Asset-Liability Management among Commercial Banks in India — A Canonical Correlation Analysis

Abstract

Compatibility between asset and liability structures of a bank is necessary to maintain adequate liquidity, enhance profitability, and control risk within acceptable limits. Coordinated management of the two has assumed special significance with growing competition, complexity and risk in the banking sector. The objective of this study is to examine and explore the nature and strength of relationship between various assets and liabilities of 68 commercial banks operating in India for eight consecutive years, 1992–2000. The special emphasis is on the performance of banks grouped by their ownership structure and size. The portfolio-matching behaviour has been examined using canonical correlation analysis – a multivariate statistical technique used for evaluating the relationship between two sets of variables. The study reveals that most of the banks, in general, show prudent matching of assets and liabilities. The most prominent relationship is between short term deposits and SLR securities. However, there are substantial inter-group and inter-period differences.