Bank ALM and Maturity Gap Analysis
Bucket every inflow and outflow, then read the gaps. How RBI's limits apply.
Asset-liability management (ALM) is how a bank keeps two promises at once: it can pay every liability when due (liquidity), and its interest margin survives a change in rates (interest rate risk). Both are measured the same way. Put every asset and liability into time buckets by when it matures or reprices, then look at the gaps.
In the Certified Treasury Professional (CTP) syllabus this is Module II's "bank level ALM and maturity gap analysis", next to fund management and CRR. The exam tests the gap arithmetic, who owns ALM inside a bank, and the treasury's role in running or closing mismatches.
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Who Does What
- ALCO
- The Asset-Liability Committee. RBI's 1999 ALM guidelines ask banks to set one up, headed by the CEO/CMD or an Executive Director, to decide funding mix, pricing and mismatch strategy.
- Board or Management Committee
- Oversees the ALM system, reviews its working periodically and approves the prudential limits on gaps.
- ALM desk / mid office
- Prepares the gap statements and tracks them against limits.
- Treasury
- Closes or runs the gaps in the market: borrowing or lending in call, repo and TREPS, issuing CDs, or using swaps.
The Liquidity Gap
The Statement of Structural Liquidity places each cash inflow and outflow in a maturity ladder by expected timing. A maturing liability is an outflow; a maturing asset is an inflow. The gap in each bucket is inflows minus outflows, and the running total is the cumulative gap.
RBI's 2012 circular on liquidity risk management caps the net cumulative negative mismatch in the short buckets: next day 5%, 2-7 days 10%, 8-14 days 15% and 15-28 days 20% of the cumulative cash outflows in those buckets.
Worked Example 1: Testing the Short Buckets
Illustrative bank, ₹ crore. Cumulative gap as a percentage of cumulative outflows is compared with RBI's limit for each bucket.
Next day
Outflows
400
Inflows
390
Gap
-10
Cumulative gap
-10
% of cumulative outflows
-2.5%
Limit
5%: within
2-7 days
Outflows
600
Inflows
490
Gap
-110
Cumulative gap
-120
% of cumulative outflows
-12.0%
Limit
10%: breached
8-14 days
Outflows
500
Inflows
450
Gap
-50
Cumulative gap
-170
% of cumulative outflows
-11.3%
Limit
15%: within
15-28 days
Outflows
700
Inflows
650
Gap
-50
Cumulative gap
-220
% of cumulative outflows
-10.0%
Limit
20%: within
| Bucket | Outflows | Inflows | Gap | Cumulative gap | % of cumulative outflows | Limit |
|---|---|---|---|---|---|---|
| Next day | 400 | 390 | -10 | -10 | -2.5% | 5%: within |
| 2-7 days | 600 | 490 | -110 | -120 | -12.0% | 10%: breached |
| 8-14 days | 500 | 450 | -50 | -170 | -11.3% | 15%: within |
| 15-28 days | 700 | 650 | -50 | -220 | -10.0% | 20%: within |
The 2-7 day bucket fails: ₹120 crore short against ₹1,000 crore of cumulative outflows. The treasury can fix it by raising term money or CDs that mature after day 7, or by keeping assets that mature inside it. Pushing the shortfall into a later bucket works only if that bucket still stays within its limit.
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The Interest Rate Gap
For interest rate risk, RBI's ALM guidelines group rate sensitive assets (RSA) and rate sensitive liabilities (RSL) by residual maturity or next repricing date, whichever is earlier. An item is rate sensitive if it has a cash flow, reprices contractually, has a rate RBI can change, or can be prepaid or withdrawn within the interval.
Gap = RSA minus RSL for each bucket. A positive gap gains when rates rise; a negative gap gains when rates fall. The rough effect on a year's net interest income (NII) is the gap times the change in rate.
Worked Example 2: Repricing Gap and NII
Illustrative bank, ₹ crore.
1-28 days
RSA
800
RSL
1,000
Gap
-200
If rates rise 1%
NII falls about ₹2 crore a year (200 x 1%)
29 days to 3 months
RSA
600
RSL
700
Gap
-100
If rates rise 1%
NII falls, slightly less (reprices later)
Over 3 to 6 months
RSA
900
RSL
600
Gap
+300
If rates rise 1%
NII rises once these reprice
Over 6 months to 1 year
RSA
1,200
RSL
900
Gap
+300
If rates rise 1%
NII rises, for a shorter part of the year
| Bucket | RSA | RSL | Gap | If rates rise 1% |
|---|---|---|---|---|
| 1-28 days | 800 | 1,000 | -200 | NII falls about ₹2 crore a year (200 x 1%) |
| 29 days to 3 months | 600 | 700 | -100 | NII falls, slightly less (reprices later) |
| Over 3 to 6 months | 900 | 600 | +300 | NII rises once these reprice |
| Over 6 months to 1 year | 1,200 | 900 | +300 | NII rises, for a shorter part of the year |
Classifying Tricky Items
- check_circleSavings and current deposits are withdrawable on demand but behave like stable money. RBI's 1999 guidelines treat 10% of savings and 15% of current deposits as volatile (first bucket) and the core portion in the over 1-3 years bucket.
- check_circleBonds with a call or put option go into the bucket of the call or put date, not final maturity.
- check_circleFloating rate loans go into the bucket of their next reset, which is why they shorten a bank's repricing gap.
- check_circleTrading securities that meet RBI's conditions can be shown in the 1-14, 15-28 and 29-90 day buckets by defeasance period.
Arbitrage by Running Mismatches
The syllabus also names "arbitrage by running maturity mismatches". Funding long assets with cheaper short liabilities earns the slope of the yield curve, and is the classic source of a bank's margin. It is profitable only while short rates stay low and funding rolls over. The gap limits exist to cap exactly this bet. Basel III liquidity ratios (LCR and NSFR) add further limits but are not part of the CTP syllabus text.
FAQs
What is a negative gap?expand_more
In a liquidity statement, outflows exceed inflows in that bucket. In an interest rate gap statement, rate sensitive liabilities exceed rate sensitive assets, so a rate rise cuts net interest income.
What are RBI's limits on short-term liquidity mismatches?expand_more
Under RBI's 2012 circular, net cumulative negative mismatches must not exceed 5% (next day), 10% (2-7 days), 15% (8-14 days) and 20% (15-28 days) of cumulative cash outflows.
Who heads ALCO in a bank?expand_more
RBI's ALM guidelines ask for ALCO to be headed by the CEO/CMD or an Executive Director, so that top management commits to its decisions.
Does the CTP exam cover LCR and NSFR?expand_more
The CTP syllabus names bank-level ALM and maturity gap analysis, not the Basel III liquidity ratios. Expect gap questions, and treat LCR and NSFR as background.
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