Commercial bank depositsను accept చేసి loans ఇవ్వడం మాత్రమే కాదు. తన వద్ద ఉన్న financial resourcesను liquidity, safety and profitability మధ్య సరైన balance ఉండే విధంగా వివిధ assetsలో allocate చేయాలి. ఈ processను broadly Bank Portfolio Management – బ్యాంకు పోర్ట్ఫోలియో నిర్వహణ అంటారు.
Bank Portfolio Management = Bank fundsను Cash + Reserves + Investments + Loans & Advances + Other Assets మధ్య suitable mannerలో allocate and manage చేయడం.
Bank Portfolio యొక్క మూడు ప్రధాన objectives:
S – Safety
L – Liquidity
P – Profitability
Remember: SLP
A portfolio is a collection of assets held by an individual, institution or bank.
Bank portfolioలో cash balances, reserves, securities, loans and advances మరియు ఇతర earning assets ఉండవచ్చు.
Portfolio = Collection / Combination of Assets
Bank available fundsను different assetsలో allocate చేసి, returns earn చేస్తూనే deposit withdrawals and other obligationsను meet చేయడానికి adequate liquidity maintain చేసి, excessive riskను avoid చేసే processను Bank Portfolio Management అంటారు.
Portfolio management అర్థం చేసుకోవడానికి bank balance sheetలో Assets మరియు Liabilities distinction చాలా important.
| Liabilities / Funding Sources | Assets / Uses of Funds |
|---|---|
| Customer Deposits | Cash and Reserves |
| Borrowings | Loans and Advances |
| Other Liabilities | Investments / Securities |
| Capital and Reserves | Other Assets |
Customer Deposit → Bank Liability
Loan Given by Bank → Bank Asset
A bank cannot keep all its funds in cash because cash generally produces little or no lending return. At the same time, it cannot lend every available rupee in long-term or risky assets because depositors may demand withdrawals.
Liquidity ↔ Profitability ↔ Safety
Liquidity means the ability of a bank to meet withdrawals and other payment obligations when they become due without unacceptable loss.
✓ Cash
✓ Balances/reserves with monetary authority or other banks, as applicable
✓ Short-term marketable securities
✓ Other assets readily convertible into cash
Depositors ask for money → Bank should be able to pay.
Banks seek income from loans, investments and other permitted activities. Hence part of the portfolio is held in earning assets.
✓ Loans and Advances
✓ Interest-bearing Investments
✓ Eligible Securities
✓ Other income-generating financial assets
Safety means protecting bank funds from excessive possibility of loss. A bank therefore evaluates borrowers, securities, maturity and concentration before allocating funds.
Credit appraisal + Diversification + Risk control + Prudential management
One of the most important concepts in bank portfolio management is the Liquidity–Profitability Trade-off.
| More Liquid Assets | More Earning / Less Liquid Assets |
|---|---|
| Greater ability to meet withdrawals | Potentially greater income |
| Generally lower return | Generally higher expected return, with additional risks |
| Lower maturity/marketability concern in many cases | Funds may be committed for longer periods |
Too much liquidity → Profitability may suffer.
Too little liquidity → Payment/withdrawal risk may rise.
Hence → Optimum Balance
Cash and reserve balances provide immediate liquidity and help banks meet payment and regulatory requirements.
But → Low/No direct earning compared with loans
Very short-term placements can help banks manage temporary liquidity while earning some return, depending on the financial system and market.
Banks invest part of their funds in permitted securities. Such investments may provide income, liquidity, diversification and regulatory compliance.
Loans and advances are important earning assets of commercial banks. They can generate interest income but expose banks to credit and liquidity risks.
Loan = Asset to Bank
Deposit = Liability to Bank
Traditional banking theory often distinguishes between Primary Reserves and Secondary Reserves.
These are highly liquid balances maintained mainly to meet immediate cash requirements and reserve obligations.
Cash in hand + qualifying reserve balances
These are highly liquid, marketable assets that can be converted into cash relatively quickly and may also provide some income.
Secondary Reserve → Near liquidity + some earning potential
| Earning Assets | Non-Earning / Low-Earning Liquid Assets |
|---|---|
| Loans and Advances | Cash in Hand |
| Interest-bearing Securities | Certain reserve balances |
| Other permitted income-generating assets | Balances primarily maintained for liquidity |
| Mainly support income generation | Mainly support liquidity/safety |
A bank should generally avoid concentrating its entire loan or investment portfolio in a single borrower, industry, region or asset type.
Instead of lending all funds to only one industry, a bank may distribute exposure across different eligible borrowers, industries and asset classes.
“Do not put all eggs in one basket” → Diversification
Bank assets and liabilities may have different maturity periods. Deposits can sometimes be withdrawn sooner than the loans financed by them are repaid.
Therefore banks manage the maturity profile of assets and liabilities.
Asset-Liability Management (ALM) is the coordinated management of a bank's assets and liabilities to control risks arising from differences in maturity, liquidity, interest rates and funding structure.
✓ Liquidity Risk
✓ Interest Rate Risk
✓ Maturity Mismatch
✓ Funding Structure
✓ Balance-sheet risk management
Portfolio Management → What assets should the bank hold?
ALM → How should assets and liabilities be coordinated?
Credit Risk is the risk that a borrower or counterparty may fail to meet repayment obligations as agreed.
Credit appraisal + Monitoring + Collateral where applicable + Diversification + Exposure limits
Liquidity Risk arises when a bank cannot meet its financial obligations when due without incurring unacceptable losses.
Changes in market interest rates can affect a bank's interest income, interest expense and the market value of interest-sensitive assets and liabilities.
Market risk arises from adverse changes in market variables such as interest rates, security prices and foreign-exchange rates for relevant positions.
Operational risk may arise from inadequate or failed internal processes, people, systems or external events.
System failure
Internal process failure
Operational error
Certain fraud events
External disruptions
| Credit Risk | Liquidity Risk |
|---|---|
| Borrower may not repay | Bank may not meet obligations on time |
| Related mainly to quality of credit exposure | Related mainly to availability of liquid funds/funding |
| Can create loan losses | Can create funding/payment stress |
For ordinary fixed-rate bonds, market interest rates and existing bond prices generally move in opposite directions.
When a loan or advance stops generating income for the bank according to applicable regulatory recognition norms, it may be classified as a Non-Performing Asset (NPA).
NPA is an asset classification problem for the lending bank. It is not a bank liability merely because repayment has become overdue.
For many standard term loans in Indian banking, a loan is generally treated as an NPA when interest and/or instalment of principal remains overdue for more than 90 days, subject to RBI's applicable asset-classification rules and product-specific provisions.
Standard term-loan NPA benchmark → More than 90 days overdue
✓ Reduce interest income
✓ Increase provisioning burden
✓ Reduce profitability
✓ Weaken asset quality
✓ Constrain fresh lending capacity
✓ Put pressure on bank capital
Higher expected returns are often associated with higher risk. A bank therefore cannot select assets only by comparing expected returns.
Maximum Profitability alone is NOT the objective of prudent bank portfolio management.
2. Liquidity
3. Profitability
4. Diversification
5. Suitable Maturity Structure
6. Credit Quality
7. Risk Management
8. Regulatory Compliance
These two terms should not be confused.
| Liquidity | Solvency |
|---|---|
| Ability to meet obligations when due | Broad ability for assets/capital to support liabilities and absorb losses |
| Mainly timing and availability of funds | Mainly financial soundness/net worth perspective |
| Short-term funding stress can create liquidity problem | Large losses can create solvency/capital problem |
Suppose a bank has ₹100 crore available for allocation:
| Asset | Amount | Return |
|---|---|---|
| Cash/Reserves | ₹20 crore | 0% |
| Securities | ₹30 crore | 6% |
| Loans | ₹50 crore | 10% |
Annual gross interest return from these simplified earning assets:
Bank A lends ₹100 crore entirely to one industry.
Bank B spreads ₹100 crore across several unrelated sectors.
Suppose:
Gross NPAs = ₹50 crore
Trap 2: Loans → Bank Assets.
Trap 3: Cash is highly liquid but generally has low direct return.
Trap 4: Loans can be profitable but carry credit and liquidity risks.
Trap 5: Diversification reduces concentration risk; it does not eliminate all risk.
Trap 6: Liquidity ≠ Profitability.
Trap 7: Liquidity ≠ Solvency.
Trap 8: ALM coordinates assets and liabilities.
Trap 9: Borrower default → Credit Risk.
Trap 10: Difficulty meeting withdrawals/payments → Liquidity Risk.
Trap 11: Interest rate ↑ → price of an existing ordinary fixed-rate bond generally ↓.
Trap 12: NPA remains an asset classification for the lending bank.
A) Collection of assets
B) Single currency note
C) Tax only
D) One deposit only
A) Allocation and management of bank funds/assets
B) Printing currency
C) Conducting elections
D) Measuring population
A) Safety, Liquidity and Profitability
B) Tax, Budget and Deficit
C) Consumption, Saving and Investment
D) Price, Quantity and Demand
A) Cash
B) Long-term loan
C) Building
D) Bad debt
A) Liability
B) Loan asset
C) Fixed capital asset
D) Profit
A) Asset
B) Liability
C) Deposit
D) Currency issue
A) Loans and advances
B) Cash kept idle
C) Office stationery
D) Currency printing
A) Ability to meet obligations when due
B) Maximum profit only
C) Borrower default
D) Tax collection
A) Ability to earn adequate returns
B) Ability to print notes
C) Ability to collect taxes
D) Number of depositors
A) Concentration risk
B) All risk completely
C) Currency supply
D) GDP
A) Credit risk
B) Population risk
C) Fiscal deficit
D) Demand-pull inflation
A) Liquidity risk
B) Credit risk only
C) Inflation only
D) Tax risk
A) Interest-rate risk
B) Population risk
C) Agricultural risk only
D) Fiscal deficit
A) Asset-Liability Management
B) Asset-Lending Method
C) Average Liability Measure
D) Annual Liquidity Money
A) Coordinating assets and liabilities
B) Printing currency
C) National income accounting
D) Tax collection
A) Immediate liquidity
B) Maximum long-term return
C) Equity speculation only
D) Tax payment only
A) Liquidity with some earning potential
B) Zero liquidity and zero return
C) Tax and subsidy
D) Consumption and saving
A) Loan
B) Cash in vault
C) Currency note held idle
D) None
A) Concentration risk
B) Diversification
C) Liquidity automatically
D) Money multiplier
A) Balance among risk, return and liquidity
B) Maximum loans irrespective of risk
C) Holding only cash
D) Avoiding all investments
A) A trade-off
B) Perfect identity
C) No relationship
D) Accounting equality only
A) Reduce profitability
B) Always maximise profits
C) Eliminate all risks
D) Increase lending automatically
A) Liquidity risk
B) Tax revenue
C) GDP deflator
D) Consumption multiplier
A) Printing maximum currency
B) Safety
C) Liquidity
D) Profitability
A) Diversification
B) Liquidity trap
C) Credit creation
D) Inflation targeting
A) Liquidity risk
B) Higher population
C) Fiscal surplus
D) Deflation necessarily
A) In opposite directions
B) In the same direction always
C) Independently by definition
D) At identical percentages
A) Falls
B) Rises
C) Remains fixed by definition
D) Becomes zero
A) Rises
B) Falls
C) Must become zero
D) Equals face value always
A) Failed processes or systems
B) Borrower default only
C) Money supply only
D) Inflation only
A) Non-Performing Asset
B) National Portfolio Account
C) Net Profit Account
D) New Payment Asset
A) Asset quality
B) Currency printing
C) Tax revenue
D) Fiscal policy
A) More than 30 days
B) More than 60 days
C) More than 90 days
D) More than 365 days only
A) Reduce bank profitability
B) Guarantee higher profit
C) Eliminate credit risk
D) Increase asset quality
A) Provisioning burden
B) Loan repayment automatically
C) Cash creation without limit
D) GDP mechanically
A) 2%
B) 5%
C) 10%
D) 20%
A) 2%
B) 5%
C) 10%
D) 20%
A) ₹2 crore
B) ₹4 crore
C) ₹8 crore
D) ₹50 crore
A) ₹5 crore
B) ₹6 crore
C) ₹8 crore
D) ₹10 crore
40×5% = 2
60×10% = 6
Total = ₹8 crore
A) 5%
B) 6%
C) 8%
D) 10%
A) Maximum return is the only objective of a bank
B) A bank balances liquidity, safety and profitability
C) Cash always gives the highest return
D) Diversification eliminates every form of risk
A) Loans are bank assets
B) Deposits are bank liabilities
C) Diversification can reduce concentration risk
D) Deposits received from customers are bank assets
A) Liquidity stress
B) No financial problem by definition
C) Inflation only
D) Fiscal deficit
A) Credit risk
B) Liquidity risk
C) Exchange rate only
D) Operational risk only
A) Diversification
B) Concentration
C) Currency leakage
D) Deficit financing
A) Assertion and Reason are true; Reason correctly explains Assertion.
B) Both are true; Reason is not the correct explanation.
C) Assertion is true; Reason is false.
D) Assertion is false; Reason is true.
Reason: Banks need to meet withdrawals and payment obligations.
Reason: Funds are spread across different exposures rather than concentrated in one.
Reason: Borrowers owe repayment to banks.
Reason: Highly liquid assets may offer lower returns than some less-liquid earning assets.
Reason: Some systemic, market, operational and other risks may remain even in a diversified portfolio.
A) ALM
B) GDP
C) MPC
D) MEC
A) Liquidity
B) Profit maximisation alone
C) National income
D) Price elasticity
A) Entire lending concentrated in one industry
B) Lending spread across unrelated sectors
C) Diversified securities portfolio
D) Broad borrower mix
A) Broader ability to absorb losses and maintain financial soundness
B) Only having cash for today's withdrawals
C) Maximum loan growth
D) Maximum deposit velocity
A) Risk, return, liquidity and maturity
B) Return alone
C) Liquidity alone
D) Number of branches alone
= Gross NPAs / Gross Advances × 100
Simple Asset Return
= Amount Invested × Rate of Return
Portfolio Yield
= Total Portfolio Income / Total Portfolio Value × 100
Core Portfolio Principle
Safety + Liquidity + Profitability
Concentration Risk
Diversification ↑ → Concentration Risk generally ↓
| Concept | Remember |
|---|---|
| Portfolio | Collection of assets |
| Bank Deposit | Liability |
| Bank Loan | Asset |
| Safety | Protection against excessive loss |
| Liquidity | Ability to meet obligations when due |
| Profitability | Ability to earn adequate returns |
| Primary Reserves | Immediate liquidity |
| Secondary Reserves | Liquidity + some earning potential |
| Diversification | Reduces concentration risk |
| Credit Risk | Borrower may fail to repay |
| Liquidity Risk | Difficulty meeting obligations |
| Interest Rate Risk | Loss/exposure from rate movements |
| ALM | Asset-Liability Management |
| NPA | Non-Performing Asset |
| High NPA | Weakens asset quality/profitability |
Bank Portfolio Management → Allocation and management of bank funds
SLP → Safety + Liquidity + Profitability
Deposits → Bank Liabilities
Loans → Bank Assets
Cash → High Liquidity, Low Direct Return
Loans → Earning Assets + Credit Risk
Primary Reserves → Immediate Liquidity
Secondary Reserves → Near Liquidity + Income
Diversification → Concentration Risk ↓
Borrower Default → Credit Risk
Withdrawal/Payment Difficulty → Liquidity Risk
Interest Rate Changes → Interest Rate Risk
Interest Rate ↑ → Existing Fixed-Rate Bond Price generally ↓
ALM → Asset-Liability Management
NPA → Non-Performing Asset
Common Indian term-loan benchmark → More than 90 days overdue, subject to applicable RBI rules
Bank Portfolio → Assets & Liabilities → Safety → Liquidity → Profitability → Liquidity-Profitability Trade-off → Primary & Secondary Reserves → Loans & Investments → Diversification → Maturity Management → ALM → Credit Risk → Liquidity Risk → Interest Rate Risk → NPA
0comments:
Post a Comment
Note: Only a member of this blog may post a comment.