Summer project

A

PROJECT REPORT

ON

“TREASURY MANAGEMENT IN THANE BHARAT SAHAKARI BANK LIMITED”

IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR

MASTER OF MANAGEMENT STUDIES (MMS)

FINANCE

2013 – 2015

ROLL NO. PARASHAR-15

SUBMITTED TO

DR V.N.BEDEKAR INSTITUTE OF MANAGEMENT STUDIES,

THANE

STATEMENT BY THE CANDIDATE

I wish to state that the work embodied in this Project titled “TREASURY MANAGEMENT IN THANE BHARAT SAHAKARI BANK” forms my own contribution to Management carried out under the guidance of Mrs. Smita Jape. Wherever references have been made to intellectual properties of any individual / Institution / Government / Private / Public Bodies / Universities, research paper, text books, reference books, research monographs, archives of newspapers, corporate, individuals, business / Government and any other source of intellectual properties viz., speeches, quotations, conference proceedings, extracts from the website, working paper, they have been clearly indicated, duly acknowledged and included in the Bibliography.

_________________________

Signature of Candidate

Roll No. PARASHAR-15

Certified by Mrs. SMITA JAPE

(ASSISTANT PROFESSOR)

Signature of Guide

____________

Certificate of the company

ACKNOWLEDGEMENT

I take this opportunity to express my gratitude to the people who have been instrumental in the successful completion of this project.

I would like to thank Mr.Suhas Sheersagar, HR Head, Thane Bharat Sahakari Bank Limited, Thane, who gave me the opportunity to work in their organization.

I owe my most sincere gratitude to Mr. Prasad Dandekar and Mrs. Priya parulekar , Branch Manager, Thane Bharat Sahakari Bank Limited, Thane, for their valuable guidance, inspiration and also for providing excellent facilities for my work.

I owe my sincere gratitude to our esteem Director Dr.Amit Padmakar Oak, DR V.N. Bedekar Institute of Management Studies for providing me an opportunity to do my project in a well established Bank.

I would like to express my deep and sincere gratitude to my guide Ms.Smita Jape, Assistant Professor, DR V.N. Bedekar Institute of Management Studies, her wide knowledge, logical way of thinking and her personal guidance have provided a good basis for my project.

Last but not the least I would like to thank my parents & my family members. without their encouragement and support it was not possible for me to complete my project.

I express my gratitude & apologize to everybody whose contributions I could not mention in this page.

Date: FAISAL Q. ANSARI

TREASURY MANAGEMENT IN THANE BHARAT SAHAKARI BANK LIMITED

TABLE OF CONTENTSParticulars Page No.Genesis Of The ProjectAbout Co Operative Bank

IntroductionTypesBackground Of The Thane Bharat Sahakari BankNature And Scope Of The ProjectTreasury ManagementIntroductionForex TreasuryObjectives Of The ProjectFunctions Of The Treasury DepartmentSources Of The Fund For TreasuryResearch MethodologyOutcome Of The StudyElement Of Rupee TreasuryElement Of Forex TreasuryAsset Liability ManagementRBI Investment AvenuesLearning Form The ProjectBibliography

EXECUTIVE SUMMARY

• Origin of the project:

In every kinds banks Treasury Management plays an integral role in order to maintain or propagate a performance of the firm, therefore it has become very crucial to know about the significant mechanism of a Treasury Management because it helps to set a cushion for the company against a risk, in short it helps to identify what decision need to be taken for mitigating a risk and also what steps to be taken for using a surplus in a treasury of the banks.

• Need for study :

The need for studying on this project is to learn the importance of Treasury management of the banks. It helps to study mainly two types of treasury Operations they are

• Indian Treasury

• Forex Treasury

This project helps to understand the structure of the Co operative banks as well as its Features, Objectives, Roles and Functions of the Co operative banks. For this purpose I undertake this project at the treasury department of Thane Bharat Sahakari Bank Limited in order to know its treasury management system.

• Overview of the project:

The project describe about how the banks effectively treasury and how it tries to maximize the profitability. It says about how banks maintain its statutory reserves and its short term funds requirement. It mentions about how banks try to minimize its risk by adapting various risk management methods and it also describes about the banks borrowings and investment decision for its effective liquidity management. This project also tells about how a bank has to maintain a Statutory Liquidity Ratio (SLR) for government and Cash Reserve Ratio (CRR) for RBI.

• Major Findings:

Major findings for this project is, what kinds of rules and regulations are set by Reserve Bank of India for banks which is meant for safeguarding an interest of the customers, performing a duty for government and also doing a business in a fair and ethical manner.

• INTRODUCTION TO PROJECT

Co operative banks are organized and managed are organized and managed on the principles of Co operation, self help and mutual help. They work on the principle of “No profit no loss”. Profit maximization is not their goal.

Co-operative banks mainly do business in agricultural and rural sectors. However UCBs, SCBs and CCBs operate in semi-urban, urban, and metropolitan areas also.

The State Co-Operative Banks (SCBs),Central Co-Operative Banks (CCBs) and Urban Co-Operative Banks (UCBS) can extend housing loan to an individual upto Rs 1 lakh.The scheduled UCBs,however can lend upto Rs 3 lakh for housing purposes. The UCBs can provide advances against shares and debentures.

Co-Operative Banks do financing in Indian rural areas as under,

• Farming

• Cattle

• Milk

• 4-Hatchery

• 5-Personal finance

Co-Operative Banks in India finance urban areas under• Self employment • Small scale units • Home finance • consumer finance• Personal finance

B-Types

• Primary Co-operative credit society:

Primary Co-operative credit society is an association of borrowers and non-borrowers residing in a particular locality. The funds of the society are derived from the share capital and deposits of members and loans from central co-operative banks. The borrowing powers of the members as well as of the society are fixed. The loans are given to members for the purchase cattle, fodder, fertilizers, pesticides etc.

• Central co-operative banks:

These are the federation of primary credit societies in district and are of two types those having a membership of primary societies only and those having a membership of societies as well as individual. The funds of the

bank consist of share capital deposits, loans and overdrafts from state co-operative and joint stocks. These banks provide finance to member societies within the limits of borrowing capacities of societies. They also conduct all the business of a joint stock bank.

• State co-operative banks:

The state co-operative bank is a federation of central co-operative bank and acts as watching of the co-operative banking structure in the state. It funds are obtained from share capital, deposits, loans and overdraft from the RBI. The co-operative banks lend money to central co-operative bank and primary societies and not directly to the farmers.

• Urban co-operative bank:

The term Urban co-operative banks (UCBs), though not formally defined refers to primary co-operative banks located in urban and semi urban areas. These banks, till 1966, were allowed to lend money only for non-agriculture purposes. This distinction doesn’t held today. These banks were traditionally centered on communities, localities, work place groups. They essentially lend to small borrowers and businessmen.

Today, their scope of operation has widened considerably.

• COMPANY PROFILE

THANE BHARAT SAHAKARI BANK LTD:

“The Thane Bharat Sahakari Bank Ltd” is a leading bank in thane districts, The bank has grown with the leading industrialization in the city of Thane.

In the early seventies, there were only two banks in Thane city. However for the growing needs of the city, there were not sufficient. It was that point of time, Dr.V.N Bedekar, M Y Gokhale and many of like-minded senior social workers came up with the idea of having a Blank in the city.

The Bank obtained the RBI license on 19 April 1979 and within 10 day, the bank was inaugurated at the hands of noted economist Dr. V.M

Dandekar. The bank had spacious premises in Vishnu Nagar area, initially the bank was named as “Bharat Sahakari Bank Ltd, Thane”.

The first general body meeting of the bank was held on 20th October 1978 and the first Board of Directors was elected as the Chairman and Shri M.Y Gohkale as the Vice Chairman.

During the routine operations of the bank, the bank saw good growth and the decision o computerizing the operations was taken. The bank installed ATMs also. However as the bank was growing. It was observed that there used to be a few confusion in the mind of people because of the similarity in the name of two other banks already operating, one Bharat Co-operative Bank and the other, Bharat Sahakari Bank. It was then decided that this bank be renamed as “The Thane Bharat Sahakari Bank Ltd”. This was done on 29 November 2000.

The bank rewarded by many awards, In 2003-04, the bank celebrated the silver Jubilee Year. The bank is constant participating in many social events and also operating many of them.

On 8th March 2003, The RBI conferred the “Scheduled bank” status to the bank.

STAMP FRANKING ACTIVITY:

Our bank has been authorized by the Chief Controlling Revenue authority of Maharashtra State, Pune for handling collection of stamp duty by vending stamps through franking of special adhesive stamp at the following designated branches.

This facility is available to all general public, any company, instituition, bank or firm for franking of all type of document except following.

• Bill of Exchange

• Letter of Credit

• Brokers Note

• Debenture

• Foreign bill

• Hundi

• Insurance documents

• Promissory Note

• Forward Contract

• Share Transfer Form

LOCKERS FACILITY:

Our of our branches are equipped with lockers facility. We have lockers in various sizes. One can avail a locker as per one’s need.

The locker are available at all branches except Srinagar, Rutu Park, Airoli, Ghodbunder, Lokmanya Nagar and Bhandup Branches.

SMS BANKING:

To enable our customers to take an advantage of technology in banking, we have started SMS banking for having a instant track on account after doing a transaction. It is available at all branches.

Branch Details Service available

Main Branch

“Satatarka”, Baji Prabhu Deshpande Marg,

Vishnu Nagar, Naupada, Thane (West) : 400602

Tel : 25429432 / 25433429 / 25442096

ATM / CDM / SMS / Lockers/Franking

Thane East Branch

“Nav Aashirvad”, Near Daulat Nagar, Harishchandra Raut Marg, Thane (East) : 400603

Tel : 2532 3951 / 2532 2608 / 2532 2374

ATM / CDM / SMS / Lockers

Pokhran Branch

Western India Steel Industries Compound, Opp. Oswal Park, Pokhran Road No. 2, Thane (West) : 400601

Tel :21736262 / 21736263 / 21736261

ATM / SMS / Lockers

Chandanwadi Branch

“Mahesh Darshan”, Near Makhmali Talao, Old Mumbai-Agra Road, Thane (West) : 400602

Tel : 25335237 / 25426078 / 25333702


Chendani Koliwada Branch

Kashiratna Bhavan, Dutta mandir Road, Near Cidco Bus Stop, Thane (West) : 400601

Tel : 25442361 / 25442362 / 25433428ATM / SMS / Lockers

Shreenagar Branch

Shreenagr Commercial Complex, Ground floor, Wagle ATM / SMS

Estate, Thane (West) : 400604

Tel : 25827955 / 25827963 / 25813281

Shivai Nagar Branch

Plot No. 78, Near Shivai Nagar Bus Stop, Shivai Nagar, Pokhran Road No.1, Thane (West) : 400606

Tel : 25854161 / 25889262 / 25854122

ATM / SMS / Lockers

Kalyan Branch

Jeevashri Apartment, Jamanabaug Compund, Shivaji Chowk, Agra Road, Kalyan (West) : 421301

Tel : 2305594 / 65741156 / 8652277758 / 2305922

ATM / SMS / Lockers / Franking

Mulund Branch

Keshav Bhavan, M. G. Road, Near Railway Station, Mulund (West) : 400080

Tel : 25932755 / 25655960 / 25640614


Ghatkopar East Branch

Saffire Arcade, Behind Sonal-Sejal Jewellers, M. G. Road, Rajawadi, Ghatkoapr (East) : 400077

Tel : 21021565 / 21024649 / 21022887


Rutu Park Branch

Parijat Rutu Park, Majiwada, Near Vrindawan Society Bus Stop, Thane (West) : 400601

Tel : 25440860 / 8652277762 / 25442363

ATM / SMS /

Ghatkopar (West)

Hindi High-school, Zunzunwala College Campus, Shree Laxmi Narayan Path, Ghatkopar (West) : 400086

Tel : 25120435 / 25120435

SMS / Lockers

Airoli Exn. Counter

Mazidun Highschool Premises, Ground Floor, Sector 8A, Airoli, Navi Mumbai : 400708

Tel : 6520766 / 27690206

ATM / SMS

Rutu Park Branch

Parijat Rutu Park, Majiwada, Near Vrindawan Society Bus Stop, Thane (West) : 400601

Tel : 25440860 / 8652277762 / 25442363

ATM / SMS /

ATM / SMS

Ghodbunder Branch

Shop No. 1, Shiddeshwar Arcade, Opp. Suraj Water Park, Thane (West) :

Tel : 25972737 / 25972720 / 25972565

ATM / SMS

Lokmanynagar Branch

Ground Floor, Shop No, 1to 4 Pachpakhadi Surbhi Co-operative HSC., Opp. R. J. Thakur

Vidhalay, N.S. Road, Savarkarnagr Thane (West) : 400606

Tel : 25810835 / 25810837

ATM / SMS

Dombivali Branch

Likhite House, Maulana Azad Road, Subhash Nagar, Dombivali (East) : 421201

Tel : 2439973 / 8652277767 / 2439974


Bhandup Branch

G-3, Corpora, LBS Marg, Bhandup (West) : 400078

Tel : 25958301 / 25958310

ATM / CDM / SMS

Dadar Branch

Jeevan Apartment, Baburao Parulekar Marg, - Dadar (West) : 400028

Tel : 24308252 / 24309062


Kalwa Branch

"Amrut Dham Co-Operative Housing Society", Manisha Nagar, Gate No.3, Kalwa (West) ,

Dist. Thane

Tel : 25441388 / 25441386


Panvel Branch

"Shree Basav Nilaya", Plot No. 152, Line Ali, Opp. Swami Hotel. Property no. 1463/1B, Panvel

: 410206

Tel : 27452206 / 27452207


• LITERATURE REVIEW

Context of topic:

In banks, treasury refers to the fund and revenue at the disposal of the bank and day to day management of the same. The treasury unit acts as a custodian of cash and other liquid assets. The art of managing, within acceptable level of risk. The consolidated fund of the bank optimally and profitably is called “Treasury Management”.

OUTLINE

In general terms and from the perspective of commercial banking, treasury refers to the funds and revenue at funds and revenue at possession of the bank and day to day management of the same. Idle funds are usually source of loss, real or opportune, and, thereby need to be managed, invested, and deployed with intend to improve profitability. There is no profit and reward between attendant risks. Thus treasury management seeks to maximize profit and earning by investing available funds at an acceptable level of risks. Risk and return both need to be managed.

Investment transaction are taken as per the approved investment policy of the bank and accordance with the trading policy and manual of instruction with a view of synergizing strengths, a bank usually operates an integrated treasury department under which both domestic and Forex treasuries are brought under a unified command structure. The following distinction is important to note. The task of domestic treasury operation is predominantly to make their investment in their own account, while the task of Forex treasury is to predominantly conduct a operation on behalf of client.

B.FOREX TREASURY

The Forex department of the bank does following:

• Administer and monitors marchant and client transactions emanating from branches.

• Undertakes cover operation for marchant transactions, under in interbank foreign market,

• Manages foreign currency funds like Foreign Currency Non Resident (FCNR) accounts. While bulk of treasury operations are on behalf of the banks own account.

• One important safeguard that banks are required to take is to make clear separations between their transactions on their own account and those on behalf of their clients.

• RESEARCH METHODOLOGY

NATURE AND SCOPE OF THE STUDY

Treasury management or short term management represent a wide range of financial management. Treasury is an essential element and at the same time, the main restriction of financial management of the company. Treasury relates the decision related to financial stability, as well as the positive and negative results of the enterprise’s activity, that is, reserves in the bank and /or petty cash. Weaknesses arising in Treasury management are as the statistics shows one of the leading causes of bankruptcy.

Short term management involves finding solution for balancing the cash flows, determining cash deficit or surpluses, their coverage and placement and insurance against risks arising at treasury level.

Treasury management establishes and monitors the needs of the financial funds for operational tasks, based on the budget of revenues and expenses, determines the short term loans that will be used, amount and costs.

For small and medium size enterprises the most important financial issues are related to the operating cycle management needs and their way of financing. For large enterprises the area of financial problem is more extensive, they develop a financial policy regarding the use of many resources of funding that be applied in subsequent years, financial structure, debt policy, the forecast profitability of projects funded etc.

Treasury management intends to use some means to optimize receipts and payment and to maintain a financial balance of the company, meaning anticipation of balance between receipts and payment, between the needs of resource exploitation and the resource plus borrowed- balance which takes into account both flow rate and periodicity or rate is to be held. Short management has two main requirements.

1.to minimize a cost of capital, if treasury is negative and it should resort to credits, and maximize the capital profitability, if treasury is positive and short term investments should be carried out.

2. Obtaining a maximize flexibility to achieve a financial balance (obtaining the needed funds and usage or placement of the surplus

Objectives of project:

In the activity, the company generates actual flows, cash flows and the treasury of the latter provides the link between inputs and outputs, representing the available results from receipts and payments.

3. Forecastimg and provided various input flows into the treasury and output flows of the treasury.

In the treasury cash inflows and outflows must be forecasted to determine the degree to which treasury may deal with the unexpected situations and to synchronize the cash flow,this meaning the cash receipts and coincide with cash outflows thus maintaining a treasury is at minimum level.

4. Ensuring a company’s liquidity.

The company needs cash for its transaction, overdue daily purchases, thus providing represents one of the most important task of the treasury. Liquidity is a company’s ability to meet an obligations and revenue operating expenses.

• Investing excess cash after analyzing the different types of investments.

If the input flow is the lower than the output flow, the treasury operates with placement during the surpluses. Regarding short term investments the following areas should be considered: high efficiency, good liquidity and low risk as such placement which cumulatively meet the three conditions which don’t exist; the company will have to accept the some compromise, following especially one aspect or another.

• Assessment and evaluation of different short term financing sources for covering the cash deficit.

An optimal debt regarding treasury seeks a low credit line and an increase a flexibility of use of that lending opportunities. It is necessary to consider the interest level, number and amount of various bank commissions (for

commitments, for non use)The sources of procurement of capital essential for short term financing are: equity capital, attracted capital and borrowed capital.

Data collection methods:

The Research Methodology use for the project is Exploratory Research. Exploratory research is a type of research conducted for problems that has not been clearly defined. Exploratory research helps determine the best research design, data collection method and selection of subjects .It should draw definite research only with extreme caution. Given its fundamental nature, exploratory research often concludes that perceived problem that doesn’t actually exist.

Exploratory research often relies on secondary research such as reviewing available literature and/or data, or qualitative approaches such as informal discussion with employees, management, or competitors, and more formal approaches through in depth interviews, focus groups, projective methods,acse

studies or pilot studies. The internet allows for research method that are more interactive in nature.

Exploratory research is not typically generalizable to the population at large.

• Banks investment policies.

• RBI master plan.

• Treasury investment policy.

• Readymade projects on Treasury.

DATA ANALYSIS AND INTERPRETATION

objectives of the treasury department;

• Meeting CRR/SLR obligations:

Having an appropriate mix of investment portfolio to optimize yield and duration.

• Liquidity and funds management:

• Analysis of major cash flows arising out of asset and liability transactions.

• Providing a balanced and well diversified liability base to fund to fund the various assets in the balance sheet.

• Asset Liability Management and Term money:

• ALM calls for determining the optimal size and growth rate of the balance sheet and also prices the Assets and Liabilities in accordance with prescribed guidelines.

Successive reduction in CRR rates and ALM practices banks increases the demand for funds for the tenure of above 15 days (Term money)to match duration of their assets.

• Risk management:

Market risks associated with a bank’s liabilities and assets. Liabilities pertain to floating interest rate risks which are as follows,

• Unfavorable change in interest rate

• Increasing levels of disintermediation.

• Securitization of assets.

• Emergence of credit derivatives etc.

• Transfer pricing

Treasury is to ensure that the funds of the bank are deployed optimally, without sacrificing the yield and liquidity. An integrated Treasury

Unit has an idea of the overall funding needs as well as direct access to various market(like money market, capital market, Forex market, Credit market)Hence ideally Treasury

Should provide a bench mark rates, after assuming market risk to various business groups and product categories about the correct business strategy to adopt.

• Capital Adequacy:

This function focuses on the quality of assets, with the Return on Assets(ROA) being the key criterion for measuring the efficiency of deployed funds.

6 -OBJECTIVE OF THE REPORTS

a- To study the functions of Treasury department

Treasury

Front

Office

Mid

Office

Back

Office

Risk

Management

Debt Market

Money

Market

Equities

Funding

Funding

Merchant Desk

Settlement

Trading Desk

Forex

Derivatives

1. Front Office:

• Study market trends.

• Buying securities for investment purpose.

• Recommendation on trading.

• Executing deals for portfolio management.

• Borrow/Lend money in intrbank money market.

• To borrow/lend in CBLO market.

• Placement of deposite with bank.

• Maintenance of the front office records.

• Keep liaison with counter party broker of back office.

• Approval of deal.

• Fund and CRR management.

2. Mid Office:

• Evaluation of risk.

• Valuation of portfolio

• Systematic risk appraisal.

• Report relating to the risk management.

• Recommending counter party limits to the broker.

• Research to assist risk management cell.

• Monitoring of adhere to various limit.

• Monitoring of stock.

• Valuation of Forex position

3- Back Office:

• Confirmation of deal made by front office.

• Settlement of deals with stipulated time.

• Update the information.

• Follow up of deposit, cash flow by way of interest.

• Follow up of securities in the portfolio.

• Reporting of market derivatives in the comparison of general deal.

• Timely submission of report.

• Reporting to the RBI current account.

• Reconciliation of securities.

• Confirmation of transaction of CCIL (Clearing Corporation of India)

• Furnish data to the account department.\

• Follow up.

• Scrutiny of transaction.

• Scrutiny of application.

• Recovery of charges, transaction, fees etc.

• Settlement of bills.

• Maintenance of records.

Sources of funds for treasury

The main sources of funds for TBSBL treasury department are as follows.

• Saving Account

• Current Account

• Fixed Deposit

• Recurring Account

Percentage of these sources are as follows

100%

34% from

CASA

66% from FD

That makes the 100 Rs.For Treasury department

CASA is the cheapest source for the banks to generate cash

And further classification of 100 Rs. Is as followes

Following percentages are approximate

Classification of Rs.100 .as per the compulsory restriction put by RBI.

100 Rs.

CRR 4.00%

SLR 22.5%

27% approx

Cash Reserves 3% approx

30.5% approx

Advances 69.25% approx

OUTCOME THE OF STUDY

• ELEMENTS OF RUPEE TREASURY

• CASH RESERVE RAIO AND STATUTORY LIQUIDITY RATIO

CRR,or cash reserve ratio, refers to the portion of deposits that banks have to maintain with RBI,This serves two purpose. First, it ensures that a portion of

bank deposits is totally risk-free. Second, it enables RBI control liquidity in the system and thereby, Inflation. Besides CRR, banks are required to invest portion (24 per cent) of their deposits in government securities as a part of their statutory liquidity ratio (SLR) requirements. Although the bonds are long-term in nature, they are liquid as they have a ready secondary market.

What impact does a cut in CRR have on interest rates?

From time to time, RBI prescribe a CRR , or the minimum amount of cash that banks have to maintain with it. The CRR is a fixed percentage of Net Demand and Time Liabilities (NDTL). Banks are now required to maintain 4% of their NDTL with RBI. Considering percentage deposit participant banks when RBI cut CRR by 1% this release 64,000 into the system.

Deposits = 64, 00,000 CR

1% CRR cut = 64,000 CR

1 BPS = 6400

CALCULATION OF CRR

Let’s assume the date of today is 29th July, 2014 which is Saturday and yesterday was Friday. Therefore to maintain CRR for the current fortnight we required the NDTL position as on the last Friday of the second preceding fortnight i.e. 1st July 2014.The DTL as on 1st June was Rs. 17000.The NDTL, after deducting liabilities to the banking system in India form DTL, is Rs 10000.Therefore bank is required to maintain CRR on NDTL of Rs.10000 as on 1st July for the fortnight starting from 30th July 2014.

Day

Date Balance needed to be maintained

(Rs)

Closing Balance

(Rs)

Cumulative Closing Balance (Rs)

1 30th July 2014 400 400 4002 1st Aug 2014 400 700 11003 2nd Aug 2014 400 300 14004 3rd Aug 2014 400 800 22005 4th Aug 2014 400 200 24006 5th Aug 2014 400 332 27327 6th Aug 2014 400 420 31528 7th Aug 2014 400 410 3562

9 8th Aug 2014 400 430 399210 9th Aug 2014 400 200 419211 10th Aug 2014 400 600 479212 11th Aug 2014 400 700 549213 12th Aug 2014 400 500 599214 13th Aug 2014 400 800 6792

The CRR is required to be maintained at the rate of 4.00% of the NDTL

Position of the bank during this period of fortnight. Therefore the CRR @4% of Rs 10000 is Rs.400 which a bank requires to maintain on a daily basis for the 14 days from 30th July 2014 to 13th Aug2014.The bank can also maintain an average daily closing balance at the rate of 95% of the CRR requirement.

In this example CRR is Rs. 400 the bank can maintain the balance up to Rs. 380 which is 95% of 400 but the bank has to maintain remaining 5% of the CRR in the remaining days of fortnight.

The bank requires to maintain CRR in products of 14 days i.e. 400*14=Rs.5600.

The cumulative CRR balance is Rs. 6792 which is greater than Rs.5600

Therefore the average CRR is Rs.485 (6792/14)

CALCULATION OF SLR

The SLR maintain at 22.5% of DTL position of the bank as on the last Friday of the second preceding fortnight. E.g. On 1st July 2014 is Rs. 10000.Therefore the SLR at the rate of 22.5% on Rs.10000 is Rs.2250, which the bank requires to maintain on daily basis. There is no flexibility in maintaining SLR unlikely in a case of CRR.

Does a change in SLR impact interest rates?

SLR reduction is not so relevant in the present context for two reasons. One as a part of the reforms prices, the government has begun borrowing at market-related rates. Therefore, banks get better interest rates compared with the earlier days for their statutory investment in government securities.

Second, banks are still the source of funds for the government. This means despite a lower SLR requirement, banks’ investment in the government securities will go up as government borrowing rises. As a result, bank investment in gilts continues to the higher than 30 percent deposit of RBI bringing down the minimum SLR to 24 percent couple of years ago.

Therefore, for the purpose of determining the interest rates, it is not the SLR requirement the is important but the size of the government-borrowing program. As government borrowing increases, interest rates, too look up. Besides, gilts also provide another tool for RBI conducts open market operations by offering to buy or sell gilts. If it feels interest rates are to high, it may bring term down by offering to buy securities at a lower yield than what is available in the market.

The securities are classified in two categories they are

• SLR

• NON SLR

Showed in following chart,

SECURITIES

SLR

NON-SLR

o-Government securities o-Approved Trusts Securities o-Cash o-Gold

o-Call/Notice/Term money o-PSU Bonds o-Commercial paper o-Certificate of deposit

• Dated government Securities

• The Government securities comprise dated securities issued by issued by government of India and state governments.The date of maturity is specified in the securities therefore it is known as dated government securities

• The government borrows funds through the issue of long term-dated securities, the lowest risk categories instruments in the economy.

• These securities are issued through the auctions conducted by RBI. Where the central bank decides the coupon or discount rate based on the response received.

• Most of these securities are issued as fixed interest bearing securities, through the government sometimes issues zero coupon instrument and floating rate securities also.

• In one of its first moves to deregulate the interest rates in the economy, RBI adopted a market driven auction method in FY 1991-92

• Since then, the interest in government securities has one up tremendously and trading in these securities has been quite active they are in form of entries in RBI’s Subsidiary General Ledger(SGL).

• The investors in government securities are mainly banks, FII, insurance companies, provident funds and trusts.

• These investors are required to hold a certain part of their investments or liabilities in government paper.

• Foreign institutional investors can also invest in these securities up to 100% of funds-in case of dedicated debt funds and 49% in case of equity funds.

MONEY MARKET INSTRUMENTS:

The bank mortgages into a number of instruments that are available in the Indian money market or the purpose of enhancing liquidity as well as profitability. Some of these instruments are as follows:

• Call Money Market:

Call/Notice money is an amount borrowed or lent on demand for a very short period. If the period is more than one day and up to 14 days, it is called “Notice money” otherwise the amount known as “Call money”. Intervening holidays and/or Sundays are excluded for this purpose. No collateral security is required to cover these transactions.

Features:

• The call money enables the banks and institutions to even out their day to day deficits and surpluses of money.

• Commercial banks, Co-operative banks and primary dealers are allowed to borrow and lend in this market for adjusting their cash reserve requirement.

• It is a completely inter-bank market hence non-bank entities are allowed access to this market.

• Interest rates in the call money markets are determined.

• It serves as an outlet for deploying funds on short term basis to the lenders having steady inflow of funds.

Banks are mainly connected with major tradable instruments which are as follows

• Treasury bill

• Certificate of deposits

• Commercial paper

• Commercial bill

• Interbank term money

• Ready forward contr

• Treasury bills

The lowest risk category instruments are Treasury bills.RBI issues these at a prefixed day and a fixed amount. Treasury bills are available for a minimum amount of Rs. 25,000 and in multiples of Rs.25, 000.

There are three types of Treasury bills, they are as follows.

• 91-day T-bill: Maturity is in 91 days, Its auction is on every week. The notified amount for this auction is Rs. 500cr

• 182-day T-bill: Maturity is in 182 days. Its auction is on every alternate Wednesday (Which is not a reporting week). The notified amount for this auction is Rs.500 cr.

• 364-day T-bill: Maturity is in 364 days. Its auction is on every alternate Wednesday (Which is a reporting week). The notified amount of for this auction is Rs.1000 cr.

Features of Treasury bill:

• A considerable part of the government’s borrowing happen through T-bills of various maturities.

• The usual investors in this instrument are banks who invest not only to part of their short-term surpluses but also since it forms part of their SLR investments.

• FIs, FIIs so far have not been allowed to invest in this instrument.

• These T-bills which are issued at a discount can be traded in the market.

• The transactions cost on T-bill are non-existent and trading is considerably high in each bill, immediately after its issue and after its redemption.

• The yield on T-bills is dependent on the rates prevalent on other investment avenues open for investors.

• Low yield on T-bills, generally a result of high liquidity in banking system as indicated by low call rates.

• Certificate of deposit:

After treasury bills, the next lowest risk category instrument option is the certificate of deposit (CD) issued y banks and FIIs.

Features:

• Allowed in 1989, where one of RBI’s measures to deregulate the cost of funds for banks and FIIs.

• A CD is negotiable promissory note, secure and short term (up to a year) in nature.

• It is issued at a discount to the face value, the discount rate being negotiated between the issuer and the investor.

• Allows CDs up to a year maturity, the maturity most quoted in the market is for 90 days.

• CDs are issued by banks and FIIs mainly to augment funds by attracting deposits from corporate, HNI , trust etc.

• The foreign and private banks, especially, which do not have large branch networks and hence lower deposit have use this instrument to raise funds.

• Commercial paper

Commercial paper (CP) is an unsecured money market instrument issued in the form of a promissory note. Highly rated corporate borrowers, primary dealers (PDs) and satellite dealers (SDs) and all-India financial institutions (FIs) which has been permitted to raise resources through money market instruments under the umbrella limit fixed by Reserve Bank of India are eligible to issue CP.

A company shall be eligible to issue CP:

• The tangible net worth of the company, as per the latest audited balance sheet, is not let than Rs. 4crore

• The working capital (fund-based)limit of the company from the banking system is not less than Rs.4crore and

• The borrower account of the company is classified as a Standard Asset by the financing bank/s.

Features:

• All eligible participant should obtain the credit rating for issuance of commercial paper, from either the Credit Rating Information Services of India Ltd (CRISIL) or the Investment Information and Credit-Rating Agency (ICRA) or The Credit Analysis and Research Ltd. (CARE) or the Duff and Phelps Credit Rating India Pvt. Ltd. (DCR India) or such other credit rating agency as may be specified by the Reserve Bank of India from time to time for the purpose.

• The minimum credit rating shall be p-2

• CP can issue for a maturity between a minimum of 15 days and a maximum up to a year from the date of issue. If the date of maturity is a holiday, the company would liable to pay on the immediate preceding working day.

• CP can be issued in denomination of Rs.5 lakhs or multiples thereof.

• CP may be issued to and held by an individual, banking companies, other corporate bodies registered or incorporated in India and incorporated bodies.

• Foreign Institutional Investors (FIIs), However investment by FIIs would be within a 30 percent limit set for their investments in debt investments.

• CP can be issued only in a dematerialized form through any of the depositories approved by and registered with SEBI.

• On maturity of CP, the holder of the CP will have to get it redeemed through the depository and receive payment from the IPA.

• Commercial Bill:

• Bills of exchange, these are negotiable instruments drawn by the seller (Drawer) of the goods on the buyer (Drawee) of the goods for the value of goods delivered.

• These bills are called trade bills.

• Trade bills are called commercial bills when they are accepted by commercial banks.

• If the bill is payable at a future date and the seller needs money during the currency of the bill then approach his bank for discounting the bill.

• If the bank needs fund during the currency of the bill then it can rediscount the bill already discounted by it in the commercial bill rediscount market at the market related discount rate.

• Interbank Term Money

Interbank market for deposits of maturity beyond 14 days and up to three months is referred to as the term money market. The specified entities are not allowed to lend beyond 14 days.

The development of the term money market is inevitable due to the following reasons.

• Declining spread in lending operations.

• Volatility in the call money market.

• Growing desire for fixed interest rates borrowing by corporate.

• Move towards fuller integration between Forex and money market.

• Stringent guidelines by regulators/management of the institutions.

• Ready Forward Contracts:

It is a transaction in which two parties agree to sell and repurchase the same security. Under such an agreement the seller sells specified securities with an agreement to repurchase the same at a mutually decided future date and a price.

The buyer purchases the securities with an agreement to resell the same to the seller on an agreed date in future at a predetermined price. Such a transaction is called Repo when viewed from the perspective of seller of securities (the party acquiring fund) and Reverse repo when describe from the point of view of the supplier of funds.

Features:

• The lender or buyer in Repo is entitled to receive compensation for use of funds provided to the counter party.

• The Repo rate is negotiated by the counter party independently of the coupon rate of the underlying securities.

• Purchase and sale price should be in alignment with the on-going market rates.

• Immediately on sale, the corresponding amount should e reduced from the investment account of the seller.

• The securities under repo should be marked to market on the balance sheet date.

• In addition to Treasury bills, all central and state government securities are eligible for repo.

• It helps banks to invest surplus cash.

CBLOs

CBLOs were developed by the Clearing Corporation of India (CCIL) and Reserve Bank of India (RBI). The details of the CBLO include an obligation for the borrower to repay the debt at a specified future date and an expectation

of the lender to receive the money on that future date, and they have a charge on the security that is held by the CCIL.

A money market instrument that represents an obligation between a borrower and a lender as to the terms and conditions of the loan. Collateralized borrowing and lending obligations (CBLOs) are used by those who have been phased out of or heavily restricted in the interbank call money market.

Banks also expand their activities by three important network or medium which are as follows.

• SWIFT

• Nostro account

1.SWIFT

The Society for Worldwide Interbank Financial Telecommunication (SWIFT) provides a network that enables financial instituitions worldwide to send and receive about financial transactions in a secure, standardised and relaible environment.SWIFT also markets software and services to financial instituitions.

The majority of international interbank massages use the SWIFT network. As of September 2010, SWIFT linked more than 9000 financial instituitions in 209 countries and territories, who were exchnging an average of over 15 million massages per day.

SWIFT does not facilitate funds transfer , rather, it sends payment orders, which must be settle by correspodent accounts that the instituition have with each other.Each financial instituitions , to exchange banking transactions, must have a banking relationship by either being a bank affiliating itself with one or more so to enjoy those particular business features.

2.NOSTRO ACCOUNT

A bank account held in a foreign countryby a domestic bank, denominated in the currency of that country. Nostro accounts are used to facilitate settlement of foreign exchange and trade transactions. The term is derived from the Latin word for "ours".Conversely, accounts that are held by the domestic bank in its home country for foreign banks are called vostro accounts.

It helps to recall that the term account refers to a record of transactions, whether current, past or future and whether in money, or shares or other countable commodities.Originally a bank account just meant the record kept by bankers of the money they were holding on behalf of the customers, and how that changed as the customers made deposits and withdrawals.

A bank counts a Nostro account with a credit balance as a cash assets its balance sheet. Nostro accounts are mostly commonly used for currency settlement, where a bank or other financial instituition needs to hold balances in a currency to home accounting unit.

ASSET LIABILITY MANAGEMENT (ALM)

It is dynamic process of planning, organizing and controlling of assets and liabilities their volumes, mixes, maturities, yield and costs in order to maintain liquidity and NII.

Significance of ALM

• Volatility

• Product innovation and complexities

• Regulatory environment

• Management recognition

Purpose and objective of ALM

An effective Asset liability Management technique aims manage the volume, mix, maturity, rate sensitivity, quality and liquidity of assets and liabiities as a whole so as to attain a predetermined acceptable risk/reward ration.

It is aimed to stabilse short-term profits, long-term earnings and long-term substance of the bank.The parameters for stabilising ALM systems are:

Net Interest Income (NII)

Net Interest Margin (NIM)

Economic Equity Ratio (EER)

Risk in ALM

1. Funding risk

Need to replace net outflows due to unanticipated withdrawals/ nonrenewal.

2. Time risk

Need to compensate for non-receipt of expected inflows of funds.

3.Call risk

Crystallization of contingent liability.

4. Interest rate risk

Interest rate risk is a risk to the earnings or market value of portfolio due to uncertain future interest rates.

5.Currency risk

A form of risk that arises from the change in price of one currency.

Maturity buckets

Risk management term for a series of time periods within which principal payments are made. Thus maturity buckets might be set for one month, two, three, and six months, and one year, two, three, four, five years, and longer. These buckets are then used to report any mismatch between assets and liabilities (cf. assets repriced before liabilities; gap analysis). An extended approach which includes both interest and principal is generally known as cash buckets.

For mitigating these risks RBI has given the eight types of maturity buckets they are as follows,

• 1 to 14 days

• 15 to 28 days

• 29 days and up to 3 months

• Over 3 months and up to 6 months

• Over 6 months and up to 1 year

• Over 1 year and up to 3 years

• Over three years and up to 5 years

• Over 5 years

Particulars

1-14 days

15-28 days

30 days to 3mnts

3 mnts6 mnts

6 mnt1 yrs

1years3years

3 yrs-5 yrs

Over 5 Yrs

Total

Capital 200 200Liab-fixed int 300 200 200 600 600 300 200 200 260

0

Others 50 50 0 200 300

Total outflow 700 650 550 1050 1100 750 650 1050 650

0

Investments 200 150 250 250 300 100 350 900 2500

Loans-fixed int 50 50 0 100 150 50 100 100 600

Loans floating 200 150 200 150 150 150 50 50 110

0Loans BPLR linked 100 150 200 500 350 500 100 100 200

0

Others 50 50 0 0 0 0 0 200 300

Total inflow 600 550 650 1000 950 800 600 1350 650

0

Gap -100 -100 100 -50 -150 50 -50 300 0

Cumulative Gap -100 -200 -100 -150 -300 -250 -

300 0 0

Gap % to total

-14.29 -15.38 18.18 -

4.76

-13.6

46.67

-7.6

928.57

• In above chart column headings show eight maturity buckets given by the RBI. Rows headings show the total inflow and outflow of the funds for the bank. It means what are the various sources of funds for the bank and where these funds deployed by the bank.

• As per the above chart in the first second buckets there is a short fall of the 100 units, so bank must fill that gap by raising money either through loan or in terms of an investment from customers.

• In third and sixth bucket there is exess money with bank. So bank can lend more money to its customers or invest in some other assets.

• From the above chart we can see that trend that there is a short fall of money in fourth and fifth bucket.

• In the last bucket of the maturity the bank having excess money of Rs-350 so they can invest that money in some securities which can give them more profits.

• At last we can see that the total inflow and outflow is matching i.e. the purpose of ALM proves of matching the assets and liabilities.

RBI INVESTMENT GUIDLINES

For investment in market related securities RBI given the three important guidlines. It is compulsory for the banks to follow these guidlines which are as followes,

• Held to Maturity (HTM)

Securities acquired by the bank with an intention to hold them up to maturity will be classified uner HTM category.

The investment included under HTM category should not exeed 25 per cent of their total investment. However, banks are permitted to exceed the limit of 25 per cent of their total investment under HTM category provided.

• The exess comprises only of SLR securities.

• The total SLR securities held in the HTM category is not more than 22.5 per cent of their Net Demand and Time liability (NDTL) as on the last Friday of the second preceding forthnight.

HTM securities are not subject to mark to market but they need to amortised over life of that security. If security is purchased at a premium price over Rs-100. If security of 10 years maturity from now is purchased at Rs-102. So we will receive only Rs-100 on maturity. Thus Rs-2 will be amortised over 10 years and then effectively Rs-0.2 will be reduced from the book value and charged to profit and loss account.

2. Held for Trading (HFT)

Securities acquired by the banks with the intention to trade by taking an advantage. The short-term price/interest rate movements will be classified under HFT category.

If banks are not able to sell the security within 90 days due to exceptional circumstances such as tight liquidity condition, or extreme volatility or market becoming undierectional, the security should be shifted the AFS category.

3.Available For Sale (AFS)

A debt or equity security that purchased with the intent of selling before it reaches to maturity, or selling prior to a lenghty time in an event the security does not have a maturity.If any security is not effective under the HFT and HTM then that security is sold under the AFS.

LEARNING FROM THE PROJECT

Its a great learning about a Treasury Management specially the risk exposure levels of the banks and how it is controlled under Treasury Management, it plays a pivotal role for every bank.But to have a proper Treasury Management process in a place, a thorough understanding of the various operations on its assets liabilities become essential. Such an understanding will enable the banks to identify and unbundled the risks and further aid in adopting and developing an appropriate risk management models to manage risks. Further with an advancement in technology, it has banks to effectively

manage its treasury and enhance its profitability with limiting its ris

Summer project

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Transcript of Summer project