IIBF CAIIB & TIRM IMPORTANT NOTES | RISK MANAGEMENT NOTES – PART 1 | 2024 EXAMS

RISK MANAGEMENT NOTES – PART 1 for 2024 EXAMS

In this post, we will be providing you revision Risk Management notes for paper of CAIIB & Diploma Course of TIRM for 2024.

As the exams are due for the Certified Associate of the Indian Institute of Bankers Exams in June 2024 & for IIBF Diploma in Treasury, Investment & Risk Management in January 2024, Learning Sessions has come up with revisionary notes for the latest attempt as per the latest prescribed Syllabus of these two IIBF Exams.

RISK MANAGEMENT 2024 VIDEO LECTURES

Before we begin with the notes, we would like to take your attention to our latest recorded lectures of Risk Management for CAIIB & TIRM (Diploma) Courses.

In these Recorded Lectures (prepared by expert faculty) will include:

• The sessions with unlimited views (also downloadable on the app)
• Mock Tests (include Prev Year Que)
• 24 by-7 access to materials access through apps & browser
• Conceptual clarity
• Hinglish language 
• The latest Syllabus 2024 as IIBF has prescribed

The course is available at the Most reasonable prices & can be accessed through:

• Android App: LS PRO & Website: iibf.info
• Android App: IIBF LEARNING CENTER  
• iOS App: My Institute 
• Website: Learning Center (Code: gegkt)

RISK MANAGEMENT UNIT 1: 

COMPONENTS OF ASSETS & LIABILITIES IN THE BANK’S BALANCE SHEET & THEIR MANAGEMENT

• In ALM, goals and objectives are analyzed and developed, and actions are taken to accomplish them such as the development of long-term strategic plans, periodic profit plans, and management rate sensitivity.
• Bank assets represent the ways in which funds are used to generate revenue.
• In the Reserves and Surplus account, the share premium is included as well as the balance in the P&L account.
• Besides refinancing from the RBI, there are other forms of borrowing.
• Besides Bills Payable, Inter-office adjustments, Interest accrued, Provisions for IT, tax deductions at sources, interest taxes, and provisions, are some other liabilities.
• Short-term money market loans are those made in the interbank call money market and repayable within 15 days of the loan being made.
• Securities investments make up a major part of the Bank’s Balance Sheet.
• Cash credits, overdrafts, and loans repayable on demand are all considered loans repayable on demand, although they may have a specific due date.
• The income on Investments is earned in the form of Dividends & Interest.
• The other income may include profit from the sale of Investments &/or other assets.
• As part of Other Income, dividends from subsidiaries and joint ventures are included.
• Banks’ financial management is centered on risk management.
• As a result of deregulation, there have been a number of discriminatory pricing policies introduced, as well as the need to match maturities between assets and liabilities.
• In addition to interest rates and exchange rates, there are liquidity risks involved in the ALM.
• ASSET LIABILITY MANAGEMENT: ALM is the action of planning, acquiring & directing the flow of funds through an organization. The ultimate aim of this procedure is to generate sufficient / regular earnings & to steadily build the organization’s equity over time, while taking appropriate and calculative business risk. 

• Various sources from where funds can be raised are: 

1. 1. 1. Capital 
      2. Reserves & Surpluses 
      3. Borrowings 
      4. Deposits 
      5. Other liabilities & Provisions 
      6. Contingent liabilities.

• The assets side of the balance sheet of bank consists of:

1. 1. 1. Cash & balances with RBI 
      2. Balances with Banks & Money at Call & Short Notice 
      3. Advances 
      4. Investments 
      5. Fixed Assets 
      6. Other Assets.

• Reasons for growing importance of ALM are:

1. 1. 1. Volatility due to deregulation of financial system, interest rates and price level. 
      2. Rapid Innovation of financial products of Banks 
      3. Requirement under the Regulatory Environment 
      4. Increasing awareness among the Top Management.

• An organization’s ALM involves planning, acquiring, and directing the flow of funds.
• In order to implement ALM, it is necessary to understand the market area in which the bank operates.
• In balance sheet restructuring, assets and liabilities are actively managed according to their composition and mix.
• The primary management aim is the control of interest income & expenses and the resulting net interest margins on an ongoing basis.
• The justifications for growing importance of ALM are Volatility, Product Innovation, Regulatory Environment and Management Recognition.
• The Central Banks in different countries including RBI have issued framework and policies for banks to develop ALM policies.
• The parameters that are selected for the aim to stabilize ALM of banks are Net Interest Income, Net Interest Margin and Economic Equity Ratio.
• Net Interest Income equals to Interest Income – Interest Expenses. i.e. (NII = income from interest – expenses to earn interest)
• To stabilize short term profits – banks have to lower down the instabilities in NII.
• Net Interest Margin equals to ‘Net Interest Income’ divided by ‘Average Total Assets’.
• Net Interest Margin can be seen as Spread on earning assets.
• Economic Equity Ratio = Shareholders funds / Total funds.
• Price matching basically aims to maintain the spread by assuring the deployment of liabilities at a rate higher than costs.
• Liquidity is assured by grouping the assets & liabilities based on their maturing profiles.
• Rising interest will benefit when there is +ve gap i.e. Assets > Liabilities and declining interest will benefit when there is -ve gap i.e. Liabilities < Assets.
• At Macro level, ALM leads formulation of critical business policies, efficient disbursement of capital and designing of products with appropriate pricing strategies.
• At Micro level the goals of ALM are to achieve profitability by price matching and by ensuring liquidity through maturity matching.

• The other assets of a Bank include Inter-office adjustments, Interest accrued, advance Tax paid/TDS, Stationary, and stamps, non-Banking assets acquired in fulfillment of claims and other items i.e. clearing items, unadjusted debit balances, and advances provided to the employees.

• Contingent Liabilities includes:

1. 1. 1. Claims against the bank which have not been acknowledged as debt, 
      2. liability for partly paid investments, 
      3. liability on forward exchange contracts and 
      4. other items such as arrears of cumulative dividends, bills rediscounted, underwriting, Commitments, estimated amount of contracts remaining to be executed on capital account and not provided for etc.

• An effective ALM technique aims to handle the volume, maturity, mix, quality, rate sensitivity, and liquidity of assets & liabilities as a whole so as to attain a predetermined permissible risk / reward ratio.

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