CONTENTS

CHAPTER I
INTRODUCTION
Introduction of topic
Statement of problem
CHAPTER II
METHODOLOGY
Objectives of the study
Need for the study
Scope of the study
Limitations of the study
Review of literature

CHAPTER III
COMPANY PROFILE & INDUSTRY PROFILE
CHAPTER IV
THEORITICAL BACKGROUND

CHAPTER - V
DATA ANALYSIS & INTERPRETATION
FINDINGS
SUGGESTIONS & CONCLUSIONS
BIBLIOGRAPHY

INTRODUCTION
Asset Liability Management(ALM) is a strategic approach of managing the balance sheet
dynamics in such a way that the net earnings are maximized. This approach is concerned with
management of net interest margin to ensure that its level and riskiness are compatible with the
risk return objectives of the bank.
If one has to define Asset and Liability management without going into detail about its
need and utility, it can be defined as simply management of money which carries value and can
change its shape very quickly and has an ability to come back to its original shape with or
without an additional growth. The art of proper management of healthy money is ASSET AND
LIABILITY MANAGEMENT (ALM).
The Liberalization measures initiated in the country resulted in revolutionary changes in
the Banking sector. There was a shift in the policy approach of banks from the traditionally
administered market regime to a free market driven regime. This has put pressure on the earning
capacity of co-operative banks, which forced them to foray into new operational areas thereby
exposing themselves to new risks.
As major part of funds at the disposal of banks come from outside sources, the bank
management are concerned about RISK arising out of shrinkage in the value of asset, and
managing such risks became critically important to them. Although co-operative banks are able
to mobilize deposits, major portions of it are high cost fixed deposits. Maturities of these fixed
deposits were not properly matched with the maturities of assets created out of them. The tool
called ASSET AND LIABILITY MANAGEMENT provides a better solution for this.
ASSET LIABILITY MANAGEMENT (ALM) is a portfolio management of assets and
liability of an organization. This is a method of matching various assets with liabilities on the
basis of expected rates of return and expected maturity patter
2

In the context of banks, ALM is defined as a process of adjusting banks liability

to meet loan demands, liquidity needs and safety requirements. This will result in optimum
value of the bank, at the same time reducing the risks faced by them and managing the different
types of risks by keeping it within acceptable levels.

OBJECTIVES OF THE STUDY

o To study the concept of ASSET & LIABLITY MANAGEMENT in HERITAGE
o To study process of CASH INFIOWS and OUTFLOWS in HERITAGE
o To study RISK MANAGEMENT under HERITAGE
o To study RESERVES CYCLE of ALM under HERITAGE
o To study FUNCTIONS AND OBJECTIVES of ALM committee.

NEED OF THE STUDY:

The need of the study is to concentrates on the growth and performance of HERITAGE and
to calculate the growth and performance by using asset and liability management. And to know
the management of non performing assets.

To know financial position of HERITAGE

To analyze existing situation of HERITAGE
To improve the performance of HERITAGE
To analyze competition between HERITAGE with other cooperative banks.

SCOPE OF THE STUDY:

In this study the analysis based on ratios to know asset and liabilities
management uder HERITAGE And to analyse the growth and performace of
HERITAGE by using the calculations under asset and liability management
based on ratio.

Ratio analysis
Comperartive statement
Common size balance sheet.

METHODOLOGY OF THE STUDY

The study of ALM Management is based on two factors.
1. Primary data collection.
2. Secondary data collection
PRIMARY DATA COLLECTION:
The sources of primary data were
The chief manager ALM cell
Department Sr. manager financing & Accounting
System manager- ALM cell
Gathering the information from other managers and other officials of the bank
SECONDARY DATA COLLECTION:
Collected from books regarding Banking, journal, and management containing relevant
information about ALM and Other main sources were

 Annual report of the HERITAGE

Published report of the Bank
RBI guidelines for ALM.

LIMITATION OF THE STUDY:

1. This subject is based on past data of HERITAGE
2. The analysis is based on structural liquidity statement and gap analysis.
3. The study is mainly based on secondary data.

INTRODUCTION
ASSET LIABILITY MANAGEMENT:

Asset Liability Management(ALM) is a strategic approach of managing the balance sheet

dynamics in such a way that the net earnings are maximized. This approach is concerned with
management of net interest margin to ensure that its level and riskiness are compatible with the
risk return objectives of the bank.
If one has to define Asset and Liability management without going into detail about its
need and utility, it can be defined as simply management of money which carries value and can
change its shape very quickly and has an ability to come back to its original shape with or
without an additional growth. The art of proper management of healthy money is ASSET AND
LIABILITY MANAGEMENT (ALM).
The Liberalization measures initiated in the country resulted in revolutionary changes in
the Banking sector. There was a shift in the policy approach of banks from the traditionally
administered market regime to a free market driven regime. This has put pressure on the earning
8

capacity of co-operative banks, which forced them to foray into new operational areas thereby
exposing themselves to new risks.
As major part of funds at the disposal of banks come from outside sources, the bank
management are concerned about RISK arising out of shrinkage in the value of asset, and
managing such risks became critically important to them. Although co-operative banks are able
to mobilize deposits, major portions of it are high cost fixed deposits. Maturities of these fixed
deposits were not properly matched with the maturities of assets created out of them. The tool
called ASSET AND LIABILITY MANAGEMENT provides a better solution for this.
ASSET LIABILITY MANAGEMENT (ALM) is a portfolio management of assets and
liability of an organization. This is a method of matching various assets with liabilities on the
basis of expected rates of return and expected maturity pattern.
In the context of banks, ALM is defined as a process of adjusting banks liability to
meet loan demands, liquidity needs and safety requirements. This will result in optimum value
of the bank, at the same time reducing the risks faced by them and managing the different types
of risks by keeping it within acceptable levels.

OBJECTIVES:
The main objective of ALM approach is to manage market risk in a way so as to
minimize the impact of net interest, income fluctuations in the short run and protect the net
economic value of the bank in the long run. The objectives of the ALM processTo control liquidity risk.
To control volatility of the net interest income.
To ensure a balance between profitability and growth rate.

ASSET LIABILITY MANAGEMENT (ALM) SYSTEM IN CO-OPERATIVE BANKS:

Introduction:
In the normal course, the banks are exposed to credit and market risks in view of the asset
liability transformation. With the liberalization in the
Indian financial markets over the last few years and growing integration of domestic
markets and with external markets the risks associated with banks operations have become
complex, large, requiring stragic management. Banks are now operating in a fairly deregulated
environment and are required to determine on their own, interest rates on deposits and advance in
both domestic and foreign currencies on a dynamic basis. The interest rates on banks investments
in government and other securities are also now market related. Intense competition for business
involving both the assets and liabilities, together with increasing volatility in the domestic
interest rates, has brought pressure on the management of banks to maintain a good balance
among spreads, profitability and long-term viability. Impudent liquidity management can put
banks earnings an reputation at great risk. These pressures call for structured and comprehensive
measuresand not just adahoc action. The management of banks has to base their business
decisions on a dynamic and integrated risk management system and process, driven by corporate
strategy. Banks are exposed to several major risks in course of their business-credit risk, interest
rate and operational risk therefore important than banks introduce effective risk management
systems that address the issues related to interest rate, currency and liquidity risks.

Banks need to address these risks in a structured manner by upgrading their

risk

management and adopting more comprehensive Asset-Liability management (ALM) practices

10

than has been done hitherto. ALM among other functions, is also concerned with risk
management and provides a comprehensive and dynamic framework for measuring, monitoring
and managing liquidity interest rate, foreign exchange and equity and commodity price risk of a
bank that needs to be closely integrated with the banks business strategy. It involves assement of
various types of risks altering the asset liability portfolio in a dynamic way in order to manage
risks.
The initial focus of the ALM function would be to enforce the risk management
discipline, viz., managing business after assessing the risks involved.

In addition, the managing

the spread and riskiness, the ALM function is more

appropriately viewed as an integrated approach which requires simultaneous decisions about

asset/liability mix and maturity structure.

11

RISK MANAGEMENT IN ALM

Risk management is a dynamic process, which needs constant focus and attention. The
idea of risk management is a well-known investment principle that the largest potential returns
are associated with the riskiest ventures. There can be no single prescription for all times,
decisions have to be reversed at short notice. Risk, which is often used to mean uncertainty,
creates both opportunities and problems for business and individuals in nearly every walk of life.
Risk sometimes is consciously analyzed and managed; other times risk is simply ignored,
perhaps out of lack of knowledge of its consequences. If loss regarding risk is certain to occur, it
may be planned for in advance and treated as to definite, known expense. Businesses and
individuals may try to avoid risk of loss as much as possible or reduce its negative consequences.
Several types of risks that affect individuals and businesses were introduced, together
with ways to measure the amount of risk. The process used to systematically manage risk
exposure is known as RISK MANAGEMENT. Whether the concern is with a business or an
individual situation, the same general steps can be used to systematically analyze and deal with
risk.

12

STEPS IN RISK MANAGEMENT:

Risk identification
Risk evaluation
Risk management technique
Risk measurement
Risk review decisions
Integrated or enterprise risk management is an emerging view that recognizes the importance
of risk, regardless of its source, in affecting a firms ability to realize its strategic objectives. The
detailed risk management process is as follows;
Risk identification:
The first step in the risk management process is to identify relevant exposures to risk.
This step is important not only for traditional risk management, which focuses on uncertainty of
risks, but also for enterprise risk management, where much of the focus is on identifying the
firms exposures from a variety of sources, including operational, financial, and strategic
activities.
Risk evaluation:
For each source of risk that is identified, an evaluation should be performed. At
this stage, uncertainty of risks can be categorized as to how often associated losses are
likely to occur. In addition to this evaluation of loss frequency, an analysis of the size, or
severity, of the loss is helpful. Consideration should be given both to the most probable
size of any losses that may occur and to the maximum possible losses that might happen.
Risk management techniques:
13

The results of the analyses in second step are used as the basis for decisions regarding
ways to handle existing risks. In some situations, the best plan may be to do nothing. In other
cases, sophisticated ways to finance potential losses may be arranged. The available techniques
for managing risks are GAP Analysis, VAR Analysis, Heinrich Domino theory etc., with
consideration of when each technique is appropriate.
Risk measurement:
Once risk sources have been identified it is often helpful to measure the extent of the risk
that exists. As pert of the overall risk evaluation, in some situations it may be possible to measure
the degree of risk in a meaningful way. In other cases, especially those involving individuals
computation of the degree of risk may not yield helpful information.
Risk review decisions:
Following a decision about the optimal methods for handling identified risks, the
business or individual must implement the techniques selected. However, risk management
should be an ongoing process in which prior decisions are reviewed regularly. Sometimes new
risk exposures arise or significant changes in expected loss frequency or severity occur. The
dynamic nature of many risks requires a continual scrutiny of past analysis and decisions.

14

DIMENSIONS OF RISK
Specifically two broad categories of risk are the basis for classifying financial services risk.
(1) Product market Risk.
(2) Capital market Risk.
Economists have long classified management problems as relating to either The
Product Markets Risks or The Capital Markets Risks.
TOTAL FINANCIAL SERVICES FIRMS RISK.
Total Risk
(Responsibility of CEO)

Business Risk

Financial Risk

Product Market Risk

Capital Market Risk

(Responsibility of the

(Responsibility of the

Chief Operating Officer)

Chief Financial Officer)

Credit

Interest rate

Strategic

Liquidity

Regulatory

currency

Operating

Settlement

Human resources

Basis
Legal

15

16

(I).PRODUCT MARKET RISK:

This risk decision relate to the operating revenues and expenses of the form that impact the
operating position of the profit and loss statements which include crisis, marketing, operating
systems, labor cost, technology, channels of distributions at strategic focus. Product Risks relate
to variations in the operating cash flows of the firm, which effect Capital Market, required Rates
Of Return;.
(1) CREDIT RISK
(2) STRATEGIC RISK
(3) COMMODITY RISK
(4) OPERATIVE RISK
(5) HUMAN RESOURCES RISK
(6) LEGAL RISK
Risk in Product Market relate to the operational and strategic aspects of managing operating
revenues and expenses. The above types of Product Risks are explained as follows.
1. CREDIT RISK:
The most basic of all Product Market Risk in a Bank or other financial intermediary is the
erosion of value due to simple default or non-payment by the borrower. Credit risk has been
around for centuries and is thought by many to be the dominant financial services today. Banks
17

intermediate the risk appetite of lenders and essential risk ness of borrowers. Banks manage this
risk by ; (A) making intelligent lending decisions so that expected risk of borrowers is both
accurately assessed and priced; (B) Diversifying across borrowers so that credit losses are not
concentrated in time; (C) purchasing third party guarantees so that default risk is entirely or
partially shifted away from lenders.
(2). STRATEGIC RISK:
This is the risk that entire lines of business may succumb to competition or obsolescence. In
the language of strategic planner, commercial paper is a substitute product for large corporate
loans. Strategic risk occurs when a bank is not ready or able to compete in a newly developing
line of business. Early entrants enjoyed a unique advantage over newer entrants. The seemingly
conservative act of waiting for the market to develop posed a risk in itself. Business risk accrues
from jumping into lines of business but also from staying out too long.
(3). COMMODITY RISK:
Commodity prices affect banks and other lenders in complex and often unpredictable ways.
The macro effect of energy price increases on inflation also contributed to a rise in interest rates,
which adversely affected the value of many fixed rate financial assets. The subsequent crash in
oil prices sent the process in reverse with nearly equally devastating effects.

18

(4). OPERATING RISK:

Machine-based system offer essential competitive advantage in reducing costs and
improving quality while expanding service and speed. No element of management process has
more potential for surprise than systems malfunctions. Complex, machine-based systems
produce what is known as the black box effect. The inner working of system can become
opaque to their users. Because developers do not use the system and users often have not
constitutes a significant Product Market Risk. No financial service firm can small management
challenge in the modern financial services company.

(5). HUMAN RESOURCES RISK:

Few risks are more complex and difficult to measure than those of personnel policy; they are
Recruitment, Training, Motivation and Retention. Risk to the value of the Non-Financial Assets
as represented by the work force represents a much more subtle of risk. Concurrent with the loss
of key personal is the risk of inadequate or misplaced motivation among management personal.
This human redundancy is conceptually equivalent to safety redundancy in operating systems. It
is not inexpensive, but it may well be cheaper than the risk of loss. The risk and rewards of
increased attention to the human resources dimension of management are immense.

(6). LEGAL RISK:

This is the risk that the legal system will expropriate value from the shareholders of financial
services firms. The legal landscape today is full of risks that were simply unimaginable even a
few years ago. More over these risks are very hard to anticipate because they are often unrelated

19

to prior events which are difficult and impossible to designate but the management of a financial
services firm today must have these risks at least in view. They can cost millions.

(II). CAPITAL MARKET RISK:

In the Capital Market Risk decision relate to the financing and financial support of Product
Market activities. The result of product market decisions must be compared to the required rate
of return that results from capital market decision to determine if management is creating value.
Capital market decisions affect the risk tolerance of product market decisions related to
variations in value associated with different financial instruments and required rate of return in
the economy.
1. LIQUIDITY RISK
2. INTEREST RATE RISK
3. CURRENCY RISK
4. SETTLEMENT RISK
5. BASIS RISK
1. LIQUIDITY RISK:
For experienced financial services professionals, the foremost capital market risk is that of
inadequate liquidity to meet financial obligations. The obvious form is an inability to pay desired
withdrawals. Depositors react desperately to the mere prospect of this situation.
They can drive a financial intermediary to collapse by withdrawing funds at a rate that
exceeds its capacity to pay. For most of this century, individual depositors who lost faith in banks

20

ability to repay them caused bank failures from liquidity. Funds are deposited primarily as a
financial of rate. Such funds are called purchased money or headset funds as they are
frequently bought by employees who work on the money desk quoting rates to institutions that
shop for the highest return. To check liquidity risk, firms must keep the maturity profile of the
liabilities compatible with that of the assets. This balance must be close enough that a reasonable
shift in interest rates across the yield curve does not threaten the safety and soundness of the
entire firm.
2. INTEREST RATE RISK:
In extreme conditions, Interest Rate fluctuations can create a liquidity crisis. The fluctuation
in the prices of financial assets due to changes in interest rates can be large enough to make
default risk a major threat to a financial services firms viability. Theres a function of both the
magnitude of change in the rate and the maturity of the asset. This inadequacy of assessment and
consequent mispricing of assets, combined with an accounting system that did not record
unrecognized gains and losses in asset values, created a financial crisis. Risk based capital rules
pertaining to banks have done little to mitigate the interest rate risk management problem. The
decision to pass it of, however is not without large cost, so the cost benefit tradeoff becomes
complex.
3. CURRENCY RISK:
The risk of exchange rate volatility can be described as a form of basis risk among
currencies instead of basis risk among interest rates on different securities. Balance sheets
comprised of numerous separate currencies contain large camouflaged risks through financial
reporting systems that do not require assets to be marked to market. Exchange rate risk affects
21

both the Product Markets and The Capital Markets. Ways to contain currency risk have
developed in todays derivative market through the use of swaps and forward contracts. Thus,
this risk is manageable only after the most sophisticated and modern risk management technique
is employed
4. SETTLEMENT RISK:
Settlement Risk is a particular form of default risk, which involves the banks competitors.
Amounts settle obligations having to do with money transfer, check clearing, loan disbursement
and repayment, and all other inter-bank transfers within the worldwide monetary system. A
single payment is made at the end of the day instead of multiple payments for individual
transactions.
5. BASIS RISK :
Basis risk is a variation on the interest rate risk theme, yet it creates risks that are less easy to
observe and understand. To guard against interest rate risk, somewhat non comparable securities
may be used as a hedge. However, the success of this hedging depends on a steady and
predictable relationship between the two no identical securities. Basis can negate the hedge
partially or entirely, which vastly increases the Capital Market Risk exposure of the firm.

22

HISTORY OF INDIAN FOODS INDUSTRY

By stating productions in 1914 the story of Indian Foods is a stage of continuous growth.
Foods is derived from the Latin word Foodsam.
Egyptians and Romans found the process of manufacturing Foods. In England during the
first century the hydraulic Foods has become more versatile building material. Later on, Portland
Foods was invented and the invention was usually attributed to Joseph Aspdin of Enland.
India is the worlds 4th largest Foods produced after China, Japan and U.S.A. The South
Industries have produced Foods for the first time in 1904. The company was setup in Chennai
with the installed capacity of 30 tonnes per day. Since then the Foods industry has progressing
leaps and bounds and evolved into the most basic and progressive industry. Till 1950 1951, the
capacity of production was only 3.3 million tones. So far annual production and demand have
been growing a pace at roughly 78 million tones with an installed capacity of 87 million tones.
In the remaining two years of 8th plan an additional capacity of 23 million tones will actually
come up.
India is well endowed with Foods grade limestone (90 billion tones ) and coal (190 billion
tones). During the nineties it had a particularly impressive expansion with growth rate of 10
percent.
The strength and vitality of Indian Foods Industry can be gauged by the interest shown and
support give by World Bank, considering the excellent performance of the industry in utilizing
the loans and achieving the objectives and target. The World Bank is examining the feasibility of
providing a third line of credit for further upgrading the industry in varying areas, which will
make it global. With liberalization policies of Indian Government. The industry is posed for a
high growth rates in nineties and the installed capacity is expected to cross 100 million tones and
production 90 million tones by 2003 A.D.
The industry has fabulous scope for exporting its product to countries like the U.S.A., U.K.,
Bangladesh, Nepal and other several countries. But there are not enough wagons to transport
Foods for shipment.
23

Foods The Product:

The natural Foods is obtained by burning and crushing the stones containing clayey,
carbonate of lime and some amount of carbonate of magnesia. The natural Foods is brown in
color and its best variety is known as ROMAN FOODS. It sets very quickly after addition of
water.
It was in the eighteenth century that the most important advances in the development of
Foods were which finally led to the invention of Portland Foods.
In 1756, John Sematon showed that hydraulic lime which can resist the action of water can
be obtained not only from hard lime stone but from a limestone which contain substantial
proportion of clayey.
In 1796, Joseph Parker found that modules of argillaceous limestone made excellent
hydraulic Foods when burned in the usual manner. After burning the product was reduced to a
powder. This started the natural Foods industry.
The artificial Foods is obtained by burning at a very high temperature a mixture of
calcareous and argillaceous material. The mixture of ingredients should be intimate and they
should be in correct proportion. The calcined product is known as clinker. A small quantity of
gypsum is added to clinker and it is then pulverized into very fine powder, which is known as
Foods.
The common variety of artificial Foods is known as normal setting Foods or ordinary Foods.
A mason Joseph Aspdn of Leeds of England invented this Foods in 1824. He took out a patent
for this Foods called it PORTLAND FOODS because it had resemblance in its color after
setting to a variety of sandstone, which is found a abundance in Portland England.
The manufacture of Portland Foods was started in England around 1825. Belgium and
Germany started the same 1855. America started the same in 1872 and India started in 1904. The
first Foods factory installed in Tamilnadu in 1904 by South India limited and then onwards a
number of factories manufacturing Foods were started. At present there are more than 150
factories producing different types ofFoods.

24

Composition of Foods:
The ordinary Foods contains two basic ingredients, namely, argillaceous and calcareous. In
argillaceous materials the clayey predominates and in calcareous materials the calcium carbonate
predominates.
A good chemical analysis of ordinary Foods along with desired range of ingredients.

Ingredients

Percent

Range

Lime (CaO)

62

62 67

Silica (SiO2)

22

17 25

Alumina (Al2O3)

38

Calcium Sulphate (CaSO4)

34

Iron Oxide (Fe2O3)

34

Magnesia (MgO)

13

Sulphur (S)

13

Alkalies

0.2 1

Industry Structure and Development:

With a capacity of 115 million tones of large Foods plants, Indian Foods industry is the
fourth largest in the world. However per capita consumption in our country is still at only 100
Kgs against 300 Kgs of developed countries and offers significant potential for growth of Foods
consumption as well as addition to Foods capacity. The recent economic policy announFoods by
the government in respect of housing, roads, power etc., will increase Foods consumption.
Opportunities and Threats

25

In view of low per capita consumption in India, there is a considerable scope for growth in
Foods consumption and creation of new capacities in coming years.
The Foods industry does not appear to have adequately exploited Foods consumption in
rural segment where damaged where damaged growth is possible.
Landed cost of Foods (with import duty) continues to be higher than home market prices but
with reduced import duty, increasing imports, may pose a serious threat to the domestic Foods
industry.
Outlook
The recent change in the budget 2001 2002 relating to fiscal incentives for individual
housing and reduction in borrowing cost for this purpose and with the government reaffirmation
to accelerate the reform process, infrastructure development should logically get priority leading
to increase in demand of Foods in coming years. The addition capacity of Foods in the pipeline is
limited and therefore the demand and supply situations is expected to be more favorable and
Foods prices are likely to firm up.

Risks and concerns

Slow down of Indian economy or drop in growth rate of agriculture may adversely affect
the consumption. The recent increase in railway freight coupled with diesel / petrol price like
will increase the cost of production and distribution, as being dulky, Foods is freight intensive
increase in Limestone royalty also adds to the cost of production, which is considerably higher
than corresponding costs of many other developing countries.
In our country there is a need to under take a massive programme of house construction
activity into the rural and urban areas. It is impossible to construct a house without Foods and
steel, in other words, Foods is one of the basic construction materials and therefore it is one of
the vital elements for the economic development of the nation.
India inspite of being the 4th biggest produces of Foods in the world has still a very low
per capital consumption of Foods.
Foods Companies

51 Nos

Foods Plants

99 Nos
26

Installed Capacity

64.8 mt

Total Investment (approx)

Rs. 10,000 Crores

Total Manpower

Over 1.25 Lakhs

Management Award of the Government of Andhra Pradesh. Heritage is also conscious of

its social responsibilities. Its rural and community development programmes include adoption of
two nearby villages, running an Agricultural Demonstration Farm, a Model Dairy Farm etc.,
Impressed by these activities, FAPCCI chose Heritage to confer the Award for Best efforts of an
Industrial Unit in the State to Develop Rural Economy twice, in the year 1994 as well as in
1998. Heritage also has to its credit the National Award (Shri. S.R. Rangta Award for Social
Awareness) for the year 1995 1996, for the Best Rural Development Efforts made by the
Company. In the same year Heritage got the First Prize for Mine Environment and Pollution
Control for year 1999 too, for the 3rd year in succession in July, 2001 Heritage annexed the Vana
Mithra Award from the Government of Andhra Pradesh.
Quality conscious and progressive in its outlook, Heritage Foods is an OHSAS 08001
Company and also joined the select brand of ISO9001-2000 Companies.

History
The first unit was installed at Basanthnagar with a capacity of 2.5 lack TPA (tones per
annum) incorporating humble supervision, preheated system, during the year 1969.
The second unit followed suit with added a capacity of 2 lack TPA in 1971.
The plant was further expanded to 9 lack by adding 2.5 lack tones in August, 1978, 1.13
lack tones in January, 1981 and 0.87 lack tones in September, 1981.

Power

27

Singareni Colleries makes the supply of coal for this industry and the power was obtained
from AP TRANSCO. The power demand for the factory is about 21MW. Heritage has got 2
diesel generator sets of 4MW each installed in the year 1987.
Heritage Foods now has a 15 KW captive power plant to facilitate for uninterrupted
power supply for manufactured of Foods.

HERITAGE FOODS
One among the industrial giants in the country today, serving the nation on the industrial
front HERITAGE FOODS INDIA LIMITEDhas a chequered and eventful history dating back to
the Twnties when the Industrial House of Birlas acquired it. With only a Textile Mill under it
banner in 1924, it grew from strength to strength and spread its activities to never firlds like
Rayon, Pulp, Transparent paper, Spun pipes and Refractories, Tyres, Oil Mills and Refinery
Extraction.
Looking to the wide gap between demand and supply, of a vital commodity, Foods, which
plays an important role in nation building the Government of India de licensed the Foods
Industry in the year 1966 with a view to attract private entrepreneurs to argument the Foods
product Heritage rose to the occasion and decided to set up a few Foods plants in the country.
The first Foods Plant of Heritage with a capacity of 2.5 lack tones per annum based on
dry process, was established in 1969 at Basanthnagar a backward area in Karimnagar District,
Andhra Pradesh, and christened it Heritage Foods. The second unit followed suit, which added a
capacity of 2.00 lack tones in 1971. The plant was further expanded to 9.00 lack tones by adding
2.5 lack tones in August 1978. 1.14 lack tones in January, 1981 and 0.87 lack tones in September,
1981.
Heritage Foods has outstanding track record of performance and distinguished itself
among all the Foods factories in India by bagging the coveted National Productivity Award for
two successive years, i.e., in 1985 and 1936, so also the National Awards for Foods Safety for
28

two year 1985 86 and 1986 - 87. Heritage also bagged NCBMs (National Council for Foods
and Building Materials) National Award for Energy Conservation for the year 1989 90.
Heritage got the prestigious State Award Yajamnya Ratna & Best Management
Award for the year 1989; so also the FAPCCI (Federation of Andhra Pradesh Chamber of
Commerce and Industry) Award for the Best Family planning effort in the State. For the year
1987 88, Heritage also got the FAPPCI Award for Best Industrial Promotion / Expansion effort
in the state. In the year 1991 Heritage also got the May day Award of the Government of Andhra
Pradesh for Best Management and Pandit Jawaharlal Nehru Silver Rolling Trophy for the
Best Productivity effort in the State, sponsored by FAPCCI, for 1993 Heritage got the Best.

Performance:
The performance of Heritage Foods industry had been outstanding achieving over cent
per cent capacity utilization although despite many odds like power cuts and which most 40%
was waste due to wagon shortage etc.
The Company being a continuous process industry works round the clock and has an
excellent record of performance achieving over 100% capacity utilization.
Heritage has always combined technical progress with industrial performance. The
company had a glorious track record for the last 27 years in the industry.

Technology:

29

Heritage Foods uses most modern technology and the computerized control in the plant.
A team of dedicated and well experienced experts manages the plant. The quality is maintained
much above the bureau of Indian Standards.
The raw materials used for manufacturing Foods are:
Lime stone
Bauxite
Hematite
Gypsum

Environmental and Social Obligations

For environmental promotion and to keep up the ecological balance, this section has
undertaken various social welfare programs by adopting ten nearly villages, organizing family
welfare camps, surgical camps, children immunization camps, animal health camps, blood
donation camps, distribution of fruit bearing trees and seeds, training for farmers etc., were
arranged.

Welfare and Recreation Facilities

For the purpose of recreation facility 2 auditoriums were provided for playing indoor games,
cultural function and activities like drama, music and dance etc.,
The industry has provided libraries and reading rooms. About 1000 books are available in
the library. All kinds of newspaper, magazines are made available.
Canteen is provided to cater to the needs to the employees for supply snacks, tea, coffee and
meals etc.,
One English medium and one Telugu medium school are provided to meet the educational
requirements.
The company has provided a dispensary with a qualified medical office and paramedical
staff for the benefit of the employees. The employees covered under ESI scheme have to avail
the medical facilities from the ESI hospital.
30

Competitions in sports and games are conducted every year for August 15, Independence
day and January 26, Republic Day among the employees.

Electricity
The power consumption per ton for Foods has come down to 108 units against 113 units last
year, due to implementation of various energy saving measures. The performance of captive
power plant of this section continues to be satisfactory. Total power generation during the years
was 84 million units last year. This captive power plant is playing a major role in keeping power
costs with in economic levels.
The management has introduced various HRD programs for training and development and
has taken various other measures for the betterment of employees efficiency / performance.
The section has installed adequate air polluting control systems and equipment and is ISO
14001 such as Environment Management System is under implementation.

Awards
Heritage Foods bagged many prestigious awards including national awards for productivity,
technology, conservation and several state awards since 1984. The following are the some of
important awards.

Awards of Heritage
No

Year

1984

1985 86

1985 86 87

1987 88

1987 89

Awards

National / State

Best family planning effort in the state

State

National productivity award

National

Foods safety

National

Best industrial promotion / expansion

State

effort
Productivity award

State
31

Best industrial promoter

State

Expansion effort in the state

State

Award for contribution given for rural

State

economy
Best family planning effort

State

Yajamanya Ratna & Best Management

State

1988 90

Award
Community development programs

State

12

1988 90

Energy conservation

13

1991

14

1991

1988 89

1988 89

1988 89

1989

10

1989

11

15
16

May Day award of the Government of

State

Andhra Pradesh for best management

Pandit Jawaharlal Nehru rolling trophy

State

for best national productivity effort

Indira Gandhi National Award for

State

1993

Excellence

1994

Management Award)
Best industrial rebellion award
Rural

17

1994 95

18

1995

19

1995 96

20

National

in

Industry

development

chief

(Best
State
minister

environmental and mineral conservation

award.
Best industrial rebellion award.

State

Best effort of an industrial unit to

State

develop rural economy

Shri S.R. Rangta award for social

National

1996

awareness for best rural development

21
22

1996
1996 97

efforts.
Best workers welfare.
Best family welfare award.
First prize for mine environment &

23.

1999

pollution control for the 3rd year in

24

2001

State

succession.
Vana Mithra

award

from

Pradesh Government.
32

Andhra

State
State
State

State

25

2007

Best Management Award from Andhra

State

Pradesh Government.

In this foods safety week celebrations, under the auspices of the Director General of
Foods Safety, Heritages Basanthnagar limestone Foods won 2 first prizes for environment and
pollution control and safe drilling and blatting and 14 2 nd prizes for over all performance,
productivity, operation and maintenance of machines publicity / propaganda etc.,
This section also bagged the award for Environment Protection in the Godavari River belt,
sponsored by the Godavari Pradushna Pariharna Pariyavarana.

Production
Last 20 years production of HERITAGE FOODS INDIA LIMITED Industry,
Basanthnagar.

Year

Production (in tones)

1983 84

7,49,197

1984 85

7,61,581

1985 86

8,05,921

1986 87

7,60,708

1987 88

5,50,254

1988 89

6,01,453

1989 90

6,43,307

1990 91

6,43,663

1991 92

7,48,258

33

1992 93

6,85,596

1993 94

7,31,177

1994 95

7,84,555

1995 96

7,82,383

1996 97

7,31,049

1997 98

7,46,474

1998 99

6,88,305

1999 00

7,77,092

2000 01

6,92,424

2001 02

7,27,447

2004-05

7,34,456

2005-06

7,68,872

2006-07

8,75,012

2007-08

10,46,466

2008-09

10,56,742

Last 20 years production of HERITAGE FOODS INDIA LIMITED Industry,

Basanthnagar.
Note: Production including internal consumption also Foods and clinker production were lower
than the previous year mainly because of lower dispatches of Foods due to recession prevailing
in Foods industry with slow down in demand during the year under review. This section had to
curtail production due to accumulation of large stocks of clinker. However, sales realization

34

during the second half of the year has improved and it is hoped that prices will stabilize at some
reasonable levels.

Directors of Heritage Industries Limited

Chairman:
Syt. B.K. Birla.,

Directors:
Smt. K.G. Maheshwari,
Shri. Pramod Khaitan,
Shri B.P. Bajoria,
Shri P.K. Chokesy,
Smt. Neeta Mukerji,
(Nominee of I.C.I.C.I.),
Shri D.N. Mishra,
(Nominee of L.I.C.),
Shri Amitabha Ghosh,
(Nominee of U.T.I.),
Shri P.K. Malik,
Smt. Manjushree Khaitan,.

Secretary:
Shri S.K. Parik.,

Senior Executives:
35

 Shri K.C. Jain (Manager of the Company),

Shri J.D. Poddar,
Shri O.P. Poddar,
Shri P.K. Goyenka,
Shri D. Tandon,

Auditors:
Messrs Price Water house.,

Subsidiary Companies of Heritage Industries

Bharat General & Textile Industries Limited,
KICM Investment Limited,
Assam Cotton Mills Limited,
Softshree Estates Limited.,

36

VISION OF THE HERITAGE

To prepare development action plan at the apex level, DCCB level and at PACS level
and organize implementation.

To cover all agricultural member of PACS under cooperative kisan credit card scheme to
achieve 100 % coverage and also to provide timely and adequate credit support both short
term and long term investments.

To improve the lending to the small and marginal farmers as also SC and ST
agriculturists.

To provide more advances through Rythu Mirta Groups (RMGs)

To formulate and adopt appropriate strategy for improved loan recoveries and to reduce
Non Performing Asstes (NPAs).

To ensure writing books of accounts and also ensure regular audit at all levels.

To ensure uniform accounts, Ledger maintenance at PACs level and DCCB level.

To provide ATM services at various important places in twin cities.

To provide anywhere banking services and Teller banking services.

To convert extension counters into full ledged branches.

To raise deposits upto Rs. 2040 crores.

To computerize the operations of DCCBs and their branches.

To provide basic training and also periodical refresher courses to staff members at all
level.

To reduce cost of management.

37

Years

Rs in crores

2004-2007
2007-2006
2006-2007
2007-2008

2.34
3.08
4.15
4.84

2008-2009

5.7

38

RISK MANAGEMENT SYSTEM :

Assuming and managing risk is the essence of business decision-making. Investing in a new
technology, hiring a new employee, or launching a marketing campaign is all decisions with
uncertain outcomes. As a result all the major management decisions of how much risk to take
and how to manage the risk.
The implementation of risk management varies from business to business, from one
management style to another and from one time to another. Risk management in the financial
services industry is different from others. Circumstances, Institutions and Managements are
different. On the other hand, an investment decision is no recent history of legal and political
stability, insights into the potential hazards and opportunities.

Many risks are managed quantitatively. Risk exposure is measured by some numerical
index. Risk cost tradeoff many tools are described by numerical valuation formulas.

Risk management can be integrated into a risk management system. Such a system can
be utilized to manage the trading position of a small-specialized division or an entire financial
institution. The modules of the system can be implemented with different degrees of accuracy
and sophistication.

39

RISK MANAGEMENT SYSTEM

Dynamics of risk factors

Cash flows
Generator

Arbitrage
Pricing Model

Price and Risk

Profile Of Contingent Claims

Dynamic

Risk
Target

Trading Rules

Optimizer

1.2 RISK MANAGEMENT SYSTEM

40

Risk Profile

Arbitrage pricing models range from simple equations to large scale numerically
sophisticated algorithms. Cash flow generators also vary from a single formula to a
simulator that accounts for the dependence of cash flows on the history of the risk
factors.

Financial engineers are continuously incorporating advances in econometric

techniques, asset pricing models, simulation techniques and optimization algorithms to
produce better risk management systems.

The important ingredient of the risk management approach is the treatment of risk
factors and securities as an integrated portfolio. Analyzing the correlation among the real,
financial and strategic assets of an organization leads to clear understanding of risk
exposure. Special attention is paid to risk factors, which translate to correlation among
the values of securities. Identifying the correlation among the basic risk factors leads to
more effective risk management.

CONCLUSION
The burden of the Risk and its Costs are both manageable and transferable. Financial
service firms, in the addition to managing their own risk, also sell financial risk management to
others. They sell their services by bearing customers financial risks through the products they
41

provide. A financial firm can offer a fixed-rate loan to a borrower with the risk of interest rate
movements transferred from the borrower to the bank. Financial innovations have been
concerned with risk reduction then any other subject. With the possibility of managing risk near
zero, the challenge becomes not how much risk can be removed.

Financial services involve the process of intermediation between those who have financial
resources and those who need them, either as a principal or as an agent. Thus, value breaks into
several distinct functions, and it includes the intermediation of the following :
Maturity Preference mismatch, Default, Currency Preference mis-match, Size of
transaction and Market access and information.

RISK MANAGEMENT IN HERITAGE

The banks were required by the RBI to introduce effective risk management systems to
cover Credit risk, market risk and Operations risk on priority.
Narasimham committee II , advised banks to address market risk in a structured manner
by adopting Asset and Liability Management practices with effect from April 1st 1989.
Asset and liability management (ALM) is the Art and Science of choosing the best mix
of assets for the firms asset portfolio and the best mix of liabilities for the firms liability
portfolio. It is particularly critical for Financial Institutions.

42

For a long time it was taken for granted that the liability portfolio of financial firms was
beyond the control of the firm and so management concentrated its efforts on choosing the asset
mix. Institutions treasury department used the funds provided by deposits to structure an asset
portfolio that was appropriate for the given liability portfolio.
With the advent of Certificate Of Deposits (CDs), Banks had a tool by which to
manipulate the mix of liabilities that supported their Asset portfolios, which has been one of the
active management of assets and liabilities.
Asset and liability management program evolve into a strategic tool for bank management,
the main elements of the ALM system are :

ALM INFORMATION.
ALM ORGANISATION.
ALM FUNCTION.
ALM INFORMATION :
ALM is a risk management tool through which Market risk associated with business are
identified, measured and monitored to maintain profits by restructuring Assets and Liabilities.
The ALM framework needs to be built on sound methodology with necessary information
system as back up. Thus the information is key element to the ALM process.
43

There are various methods prevalent worldwide for measuring risks. These range from the
simple Gap statement to extremely sophisticate and data intensive Risk adjusted profitability
measurement (RAPM) methods. The central element for the entire ALM exercise is the
availability of adequate and accurate information.
However, the existing systems in many Indian Banks do not generate information in manner
required for the ALM. Collecting accurate data is the biggest challenge before the banks,
particularly those having wide network of branches, but lacking full-scale computerization.
Therefore the introduction of these information systems for risk measurement and
monitoring has to be addressed urgently.
The large network of branches and the lack of support system to collect information
required for the ALM which analysis information on the basis of residual maturity and
behavioral pattern, it would take time for banks in the present state to get the requisite
information.
ALM ORGANISATION :
Successful implementation of the risk management process requires strong commitment on
the part of senior management in the bank to integrate basic operations and strategic decision
making with risk management.
The Board of Directors should have overall responsibility for management of risk and
should decide the risk management policy of the bank, setting limits for liquidity, interest rate,
foreign exchange and equity / price risk.
The Asset Liability Management Committee (ALCO) consisting of the banks senior
management, including CEO/CMD should be responsible for ensuring adherence to the limits set
44

by the Board of Directors as well as for deciding the business strategy of the bank (on the assets
and liabilities sides) in line with the banks budget and decided risk management objective.
The ALM support group consisting of operation staff should be responsible for analyzing,
monitoring and reporting the risk profiles to the ALCO. The staff should also prepare forecasts
(simulations) showing the effects of various possible changes in market condition related to the
balance sheet and recommend the action needed to adhere to banks internal limits,
The ALCO is a decision-making unit responsible for balance sheet planning from a riskreturn perspective including the strategic management of interest rate and liquidity risks. Each
bank has to decide on the role of its ALCO, its responsibility as also the decision to be taken by
it. The business and risk management strategy of the bank should ensure that the bank operates
within the limits / parameters set by the Board. The business issues that an ALCO would
consider, inter alia, will include product pricing for deposits and advances, desired maturity
profile and mix of the incremental Assets and Liabilities, etc. in addition to monitoring the risk
levels of the bank, the ALCO should review the results of and progress in implementation of the
decisions made in the previous meetings. The ALCO would also articulate the current interest
rate view of the bank and base its decisions for future business strategy on this view. In respect
of this funding policy, for instance, its responsibility would be to decide on source and mix of
liabilities or sale of assets. Towards this end, it will have to develop a view on future direction of
interest rate movements and decide on funding mixes between fixed vs. floating rate funds,
wholesale vs. retail deposits, Money markets vs. Capital market funding, domestic vs. foreign
currency funding etc. Individual banks will have to decide the frequency for holding their ALCO
meetings.

45

TYPICAL BUSINESS OF ALCO

Reviewing of the impact of the regulatory changes on the industry.

Overseeing the budgetary process;

Reviewing the interest rate outlook for pricing of assets and liabilities

(Loans

and

Deposits)

Deciding on the introduction of any new loan / deposit product and their impact on
interest rate / exchange rate and other market risks;

Reviewing the asset and liability portfolios and the risk limits and thereby, assessing the
capital adequacy;

Deciding on the desired maturity profile of incremental assets and liabilities and thereby
assessing the liquidity risk; and

Reviewing the variances in actual and projected performances with regard to Net Interest
Margin(NIM), spreads and other balance sheet ratios.

COMPOSITION OF ALCO
The size ( number of members) of ALCO would depend on the size of each institution,
business mix and organizational complexity, To ensure commitment of the Top management and
timely response to market dynamics, the CEO/MD or the GM should head the committee. The
chiefs of Investment, Credit, Resources Management or Planning, Funds Management / Treasury

46

(domestic), etc., can be members of the committee. In addition, the head of the computer
(technology) Division should also be an invitee for building up of
MIS and related computerization. Some banks may even have Sub-Committee and Support
Groups.

ALM ORGANIZATION consists of following categories :

ALM BOARD
ALCO
ALM CELL
COMMITTEE OF DIREC
ALM BOARD
The Board of management should have overall responsibility for management of risk
and should decide the risk management policy of the bank and set limits for liquidity and
interest rate risks.

ALCO
The bank has constituted an Asset- Liability committee (ALCO). The committee may consists
of the following members.
i) General Manager / Banking

Head of Committee

ii) General Manager (Loans & Advances)

Member

iii) General Manager (CMI & AD)

Member

iv) AGM / Head of the ALM Cell

Member
47

The ALCO is a decision making unit responsible for ensuring adherence to the limits set by
board as well as for balance sheet planning from risk return perspective including the strategic
management of interest rate and liquidity risks, in line with the banks budget and decided risk
management objectives.

The Business issues that an ALCO would consider interalia, will include fixation of interest
rates for both deposits and advances, desired maturity profile of the incremental assets and
liabilities etc.

The ALCO would also articulate the current interest rate due of the bank and base its
decisions for future business strategy on this view. In respect of funding policy, for instance, its
responsibility would be decided on source and mix of liability.
Individual Banks will have to decide the frequency for their ALCO meetings. However, it is
advised that ALCO should meet at least once in a fortnight. The ALCO should review results of
and process in implementation of the decisions made in the previous meetings

ALM CELL

The ALM desk / cell consisting of operating staff should be responsible for analyzing,
monitoring and reporting the profiles to the ALCO. The staff should also prepare forecasts
(simulations) showing the effects of various possible changes in market conditions related to the
balance sheet and recommend the action needed to adhere to Banks internal limits.

48

COMMITTEE OF DIRECTORS

The Banks should also constitute professional, management and supervisory committee,
consisting of three to four directors, which will oversee the implementation of the ALM system,
and review its functioning periodically.

49

ALM PROCESS
The scope of ALM function can be described as follows:
1. Liquidity Risk Management
2. Interest Rate Risk Management
3. Currency Risk Management
4. Settlement Risk Management
5. Basis Risk Management
The RBI guidelines mainly address Liquidity Risk Management and Interest Rate Risk
Management.
The following are the concepts discussed for analysis of banks Asset-Liability
Management under above mentioned risks.
Liquidity Risk
Maturity profiles
Interest rate risk
Gap analysis
1. Liquidity Risk Management :
Measuring and managing liquidity needs are vital activities of the banks. By assuring a
banks ability to meet its liability as they become due, liquidity management can reduce the
probability of an adverse situation development. The importance of liquidity transcends
individual institutions, as liquidity shortfall in one institution can have repercussions on the
entire system.
50

Liquidity risk management refers to the risk of maturing liability not finding enough
maturing assets to meet these liabilities. It is the potential inability to meet the banks liability as
they became due. This risk arises because bank borrows funds for different maturities in the form
of deposits, market operations etc. and lock them into assets of different maturities.

Liquidity Gap also arises due to unpredictability of deposit withdrawals, changes in loan
demands. Hence measuring and managing liquidity needs are vital for effective and viable
operations of the bank.

Liquidity measurement is quite a difficult task and usually the stock or cash flow
approaches are used for its measurement. The stock approach used certain liquidity ratios.
The liquidity ratios are the ideal indicators of liquidity of banks operating in developed
financial markets, the ratio do not reveal the real liquidity profile of banks which are
operating generally in a fairly illiquid market. The assets, which are commonly
considered as liquid like Government securities, have limited liquidity when the market
and players are in one direction. Thus analysis of liquidity involves tracking of cash flow
mismatches.

The statement of structural liquidity may be prepared by placing all cash inflows and
outflows in the maturity ladder according to the expected timing of cash flows.
The MATURITY PROFILE could be used for measuring the future cash flows in different
time bands.

51

The position of Assets and Liabilities are classified according to the maturity patterns a
maturing liability will be a cash outflow while a maturing asset will be a cash inflows. The
measuring of the future cash flows of banks is done in different time buckets.
The time buckets, given the statutory Reserve cycle of 14 days may be distributed as under:
1. 1 to 14 days
2. 15 to 28 days
3. 29 days and upto 3 months
4. Over 3 months and upto 6 months
5. Over 6 months and upto 1 year
6. Over 1 year and upto 3 years
7. Over 3 years and upto 5 years
8. Over 5 years.

52

MATURITY PROFILE LIQUIDITY

HEAD OF ACCOUNTS

Classification into time buckets

A.OUTFLOWS
1.Capital, Reserves and Surplus

Over 5 years bucket.

2.Demand Deposits (Current &

Savings Bank Deposits)

Demand Deposits may be classified into

volatile and core portions, 25 % of
deposits are generally withdraw able on
demand. This portion may be treated as
volatile. While volatile portion may be
placed in the first time bucket i.e., 1-14
days, the core portion may be placed in
1-2 years, bucket.

3. Term Deposits

Respective maturity buckets.

4. Borrowings
5. Other liabilities and provisions
(i)
Bills Payable

Respective maturity buckets.

(i)

1-14 days bucket

Items not representing cash
payable may be placed in over 5
years bucket

(ii)

Inter-office Adjustment

(ii)

(iii)

Provisions for NAPs

(iii)

a) sub-standard
b) doubtful and Loss
(iv)

provisions for depreciation

in Investments

(v)

provisions for NAPs in

investment

a) 2-5 years bucket.

b) Over 5 years bucket
.
(iv)

Over 5 years bucket.

(v)
a) 2-5 years bucket.
b) Over 5 years bucket

(vi)

provisions for other purposes (vi) Respective buckets depending on

53

the purpose.

54

B. INFLOWS
1. Cash
2. Balance with other Banks
(i) Current Account

(ii)

Money at call and short Notice,

Term Deposits and other
Placements
3. Investments
(i)
Approved securities
(ii)

Corporate Debentures
and bonds, CDs and
CPs,
redeemable
preference
shares,
units of Mutual Funds
(close ended). Etc.
(iii) Share / Units of Mutual
Funds
(open ended)
(iii)
Investment
in
subsidiaries /
Joint Ventures.

1-14 days bucket.

(i)

Non-withdraw able portion on

account of stipulations of
minimum balances may be shown
Less than 1-14 days bucket.
(ii) Respective maturity buckets.

(i)

Respective maturity buckets

excluding the amount required to
be reinvested to maintain SLR
(ii) Respective Maturity buckets.
Investments classified as NPAs
Should be shown under 2-5 years
bucket (sub-standard) or over 5
years bucket (doubtful and loss).
(iii) Over 5 years bucket.
(iv)

Over 5 years bucket.

4. Advances (performing / standard)

(i)
Bills Purchased and
(i) Respective Maturity buckets.
Discounted
(ii) Banks should undertake a styud
(including bills under
of behavioral and seasonal pattern
DUPN)
of a ailments based on outstanding
(iii)
Cash Credit / Overdraft
and the core and volatile portion
(including TOD) and
should be identified. While the
Demand Loan component of
volatile portion could be shown in
Working Capital.
the respective maturity bucket. The
core portion may be shown under 12 years bucket.
(iii) Term Loans
(iii) Interim cash flows may be
shown under respective maturity
buckets.

55

5. NPAs
b. Sub-standard
c. Doubtful and Loss

6. Fixed Assets

(I) 2-5 years bucket.

(ii) Over 5 years bucket.

Over 5 years bucket.

7. Other-office Adjustment
(i)
Inter-office Adjustment

(ii)

Others

(i)

As per trend analysis,

Intangible items or items
not representing cash
receivables may be shown
in over 5 years bucket.
Respective maturity buckets.
Intangible assets and assets
not
representing
cash
receivables may be shown in
over 5 years bucket.

(i)

Terms used:
CDs: Certificate of Deposits.
CPs: Commercial Papers.
DTL PROFILE: Demand and Time Liabilities.
Inter office adjustment:
Outflows: Net Credit Balances
Inflows: Net Debit Balances
Other Liabilities: Cash payables, Income received in advance, Loan Loss and
Depreciation in Investments.
Other assets: Cash Receivable, Intangible Assets and Leased Assets.

2.Interest Rate Risk :

56

Interest Rate Risk refers to the risk of changes in interest rates subsequent to the creation
of the assets and liabilities at fixed rates. The phased deregulations of interest rates and the
operational flexibility given to banks in pricing most of the assets and liabilities imply the need
for banking system to hedge the interest rate risk. This is a risk where changes in the market
interest rates might adversely affect a banks financial conditions.

The changes in interest rates affect banks in large way. The immediate impact of change
in interest rates is on banks earnings by changing its Net Interest Income (NII). A long term
impact of changing interest rates is on banks Market Value of Equity (MVE) or net worth as the
economic value of banks assets, liabilities and off-balance sheet positions get affected due to
variation in market interest rates.

The risk from the earnings perspective can be measured as changes in the Net Interest
Income (NII) OR Net Interest Margin (NIM).

There are many analytical techniques for measurement and management of interest rate
risk. In MIS of ALM, slow pace of computerization in banks and the absence of total
deregulation, the traditional GAP ANALYSIS is considered as a suitable method to measure the
interest rate risk.

Gap Analysis:

57

The Gap or mismatch risk can be measured by calculating Gaps over different time
buckets as at a given date. Gap analysis measures mismatches between rate sensitive liabilities
and rate sensitive assets including off-balance sheet position.

An asset or liability is normally classified as rate sensitive if:

If there is a cash flow within the time interval.
The interest rate resets or reprices contractually during the interval.
RBI changes the interest rates i.e., on saving deposits, export credit, refinance, CRR
balances and so on, in case where interest rate are administered.
It is contractually pre-payable or withdrawable before the stated maturities
The Gap is the difference between Rate Sensitive Assets (RSA) and Rate sensitive Liabilities
(RSA) for each time bucket.
The positive GAP indicates that RSAs are more than RSLs (RSA>RSL).
The negative GAP indicates that RSAs are more than RSALs (RSA<RSL).

58

2.2 TABLE
months
inflows
outflows
GAP

up to 3
69176.2
131724.6
62548.39

3 to 6
330487.3
95515.39
62467.14

6 to 12
157602.3
133159.8
-24442.5

above 1 yr
529926.8
430353.8
-99573

The above analysis reveals the extent of mismatches and the nature of sensitivity
of Assets and Liabilities which are having high liquidity. In short term maturity bucket of
the bank are having excess liquidity and the liquidity crisis is arising only in long term
maturity bucket. The bank can adequately plan their long liquidity according to the
buckets effect on profitability.

The bank can implement ALM policies for the better identification of the mismatch, risk
and for the implementation of various remedial measures.
59

GENERAL:
The classification of various components of assets and liabilities into different time
buckets for preparation of Gap reports (Liquidity and interest rate sensitivity) may be done as
indicated in Appendices I & II as a sort of bench mark. Banks which are better equipped to
reasonably estimate the behavioral pattern, embedded options, rolls-in and rolls-out etc of
various components of assets and liabilities on the basis of past date. Empirical studies could
classify them in the appropriate time buckets, subject to approval from the ALCO / Board. A
copy of the note approved by the ALOC / Board may be sent to the Department of Banking
Supervision.
The present framework does not capture the impact of embedded options, i.e., the
customers exercising their options (premature closure of deposits and prepayment of loans and
advances) on the liquidity and interest rate risks profile of banks. The magnitude of embedded
option risk at times of volatility in market interest rates is quite substantial banks should
therefore evolve suitable mechanism, supported by empirical studies and behavioral analysis to
estimate the future behavior of assets; liabilities and off-balance sheet items to changes in market
variables and estimate the embedded options.
A scientifically evolved internal transfer pricing model by assigning values on the basis of
current market rates to funds provided and funds used is an imported component for elective
implementation of ALM systems. The transfer price mechanism can enhance the management of
margin i.e., landings or credit spread the funding or liability spread and mismatch spread. It also
helps centralizing interest rate risk at one place which facilitates effective control and

60

management of interest rate risk. A well defined transfer pricing system also provide a rational
framework for pricing of assets and liabilities.

61

2.3 TABLE
STRUCTURAL LIQUIDITY STATEMENT AS ON 31-3-2012

S.No Particulars
A
Liabilities:
1 Deposits
I. Current A/c
II. SB A/c
III. Fixed Dep.
Sub-Total
2 Borrowings
3 Paid-up Share Capital
4 Reserves and Surpluses
5 Other provisions
6 Balance P & L A/C
7 Other Liabilities
TOTAL (A)
B.
ASSETS:
1 Cash in Hand
2 Bank Balances
3 Advances:
Agriculture-LT
Agriculture-ST
Bills purchased
Other Loans
4 Current Assets / Investments
5 Fixed Assets & other Assets
TOTAL (B)
C
Mismatches (B-A)
D
C as % to A

Rs in lakhs
Upto 3 months 3-6 months 6-12 months Above 1 year Total

797.51
2326.15
6527.21
9650.87
49186.96

14607.72
14607.72
62102.79

16270.13
16270.13
65967.38

16210.24
75048.07

829.28
77539.79

734.22
1405.71
25804.99
17632.22
329.64
574.44
25668.8
20124.38
92274.4
17226.33
22.95

1070.16
83307.67

2392.51
6978.46
117894.11
127265.08
144680.44
19013.72
64270.99
47222.42
415.72
16703.4
419571.77

3190.02
9304.61
155299.17
167793.8
321937.57
19013.72
64270.99
47222.42
415.72
34813.08
655467.3

565.04

629.98

4931.5

734.22
7532.23

49643.25

5618.56
63833.34

148457.6
80567.43

653
15400
672.05
66933.34
-10606.45
-13.68

10409.89
11200
9053.33
100745.1
17437.43
20.93

45096.54
60506.4
55954.99
395514.46
-24057.31
-5.73

1.3 GRAPH
Gap analysis
20000
10000
0
-10000

Upto 3
months

3-6 months

6-12 months

-20000
-30000

62

Above 1 year

179881.15
211676.24
329.64
56733.87
112775.2
85804.75
655467.3

STRUCTURAL LIQUIDITY STATEMENT ANALYSIS 2012

(1) The total current liabilities for the three months are Rs. 75048.07 is less than the total
assets for the 3 months are Rs.92274.4. There fore the assets are more than the liabilities.
So there is a positive gap of Rs.17226.33.
(2) The total current liability for the 3-6 months is Rs.77539.79 is more than the total assets
for the 3-6 months are Rs.66933.34. There fore the liabilities are more than the assets
.This is a negative gap so the company should take steps to ensure the liquidity position.
(3) The total current liabilities for the 6-12 months are Rs.83307.67. current assets are
Rs.100745.1. current liabilities less than the current assets so there is a positive gap of
Rs.17437.43.
(4) The total current liabilities for the above 1 year amount 419571.77. Current assets
amount Rs.395514.46. Current Liability is more than the current assets. This is negative
gap. So the company should take steps to ensure the liquidity position.

63

2.4 TABLE

Structural liquidity statement as on 31-3-2013

S.no. Particulars
A

C
D

LIABILITIES:
1 DEPOSITS
I) Current A/C
ii) Savings Bank A/C
iii) Term Deposits
Sub-total
2 Borrowing
3 Other Liabilities
TOTAL 'A'
ASSETS
1 Cash in hand &Bank Balance
2 Advances
I) LT - operations
ii) ST-operations
iii) other loans including BP
3 Investments
4 Other Assets
TOTAL 'B'
MISMATCHES (B-A)
C as % to A

(Rs. In Lakhs)
Upto 3 momths 3-6 months 6-12 months Above 1years Total

998.25
2351.63
3860.87
7210.75
33421.23
22274
62905.98

0
0
21958.14
21958.14
73972.32
1926.62
97857.08

0
0
29535.68
29535.68
65328.19
1689.58
96553.45

2994.76
7054.9
118010.02
128059.68
139630.18
160740.84
428430.7

3993.01
9406.53
173364.71
186764.25
312351.92
186631.04
685747.21

8614.44

411.04

9025.48

22602.8
80033.7
1809.51
14775
15755.15
134976.16
72070.18
128.26

0
43083.29
17582.02
6500
678.46
67843.77
-30013.31
-30.6

0
80265.3
2860.37
10850
81.37
94057.04
-2496.41
-2.59

222561.37
5832.45
39613.13
61325.22
50512.59
379844.76
-48585.94
-11.24

245164.17
209214.74
61865.03
93450.22
67027.57
676721.73

64

1.4 GRAPH

Gap analysis
80000
60000
40000
20000
0
-20000
-40000
-60000

Upto 3
months

3-6 months

6-12 months

Above 1 year

Structural liquidity statement analysis as on 2013

(1)The total current liabilities for the 3 months are Rs.62905.98 is less than the total assets
for the 3months are Rs.134976.16. Therefore the assets are more than the liabilities. So there
is a positive gap of Rs.72070.18
(2)The total current liabilities for the 3-6months are Rs.97857.08 is more than the total
assets for 3-6 months are Rs.67843.77. This is a negative gap. So the company should take
steps to ensure the liquidity position.
(3) The total current liabilities for the 6-12 months are Rs.96553.45 is more than the total
assets for the 3-6months are Rs.94057.04.This is a negative gap. So the company should
take steps to ensure the liquidity position

(4)The total current liabilities for the above 1year amount Rs.428430.7. current asset
amount Rs.379844.76. current liability is more than the current asset. This a negative gap.
So the company should take steps to ensure the liquidity position.

65

66

2.5 TABLE
STRUCTURAL LIQUIDITY STATEMENT AS ON 31-3-2014

S.no
A

C
D

Rs. In lakhs
Particulars
Upto 3 months 3-6 months 6-12 months Above 1year Total
Liabilities
1 Deposits
I) Current A/C
1337.91
4013.73
5351.64
ii) SB A/C
3051.33
9153.97
12205.3
iii)Fixed Dep.
33172.78 14614.27
47364.4
57006.47
152157.92
Sub-Total
37562.02 14614.27
47364.4
70174.17
169714.86
2 ST Borrowings
16493.88 15976.62 107647.03
82276.53
222394.06
3 LT Borrowings
42.8
1454.4
957.56
182624.56
185079.32
4 Paid-up Share Capital
19192.55
19192.55
5 Reserves
116703.38
116703.38
6 Other Reserves/Provisions
3246.47
3246.47
7 Balance P&L A/C
300.38
300.38
8 Interest Payable
5021.66
987.81
1623.37
21921.62
29554.46
9 Other Liabilities
10055.84
15.15
9.97
33487.16
44568.12
TOTAL'A'
69176.2 33048.25 157602.33
529926.82
790753.6
Assets:
1 Cash in hand
954.44
954.44
2 Bank Balances
9404.34
9404.34
3 Advances:
I) LT-operations
20383.8
4633.7
236705.36
261722.86
ii) ST-operations
34340 76352.64
126802.3
64850.36
302345.3
4 Bills purchased
20.6
20.6
5 Current Assets/Investments
48220
18442
835.31
76805.6
144302.91
6 Interest Receivable
18300.57
720.75
888.31
34583.98
54493.61
7 Other Assets
100.84
17409.5
17510.34
TOTAL'B'
131724.59 95515.39 133159.62
430354.8
790753.6
MISMATCHES (B-A)
62548.39 62467.14
-24442.71
-99572.02
C as % to A
90.42
189.02
-15.51
-18.79

67

1.5 GRAPH

Gap analysis
100000
50000
0
-50000

Upto 3
months

3-6 months

6-12 months Above 1 year

-100000
-150000

Structural liquidity statement analysis on 2014

(1) The total current liabilities for the 3months are Rs.69176.2 is less than the total
assets for the months are Rs.131724.59.Therefore the assets are more than the liabilities.
So there is a positive gap of Rs.62548.39
(2)The total current liabilities for the 3-6 months are Rs.33048.25 is less than the assets
for the 3months are Rs.95515.39. Therefore assets are more than the liabilities. So there
is a positive gap of Rs.62467.14
(3)The total current liabilities for the 6-12 months are Rs.157602.33 is more than total
assets for 6-12 months are Rs.133159.62. Therefore the liabilities are more than the
assets. This is a negative gap. So the company should take steps to ensure the liquidity
position.
(4)The total current liabilities for the above 1 year are Rs.529926.82 is more than the
total assets for the above 1 year Rs.430354.8. Therefore the liabilities are more than the
68

assets. This is a negative gap. So the company should take steps to ensure the liquidity
position.

69

BALANCE SHEET OF HERITAGE

AS AT 31-03-2014
(Amount in Cr)
Period&Months

Year Ended

Year Ended

31-03-2014(Cr)

31-03-2013(Cr)

SOURCES OF FUNDS
Owned Funds
Equity Share Capital

132.74

64.69

Share Application Money

0.00

1.33

Preferential Share Capital

0.00

0.00

3,292.28

2,511.18

40.77

13.17

0.12

0.21

3,465.91

2,590.58

1,332.67

1,014.08

Accumulated Depreciation

662.58

488.40

Less: Revaluation Reserve

0.00

0.00

Net Block

670.09

525.68

Capital Work-in-Progress

212.86

163.63

1,988.86

1,907.76

CurrentAssets,loans&Advances

1,912.51

1,128.61

Less: Current Liabilities&Provisions

1,318.41

1,135.10

594.10

-6.49

0.00

0.00

3,465.91

2,590.58

Number of Equity shares outstanding(Cr)

66.37

32.34

Bonus component in Equity capital

81.69

16.60

Book value of Unquoted Investments

1,988.86

1,323.33

Market value of Quoted Investments

0.00

10.11

418.65

331.01

Reserves&Surplus
Loan Funds
Secured Loans
Unsecured Loans
TOTAL
USES OF FUNDS
Fixed Assets
Gross Block

Investments
Net Current Assets

Total Net Current Assets

Miscellaneous Expenses not written off
TOTAL

Notes:

Contingent liabilities

70

FINDINGS
1. ALM technique is aimed to tackle the market risks. Its objective is to stabilize and

improve Net interest Income (NII).

2. Implementation of ALM as a Risk Management tool is done using maturity profiles and

GAP analysis.
3. ALM presents a disciplined decision making framework for banks while at the same time

guarding the risk levels.

4. For the duration of upto 3 months, the Bank has a positive gap Rs 17226.33 per the year 2014

&Rs72070.18 for the year 2012 however for the year 2013 there is a negative Gap of Rs
62548.39.
5. For duration of 3-6 months, the Bank has a negative Gap of Rs 10606.45 for the year 2013

&Rs 30013.31 for the year 2012. In the year 2013 Bank is able to maintain a positive gap of
Rs 62467.14.
6. For the duration 6-12 months, the Bank has positive Gap of Rs 17437.43 in the year 2012.

However for the year 2013-2014, the Gap is negative.

7. For the time duration of above 1 year the Bank has negative Gap in all the 3 years is Rs

24057.31 In the year 2012 Rs 48585.94 in the year 2013 of& Rs 99572.02 in the year 2014.

Suggestions

71

1. The Bank should strengthen its management information system (MIS) and computer

processing capabilities for accurate measurement of liquidity and interest rate Risks
in their Banking Books.
1. In the short term the Net interest income or Net interest margins (NIM) creates

economic value of the Bank which involves up gradation of existing systems &
Application software to attain better & improvised levels.
2. It is essential that Bank remain alert to the events that effect its operating

environment & react accordingly in order to avoid any undesirable risks.

3. HERITAGE requires efficient human and technological infrastructure which will

future lead to smooth integration of the risk management process with effective
banks business strategies.

BIBILIOGRAPHY
Title of the Books

Author
72

1. Risk management

Gustavson hoyt

2. Management Research magazine

P.M.Dileep Kumar

3. India financial system

M.Y. Khan

4. Web sites
WWW.HERITAGEAP.IN
WWW.RBI.ORG.COM

73

ANNEXURE - 1

74

INDIAN BANKS PROFILE:

RESERVE BANK OF INDIA (RBI)

NATIONAL BANK OF AGRICULTURAL AND RURAL DEVELOPMENT

(NABARD)

STATE
CO-OPERATIVE
BANKS (SCBs)

STATE
LAND

URBAN
CO-OPERATIVE

DEVELOPMENT

CENTRAL
75

BANKS (UCBs)

CO-OPERATIVE
BANKS (CCBs)

PRIMARY
AGRICULTURAL
CREDIT
SOCIETIES (PACSs)
1.1 INDIAN BANK PROFILE
Total state co-operative banks (SCBs) till date are 28 banks.
Total primary agricultural credit societies under various CCBs are 2950.

76