• PAGE ONE
• INDEX
• HOME

Fund management: Art of tight-rope walking

K. Mallikarjunan

WILL it not surprise you, if some one asserts that a similarity can be discerned between, say, a rustic funambulist (commonly known as a tight-rope walker), and a white-collared fund manager of any contemporary establishment, say, a bank. But both have t o perform a balancing act that will not admit of even the smallest of errors.

Even an infinitesimal sway to one side may cost them every thing vital for their existence. While the former is up on a tight rope, the latter is down on the central line of the balance-sheet, that is, the line that divides the assets from the liabilitie s. Like a funambulist who manages the gravity on either side, the fund expert has to manage the two sides that pull him in the opposite directions by virtue of their varying quanta and the fluctuating "flows"!

While this technique is needed in almost all organisations, nowhere is it felt more imperative than in banks, whose stock-in-trade is 'money' that can, at the slightest excuse, flow in all directions, more often than not, down the drain too. Hence, the R BI also has come out with detailed guidelines in the matter.

While performing the walking the tight rope of 'Asset Liability Management', the fund expert, particularly in banks, cannot afford to lose sight of the forces in the business environment around him. The threats that loom very often on the bank's horizon are the inter-dependent interest rate and liquidity risks. To overcome these, the bank resorts to the ALM function that basically involves studying, tracking and matching the periodicity of fund-flows on either side of the balance-sheet.

Depending on whether the interest rates move north or south, a bank can manipulate the sluice regulating the fund flow. In the matter of liquidity maintenance, banks are, on the side of borrowed funds, in an inescapable situation of meeting all the oblig ations on time, and, on the side of deployment, have the unpredictable situation of facing defaults in 'receivables'. In other words, they have to rely on the maturing inflows for discharging all their obligations.

In this formidable task of matching the stream, the fund expert is torn between the forces and faces the unfortunate, but frequent occasions of default in inflows. Hence, a wise banker, based on experience, invariably makes allowance for a certain percen tage of default in recoveries and, being thus prepared, restricts deployment or, if it is unavoidable, borrows at a cost. Presence of NPAs, the inevitable consequence of ill-processed credit, results in malignant blocks to the regular fund flow.

The fund manager is perennially at the mercy of the unpredictable lending and investment portfolios that generate very often only irregular inflows. He is constantly on his toes to maximise the inflow and is relentlessly on his spree to minimise the NPA- impact. If excess flow on one side chokes him, excess flow on the other would bleed him to lifelessness.

While the funambulist invariably reaches the other end on a tight rope with practised ease, the fund manager does so with Herculean efforts braving, on his way, the forces beyond his control, the tides and the typhoons!

In all his efforts to match the flows on either side of him, the fund-conscious banker, no doubt, needs the best wishes of every one. If you can applaud the feat of a tight ropewalker, why not applaud a Fund Manager who makes it down the line from capita l to bottomline, without losing even a wee bit of balance during his act?

(The author is a former general manager, UCO Bank.)