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Unit 9: Commercial Banking Services

before expiry, in case of need. Against a background of rapid growth in the banking business, Notes
integrated approach to managing all assets and all liabilities evolved as balance sheets became
more complex and as the volatility of interest rates and exchange rates increased. In the eighties,
the rescheduling of debt of developing countries on account of their serious payments difficulties
involved conversion of short-term and medium term assets into long-term and became frozen.
Banks abroad met the problem by raising long-term funds including capital liabilities. In the
process, banks could meet the rise in capital adequacy norms stipulated by bank supervisors.
Banks shifted their focus from growth to profitability and asset quality. Banks also started
lending against negotiable assets and to the packaging for resale of conventional bank loans.
Borrowers were encouraged to raise funds directly through issue of negotiable short-term
paper by providing guarantees, standbys and backup facilities. Banks benefited from fee income
without expanding balance sheet which would worsen capital ratios. Of course, off-balance
sheet contingent liabilities went up.

There was a deliberate attempt to extend asset liability management beyond the range of on -
balance sheet assets and liabilities which arises from the bank acting as principal in direct
transactions with borrowers and lenders of money. Asset and liability management has helped
to bring about securitisation of banking blurring the distinction between commercial banking
and investment banking.
Self Assessment

Fill in the blanks:
1. In a market-oriented financial system, specialized ……………………..including banks,
financial markets and market intermediaries cater to the different financial needs.

2. In a ………………….financial system, savings are largely transferred directly from those
who generate them to those wishing to use them by the intermediation of banks.
3. …………………..consists of provision of banking services by a single institution.

4. A bank's overall risk can be defined as the probability of failure to achieve an expected
value and can be measured by the ………………….of the value.
5. ……………………..arises when a bank cannot get back the money from loan or investment.
Interest rate risk arises when the market value of a bank asset, loan or security falls when
interest rates rise.
6. Liquidity risk refers to the bank's ability to meet its …………….obligations to depositors
and borrowers.
7. ……………..risk arises out of the fluctuations in value of assets, liabilities, income or
expenditure when unanticipated changes in exchange rates occur.

9.8 RBI Guidelines for Risk Management

Consequent to the liberalization of domestic market in India, the volatility in interest/exchange
rates would be transmitted to the financial sector as a whole. To address these risks, banks have
to undertake a comprehensive Asset Liability Management (ALM) strategy. The objectives of
ALM are to control volatility of net interest income and net economic value of a bank.

RBI issued guidelines on 21.10.1999 for risk management in banks which broadly cover credit,
market and operational risks. Earlier, guidelines were issued on 10.2.1999 on asset-liability
management system which covered management of liquidity and interest rate risks. Together
they are purported to serve as benchmark to banks.

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