CAIIB BFM Treasury & ALM — Gap Analysis, Duration & Liquidity Ratios Complete Guide

Last updated by BankersClub on July 20, 2026

Quick Answer

What does BFM Module C — Treasury & ALM — actually test?

Treasury structure: Front office (dealing), Mid office (risk monitoring), Back office (settlement) — who does what, and why they must stay separate
Money market instruments: Call money, CBLO/TREPS, CDs, CPs, T-Bills, Repo/Reverse Repo — maturity and issuer differences
Gap analysis: Structural Liquidity Statement and Interest Rate Sensitivity Statement — bucket-wise RSA vs RSL
Duration: Macaulay and Modified Duration — price sensitivity of bonds to interest rate changes
Liquidity ratios: LCR ≥ 100%, NSFR ≥ 100% under Basel III
Investment classification: HTM, AFS, HFT — RBI’s three buckets with different accounting treatment

Why This Is the Highest-Weightage Numerical Module in BFM

Treasury & ALM consistently carries the heaviest calculation load in BFM. Unlike Forex (Module A/B calculations), which most candidates can practise mechanically once the formula is memorised, ALM questions require understanding how a bank’s balance sheet behaves under different scenarios — which is why case-study questions in this module trip up candidates who memorised formulas without understanding what a “gap” or “duration mismatch” actually represents for a bank’s risk. This guide builds the framework first, then works through the three calculation types that appear most often: gap analysis, duration, and liquidity ratios.

Treasury Structure — Front, Mid, Back Office

Office	Function	Why Kept Separate
Front Office	Dealers execute trades — forex, money market, securities	Takes the risk position; must not also verify or settle its own trades
Mid Office	Independent risk monitoring — limits, VaR, exposure tracking, MIS to top management	Must report directly to risk management, not to the treasury head, to remain independent of trading pressure
Back Office	Settlement, confirmation, accounting, reconciliation of trades executed by the front office	Segregation of duties — the same person who deals must never settle the deal (classic fraud-control principle)

Exam trap: A question describing a dealer who also confirms and settles their own trades is describing a control failure — this exact segregation-of-duties breach is how several major treasury frauds in Indian banking history occurred. IIBF tests this concept through scenario questions, not direct definition recall.

Money Market Instruments — Quick Comparison

Instrument	Issuer	Tenure	Secured?
Call Money	Banks (interbank)	Overnight (1 day)	Unsecured
Notice Money	Banks (interbank)	2 to 14 days	Unsecured
Term Money	Banks (interbank)	15 days to 1 year	Unsecured
CBLO / TREPS	Banks, mutual funds, NBFCs (via CCIL)	Overnight to 90 days	Secured (collateralised)
Certificate of Deposit (CD)	Banks	7 days to 1 year	Unsecured, tradeable
Commercial Paper (CP)	Corporates, NBFCs	7 days to 1 year	Unsecured, tradeable
Treasury Bill (T-Bill)	Government of India	91 / 182 / 364 days	Sovereign, zero-coupon (issued at discount)
Repo / Reverse Repo	RBI-regulated, banks with RBI or each other	Overnight to short-term	Secured (against govt securities)

Gap Analysis — Structural Liquidity & Interest Rate Sensitivity

Gap analysis measures the mismatch between assets and liabilities that mature or reprice within the same time bucket. Two related statements use the same bucketing logic but answer different questions: the Structural Liquidity Statement asks “can the bank meet its cash outflows in each bucket?” and the Interest Rate Sensitivity Statement asks “how much will the bank’s earnings change if interest rates move?”

Worked Example — Interest Rate Sensitivity Gap

Given (1–3 month bucket): Rate-Sensitive Assets (RSA) = ₹450 crore. Rate-Sensitive Liabilities (RSL) = ₹600 crore.

Step 1 — Compute the Gap: Gap = RSA − RSL = 450 − 600 = −₹150 crore (Negative Gap)

Step 2 — Interpret the sign: A negative gap means RSL exceeds RSA in this bucket — more liabilities than assets will reprice. If interest rates rise, the bank’s cost of funds increases faster than its earning yield, reducing Net Interest Income (NII). If rates fall, a negative gap benefits the bank — costs fall faster than income.

Step 3 — Quantify the NII impact: ΔNII = Gap × Δ Interest Rate. If rates rise by 1% (100 bps): ΔNII = −150 crore × 1% = −₹1.5 crore (NII falls by ₹1.5 crore in this bucket for a 1% rate rise).

Gap Type	Condition	Rates Rise → NII	Rates Fall → NII
Positive Gap	RSA > RSL	Increases	Decreases
Negative Gap	RSA < RSL	Decreases	Increases
Zero Gap	RSA = RSL	No change	No change

Duration — Price Sensitivity Worked Example

Worked Example — Modified Duration and Price Change

Given: A bond has Macaulay Duration = 6.2 years. Yield to Maturity (YTM) = 8%, compounded annually.

Step 1 — Compute Modified Duration: Modified Duration = Macaulay Duration ÷ (1 + YTM) = 6.2 ÷ (1 + 0.08) = 6.2 ÷ 1.08 = 5.74 years

Step 2 — Apply the price-change formula: % Change in Price ≈ −Modified Duration × Δ Yield. If yields rise by 0.5% (50 bps): % Change in Price = −5.74 × 0.5% = −2.87%

Step 3 — Interpret: The bond’s price falls by approximately 2.87% for a 50 bps rise in yield. The negative sign confirms the fundamental bond relationship: yields up, prices down. Higher duration = higher price sensitivity = higher interest rate risk.

The single most common Duration mistake

Candidates use Macaulay Duration directly in the price-change formula instead of Modified Duration. Macaulay Duration is a time measure (in years) — the weighted average time to receive cash flows. Modified Duration is a sensitivity measure (also expressed in years, but used differently) — it is Macaulay Duration adjusted for the discounting effect of yield, and it is Modified Duration that goes into the price-sensitivity formula. If a question gives you Macaulay Duration and asks for price impact, convert first.

Liquidity Ratios — LCR and NSFR

Ratio	Formula	Minimum Requirement	Time Horizon
LCR (Liquidity Coverage Ratio)	High Quality Liquid Assets (HQLA) ÷ Total Net Cash Outflows (next 30 days)	≥ 100%	30-day stress scenario
NSFR (Net Stable Funding Ratio)	Available Stable Funding (ASF) ÷ Required Stable Funding (RSF)	≥ 100%	1-year structural horizon

How to remember which is which: LCR = short-term survival test (can the bank survive 30 days of severe stress using only its most liquid assets?). NSFR = long-term structural test (is the bank’s funding stable enough over a full year, not overly reliant on short-term wholesale funding to finance long-term assets?). LCR is about liquid assets; NSFR is about stable funding sources.

Worked Example — LCR

Given: HQLA = ₹1,200 crore. Total Net Cash Outflows over the next 30 days (stressed) = ₹1,000 crore.

LCR = 1,200 ÷ 1,000 × 100 = 120%

Since 120% > 100% minimum, the bank comfortably meets its LCR requirement — it holds enough high-quality liquid assets to survive the prescribed 30-day stress scenario without external support.

Investment Portfolio Classification — HTM, AFS, HFT

Category	Intent	Valuation
HTM (Held to Maturity)	Securities the bank intends to hold until maturity	At acquisition cost — no mark-to-market. Premium amortised over remaining maturity.
AFS (Available for Sale)	Neither held-to-maturity nor for short-term trading	Marked to market — typically quarterly. Depreciation/appreciation net of category, not security-wise.
HFT (Held for Trading)	Bought principally to sell in the near term for short-term price gains	Marked to market frequently — typically monthly or more often. Must be sold within 90 days of purchase under RBI norms.

Master Numbers Reference — Treasury & ALM

Item	Number
LCR minimum requirement	≥ 100%
NSFR minimum requirement	≥ 100%
LCR stress horizon	30 days
NSFR structural horizon	1 year
HFT holding limit	Must sell within 90 days
Call money tenure	Overnight (1 day)
Notice money tenure	2–14 days
Modified Duration formula	Macaulay Duration ÷ (1 + YTM)

Frequently Asked Questions

What is the ALCO and why does it matter for this module?

ALCO (Asset-Liability Management Committee) is the top-management committee — typically chaired by the CEO/MD with senior functional heads — responsible for balance sheet risk management: liquidity risk, interest rate risk, and funding strategy. It reviews the gap statements and duration analysis covered in this article and sets policy limits on mismatches. IIBF frequently frames case-study questions as “the ALCO observes X — what should it do,” so understanding gap direction and its NII implication (covered above) is directly testable through this framing.

If a bank has a negative gap and expects rates to fall, should it act to close the gap?

Not necessarily — a negative gap benefits the bank if rates fall, since liabilities reprice down faster than assets, widening NII. Whether to act depends on the bank’s rate view and risk appetite: if management is confident rates will fall, they may deliberately maintain or even widen the negative gap to benefit from the anticipated NII improvement. If the rate direction is uncertain, ALCO typically reduces the gap to limit exposure either way. This is a risk-management judgment call, not a mechanical rule — which is exactly why IIBF tests it through scenario-based questions rather than direct formula recall.

Why does HTM not require mark-to-market while AFS and HFT do?

The accounting principle follows the holding intent. HTM securities are intended to be held until redemption, so their eventual value is contractually certain (face value at maturity) regardless of interim market price swings — marking them to market would introduce volatility into the bank’s P&L that has no bearing on the actual cash the bank will receive. AFS and HFT securities may be sold before maturity, so their current market value is directly relevant to what the bank could realise if it chose to sell — hence the mark-to-market requirement.

Is CBLO the same as TREPS?

TREPS (Tri-Party Repo) effectively replaced CBLO (Collateralised Borrowing and Lending Obligation) as the dominant secured money market instrument on the CCIL platform after RBI’s 2018 transition. Both serve the same functional purpose — secured short-term borrowing/lending collateralised by government securities through a central counterparty — but IIBF study material sometimes references both names since the transition is relatively recent in banking-exam terms. For exam purposes, treat them as functionally equivalent secured money-market instruments distinct from unsecured call money.

How is this module different from the BFM Forex Calculations article?

The Forex Calculations guide covers Module A/B numerical work — cross rates, forward premiums, TT rates — all currency-market calculations. This article covers Module C — Treasury & ALM — which deals with the domestic money market, the bank’s own balance sheet risk (gap and duration), and liquidity/investment regulation. Some candidates conflate “Treasury” with “Forex” because both sit under the treasury function organisationally, but the exam tests them as distinct modules with distinct calculation types.