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Prudent Asset Liability management

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  • Published
    24th Mar, 2023


Reserve Bank of India (RBI) governor Shaktikanta Das mentioned that developments in the U.S. banking sector highlight the importance of ensuring ‘prudent asset liability management’.


  • The recent developments in the United States’ banking system have brought to the fore the criticality of banking sector regulation and supervision. 
  • The ripple effects of the failure of the Silicon Valley Bank (SVB), the 16th largest bank in the US, may be seen globally.
  • SVB collapsed because of poor financial management.

What is Asset Liability Management?

  • ALM in banking means managing the cash flows of assets and liabilities to increase profitability, manages risk, and maintains safety and soundness. 
  • Simply put, it is the process whereby a bank’s total assets and liabilities are controlled and managed simultaneously in an integrated fashion. 
  • ALM is all about managing three central risks:
    • Interest Rate Risk
    • Liquidity Risk
    • Foreign currency risk
  • For banks with forex operations, it also includes managing,
    • Currency risk

Issues with Banking sector in India:

  • NPAs of public sector banks: Parliamentary committee noted that the problem of high loan write-offs and NPAs, combined with low asset growth, is more severe for public sector banks (PSBs) than private banks.
  • Lowering of Capital to Risk-weighted Assets Ratio (CRAR) requirement: The RBI’s requirement of a minimum CRAR of 9%, to prevent banks from becoming highly leveraged, is 1% higher than the Basel III norms for internationally active banks.
  • Performance of the National Company Law Tribunals (NCLT): Larger NPAs under the Insolvency and Bankruptcy Code (IBC) have been taking much longer than the stipulated time period of 270 days.
  • Powers of the RBI in case of PSBs: RBI had stated that some powers available to the RBI under the Banking Regulation Act, 1949 are not available in the case of PSBs.  These include: (i) removing and appointing Chairman and Managing Directors of banks, (ii) superseding the Board of Directors etc.

Way forward:

  • Reducing CRAR: high CRAR requirement is impractical for these banks, and a relaxation would release capital and increase credit in the market.
  • Strengthening NCLT: NCLTs’ resources are increased to enable them to dispose of such cases swiftly.
  • Strengthening RBI: Government should constitute a high powered committee to evaluate the powers of the RBI with respect to PSBs as provided under various statutes.

Verifying, please be patient.

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