Training Programme on Asset Liability Management An Impact Evaluation Study. Samir R Samantara U D Shirsalkar Niraj K Verma

Transcription

1 Training Programme on Asset Liability Management An Impact Evaluation Study Samir R Samantara U D Shirsalkar Niraj K Verma

2 CONTENTS Particulars Page No. FOREWORD I ACKNOWLEDGEMENTS LIST OF TABLES LIST OF FIGURES LIST OF APPENDIX LIST OF ABBREVIATIONS EXECUTIVE SUMMARY II III IV V VI VII I INTRODUCTION 1 II OBJECTIVE, SAMPLE DESIGN AND METHODOLOGY 4 III RESULTS AND DISCUSSION 8 IV CONCLUSION AND POLICY PRESCRIPTION 23 REFERENCES 25 APPENDIX 26

3 FOREWORD The development of the banking system is always associated with the contemporary changes in the economy. The Indian banking industry particularly Regional Rural Banks has undergone a metamorphosis in the last two decades due to changes in the political, economic, financial, social, legal and technological environments. The significant advances in technology and deregulation of financial markets across the countries created new opportunities, encouraging banks to enter every business that had been thrown open. The banks are now moving towards universal banking concepts, while adding new channels and a series of innovative product offerings catering to various segments at an attractive price. This makes it imperative for the banks to adopt sophisticated risk management techniques and to establish a link between risk exposures and capital. Effective management of risk has always been the focus area for banks owing to the increasing sophistication in the product range and services and the complex channels that deliver them. The challenge for the banks is to put in place a risk control system that minimizes the volatility in profit and engenders risk consciousness across the rank and file of the organization. Sound risk management will ensure a healthy bottom line for the bank as risk taken by the bank will be commensurate with return and will be within an approved risk management policy. As all transactions of the banks revolve around raising and deploying the funds, Asset-Liability Management (ALM) gains more significance as an initiative towards the risk management practices by the Indian banks. The introduction of ALM in RRBs with a focus on a continuous rearrangement of assets and liabilities of the balance sheet so as to maintain the profit, minimise interest rate risk and provide adequate liquidity is a step in this direction to address the challenge. In order to assess the impact of ALM training programme for RRBs conducted during last 2-3 years, it was felt by BIRD to conduct a study. BIRD conducted a study covering 16 RRBs, 36 officers trained by BIRD in 10 States. The study brings out the fact that implementation of ALM in RRBs in the form of constitution of ALCO, periodicity of ALCO meeting and number of items in the agenda and tools of ALM was in a sub-optimal stage. A few policy pointers on redesigning the ALM training module in the form of suggestions/feedbacks from trainee officers of RRBs included latest ALM tools & techniques (Duration Gap Analysis, Simulation and Value at Risk (VaR), use of software package(cloret,ascrom,alman, FINACLE, etc), sessions by professionals handling ALM desk and capacity building of support staffs. The study has further suggested that there is a need to adopt ALM as a critical exercise of balancing the risk profile due to financial intermediation with the long/short term profits as well as its long-run sustenance. I am sure that the study findings will be useful to bankers, academicians, policy makers and other stake-holders in initiating follow-up actions. Shri K K Gupta Director BIRD, Lucknow I

4 ACKNOWLEDGEMENTS The study team sincerely records its obligation to Shri Sunil Chawla, Joint Director BIRD, Lucknow, for his continuous encouragement and suggestions and guidance in various fora, which helped the study team to enrich the contents of the report. The study team gratefully acknowledges the guidance and the valuable inputs provided by all the Faculty Members of Finance group, BIRD, Lucknow. The study team also makes special mention of the Top management teams of three RRBs Viz, Aryavat Gramin Bank, Baroda Rajasthan Gramin Bank and Bihar Gramin Bank for their useful suggestions and comments. The study team is grateful to team of officers from sixteen Regional Rural Banks, for required inputs (feedbacks through questionnaire) and insights offered in consolidating the report. However, the opinions expressed in the study report, are that of the Study Team and not necessarily reflect those of BIRD. The contents can be reproduced with proper acknowledgement. The write-up is based on information & data procured from various sources and no responsibility is accepted for the accuracy of facts and figures. BIRD or the Study Team assumes no liability, if any, person or entity relies on views, opinions or facts & figures finding place in this Report. Study team: Shri/s Samir R Samantara, U. D.Shirsalkar and N.K.Verma Deputy General Managers/Faculty Members, BIRD, Lucknow II

5 LIST OF TABLES Table II.1 : Sample Frame RRB Banks and Trainees Table III.1: RRB Trainees/participants having understanding about various type of risk Table III.2: Knowing financial market instruments Table III.3: ALM Concept Table III.4: Usefulness of ALM Training Table III.5: ALM Desk Table III.6: ALM Desk - sharing of inputs Table III.7: ALM training effectiveness for participants Table III.8: ALM Policy Table III.9: ALM Policy Formulation Table III.10: ALM training effectiveness for banks Table III.11: ALM types of tools Table III.12: ALM - Mitigation of liquidity risk Table III.13: ALM training Impact on profitability Table III.14: ALM training Improvement in financial position of banks Table III.15: ALM training Suggestion for improvement Table III.16: Statistical results of step-wise regression model sample RRBs Table III.16: Statistical results of regression model having dummy variables RRBs received ALM training inputs by BIRD III

6 LIST OF FIGURES Figure III.1: RRB Trainees/participants having understanding about various type of risk Figure III.2: Knowing financial market instruments Figure III.3: ALM Concept Figure III.4: Usefulness of ALM Training Figure III.5: ALM Desk Figure III.6: ALM Desk - sharing of inputs Figure III.7: ALM training effectiveness for participants Figure III.8: ALM Policy Figure III.9: ALM Policy Formulation Figure III.10: ALM training effectiveness for banks Figure III.11: ALM types of tools Figure III.12: ALM - Mitigation of liquidity risk Figure III.13: ALM training Impact on profitability Figure III.14: ALM training Improvement in financial position of banks Figure III.15: ALM training Suggestion for improvement IV

7 LIST OF APPENDIX Appendix I DETAILS OF THE DATA EXTRACTION AND COVERAGE Appendix II ALM SYSTEM - A FORMALIZED FRAMEWORK FOR MANAGEMENT OF MARKET RISKS Appendix III CORRELATION MATRIX & STEP-WISE REGRESSION RESULTS Appendix IV QUESTIONNAIRE Appendix V KEY FINANCIAL RATIOS OF SAMPLE RRBS (BANK-WISE) V

8 ABBREVIATIONS ALCO Asset Liability Management Committee ALM Asset Liability Management ANOVA Analysis of Variance ASCROM Asset Classification & Credit Monitoring BIRD Bankers Institute of Rural Development FIMMDA Fixed Income Money Market and Derivatives Association of India NIM Net Interest Margin NSE National Stock Exchange of India Ltd. OTCEI Over-The-Counter Exchange of India RRB Regional Rural Banks SEBI Securities and Exchange Board of India VaR Value at Risk VI

9 Executive Summary Asset Liability Management Policy aims to lay down the ALM structure, define the role of identified individuals or committees and the top management, measure and manage the asset liability related risks facing the bank by setting down various risk limits and lay down the MIS process to keep the various levels of management including the top management informed to enable them take appropriate decision in a timely manner. The assets and liabilities of the bank have to be managed to maximize profitability and enhance capital thereby increasing shareholders value and also to protect the organization from financial stress arising out of adverse movement in market rates and thereby continue to serve the customers and community more effectively. The major objective of the study was to assess the impact of ALM Programmes conducted by BIRD for Regional Rural Banks. The specific Terms of Reference (ToR) of the study were to critically review the progress of ALM policy formulation with focus on bottlenecks/constraints in the implementation of the ALM and to estimate the effectiveness of liquidity & interest risk management and pricing of loan product. During the study a survey was conducted to find out the training effectiveness. Questionnaire was used to collect data/feedback/input from respondents. Respondents were officials of RRBs. From the study it was found that in all respects the training programs were successful and for majority of the respondents the training program met their needs and expectations. Some suggestions like incorporation of latest ALM tools and techniques in the training modules and designing the training programme keeping in view the jobs assigned or to be assigned merit consideration. Major findings/observation from the study are as under : (i) The respondents were able to understand various types of risks like Liquidity Risk(94%), Interest Rate Risk(91%), Credit Risk(88%) and Operational Risk (77%) after attending the ALM programme. (ii) 83% of the respondents came to know about the financial market instruments and terms like SEBI, OTCEI, NSE, FIMMDA etc., after attending the programme. Remaining officers knew about these terms even before attending the programme. 56% of the respondents had knowledge/experience in ALM before the training indicating strong entry level behavior. (iii) Majority of the respondents had indicated that the course material provided during the training was useful. 22 % of the respondents have not been posted in ALM desk despite receiving training. Further, 8% of the respondents felt that there was no scope for use of knowledge gained during the training in their day-to-day functioning. (iv) Majority of the respondents indicated that their banks have formulated ALM policy approved by Board. Further,78% of the respondents indicated that training programme at BIRD helped in formulation/refinement of the policy in their bank. VII

10 (v) In percentage terms, officials from RRBs indicated that training programme at BIRD helped in constitution of ALCO(16.7 %), in finalizing agenda items for ALCO(77.8 %), in understanding interest rate movements & expected spreads(86.1 %), mismatches in maturity pattern(75 %), pricing of loan products/ risk mitigating measures for liquidity & interest rate risks(91.7 %), operational issues & difficulties associated in implementation of the ALM(88.9 %), discussions on investment portfolio(83.3%). Further, majority of the respondents agreed that training programme at BIRD helped in areas for further improvement. (vi) Majority of the respondents indicated that training programme at BIRD helped in using some of the ALM tools. To be specific, 83.3 % of the respondents indicated that training programme at BIRD helped in understanding impact of interest rate movement on Net Interest Margin (NIM) and gap statement to measure Interest Rate Risk(77.8 %). (vii) As regards mitigation of liquidity risk, 94.4 % of the respondents mentioned that their banks are putting assets and liabilities in different time buckets, 52.8 % responded affirmatively on preparing Structural Liquidity statement, 61.1 % on preparing Dynamic Liquidity statement and 47.2 % on preparing both Dynamic Liquidity statement and Structural Liquidity statement. Only 5.6 % of the respondents indicated that they are preparing neither Dynamic Liquidity statement nor Structural Liquidity statement. (vii) 78 % of the respondents indicated that the profitability of the bank has improved after implementation of ALM concept in the bank. In terms of percentage contribution in improving financial position of the bank, they have ranked Dynamic Liquidity Ladder (94.4 %), Gap Statement to measure interest rate risk (80.6 %) and Duration concept (25 %). (viii) As regards suggestions to bring about improvement in the training programme on ALM conducted by BIRD, 83.3 % of the respondents indicated that the programme does not need any changes and may continue to be conducted in the present format. However, 11.1% felt that the contents of the programme were inadequate and needed to be up-graded, while remaining respondents could not comment on the issue as they were not presently working on the ALM desk (5.6 %). (ix) Mean Net Interest Margin (NIM) of the two categories (RRB officers who attended ALM training conducted by BIRD and those who did not attend is different. If all other variables are held constant, it may be partially concluded that there is a significant difference in the NIM level of the two categories (sample RRB and other RRBs 0.91). Further, one percentage increase in number of ALM training programme for RRBs may lead to percentage increase in NIM by 13 basis points (0.13). (x) Relevant items in the agenda of ALCO - NAI 1 (0.4329) as a whole influenced significantly the Net Interest Margin compared to other variables, i.e. ALM Policy & Constitution of ALCO (0.1339) and Periodicity of meeting (0.2142) clearly indicating the importance of interest rate sensitivity on NIM variability, structural/dynamic liquid statement, duration analysis as an agenda items in ALCO meeting. 1 NAI Number of Relevant Items in Agenda. VIII

11 Conclusion and Policy Issues Asset Liability Management is a risk management technique and an on-going process of formulating, implementing, monitoring, and revising strategies related to assets and liabilities in an attempt to achieve financial objectives for a given set of risk tolerances and constraints. Thus a general perspective of ALM as per study team may be laid out as - ALM is a hierarchy (to execute the process), a process (to track, report and monitor risk management), a tool (to analyze relevant data), a technique (to measure risk and suggest alternatives) and a repository (a versatile data warehouse). The study team is of the opinion that since interest rate risk and liquidity risks are significant risks in a bank s balance sheet, they should be regularly monitored and managed. These two aspects should be a key input in business planning process of a bank. Banks should make sure that increased balance sheet size should not result in excessive asset liability mismatch resulting in volatility in earnings. There should be proper limit structures, which should be monitored by Asset Liability Management Committee (ALCO) on a regular basis. The effectiveness of ALM system should be improved with a good Fund Transfer Pricing system by involving all ALCO members in decisions, as ALM sheet item granularity depends on distribution of time buckets of short-duration. Further, the study brings out the fact that implementation of ALM in RRBs in the form of constitution of ALCO, periodicity of ALCO meeting and number of items in the agenda and tools of ALM was in a sub-optimal stage. Based on the feedbacks/suggestion/inputs received on training effectiveness on ALM programme for RRBs, the study team is of the opinion that in all respects the training programs were successful and for majority of the respondents the training program met their needs and expectations. However it was found that there should be more on the job support to encourage employees to practice what they learnt. A few policy pointers on redesigning the ALM training module in the form of suggestions/feedbacks from trainee officers of RRBs included coverage on latest ALM tools & techniques (Duration Gap Analysis, Simulation and Value at Risk (VaR), use of software package(cloret 2,ASCROM,ALMAN 3, FINACLE 4, etc), sessions by professionals handling ALM desk and capacity building of support staff. 2 CLORET menu option will generate GLMAS.txt and PLMAS.txt which will be copied / imported to PC where cloret software is installed. Please take care that GLMAS.TXT is generated for 01 st April of Calendar Year and PLMAS.TXT is generated for 31 st March Calendar Year. 3 Batch job is set for ALMAN Download in CSOLOP. It generates file named XXXXXXFD.DDMMYYYY is generated. Where the XXXXXX is the branch ALPHA and DDMMYYYY is the date of download for which it is created. This file is available in the directory of the user who has done CSOLOP for that day. This file is created in UNIX; therefore we have to bring it to PC to copy on floppy so that the data can be uploaded in ALMAN package. 4 FINACLE Core Banking System. All transactions are accounted in FINACLE on daily basis. ASCROM Advances Monitoring System Data from FINACLE uploaded to ASCROM and Reports generated for Advances Monitoring. CLORET Closing Return System. Data from FINACLE uploaded to CLORET and Final Financials and Schedules generated from CLORET. IX

12 Introduction Banks Asset Liability Management (ALM) philosophy is aimed at accomplishing its mission of profit maximizing through efficient market risk management by ensuring returns commensurate with the level of risk taken. In an increasingly deregulated market, banks are facing greater exposure to market risks, viz. interest rate risk, foreign exchange risk and liquidity risk. Asset Liability Management System provides a comprehensive and dynamic framework for measuring, monitoring and managing these risks. The objectives of ALM Policy are to formulate guidelines for management of Liquidity Risk and Interest Rate Risk; fixing market risk limits; efficient liquidity risk management for ensuring the bank's ability to meet its liabilities as they become due; interest rate risk management to keep the volatility of the net interest margin within acceptable limits and profit planning and growth projections like Net Interest Margin, Market Value of Equity etc. Thus the areas of consideration of the policy for ALM are Liquidity and funding risk, Interest rate risk, Forex rate risk, pricing risk in relation to Interest Rate fluctuation, Pricing of lending and deposit rates, Allocation of resources, etc. As per NABARD guidelines, the Board of Directors has overall responsibility for deciding the Risk Management Policy of the bank and setting of potential limits. ALM is the function of Asset Liability Management Committee (ALCO) 1, which will operate under the guidance and supervision of the Board and /or Sub-Committee of Board on ALM and Risk Management. The ALCO 2 is responsible for Balance Sheet planning from risk returns perspective, particularly strategic management of interest rate and liquidity risk. ALCO is also responsible for establishing ALM monitoring and management procedures as per risk management guidelines issued by the regulator and adhering to parameters, procedures and policies decided by the Board. As per NABARD guidelines banks were asked to set interim targets so as to cover 100 percent of the business by April 1, Once the ALM System stabilizes and the 1 Asset Liability Management Committee (ALCO) in general is headed by the Chairman consisting of following Officers: Chief Manager (HRM), Chief Manager (OPR), Senior Manager (ADV), Senior Manager (OPR), Manager (I.T.), Manager (Investment) and Senior Manager(Risk Management) as Convener of ALCO. The quorum for meeting of ALCO shall be five members. The ALCO shall endeavour to meet at least once in a month 2 The ALCO would focus on the following business issues (i) Product pricing (Interest rate) for deposits and advances, (ii) Deciding on desired maturity profile and mix of incremental assets and liabilities. (iii) Articulating interest rate view of the bank and deciding on the future business strategy, (iv) Reviewing and articulating funding policy, including liquidity management.,(v) Monitoring and managing exposures/ mismatches, (vi) Reviewing impact on monetary policies and economic/ political changes on the balance sheet, (vii) Deciding the transfer pricing policy (TPM) or TPM of the bank, (viii) Recommending changes in the liquidity and interest rate sensitivity mismatch limits or any provision of this policy and (ix) Monitoring the structure of Balance Sheet in light of Capital Adequacy requirement. 1

13 bank gains experience, it should be prepared to switchover to more sophisticated computerized technique like Duration Gap Analysis, Simulation and Value at Risk (VaR) for interest rate risk Management. The details of the data extraction and coverage are given in Appendix- I. Asset Liability Management Policy aims to lay down the ALM structure, define the roles of identified individuals or committees and the top management, measure and manage the asset liability related risks facing the bank by setting down various risk limits and lay down the MIS process to keep the various levels of management including the top management informed to enable them take appropriate decision in a timely manner. The assets and liabilities of the bank shall be managed to maximize profitability and enhance capital thereby increasing shareholders value and also to protect the organization from financial stress arising out of adverse movement in market rates and thereby continue to serve the customers and community more effectively. For attaining the objectives 3, the ALM policy may look into allocation of resources Interest rate risk, Pricing risk, Liquidity risk and Funding risk. The Board of Directors shall have the overall responsibility for deciding the ALM management policy of the bank and setting up of prudential limits. The Board of Directors 4 shall have ultimate responsibility for implementing and ensuring adherence to this policy. If deemed necessary, the function of periodic supervision may be delegated to a Sub- Committee of Board on ALM and Risk Management. If deemed fit, the Board may decide to include in the Sub-Committee persons who are not board members. ALM on a continuing basis is the function of Asset Liability Management Committee (ALCO) 5, 3 Objectives of the ALM Policy : Setting guidelines for management of Liquidity Risk and Interest Rate Risk; Setting risk limits, wherever required; Managing liquidity risk; Managing interest rate risk & Profit planning and projections of business parameters 4 The board may periodically review the fund management activities of the bank. The review shall, inter alias, include the following : a) Study and analysis of the minutes of the ALCO meetings; b) Review of Bank s liquidity position; c) Monitoring of internal and external factors affecting liquidity position; d) Periodic review of Bank s liquidity strategies, policies and procedures; e) Study of Bank s interest rate sensitivity analysis; f) Study of contingency funding plan 5 Liquidity and Market Risk management functions shall be centralized at Head Office level with the Asset Liability Management Committee (ALCO). It may be the top operational unit for managing the balance sheet within the performance/ risk parameters determined by the Risk Management, Internal Audit and Internal Control System Board. Asset Liability Management Committee (ALCO) may be headed by the Chairman/Managing Director (Chairman of ALCO) of the bank. The other members may consist of General Managers and departmental heads. The Chairman/ Managing Director may be the competent person for deciding upon the number of members as well as composition of the ALCO. Depending on the subject being dealt with, other senior functionary/ies may be called to attend the meetings as invitees from time to time. Chairman of ALCO may be empowered to make necessary changes in composition of ALCO. Functional Head of Risk Management department may be the convener of ALCO. The ALCO shall 2

14 which may operate under the guidance and supervision of the Board. Balance sheet planning may be the primary responsibility of ALCO, with special emphasis on liquidity risk and interest rate risk management. Establishment of process and procedure for management of ALM in line with guidelines from the regulator/ supervisor and monitoring of the same on an ongoing basis may be the responsibility of ALCO 6. ALCO shall draw upon the in-house expertise available in the concerned departments of the bank for effective discharge of its responsibilities. ALCO shall have the overall responsibility of spread management, for achieving the targets set by the Board, in line with the directions given by the Board. Any matter relating to size, composition and price of assets and liabilities may be the functional area of ALCO. Deposit rates, lending rates, concession/ loading (mark down or mark-up) to lending rates, transfer pricing etc., may be first discussed by the ALCO. Only upon approval from ALCO, the matter may be placed before the Board. To focus exclusively on the risks faced by a financial institution in Asset Liability transformation process, the instrument of a systematized ALM process is needed. Asset Liability Management can be defined as a continuous rearrangement of assets and liabilities of the balance sheet so as to maintain the profit, minimise interest rate risk and provide adequate liquidity. ALM system is a formalized framework for management of market risks through measuring, monitoring and managing liquidity and interest risks. The details are given in Appendix II. Need for an evaluation of ALM Programme: The study group has defined the evaluation as an attempt to obtain information on the effects of training on performance and to assess the value of training in the light of that information. Basically, the impact evaluation 7 has been attempted to address the effectiveness of training to improve performance of employees on the jobs/tasks. Review of literature has been attempted through cross references of various study reports/working papers on evaluation of training programmes by reputed research organizations including BIRD. Endeavour to meet at least once in a month. In the absence of Chairman/ Managing Director, the senior most General Manager shall chair the meetings. The quorum for the meetings of the Committee shall be three members. 6 ALCO would, inter alias, focus on the following areas: Desired maturity profile and mix of incremental assets and liabilities; Composition of Capital Funds in the light of the Capital Adequacy regulations; Future interest rate movement and the consequent future business strategy; Liquidity position; Exposures to various sectors, groups, industries etc.; Mismatches in inflow /outflow; Product pricing for deposits and advances; Impact of economic/ political changes on the balance sheet; Transfer pricing policy (TPM) or TPM rates of the Bank; Investment operations of the Bank 7 Evaluation must be continuous, be specific and based on objective method and standards. 3

15 Objective, Sample Design and Methodology The major objective of the study was to assess the impact of ALM Training 8 Programmes conducted by BIRD on Regional Rural Banks. The specific Terms of Reference (ToR) of the study were (i) To critically review the progress of ALM policy formulation with focus on bottlenecks/constraints in the implementation of the ALM. (ii) To quantitatively estimate the effectiveness of liquidity & interest risk management and pricing of loan product. The study was based on both primary as well as secondary data. The secondary information had been collected from various published and unpublished sources of RRBs, controlling/sponsor banks and other financial institutions. Data/information on ALM information system, ALM decision making processes(alm Committee/ALCO), tools/techniques(traditional Gap Analysis, Maturity Gap analysis, Duration Gap analysis), strategies for liquidity and interest rate risk management through ALM has been used to examine progress made under ALM framework (information systems, organization and processes for effective implementation. To collect data from the trainees, a multi-stage stratified sampling design on the lines given below has been adopted. The survey of the trainees has been carried out in selected RRBs on the basis of total number of trainees covered during , and Subsequently, the state, the bank and trainee officers formed three stages of sample selection within the selected region. 8 Definition of Training: It is any attempt to improve current performance by increasing an employee s ability to perform through learning, usually by changing the employee s attitude or increasing his or her skills and knowledge. General objectives of any Training program are: (a) to impart the basic knowledge and skill to the new entrants and enable them to perform their jobs well; (b) to equip the employee to meet the changing requirements of the job and the organization; (c) to teach the employee the new techniques and ways of performing the job or operation and (d) to prepare employees for higher level tasks. Training benefits both the employees and employers. It makes the employee more productive and more useful to an organization; Training enables the employee to develop and rise within the organization; Training makes the employee more loyal to an organization; Training makes an employee to work more efficiently; Training enables to secure promotions easily; Training reduces wastages as the employees use the tools properly. Areas of training: Knowledge: Awareness of the rules & regulations and policies of the company; Social Skills: Teaching the employee how to be a team member and get ahead; Technical Skills: Teaching the employee regarding the technical aspects of his job; Decision making and Problem solving Skills: Emphasis on methods and techniques for making organizational decisions and solving work related problems. 4

16 Depending upon the number of trainees covered during last three years, a sample of 36 trainee officers has been selected using simple random sampling out of total 67 trainees. Keeping in view the distribution of RRBs(amalgamated), the sample RRBs has been drawn in such a way that the rural banking infrastructure(particularly RRBs) is truly represented. The total number of RRBs selected within the region has been further distributed according to the number of trainees covered, size of the bank in terms of business and coverage, etc. RRBs have been selected on the basis of probability proposal to size method applied independently to each stratum. An independent trainee was the ultimate sampling unit for the selection of sample. From the same state, a sample of 2-3 RRB officials (as a control sample) who had not undergone similar training, had been selected to have a comparative analysis. In this impact evaluation 9 study both pre-post and with-without approaches representing temporal and spatial variation have been adopted. The data has been collected with the help of pre-tested questionnaires 10. The type of data collected with these questionnaires included information on the following variables. 9 Evaluation of Training: Definition: Any attempt to obtain information on the effects of training on performance and to assess the value of training in the light of that information. Objectives of Training Evaluation: To check the effectiveness of training to improve performance of employees on the jobs; To ascertain how far the training is useful to improve career prospects of individual employees in the organization; To identify the deficiencies of the training for the purpose it is intended in order to incorporate additions to the training program; To identify unnecessary aspects in the training program for the purpose of deleting such things from the training program. Principles of Evaluation: Evaluation must be continuous, must be specific, must be based on objective method and standards and Evaluation specialist must be clear about the goods and purpose of evaluation. 10 Techniques of Evaluation: Questionnaires; Tests; Interviews; Cost benefit analysis and Feed back Evaluation methods: Test-retest method: Participants are given a test before they begin the program. After the program is completed the participants retake the test. This test may not be valid but more importantly, Increase in test scores may be due to causes other than the training program. Pre-post performance method: In this method each participant is evaluated prior to training and rated on actual job performance. After instruction (program) is completed the participant is reevaluated. It deals directly with job behavior. Experimental Control group method: Two groups are established i.e. experimental & Control group, comparable as to skills, intelligence and learning abilities and evaluated on actual job performance. Members of control group work on the job but do not undergo training. Experimental group is given the training. At the conclusion of the training the two groups are reevaluated. Four factor comparison method (Kirkpatrick model): This method is proposed by Kirkpatrick& others. According to this method evaluation of following 4 factors are essential to determine the effectiveness of training program. These are Reaction: Employees reaction to the training program by itself is a good indicator. This is subjective evaluation. However it reveals the attitude of the trainees to the training program. Reaction is obtained by opinion surveys and taking majority views. Learning: In this case an attempt is made to assess whether the trainees have learned the skills and knowledge intended to be imparted through the training program. Behavior: here the trainee s behavioral pattern is examined carefully after his training program for the purpose of evaluating whether there are changes in his behavior in the job compared to the period before the training program was imparted. Result: This is a method of evaluating quantifiable indices or attributes of performance which can be directly related as a result of training. For 5

17 i. Trainee questionnaire Understanding of various risks/financial market instruments, concept of ALM, posting in the concerned desk, programme meeting the needs and expectations, adequate training facilities provided, contents of programme logically organized, exchange of knowledge/skills gained with colleagues, usefulness of training and training materials, ability to handle the job/task, usefulness in day-to-day functioning, use of various types of ALM tools, linkage between ALM and profitability, suggestions in the training programme on ALM, etc. ii. Field level questionnaire- ALM policy formulation, constitution of ALCO, periodicity of meetings, agenda items (interest rate movements & expected spreads, mismatches in maturity pattern, funding policy, liquidity position, net interest margin, investment portfolio, etc.), pricing of loan products, risk mitigating measures in liquidity & risk management, staffing pattern, operational issues and difficulties associated with the implementation of the ALM and areas for further improvement. Feedback received after canvassing trainee questionnaire to all 67 trainees Table II.1 Sample frame of Banks and Trainees No. of RRBs covered No. of RRBs covered for canvassing field level questionnaire States covered during field visit UP, Bihar and Rajasthan Primary data has been supported by secondary data for the study. Data on the progress, operation aspects under the ALM Programme, etc., were collected from the RRBs covered under the study. Top Management/senior bankers of RRBs was interviewed during field visits to assess the operational advantages and disadvantages of the Programme. Qualitative parameters like ALM policy, constitution of ALCO, periodicity of meeting and number of relevant items in the agenda of ALCO were assigned number/value on a 1 to 5 scale depending upon their performances/progress for sample RRBs. Various techniques of evaluation like questionnaires, interviews & feed-back; evaluation methods like pre-post performance method; experimental control group method and four factor comparison method (reaction, learning, behaviour, and result) have been attempted. Primary data and secondary data (A profile of RRBs-Bank-wise for example Productivity, reduction in rejection rates of finished goods, incidents of accidents, absenteeism, conflicts, etc. 6

18 year 2013 and 2014) have been tabulated and analyzed using statistical tools such as mean, percentage share, weighted average, pie-chart, correlation matrix, step-wise regression, ANOVA 11 and Dummy variable, etc., to derive inferences. Limitations of the study: 1. Due to organizational restructuring (post-amalgamation) the sample was restricted to 36. More samples would have provided better results. 2. The study is restricted to trained officers of RRBs only as it has no universal application. 3. Details like work-experience in ALM desk were not given by some employees during the survey. 4. The study findings are based on the impressionistic views of some officers instead of their experience of working on the ALM desk. 11 ANOVA Analysis of Variance 7

19 Results and Discussion Impact of the training (Studying the demand side - testing the water) Trainee Questionnaire 1. After attending the training programme at BIRD, I am able to understand the various types of risks indicated below, associated with banks Type of Risk Able to understand Yes No Credit Risk Liquidity Risk Interest Rate Risk Operational Risk % of RRB Trainees/participants having understanding about various type of risk 77.8 % 91.7 % 94.4 % 88.9 % Credit Risk Liquidity Risk Interest Rate Risk Operational Risk The above pie chart shows that: 94 % of the respondents have understanding about liquidity risk. 91 % of the respondents have understanding about interest risk. 88 % of the respondents have understanding about credit risk. 77 % of the respondents have understanding about operational risk. 8

20 2. I came to know about the financial market instruments and terms like SEBI, OTCEI, NSE, FIMMDA etc., after attending the programme Yes No. I knew these terms even before attending the training programme The above pie chart shows that 83% of the respondents came to know about the financial market instruments and terms like SEBI, OTCEI, NSE, FIMMDA etc., after attending the programme. 3. I came to know on the concept of ALM after attending the programme Yes No. I knew about ALM even before attending the training programme The above pie chart shows that 56 of the respondents had knowledge/experience in ALM before the training indicating strong entry level behavior. 9

21 4. Whether the course material provided during the training was useful? Yes 36 No Nil. All the respondents had indicated that course material provided during the training was useful. 5. Have you been posted to the ALM desk /Cell after attending the training conducted by BIRD? I was posted to the desk even before I attended the training 07 I have been posted to the desk after attending the training 21 programme I have not been posted although I have undergone the training 08 At present I am working on ALM desk (yes / no) % of the respondents have not been posted in ALM desk despite receiving training. 10

22 6. Whether you shared the inputs received during training with other colleagues working on ALM desk? Yes 36 No Nil All the respondents had indicated that course material provided during the training was useful. 7. To what extent the knowledge gained during the training is useful in your day-to-day functioning? To a great extent 23 To some extent 10 No scope for use 3 8% of the respondents felt that there was no scope for use of knowledge gained during the training in our day-to-day functioning. 8. Whether your bank has formulated ALM policy? Yes 36 No Nil All the respondents indicated that their banks have formulated ALM policy approved by Board. 11

23 9. If answer to above question is yes, whether the training programme at BIRD helped you to assist in formulation/refinement of the policy in your bank The programme helped me to a great extent in assisting in formulation / refinement of ALM policy in my bank 10 The programme helped to some extent in assisting in formulation / refinement of ALM policy in my bank 18 Policy was formulated in the bank before I attended the programme 6 I did not get an opportunity to assist in formulation / refinement of the policy 2 78% of the respondents indicated that training programme at BIRD helped in formulation/refinement of the policy in their bank. 12

24 IN % AGE Impact Evaluation Study of Training Programme on Asset Liability Management 10. Whether the training programme has helped the bank in any of the following areas? Particulars Programme helped Yes No Constitution of ALCO 6 30 Finalising agenda items for ALCO 28 8 Understanding interest rate movements and expected spreads 31 5 Understanding mismatches in maturity pattern 27 9 Understanding pricing of loan products, risk mitigating measures for 33 3 liquidity and interest rate risks Operational issues and difficulties associated in implementation of the 32 4 ALM Areas for further improvement 36 0 Discussions on investment portfolio 30 6 PROG. HELPED Yes No % of the respondents indicated that training programme at BIRD helped in Constitution of ALCO % of the respondents indicated that training programme at BIRD helped in Finalising agenda items for ALCO % of the respondents indicated that training programme at BIRD helped understanding interest rate movements and expected spreads. 75 % of the respondents indicated that training programme at BIRD helped in Understanding mismatches in maturity pattern 91.7 % of the respondents indicated that training programme at BIRD helped in understanding pricing of loan products, risk mitigating measures for liquidity and interest rate risks % of the respondents indicated that training programme at BIRD helped in Operational issues and difficulties associated in implementation of the ALM % of the respondents indicated that training programme at BIRD helped in Discussions on investment portfolio All the respondents indicated that training programme at BIRD helped in Areas for further improvement. 13

25 (in %age) Impact Evaluation Study of Training Programme on Asset Liability Management 11. What type of ALM tools have been introduced by your bank after your attending the training programme? Particulars Tool used / introduced Yes No Preparation of Liquidity Gap Statement 33 3 Preparation of Gap Statement to measure interest rate risk 28 8 Duration concept 6 30 Impact of interest rate movement on Net Interest Margin (NIM) 30 6 Only some of these tools have been introduced 36 0 None of these tools are used in the bank for ALM 0 36 ALM Tools Preparation of Liquidity Gap Statement 22.2 Preparation of Gap Statement to measure interest rate risk 16.7 Duration concept 16.7 Impact of interest rate movement on Net Interest Margin (NIM) Only some of None of these these tools havetools are used in been introduced the bank for ALM Yes No 91.7 % of the respondents indicated that training programme at BIRD helped in preparation of Liquidity Gap Statement Constitution of ALCO % of the respondents indicated that training programme at BIRD helped in preparation of Gap Statement to measure interest rate risk % of the respondents indicated that training programme at BIRD helped understanding Duration concept % of the respondents indicated that training programme at BIRD helped in Understanding Impact of interest rate movement on Net Interest Margin (NIM). All the respondents indicated that training programme at BIRD helped in using some of the ALM tools. 14

26 IN %AGE Impact Evaluation Study of Training Programme on Asset Liability Management 12. In order to mitigate liquidity risk, which of the following statements have been introduced in your bank after you are attending the training programme? Particulars Statement introduced Yes No Putting assets and liabilities in different time buckets 34 2 Structural Liquidity statement (1) Dynamic Liquidity statement (2) Statements at (1) and (2) only are introduced None of the above statements introduced 2 34 LIQUIDITY RISK MITIGATION P U T T I N G A S S E T S A N D L I A B I L I T I E S I N D I F F E R E N T T I M E B U C K E T S S T R U C T U R A L L I Q U I D I T Y S T A T E M E N T D Y N A M I C L I Q U I D I T Y S T A T E M E N T S T A T E M E N T S A T ( 1 ) A N D ( 2 ) O N L Y A R E I N T R O D U C E D N O N E O F T H E A B O V E S T A T E M E N T S I N T R O D U C E D Yes No 94.4 % of the respondents indicated that in order to mitigate liquidity risk, they are putting assets and liabilities in different time buckets % of the respondents indicated that in order to mitigate liquidity risk, they are preparing Structural Liquidity statement % of the respondents indicated that in order to mitigate liquidity risk, they are preparing Dynamic Liquidity statement % of the respondents indicated that in order to mitigate liquidity risk, they are preparing both Dynamic Liquidity statement and Structural Liquidity statement. Only 5.6 % of the respondents indicated that they are preparing neither Dynamic Liquidity statement nor Structural Liquidity statement. 15

27 13. In your opinion whether the profitability of the bank has improved after implementation of ALM concept in the bank? Yes 28 No 8 22% profitability of the bank has improved Yes No 78% 78 % of the respondents indicated that the profitability of the bank has improved after implementation of ALM concept in the bank. 16

28 IN % AGE Impact Evaluation Study of Training Programme on Asset Liability Management 14. Which of the following areas related to ALM, in your opinion, have contributed in bringing about overall improvement in the financial position of the bank? Particulars Whether resulted in improving financial position of the bank Yes No Preparation of Liquidity Gap Statement 31 5 Preparation of Gap Statement to measure interest rate risk 29 7 Introduction of Duration concept 9 27 Preparation of Structural Liquidity Ladder Preparation of Dynamic Liquidity Ladder 34 2 None of the above 2 34 IMPROVING FINANCIAL POSITION OF THE BANK P R E P A R A T I O N O F L I Q U I D I T Y G A P S T A T E M E N T P R E P A R A T I O N O F G A P S T A T E M E N T T O M E A S U R E I N T E R E S T R A T E R I S K I N T R O D U C T I O N O F D U R A T I O N C O N C E P T P R E P A R A T I O N O F S T R U C T U R A L L I Q U I D I T Y L A D D E R P R E P A R A T I O N O F D Y N A M I C L I Q U I D I T Y L A D D E R N O N E O F T H E A B O V E Yes No 86.1 % of the respondents indicated that preparation of Liquidity Gap Statement resulted in improving financial position of the bank 80.6 % of the respondents indicated that preparation of Gap Statement to measure interest rate risk resulted in improving financial position of the bank 25 % of the respondents indicated that Introduction of Duration concept resulted in improving financial position of the bank 72.2 % of the respondents indicated that Preparation of Structural Liquidity Ladder resulted in improving financial position of the bank 94.4 % of the respondents indicated that Preparation of Dynamic Liquidity Ladder Only 5.6 % of the respondents indicated that none of the above areas related to ALM resulted in improving financial position of the bank. 17

29 Impact Evaluation Study of Training Programme on Asset Liability Management 15. What suggestions would you like to give to bring about improvement in the training programme on ALM conducted by BIRD? Particulars The programme does not need any changes and may continue to be conducted in the present format. 30 The contents of the programme were inadequate and needs to be upgraded 4 Cannot comment as I am not presently working on the ALM desk 2 IMPROVEMENT IN THE TRAINING PROGRAMME 83.3 % of the respondents indicated that the programme does not need any changes and may continue to be conducted in the present format % of the respondents indicated that the contents of the programme were inadequate and needs to be upgraded 5.6 % of the respondents indicated that they cannot comment as they are not presently working on the ALM desk 18

30 Field level Questionnaire Impact Evaluation Study of Training Programme on Asset Liability Management In order to study the determinants of profitability of RRB, the study team has applied cross - sectional multiple step-wise regression analysis using data for select RRBs. Among the explanatory variables, we have taken ALM policy formulation, constitution of ALCO, periodicity of meetings, agenda item( interest rate movements & expected spreads, mismatches in maturity pattern, funding policy, liquidity position, net interest margin, investment portfolio, pricing of loan products, risk mitigating measures in liquidity, pricing of loan products, risk mitigating measures in liquidity & risk management, staffing pattern). Using dummy variables (ALM training by BIRD and Non-trainees), the intercept term has been allowed to vary across the cost of fund, so as to pick up difference in Net interest margin. In the regression model, the dependent variables Net interest margin is frequently influenced not only by variables that can be readily quantified on some well-defined scale (i.e. cost of funds, Yield on assets, Liquidity risk and interest risk, etc.), but also by variables that are essentially qualitative in nature (i.e. ALM policy formulation, constitution of ALCO, Periodicity of meetings,). Since such qualitative variables usually indicate the presence or absence of an attribute (in the present study it is either officers of RRBs attended ALM training by BIRD or otherwise), one method of quantifying such attribute is by constructing artificial variables that take on values of 1 or 0, 0 indicating the absence of an attribute and 1 indicating the presence (or possession) of that attribute. Variables that assume such as 0 and 1 value are called dummy variables. 19