In
pre financial reforms era, banks were subjected to the
controlled measures of central banks in all activities
undertaken by them which included, regulation of deposit
interest rates, minimum lending rates, administration
of prime lending rates linked to borrowing accounts
etc. In the late 1970s, the rate of inflation soared
high where the deposit rates as well as the profit margins
of banks were at risk. Generally, fixed rates transactions
and number of instruments available to the users were
also limited. All the above left the banks with widespreads
and helped them maintain bottom-lines at a respectable
level. But with the onset of financial sector reforms
and the liberalization processes growing, the scope
of the banks in today's scenario has been extended from
mere acceptance of deposits and lending of loans to
a wide range of activities. There, the concept of Asset-Liability
Management (ALM) was born and is prevalent since then.
The
post-liberalization period witnessed a rapid industrial
growth in the fund raising activities. With the rise
in the demand for funds, there has also been a remarkable
shift in the sources and uses of funds of banks. Traditionally,
administered rates were used to price the assets and
liabilities of the banks. However, in the deregulated
environment, competition has narrowed the spreads of
the banks. This has not only led to the introduction
of discriminate pricing policies, but has also highlighted
the need to match the maturities of assets and liabilities.
The developments that have taken place since liberalization
have led to a remarkable transition in the risk profile
of financial intermediaries. |
