Review of Literature and Research Methodology:In the normal course, NBFCs are exposed to credit and market risksinviewof theasset-liabilitytransformation. ithliberalisationinIndian !nancial markets over the last fewyears and "rowin"inte"ration of domestic markets with external markets and entry of#NCs for meetin" the credit needs of not only the corporates butalso the retail se"ments, the risks associated with NBFCs$ operationshave become complex and lar"e, re%uirin" strate"ic mana"ement.NBFCs are now operatin" in a fairly dere"ulated environment andare re%uired to determine on their own, interest rates on deposits,sub&ect to the ceilin" of maximum rate of interest on deposits theycan o'er on deposits prescribed by the Bank( and advanceson adynamic basis. )he interest rates on investments of NBFCs in"overnment and other securities are also nowmarket related.Intense competition for business involvin" both the assets andliabilitieshasbrou"ht pressureonthemana"ement of NBFCstomaintain a "ood balance amon" spreads, pro!tability and lon"-termviability. Imprudent li%uidity mana"ement can put NBFCs$ earnin"sand reputation at "reat risk. )hese pressures call for structured andcomprehensive measures and not &ust ad hoc action. )hemana"ements of NBFCs have to base their business decisions on adynamic and inte"rated risk mana"ement systemand process,driven by corporate strate"y. NBFCs are exposed to severalma&orrisks in the course of their business - credit risk, interest rate risk, ,e%uity * commodity price risk , li%uidity risk and operational risk. Itis, therefore, important that NBFCs introduce e'ective riskmana"ementsystemsthataddresstheissuesrelatin"tointerestrate and li%uidity risks.NBFCS need to address these risks in a structured manner by upgrading their riskmanagement and adopting more comprehensive Asset-Liability Management (ALMpractices than has been done hitherto! ALM" among other #unctions" is alsoconcerned $ith risk management and provides a comprehensive and dynamic#rame$ork #or measuring" monitoring and managing li%uidity and interest rate e%uityand commodity price risks o# ma&or operators in the #inancial system that needs to becloselyintegrated$iththeNBFCs' businessstrategy! (t involvesassessment o#varioustypeso# risksandalteringtheasset-liabilityport#olioinadynamic$ayinorder to manage risks!#anystudies havebeenconcludedinIndiaandabroadtoinvesti"ate the ma&or structural chan"es in the !eld of bankin"and the relevance of +,# for NBFC in marinatin" their interestspreads and pro!tability. In this context the present chapter isan attempt to review the studies already done and draw someimportant conclusions that can serve as a "uide mark for thestudy.2.1 Review of Literature-umar, .avi ). /01112 in the study, 3+sset ,iability#ana"ement3,has discussed the +,#in di'erent models.+ccordin" to him, +,# is basically a hed"in" response to theriskin!nancial intermediationwith+,#inplace, mana"erscan evaluate the impact of alternative decisions on the futurerisk pro!les. #ana"in" the spread income and controllin" therisk associated with "eneratin" the spread are the crucial partofthe+,# processforanyBank. 4econcludedthatintensecompetition for business on the +sset and ,iability sidecoupledwithincreasin"volatility inbothdomestic interestratesandforei"nexchan"eratesisputtin"pressureonthemana"ement of bankstomaintainspreads, pro!tabilityandlon" termviability. 4e further concluded that to remaincompetitive Indian !nancial institutions can not a'ord toremain aloof and they should evolve necessary system for theadoption of +,#..a&wade, +. 5. /01102inthestudy, 6Issuesin+sset,iability#ana"ement 7 III8 #ore on .e"ulatory Framework3,emphasi9ed on di'erent issues involved in +,# by NBFC andfocused mainly on points arisin" from the re"ulatoryframework. )hestudyshowedthat dere"ulationof interestrates, itself was a recent idea and that .BI had an in:ation aswell as exchan"e rate tar"et or ob&ective. +"ain .BI;smechanism for implementin" monitorin" policy wasunder"oin" chan"es and re!nement. )he study found that ofthe reserved money, around =from.BI holdin"s of"overnment securities. )he study concluded that fro predictin"chan"es in interest rates, one will have to take a view of theexchan"e market demand supply in future and this was a verydi?cult exercise as it depended onmany factors suchassentiment, other political or economic scenario, which arebeyond anybody;s control.@eh"al, #. and-her, .. /01102inthestudy, 6+sset,iability#ana"ement in NBFC3,stressed on the ob&ective and aspectsof +,# in NBFC, and to some extent, on the broader aspects ofrisk mana"ement. )hey viewed that a sound +,# system forthebankshouldencompassreviewof interest rateoutlook,!xation of interest, product pricin" of both assets andliabilities, review of credit portfolio and credit risk mana"ementof forei"nexchan"eoperationsandmana"ementof li%uidityrisks. In the present context, +,# exercised should comprise ofprudential mana"ement of funds with respect to si9e anddurationminimi9in"undesirablematuritymismatchtoavoidli%uidity problem and reducin" the "ap between risks sensitiveassetsandratesensitiveliabilitieswiththe"ivenrisktakencapacity.Aurumoorthy, ). .. /011B2 inthestudy, 6+nalysisof Incomeand Cxpenditure in NBFC3,attempted to analy9e the income,expenditureandoperatin"pro!t of NBFC. )henewprivatesector NBFChavebeeninthesta"eof branchexpansion.)hus, thepercenta"eriseinexpenditureof thenewprivatesector NBFC has been "reater than that of the other NBFC. +sfar as operatin" pro!ts are concerned the new private sectorNBFCstand!rst, followedbyoldpublicsector NBFCandprivate sector NBFC. In this competitive environment thee?cient asset liability mana"ement, pro&ect appraisal andrecovery mechanismwill helpto earnthe interest incomesubstantially.)himmaiah, A. /011B2 in the study, 6+sset ,iability#ana"ement in NBFC3, focused on +sset ,iability #ana"ementintheNBFCandtosomeextentonbroaderaspectsof riskmana"ement. )heob&ectiveof thestudywastoreviewtheinterestrate, creditportfolio, investmentportfolio, creditriskmana"ement, risk mana"ement and mana"ement of li%uidityrisk. In the study four principal approaches were used to%uantify the risk i.e. Aap #ethod, Duration #ethod, @imulation#ethodand5alue at .isk#ethod.)hestudy concludedthatthere was a need of +,# in India because to maximi9e incomewith acceptable risk there was need to emphasi9e on interestmar"in*spread, li%uidity and capital which were havin" desiredmaneurability..a"havan, .. @. /011E2 in the study, 6.isk #ana"ement 7 +nFverview3,discussed the implication of Basel-II +ccord on thecapital structure of NBFC. )he purpose of Basel-II is tointroduce a more risk sensitive capital framework withincentives for "ood risk mana"ement practices. Gnder Basel-IIapproach, capital re%uirementswill increasefor thoseNBFCthatholdhi"hriskassets*low%ualityassetsandthosewithlowriskassets/hi"h%ualityassets2, abalancedportfolioaswell as e'ective risk mana"ement control systems may needless capital re%uirements. 4e concluded that the !nancialsystemhastocopeconstantlywithchan"esinthebroaderenvironment in which it operates and face new challen"es thatthose developments impose on it.Bhasin, +. /011