal study which was not appropriate for the particular research topics. Therefore, descriptive design is followed for the application of assets and liabilities management in the Indians banks for minimizing the potential risks that can affect the cash flows of the banks.

Data Collection Procedure

Magilvy and Thomas (2009), mentioned that the acquisition of data are helpful in figuring the correct and accurate results for the process of research work that can enable a standard design for conducting research work.

Data Sources: Primary and Secondary

The sources of information are helpful in chalking out the research topic so that, better information can be extracted as per the requirements of the research topics. The primary and secondary are the two main sources of data that, are used in the research work as it provide helpful material in gaining information about the particular research topic. Crouch and Pearce (2012), illustrated that the primary data are helpful in assessing the raw data for implementing the information in the related research topic. Primary data are normally considered as first hand information therefore the researcher has to look that collected data are reliable and validate with the research topic. The secondary data in the particular research work are collected from various websites, blogs, journals, articles, magazines and literature source so that, the research topic can be explained in more brief and wider way.

Data Techniques: Qualitative and Quantitative

Qualitative data can be used by the researcher as it can be helpful in presenting the researchwork and related topics in a more descriptive way that, can help the reader to understand the topic in much more easier and brief manner. et al. (2011), mentioned that the qualitative data provide theoretical concepts in the practical ground that helps in better understanding of the carried topic. Quantitative data on the other side follows the statistical data that can help the researcher in reporting the data of larger sample sizes. Both qualitative and quantitative approaches, has been effectively applied for analyzing the level of risk and their impact on the assets and liabilities of the banks.

Research Limitations

According to Cooper and Schindler (2010), the research study can also have to bear some of the restriction that can be related to the concerned topic in the research work that might be avoidable or non-avoidable. In the particular work of research, the limitation that arises in the research work are:

Reliability: The method of data that has been applied for gathering the information was not able to provide consistent result. Therefore, the absence of reliability in analyzing the risk related to assets and liabilities management somehow affected the findings of the research work’s topic.

Most of the research topics are based on the characteristics of longitudinal or cross sectional that depend on the apportionment of time for conducting the particular topic of the research work. In the current research, adoption of cross sectional study has been implemented that has defined time period therefore, employment of “Gantt Chart” has been considered for the realization of the research work in simpler form. Saunders et al. (2009) illustrated that Gantt chart assist in segmenting the major work in accordance to the body of the study and helps in better close of the topic.

 

 

As discussed in the above table, the researcher will exercise the Gantt chart at regular intervals so that the topics of the research work can be explained and analyzed in more brief and detailed manner.

The carried chapter focus on the different techniques of research     of selection that provide assistance in analyzing the topic in better an appropriate way. The current chapter has provided support to the researcher for coordinating the essence of the study with the applicable tools of research so that the perfect research methodology can be formed. The tools are more relevant to analyze the concepts of management of assets and liabilities for evaluating the different risk with reference to largest banks of India that is SBI, IDBI, Axis, PNB and ICICI.

Introduction

In this chapter, the researcher has focused on the analysis of the data on the management of assets and liabilities of the international banking module in the banks. With the support of qualitative and quantitative analysis, the analysis of the information aids the researcher to enhance the quality of the information and analyze and conclude the particular topic in better way through better analysis. Kohn (2010), discussed that the data analysis helps the researcher in enforcing the theoretical knowledge in the practical application. However, Allayannis et al. (2009), pointed that the data analysis helps the researcher in analyzing the data that involves complexities and the drawbacks along with the data manipulation, limits of genuineness and other factors. Thus, a procedure of cross check has been formed via evaluation of data in the particular research work. The management of assets and liabilities in accordance with the international standard system will be evaluated in the following chapter with the help of calculated data. The data that will be generated in the particular chapter, the researcher will try to acquire knowledge in relation to the topic and will significantly recognize and analyze the findings so that valid points can be added in the process of collection of necessary data.

Qualitative Approach

The qualitative section comprises the banks as the potential sample as the detailed concepts of assets and liabilities management has been applied to Indian’s bank. Moreover, the learning of qualitative will provide deeper analysis for every sub heading in more effective diffusion of the study topic.

Importance of Assets and Liabilities Management in Banks

The assets and liabilities management techniques has been considered by banks in order to improve and enhance the quality of the assets and assess the potential risk that are associated with the assets and liabilities of the banks that can affect the earnings and cash flows of the banks. The assets and liabilities management will help the bank in identifying the risk that can affect the short term profits, the long term earnings and sustenance scope of the long run of the banks. Thus, the assets and liabilities management model can help in maintaining the severe impact of risk on the earnings of the banks.

Risk management as a parameter in controlling the risk

Risk management can be used as tool in the banks for mitigating the risk that are related to risk of development, operations risk, sales and marketing risk and future growth risk. Therefore the risk management can be effectively applied in the banks for managing the potential risk. The banks like SBI, ICICI and Axis bank has many multiple sites and also operating internationally. Therefore, the banks may not be able to control the risk effectively. Thus, the implementation of risk management can help the banks in knowing the risk that can have affect on the earnings and cash flows and on the balance sheet too.

Advantage Gained from the Application of Assets and Liabilities Management

Assets and liabilities management positively influence the income and cash flows of the Indians banks and recognizing the risk like credit risk, liquidity risk effectively which improves the performance of the banks and controlling the risk effectively has improved and strengthen their balance sheet. The credit risk management like risk rating, risk pricing and portfolio management has helped in managing the assets and liabilities which has helped the banks in attaining the long term goals of controlling the cash flow and assets and liabilities.

Quantitative Approach

For gauging the performance of the Banks in accordance to the assets and liability management, the profitability ratio, management efficiency ratio, and different balance sheet ratios has been used for evaluating the same.

Analogy of Banks through Ratio Analysis

 

Chart 1: Profitability Ratio

(Source: Created by Author)

The interest rate spread ratio PNB is high followed by SBI, IDBI, AXIS and ICICI. Therefore it indicates that the PNB is able to generate more earnings that help them to effectively manage the difference between assets and liabilities. Thus, other banks have to monitor the change in interest rate spreads for managing their earnings. The net profit margin of IDBI is quite high in comparison to public banks of SBI and PNB whereas, between the private banks ICICI and AXIS, Axis bank has the better net profit margin which reflects that IDBI and AXIS has increased their sales that reflects on their profit. The adjusted cash margin is high for IDBI followed by PNB and then SBI which shows that the banks were able to effectively convert their sales into sales for keep on operating. In private sector banks, both AXIS and ICICI has positive adjusted cash margin figure. The return on long term funds of PNB is 119.50%, SBI is 97.83%, IDBI is 90.34%, ICICI is 61.10% and Axis is 83.30. Therefore, it reflects that the banks have effectively made investment for the long term which has ensure higher operating profit. The Return on net worth for SBI is 23.82%, PNB is 33.23%, IDBI is 31.3%, ICICI is 22.12% and AXIS is 28.94%. Therefore, PNB and AXIS bank have higher ratio in the public and private banking sector but all other banks has positive ratio which shows that the banks have affectively utilised the investment of the shareholders in order to create the better returns for their banks and business operation domestically and internationally. Thus, the banks were able to minimize the risk of bankruptcy that has maintained the investment in the banks. Therefore, the banks have to determine the levels of debt in order to seek excessive returns for enhancing the bank’s performance. PNB has gained higher return from the adjustment of tax on the total net worth of the bank and the bank is effectively deploying the capital of the shareholders. Other public banks SBI and IDBI has also good ratio that are ensuring the banks are also gaining better return but less than PNB. In private banks, AXIS has better figure than ICICI. Therefore, all the banks have generated better return on the net income.

The return on assets by excluding revaluations of SBI is 2134.51, PNB is 743.59, IDBI is 647.27, ICICI is 591.26 and Axis Bank is 573.88. Therefore, it can be analyzed that the banks were able to utilize their assets effectively in generating income. From the figure it can be assessed that the Punjab National Bank and ICICI has better number in comparison to other banks. Therefore, it indicates that these two banks are low asset insensitive because of which they are able to use their assets to gain higher income. The return on assets by including the revaluations, the figure is equal for the SBI, IDBI, ICICI and Axis banks as the figure by excluding the revaluation from return on assets but PNB has an increasing figure of 790.02 which shows that the PNB earnings is much better than in comparison to other banks and it also depicts that the PNB performance is also high then SBI, ICICI, Axis bank and IDBI. Therefore, overall it can be analyzed that the Punjab National Bank is working effectively than the other banks in relation to the ratios of profitability. In the whole, it can be evaluated that the banks have effectively managed the assets and liabilities which have controlled their cash flows and income for decreasing the mismatch among the assets and liabilities.

The management efficiency ratio that has been calculated in above chapter helped in analyzing the efficient levels of the banks in apportioning the assets and liabilities for improving the profitability of the banks. The interest income to total funds for PNB and Axis bank is higher than SBI, IDBI and ICICI. The PNB has 9.98 and AXIS has 10.25% while that of SBI is 9.41%, IDBI 8.6% and ICICI has 8.47%. Therefore it indicates that the PNB and AXIS bank has generated more income in spite of change in the interest rate. The net interest income to total funds of PNB has 5.46% which is higher than SBI of 5.2% and IDBI of 4.40% in respect to public sector banks while AXIS bank has 6.19% in comparison to 4.68% of ICICI. Therefore, it indicates that the banks with higher ratio are able to comply with change in rate with the assets and liabilities that have maintained their cash flows effectively. The non interest income to total finds in public sector bank, that is SBI has 1.10%, PNB has 1.20% and IDBI has 1.36% and in private sector bank Axis bank has 1.28%% and in ICICI 5.76%. Therefore, it has been analyzed that the banks were least affected from the economic and financial market cycles that have improved the earnings of the banks. The operating expenses to total funds is also at positive side for all the banks which indicates that the assets and liabilities have been well managed to cover the expenses of operating that have ensured the banks to continue with their operation effectively in the domestic circle as well as in the foreign circle. The positive ratio shows that the company has effectively met the profitability from the investors. The operating expenses to total funds of SBI is 3.78%, Punjab National Bank is 3.52%, IDBI is 2.8%, ICICI is 7.40% and Axis bank is 3.68%.

The return on capital employed for SBI is 9.59%, PNB 10.17%, IDBI 8.86%, ICICI 23% and Axis bank 10.4%. Therefore the figure reveals that the banks effectively generated the earnings from the money invested. PNB and ICICI has higher ratio that means that they were able to gain more profits from the apportionment of capital in comparison to other banks. Thus, the investors have been effectively attracted to invest in the banks and providing better return. The loans turnover is almost same for all the banks SBI, IDBI, PNB, ICICI and Axis bank. Therefore it reflects that the banks were able to generate enough sales to pay off their debts which have helped in improving the cash flows of the banks. The total assets turnover ratio is also quite same for the banks at around 1% which reflects that the banks are not able to make the maximum use of the assets for increasing the sales and meeting the liabilities. Therefore the low total assets turnover ratio has affected the sale of the banks because of which the cash flows of the company can be affected that can result into misbalance between assets and liabilities. The ratio of total assets turnover of 1% reflects that the net sales of the banks are equal to the total assets for the year which means that the banks have used all their assets for meeting the sales. The assets turnover ratio is quite impressive for all the banks. The ratio of SBI is 8.35%, PNB is 7.15% and IDBI is 6.35% while that of private sector banks, ICICI has 4.69% and Axis bank has 6.76. Therefore, it can be clearly analyzed that the banks are efficient in effectively applying the assets in generating the sales and meeting the assets and liabilities comprehensively too. Thus, the ratio indicates that all the banks are able to produce more sales with the use of fewer assets that resulted into higher turnover ratio.

Therefore, after analyzing the management efficiency ratio it has been found that all the banks have moreover equal ratios. The performance of Punjab and National Bank and ICICI is quite better than the other banks as per the management efficiency ratio. The management of the banks have to analyze the efficiency in order to increase the productivity of the bank. The banks will have to effectively utilize their assets in order to increase the sale and revenue. The management efficiency ratio analysis depicts that the banks has a great scope in increasing their total income on the employed finance which will help in managing the assets and liabilities and controlling the cash flows that will enhance the operation of the bank in foreign market and in national market. All the banks, SBI, IDBI, ICICI, PNB and Axis bank have noticed improvement in their financial position through effective management of assets and liabilities.

 Chart 3: Balance Sheet Ratios

(Created by Author)

The analysis of the balance sheet ratios has helped in determining the financial health of banks that is SBI, IDBI, Axis, PNB and ICICI. The ratios have effectively identified the affect of assets and liabilities on the financial status of both private and public banks. The chart 3 comprehensively showcase that the banks performance is on increasing side. The capital adequacy ratio of SBI is 22.09%, PNB is 23.53%, IDBI is 25.63%, ICICI is 22.47% and Axis bank is 23.76%. Thus, it can be evaluated that the banks were able to maintain sufficient capital in order to control the losses that might arise due to various risk of interest rate risk fluctuation, credit risk and liquidity risk. Therefore, the positive capital adequacy ratio have influenced positively in enhancing and strengthening the balance sheet of the banks. Therefore maintaining the capital adequacy ratio has helped the banks in analyzing the risk and risk measurement techniques for reducing the affect of the risks on the earnings of the banks.

The advance to loan fund ratio of SBI is 88.20%, PNB is 89.67%, IDBI is 89.67%, ICICI is 76.74% and Axis bank is 87.27%. All the banks have higher advance to loan fund ratio that indicates the banks have taken borrow more money to finance their loans with a view to manage the assets and liabilities and the cash flows that can strengthen the balance sheet of the banks.

Therefore, both the ratios capital adequacy and advance to loan have effectively enhance the proficiency of the banks that helps the banks in managing the cash inflow and cash outflow for carrying out the necessary activities of depositing and lending.

The analysis of debt coverage ratio depicts that the banks are effective in generating income from their operations that are helping them to cap the payments of outstanding debts. The banks have generated the payment of loan from the borrowers on time because of which they were able to maintain their cash outflow and inflows. The credit deposit ratio of the banks is very high that indicates that the banks might not have sufficient liquidity to meet future unexpected requirements of fund. Therefore, it can be pointed that the banks have granted more money from the deposits. According to the ratio the PNB has lend more credit followed by IDBI and then SBI in public sector banks whereas in private sector banks ICICI banks has provided higher credit than AXIS bank from its deposits. The investment deposit ratio is also high for all the banks that represents that the banks have made high investment from the capital mobilised by them that shows that the banks has more cash outflows then cash inflows. SBI bank has invested more money than the Punjab National Bank and IDBI into projects from the cash acquired through deposits. As, in private sector again ICICI bank has contributed higher percentage of finance into ventures from the deposits than the investment made by AXIS bank. It can be regarded that all the banks have made investment that is positive sign that the banks are able to gain deposits so that they can lend credit and make investment effectively for the stability of cash flows and assets and liabilities too.

The cash deposit ratio is of all the banks is below 10% that represents that the cash balance held by the banks is very less in relation to the deposits. The total debt to owner’s fund ratio is high for all public banks SBI, PNB and IDBI and it’s less for private banks ICICI and Axis banks. Thus, it shows that the public banks are having more debt than the value of equity whereas the private banks have more equity then the amount of debts.Therefore it can be analyzed that the financial strength of the private banks are stronger than the financial position of the public banks. The financial charges coverage ratio all the banks are greater than the standard ratio of 1. Therefore, it can be depicted that the banks are able to pay off the financing expenses like interest or lease from their cash that helps in maintaining the cash flows and assets and liabilities and improving the financial strength of the banks. The financial charges coverage ratio post tax is also acceptable for all the banks that reflect that the banks are effectively covering of the requirements of obligations in spite of charge of tax. Therefore, the calculated debt coverage ratios shows that overall performance of the banks in generating income has improved due to which they are able to mitigate the limitations of managing assets and liabilities and the banks are capable to generate the returns on the capital and comprehensively deal with the emerging competition and risks. Thus, the banks are able to avail cash for covering the payments of debt that can be related to payment of interest or lease and payments of principle on debt. Other thing is that the banks can easily lend loan to the customers that can increase the income level of the banks.

The leverage ratio of the banks has been analyzed through the evaluation of current ratio and quick ratio. The leverage ratio of the banks depicts that the banks has higher assets than the level of debts. Therefore, it can be assessed that the banks are able to measure the risk effectively and cash flows. The current ratio that has been analysed shows that the all banks have somewhat similar figures. Therefore, it can be noted that banks were able to settle their liabilities and realized their assets effectively within 12 months due to management of assets and liabilities that improved their movement of cash flows. In public sector bank SBI has 0.15, PNB has 0.14 and IDBI has 0.13 current ratios while in private sector bank ICICI has 0.2 and 0.13 current ratio. The quick ratio of IDBI has better number of 37.49% than PNB that has 33.35% and SBI of 9.6%. In private bank AXIS has 20.7% and ICICI has 4.37%. Therefore, it can be evaluated that the banks are able to manage enough cash and other current assets for meeting the short term obligations and they are able to reduce the liquidity risk that helps in stabilizing the cash flows. As per the figure IDBI, PNB and AXIS banks are investing more resources in the working capital in order to gain profit.

Therefore, overall analysis shows that the Punjab National Bank is performing well in terms of profitability ratio and AXIS bank is doing better in asset turnover ratio, profits ratios and management efficiency ratios. ICICI bank has high current ratio in comparison to SBI, PNB, IDBI and Axis bank. Most of the banks are using re-pricing gap analysis and duration analysis to tackle down the risk related to interest rate risk, liquidity risk and credit risk. All the banks are effectively using interest rate derivatives for efficient management of position of assets and liabilities and flow of cash in business operation. Thus, all the banks are able to see improvement in their performance and earnings that are helping them to maintain balance between liabilities and assets and monitoring the probable risks and strengthening the balance sheet of the banks. Thence, asset and liability management are assisting the banks in the management of investments, deposits, credit, borrowing, FOREX reserves and capital and minimizing the gap among rate sensitive assets and rate sensitive liabilities and reducing the mismatch of maturity so that liquidity problem can be dodged.

Summary

Asset and liability management has emerged as a crucial activity for all the financial institution SBI, PNB, IDBI, ICICI and AXIS bank. All these banks are concentrating on effective management of assets and liabilities for improving and increasing the yield and reducing the exposure of risks. The result of this chapter shows that the public sector banks and the private banks both have a comfortable liquidity position of short term. Thus, public banks SBI, PNB and IDBI and private banks ICICI and AXIS bank both has a great scope to improve and enhance their profitability and income through making reduction in short term liquidity. Accordingly, the techniques of assets and liabilities management has helped the banks in tackling the risks of market effectively that improved their performance and earnings and it also helped to improve and stabilize the net interest income of the banks. Therefore, the banks can make effective decisions for guarding the level of risks that can affect the cash flows of the banks and balance sheet. Therefore, above all analysis presents that the banks performance have considerably improved.

Conclusions

The whole research study was focussed on the concept of management of assets and liabilities in the Indian Banks and its impact on the earnings of the banks that is SBI, PNB, IDBI, ICICI and AXIS and reducing the affect of various financial and market risks. The study of the research paper shows that Indian banks are considered by the researcher so that the impact of assets and liabilities can be assessed. The effect of assets and liabilities management is positively related on the performance of the banks and controlling the risks and strengthening the flow of cash. The data acquired helped in knowing the level of success of asset and liabilities management on the balance sheet of the banks. It has been found that the banks have register growth in their performance and income that are positively affecting the cash inflow and outflow from the banks and recognize the possible risk.

Linking with the Objectives

On the basis of collection of data, the researcher will try to figure out the links generated between the practical applications and the objectives of the research work. As per aims of the research study, the researcher has focused to link the associated data so that the reliability and achievement rate of the study can be enhanced.

Linking Objective 1: To recognise the role played by asset and liabilities of international banking in accordance with Indian banks

As observed in data findings and analysis, the role of assets and liabilities management is very effective on the performance of the banks that are positively influencing the balance sheet of the banks. Based on the survey, the researcher determined that all the banks SBI, IDBI, PNB, ICICI and AXIS bank are deeply concentrating on the management of assets and liabilities that are helping banks to mobilize their savings effectively. The banks are able to maintain the acceptable profitability and minimized the risk of interest risk and provided adequate amount of liquidity comprehensively as well. The role of assets and liabilities has made the banks to adapt to the changes that occur in the market in terms of risk. The net interest margin of the banks have considerably improved that have maximized their income by comprehensively quantify to the exposure to risk. Thus, the effective management of assets and liabilities helped the banks in managing the mix, volume, maturity, rate sensitivity, quality and the liquidity of liabilities and assets so as to receive a prearranged adequate ratio of risk or reward.

Linking Objective 2: To analyse the importance of the managing asset and liabilities of International banking in Indian banks

With the assistance of assets and liabilities management, it has been opined that the Indian banks are able to gain sufficient amount of earnings along with the better flow of cash both in domestic market as well as in foreign markets. Banks are productively adopting techniques of assets and liabilities and risk measurement techniques that are effectively minimizing the financial risk and market risk because of that the balance sheet of the banks are showing a better financial position of the banks. The assets and liabilities management has helped in minimizing the fluctuations in the returns of the banks due to change in interest rate and credit rate. Therefore, the liquidity and profitability of the banks have improved. Asset liability management has helped in planning, organizing and controlling the volumes of assets and liabilities and yields so as to gain the profitability levels through minimisation of interest rate risk. Thus, it can be linked that the banks can effectively anticipate the change in their returns through assets and liabilities management that can arise due to various risks. The banks can identify the sources of risk that can affect the balance between the assets and liabilities. The rate sensitive assets and rate sensitive liabilities are effectively measured by the banks.

Linking Objective 3: To identify the issues and risk associated with the asset and liability trend in Indian banking system

The findings of the research work shows that the assets and liabilities of the banks are connected with various types of risk such as interest rate risk, credit risk and liquidity risk. There are also other types of risk like FOREX risk, currency risk, operational risk, reputation and country risk. Thus, these risks are influencing the net interest income and margin of the SBI, IDBI, PNB, ICICI and AXIS bank. Therefore, the banks have successfully adopted various risk measurement techniques to mitigate the effects of risks on the balance sheet and the cash flows of the banks. The gap analysis and duration analysis are used by the banks to measure the rate sensitive assets and rate sensitive liabilities and also the measurement of risks effectively. Thus, using the techniques for risk measurement has helped the banks in identifying the potential risk that are associated with the assets and liabilities and helped in measuring and stabilizing the cash outflow and cash inflow. Therefore, it has been linked that the Indian Banks are able to manage effectively the assets and liabilities that are strengthening the balance sheet and financial position of the banks.

Recommendations

Depending on the analysis and outcome of the research study, the researcher has enlisted some suggestions that can help in reducing the difference in the risks and management of assets and liabilities in Indian banks. As per the topic of the research study, the researcher has recommended certain norms that can help in better management of assets and liabilities in Indian Banks that can help in balancing the balance sheet and cash flows.

» The banks have to monitor and manage on continuous and regular basis the interest rate risk and liquidity risks that are associated with the balance sheet of the banks so that possible steps can be taken by the banks in controlling the risks. Therefore monitoring and managing the risks can help the banks in knowing the impact of the risks on the net interest income of the banks and on the liquidity of the banks.

» The banks have to keep in control the level of assets liability mismatch while expanding the range of the balance sheet. As large mismatch in the assets and liabilities can, result into volatility in the earnings of the banks. Thus, controlling the mismatch can strengthen the balance sheet of the banks and the banks can make suitable strategies so that they can be protected from the potential risks. Controlling the assets and liabilities can help the banks to face the financial risks effectively.

» The banks can follow the implementation of sensitivity analysis for the determination of management of risks. As, all the banks are considerably influenced by the interest rate risk. Therefore using the sensitivity analysis the banks can assess the risk and can take effective decisions regarding minimizing the risks. The sensitivity analysis can help the banks in analysing the risk associated with portfolios of the banks. Thus, the sensitivity analysis can help in measuring the impact of actual outcome on the performance of the banks in regard to the assumed outcomes of the banks.

» The banks should focus on strengthening the management information system and efficiency of computer handling so that the banks can accurately measure the liquidity and interest rate risks. The management information system can help the banks in faster flow of information so that the banks can make quick decision on the issues of risk and managing the cash flows.

» The banks has to take care of the effective management of cash balances and bank balances as it can fluctuate over the time so that the cash inflow and cash outflow of the banks can be controlled comprehensively.

» The re pricing gap analysis and duration analysis can be used by the banks for measuring the interest rate risk and liquidity risk for managing assets and liabilities in banks. The re-pricing gap analysis can help the banks in making differentiation among the interest rate gaps and liquidity gaps and the duration analysis can help in measuring the sensitivity of price of assets and liabilities in accordance to movements in interest. The use of interest rate derivatives can also help in managing assets and liabilities.

Future Scope of the Study

The scope of the research study was not successfully exploited to its maximum level due to presence of restrictions in the conducting study. In addition, the topic could have been explained better through analysis of more banks and using various risk measurement techniques in analysing and controlling the potential risks. Further, the study of comparative can also upgrade the chances of penetrating the different steps enforced in the management of assets and liabilities in the banks. The conducting the better study analysis of the income statement, profit and loss account of the banks can be assessed and the IFRS can be followed for the purpose of doing the research work in impressive way.

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Appendices

Appendix 1