Reserve Bank of India (All India Financial Institutions – Asset Liability Management) Directions, 2025

1. What this book does

This book sets how an All India Financial Institution must manage its assets against its liabilities.

1. Who is covered

These rules apply to the All India Financial Institutions.

2. Start date

These rules took effect from the date RBI issued them.

3. Words from the Acts

Any other word takes its meaning from the Banking Regulation Act or the RBI Act.

1. Move on when able

Where the systems allow it, the board must see the institution move to modern measurement techniques.

2. The board owns the risk

The board carries overall responsibility for risk. It decides the policy and sets the limits.

3. Set the liquidity appetite

The board frames the liquidity policy, including how much liquidity risk it will bear.

4. Sign off the trading book

The board or the committee approves the size, mix, maximum maturity and holding of the trading book.

5. Limits on negative gaps

The board approves limits on the running negative liquidity gap across every time bucket.

6. Limits on rate gaps

The board approves limits on the interest rate gap in each time bucket.

7. Approve the bucketing

The board approves how components of assets and liabilities are placed in time buckets.

1. Build the framework

The institution must build a framework for measuring liquidity, interest rate and foreign exchange risk.

2. Policy and tolerance

Risk policies and tolerance limits support it, and senior management must see them put in place.

3. At the very least

At a minimum the systems must produce liquidity gap and interest rate gap reports.

4. A formal system

The system puts market risk management on a formal footing.

5. Three pillars

The process rests on information, organisation and process.

6. Senior management delivers it

Senior management is responsible for making the risk framework work.

7. Set up an ALCO

The institution sets up a committee that manages the balance sheet as one, for risk and return.

8. Who sits on it

Its make-up follows the size of the institution, its business mix and its complexity.

9. A support group

A support group of operating staff may be formed to study and report the risk profile.

10. What ALM covers

The work covers liquidity risk, market risk and trading risk.

1. Judge the funding risk

The institution must judge the risk of not meeting its dues because assets cannot be sold quickly.

2. A strong framework

The framework must identify, measure, watch and control liquidity risk, and project cash flows.

3. Watch for early signs

Early warning indicators must be used to spot rising risk in the liquidity position.

4. Test under stress

Stress tests and scenario analyses must be run regularly to size possible exposures.

5. Conditions for the book

Securities held in the trading book must meet stated conditions on composition and volume.

6. Govern the liquidity

Strong governance of liquidity risk, including a stated tolerance, is a key part of managing it.

7. The maturity ladder

The maturity ladder is the standard tool for measuring net funding needs.

8. Fixed time buckets

The maturity profile sets the buckets used to measure future cash flows.

9. Slot them separately

Securities meeting those standards may be slotted as trading book holdings.

BankPulse example. Trading book securities do not sit with the rest. They are slotted under 1 to 14 days, 15 to 28 days, and 29 to 90 days. A holding with a defeasance period of 20 days sits in the middle bucket.

10. An integrated option

An institution with the capability may, with board approval, adopt an integrated approach.

11. The first two buckets

Mismatches are watched in every bucket, and the negative gap in the first two is capped.

12. Place flows when they fall

The liquidity statement places every inflow and outflow in the bucket where it is expected.

13. Count the forex flows

Rupee inflows and outflows from foreign exchange business go into the same statement.

1. A currency-wise view

A separate statement is kept, as it goes, for the foreign currency book.

1. Twenty-eight days first

Interest rate gaps are identified in fixed buckets, the first of them 1 to 28 days.

BankPulse example. The first bucket runs 1 to 28 days. The next runs 29 days to 3 months. Then over 3 months to 6 months, and over 6 months to 1 year. A repricing at day 40 falls in the second bucket.

2. Start with gap analysis

The institution uses traditional gap analysis to measure interest rate risk.

3. Work out the difference

Under gap analysis the institution measures the difference between rate sensitive liabilities and assets.

4. Group into buckets

The gap report groups rate sensitive items into time buckets.

5. Slot by repricing

Trading book securities are slotted by residual maturity, or by repricing for floating rate paper.

6. Limits with board approval

The board or the committee approves a limit on each gap.

1. Price funds internally

A properly designed internal transfer pricing mechanism must be part of the system.

1. Act on what you find

Senior management and the board must review these statements and frame corrective steps.

2. Fortnightly liquidity

The liquidity statement is prepared every fortnight.

3. Monthly rate statement

The interest rate sensitivity statement is prepared every month.

4. Both go to RBI

Both statements are sent to RBI's Department of Supervision.

1. Old instructions repealed

The old rules on this subject were repealed by RBI's own circular.

2. Earlier action stands

What was done or begun under the old rules is still ruled by them.

BankPulse example. A show cause notice was issued under the old rules last year. The repeal does not move it. Any action taken or initiated under the repealed directions is still governed by them. The new rulebook applies to what comes after.

3. Adds to other law

These rules add to other laws in force. They take nothing away.

BankPulse example. A bank follows these Directions and thinks the matter is closed. It is not. Any other laws, rules, regulations or directions in force still apply on top. Where another one asks for more, the bank does the more.

4. RBI's reading is final

RBI may clear up doubts, and its reading of any clause is final.