The increasing risks of asset-liability management (ALM) in banks is inevitable with rising credit demand and falling deposit growth. Apart from liquidity risk in the near term due to imbalance in resource flows, ALM risk can also emanate from market risk when the actual value realised from securities is less than expected values. Similarly, from credit risk when a delinquent borrower fails to repay dues on time.

Thus, no risk can be treated in isolation. There is huge intermingling of risks that ultimately crystallises into liquidity risk. Keeping in view its significance, based upon Basel-III norms, the RBI prescribes liquidity coverage ratio (LCR) under which banks should hold high quality liquid assets to meet the liquidity needs of next 30 days.

In addition, the internal capital adequacy assessment policy and ALM policy are other systemic tools to keep a watch on the evolving liquidity profile of banks and to adopt quick, cost-efficient methods to tackle them. In managing ALM, it is more important to look beyond immediate data to get into root-cause analysis of liquidity gaps to work out strategies to minimise these gaps.

The share of current account and savings account (CASA) deposits to total deposits in banks was 33.45 per cent in March 2012. It increased to 38.70 per cent in March 2017. And in the next five years, the CASA ratio went up steeply, to 45.15 per cent by March 2022. Correspondingly, the share of term deposits dropped, increasing the volatility in liquidity.

Higher share of CASA deposits will provide relief to banks by reducing the average cost of deposits. But such advantage may get offset in managing liquidity gaps through market borrowings, potentially at a higher cost. With proliferation of digital banking, the tendency of customers to keep savings handy and accessible through CASA seems to be the new normal.

The break-up of data of public sector banks (PSBs) and private banks indicates their existing and potential ALM risks. The CASA share of PSBs increased from 32 per cent in March 2012 to 37.38 per cent in 2017 to 41.52 per cent in March 2021. Private banks have a larger CASA share, at 37.36 per cent in 2012, 43 per cent in 2017, and 44.53 per cent in March 2021.

Share of deposits

As a result of the aggressive role of private banks, the market share of deposits of PSBs came down from 77.50 per cent in March 2012 to 72.69 per cent in March 2017 to just 63.5 per cent in March 2021. Since the Gen Y and Gen Z customers bank more with new generation private banks, the retention of deposits in readily accessible CASA will be high with propensity for higher risks.

Concentration of new generation customers with private banks may tend to erode the term deposit component . The risks of the new trend need to be factored in planning ALM.

The key stakeholders of the financial system have to recognise the evolving lifestyle and shift in saving habits of the society. In allocating savings, more could go to the insurance sector and equity markets through mutual funds. The pandemic has highlighted the significance of insurance. The rising financial literacy and awareness about financial markets will prompt people to try out alternative investments, diverting savings away from banks.

The changing dimensions of risks will call for a tectonic shift in strategies, going beyond trading book management.

Managing integrated risks better with technology-driven innovations using metaverse tools will be essential. Product re-engineering to suit new-age customers and creating alternative resources will be essential. It will not be enough to base ALM strategies on past data to manage future risks.

Banks will have to mine market intelligence data to decipher the future shape of liquidity flows and its interlinkage with business aspirations.

The writer is Adjunct Professor, Institute of Insurance and Risk Management. Views are personal

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