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MF0016 Fall Drive Assignment 2012

MF0016 Fall Drive Assignment 2012

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 August/Fall 2012
Master of Business Administration - MBA Semester 4
 Subject Code
 –
MF0016Subject Name
 –
Treasury Management4 Credits
(Book ID: B1311)
 
Assignment Set- 1 (60 Marks)
 
Note: Each question carries 10 Marks. Answer all the questions.Q.1
Explain how organization structure of commercial bank treasury facilitates in handling varioustreasury operations.
[10 Marks]
Ans:-The treasury organization deals with analysing, planning, and implementing treasury functions. It deals with issues of profit centre,cost centre etc. The organizations managing interfaces with treasury functions include intergroup communications, taxation, recharging,measurement and cultural aspects.
 
Structure of treasury organization
 
Figure 1.2 depicts the structure of treasury organization which is divided into five groups.
 
Figure 1.2: Treasury Organizations
Fiscal
 – 
This group includes budget policy planning division, industrial and environmental division, common wealth state relationships, andsocial policy division.
 
Macroeconomic
 – 
This group deals with economic sector of the organization. It includes domestic and international economic divisions,macroeconomic policy and modeling division.
 
Revenue
 – 
This group is concerned with the taxes in an organization. It includes business tax division, indirect tax, international and treatiesdivision, personal and income division, tax analysis and tax design division.
 
Markets
 – 
This group mainly deals with selling of products in the competitive market. It includes competition and consumer policy,corporations and financial services policy, foreign investments and trade policy division.
2
With Lots of Luck: Ali
 
Corporate services
 – 
This group deals with overall management of the treasuryorganisation. It includes financial and facilities division, humanresource division, business solutions and information management division.
 
Treasury management in banks
 
In recent days, most of the Indian banks have classified their business into two primary business segments like treasury operations(investments) and banking operations (excluding treasury).
 
The treasury operations in banks are divided into:
 
Rupee treasury
 – 
The rupee treasury carries out various rupee based treasury functions like asset liability management, investments andtrading. It helps in managing the
 bank’s position
in terms of statutory requirements like cash reserve ratio, statutory liquidity ratio according tothe norms of the Reserve Bank of India (RBI). The various products in rupee treasury are:1.
 
Money market instruments
 – 
Call, term, and notice money, commercial papers, treasury bonds, repo, reverse repo and interbank participationetc.2.
 
Bonds
 – 
Government securities, debentures etc3.Equities
 
Foreign exchange treasury
 – 
The banks provide trading of currencies across the globe. Ideals with buying and selling currencies.
 
Derivatives
 – 
The banks make foundation for Over the Counter (OTC). It helps in developing new products, trading in order to lay off risksand form apparatus for much of 
the industry’s self 
-regulation. The role of policies in strategic management was described in this section. Thenext section deals with inter-dependency between policy and strategy
 
Q.2 Bring out in a table format the features of certificate of deposits and commercial papers. [10marks]
Ans:-Features of commercial papers Features of CDs in Indian market
 
 
CPs is an unsecured promissory note. Schedule banks are eligible to issue
CPs can be issued for a maturityperiodof 15 days to less than oneyear. Maturity period varies from threemonthsto one yearCPs is issued in the denomination of Rs.5 lakh. The minimum size of the issue is Rs.25 lakh.Banks are not permitted to buy back their CDs before the maturity The ceiling amount of CPs should not exceed the working capitalof the issuing company.CDs are subjected to CRR andStatutoryLiquidity Ratio (SLR) requirements The investors in CPs marketarebanks,individuals, business organisationsandthe corporate units registered in India and incorporated units.They are freely transferablebyendorsement and delivery.They have no lock-in period. The interest rate of CPs depends onthe prevailing interest rate on CPsmarket,forex market and call moneymarket. The attractive rate of interestIn any of these markets, affects thedemand of CPs.CDs have to bearstamp duty at theprevailing rate in the marketsThe eligibility criteria for thecompaniesto issue CPs are as follows:The NRIs can subscribe toCDs onrepatriation basisThe tangible worth of the issuingcompany should not be less than Rs. 4.5 Crores.The company should haveaminimum credit rating of P2 andA2 obtained from Credit RatingInformation Service of India(CRISIL) andInvestment Information andCreditRating Agency of India Limited. (ICRA)respectivelyThe current ratio of the issuingcompany should be 1.33:1.The issuing company hasto belisted on stock exchange.
 
Q.3 Critically evaluate participatory notes. Detail the regulatory aspects on it. [10 Marks]
Ans:-The participants in forex market are the RBI at the apex, authorised dealers (ADs) licensedby forex market, exporters, importers,companies and individuals. The major participants of foreign exchange market are:
 
Corporates
 – 
They mainly include business houses, international investors, andmultinational corporations. They operate in market by buyingor selling currencies withinthe framework of exchange control regulations. It deals with banks and their clients toform retail segment of forexmarket.
 
Commercial banks
 – 
They play an important role in forex market. They operate in marketby trading currencies for their clients. Large volumeof transactions consists of banksdealing directly among themselves and smaller transactions usually consists of intermediary foreign exchangebrokers.
 
Central bank 
 – 
 
It plays a vital role in the country’s economy by controlling moneysupply. Central banks get involved in forex market to rega
inprice stability of exchangerate, protect certain levels of price in exchange rate, and support economic goals likeinflation and growth.
 
Exchange brokers
 – 
They ensure the most favourable quotations between the banks at alow cost in terms of time and money. Banks provideopportunities to brokers in order toincrease or decrease the rate of buying or selling foreign currencies. Exchange brokershave a tendency tospecialise in unusual currencies but also manage major currencies. InIndia, many banks deal through recognised exchange brokers or may dealdirectly amongthemselves.
 
The other participants include RBI and its authorised dealers, exporters, importers, companiesand individuals.
Q.4 What is capital account convertibility? What are the implications onimplementingCAC?
Ans:- Capital Account Convertibility(CAC) refers to relaxing controls on capital accounttransactions. It meansfreedom of currency conversion in terms of inflow and outflows withrespect to capital account transaction. Most of the countries haveliberalised their capital accountby having an open account, but they do retain some regulations for influencing inward andoutward capital flow.Due to global integration, both in trade and finance, CAC enhances growthand welfare of country.
 
The perception of CAC has undergone some changes following the events of emerging marketeconomies (EMEs) in Asia and Latin
America, which went through currency and banking crisesin 1990’s. A few counties backtracked and re
-imposed capital controls as part of crisisresolution. Crisis such as economic, social, human cost and even extensive presence of capitalcontrols creates distortions, making CACeither ineffective or unsustainable. The cost andbenefits from capital account liberalisation is still being debated among academics andpolicymakers. These developments have led to considerable caution being exercised by EMEs in opening up capital account. The Committee
on Capital Account Convertibility (Chairman: Shiras’s. Tarapore) which submitted its report in 1997 highlighted the benefits
of a more opencapitalaccount but at the same time cautioned that CAC could pose tremendous pressures on thefinancial system. India has cautiously openedits capital account and the state of capital control inIndia is considered as the most liberalised it had been since late 195
0’s. The different ways
of implementing CAC are as follows:
Open the capital account for residents and non-residents.
 
 
Initially open the inflow account and later liberalize the outflow account.
 
Approach to simultaneously liberalize control of inflow and outflow account.
 
Q.5 Detail domestic and international cash management system [10 Marks]
Ans;-The strategy of a company which has its businesses in many nations and efficientlymanages its cash and liquidity is calledmultinational cash management programme. The maingoal of multinational cash management is the utilisation of local banking and cashmanagementservices.Multinational companies are those that operate in two or more countries. Decision making withinthe corporation iscentralised in the home country or decentralised across the countries where theorganisation does its business.The reasons for which the firmsexpand into other countries are as follows:
 
Seeking new markets and raw materials
 
 
Seeking new technology and product efficiency.
 
Preventing the regulatory obstacles.
 
Retaining customers and protecting its processes
 
Expanding its business.Several factors which distinguish multinational cash management from domestic cashmanagement are as follows:
 
Different currency denominations
 
Political risk and other risk.
 
Economic and legal complications.
 
Role of governments
 
Language and cultural differences.
 
Difference in tax rates, import duties.The principle objective of multinational cash management programme is to maximise acom
 pany’s
financial resources by taking benefits from all liability provisions, payable periods.The multinational cash management programme effectivelyachieve its goals by using excess cash flow from some units across the globe to extend cash needs in other units which is called in-
housebanking and by relocating funds for tax and foreign exchange management throughrepricing and invoicing.During multinational cashmanagement system payments by customers to
company’s
branchesare basically handled through a local bank. The payments betweenthe branches and the parentcompany are managed through the branches, correspondents or associates of the parent company.Throughthe use of electronic reporting systems a parent company observes cash balances in itsforeign local banks.Multinational cash managementprogramme specifically evaluate its techniques by timing of billing, use of lockboxes or intercept points, negotiated value range.Themultinational cash management system involves exchange rate risk which occurs when thecash flow of one currency during transformationto another currency the cash value getsdeclined. It occurs due to the change in exchange rates. The exchange rates are determined byastructure which is called the international monetary system.For example, Wincor Nixdorf played an innovative role in enhancing cashhandling betweenvarious countries.
Wincor’s
focus was on the entire process chain which started from head officeto stores, crediting to theretail
company’s
account, head office to branches and so on.
WincorNixdorf’s
served several countries with its innovative hardware andsoftware elements, ITservices to side operations and consulting services to develop custom optimised solutions.
 
Q.6 Distinguish between CRR and SLR [10 Marks]
Ans:- Cash Reserve Ratio
Cash Reserve Ratio (CRR) is a country’s central bank regulation that sets the minimum reservesfor 
banks to hold for their customer deposits and notes. These reserves are considered to meet thewithdrawal demands of the customers. Thereserves are in the form of authorised currency storedin a bank treasury (vault cash) or with the central bank. CRR is also called liquidity ratio as
itcontrols money supply in the economy. CRR is occasionally used as a tool in monetary policiesthat influence the country’s e
conomy.CRR inIndia is the amount of funds that a bank has to keep with the RBI which is the centralbank of the country. If RBI decides to increase CRR, then
the banks’ available cash drops. RBIpractices this method, that is, increases CRR rate to drain out ex
cessive money from banks. TheCRR inthe economy as declared by RBI in September 2010 is 6 percent.An organisation that holds reserves in excess amount is said to hold excessreserves.
 
The following are the effects of CRR on economy:
 
CRR influences an economy’s money supply by effecting the potential of banks
 
CRR influences inflation in an organization
 
CRR stimulates higher economic activity by influencing the liquidity
 
Statutory Liquidity Ratio
 
Statutory Liquidity Ratio (SLR) is the percentage of total deposits that banks have to invest ingovernment bonds and other approved securities.It means the percentage of demand and timematurities that banks need to have in forms of cash, gold and securities like GovernmentSecurities(G-Secs). As gold and government securities are highly liquid and safe assets they areincluded along with cash.In India, RBI determines the

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