- 1. Asset LiabilityManagement and Hire-Purchase Submitted By:
Nikhil Khati (99) Divya Joshi (107) Ridhima Makkar (109) Rituparna
Sarangi (112) Shashank Gawalee (113) Sumkit Paharia (114)
2. Asset Liability Management(ALM) It is a risk management
technique designedto earn an adequate return while maintaininga
comfortable surplus of assets beyondliabilities. It defines
management of all assets andliabilities (both off and on balance
sheetitems) of a bank. It requires assessment ofvarious types of
risks and altering the assetliability portfolio to manage risk.
Also called surplus management. 3. Function of ALM To measure and
control three levels offinancial risk: Interest Rate Risk (the
pricingdifference between loans and deposits), Credit Risk (the
probability of default), Liquidity Risk (occurring when loansand
deposits have different maturities). 4. Primary Objective Managing
Net Interest Margin that is, the net difference between interest
earning assets (loans) and interest paying liabilities (deposits)
to produce consistent growth in the loan portfolio and shareholder
earnings, regardless of short-term movement in interest rates. 5.
ALM Objectives Establish a comprehensive risk managementsystem.
Identify the sources of requisite informationfor ALM process.
Identify and define the strategies formanagement of market risks.
Develop new products as risk hedgingtechniques 6. ALM Models Gap
Analysis Duration Gap Analysis VAR Simulation 7. Gap Analysis
Simple to use Interest rate risk arises in bank operations
becausebanks assets and liabilities generally have theirinterest
rates reset at different times. The magnitude of interest rate risk
depends on thedegree of mismatch between the times when asset
andliability interest rates are reset. A maturity gap is calculated
for a given time periodand includes all fixed-rate assets and
liabilities thatmature in that period and all floating-rate assets
andliabilities that have interest rate reset dates in thatperiod.
8. Gap Analysis A bank that has a positive gap will see itsinterest
income rise if market interest rates rise,since more assets than
liabilities will exhibit anincrease in the interest rate. Drawbacks
Not usable in conjunction with income statementanalysis. Time value
of money isnt taken into account. 9. Duration Gap Analysis Measures
the impact of changes in interest rates on the expected maturities
of both assets and liabilities. Converts that information into
present-value worth of deposits and loans, which is more meaningful
in estimating maturities and the probability that either assets or
liabilities will reprice during the period under review. 10. Value
At Risk (VAR) It measures market or economic value risk. It is an
overall indicator of loss likelihood that computes the maximum loss
over a chosen horizon at a selected level of probability
(confidence level). Its major feature is that it takes portfolio
diversification between risk factors into account. 11. Value At
Risk (VAR) It simulates hundreds or thousands of times the next day
value change in each instrument for each risk factor relative to
the current risk factor values, classes the changes by order of
magnitude, then determines the maximum expected loss. To integrate
the correlation between risk factors, the variance/covariance
matrix is used to convert the random risk factor changes to a set
of correlated changes by pre-multiplying the vector of changes by
the square root of the variance/covariance matrix. 12. Simulation
This modeling is also referred to as a stochastic approach because
the interest rate paths that it generates are based on a
random-number generator. The method generates a large number of
arbitrage- free interest rate paths, reevaluates the balance sheet
and income value for each path and then presents the Asset &
Liability Manager with a view of the values distribution and
probability of occurrence. Useful for analysing mortgage prepayment
options 13. Problems with Simulation Lack of historical data on
customer behaviour still made modeling unreliable. Additionally,
lack of on-going data storage made back testing the models
difficult. 14. Hire-Purchase 15. Hire-Purchase It is the legal term
for a conditional sale contract Under a hire-purchase agreement you
hire the goods unless and until you exercise the option to purchase
them at the end of the agreement. This means that, as you dont own
the goods, you cant sell them and must comply with the terms and
conditions set out in the hire-purchase agreement. 16. Advantages
When a sum equal to the original full price plus interest has been
paid in equal installments, the buyer may then exercise an option
to buy the goods at a predetermined price (usually a nominal sum)
or return the goods to the owner. If the buyer defaults, the owner
can repossess the goods (differentiation of HP from other unsecured
consumer credit systems and benefits the economy because markets
can expand while minimizing the sellers exposure to risk of
default.) 17. Advantages HP is advantageous both To private
consumers because it spreads the cost of expensive items over an
extended time period. To certain business consumers in that the
balance sheet and taxation treatment of hire purchased goods
differs from outright capital purchases. The need for HP is reduced
when consumers have collateral or other forms of credit are readily
available. 18. HP Agreement A clear description of the goods The
cash price for the goods The HP price, i.e., the total sum that
must be paid to hire and then purchase the goods The deposit The
monthly installments (most states regulate the rates and charges
that can be applied in HP transactions) A reasonably comprehensive
statement of the parties rights (including the right to cancel the
agreement during a "cooling-off" period). 19. The seller and the
owner If the seller has the resources and the legal right to sell
the goods on credit (which usually depends on a licensing system in
most countries), the seller and the owner will be the same person.
The seller transfers ownership of the goods to a Finance Company,
usually at a discounted price, and it is this company that hires
and sells the goods to the buyer. 20. Implied warranties and
conditions The hirer will be allowed to enjoy quiet possession of
the goods. What is actually supplied must correspond with the
description and the sample. If goods are misdescribed or faulty,
you have a direct cause of action against the hire- purchase
company (Supply of Goods (Implied Terms) Act 1973). 21. Implied
warranties and conditions If, prior to signing the HP agreement,
the dealer/shop made a false claim about the goods, you may be
entitled to end the hire-purchase agreement and/or recover
compensation from the HP company (section 56 Consumer Credit Act).
If the dealer/shop gave you a false assurance about a
financial-related matter under the HP agreement Youll have no cause
for complaint if the written agreement which you signed sets out
accurately the necessary financial details. 22. Implied warranties
and conditions The hire-purchase company can always sue you for any
arrears, but a prior notice of default is compulsory. If, with
extra time, youll be able to make the repayments, apply to the
court for a time order if, and when, youre served with a notice of
default. 23. Hirers rights Buy the goods at any time by giving
notice to the owner and paying the balance of the HP price less a
rebate Return the goods to the buyer this is subject to the payment
of a penalty to reflect the owners loss of profit but subject to a
maximum specified in each states law With the consent of the owner,
to assign both the benefit and the burden of the contract to a
third person. 24. Hirers obligation To pay the hire installments To
take reasonable care of the goods (if the hirer damages the goods
by using them in a non-standard way, he or she must continue to pay
the installments and, if appropriate, compensate the owner for any
loss in asset value) To inform the owner where the goods will be
kept. 25. Owners rights To forfeit the deposit To retain the
instalments already paid and recover the balance due To repossess
the goods (which may have to be by application to a Court depending
on the nature of the goods and the percentage of the total price
paid) To claim damages for any loss suffered. 26. Thank You No
Queries????????
