Indian Financial System: Banking| Treasury| Risk Management

Explore basic definitions of financial and negotiable instruments, distinguish debt from equity, and summarize bonds’ maturity, par value, coupon rate, price via present value, inverse relation to interest rates.

Money market comprises treasury bills, commercial papers, and certificates of deposits, plus interbank money, enabling banks to park short-term surplus with discount pricing, liquidity, and government-backed safety.

Learn about certificate of deposit as a short-term debt instrument issued by commercial banks to raise funds, with maturities ranging from seven days to one year.

Explore the capital market and differentiate debt and equity instruments, including government securities and corporate debt, while noting fixed maturity, coupons, and banks' liquidity management with RBI.

Oversee the treasury's management of a bank's foreign exchange surplus and foreign currency loans and advances. Use spot and forward trades to cover currency risk.

Define risk as the probability of loss and show how banks measure and manage it for profitability; examine interest rate, liquidity, credit, operational, FX, country, reputational, and strategic risks.

Explain how fluctuating interest rates impact bank earnings and asset-liability values. Describe inflation-based pricing with repricing dates and contrast fixed and floating rates.

Examine interest rate risk in banking, focusing on gap or mismatch risk, repricing periods, and how to calculate the gap between assets and liabilities for a given period.

Analyze gap risk from misaligned asset and liability maturities and repricing dates, shown by a 1-year liability at 10% and a 2-year asset at 12%, creating a 2% spread.

Explore how maturity mismatch and repricing between bank assets and liabilities create interest rate risk, affecting profits, with asset sensitive and liability sensitive portfolios.

Explore yield curve concepts, including normal and inverted curves, and learn how parallel and non-parallel shifts create interest rate risk and basis risk in banking.

Explore option risk from loan prepayments and premature deposit withdrawals, and explain price risk for fixed-rate assets sold before maturity as rates move.

Study net interest position risk, where the balance of earning assets and liabilities affects net interest income and the bank's economic value from rate changes.

Explore methods to measure interest rate risk, including maturity gap analysis, rate adjusted maturity gap analysis, duration gap, and simulation, and learn how rate sensitive assets and liabilities drive risk.

The example compares 2800 assets with 1800 liabilities over three months, showing a 1000 gap and that a 1% rate rise raises net interest income.

Examine how positive, negative, and zero rate-sensitive gaps affect net interest income as rates move, and assess the limitations of maturity gap analysis for forecasting changes.

Explore rate adjusted maturity gap analysis, which weights rate sensitive assets and liabilities to capture different asset and liability reactions to interest rate changes, and yields a revised gap.

Apply duration gap analysis alongside maturity gap analysis to manage net interest income and economic value, using a three year bond example.

Show how higher coupon rates shorten duration and lower interest rate risk, then use duration gap analysis to immunize risk and estimate market value changes using the approximate formula.

Examine how a 1% interest-rate shift alters bank value by weighted durations of assets and liabilities and the resulting net worth via duration gap.

Explore how a positive duration gap lowers bank net worth when rates rise, and how a zero gap immunizes value, alongside static and dynamic simulations estimating earnings.

Manage interest rate risk by controlling rate sensitivities of assets and liabilities using maturity gap analysis. Forecast rates and adjust the gap by extending maturities or increasing floating-rate deposits.

Explore how banks manage liquidity by balancing deposits, loan repayments, and asset sales to meet withdrawals and loan demands while avoiding liquidity risk.

Identifies three liquidity risks banks face: funding risk, time risk, and call risk. Explains measurement through liquidity indicator approach, structure of fund approach and sources, and usage of funds approach.

Apply the structure of funds approach to liquidity risk by categorizing deposits into volatile, vulnerable, and stable funds, assigning reserves, and factoring maximum loan growth.

The sources and usage of funds approach forecasts deposits and loans for a period, accounts for incoming funds, and computes the liquidity gap from forecasted changes, yielding surplus or deficit.

Learn how banks measure and manage liquidity risk using asset liquidity management, liability liquidity management, and balanced strategies, including asset sales, market borrowing, and near-term funding.

Explore credit risk in banking, including default risk, credit spread or downgrade risk, collateral, recovery rates, and portfolio level risks like concentration and systematic risk, and diversification.

Compare default probability and credit rating methods to measure credit risk, and see how banks price loans with probability of default, recovery rate, and contractual rate.

Explore how operational risk arises from people, processes, and systems, plus external events, and learn measurement and management with thresholds, risk and control self-assessment, and key risk indicators.

Explore how unanticipated exchange rate fluctuations affect a bank's foreign currency denominated assets and liabilities, and in turn, firm value.

Examine how rupee movements alter a bank's value by converting assets and liabilities, highlighting transaction and translation exposure. Learn management methods: netting, leading and lagging, and invoicing.

Learn how banks manage foreign exchange risk using leading and lagging to match cash flows and reduce conversions, and how invoicing in domestic currency transfers risk to the counterparty.

Asset liability management aligns a bank’s assets and liabilities on the balance sheet by matching prices and maturities to minimize interest rate and liquidity risk and support risk management.

Asset liability management controls a bank's market-rate sensitivity to protect profitability and liquidity through price matching and maturity. It translates macro-level policy into micro-level loan and investment decisions.

Perform price matching of assets and liabilities to secure returns above costs and apply maturity matching by grouping assets and liabilities into RBI time buckets to ensure liquidity.

Asset liability management analyzes price matching and maturity matching to balance liquidity and risk, highlighting positive gaps in near-term maturities and liquidity gaps in 12–24 and 24–36 months.

Asset liability management minimizes risk while maximizing profitability under the guidance of the asset liability management committee, which oversees regulatory impacts, budgeting, interest-rate outlook, product decisions, and risk limits.

Understand how banks use balance sheets, income statements, and cash flow statements to reveal funds sources, profitability, and cash position under accrual accounting.

Explore the bank balance sheet components: assets, liabilities, and equity, detailing share capital and reserves and surpluses, deposits, borrowings, statutory reserves, and other liabilities.

Explore the assets section of a bank's balance sheet, covering cash and balances with RBI, investments, loans and advances, fixed assets, other assets, as well as crr and slr considerations.

Explore how banks present the profit and loss account, detailing interest and dividend earned, income on investments, other income, and related operating and interest expenses.

Explain how a cash flow statement, prepared on cash accounting, reveals a bank's actual liquidity by detailing operating, investing, and financing cash flows.

Analyze bank performance through profitability ratios and the Camels rating, comparing return on equity, return on assets, net and non-interest margins, and earnings per share against industry averages.

Analyze camels ratings, a framework to appraise banks, covering capital adequacy, asset quality, management, capacity, earnings, liquidity, and market risk. Learn how 1–5 scores and Basel norms shape bank conditions.

Analyze how banks calculate capital adequacy ratio and assess camels components—asset quality, management, and earnings—using risk weights, non-performing loans, underwriting standards, and risk exposures.

Evaluate bank performance using camels liquidity and market risk criteria, including capital adequacy ratio, cash flow, liquid assets, funding sources, maturity matching, and sensitivity to market risk.