Cash Management in Banks Project11
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Transcript of Cash Management in Banks Project11
1
OBJECTIVE OF THE PROJECT
To know about Cash Management of Banks
To analyze the Cash Management Process of Bank
To analyze in detail, the way Banks currently manage their finances and make
decisions to achieve trade off between profitability and liquidity
2
SSccooppee ooff tthhee PPrroojjeecctt
Efficient cash management processes are pre-requisites to execute payments, collect
receivables and manage liquidity. This study done, taking consideration of Thane
Janta Sahakari Bank. With reference to experience availed at branch. The study of this
topic will help to get the knowledge about cash management policy of banks as
particularly in co-operative sector. The mounting pressure from competitors forces the
Banks to look for an Information Technology vendor who can offer better solutions
and services in Cash Management and Internet Banking.
Hence the study will lead to analysis of policies and procedure of managing cash
inflow and outflow, also this project focus on RBI norms and rules regarding PCBs
(Primary Co-operative Banks) cash management policies. This will give brief view
about entire structure of liquidity management of banks and solutions offered by
them.
3
Hypothesis-
Thane Janata Sahakari Bank’s cash management policy is in conformity
with rules and regulation of RBI.
4
RESEARCH METHODOLOGY
Problem Formulation
Efficient management of cash (outflows/inflows) to improve liquidity and
returns will be important factors for the banking sector. This project analyzed
cash management of banks on this basis.
Research Design
The research design for this study is basically analytical because it utilizes the
large number of data of the Banks.
Data Type
Primary data takes much time and are also expensive whereas the secondary
data are easy to search and are not expensive too.
Mainly secondary data utilised for this project study. The annual reports of the
TJSB bank and master circulars of RBI were used for getting information.
5
Executive Summary
In a business anything done financially affects cash eventually.
“Cash Is To A Business Is What Blood Is To A Living Body”.
A business cannot operate without its life blood cash, & without cash management
there may remain no cash to operate. Cash movement in a business is two way traffic.
It keeps on moving in & out of business. The inflow & outflow of cash never
coincides. Important aspect which is unique to cash management is time dimension
associated with the movement of cash. Due to non-synchronicity of cash inflow
outflow, the inflow may be more than outflow or outflow may be more than inflow at
a particular point of time. Hence there is a direct need to control its movement
through skilful cash management. The primary aim of cash management is to ensure
that there should be enough cash availability when the needs arise not too much but
never too little.
6
Banking History
Banks are the most significant players in the Indian financial market. They are the
biggest purveyors of credit, and they also attract most of the savings from the
population. Dominated by public sector the banking industry has so far acted as an
efficient partner in the growth and the development of the country. Public sector
banks have long been the supporters of agriculture and other priority sectors. They act
as crucial channels of the government in its efforts to ensure equitable economic
development.
The Indian banking can be broadly categorized into:
1. Nationalized (Government owned)
2. Private Banks and
3. Specialized Banking Institution.
The reserve bank of India acts as a centralized body monitoring any discrepancies and
shortcoming in the system. It is the foremost monitoring body in the Indian financia l
sector. Since the nationalization of banks in 1969, the public sector banks or the
nationalized banks have acquired a place of prominence and has since then seen
tremendous progress. The need to become highly customer focused has forced the
slow-moving public sector banks to adopt a fast track approach. The unleashing of
products and services through the net has galvanized players at all levels of the
banking and financial institutions market grid to look a new at their existing portfolio
offering. Conservative banking practices allowed Indian banks to be insulted partially
from the Asian currency crisis.
7
Indian banks are now quoting at higher valuation when compared to banks in other
Asian countries (viz. Hongkong, Singapore) that have major problems linked to huge
Non Performing Assets & payment defaults.
Co-operative banks are nimble footed in approach and armed with efficient branch
networks focus primarily on the high revenue nicknames of the new Indian market
and is addressing the relevant issues to take on the multifarious challenges of the retail
segment.
The Indian banking finally worked up to the competitive dynamics of the new Indian
market and is addressing the relevant issues to take on the multifarious challenges of
globalization. Private Banks have been fast on the uptake and are reorienting their
strategies using the internet as a medium. The internet has emerged as the new and
challenging frontier of marketing with the conventional physical world tenets being
just as applicable like in any other marketing medium.
The Indian banking has come from a long way from being a sleepy business
institution to a highly proactive & dynamic entity. This transformation has been
largely brought about by the large dose of liberalization and economic reforms that
allowed banks to explore new business opportunities rather than generating revenues
from conventional stream (borrowing and lending).
The banking in India’s highly fragmented with 30 banking units contributing to
almost 50 % deposits and 60% advances. Indian nationalized banks continue to be
major lenders in the economy due to their sheer size and penetrative networks which
assures them high deposits mobilization. The nationalized banks continue to dominate
the Indian banking area. Industry estimates that out of 274 commercial banks
operating in India 223 banks are in the public sector and 51 are in the private sector.
The private sector bank also includes 24 foreign banks.
8
WHAT IS CASH MANAGEMENT OF BANKS?
Cash management is a broad term that refers to the collection, concentration, and
disbursement of cash. It encompasses a bank’s level of liquidity, its management of
cash balance, and its short-term investment strategies. In some ways, managing cash
flow is the most important job in today’s scenario. Efficient cash management
involves proper outflow and inflow of cash to improve liquidity and returns while
implementing adequate controls to manage risks. Cash management is achieving
tradeoff between liquidity and profitability.
9
CASH MANAGEMENT IN BANKS
The Reserve Bank of India (RBI) has placed an emphasis on upgrading technological
infrastructure to manage cash efficiently. Electronic banking, cheque imaging,
enterprise resource planning (ERP), real time gross settlements (RTGS) are just few
of the new initiatives for efficient cash management.
There are a number of regulatory and policy changes that have facilitated an efficient
cash management system (CMS). Fox example, the Enactment of Information
Technology Act gives legal recognition to electronic records and digital signatures.
The establishment of the Clearing Corporation of India in order to establish a safe
institutional structure for the clearing and settlement of trades in foreign exchange
(FX), money and debt markets has indeed helped the development of financial
infrastructure in terms of clearing and settlement. Other innovations that have
supported in streamlining the process are:
Introduction of the Centralized Funds Management Service to facilitate better
management of fund flows.
Structured Financial Messaging Solution, a communication protocol for intra-bank
and interbank messages.
10
EVOLUTION OF SERVICES
One of the emerging cash management services in India is payment outsourcing.
Though cheques and drafts are a popular mode of payment in India, it is obviously a
time consuming procedure because of the manual processing required. This is an area
where payment outsourcing can help. It allows corporate to reduce their overheads
and focus on their core competencies and, as a result, benefit from speed and
accuracy. The enhanced security it offers also allows for tighter fraud control. For the
Indian payment system to become completely seamless there are many variables that
need to be tackled, such as regulatory and legal issues, customer behavior and
infrastructure. As more corporate and banks have added technology to their processes,
the issues surrounding connectivity security have become much important.
Today, treasurers need to ensure that they are equipped to make the best decisions.
For this, it is imperative that the information they require to monitor risk and exposure
is accurate, reliable and fast. A strong cash management solution can give corporate a
business advantage and it is very important in executing the financial strategy of a
company. The requirement of an efficient cash management solution in India is to
execute payments, collect receivables and managing liquidity. Traditional or e-
business objectives, in India there are different cash management solutions.
11
CASH MANAGEMENT SOLUTION CURRENTLY OFFERED IN
INDIA
Account Reconciliation Services
Balancing a chequebook for a very large business can be quite a difficult process.
Banks have developed a system to overcome this issue. They allow companies to
upload a list of all the cheques whereby at the end of the month, the bank statement
will show not only the cleared cheques but also unclear ones.
Positive Pay
An effective anti- fraud measure for cheque disbursements. Using the cheque issuance
data, updated regularly with cheque issuance and payment, the bank balances all
cheques offered for payment. In the case of any discrepancies, the cheque is reported
as an exception and is returned.
Balance Reporting Services
Balance reporting provides help in procuring a company's current banking
information from its accounts. With this service the banks can offer almost all types
of transaction-specific details on activities related to payment like deposits, cheques,
wire transfers etc. It also helps in an effective and efficient management of regular
cash flow.
12
Lockbox
Facilitates the cash improvement where, instead of being delivered to business
address, customer payments are delivered to a special post office (PO) box. It is only
the customers' payments that are delivered in the PO box and the company's own bank
collects the amount and delivers them to the banks of the customers. The bank of the
customers opens and processes the payments for direct deposit to the bank account.
Lockbox contents regularly removed and processed.
CBLO
CCIL (Clearing Corporation of India) launched a new money market instrument with
RBI, the Collateralized Borrowing and Lending Obligation (CBLO).
It is a variant of liquidity adjustment facility, permitted by RBI. It is a mechanism to
borrow and lend funds against securities for maturities of 1 day to 1 year. CBLO is
expected to meet the needs of banks, FIs, PDs, MFs, NBFCs and companies for
deploying their surplus funds. Borrowing limits for members will be fixed by CCIL at
the beginning of the day taking into account the securities deposited by borrowers in
their CSGL account with CCIL.
•It is an obligation by the borrower to return the money borrowed, at a specified
future date.
• It is an authority to the lender to receive money lent, at a specified future date with
an option/privilege to transfer the authority to another person for value received;
• It is an underlying charge on securities held in custody (with CCIL) for the amount
borrowed/lent.
13
RTGS System
The acronym “RTGS” stands for Real Time Gross Settlement. RTGS system is a
funds transfer mechanism where transfer of money takes place from one bank to
another on a “real time” and on “gross” basis. This is the fastest possible money
transfer system through the banking channel. Settlement in “real time” means
payment transaction is not subjected to any waiting period. The transactions are
settled as soon as they are processed. “Gross settlement” means the transaction is
settled on one to one basis without bunching with any other transaction.
Source-CashManagementTrendsInIndia_GT_NVedwa.pdf
14
Brief History of Urban Cooperative Banks in India
The term Urban Co-operative Banks (UCBs), though not formally defined, refers to
primary cooperative banks located in urban and semi-urban areas. These banks, till
1996, were allowed to lend money only for non-agricultural purposes. This distinction
does not hold today. These banks were traditionally centered around communities,
localities work place groups. They essentially lent to small borrowers and businesses.
Today, their scope of operations has widened considerably.
Under State Purview
There was the general realization that urban banks have an important role to play in
economic construction. This was asserted by a host of committees. The Indian Central
Banking Enquiry Committee (1931) felt that urban banks have a duty to help the
small business and middle class people. The Co-operative Planning Committee (1946)
went on record to say that urban banks have been the best agencies for small people in
whom Joint stock banks are not generally interested. The Rural Banking Enquiry
Committee (1950), impressed by the low cost of establishment and operations
recommended the establishment of such banks even in places smaller than Taluka
towns.
15
The first study of Urban Co-operative Banks was taken up by RBI in the year 1958-
59. The Report published in 1961 acknowledged the widespread and financially sound
framework of urban co-operative banks; emphasized the need to establish primary
urban cooperative banks in new centers and suggested that State Governments lend
active support to their development. In 1963, Varde Committee recommended that
such banks should be organized at all Urban Centers with a population of 1 lakh or
more. The committee introduced the concept of minimum capital requirement and the
criteria of population for defining the urban centre where UCBs were incorporated.
Duality of Control
However, concerns regarding the professionalism of urban cooperative banks gave
rise to the view that they should be better regulated. Large cooperative banks with
paid-up share capital and reserves of Rs.1 lakh were brought under the perview of the
Banking Regulation Act 1949 with effect from 1st March, 1966 and within the ambit
of the Reserve Bank’s supervision. This marked the beginning of an era of duality of
control over these banks. Banking related functions (viz. licensing, area of operations,
interest rates etc.) were to be governed by RBI and registration, management, audit
and liquidation, etc. governed by State Governments as per the provisions of
respective State Acts. In 1968, UCBS were extended the benefits of Deposit
Insurance.
16
Towards the late 1960s there was much debate regarding the promotion of the small
scale industries. UCBs came to be seen as important players in this context. The
Madhavdas Committee (1979) evaluated the role played by urban co-operative banks
in greater details and drew a roadmap for their future role recommending support
from RBI and Government in the establishment of such banks in backward areas and
prescribing viability standards.
The Hate Working Group (1981) desired better utilization of banks' surplus funds and
that the percentage of the Cash Reserve Ratio (CRR) & the Statutory Liquidity Ratio
(SLR) of these banks should be brought at par with commercial banks, in a phased
manner. The Madhava Rao Committee (1999) focused on consolidation, control of
sickness, better professional standards in urban co-operative banks and sought to align
the urban banking movement with commercial banks.
Recent Developments
Over the years, primary (urban) cooperative banks have registered a significant
growth in number, size and volume of business handled. As on 31st March, 2003
there were 2,104 UCBs of which 56 were scheduled banks. About 79 percent of these
are located in five states, - Andhra Pradesh, Gujarat, Karnataka, Maharashtra and
Tamil Nadu.
Source- www.rbi.org.in/scripts/fun_urban.aspx
17
Introduction of Thane Janata Sahakari Bank
With the modest beginning in 1972 in the co-operative field, the dynamism infused by
the Board of Directors, unflinching loyalties of clientele and devotion of staff has
propelled the sound foundation of The Thane Janata Sahakari Bank Ltd (TJSB) and
has emerged as one of the leading multi state scheduled co-operative Bank in the
country.
TJSB presently is catering to the needs of society through a close network of 48
Branches and 2 Extension Counters spread all over the city of Thane, Mumbai, Navi
Mumbai, Nasik, Pune & Satara. All these Branches have made remarkable progress
on all fronts in all these years.
TJSB believes that "customer delight" is the ultimate goal and has a strong belief that
Customers & all Stakeholders wholehearted support, absolute faith and their
patronage has largely been responsible for its enviable growth. TJSB is committed to
provide banking with speed, comfort and convenience.
TJSB feels proud to acknowledge the growth of large number of successful
industrialists, traders and professionals who have grown leaps & bound due to timely
assistance and support of the Bank.
TJSB has set before a Visionary Growth Plan focusing all business strategies solely
on creation of Stakeholders value.
18
Technological Initiatives
TJSB, a Techno-savvy Bank has implemented successfully the Core Banking Solution
(CBS). This has helped the Bank to migrate the Branches from being the processing
centers to marketing customer centric outfits. It will also extend the Bank’s reach to
its customers by multiple delivery channels such as ATM, Internet, Mobile etc. This
has brought the Bank on par with the leading Banks. Bank has network of 49 ATM’s
across Thane, Mumbai, Navi Mumbai, Pune & Nashik.
TJSB is the first Bank in Co-operative sector to install Cheque Depository Machines
at 37 branches, which are operational 24 X 7.
TJSB has put in place Real Time Gross Settlement System (RTGS) transactions. With
Core Banking Solution in place the Bank is Providing RTGS facility to all its
customers.
TJSB has initiated process for strategic alliance with other Banks for the usage of
their delivery channels by which nearly 5000 ATMs will be available to Bank’s
customers across the country.
TJSB is first Bank In the country to introduce Automated Cheque Issuance Machine
which enables Customers to take Personalized Cheque Book 24 X 7
19
Bancassurance :
TJSB is having arrangement with Max New York Life Insurance Co. Ltd. for Life
Insurance products and with The Oriental Insurance Co. Ltd. for General
Insurance. TJSB’s bancassurance is recognized as one of the most successful
bancassurance in the country.
Business Expansion Plans :
TJSB has recognized the opportunity for its expansion through the Merger and
Takeover of the other Banks. To step forward it has recently acquired two Pune based
Co-operative Banks namely The Navjeevan Nagrik Sahakari Bank Ltd and The
Sadguru Jungli Maharaj Sahakari Bank Ltd.
Special Mention :
TJSB has been awarded 1st Prize for the Best Co-Operative Bank in Maharashtra
by “Maharashtra State Urban Bank’s Federation Ltd.” for the F.Y.2004-2005.
TJSB has been awarded 1st Prize as “Padmabhushan Vasantdada Patil Utkarsha
Nagri Sahakari Bank” for the F.Y.2003-2004 from Kokan Region for the second time
consecutively.
TJSB was recognized amongst top 5 Co-Operative banks in the country, during
centenary celebration of Co-Operative movement by Kalupur Commercial Co-
Operative Bank Ltd.
20
Cash management of TJSB
Generally cash management in banks done in two ways :
Actual transfer of cash among branches
Proper management of surplus cash
Interbank transfer of cash in TJSB :
Guidelines & system for effective cash management-
i. In TJSB every branch has maximum retention limit i.e. amount of cash every
branch can hold with them, this limit can decided by estimated transaction
takes place in particular branch i.e. as per inflow and outflow of cash in that
branch.
ii. In any branch of TJSB, retention limits decided as per business mix by board
authority, maximum retention limit for any branch should not exceed 1% total
deposits and advances.
21
iii. it is necessary to run the software/programme installed at cash pool regarding
daily cash balance of all branches. After running the said software programme
will show the daily current balance at the time of running the software
programme along with the receipt & payment and cash retention limit of the
respective branch at the time of running the same.
iv. It is necessary to take into account each branch’s cash position & cash limit
while managing the daily cash requirement. Many of the branches are not in
need of cash viz-a-viz they are having surplus cash which they need to deposit
with the cash pool where as some of the branches have to fulfill their cash
requirement daily or on alternate days. The cash pool has to fulfill all the cash
needs as & when necessary.
v. The corporate office has decided the limit of branches which also includes the
ATM cash. Also, likewise cash pool, the branches have also to run the
software/programme in respect of daily cash balance and closely monitor that
whether the cash limit of their respective branch do not exceed. However at
present while running the said programme, the ATM cash is not shown
separately in the said programme. The official have to keep record in the
register maintained at the cash pool by telephonic enquiry with the branches
volume of average daily cash they require for ATM transactions which
enables the cash pool to take into account the daily cash requirement of the
branches. The total daily cash required for the ATM transaction and across the
counter is to be considered while managing cash and the branch heads should
be communicated asked to deposit the excess cash if any, with the cash pool.
22
vi. On 7th & 10th of every month on which generally the salaries of the customer
are being credited at the branches and so also, the huge withdrawals from the
customers takes place on the said dates which results into increase in daily
cash requirement up to Rs 50 lacs to 70 lacs. The cash pool has to provide this
cash requirement to the branches. This cash requirement gets reduced after
15th of every month.
vii. It is the duty & responsibility of the cash pool to bring down the cash
requirement by Rs 1.50 crores to Rs.2 crores than the total prescr ibed cash
limit after 15th to 30th of every month.
viii. On Saturday, many of the branches in thane city function during 9 a.m. to
12.15 afternoon. As such cash pool should provide the cash on Sunday only to
local branches and cash should be provided to the branches such as, Airoli and
Vashi on Friday itself and not on Saturday.
ix. The cash pool should ask telephonically to the branches at western suburbs
about their cash requirement or deposit of excess cash if any and accordingly
cash should be provided or to be carried out for depositing the same with the
cash pool. This will enable the cash pool to manage the carrying of cash on the
same day only.
23
x. Cash pool can easily find out the exact daily cash requirement of the branches
by running the above software. While managing daily cash requirement, the
cash pool should ask telephonically the branches during 7 pm to 7.30 pm
about the exact cash requirement of their respective branches and note the said
into their diaries. To keep the balance between the required / excess cash the
cash pool should inform daily to the accounts department of the corporate
office to enable them to issue the cheque for withdrawal from the state bank of
India. The cash pool should maintain their total cash limit prescribed by
proper co-ordination & communication with the branches.
xi. As per existing practice, the cash pool withdrew the required cash from the
state bank of India as & when necessary. It is the duty & responsibility of the
manager and all the official of the cash pool to maintain relationship with the
official of the state bank of India, their cash department in charge, subordinate
staff etc. this will enable the cash pool to obtain new notes in required
denomination from both the above SBI branches.
It is mandatory for every bank to affix the round seal of the respective branch
on each soiled note while depositing the soiled cash with SBI on and after 10 th
every month the cash pool should collect the soiled cash along with the letter
addressed to bank where the soiled cash is to be deposited as per the norms
prescribed in the clean note policy of the RBI. A copy of the said letter should
be kept at the respective branches for record purpose.
24
The cash pool should ensure that the said cash is deposited with the SBI, TCC
branch by the accounts department of the corporate office and the
acknowledgement of the same & the counter foil number should be sent to the
accounts department on same day and the zerox copy of the same should be
kept on record of the cash pool. As it is mandatory to follow this procedure
during 11th to 20th of every month. The cash pool scrupulously adhere the
same and the soiled cash should not be kept in the custody of the cash pool for
more than two days.
xii. Cash pool officials should submit the letter of intimation one & half month in
advance for denomination wise cash requirement of Rs 25 cores during the
festivals seasons, especially at the time of Ganpati and Diwali to the manager
currency cash ,HDFC bank , kamal mill compound, Parel, Mumbai so also
such denomination wise letter of intimation for Rs 20 crores should be
submitted to the SBI, TTC one month before the festival season start.
The cash pool should ensure that confirmation for collection of the cash the
cash pool in charges of respective banks three days before Ganpati & Diwali
to enable the cash pool official to distribute the same to the branches.
xiii. For example maximum retention limit for Noupada branch of TJSB is 75 lakh
as this is a industrial area where need for cash is maximum due to business
transaction, whereas for thane east branch maximum limit is 30 lakh as there
are less transaction.
25
Rules and Regulation Of Primary Co-Operative Banks In India
The banking regulation act 1949 which had come into force from 1st march 1966, has
vested the Reserve Bank with various statutory powers of control and supervision
over the co-operative banks.
Sec.5 (CCV): in terms of this section a primary co-operative bank means a co-
operative society other than a primary agricultural credit society:
1. Primary object of which is the transaction of banking business
2. The paid-up share capital and reserves of which are not less than one lakh
rupees
3. The bye- laws of which do not permit admission of any other co-operative
society as a member.
26
Legal And Regulatory Regime Regarding Cash Management
Of Co-Operative Banks
Maintains of statutory reserves- cash reserve ratio (CRR) & statutory
Liquidity ratio (SLR)
All primary (urban) co-operative banks (PCBs) are required to maintain stipulated
level of cash reserve ratio and statutory liquidity ratio.
1. CRR reserves for scheduled PCBs-
The scheduled PCBs were required to maintain with the RBI during the
fortnight, a minimum average daily balance of 5% of their demand and time
liabilities (DTL) in India obtaining on the last Friday of the second preceding
fortnight
In order to provide flexibility to banks and enable to choose an optimum
strategy for cash management depending upon their intra period cash flow
scheduled PCBs are presently required to maintain on average daily balance a
minimum of 70 percent of the prescribed CRR balance on their NDTL(Net
Demand and Time Liabilities) as on the last Friday of the second preceding
fortnight.
In order to improve the cash management by banks, as a measure of
simplification a lag of two weeks has been introduced in the maintenance of
stipulated CRR by the scheduled banks. Thus with effect from the fortnight
beginning from 1999 the prescribed CRR during a fortnight has to be
maintained by every bank based on its NDTL as on the last Friday of the
second preceding fortnight i.e. based on the NDTL.
27
For the purpose of maintain CRR every scheduled bank is required to maintain
a principal account with the deposit accounts department (DAD) of the reserve
bank of India.
i) Average daily balance- It shall mean the average of the balances held
at the close of business on each day of a fortnight.
ii) Fortnight- It shall mean the period from Saturday to second following
Friday, both days inclusive.
Generally ASSETS and LIABILITIES of banks include:
Liabilities to the banking system include:
Deposit of the banks
Borrowing from banks (call money/notice deposits)
Other miscellaneous items of liabilities to the banks
Assets with the banking system:
Balances with banking system in current account
Balances with the banks and notified financial institution
Money at call and short notice up to 14 day lent to banks and notified
financial institution
Loans other than money at call and short notice
Any other amounts due from the banking system, like amount held by
the bank with inter-bank remittance facility etc.
28
2. Statutory liquidity reserves-
In terms of provisions of section 24 of the Banking Regulation Act 1949, (As
applicable to co-operative societies), every primary (urban) co-operative bank
is required to maintain liquid assets which at the close of business on any day
should not be less than 25 percent of its demand and time liabilities in India
(in addition to the minimum cash reserve requirement).
Current prescription for SLR: presently the PCBs are required to maintain a
uniform SLR of 25 percent on their total DTL in India.
Manner of maintaining Statutory Liquidity reserves:
The liquid assets may be maintained-
In cash or
In gold valued at a price not exceeding the current market price, or
In unencumbered approved securities
Holding in Government/other approved Securities
29
All primary (urban) co-operative banks are required to achieve certain
minimum level of their SLR holdings in the form of government and other
approved securities as percentage of their Net Demand and Time Liabilities
(NDTL) as indicated below:
Sr.
No.
Category of bank Minimum SLR holding in
government and other
approved securities as
percentage of Demand
and Time Liabilities
1. Scheduled banks
25%
30
GENERAL CONDITION FOR CALCULATION OF CRR AND SLR
REQUIREMENT OF BANKS-
In order to improve the cash management by banks, as a measure of
simplification, a lag of two weeks has been introduced in the maintains of
stipulated CRR by the scheduled banks.
Thus for example fortnight beginning from November 6 2009 the prescribed
CRR during a fortnight has to be maintained by every bank based on its NDTL
as on the last Friday of the second preceding fortnight i.e. based on the NDTL
as on reporting Friday i.e. October 22, 2009 and so on.
CRR doesn’t include interbank deposit- for the purpose of computation of
liabilities the aggregate of the liabilities of a co-operative bank to the state
bank of India, a subsidiary bank, a corresponding new bank, a regional rural
bank, a banking company or any other financial institution notified by the
central government in this behalf shall be reduced by the aggregate of the
liabilities of all such banks and institution to the co-operative bank.
SLR requirement of banks- every PCB is required to maintain on a daily basis
liquid assets the amount of which shall not be less than 25 percent of its
demand and time liabilities in India as on last Friday of the second preceding
fortnight.
31
For SLR purpose- banks are required to maintain SLR on borrowing through
CBLO.
All the PCBs are required to maintain investments in government securities
only in SGL accounts with reserve bank of India, primary dealers, state co-
operative banks.
Computation of net demand & time liabilities (NDTL)
Liabilities of a bank may be in the form of demand or time deposits or
borrowings or other miscellaneous items of liabilities.
Demand liabilities include all liabilities which are payable on demand.
Time liabilities are whose which are payable otherwise than on demand.
Time liabilities include
Fixed deposits
Cash certificates
Cumulative and recurring deposits
Staff security deposits
Time liabilities portion of savings bank
32
Demand liabilities include
Current deposits
Margins held against letter of credit
Outstanding telegraphic and mail transfer
Demand drafts
unclaimed deposits
33
NON-SLR INVESTMENTS -
With a view to allowing UCBs greater flexibility in making Non-SLR investments.
Non-SLR investments would be governed by the following guidelines.
(i) Non-SLR investments will be limited to 10% of a bank's total deposits as on
March 31 of the previous year.
(ii) Investments will be limited to "A" or equivalent rated Commercial Papers (CPs),
debentures and bonds that are redeemable in nature.
(iii) Investments in unlisted securities should not exceed 10% of the total non-SLR
investment at any time. Where banks have already exceeded the said limit, no
incremental investment in such securities will be permitted.
(iv) Investments in units of Mutual Funds, except Debt Mutual Funds and Money
Market Mutual Funds, will not be permitted.
(vi) All fresh investments under Non-SLR category should be classified under Held
for Trading (HFT) / Available for Sale (AFS) categories only and marked to
market as applicable to these categories of investments.
34
(vii) Balances held in deposit accounts with commercial banks and in permitted
scheduled UCBs and investments in Certificate of Deposits issued by
Commercial Banks will be outside the limit of 10% of total deposits prescribed
for Non-SLR investments
(viii) The total amount of funds placed as inter-bank deposits (for all purposes
including clearing, remittance, etc) shall not exceed 10% of the DTL of a UCB
as on March 31 of the previous year.
(ix) Exposure to any single bank should not exceed 2% of the depositing bank's DTL
as on March 31 of the previous year, inclusive of its total non- SLR investments
and deposits Placed with that bank.
(xi) All investments, other than those in CPs (commercial papers) and CDs (certificate
Of deposits), shall be in instruments with an original maturity of at least one year.
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MANAGEMENT OF LOANS AND ADVANCES :
In the context of rapid growth of primary co-operative banks (PCBs),
qualitative aspects of lending, such as adequacy of lending to meet credit
requirements of their borrowers and effective supervision and monitoring of
advances have assumed considerable importance.
Consistent with the policy of liberalisation and financial sector reforms,
several indirect measure to regulate bank credit such as exposure norms for
lending to individual/group borrowers, prudential norms for income
reorganisation, asset classification and provisioning for advances, capital
adequacy ratios,etc. were introduce by RBI.
UCBs are permitted to determine their lending rates taking into account their
cost of funds, transaction cost etc.with the approval of their board
However it may be appreciated that though interest rates have been
deregulated, rates of interest beyond a certain level may be seen usurious and
can neither be sustainable nor be conforming to normal banking practice.
Banks also required publishing the minimum and maximum interest rates
charged on advances and displaying the information in every branch.
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MANAGEMENT OF INVESTMENT OF BANKS:
Keeping in view the various regulatory and the banks own internal requirements,
primary (urban) co-operative banks should lay down with the approval of their board
of directors, the broad investment policy which efficiently manage their cash.
The investment policy of the bank should include guidelines on the quantity and
quality of each type security to be held on its own investment account.
INVESTMENT POLICY OF TJSB:
Objective of policy
To decide investment policy for financial year and to revise it from time to
time.
To decide investment strategies in respect of government securities, PSU
bonds (Public sector bonds), CD, CP, T-bills, MF.
To fix borrowing limits under Call/CBLO, government securities.
37
TJSB can invested in following securities-
Central/state government securities
Treasury bills
Approved security
Call money deposit
CBLO, bonds/NCDs(Non-Convertible Debenture) issue PSU
Debt/money market
Certificate deposit
Deposit with nationalised
Shares of cooperative banks
Repo in government security
Commercial papers
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Delegation of Powers:
The powers for investment decision are proposed to be delegated as under :
Government approved
security/T-bills
PSU
bonds
Non trustee
security
Call
CBLO
Bank
fixed
deposit
CEO 50 crore 40 10 100 50
General
manager
25 15 - 100 25
Deputy
general
manager
- - - 100 10
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Investment Strategies of TJSB-
In the monthly meeting the investment committee shall review the economic
scenario & market condition.
The investment department shall take a view on interest rates as per the
prevailing market & economic condition
The exposure under short/medium/long term government securities may be
taken considering various aspects such as liquidity position in the system
duration of portfolio etc. If the yield curve is flat more risk is involved at the
longer maturity and therefore exposure in the same may be reduced, if the
yield curve is steep the exposure in the longer term may be increased as per
availability of the funds because chances of appreciation in the value are more.
If the interest rates are likely to go down and condition are conducive for
investment, a certain percentage of the excess g-securities over and above the
SLR requirement may be shifted for aggressive trading in the market to grab
the available opportunity of increasing trading income.
Impact of change in interest rate on entire portfolio in the existing condition
shall be analyzed by the investment department on monthly basis.
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The investment department shall analysed average modified duration of the
portfolio on monthly basis.
The average modified duration at any point of time shall not be allowed to
increase above six years.
If the interest rate scenario is conducive for the longer and maturity,
investment committee may take a decision about increasing portfolio duration.
This is an estimated portfolio as on 31st march 2010 considering deposit and advance
target for 09-10.
The estimated portfolio mix of investment as follows-
Particulars 31st Mar 2009 31st Mar 2010
G-securities 66253 75000
Treasury bills 2843 3500
Trustee securities 50 50
Bonds/NCDs 18466 23200
Commercial papers 1375 00
Fixed deposit with banks 17283 27500
Certificate of deposit 893 0
Mutual fund 450 750
Call deposit 0 0
Shares of co-operative
banks
44 44
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Various Measures UCB Can Take For Efficient Cash Management :
The bank shall borrow funds in CBLO as per its requirements within limit and
as per the basis of collateral security pledged by the bank
The bank shall lend money in CBLO depending upon surplus funds in hand
The bank shall borrow money in CBLO depending upon deficit funds in hand.
The bank may borrow in call money market for maintaining liquidity or
fulfilment of CRR requirement.
The bank may lend in call money market for same purpose.
As per RBI borrowing in call money market shall not exceed amount
equivalent to 2% of aggregate deposit as at end of year last financial year.
The PSU bonds may be sold according to the liquidity position opportunity for
improving the yield.
Investment in bonds which are considered for non-SLR investment will be for
higher yields.
The total transaction in case of government securities (sale/purchase both)
In a day can done upto Rs.100 crore. The bank shall sell/purchase government
securities & T-bills should be minimum 25% of NDTL (SLR) as per RBI.
Purchase of government securities will be made according to the availability
of funds prevailing market condition and SLR requirement as per RBI.
Sale of government security will be made according to the liquidity position
and requirement of funds for credit deployment and prevailing market
condition.
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Measures Taken By TJSB For Efficient Cash Management:
TJSB target investment margin for FY 2009-2010 is 8.53%.
For risk management TJSB- total exposure in government securities should
not exceed 45% of the NDTL and the excess portion over and above SLR
requirement i.e. 20% kept for trading purpose.
For SLR requirement it maintains daily register.
Sale of government security will be made according to the liquidity position
and requirement of funds for credit deployment and prevailing market
condition.
In CBLO rates are low but it involves securitization with CCI, it offer
instrument for management of cash.
TJSB use this instrument very efficiently to fulfil its CRR requirement.
TJSB use this instrument for trading purpose also i.e. if they have excess cash
they can lend at higher interest rates
For maintain SLR, TJSB invest in government securities as they offer higher
interest rates with security, compare to invest in gold as well as cash,
Because if SLR maintained in cash it would remain ideal cash result in
generating no margin.
Only 0.15 basis points they aim from trading in market, rest they planned to
invest in secure securities.
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They restricted their investment in unlisted securities up to 10% of total non-
SLR portfolio.
Investment other than in those held against term deposits with
banks/institutions/mutual fund/certificate of deposits and shares of co-op
institutions are classified into “held for trading” (HFT), “available for sale”
(AFS) and “held to maturity” (HTM) categories in accordance with the reserve
bank of India guidelines.
TJSB’s fixed deposits with other banks include deposits which are lodged as
margin to secure overdraft limits/issuance guarantees.
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FINDINGS:
These are some key points which analyzed while studying this project which reflects
some major factors about cash management of TJSB as follows:
TJSB bank manages its daily requirement of CRR as per guidelines of RBI
every day.
Every day it calculate its CRR requirement and try to maintain this
requirement as per norms of RBI , if there is shortfall of cash it borrow
through CBLO and vice versa.
It doesn’t maintain more cash as CRR, it try to avoid cash remain ideal.
TJSB purchase government securities according to the availability of funds,
prevailing market condition and SLR requirement
By using CBLO,TJSB can take arbitrage opportunity as all security on CBLO
are pledged with CCIL
For NON-SLR option TJSB invest mainly in –
Government securities
Inter bank exposure- not more than 5% of deposits of previous FY
PSU bonds
IDBI, IFCI bonds
Commercial Papers
TJSB invest more in government securities as compare to call money market
or CBLO instrument because of risk purpose.
TJSB doesn’t invest much in money market mutual fund instrument as it not
offers higher return as compared to government securities.
45
TJSB manage its cash efficiently and it shows by their investment policy and
by its financial performance as follows-
(Rs.in crores)
Source38th Annual
Report 2008-09
Paid up capital
Reserves Deposits AdvancesInvestment
sWorking
Funds
% increse 50 12.4 15 17 24 16.5
31.03.2009 27 281 2347 1506 1098 2951
31.03.2008 18 250 2039 1285 883 2533
0
1000
2000
3000
4000
5000
6000
Financial Performance
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Recommendations of The Study
After analyzing TJSB bank’s cash management policy, I would like to place
following recommendation -
TJSB bank should try to make more use of current money market instrument
such as CBLO, as risk involve in CBLO is less, Since CBLO is fully
collateralized by government securities, the risk weight as applicable to
government securities for market risk would be applicable to CBLO.
TJSB should go for more techno savvy products for payment and collection
services.
TJSB already introduce core banking solution, it should implement it for all its
branches as soon as possible so it can make use of tech-savvy instruments
such as RTGS
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Conclusion of the Study
TJSB manage its cash efficiently as per rules and regulation of RBI, as it
manages it’s inter branch cash very efficiently among various branches.
TJSB also manage to achieve balance between its liquidity and profitability
through various instrument, maintained its requirement for CRR and SLR
regularly and invest its surplus cash in secure instruments and try to maximise
its profit.
In India RBI frame policies on cash management which helps to banks for
proper management of their cash.
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LIMITATIONS
Every research is conducted under some constraints and this research is not an
exception. Limitations of this study are as follows:-
1. There were several time constraints.
2. Difficulty in getting information due to internal policies and procedure.
3. The study is based on information given by concerned persons.
4. People were reluctant to go in to details because of their busy schedules.
5. Due to continuous change in environment, what is relevant today may be
irrelevant tomorrow.
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Learning-
Understanding of various norms and procedure of RBI for cash
management
Understanding about how one bank manage its liquidity position
Importance of time and investing funds in right instruments.
It helps me to increase my confidence, also thought me how to
communicate with personnel in esteemed organization.
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Websites:
www.banknetindia.com/banking/boverview.htm www.rbi.org.in
http://www.rbi.org.in/SCRIPTS/PublicationsView.aspx?id=7250 www.thanejanata.co.in/24x7_banking.html
http://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=5146
Books
38th Annual Report 2008-09 Co-operative Diary of PCB
Master Circular of RBI on Investment
Paper and Journal: International Research Journal of Finance and Economics
ISSN 1450-2887 Issue 19 (2008)
Article on Cash Management and Payment Developments in India :Bank Offerings and New Corporate Best Practices by Niraj Vedwa
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