With increased competition and removal of entry barriers, banks today are confronted with the question of survival. There is increasing need for greater innovation on the deposit mobilization front and to simultaneously invest greater capital in speedier money transfer mechanisms, innovative products, and hedging instruments. The Asset Liability Management (ALM) provides solutions to a number of problems encountered by banks. Some of the reasons for the increased importance of ALM in banks are financial volatility, introduction of new financial products such as interest rate swaps, options, and futures, regulatory initiatives, and heightened awareness of top management. The successful negotiation and implementation of Basel II Accord is likely to lead to an even sharper focus on the risk measurement and risk management at the institutional level. This paper examines the ALM practices of six banks using the tool of Duration GAP Analysis by looking at interest rate sensitivity statements of the six banks for the period 2000-04.

Banking in modern economies is all about risk management. Asset Liability Management (ALM) is important to the banking industry because of increased financial volatility, introduction of new financial products such as interest rate swaps, options and futures, regulatory initiatives, and heightened awareness of top management. Increased volatility results in greater uncertainties in profitability, portfolio values, and solvency and this implies greater risk. When there is a risk, there is a need for risk management and thus asset-liability management. Banks can, on their part, formulate `early warning indicators' suited to their own requirements, business profile, and risk appetite in order to better monitor and manage risks. In this context, ALM represents the core of sound bank planning and financial management and can be defined as "the management of a bank's entire balance sheet to achieve desired risk-return objectives and to maximize the market value of stockholders' equity" (Timothy and Scott, 2004). The ALM function indicates to the manager the current market risk profile of the bank and the impact that various alternative business decisions would have on the future risk profile. The manager can then choose the best course of action depending on his board's risk appetite. ALM is a critical function for any bank and determines the efficiency with which a bank is able to structure its balance sheet in order to influence net income, return on equity, and return on assets.

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