Provisioning- The Weapon Of The Financial Institutions.

There is a direct correlation of profit loss in business with provision of preservation. The financial statement of the business is prepared every year at a particular time. On the date on which the accounting statement is prepared, some issues remain uncertain. There may be some costs that will need to be paid in the near future, but the time or quantity of payment is not guaranteed right now. For example, a profit bonus will be given to the employees of a portion of net profits of the year 31 December 2017. It will be 5% of the net profit or 7% will be fixed later. In this case, profit bonus protection is preserved. Provisioning means that the expenditure will be made in the future, showing the amount of profit (right) shown in the cost of this year, so that the future cost should not be reduced to the extent of profit.

Provisioning is a program of modern accounting where some part of the profit is removed so that any liability that will be spent on future money or resources is paid. The institution can not figure out the exact amount or the exact duration of the future or the amount of time spent on it, but the institution will be fair about the cost.

For example, provision is made for income tax. The institution knows that after a few days income tax is to be given, it is not yet certain how much to pay, as the tax or tax sector may change. Banks have made provisions based on loan classification. The institution knows that it can not be possible to recover some debts, but it is not possible to ensure that the amount of debt will be unrealized. Since the bank will face losses in the future if the debt is not inadequate, it is showing low interest rates this year by showing that the loans will be unpredictable so that in the future the profits will not be reduced very much. The customer's compensation case against the organization is ongoing. With the possibility of losing the organization in the case, the provision will be preserved by showing this as the cost of financing this year so that the profits of the business will not suddenly get reduced in the future when paying the customer.

If the provision of this year is more than last year's provisional provision, the cost of this year will increase (profit will decrease). Likewise, if the provision of this year is less than last year's provisional provision, the cost of this year will be reduced or the profit will increase. Therefore, it is possible to make profit smoothing more than the amount of probation. In 1998, the International Accounting Standards Organization (IAB) published the calculation standard for provisioning which has been followed by most of the world including Bangladesh since 1999.

In accordance with international accounting standards, three conditions must be met for preservation. 1st Condition: There is no liability for any of the events in the past. Behavioral liability will mean liability which is not legally bound to be done by the institution, but it is practiced according to the rules of the long run, such as profit bonus payment. Provision can not be saved for any work that will happen in the future. For example, a buyer will be selling the goods in the balance, which he can not pay; Provision can not be saved in this case. 2nd condition: It is fairly sure that the event will cost some of the organization. If the customer is sued against the organization, then the provision can not be saved until the matter is fully confirmed that the institution will lose the case. 3rd condition: In any event, the cost of the organization can be easily estimated.

Provision can not be saved in some cases below-

1. The provision of this year will not be preserved for the loss of the organization in the next year. As the incident happens in the future, the 1st condition has been violated.

2. The machinery will be repaired for the next year so that the provision can not be saved this year. Because the company is not legally obliged to repair the machine (1st condition).

3. The government has sued the organization to harm the environment. The provision can not be preserved because of not having the right hold on how much compensation can be made. (Anwar Parvez, ACCA)

Asset Liability Management

Definition of 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 central bank 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.

The key roles and responsibilities of the ALM Desk.

1) To assume overall responsibilities of Money Market activities.

2) To manage liquidity and interest rate risk of the bank.

3) To comply with the local central bank regulations in respect of bank’s statutory obligations as well as thorough understanding of the risk elements involved with the business.

4) Understanding of the market dynamics i.e competition, potential target markets etc.

5) Provide inputs to the Treasurer regarding market views and update the balance sheet movement.

6) Deal within the dealer’s authorized limit.

Description of "absence of good/effective ALM of a bank may lead it to different crisis jeopardizing image and foundation of the bank?"

In banking, asset liability management is the practice of managing the risks that arise due to mismatches between the assets and liabilities (debts and assets) of the bank. Banks face several risks such as liquidity risk, interest rate risk, credit and operational risk. Asset/Liability management (ALM) is a strategic management tool to manage Asset, Liability, spread of interest rate and liquidity risk faced by banks & Financial Institutions.

In absence of good/effective ALM of a bank may lead it to following crisis:

Liquidity risk:

the current and prospective risk arising when the bank is unable to meet its obligations as they come due without adversely affecting the bank's financial conditions.

Interest rate risk:

The risk of losses resulting from movements in interest rates and their impact on future cash-flows. One of the primary causes are mismatches in terms of bank deposits and loans.

Currency risk management:

The risk of losses resulting from movements in exchanges rates. To the extent that cash-flow assets and liabilities are denominated in different currencies.

Funding and capital management:

As all the mechanism to ensure the maintenance of adequate capital on a continuous basis. (Usually a prospective time-horizon of 2 years).

Profit planning and growth:
Profit planning is required to make a sufficient growth for the organization itself.

In addition, ALM deals with aspects related to credit risk as this function is also to manage the impact of the entire credit portfolio (including cash, investments, and loans) on the balance sheet. The credit risk, specifically in the loan portfolio, is handled by a separate risk management function and represents one of the main data contributors to the ALM team.

Ending words :

So, it can be said undoubtedly that absence of good/effective ALM of a bank may lead it to different crisis jeopardizing image and foundation of the bank.