Asset Liability Management (ALM) is concerned with strategic balance sheet management. The significance of ALM to the financial sector is highlighted due to the dramatic changes that have occurred in recent years in the

The main reasons for the growing significance of Assets Liability Management (ALM) are: (a) Volatility: In the recent times, we have witnessed increasing number of free economics, with more and more nations globalizing their operations. Closely regulated markets are paving the way for market-driven economics. The vagaries of such free economic environment are reflected in the interest rate structures, money supply and the overall credit position of the market, the exchange rates and the price levels. For a business which involves trading in money, rate fluctuations invariably affect the market value, yields/costs of the assets/liabilities which further affect the market value of the bank. Tackling this situation would have been a very difficult task in a setup where interest rates are volatile and exchange rate volatility is high, but for ALM. (b) Product Innovation: The second reason for the growing significance of ALM is the rapid innovations taking place in the financial products of the bank. In several cases, the same product has been repackaged with certain differences and offered by various banks. Whatever may be the features of the products, most of them have an impact on the risk profile of the bank thereby enhancing the need for ALM. (c) Regulatory Environment: In order to enable the banks to cope with the changing environment that has resulted due to the integration of the domestic markets with international markets, the regulatory authorities of various financial markets have initiated a number of measures with an objective to prevent market vagaries. One step towards this direction was the increased focus in the management of the bank's assets and liabilities. The RBI also asserted for a framework for banks to develop ALM policies. (d) Management Recognition: All the above mentioned aspects forced the managements of the banks to have a serious thought about the management of the assets and liabilities. The managements have realized that it is just not sufficient to have very good franchise for credit disbursement nor is it enough to have just a very good retail deposits base. In addition to these, the bank should be in a position to relate and link the assets side with the liability side and this calls for efficient ALM.