Reserve Bank of India (Local Area Banks – Asset Liability Management) Directions, 2025

1. What this book does

This book sets how a local area bank must manage its assets against its liabilities.

1. Start date

These rules took effect from the date RBI issued them.

2. Who is covered

These rules apply to every local area bank.

3. Words from the Acts

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

1. Limits beyond 28 days

The board approves limits on running mismatches in every bucket beyond 1 to 28 days.

BankPulse example. RBI sets the caps for the buckets up to 28 days. Past that, the Board sets its own limits for the running total in every bucket. Those limits are internal, and the Board approves them.

2. Act on what you find

Senior management must frame corrective steps when the interest rate risk reports call for them.

3. The board owns the risk

The board carries overall responsibility for risk. It decides the risk management policy.

4. Four kinds of limit

The board sets limits for liquidity, interest rate, foreign exchange and equity price risk.

5. A committee to watch it

The board forms a management committee to oversee how the system is put in place.

6. Sign off the trading book

The board or the committee approves the size, mix, holding period and cut-loss of the trading book.

7. Limits on each gap

The board approves limits on gaps in each time bucket of the interest rate statement.

8. How much may be lost

The board approves a prudent level of earnings at risk, or of net interest margin.

9. Approve the assumptions

The board or the committee approves how behaviour, embedded options and roll-ins are estimated.

1. Senior management joins it up

Senior management reporting to the chief executive must join daily operations to strategy.

2. A floor, not a ceiling

These rules are the benchmark. The work gives a moving frame for measuring and managing risk.

3. Three pillars

The system rests on information, organisation and process.

4. Policy and tolerance

Risk policies and tolerance limits support it. Sound internal control holds it up.

5. The support group

Operating staff form support groups. They study the risk profile and report it to the committee.

6. What ALM covers

The work covers liquidity risk, market risk and trading risk. It also covers funding and capital planning.

1. Ninety days ahead

Short-term liquidity may be estimated over a horizon of 1 to 90 days.

BankPulse example. The short-term view runs from 1 to 90 days. A cash need arising on day 60 is inside that window. One arising on day 120 falls outside it.

2. Twice your net worth

Inter-bank liability must not go beyond 200 per cent of net worth as at 31 March of the previous year.

BankPulse example. Inter-bank liability may not go past 200 per cent of net worth. Suppose net worth on 31 March last year was ₹500 crore. That gives ₹1,000 crore.

3. Measure it all the time

Senior management must measure liquidity continuously. It must test how that position would look under stress.

4. Watch the near buckets

Mismatches inside a year give early warning. The short end must be watched closely.

BankPulse example. Gaps inside one year are the early warning. The closest watch goes on the gaps up to 28 days. A gap at day 200 still matters, but it is not the short end.

5. Track the running total

A bank must watch its running mismatch across every bucket against board-approved limits.

6. A daily statement

The Structural Liquidity Statement is prepared every day.

7. Fixed time buckets

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

8. Place flows when they fall

Every inflow and outflow sits in the bucket where it is expected.

9. Show securities by residual

Statutory liquidity securities and other investments sit in the bucket matching their remaining maturity.

1. Gap limits on forex

A bank authorised to deal in foreign exchange must set gap limits. It must also use a value at risk approach.

2. Currency risk counts

A mismatched currency position exposes the balance sheet to exchange rates. It also brings country risk.

1. Two ways to see it

Interest rate risk hits profits at once through net interest income.

2. The longer view

Seen by economic value, a rate change hits the bank's market value of equity over the long run.

3. Start with gap analysis

A bank uses traditional gap analysis to measure interest rate risk.

4. What a gap is

A gap is the mismatch between rate sensitive liabilities and rate sensitive assets.

5. Work it out by date

Under gap analysis a bank works out the mismatches as at a given date.

1. Price funds internally

A bank must run a proper internal transfer pricing model as part of the system.

1. Daily to the committee

The liquidity statement is prepared daily and put before the committee.

2. Monthly rate statement

The interest rate sensitivity statement is prepared every month.

3. Fortnightly to RBI

The liquidity statement goes to RBI on the first and third Wednesday of each month, and the rate statement monthly.

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.