The banking scenario in India in the 1980s and now, presents a perfect study of contrast. Due to several reforms, banks are now moving away from the traditional lines of service and in the process, are exposed to more risks. One of the ways for managing the risks is Asset Liability Management (ALM). ALM is an attempt to match the assets and liabilities in terms of their maturities and interest rate sensitivities so that the risk arising from such mismatches mainlyinterest rate risk and liquidity riskcan be contained within the desired limit. As far as ALM in Indian banking system is concerned, it is still in a nascent stage. Against this backdrop, the objective of the paper is to study and analyze the status of ALM approach in the Indian banking system. For this purpose, a sample consisting of nationalized, private, and foreign banks operating in the Indian environment was taken and the multivariate statistical technique, canonical correlation has been done to capture the nature and strength of relationship between the assets and liabilities in these banks. From the analysis, it is derived that a majority of banks have a good ALM framework in place. The study also indicates a strong relationship between fixed assets and net worth for all groups of banks.

Under the highly protected environment, for years the Indian banks remained unconcerned about risk management but things are changing now. In the present day, Asset Liability Management (ALM) has become the buzzword in the banking world. It is a part of the overall risk management system in banks. ALM implies examination of all the assets and liabilities simultaneously on a continuous basis with a view to ensure a proper balance between fund mobilization and their deployment with respect to their: (a) maturity profiles; (b) cost; (c) yields; (d) risk exposure, etc., so as to prepare the banks fully to face the emerging challenges. It includes product pricing for deposits as well as advances and the desired maturity profile of assets and liabilities. ALM is basically a hedging response to the risk in financial intermediation. It attempts to provide a degree of protection to the institution from intermediation risk and makes such risk acceptable. It provides the necessary framework to define, measure, monitor, modify and manage these risks. In a way, it is a form of insurance. The function of ALM is not just protection from risk. The safety achieved through ALM also opens up opportunities for enhancing the net worth. ALM can make it possible for an institution to take on positions that would have been considered too large in the absence of protection offered by ALM.

The ALM approach in banks can help the managers to see their banks' current market risk profiles and evaluate the impact of alternative decisions on the future risk profiles. By evaluating each of these alternative decisions, the management would be in a position to decide the best course of action depending on the risk appetite of the bank. Though a number of factors affect the business decision making apart from risk-related information, ALM system facilitates it to take place in a more disciplined and informed framework with the intention of viewing the risks the bank is exposed to. Thus, ALM process for any bank aims at managing the spread income and controlling the risks associated with generating the spread. Along with it, the ALM function is more appropriately viewed as an integrated approach which requires simultaneous decisions about the asset/liability mix and maturity structure of the institution. Also, it integrates relevant financial market variables such as the shape of the yield curve, capital adequacy and regulatory issues and evaluation of various capital market hedging instruments with the intention of measuring the asset/liability gap along with analyzing the management of risks associated with generating the spread.

Bank Management Journal, Asset Liability Management, Indian Bank, Risk Management, Financial Markets, Business Decision Making, Capital Markets, Commercial Banks, Private Banks, Liquidity Risks, Money Markets, Foreign Banks.