Case-2 : Asset Liability Management (ALM) of a bank

Case Scenario :

XYZ is a mid-sized scheduled commercial bank of Bangladesh with a deposit base and significant exposure to long-term housing loan and corporate advances. Recently, the bank has faced liquidity, profitability and regulatory compliance pressures. Thus, the bank reviewing its asset liability management activities. The relevant information is as follows :

• XYZ bank has a high concentration of 10-year fixed rate home loans and 5-year project loans funded by 1-year or less deposits.
• Rising interest rates (Tending to higher deposit costs).
• Out of total deposits 40% deposits belong to top 10 depositors.
• 85% deposits are high-cost deposit.
• Advance-to-Deposit Ratio (ADR) is 94% and an increasing trend for last 6 quarters.
• Yearly loan growth is higher than deposit growth.
• There is a big positive gap between Rate Sensitive Asset (RSA) and Rate Sensitive Liability (RSL).
• Increased Non-performing Assets (NPAs) in its loan portfolio.

The central bank's recent monetary tightening has further strained
the bank's Net Interest Margin (NIM). The ALM committee must reassess the bank's strategy to maintain liquidity, profitability and regulatory compliance.

As an expert, you are required to analyze the given scenario in the following context :

(i) Discuss the maturity mismatch problems of asset and liability of the bank. How can the bank manage this problem?

(ii) Identify and discuss the liquidity crisis issues that the bank might face.

(iii) Analyze the impact of interest rate change (increase/decrease) on the profitability of the bank considering RSA and RSL.

(iv) How do rising NPAs impact the bank's ALM position?