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Reserve Bank of India (Rural Co-operative Banks – Asset Liability Management) Directions, 2025
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DRAFT FOR COMMENTS RBI/2025-26/-- XX, 2025
Reserve Bank of India (Rural Co-operative Banks – Asset Liability Management) Directions, 2025
A. Short Title and Commencement 1. These Directions shall be called the Reserve Bank of India (Rural Co-operative Banks – Asset Liability Management) Directions, 2025. 2. These Directions shall come into effect from the date of issue. 3. These Directions shall be applicable to Rural Co-operative Banks (hereinafter collectively referred to as 'banks' and individually as a 'bank'). In this context, rural co-operative banks shall mean State Co-operative Banks and Central Co-operative Banks, as defined in the National Bank for Agriculture and Rural Development Act, 1981. 4. In these Directions, unless the context otherwise requires, the terms herein shall bear the meanings assigned to them below: (1) ‘Defeasance period’ means time taken to liquidate the investment in securities on the basis of liquidity in the secondary market. (2) ‘Interest Rate Risk’ is the risk where changes in market interest rates might adversely affect a bank's financial condition. (3) ‘Embedded Options’ means customers exercising their options (premature closure of deposits and prepayment of loans and advances). 5. All other expressions unless defined herein shall have the same meaning as have been assigned to them under the BR Act, the RBI Act, rules/regulations made thereunder, or any statutory modification or re-enactment thereto or as used in commercial parlance, as the case may be. A. Responsibilities of the Board 6. The Board shall have an overall responsibility for risk management and shall decide the risk management policy of a bank including ALM Policy, and set limits for liquidity, interest rate and equity price risks. 7. The Managing Committee of the Board or any other specific committee constituted by the Board shall oversee the implementation of the ALM system and review its functioning periodically. 8. The Board shall be responsible for providing adequate information to the stakeholders. Board approved policies, limits, and reviews 9. The Board / Management Committee shall approve internal prudential limits for cumulative mismatches (running total) across all time buckets of the structural liquidity statement (SLS) for monitoring by a bank. 10. The business and risk management strategy of the bank should ensure that the bank operates within the limits / parameters set by the Board. 11. The Board / ALCO of a bank shall approve the volume, composition, holding/ defeasance period and cut-loss limits of the ‘current category’. 12. The Board / Management Committee shall approve prudential limits on individual gaps in Statement of Interest Rate Sensitivity (IRS) for a bank. The prudential limits shall have a bearing on the Total Assets, Earning Assets or Equity. The Board / Management Committee shall also approve a prudent level of Earnings at Risk (EaR) or Net Interest Margin (NIM) for the bank. 13. The Board / ALCO shall approve the estimates of behavioural pattern, embedded options, rolls-in and rolls-out, etc. of various components of assets and liabilities on the basis of past data / empirical studies for classification of the same in the appropriate time buckets. Chapter III-Asset Liability Management Governance 14. A bank shall establish an Asset Liability Management (ALM) system that offers a comprehensive and dynamic framework for measuring, monitoring, and managing liquidity, interest rate, currency/ foreign exchange and equity price risks. The ALM framework shall be closely aligned with the bank’s business strategy. 15. The bank shall use the ALM function to promote risk management discipline by making informed business decisions that account for inherent risks. ALM decisions shall be integrated, addressing asset-liability mix and maturity structure simultaneously. 16. The ALM system shall be developed into a strategic tool for a bank’s management, clearly specifying the risk policies and tolerance limits. 17. A bank shall ensure that the ALM process encompasses the following:
18. A bank shall implement the ALM system on the following three pillars:
19. A bank shall align its ALM operations within the risk policies and tolerance limits approved by the Board. Top Management of the bank shall put in place a robust Management Information System (MIS) to facilitate timely and accurate data collection. A bank shall evolve the MIS to better capture the risk parameters, measurements of identified risks and their management. 20. A bank shall supplement its balance sheet, income and cash flow statements with risk disclosures to promote efficient resource allocation, enforce financial discipline, enhance transparency and reflect its true financial health. 21. A bank shall establish an Asset-Liability Management Committee (ALCO) comprising Top Management, including CEO. The ALCO shall meet regularly, ensure compliance with Board-approved limits and align asset-liability strategies with budget and risk objectives. 22. The size (number of members) of ALCO shall depend on the size of the bank’s business mix and organisational complexity. The CEO / MD or General Manager shall head the ALCO, and Heads of Investment, Credit and Strategy, Resources Management, Treasury, Risk Management can be members of the ALCO, along with other members, as deemed suitable. The Head of the IT will be a special invitee. An RCB, at its discretion, may have Sub-Committees and Support Groups. 23. The ALM Support Groups consisting of operating staff shall be responsible for analysing, monitoring and reporting the risk profiles to the ALCO. The staff shall also prepare forecasts (simulations) showing the effects of various possible changes in market conditions related to the balance sheet and recommend the action needed to adhere to prescribed internal limits. 24. The ALCO shall be responsible for balance sheet planning from risk-return perspective, including the strategic management of interest rate and liquidity risks. A bank shall define the roles and responsibilities of its ALCO, as also the decisions to be taken by it. A bank’s business and risk management strategy shall ensure that it operates within the limits / parameters set by the Board. 25. The agenda/ typical business of ALCO shall include the following:
26. The agenda indicated above is illustrative and not exhaustive. A bank shall incorporate such other issues which, in its opinion, need to be discussed in the committee based on the local conditions. A bank shall take a view on whether all the agenda items are required to be discussed in all the meetings, and agenda can be fixed for each meeting depending upon the emergent needs and priority. 27. A bank shall decide the frequency for holding its ALCO meetings, as also take steps for capacity building of the Nodal Officer and other officers involved in ALM functions. 28. The bank shall ensure that the ALM process covers the following functional areas with focus on liquidity and interest rate risks
Chapter IV- Liquidity Risk Management 29. A bank’s management shall measure its liquidity position on an ongoing basis, as also evaluate liquidity requirements under different assumptions by putting in place a system for ascertaining its cash flow mismatches periodically. B. Maturity/Cash flow mismatches 30. A bank shall use maturity ladder tool to measure and manage net funding requirements. A bank shall use Structural Liquidity Statement (SLS) at Annex-I of the Directions for calculation of cumulative surplus or deficit of funds at selected maturity dates. 31. A bank shall use the Maturity Profile as given in Annex-IV of the Directions for measuring the future cash flows in different time buckets. The time buckets shall be distributed as under:
32. The SLS shall place all cash inflows and outflows in the maturity ladder according to the expected timing of cash flows. A maturing liability shall be a cash outflow while a maturing asset shall be a cash inflow. A bank shall make appropriate assumptions according to its asset-liability profile while determining the likely cash inflows and outflows. A bank shall also take into account all relevant factors, based on its asset-liability base and nature of business while determining the tolerance levels. 33. A bank shall primarily focus on the short-term mismatches (1-14 days and 15-28 days). The mismatches (negative gap) during 1-14 days and 15-28 days shall not exceed 20 per cent of the cash outflows in each time bucket. 34. A bank shall monitor its cumulative mismatches (running total) across all time buckets by establishing internal prudential limits with the approval of the Board / Management Committee. 35. A bank’s investment in SLR securities and other investments in permanent category shall be shown under respective maturity buckets, corresponding to the residual maturity. 36. A bank maintaining securities in the ‘current’ category, distinct from investments made for complying with the Statutory Reserve requirements and for retaining relationship with customers, shall be permitted to place such trading securities into 1-14 days, 15-28 days and 29-90 days buckets on the basis of the defeasance periods, provided following conditions are met:
37. The Board / ALCO of a bank shall approve the volume, composition, holding / defeasance period and cut-loss limits of the ‘current category’. A copy of the approved policy note shall be forwarded to the Department of Supervision, NABARD, and Financial Inclusion and Development Department (FIDD), RBI under advice to the respective Regional Office. 38. A bank may also be guided by the Guidance Note on Liquidity Risk Management issued by NABARD dated July 30, 2024. C. Dynamic Liquidity Assessment 39. A bank shall estimate its short-term liquidity profiles on the basis of business projections and other commitments for planning purposes, to monitor its short-term liquidity on a dynamic basis over a time horizon spanning from 1-90 days, as per format of Statement of Dynamic Liquidity provided in Annex-II of the Directions. D. Liquidity Adjustment Facility (LAF) and Marginal Standing Facility (MSF) for Scheduled StCB 40. A Scheduled State Cooperative Bank (StCB) which is Core Banking Solution (CBS) enabled and maintains a Capital to Risk-weighted Assets Ratio (CRAR) of at least 9 per cent shall be eligible to access the Liquidity Adjustment Facility (LAF) and the Marginal Standing Facility (MSF). 41. The terms and conditions for availing LAF and MSF would be as per the instructions issued by Financial Markets Operations Department (FMOD) of the Reserve Bank of India from time to time. 42. The Department of Regulation (DoR) shall communicate to the FMOD, the list of Scheduled StCBs eligible to participate in LAF and MSF (“Positive List”) and the list of Scheduled StCBs found ineligible (“Negative List”). 43. The eligibility status of a Scheduled StCB in the Positive List shall be reviewed on an ongoing basis to ensure that the CRAR requirement is being complied with. Chapter V- Interest Rate Risk (IRR) Management 44. Interest rate risk from ‘earnings perspective’ is the immediate impact of interest rate changes on bank’s earnings (i.e. reported profits) through changes in its Net Interest Income (NII). Interest rate risk from ‘economic value’ perspective is long-term impact of interest rates changes on bank’s Market Value of Equity (MVE) or Net Worth as the economic value of bank’s assets, liabilities and off-balance sheet positions get affected due to variation in market interest rates. The risk from the earnings perspective can be measured as changes in the Net Interest Income (NII) or Net Interest Margin (NIM). A bank shall follow the Traditional Gap Analysis to measure the Interest Rate Risk. 45. A bank is expected to gain sufficient expertise and sophistication in acquiring/ handling MIS and transit to the modern techniques of Interest Rate Risk measurement like Duration Gap Analysis, Simulation and Value at Risk (VaR). 46. The Gap or Mismatch risk shall be measured by calculating Gaps over different time intervals as at a given date, by preparing the Statement of Interest Rate Sensitivity as per format given in Annex-III of the Directions. 47. Gap analysis’ means measurement of “Gap”, i.e., mismatches between rate sensitive liabilities and rate sensitive assets (including off-balance sheet positions) through a Gap Report generated by grouping rate sensitive liabilities, assets and off-balance sheet positions into time buckets according to residual maturity or next repricing period, whichever is earlier. 48. The Gap reports shall cover the following aspects:
C. Statement of Interest Rate Sensitivity 49. The rate sensitive liabilities, assets and off-balance sheet positions shall be grouped into time buckets based on residual maturity or next repricing period, whichever is earlier to prepare a gap report. The Gaps shall be identified in the following time buckets.
50. The various items of rate sensitive assets and liabilities and OBS items shall be classified as explained in Annex-V of the Directions. 51. A positive Gap (RSA > RSL) indicates that bank is in a position to benefit from rising interest rates, while a negative Gap (RSL > RSA) indicate that bank is in a position to benefit from declining interest rates. 52. A bank shall set prudential limits on individual Gaps with the approval of the Board / Management Committee. The prudential limits shall have a bearing on the Total Assets, Earning Assets or Equity. A bank shall also work out Earnings at Risk (EaR) or Net Interest Margin (NIM), based on its views on interest rate movements and fix a prudent level with the approval of the Board / Management Committee. 53. Notwithstanding guidance provided in Annex-IV and Annex-V of the Directions, a bank which is better equipped to reasonably estimate the behavioural pattern, embedded options, rolls-in and rolls-out, etc., of various components of assets and liabilities on the basis of past data / empirical studies shall classify the same in the appropriate time buckets, subject to approval from the ALCO / Board. A copy of the note approved by the ALCO / Board shall be sent to the Department of Supervision, NABARD and FIDD, RBI under advice to the respective Regional Office. 54. A bank shall evolve suitable mechanism, supported by empirical studies and behavioral analysis to estimate the future behaviour of assets, liabilities and off-balance sheet items to the changes in market variables and estimate the embedded options. 55. A bank shall follow a well-defined 'transfer pricing system' which provides a rational framework for pricing of assets and liabilities. A scientifically evolved 'internal transfer pricing model', that assigns values on the basis of current market rates to the funds provided/ used, is an important component for effective implementation of ALM system. The 'Transfer Price Mechanism' (TPM) would enhance the management of margin i.e. lending or credit spread, the funding or liability spread and mismatch spread. It also helps centralising interest rate risk at one place which facilitates effective control and management of interest rate risk. D. Financial Reporting and Role of Auditors 56. The Board shall ensure that adequate financial information is disclosed to stakeholders in order to promote market discipline. The authenticity of financial statements shall be certified by the auditors, whose independence shall be ensured by the bank. Auditors shall exhibit the highest standards of integrity in the conduct of their responsibilities. Chapter- VII- Monitoring and Reporting 57. A bank may submit the two ALM returns viz. Statement of Structural Liquidity (SSL) and Statement of Interest Rate Sensitivity (SIRS) at quarterly intervals. Formats of the returns are as per Annex I and Annex III. Further, bank shall refer to relevant supervisory guidelines from NABARD for submission timelines for all ALM returns. Chapter- VIII- Repeal and Other Provisions 58. With the issue of these Directions, the existing Directions, instructions, and guidelines relating to Asset Liability Management as applicable to Rural Co-operative Banks stands repealed, as communicated vide notification dated XX, 2025. The Directions, instructions and guidelines already repealed shall continue to remain repealed. 59. Notwithstanding such repeal, any action taken or purported to have been taken, or initiated under the repealed Directions, instructions, or guidelines shall continue to be governed by the provisions thereof. All approvals or acknowledgments granted under these repealed lists shall be deemed as governed by these Directions. B. Application of other laws not barred 60. The provisions of these Directions shall be in addition to, and not in derogation of the provisions of any other laws, rules, regulations, or directions, for the time being in force. 61. For the purpose of giving effect to the provisions of these Directions or in order to remove any difficulties in the application or interpretation of the provisions of these Directions, the RBI may, if it considers necessary, issue necessary clarifications in respect of any matter covered herein and the interpretation of any provision of these Directions given by the RBI shall be final and binding. |
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