Treasury and Fund Management in Bank

What is Treasury Management?

oTo ensure that the right amount of cash reserves are available

oTo maximize the return or surplus fund

oMinimize the financing cost of the business

ocontrol interest rate risk and currency exposure

Key factor

Assets and Liability Committee of the bank; Lending and funding policy; Assets and liability management skills; Investment management skills; Policy guideline; Control and supervision; Proper infra structure etc.

The advantages of centralized treasury are

A clear idea of liquidity position

Reserve closely from time to time

Movement of funds around different centers

Reduce and optimize the actual transmission of fund.

Minimized by operating in the wholesale market.

Reporting and implementation of management / ALCO decision can be quickened through centralization.

The major problem

It may not be possible to take gains of better conditions prevailing in other centers.

The importance of treasury management may be ignored by other centers since all financial matters are centralized.

Integrated Treasury

“Integration” means merger or centralized

Global market at macro level

Raised the need for integration of micro level units.

Increased demands

The major outcomes of financial integration are summarized below:-

Increased competition improves quality of goods and services.

Reduced margins and transaction costs.

Minimizes interest rate differentials.

Provides greater opportunity for risk diversification and distribution.

Provides greater liquidity for financial assets.

Deepens the financial markets.

Need of integration of the bank treasury

Forex dealing treasury operations has arisen

Deregulation of exchange control,

Development of forex market,

Introduction of derivatives product

Technological advancement in settlement system

Cont…

public sector bank operate independently.

operate quite independently.

Money market and forex market

“spot buy forward sale”

The opportunities available for banks in the present scenario:-

Borrowing from / investing in overseas market, depending on the interest rate movements and differentials.

Maintaining nastro accounts / balances depending on market conditions.

Providing fund and non fund based based services to joint venture, etc.

Setting interest rates and prices for foreign currency deposits / liabilities.

Advantages of integrated treasury

Making risk less profits

Diversifying the risk

opening additional sources of funds and opportunities to invest

Organizational structure of treasury Typically banks maintain 3 independent tires at the

functional / operation level:

Dealing Desk (front office)

Settlement Desk (back officer)

Accounting, Monitoring and Reporting office (Audit group)

Operations of Treasury

operation depending on the previous days market conditions

bank’s own business requirements

‘word of mouth’

Front office Operations

Respective market

Constant touch with dealer / brokers

Quotes and terms

Record all transactions on the deal slip

Back office operation

Identification and rectification of discrepancies.

Verification for correctness of confirmed deals/ contracts.

Preservation of transaction documents.

Updating relevant registrars regularly.

Periodical submission of returns/ statements.

Monitoring balance of stock/ security held in the SGL account to ensure smooth functioning.

Accounting, Monitoring and Reporting

All the transactions

Closely and makes necessary updates in the books of accounts

Ledger/ registers

Dealing procedure

The instructions given by the head of treasury

Slip prepared by the dealer

Deal slip should be serially numbered and should given the following information:-

1) Contract date and time 2) Contract price 3) Details of the securities 4) Details of broker and brokerage 5) Counterparty 6) Details of delivery

Call Money Market

Part of the money market, where, day-to-day

Full details regarding the fund position of the bank.

Till the end of the fortnight (1 to 14 days)

Money market

short term instrument

a different set of procedure in settlement

Government securities:-

secondary market

chances of capital gains

Market perception of industry and company Marketability and tradability

Track record, promoted group and directors of the company

Market price and its volatility.

Debentures :- earning high yield

Shares :-

Forex Market

5-7 dealers based on their foreign exchange turnover

Corporate dealers quote rate

Spot market dealers

Swap market dealers operate on the market quotes

Fund Management:-

It is management of net funds available for investment and external fund process from other bank.

Cash Management

Satisfying regular transaction needs of their customers

Meeting the statutory reserve requirement.

They also have to keep sufficient cash assets at RBI or SEBI to honor the cheques drawn on it on presentation.

What is cash?

All liquid cash balances held at branches

All balances held with other banks and

Current account balances with RBI

Cash Reserve Ratio:-

Section 42 of the RBI Act 1934

less than 3%

The minimum and maximum levels

3% of NDTL

Prevailing percentage as announced by the RBI of the reservable liabilities.

And Current rate is 6.0%

NDTL=Aggregate deposits (Demand + Time Deposits) +Borrowings (Other than the RBI, IDBI, NABARD, & EXIM Bank)

Role of Treasury in maintenance of CRR

liquidity position

mismatches in the day to day liquidity

any shortfall and surplus

Financial institutions such as LIC, UTI, and MUTUAL FUND

Investment Portfolio Management

SLR low as 25%

Zero risk weighted assets

Market related coupons/interest

Electronic Cash Management

Payment & Clearing Operations

RBI Improvements

Various Functioning

Transfer Pricing

Either deposit oriented or advance oriented

Different systems:-

Unitary Transfer Price System

Dual Transfer Price System

Multiple Transfer Price System