Define ALM (Asset Liability Management) and ALCO (Asset Liability Committee).

 ALM: Asset Liability Management (ALM) can be defined as a mechanism to address the risk faced by a bank due to a mismatch between assets and liabilities either due to liquidity or changes in interest rates. Liquidity is an institution‘s ability to meet its liabilities either by borrowing or converting assets. Apart from liquidity, a bank may also have a mismatch due to changes in interest rates as banks typically tend to borrow short term (fixed or floating) and lend long term (fixed or floating).

A comprehensive ALM policy framework focuses on bank profitability and long term viability by targeting the net interest margin (NIM) ratio and Net Economic Value (NEV), subject to balance sheet constraints. Significant among these constraints are maintaining credit quality, meeting liquidity needs and obtaining sufficient capital.

 

 ALCO: Asset Liability Management (ALM) is an integral part of Bank Management; and so, it is essential to have a structured and systematic process for manage the Balance Sheet. Committee comprising of the senior management of the bank to make important decisions related to the Balance Sheet of the Bank (asset-Liability). The committee typically called the Asset Liability Committee (ALCO). As per BB guideline, the committee consists of the following key personnel of a bank:

- Chief Executive Officer / Managing Director

- Head of Treasury / Central Accounts Department

- Head of Finance

- Head of Corporate Banking

- Head of Consumer Banking

- Head of Credit

- Chief Operating Officer / Head of Operations

The committee calls for a meeting once every month to set and review strategies

characteristic of a credit officer

 A credit officer should have the following characteristics---

 1. Theoretical knowledge about loan operation rules & regulation

 2. Must be concerned about last update circular about loan operation rules & Regulation given by government and Bangladesh.

 3. Must be concerned about own bank rules-regulations & program schedule about loan.

 4. Know and carryout the empowerment power of bank.

 5. Methodological knowledge and skill about lending operation—

a) Credit planning 

b) Marketing: borrower selection 

c) evaluating

 d) Processing 

e) sanctioning 

f) Documentation 

g) disbursing 

h) Monitoring & follow-up 

i) Recovery activities—cash recovery, regularization, legal action, negotiation

 j) classification 

k) Reporting   

Discuss different types of credit facilities that a commercial bank can offer to its client, which one is preferable by bank and why

 Types of credit commercial bank prefer to finance & its reason

Commercial bank is a financial business institution. Profit is the main target of such institution. Again commercial banks are bound to repay the deposit money to the customer. so commercial banks prefer short term credit than long term credit for  earning profit. the main reason for  preference to finance short term credit are given below----

 

1. Liquidity act—commercial bank are bound to repay the deposit to its customer at demand. For this reason commercial bank give short term credit so that they can easily convert it to cash. Liquidity does not exist in long term loan.

2. Risky activities- approval of long term loan is risky and so, banks prefer short term lending.

3. Earning of profit- the more you will use the invested money the more you will earn profit but in case of long term lending investment cannot reuse. As a result profit margin become low. So, banks prefer short term loan.

At last we can say that considering on profit margin, risk factor and liquidity condition commercial bank prefer short term loan than long term loan.