The imminent transition of the economy from easy to dear money regime will expose the financial sector to some complex risks.
Banks are particularly susceptible to such risks as demand for credit is rising and deposit growth is falling. A more holistic approach is needed to fine-tune the nuances of asset liability management (ALM).
While managing ALM, focus on liquidity risk is a near term activity and working on cost-efficient liability mix (growth of deposit segments) is a continuing long-term ALM activity.
Liquidity risk management is a treasury function whereas balancing liability mix is a line function to augment cost efficient resources. With the use of centralised online real-time exchange (CORE) banking technology, management of risks arising from ALM has become a centralised function whereas mobilising deposit resources continues to be a line function.
The pattern of capturing data in the prescribed time buckets on inflows and outflows of assets and liabilities in banks is processed as part of ALM function at the corporate level whereas mobilisation of business (deposits and credit) is done at the line management level.
Among others, ALM data becomes a critical factor in pricing assets and liability products that helps branches in mobilising business.
In this context, it becomes important to share the ALM data regularly with field level functionaries to ensure that they are aware of the tenor-based gaps and risks inherent in the business mix. The top down and bottom-up communication on ALM risks must be well aligned to mitigate ALM risks.
Branches’ role
In addition to term deposits, bank branches focus more on augmenting low-cost deposits through current accounts and savings accounts (CASA). The component of CASA is an important line of business to not only mitigate ALM risks but also to improve liquidity and profitability to increase stakeholder value. With innovative alternate investment products available in the market and tax saving schemes, operating units of banks have to work hard to mobilise deposits.
The efficiency in augmenting deposits and deploying credit at unit level is the driving factor in better managing ALM risks in the long term while the efficiency of treasury has a limited but significant near-term role in managing risks. Thus, the role of unit level business operations holds the key for managing ALM risks.
Credit surpasses deposits
The dynamic between deposit and credit growth in the banking system is changing fast. With the economy working on full swing as the pandemic enters the endemic stage, the lending support of banks assumes greater significance.
When entrepreneurs are struggling for enhanced working capital needs due to rising input costs and exacerbated business risks, handholding by banks with timely credit is important. A look at the data on assets (Credit) and liabilities (deposits) will provide cues on the next level of ALM challenges.
The trend reflects diminishing deposit growth and rising credit growth which will widen the gulf between the two unless deposit growth is reinforced to enable credit flow. While capital adequacy ratio (CAR) of most banks is far higher than the threshold of 11.5 per cent, what is needed is the seamless inflow of deposit resources. The CD ratio at 78.2 per cent in March 2019, before the pandemic struck, had gone down to 71.50 per cent in March 2021 and is now bouncing back with early signs of uptick.
Long-term strategies
Seamless cost-efficient resource inflows are important for managing ALM risks. Even prior to the recent hike in repo rate, banks started increasing interest rates on fixed deposits and marginal cost of fund-based lending rates (MCLR). The trend further firmed up after RBI intervention on May 4.
While interest rate is an important factor in deposit mobilisation and lending, it is not the sole differentiating factor. The efficiency of digital infrastructure and management of customer service holds the key in attracting customers.
With customers holding bank accounts in multiple banks, customer-friendly banks will garner a greater share of the business while others will end up carrying the overheads with unremunerative accounts.
Besides adopting a customer-friendly and service oriented attitude, the responsiveness and efficiency of technology driven back offices have to be improved with appropriate operational risk management practices. Availability of cash at ATMs, well-functioning digital devices in kiosks, safety and security against cyber risks have to be ensured.
Business per customer, revenue per customer, cost of deposits and risk adjusted yield on advances are some of the data points that need to be closely monitored.
RBI insists on customer protection and quality of customer service. Recently, it had set up a six-member committee to look into the adequacy of customer service regulations.
Banks should regularly introspect into quality of customer service at unit level. A holistic look at ALM risks is essential to mitigate them and balance near-term and long-term perspectives.
The writer is Adjunct Professor, Institute of Insurance and Risk Management – IIRM. Views expressed are personal