treasury and fund management in banks

8/13/2019 Treasury and Fund Management in Banks

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What is Treasury?

The management of banks liquidity.

To ensure that the r ight amount of cash resources are available in theright place in the right currency and at the right time.

Maximize the return on surplus funds & M inimize the f inancial costs ofthe business,

Control interest rate risk and cur rency exposure to an acceptable level

Eff icient management of the financial r isk and liquidity of the business

Planning, organizing and controll ing of cash and borrowings so as tooptimize interest and currency f lows, and minimize the cost of funds.

As such treasury refers to the management of funds and revenue on a dayto day basis.

The treasury acts as the custodian of the cash and others assets. The art of

the managing funds within the acceptable level of the r isk and theconsolidated management of funds of the bank optimall y and profitably iscalled the treasury management.


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Integrated Treasury

Integrated Treasury refers to integration of money market,securities market and foreign exchange operations.

-Meeting reserve requirements

-Efficient merchant services

-Global cash management

-Optimizing profit by exploiting market opportunities inforex market, money market and securities market

-Risk management

-Assisting bank management in ALM


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MAIN OBJECTIVES OF TREASURY

Ensure L iquidity at all times

Operate in Cost-effective manner Provide stable earnings

Protect from possible adverse movements in

interest rate and foreign exchange Take advantage of market movements to reduce

interest cost and to avail earning opportunity


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Main Focus of Treasury

CRR- Maintain Correctly- Non Interest earning- minimize flak

SLR- Maintain Correctly- Maximize Yield

I nvestments in GOI Secur ities

I nvestment in State Government Secur ities

I nvestment in other SLR secur ities Trading- Gain f rom market volatil i ty

Risk- Hedge and Profi t


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Investment Types

F ixed I ncome Securities

F loating rate secur ities

NAV based Secur ities

Shares

Bonds and Debentures

Structured I nstruments

Securatised I nstruments

Derivatives


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Instruments Call & Notice Money

Treasury Bill s Government Secur i ties

Central

State

Bonds

PSU Others

Structured notes

REPO

Forex Forward

Forex Option FRA

I RS

Swap- Currency

Options


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Investment Horizon

Short Term-

Long Term-

Medium Term

Trading


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Why Invest?

I nvest for interest

I nvest for Dividend

Capital Growth in the form of NAV or Price appreciation Capacity to Decide is important

Risks Factors

I nterest rate r isk

price and valuation issues

Credit Risk- defaul t

Volatili ty r isktrading r isk

L iquidity Risk

Trading

Buying and Selli ng to arbitrage market volatil i ty

Rules and circumstances dif fer from market to market and instrument to

instrument I dle assets do not earn!

Trading Policy is needed.

VAR to be decided


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Constraints in Treasury

Valuation norms

Risk Weight Norms

NPA norms

Capital Adequacy norms

Settlement systems

Exposure Norms

Balance Sheet Function

Asset Liability Management- Fixed and Floating-

Balance Sheet limitations Capital Management

Liquidity Management


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WHATISTREASURYMANAGEMENT Treasury Management is the management of cash flows, its banking, money market and capital

market transactions; the eff ective control of the risks associated with those activities; and the

pursui t of optimum performance consistent wi th those risks. INFINANCIALENVIRONMENT, IMPORTANCEOFBANKTREASURY

Banks represent a vital link between economic policies of the government & various economic

factors.

They are the most important financial intermediaries & impact the performance of the economy as

a whole.

They borrow at a lower rate & lend at higher rate. Or they borrow short and lend long.

They accept retail and lend wholesale to take Credit risks

Play on volatility

The difference levels of risk results in spreads/profits.

The main difficulty for banks is to earn profit on spreads but at the same time be liquid enough to

meet the withdrawal demand.

In present competitive world banks cannot restrict themselves to mere lending & borrowing.

For lucrative business banks have to enter Equity & Debt Derivative market to earn more profits

on its portfolio.

Banks have also to look out for various investment avenues which will maximize their returns at

acceptable level of risk and minimize the cost of investment. Due to these reasons TREASURY MANAGEMENTbecomes an important function in Banking.


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FRONT OFFICE

BACK OFFICEMID OFFICE

Dealing

MIS

settlement


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Structure of Treasury

Function Responsible for

Front office Dealing

Mid-Office

Risk management,accounting andmanagement information

Back office Confirmations, settlement

and reconciliation


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Segment wise functions of Treasury

Front Office

Front Office deals in Govt. Securities, Call Money market, Repo transactions, T-Bills,

Short term deposits, CBLO, Forex, etc; Adheres to various exposure limits.

Reviews, frequently, investment strategies

Inflation forecasting and views on interest rates.

Dealing in Derivative instruments like interest rate swaps, futures and currency swaps.

Back Office

Exchange of cheques and instruments

Passing of Vouchers

Accounting

Verification of limit adherence

ALM statement preparation Middle Office

Market Risk management and Asset Liability Management.

Monitoring adherence of investment parameters, viz; duration, value at risk, etc.-

Authorising payments, inter-bank investments, viz; call money, Term deposits, Mutual

Fund instruments,


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Treasury


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Oversight of Treasury Function

Review of Dealing Room Operation

Organization Set up vis--vis RBI Guidelines

I nf rastructure availabil i ty and adequacy Segregation of F ront, M id and Back off ice functions

Compliance with I nternal Control Guidel ines- I nvestmentpolicy

Reconcil iation of Nostro Accounts, SGL, CSGL, DPAccounts

Submission of Per iodical Regulatory Returns

Physical Ver i f ication of Secur i ties.

Adherence to var ious exposure limits Review of NPA investments, disclosure and provisioning

Verif ication of I nterest / dividend income

Valuation of investments


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The approved activities of the Treasury Management operation

[a]Cash Flow (daily balances and longer term forecasting).

[b] Investing surplus funds. [c] Borrowing to finance cash deficits.

[d] Funding of capital payments through borrowing, capital

receipts, grants or leasing.

[e] Management of debt (including temporary borrowing)

[f] Interest rate exposure management.

[g] Dealing procedures with brokers, banks and the PWLB,

and directly with counter parties.

[h] Use of managers for investment of funds.


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Integrated Treasury

Banks adopt a focused approach towards improving efficiency

and profitability by successfully integrating the operations ofdifferent financial markets, viz. Domestic Money, Investments,

Foreign Exchange and Derivatives.

Traditionally the forex dealing room of a bank managed the forex

dealing mainly arising out of merchant transactions by way ofselling from and to customers and consequent cover operations in

inter-bank market.

The Domestic treasury /Investment operations were independent

of forex dealing of a bank.

Treasury operations were treated as cost centre specially devoted

to reserve management (CRR and SLR) and consequent


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Objectives of Monetary Policy

goals of monetary policy is growth and price stability

RBI modifies monetary policy in response to changes in the economic and financial

environment. For e.g. recently RBI adopted policy to fight inflation.

Traditionally monetary management was undertaken mainly through changes

in the CRR & Bank rate, which is used to influence indirectly the marginal cost

of borrowing by having an initial impact on the call money market.

Financial sector reforms since the early 1990s have provided a strong impetus

to the development of financial markets, which, along with interest rate

deregulation, paved the way for introduction of market-based monetary policy

instruments.

Of l t RBI i l i / t d th li idit dj t t


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Of late RBI is also using repo/reverse repo rates under the liquidity adjustment

facility (LAF) from June 2000.

This shift in emphasis from money to interest rates has been spurred by

increased financial liberalization, greater trade openness and capital flows, and

innovations in payment and transactions technologies.

Such a shift was gradual and a logical outcome of measures implemented in the

reform period since the early 1990s (Reddy, 2002).

New money market instruments such as CP, CD and repos has been introduced

in order to broaden the money market

Due to increased sophistication of financial markets, the risk profiles offinancial market participants also changed, necessitating introduction of

derivative instruments as effective risk management tools.

The greater integration of domestic and international markets also calls for

flexible use of monetary policy instruments for modulating domestic liquidity

conditions and correcting any serious misalignments between short-term andlong-term interest rates.


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Money Market

Certificate of Deposit (CD)

Commercial Paper (C.P)

Inter Bank Participation Certificates Inter Bank term Money

Treasury Bills

Call Money


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Certificate of Deposit

CDs are short-term borrowings BY BANKS in

the form of Usance Promissory Notes having a

maturity of not less than 7 days up to a

maximum of one year.

CD is subject to payment of Stamp Duty under

Indian Stamp Act, 1899 (Central Act)


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Features of CD

Issued by all scheduled commercial banksexcept RRBs

Minimum period 7 days

Maximum period upto 1 year

Minimum Amount Rs 1 lac and in multiples ofRs. 1 lac

CDs are transferable by endorsement CRR & SLR are to be maintained

CDs are to be stamped


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Commercial Paper

Commercial Paper (CP) is an unsecuredmoney market instrument issued in the form

of a promissory note by corporates/PDs/FIs

Who can issue Commercial Paper (CP)Highly rated corporate borrowers, primary

dealers (PDs) and all-India financial

institutions (FIs)


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Eligibility for issue of CP

a) The tangible net worth of the company, as

per the latest audited balance sheet, is not

less than Rs. 4 crore;

b) The borrowal account of the company is

classified as a Standard Asset by the

financing bank/s.


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Rating Requirement

All eligible participants should obtain the credit rating forissuance of Commercial Paper

Credit Rating Information Services of India Ltd. (CRISIL)

Investment Information and Credit Rating Agency of India Ltd.

(ICRA) Credit Analysis and Research Ltd. (CARE)

Duff & Phelps Credit Rating India Pvt. Ltd. (DCR India)

The minimum credit rating shall be P-2 of

CRISIL or such equivalent rating by otheragencies


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To whom issued

CP is issued to individuals, banking companies,

other corporate bodies registered or

incorporated in India and unincorporated

bodies, Non-Resident Indians (NRIs) andForeign Institutional Investors (FIIs).


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Maturity

CP can be issued for maturities between a

minimum of 7 days and a maximum upto one

year from the date of issue.

If the maturity date is a holiday, the company

would be liable to make payment on the

immediate preceding working day.


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Meaning of Repo

It is a transaction in which two parties agree to selland repurchase the same security. Under such anagreement the seller sells specified securities with anagreement to repurchase the same at a mutually

decided future date and a price

The Repo/Reverse Repo transaction can only be doneat Mumbai between parties approved by RBI and insecurities as approved by RBI (Treasury Bills,

Central/State Govt securities).


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Repo

Uses of Repo

It helps banks to invest surplus cash

It helps investor achieve money market returns with

sovereign risk.It helps borrower to raise funds at better rates

An SLR surplus and CRR deficit bank can use the

Repo deals as a convenient way of adjusting SLR/CRR

positions simultaneously.RBI uses Repo and Reverse repo as instruments for

liquidity adjustment in the system


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Call Money Market

The call money market is an integral part of the

Indian Money Market, where the day-to-day

surplus funds (mostly of banks) are traded.

The money that is lent for one day in this

market is known as "Call Money",

if it exceeds one day (but less than 15 days) it

is referred to as "Notice Money".


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Call Money Market

Banks borrow in this market for the following

purpose

To fill the gaps or temporary mismatches in

funds

To meet the CRR & SLR mandatory

requirements as stipulated by the Central

bank

To meet sudden demand for funds arising out

of large outflows.


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Factors influencing interest rates

The factors which govern the interest rates aremostly economy related and are commonly referredto as macroeconomic factors. Some of these factorsare:

1) Demand for money

2) Government borrowings

3) Supply of money

4) Inflation rate5) The Reserve Bank of India and the Government

policies determine some of the variables mentionedabove.


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Gilt edged securities

The term government securities encompass allBonds & T-bills issued by the Central

Government, and state governments. Thesesecurities are normally referred to, as "gilt-edged" as repayments of principal as well asinterest are totally secured by sovereign

guarantee.


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Treasury Bills

Treasury bills, commonly referred to as T-Bills

are issued by Government of India against

their short term borrowing requirements with

maturities ranging between 14 to 364 days.

All these are issued at a discount-to-face

value. For example a Treasury bill of Rs.

100.00 face value issued for Rs. 91.50 getsredeemed at the end of it's tenure at Rs.

100.00.


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Who can invest in T-Bill

Banks, Primary Dealers, State Governments,

Provident Funds, Financial Institutions,

Insurance Companies, NBFCs, FIIs (as per

prescribed norms), NRIs & OCBs can invest in

T-Bills.


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What is auction of Securities

Auction is a process of calling of bids with an

objective of arriving at the market price. It is

basically a price discovery mechanism


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Yield of Treasury Bill

Y= (100-P)*365*100

-----------------------

P*D

Y = Yield

P= Price

D =Days to maturity


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Example

91 days treasury bills maturing on 6-12-2008

Purchased on 12-10-2008 Rate quoted isRs.99.1489 per Rs100

(100-99.1489)*365*100= 31065.15----------------------------

(99.1489*55 days) =5453.18

treasury and fund management in banks

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