EXECUTIVE SUMMARY

The project is about Treasury management operations in banks. Treasury management is

the management of an organization’s liquidity to ensure that the right amount of cash

resources are available in the right place in the right currency and at the right time in such

a way as to maximize the return on surplus funds, minimize the financing cost of the

business, and control interest rate risk and currency exposure to an acceptable level.

This project covers functions of treasury management operations in banks, organizational

structure of treasury, objectives and functions of treasurer which plays an important role

in banks.

The project also involves the elements in treasury management like cash reserve ratio,

statutory liquidity ratio, dates government securities, etc. which should be properly

functioned by treasurer.

The project includes nature of treasury assets and liabilities and treasury products &

services which plays an important role in very banks.

The project deals with risk involved in these treasury assets and liabilities and their

mitigation. Risks are of two types’ operational risk & financial risk. The project also

includes risk management guidelines which are laid down by RBI.

The project covers the future scope / challenges in treasury management, role of

information technology in treasury management and a study on SBI’s treasury.

INTRODUCTION

In general terms and from the perspective of commercial banking, treasury refers to the

fund and revenue at the 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 intent to improve profitability. There is no profit or reward

without attendant risk. Thus treasury operations seek to maximize profit and earning by

investing available funds at an acceptable level of risks. Returns and risks both need to be

managed. If we examine the balance sheets of Commercial Banks (Public Sector Banks,

typically), we find investment/deposit ratio has by far overtaken credit/deposit ratio.

Interest income from investments has overtaken interest income from loans/advances.

The special feature of such bloated portfolio is that more than 85% of it is invested in

government securities.

The reasons for such developments appear to be as under:

Poor credit off-take coupled with high increase in NPAs.

Banks' reluctance to cut-down the size of their balance sheets.

Government's aggressive role in lowering cost of debt, resulting in high

inventory profit to commercial banks.

Capital adequacy requirements.

The income flow from investment assets is real compared to that of loan-

assets, as the latter is size ably a book-entry.

In this context, treasury operations are becoming more and more important to the banks

and a need for integration, both horizontal and vertical, has come to the attention of the

corporate. The basic purpose of integration is to improve portfolio profitability, risk-

insulation and also to synergize banking assets with trading assets. In horizontal

integration, dealing/trading rooms engaged in the same trading activity are brought under

same policy, technological and accounting platform, while in vertical integration, all

existing and diverse trading and arbitrage activities are brought under one control with

one common pool of funding and contributions.

MEANING AND DEFINITION

Meaning:

Treasury is the glue binding together liquidity management, asset/liability management,

capital requirements and risk management. It has an increasingly important job to do. At

one end of the spectrum it manages balance sheets and liquidity, and does good things to

enhance the yield on assets and minimize the cost of liabilities, mostly through the clever

and intelligent use of derivatives. At the other end of the spectrum, treasury can help

restructure the balance sheet and provide new products.

All banks have departments devoted to treasury management, as do larger corporations.

Treasury management modules are available for many larger enterprise software systems.

Banks do not disclose the prices they charge for Treasury Management products.

Definition:

Treasury management is the management of an organization’s liquidity to ensure that the

right amount of cash resources are available in the right place in the right currency and at

the right time in such a way as to maximize the return on surplus funds, minimize the

financing cost of the business, and control interest rate risk and currency exposure to an

acceptable level.

In other words,Treasury management (or treasury operations) includes management of an

enterprise' holdings in and trading in government and corporate bonds, currencies,

financial futures, options and derivatives, payment systems and the associated financial

risk management.

Integrated Treasury:

We see integration of segmented financial markets- money market, debt and capital

market and forex market, etc., at the macro level and integration of treasury operations at

the operational level of banks. The term ‘integration’ means merger or centralization or

consolidation. The reforms that were initiated in 90s made domestic markets closely

linked to global markets. The domestic market is integration with global market at the

micro level, which has raised the need for integration of micro level units. Relaxation of

regulations has almost integrated different segments of financial markets- debt market,

money market, capital market, forex market, etc., which enabled free flow of money from

one market to another. Increased demands from their clients in tandem with high

competition forced banks to operate in all these markets. Once capital account

convertibility is fully materialized, the markets will become fully integrated.

OBJECTIVE OF THE STUDY

• The objective of undertaking a project on Treasury Management operations in

banks is to have in-depth knowledge about the meaning of Treasury Management.

• To know about the functions, organizational structure and objective of Treasury

Management in Banks.

• To understand the elements of Treasury Management and the functions of

treasurer.

• To have a broader view on nature of treasury assets & liabilities and to know what

are their products and services involved in Treasury Management.

• To understand the risk associated with Treasury Management and their

mitigation.

• To know what are the RBI guidelines formulated for Treasury Management.

• To know the future scope involved in Treasury Management & role of

information technology in Treasury Management.

• To have an in-depth knowledge of how SBI manages its treasury as SBI is the

major contributors in money and forex market.

RESEARCH METHODOLOGY

• Gathering primary data through meeting key officials from the related area of

Treasury Management, collecting view points from them to arrive at meaningful

conclusion.

• Gathering secondary data from books, periodicals, publications, newspaper,

survey reports, journals, websites, and internal website.

• Conducting interview with appropriate officials relating to the field of Treasury

Management by designing appropriate questionnaires.

TREASURY MANAGEMENT: AN OVERVIEW

Webster defines treasury as "a place where stores of treasures are kept; the place of

deposit, care, and disbursement of collected funds." Moreover, if one considers the

treasury functions in ones own organization; this definition would most likely broadly

describe it. Treasury and its responsibilities fall under the scope of the Chief Financial

Officer. In many organizations, the Treasurer will be responsible for the treasury function

and also holds the position of Chief Financial Officer. The CFO's responsibilities usually

include capital management, risk management, strategic planning, investor relations and

financial reporting. In larger organizations, these responsibilities are usually separated

between accounting and treasury, with the controller and the treasurer each leading a

functional area. Generally accepted accounting principles and generally accepted auditing

standards recommend the division of responsibilities in areas of cash control and

processing.

The specific tasks of a typical treasury function include cash management, risk

management, hedging and insurance management, accounts receivable management,

accounts payable management, bank relations and investor relations.

Following is a description of each of these tasks:

(a) Cash Management includes the control and care of the cash assets and liabilities

of the organization. This will include the selection of banks and bank accounts,

investment vehicles, investment brokers, methods of borrowing, cash management

information systems, and the development and compliance with cash and investment

policy and processes. All of these pieces of the cash management puzzle need to be

coordinated and documented in a procedural manual in order to control the risk

associated with cash.

(b) Risk Management includes customer credit management, vendor/contractor

financial analysis, liability claims management, business disaster recovery, and employee

benefits program risk.. There are many risks associated with employee benefit plans, and

treasury should be an integral part of this process in order to mitigate and control this

risk.

(c) Insurance Management is the process of negotiation of insurance policies to

mitigate the risks that the organization does not want to assume. The normal types of

insurance that are usually obtained are General Liability, Workers' Compensation,

Automobile, Director & Officers Liability, Fiduciary Liability, Employment Practices

Liability, Crime & Theft (Securities), Property, Transportation and Surety Bonds. Some

companies substitute self-insurance or captive insurance companies for some of this risk.

If the organization does not employ a full-time licensed insurance manager, they usually

retain an insurance broker to advice on insurance issues and obtain insurance in the open

market. Another method of risk mitigation is through hedging; this is normally used for

foreign exchange, interest rates and purchase of raw materials.

(d) Accounts Receivable Management includes the control of cash receipt systems

within the organization. This involves the management of customer disputes and

deductions, collections, and the systems and processes for control of accounts receivable.

It will usually include the establishment of credit card/purchasing card settlement

systems.

(e) Accounts Payable Management includes the control of the cash disbursement

process. This function will include vendor relations, disputes and negotiation of the

disputes, and the systems and processes for control of accounts payable to conserve cash

while maintaining positive vendor relationships.

(f) Bank Relations is that function which is a delicate balancing act due to the normal

practice of having more than one lender involved in most credit arrangements, and

meeting their needs for services and information from your organization. These lenders

must be considered a partner to your business and must be treated fairly.

(g) Investor Relations is that area of treasury's responsibilities that can have a great

effect on the value of publicly traded organizations. To provide expedient processing of

stock trades, a competent shareholder service provider should be retained by the

organization.

A successful treasury function has the same attributes as any other function within the

organization that is considered successful. These qualities are:

* Teamwork

* Respect for Organization

* Forward Thinking

* Global Thinking

* Technological Advancement

* Customer Focused

* Finance/Accounting Knowledge

* Legal Knowledge

* Reliability

The treasury function must work with all operations within the organization. The

operational functions they are working with should consider treasury to be an internal

consultant, with expertise in risk and finance.

Treasury is an exciting and interesting function of the organization that gets involved in

many diverse areas of the business that most other positions in the company do not get

the opportunity to be involved in. It is a natural progression in the career of many who

start out in credit management.

FUNCTIONS OF TREASURY DEPARTMENT IN BANKS

Since 1990s, the prime movers of financial intermediaries and services have been the

policies of globalization and reforms. All players and regulators had been actively

participating, only with variation of the degree of participation, to globalize the economy.

With burgeoning forex reserves, Indian banks and Financial Institutions have no

alternative but to be directly affected by global happenings and trades. This is where;

integrated treasury operations have emerged as a basic tool for key financial

performance.

A treasury department of a bank is concerned with the following functions:

(a) Reserve Management & Investment: It involves (i) meeting CRR/SLR

obligations, (ii) having an appropriate mix of investment portfolio to optimise yield and

duration. Duration is the weighted average ‘life’ of a debt instrument over which

investment in that instrument is recouped. Duration Analysis is used as a tool to monitor

the price sensitivity of an investment instrument to interest rate charges.

(b) Liquidity & Funds Management: It involves (i) analysis of major cash flows

arising out of asset-liability transactions (ii) providing a balanced and well-diversified

liability base to fund the various assets in the balance sheet of the bank (iii) providing

policy inputs to strategic planning group of the bank on funding mix (currency, tenor &

cost) and yield expected in credit and investment.

(c) Asset Liability Management & 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 by banks increase the demand for funds for tenor of above 15 days (Term

Money) to match duration of their assets.

(d) Risk Management: integrated treasury manages all market risks associated with a

bank’s liabilities and assets. The market risk of liabilities pertains to floating interest rate

risk for assets & liability mismatches. The market risk for assets can arise from (i)

unfavorable change in interest rates (ii) increasing levels of disintermediation (iii)

securitization of assets (iv) emergence of credit derivates etc. while the credit risk

assessment continues to rest with Credit Department, the Treasury would monitor the

cash inflow impact from changes in assets prices due to interest rate changes by adhering

to prudential exposure limits.

(e) Transfer Pricing: Treasury is to ensure that the funds of the bank are deployed

optimally, without sacrificing yield or liquidity. An integrated Treasury unit has as idea

of the bank’s 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 benchmark rates, after assuming market risk, to various business groups

and product categories about the correct business strategy to adopt.

(f) Derivative Products: Treasury can develop Interest Rate Swap (IRS) and other

Rupee based/ cross- currency derivative products for hedging Bank’s own exposures and

also sell such products to customers/other banks.

(g) Arbitrage: Treasury units of banks undertake this by simultaneous buying and

selling of the same type of assets in two different markets to make risk-less profits.

(h) Capital Adequacy: This function focuses on quality of assets, with Return on

Assets (ROA) being a key criterion for measuring the efficiency of deployed funds. An

integrated treasury is a major profit centre. It has its own P&L measurement. It

undertakes exposures through proprietary trading (deals done to make profits out of

movements in market interest/ exchange rates) that may not be required for general

banking.

(i) Coordination: Banks do operate at more than one money market centers. All the

centers undertake similar transactions with differing volumes. There is a need to

coordinate the activities of these centers so that aberrations are avoided (situations where

one center is lending and the other one is borrowing at the same time). The task of

coordination of foreign exchanges positions is no different.

(j) Control and Development: Treasury operates as the focal point of dealing

operations. Dealing operations could include cash/spot, forward, futures, options, interest

and currency liability swaps, forward rate agreements and the like. Treasury is the sole

owner and performer of these transactions.

(k) Fraud Protection: The decade of nineties has witnessed more frauds in trading

than banking books. The amount and variety of such embezzlements have been directly

relatable to the operational level. The ground level task of this kind is to be undertaken at

the treasury.

All the aforesaid activities are funds management functions in a banking environment.

ORGANISATIONAL STRUCTURE OF TREASURY

There is no standard structure for treasury department of a bank. Depending on the

responsibilities assigned and power delegated, it can be aptly structured. Typically, banks

maintain three independent tiers at the functional/operational level-

Tier I – Dealing Desk (Front Office): The dealers and traders in different markets-

money, stock, debt, commodity, derivatives and forex- operate in their respective areas.

They are the first point if interface with other participants in the market. The number of

dealers depends on the size and frequency of the operations. In case of larger in each

bank, operations would be carried out by separate and independent set of dealers in each

market. But, for a relatively smaller treasury, operations would be done by one or more

dealers jointly in all the markets.

Tier II – Settlement Desk (Back Office): Once the deals are concluded, it is for the back

office to process and settle the deals. Indeed, the back office undertakes settlement and

reconciliation operations.

Tier III – Accounting, Monitoring and Reporting Office (Audit group): This department

looks after the activities relating to accounting, auditing and reporting. Accountants’

record all deals in the books of accounts, while auditors and inspectors closely monitor

all deals and transactions done by the front and the back office, and send regular reports

to authorities concerned. This department independently inspects daily operations in the

treasury department to ensure internal/regulatory system and procedures.

The three departments should be compartmentalized and they act independently. The

heads of each section reports directly to the Head of the Treasury. A treasury can have

more functional desk depending on the size and structure of the bank, and activities

undertaken by the bank. For example, the treasury may have separate

individuals/managers for monitoring funds movement, for monitoring of risks,

developing and marketing innovative instruments/products.

OBJECTIVES OF THE TREASURY MANAGEMENT

Treasury of a commercial bank undertakes various operations in fulfillment of the

following objectives:

• To take advantage of the attractive trading and arbitrage opportunities in the bond

and forex markets.

• To deploy and invest the deposit liabilities, internal generation and cash flows

from maturing assets for maximum return on a current and forward basis consistent with

the bank’s risk policies/appetite.

• To fund the balance sheet on current and forward basis as cheaply as possible

taking into account the marginal impact of these actions.

• To effectively manage the forex assets and liabilities of the bank.

• To manage and contain the treasury risks of the bank within the approved and

prudential norms of the bank and regulatory authorities.

• To assess, advise and manage the financial risks associated with the non-treasury

assets and liabilities of the bank

• To adopt the best practices in dealing, clearing, settlement and risk management

in treasury operations.

• To maintain statutory reserves- CRR and SLR- as mandated by the RBI on

current and forward planning basis.

• To deploy profitably and without compromising liquidity the clearing surpluses of

the bank

• To identify and borrow on the best terms from the market to meet the clearing

deficits of the bank

• To offer comprehensive value-added treasury and related services to the bank’s

customers

• To act as profit center for the bank.

ELEMENTS OF TREASURY MANAGEMENT

1. Cash Reserve Ratio/Statutory Liquidity Ratio Management: CRR, or cash reserve

ratio, refers to the portion of deposits that banks have to maintain with RBI. This serves

two purposes. 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 a portion (8.25 per cent now) of their deposits in government

securities as a part of their statutory liquidity ratio (SLR) requirements. The government

securities (also known as gilt-edged securities or gilts) are bonds issued by the Central

government to meet its revenue requirements. Although the bonds are long-term in

nature, they are liquid as they have a ready secondary market.

2. Dated Government Securities: The Government securities comprise dated

securities issued by the Government of India and state governments. The date of maturity

is specified in the securities therefore it is known as dated government securities.

a) The Government borrows funds through the issue of long term-dated securities,

the lowest risk category instruments in the economy. These securities are issued through

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, though the government sometimes issues zero coupon instruments and

floating rate securities also. In one of its first moves to deregulate interest rates in the

economy, RBI adopted the market driven auction method in FY 1991-92. Since then, the

interest in government securities has gone up tremendously and trading in these securities

has been quite active. They are not generally in the form of securities but in the form of

entries in RBI's Subsidiary General Ledger (SGL).

b) The investors in government securities are mainly banks, FIs, 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.

c) Till recently, a few of the domestic players used to trade in these securities with a

majority investing in these instruments for the full term. This has been changing of late,

with a good number of banks setting up active treasuries to trade in these securities.

Perhaps the most liquid of the long term instruments, liquidity in gilts is also aided by the

primary dealer network set up by RBI and RBI's own open market operations.

1. Money Market Operations: The bank engages into a number of instruments that

are available in the Indian money market for the purpose of enhancing liquidity as well as

profitability. Some of these instruments are as follows:

A. 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 is known as Call money'. Intervening holidays and/or Sundays are excluded

for this purpose. No collateral security is required to cover these transactions.

B. Treasury Bills Market

In the short term, the lowest risk category instruments are the treasury bills. RBI issues

these at a prefixed day and a fixed amount.

There are four types of treasury bills:-

• 14-day T-bill - maturity is in 14 days. Its auction is on every Friday of every

week. The notified amount for this auction is Rs. 100 cr.

• 91-day T-bill - maturity is in 91 days. Its auction is on every Friday of every

week. The notified amount for this auction is Rs. 100 cr.

• 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.

100 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 for this auction is Rs. 500

cr.

C. Inter-Bank Term Money

Inter bank 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 market in this segment is presently not very deep. The declining

spread in lending operations, the volatility in the call money market with accompanying

risks in running asset/liability mismatches, the growing desire for fixed interest rate

borrowing by corporate, the move towards fuller integration between forex and money

markets, etc. are all the driving forces for the development of the term money market.

These, coupled with the proposals for Nationalization of reserve requirements and

stringent guidelines by regulators/managements of institutions, in the asset/liability and

interest rate risk management, should stimulate the evolution of term money market

sooner than later. The DFHI, as a major player in the market, is putting in all efforts to

activate this market.

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

D. Certificates of Deposits

The scheduled commercial banks have been permitted to issue certificate of deposit

without any regulation on interest rates. This is also a money market instrument and

unlike a fixed deposit receipt, it is a negotiable instrument and hence it offers maximum

liquidity. As such, it has secondary market too. Since the denomination is very high, it is

suitable to mainly institutional investors and companies.

E. Commercial Paper (CP)

Commercial Paper (CP) is an unsecured money market instrument issued in the form of a

promissory note. CP was introduced in India in 1990 with a view to enabling highly rated

corporate borrowers to diversify their sources of short-term borrowings and to provide an

additional instrument to investors.

Highly rated corporate borrowers, primary dealers (PDs) and satellite dealers (SDs) and

all-India financial institutions (FIs) which have 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 provided - (a) the tangible net worth of the

company, as per the latest audited balance sheet, is not less than Rs. 4 crore; (b) the

working capital (fund-based) limit of the company from the banking system is not less

than Rs.4 crore and (c) the borrower account of the company is classified as a Standard

Asset by the financing bank/s.

F. 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. Similarly, 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 a Repo when viewed

from the prospective of the seller of securities (the party acquiring fund) and Reverse

Repo when described from the point of view of the supplier of funds. Thus, whether a

given agreement is termed as Repo or a Reverse Repo depends on which party initiated

the transaction.

G. Commercial Bills

Bills of exchange are negotiable instruments drawn by the seller (drawer) of the goods on

the buyer (drawee) of the goods for the value of the goods delivered. These bills are

called trade bills. These 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 he may approach his bank for discounting the bill. The

maturity proceeds or face value of discounted bill, from the drawee, will be received by

the bank. 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.

The RBI introduced the Bills Market scheme (BMS) in 1952 and the scheme was later

modified into New Bills Market scheme (NBMS) in 1970. Under the scheme,

commercial banks can rediscount the bills, which were originally discounted by them,

with approved institutions (viz., Commercial Banks, Development Financial Institutions,

Mutual Funds, Primary Dealer, etc.).

With the intention of reducing paper movements and facilitate multiple rediscounting, the

RBI introduced an instrument called Derivative Usance Promissory Notes (DUPN). So

the need for physical transfer of bills has been waived and the bank that originally

discounts the bills only draws DUPN. These DUPNs are sold to investors in convenient

lots of maturities (from 15 days upto 90 days) on the basis of genuine trade bills,

discounted by the discounting bank.

FUNCTIONS OF A TREASUER

The Treasury in the finance department Deals with the liquid assets; since the treasurer is

the head of the treasury, he has a major responsibility of being a custodian of cash and

other liquid assets. The other functions are:

(a) Funding: The treasurer has the responsibility of exploring and selecting best

source of finance for funding long-and short term cash requirements of the business.

While determining the best source of finance, the treasurer must take various matters into

consideration like debt structure of the organization, structure of the debt portfolio, and

advantages and shortcoming of short-and long –term financing, etc.

(b) Working Capital Management: The goal of the working capital management is

to maintain good balance between current assets and liabilities as per the requirements of

the business. Since cash surplus as well as cash deficit is not recommendable for and

organization, the treasurer has the responsibility to maintain an optimum cash level. A

good working capital management maximizes the liquidity and profitability of the

organization.

(c) Better Investor Relations: This involves establishing, strengthening and

maintaining better interaction with interested members of the financing and investing

community such as:

• Individual investors,

• Institutional investors,

• Professional Fund Managers, and

• Foreign Investors etc.

(d) Good Banking Relationships: in general, selection of appropriate, desirable and

suitable banking services is the responsibility of the individuals responsible for cash

management, who fall under the treasury belt. This includes cash transmission and bank

account and bank relationship management.

(e) Short-term Investments: Idle cash incurs opportunity costs as time passes. The

excessive surplus cash in the business may arise due to various factors such as cyclical,

seasonal to temporary business trends. The treasurer has the authority to utilize surplus

cash of the organization in short-term beneficial investments.

(f) Risk (Hedging) and Forex Management: due to increasing globalization of

business, the importance of risk and forex management has been spurring. The

international treasurer has to ensure liquidity in foreign exchange funds without

compromising profitability. On the other hand, risk management (hedging) involves the

utilization of financial instruments to cushion the company against interest rate,

commodity and currency exposures.

(g) Establishing the Company Policy: Functions of the treasurer, further includes

establishing of company policy with respect to decision on trade discounts and vendor

payment ageing.

(h) Capital Structure Formulation: The treasurer must formulate the capital structure

for the organization in accordance to business goals and implement the same. He has the

responsibility of taking appropriate debt vs. equity financing decisions. A wrong or

inappropriate capital structure decision may through the business into irrecoverable

losses.

(i) Insurance and Tax Planning: A sound tax planning involves utilization of various

provisions of the statute that enables the organization to reduce the tax liability without

violating the latter and spirit of the law. The treasurer must identify and undertake such

transactions that will result in reduction/elimination of tax liabilities of the business.

(j) Internal Treasury Controls: The treasurer acts as a cashier; undertakes the role of

an authorized signatory on payment cheques including the authority to approve such

cheques. Even reconciliation of relevant accounts is an important function of the

treasurer.

(k) Financing Decision: The financing decision relates to mobilization of funds to

ensure smooth business activity and healthy growth of an organization.

The financing aspect involves decision-making about the following:

How much to mobilize: The treasurer has to estimate the amount of funds that will be

required in future, and what part of this can be met by funds generated internally and how

much will have to be mobilized from external sources.

From where/whom to mobilize: A firm has access to different sources of finance, both

long-term and short-term. The treasurer has to decide which will be the most appropriate

source of finance for his firm.

At what costs: all funds have a cost associated with them (e.g., interest on loans,

debentures, etc. dividend on equity). The average cost of all the funds mobilized should

be kept as low as possible.

When to mobilize: the treasurer has to estimate when a shortfall of funds will occur and

raise funds accordingly.

l) Investment Decision: The funds generated in the course of business need to be put to

further use. The investment decision relates to the selection of assets in which funds will

be invested by firm. The assets, which can be acquired, fall into two categories- (i) long-

term assets (ii) short-term or current assets- defined as those convertibles into cash

usually within a year.

Accordingly, asset selection decision is also of two types: (i) the first involving long-term

assets are popularly called capital budgeting, and (ii) the second involving short-term

assets or current assets is popularly called working capital management.

A proper balance should be achieved between fixed and current assets. The money

manager has to decide which kind of funds (long-term or short-term) should be used for

financing either of the two kinds of (fixed or current) assets.

NATURE OF TREASURY ASSETS AND LIABILITIES

Bank’s balance sheet consists of treasury assets and liabilities on the one hand and non-

treasury assets and liabilities on the other. There is a clear distinction between the two

groups. In general, if a specific assets or liability is created through a transaction in the

inter-bank market and/or can be assigned or negotiated, it becomes a part of the treasury

portfolio of the bank.

Treasury assets are marketable or tradable subject to meeting legal obligations such as

payment of applicable stamp duty, etc. another characteristic of treasury assets is that

they can (and often are required to be marked to market. An example of treasury

asset/liability which is created by corporate/treasury actions/decisions on

funding/deployment but is not tradable, is the Inter-bank Participation Certificate.

Loans and advances are specific contractual agreements between the bank and its

borrowers, and do not form a part of the treasury assets, although these are obligations to

bank. (They can however, be securitized and sold in the market. If a bank were to take a

position in such securitized debts, it would become part of treasury activity). On the other

hand, an investment in G-Secs can be traded in the market. It is, therefore, a treasury

asset.

Treasury liabilities are distinguished from other liabilities by the fact that they are

borrowings from the money (or bond) market. Deposits (current and savings accounts

and fixed deposits) are not treasury liabilities, as they are not created by market

borrowing.

List of Bank’s Treasury Products

A. Domestic Treasury

1. Assets Products/ Instruments:

• Call/Notice Money lending

• Term money Lending/Inter-bank Deposits

• Investment in CDs

• Commercial Paper

• Inter-bank Participation Certificates

• Derivative Usance promissory Notes/ Bankers’ or Corporate Acceptances

• Reverse Repos/CBLO- backed Lending through CCIL

• SLR Bonds (notified as such by the RBI)

(a) Issued by the Government of India as securities and T-bills

(b) Issued by State Governments

(c) Guaranteed by Government of India

(d) Guaranteed by State Governments

• Non-SLR Bonds (issued by)

(a) Financial Institutions

(b) Banks/NBFCs (Tier II Capital)

(c) Corporate

(d) State-level Enterprises

(e) Infrastructure Projects

• Assets-backed Securities (PTCs)

• Private Placements

• Floating Rate Bonds

• Tax-free Bonds

• Preference Shares

• Listed/Unlisted Equity

• Mutual Funds

2. Liability Products/Instruments

• Call/Notice Money Borrowing

• Term Money Borrowing

• CD Issues

• Inter-bank Participation Certificates

• Repos/CBLO-backed Borrowing through CCIL

• Refinance (RBI, SIDBI, NABARD, Exim Bank, NHB)

• Tier II Bonds (issued by bank)

B. Foreign Exchange

1. Interbank

• Spot Currencies

• Cash

• Tom

• Forward and Forward-Forward (simultaneous purchase and sale of a currency

for two different forward maturities)

• Foreign Currency Placements, Investments and Borrowings (in accordance with

RBI guidelines)

2. Merchant(Initiated In Branches, Arranged By Forex Treasury)

• Preshipment Foreign Credit (PCFC)

• Foreign Currency Bills Purchased (FCBP)

• Foreign Currency Loans (FCLs)/FCNR (B) Loans

• Postshipment Foreign Credit (PSFC)

• External Commercial Borrowing (ECB)

C. Derivatives

• Interest Rate Swaps (IRSs)

• Forward Rate Agreements (FRAs)

• Interest Rate Options

• Currency Options

D. Certain corporate assets such as investments in subsidiaries and joint ventures are

reckoned as treasury assets although they are not traded and are permanent in nature.

TREASURY PRODUCTS & SERVICES

1. Forward Contract: It is a contract between the bank and its customers in which the

exchange/conversion of currencies would take place at future date at a rate of exchange in

advance under the contract. The essential idea of entering into a forward contract is to

peg the price and thereby avoid the pricerisk.

Forward Rates = Spot rate +/? Premium/Discount

2. Forward Rate Agreement (FRA): An FRA is an agreement between the Bank and a

Customer to pay or receive the difference (called settlement money) between an agreed

fixed rate (FRA rate) and the interest rate prevailing on stipulated future date (the fixing

date) based on a notional amount for an agreed period (the contract period). In short, this

is a contract whereby interest rate is fixed now for a future period. The basic purpose of

the FRA is to hedge the interest rate risk.

For example, if a borrower is going to borrow FC loan for 6 months at LIBOR rate after 3

months, he can buy an FRA whereby he can fix interest rate for the loan.

3. Interest Rate Swap(IRS) : It is a financial transaction in which two counterparties agree

to exchange streams of cash flows throughout the life of contract in which one party pays

a fixed interest rate on a notional principal and the other pays a floating rate on the same

sum. The basic purpose of IRS is to hedge the interest rate risk of constituents and enable

them to structure the asset/ liability profile best suited to their respective cash flows.

4. Currency Swap: It is an agreement between two parties to exchange obligations in

different currencies at the beginning, during the tenure and at the end of the transaction.

At the start, initial principal is exchanged, though not obligatory. Periodic interest

payments (either fixed or floating) are exchanged through out the life of the contract. The

principal is exchanged invariably on termination at the exchange rate decided at the start

of the transaction. By means of currency swap, the counterparties can reducethe

cost of funding.

5. Option: It is a contract between the bank and its customers in which the customer has

the right to buy/sell a specified amount of underlying asset at fixed price within a specific

period of time, but has no obligation to do so. In this contract, the customer has to pay

specified amount upfront to the counterparty which is known as premium. This is in

contrast of the forward contract in which both parties have a binding contract.

This is a facility offered to customers to enable them to book Forward Contracts in Cross

Currencies at a target rate or price. This facility helps the customer to en cash the

currency movements in late European market, New York market and early Asian market.

The minimum amount of the contract is 250,000/- in respective base currencies (for e.g.

USD, EUR & GBP).

TYPES OF RISKS ASSOCIATED WITH TREASURY AND THEIR MITIGATION

Risk profile of the treasury activities consists of two broad categories viz. Financial Risk

and Operational Risk. Financial risks include market risks (interest rate risk, price risk,

basis risk), credit risks, liquidity risks, etc. Operational risks include systemic risk,

compliance risk, legal risks, IT risks, fraud risks, etc. For mitigation of such risks, various

prudential guidelines prescribed by the regulators and internal policies and procedures

laid down by the management are to be followed

1. Operational Risk: This covers the entire gamut of the transaction cycle from

dealing to custody. Operational risk can again be divided into those arising from:

• System deficiencies, authorizations, based on approved delegation of powers,

must integrate with work and document flows. This ensures that individual payments and

deliveries by the bank are entirely deal/transaction supported;

• Non-compliance with laid-down procedures and authorizations for dealing,

settlement and custody;

• Fraudulent practices involving deals and settlements;

• IT involving software quality, hardware uptime; and

• Legal risks due to inadequate definitions and coverage of covenants and

responsibilities of the bank and counterparty in contracts and agreements.

Mitigation

• Dealers must operate strictly within the single deal, portfolio and prudential limits

set for the instrument and counterparty. Stop loss and risk norms of duration and value at

risk should be adhered to all times.

• No deviation from approved and implemented work and document flows should

be allowed.

• The necessary authorizations must accompany documents as they pass from one

stage of the transaction cycle to the next.

• Delegation of powers must be strictly adhered to. Deals or transactions exceeding

powers must be immediately and formally ratified in accordance with management/board

edicts on ratification.

• The prescribed settlement systems in each product/instrument and market must be

followed. Deviations from delivery and payment practices should not be allowed.

• Computer systems- hardware, networks and software should have adequate

backups. They should be put through periodic stress tests to determine their ability to

cope with increased volumes and external data combinations.

• Custodian’s creditworthiness is paramount in demat systems of records of

ownership and transfer. Custodial relationships should be only with those with the

highest credit rating.

• Counterparty authorizations/powers of attorney must be kept current.

• The list of approved brokers should be reviewed periodically to satisfy the bank’s

credit standards and ethics. In equity transactions, the broker is the counterparty.

Settlement must be of the delivery against payment type.

• Deal, transaction and legal documentation should be adequate to protect the bank,

especially in one-off transactions and structured deals.

2. Financial Risks: The following identifies and defines individual financial risks:

(a) Credit Risk

The oldest of all financial risks in its simplest form, refers to the possibility of the issuer

of a debt instrument being unable to honour his interest payments and/or principal

repayment obligations. But, in modern financial markets, it includes non-performance by

counterparty in a variety of off-balance sheet contracts such as forward contracts, interest

rate swaps and currency swaps and counterparty risk in the inter-bank market. These have

necessitated prescribing maximum exposure limits for individual counterparties for fund

and non-fund exposures.

Mitigation

• Better credit appraisal. Careful analysis of cash flows of the business before

investing.

• Investing only in rated instruments

• Risk pricing

• Credit enhancement through margin arrangements, escrow accounts etc.

• Guarantees/letters of credit from rated entities

• Adequate financial and/or physical assets as security

• Exposure limits by counterparty, industry, location, business group, on and off

balance sheet

• Diversification by industry, sector, location and so on

• Exposure limits for individual bank counterparties for funded/non-funded assets

• Reputation and image of counterparties

• Collateralization of transactions through repos

(b) Liquidity Risk

An asset that cannot be converted into cash when needed is liquidity note which is the

normal characteristic of the vast majority of bonds.

There is also the risk of scarcity of funds in the market. This could happen, for example,

when the RBI deliberately tightens liquidity, by increasing CRR, selling securities or

forex. A third situation is when a bank’s creditworthiness becomes suspect and there are

no willing lenders, even though there is no liquidity shortage in the market.

Mitigation

• Increase the proportion of investments in liquid securities

• Increase the proportion of investments in near-maturity high quality instruments

• Maintain credit rating, reputation and image

• Securitize loan portfolio of large as well as small borrowers

(c) Interest Rate Risk(Balance Sheet):

This affects both the assets and liabilities of a bank. On an overall basis, the maturity

gaps between assets and liabilities lead to the risk of a contraction of spreads if interest

rates fall and assets mature before liabilities or interest rates rise and liabilities mature

before assets.

Apart from interest rate risk originating from the disparity in the maturities of assets and

liabilities, there is also basis risk, because interest rate determination may differ. For

example, if assets are MIBOR-linked (floating rate), while liabilities are fixed rate and

MIBOR falls, assets yields also do, compressing the spreads.

Mitigation of basis risk will involve converting (in the above instance) assets to fixed rate

(or converting liabilities to MIBOR-linked). Instruments used are interest rate swaps,

futures and FRAs.

(d) Interest Rate Risk (Investment/Trading Book):

The prices of bonds are affected by changes in interest rates. When interest rates come

down, their prices go up. The opposite happens when interest rates rise. The most price-

affected bonds in response to rate movements are those of long maturity- indeed maturity

and price changes are strongly positively correlated.

Duration measures the price sensitivity of a bond to changes in interest rates. Increasing

duration makes the bond portfolio more sensitive to interest rates while decreasing

duration reduces it.

As bond prices and interest rates are inversely related, if the bank expects interest rates to

fall, subject to market liquidity, it will have to increase duration by buying long-dated

securities. Conversely, in anticipation of a rise in interest rates, the bank will lower

duration by selling long-dated securities.

(e) Value-At-Risk (VAR):

Value-at-risk indicates the possible maximum loss which will be suffered in a specified

period and at a specified confidence level from a fall in the price of a security (or

exchange rate), given historic data on the price behavior of the security (exchange rate) or

assessment of likely future market movements. The concept is applied to calculate the

risk content of an individual security, foreign exchange position, equity share or a

portfolio of these instruments.

(f) Forex (Market) Risk:

The forex market is probably the most consistently volatile of all financial markets.

While it offers enormous scope for making profits, the other side of the coin is the risk of

big losses from unexpected swings in exchange rates. This necessitates and effective

forex risk management system involving:

1. Fixing exposure limits by currency and maturity

2. Continuous market monitoring with reference to the bank’s open positions; and

3. Closing loss positions, if stop loss limits/VAR are breached.

For supporting the above, it is necessary to have adequate data gathering systems in place

to measure currency wise exposures and their maturities.

The following determine the forex risk exposure of the bank:

1. Open Positions

2. Gap (Interest Rate/ Swap) Risk;

3. Counterparty (Credit) Risk;

4. Settlement Risk;

5. Country Risk;

6. Value-at-Risk;

7. Operational Risk; and

8. Legal Risk.

(g) Settlement Risk:

Settlement risk arising from time differences between trading zones, which may result in

one of the parties to a transaction having to settle ahead of the other party, i.e., debit and

credit are not synchronized. To some extent (but not completely), this is mitigated by the

exposure limits fixed for each inter-bank counterparty.

(h) Country Risk:

Country risk is the possibility that a country or bank in a country will not be able to

honour obligations due to shortage of foreign exchange or political risk.

The RBI has asked banks to measure monitor and control country exposures. It requires

specific responsibility and accountability in the organization structures of the bank for

country risk management.

(i) Legal Risk:

Standard agreements govern forex contracts in the domestic and international markets,

the main being:

i. For spot and forward foreign exchange - International Foreign Exchange Nostro

Agreement (IFENA)

ii. Foreign Exchange Options – International Currency Options Agreement (ICOM)

iii. All others including Derivatives – Internal Swap Dealers’ Association Master

Agreement ( ISDA Master Agreement)

Disputes and arbitration in international courts/tribunals will be governed by covenants

and obligations in the above agreements.

(j) Operational Risk and Concurrent Audit:

As required by the RBI, the banks carry out concurrent audit of all forex transactions.

Auditors are required to give daily and monthly reports covering:

• Compliance with approved open position limit

• Compliance with overnight exposure limits

• Compliance with aggregate and individual gap limits

• Compliance with value at risk norms.

RISK MANAGEMENT: RBI GUIDELINES/NORMS

The RBI has circulated detailed guidance notes on Market Risk Management, Asset

Liability Management and Credit Risk Management. According to these,

(a) Banks are required to send monthly reports covering liquidity mismatches and

interest rate sensitivity.

(b) Banks are required to pay special attention to liquidity risk and management and

monitor the following:

• Call Borrowing/Lending

• Purchased Funds vis-à-vis liquid Assets

• Core Deposits vis-à-vis Core Assets, i.e., CRR, SLR and Loans

• Duration of Liabilities and Investments

• Maximum Cumulative Outflows across all time bands

• Commitment Ratio – on and off B/S

• Swapped Funds Ratio, i.e., extent of liabilities from forex sources.

RISK MANAGEMENT IN BANKS

a) Banks have an Assets-Liability Management Committee (ALCO), which manages

gap, interest rate, liquidity and currency risks of the treasury and non-treasury balance

sheets.

b) The banks submit monthly statements to the Board and RBI on liquidity

mismatches and interest rate sensitivity.

c) Stop loss levels are fixed for both SLR and non-SLR securities.

d) Bank undertakes concurrent audits of securities and funds management

transactions. These findings/reports are put up to the Audit Committee of the Board every

quarter.

e) The investment committee reviews the investment portfolio every half-year, with

emphasis on rating migration and portfolio quality.

f) The treasury Department is subject to periodic inspection.

g) The panel of brokers is reviewed annually.

h) The software package used by treasury is system-audited at regular intervals to

test its ability to cope with new products and instruments, scale of operations and

outlying data and conditions.

i) The functions of front-office, settlement back-office, mid-office and accounts

are completely segregated.

j) Deals are backed by deal slips, and office memos containing approvals by

competent authority.

k) Defaults/arrears in interest/principal on bonds are monitored and reported to

appropriate authorities.

l) A bank will fully comply with all the RBI’s guidelines, regulations and rules

governing the investment portfolio.

m) The RBI has now finalized norms for risk-based internal audit system from the

first quarter of 2003.

FUTURE SCOPE/CHALLENGES IN TREASURY MANAGEMENT

Treasury Management is increasingly being viewed as a specialised function in many

corporate companies, and has already been assigned a separate status from the general

financial functions. Treasury management asks for expertise on capital markets, money

markets, instruments & investment avenues, treasury & risk management and related

areas. In this increasingly integrated and interdependent financial environment, the links

between money and capital markets have become extremely close. To better understand

this inter-linking and manage business in a better way, firms are hiring persons who can

handle Treasury Management and forecast rates accurately.

Career Prospects in Treasury Management:

India is changing from an economy with strong socialistic leanings to a free-market one

where the barriers to trade, both domestic and international, are fast vanishing. The

transformation process that began in the early 1990s has been put into overdrive. While

foreign firms are busy trying to get a foothold on Indian soil, Indian companies do not lag

behind in attempting to penetrate foreign markets. There has been an unexpected rise in

exports as well as imports, which has resulted in volatile exchange rates and more

financial constraints. Given the inconsistency of exchange rates, the corporate and

banking worlds are paying greater attention to treasury and foreign exchange

management. Careers in treasury and forex management have suddenly been pitch-forked

into the limelight. Banks have been scouting campuses of Indian B-schools with a view

to recruiting for their treasury and forex functions.

Opportunities chiefly exist in the areas of:

Corporate Finance: Many Indian corporate are doing business internationally. They are

also raising funds abroad, exposing them to greater risk due to deregulation of interest

and exchange rates. To minimize these risks, it is necessary to handle forex and treasury

related functions carefully. If neglected, it may lead to profit erosion. Corporate are on

the look out for people with professional qualifications to handle all aspects pertaining to

treasury and forex management.

Banks and other Financial Institutions: Volatile exchange rate regimes and fickle interest

rates are posing stiff challenges to financial institutions and banking organizations. They

are also being offered myriad opportunities with the inter-linking of financial markets.

Inconsistencies in lending rates require continuous monitoring and management of the

asset-liability gap of these institutions. Clients are transacting more and more business

with banks in foreign currencies. Thus, banks and financial institutions are also seeking

professionally qualified persons to look after the treasury and forex management

functions.

Treasury and Forex Consultancy: Corporate and banks are roping in experienced

professionals as consultants for risk management. Opportunities as consultants are not

only well paid but also satisfying. However, these positions demand sound experience. It

is very natural to be curious about the kind of openings or careers that Treasury and

Forex

Management offers. Some of them are:

a. Treasury Analyst

As a Treasury Analyst, you will support the Cash Management and Capital Markets

department of the company. The candidate is expected to have a degree in

business/finance and should demonstrate advanced analytical and system skills. He

should be able to use these skills to develop sophisticated models and apply them to the

treasury and accounting systems. Exposure to treasury workstation, ledger system,

reporting and billing systems is an additional advantage.

b. Functional Support Analyst

Functional Support Analysts are responsible for directly supporting treasury workstation

functions. This includes modifying existing processes, clinching new business deals,

reviewing old processes, upgrading systems, maintaining database, research of

accounting data, end user training, and security control. They are also responsible for the

documentation of all support processes. Financial

Support Analysts will also respond to client support requests by resolving and diagnosing

problems, and escalate (refer) complex ones to appropriate levels of expertise. They also

maintain knowledge about Treasury banking systems and will serve as back-up support.

c. Cash Analyst

Cash Analysts are responsible for everyday cash management for the company and its

subsidiaries. They are also responsible for bank charge analysis, troubleshooting of credit

card and direct debit problems as well as maintaining a database of quarterly and ad-hoc

payments made. They will also serve as support to Treasury Operations, and assist in

credit card charge backs and drafting of monthly reports. Cash Analysts will also follow

up on sales and refinance distributions from partnerships.

d. Treasury Analyst-Business Solutions

In this capacity, treasury analysts will act as visionaries for world class business process

reengineering. They will focus their efforts on creating a world-class treasury

organization through documentation of business process flows and analysis of Treasury

functions. They will analyze the benefits of using existing and future platforms to ensure

that the Treasury Organisation is an enterprise solution and is compatible with existing

Treasury processes and requirements. They also use their knowledge of treasury/business

functions in association with IT experience to transform business requirements into

software solutions.

e. Trade Specialist

The Trade Specialist provides support to Investment Managers and Clients through

timely and accurate processing of trade instructions and related transactions. The varieties

of trade instructions that require daily processing include global and domestic securities,

derivatives, foreign exchange transactions and transfer of currency between accounts.

They will maintain and strengthen the account’s relationship while minimizing risk and

maximizing profitability. They= will assist in the investment of cash and the research of

currency balances, idle and overdrawn balance and the resolution of trade problems to

ensure accurate client statements.

ROLE OF INFORMATION TECHNOLOGY IN TREASURY MANAGEMENT

1. Negotiated Dealing System

Negotiated Dealing System (NDS) is an electronic platform for facilitating dealing in

government securities and money market instruments.

The Indian debt market has gone through sweeping changes with the introduction of the

Negotiated Dealing System (NDS). This is an electronic trading platform for the

following instruments:

• Government of India Dated Securities

• State Governments securities

• T-bills

• Call/Notice/Term Money

• Commercial Paper

• Certificates of Deposit

• Repos

Membership of the NDS is open to all institutions which are members of INFINET and

have Subsidiary General Ledger (SGL) accounts with the RBI. At present, this covers the

following:

• Banks

• Financial Institutions

• Primary Dealers

• Insurance Companies

• Mutual Funds

Banks and Primary Dealers are obliged to become members of the NDS. NDS facilitates

electronic submission of bids/application by members for Primary issuance of

government securities by RBI through auction and floatation. The system of submission

of physical SGL transfer form for deals done between members on implementation of

NDS has been discontinued. NDS also provides interface to Securities Settlement System

(SSS) of Public Debt Office, RBI, and thereby facilitating settlement of transactions in

Government Securities including treasury bills, both outright and repos.

NDS use INFINET, a closed user group network as communication backbone. Hence,

membership to the NDS is restricted to members of INFINET. Membership of INFINET

entails holding SGL and/or current account with RBI or as may be prescribed from time

to time.

2. Other Trading Platforms/System

Trading is done electronically through networked computers/workstations. Market

participants and players are part of secure WAN and make bids and offers, be it forex,

bonds or equities. The system electronically matches bids and offers. Current examples of

electronic trading platforms are those of NSE, BSE and foreign exchange (through the

Reuters electronic dealing system).

3. Straight-through-processing (STP)

STP is latest technological wave to hit financial markets. This electronic system enables

trading, documentation, clearing, settlement, and custody on a single, end-to-end

hardware and software platform.

This is a natural extension of electronic trading whereby individual traders, once

approved and authorized by the buyer and seller, are settled automatically by the system

through its connectivity with a Clearing House. Buyers receive securities in their

custodial accounts and sellers receive funds.

4. Electronic Form

a. Settlement: Post-approval of a deal, the system suo motu, credits and debits the

respective cash and securities accounts of the buyer and seller as required. In G-Secs, the

NDS enables this through the intermediation of the CCIL.

Forex deals in USD/INR and cross-currencies, i.e., USD/JPY, Euro/USD, GBP/USD,

etc., are also settled electronically through CCIL or SWIFT, through transfers of funds

from and to Nostro accounts.

b. Custody: Electronic records of ownership of securities are held by DPS. Such

securities do not exist in physical form. The SGL depository of the RBI maintains

custody and ownership of SLR securities in electronic form.

c. Conversion of Physical Securities to Demat: The RBI and SEBI have now made it

mandatory for almost all securities to be in demat, i.e., electronic record of ownership and

transactions in securities, maintained with a depository participant (DP), which, in turn,

maintains an account with the apex depository (NSDL,CDSL, etc.)

Similarly, Real Time Gross Settlement [RTGS] has already been introduced, which is a

completely electronically propelled countrywide payment system.

Besides the above the application of sophisticated IT tools has made it possible to

calculate VaR, conduct thousands of scenario analysis through simulation, carry out back

testing/stress testing, and apply statistical tools for complicated analysis in bond

dynamics and exchange rate mechanisms.

CASE STUDY ON STATE BANK OF INDIA

TREASURY

Profile

Profile India's largest bank is also home to the country's biggest and most powerful

Treasury, contributing to a major chunk of the total turnover in the money and forex

markets. Through a network of state-of-the-art dealing rooms in India and abroad, backed

by the assured expertise of informed professionals, the SBI extends round-the-clock

support to clients in managing their forex and interest rate exposures.

SBI's relationships with over 700 correspondent banks are also leveraged in extracting

maximum value from treasury operations. SBI's treasury operations are channeled

through the Rupee Treasury, the Forex Treasury and the Treasury Management Group.

The Rupee Treasury deals in the domestic money and debt markets while the Forex

Treasury deals mainly in the local foreign exchange market. The TMG monitors the

investment, risk and asset-liability management aspects of the Bank's overseas offices.

RUPEE TREASURY

The Rupee Treasury carries out the bank’s rupee-based treasury functions in the domestic

market. Broadly, these include asset liability management, investments and trading. The

Rupee Treasury also manages the bank’s position regarding statutory requirements like

the cash reserve ratio (CRR) and the statutory liquidity ratio (SLR), as per the norms of

the Reserve Bank of India.

Products and Services

• Asset Liability Management (ALM): The ALM function comprises management

of liquidity, maturity profiles of assets and liabilities and interest rate risks.

• Investments: SBI offers financial support through a wide spectrum of investment

products that can substitute the traditional credit avenues of a corporate like commercial

papers, preference shares, non-convertible debentures, securitized paper, fixed and

floating rate products. SBI invests in primary and secondary market equity as per its own

discretion.

These products allow you to leverage the flexibility of financial markets, enable efficient

interest risk management and optimize the cost of funds. They can also be customized in

terms of tenors and liquidity options.

SBI invests in these instruments issued by your company, thus providing you a dynamic

substitute for traditional credit options. The Rupee Treasury handles the bank’s domestic

investments.

Trading

The bank’s trading operations are unmatched in size and value in the domestic

market and cover government securities, corporate bonds, call money and other

instruments. SBI is the biggest lender in call.

FOREX TREASURY (FX)

The SBI is the country’s biggest and most important Forex Treasury, both in the

Interbank and Corporate Foreign Exchange markets, and deals with all the major

corporate and institutions in all the financial centers in India and abroad. The bank’s team

of seasoned, skilled and professional dealers can tailor customized solutions that meet

your specific requirements and extract maximum value out of each market situation.

The bank’s dealing rooms provide 24-hour trading facilities and employs state-of-the-art

technology and information systems. SBI’s relationships with over 700 correspondent

banks and institutions across the globe enhance the strength of the Forex treasury. The

FX Treasury can also structure and facilitate execution of derivatives including long term

rupee-foreign currency swaps, rupee-foreign currency interest rate swaps and cross

currency swaps.

OVERSEAS TREASURY OPERATION

Treasury Management Group

The Treasury Management Group (TMG) is a part of the International Banking Group

(IBG) and functions under the Chief General Manager (Foreign Offices). As the name

implies the department monitors the management of treasury functions at SBI’s foreign

offices including asset liability management, investments and forex operations.

Products and Services

• Asset Liability Management (ALM): The ALM function comprises management

of liquidity, maturity profiles of assets and liabilities and interest rate risks at the foreign

offices.

• Investments: Monitoring of investment operations of the foreign offices of the

bank is one of the principal activities of TMG. The main objectives of investment

operations at our foreign offices, apart from compliance with the regulatory requirements

of the host country, are (a) safety of the funds invested, (b) optimization of profits from

investment operations and (c) maintenance of liquidity. Investment operations are

conducted in accordance with the investment policy for foreign offices formulated by

TMG.

• The activities include appraisal of the performance of the foreign offices broad

parameters such as income earned from investment operations, composition and size of

the portfolio, performance vis-à-vis the budgeted targets and the market value of the

portfolio.

• Forex monitoring: Monitoring of forex operations of our foreign offices is done

with the objective of optimizing of returns while managing the attendant risks.

• Forex and Interest rate (Foreign Currency) derivatives: TMG also plays an

important role in structuring, marketing, facilitating execution of foreign currency

derivatives including currency options, long term rupee - foreign currency swaps, foreign

currency interest rate swaps, cross currency swaps and forward rate agreements.

Commodity hedging is one of the recent activities taken up by TMG.

• Reciprocal Lines: The department is also responsible for maintenance of

reciprocal lines with international banks.

PORTFOLIO MANAGEMENT & CUSTODIAL SERVICES

The Portfolio Management Services Section (PMS) of SBI has been set up to handle

investment and regulatory related concerns of Institutional investors functioning in the

area of Social Security. The PMS forms part of the Treasury Dept. of SBI, and is based at

Mumbai.

PMS was set up exclusively for management of investments of Social Security funds and

custody of the securities related thereto. In the increasingly complex regulatory and

investment environment of today, even the most sophisticated investors are finding it

difficult to address day to day investment concerns, such as

• Adherence to stated investment objectives

• Security selection quality considerations

• Conformity to policy constraints

• Investment returns

The team manning the PMS Section consists of highly experienced officers of SBI, who

have the required depth of knowledge to handle large investment portfolios and address

the concern of large investors. The capabilities of the team range from Investment

Management and Custody to Information Reporting.

OVERALL FINDING OF THE STUDY

The project has given an insight into the various aspects of treasury management namely

• Meaning and definition of treasury management.

• Different functions of treasury departments in banks like reserve management&

investment, liquidity & fund management, assets liability management, etc.

• Organisational structure & objective of treasury management

• Element of treasury management and functions of treasurer in these elements.

• Nature of treasury assets and liabilities, treasury products and services, risk

associated in treasury, their mitigation and RBI guidelines for risk management.

• Future scope in treasury management and role of information technology in

treasury management.

• SBI,s treasury. SBI is the first treasury operator.

• SBI bank has an integrated treasury management; they don’t have any

competitors as such because it is well maintained and functioned.

• SBI has their own procedure for treasury management which is followed very

well by them. Percentage of income is not disclosed by them to any one. SBI do follow

RBI guidelines for treasury management properly which they think that it is well

formulated.

• Risk involved in treasury management for SBI is the same like operational risk

and financial risk and they aim for a well integrated and innovative management of

treasury with low risk and proper function of treasury assets and liabilities. It also has

good career opportunities.

LIMITATION OF THE STUDY

• Time allotted for making project is very limited. As study is restricted only to a

specific area. If time permits then there would be a vast scope of study of different

organizational treasury management or having a comparative study between two banks.

• Study allotted has a page constraint. The information required for in-depth study

is not possible.

• Due to lack of work experience, there is a disadvantage for making a project as

there is no in-depth practical information of the subject. If there would be work

experience, the project would have been of practical information.

• Treasury management has awareness among the banking sector only which

restricts from getting information from public.

• There is no space horizon. So study on treasury management is restricted only to

Indian scenario. So we can’t have a comparative study with other countries.

CONCLUSION

Historically, the treasury operations were oriented more toward compliance of the

regulatory prescriptions in terms of cash reserve ratio and statutory liquidity ratio.

Ensuring that there are no defaults in central bank account and that the borrowings are

minimal were the focal issues addressed to. With the globalization process, the role of

treasury has undergone a sea change and it is a major profit center for better performing

banks.

Treasury operations have become more significant and complex today than what it was

few years back. The role played by the technology and the rapid changes in the financial

sector has brought in more flexibility in the funds deployment by banks. The dynamism

with which the Treasury Market moves needs to be fully understood which is integrated

in the Banks.

The role of information technology is pivotal particularly because huge funds are handled

by comparatively a few people in each bank. Unless informational expectations are

clarified and met with, treasury operations can seldom be successful in terms of revenue

acceleration.

To sum up, the paradigm shift in the risk exposure levels of the financial institutions, has

definitely led to treasury management assuming a center stage. Undoubtedly all financial

institutions need to perform treasury management. But to have a proper treasury

management function in place, a thorough understanding of the various operations on its

assets/ liabilities becomes essential. Such an understanding will enable the financial

institution to identify and unbundle the risks and further aid in adopting and developing

appropriate risk management models to manage risks.

BIBLIOGRAPHY

BOOKS

? Transformation Of Indian Banks With Information Technology

- Prof. Sharad Padwal & Dr. Vasant Godse

? Theory And Practice Of Treasury And Risk Management In Banks

- Indian Institute Of Banking & Finance (Taxman)

? Treasury Management

- Indian Institute Of Banking & Finance (Taxman)

INTERNET

? www.indiainfoline.com

? www.investopedia.com

? www.treasury-management.com.

? www.financialexpress.com

? www.google.com

ANNEXURE

QUESTIONNAIRE

1) Treasury management relates to

a. Managing assets and liabilities of treasury

b. Managing deposits and advances

c. Managing working capital

d. Managing foreign currency

2) Does your bank have an integrated organization structure?

Yes: No:

3) Do you have competitors for treasury management operation?

Yes: No:

4) Are procedures for treasury management operation in banks different from other

organization? If yes how?

Yes: No:

5) What is the percentage of income SBI gains from treasury management

operation?

a. 50 %

b. 40 %

c. 70%

d. If any other, kindly specify

6) Does SBI follow the RBI guidelines for treasury management?

Yes: No:

7) Do you think are RBI guidelines very strictly formulated? If yes, why do you feel

so?

Yes: No:

8) What is your suggestion for the above?

9) Are there career opportunities in treasury management?

Yes: No:

10) What are the different risks involved in treasury management in your bank while

compared to other banks or organization?

11) What is your aim for future challenges relating to treasury management?