A Summer Internship Project Report

³Study of Treasury Management Banking in Sector: with Reference To: SBI and ICICI Banks
In the partial fulfillment of the Degree of Master of Management Studies under the University of Mumbai By

Mr. Anand.P.Mishra [Roll No: B-36]

Specialization: Finance
Under the Guidance of

(Mrs)Prof. Raghukumari
(Internal Guide)

Aruna Manharlal Shah Institute of Management and Research Ghatkopar [W], Mumbai-86 2010-2011


Acknowledgement :³No Learning is proper and effective without Proper Guidance´ Every study is incomplete without having a well plan and concrete exposure to the student. Management studies are not exception. Scope of the project at this level is very wide ranging. On the other hand it provide sound basis to adopt the theoretical knowledge and on the other hand it gives an opportunities for exposure to real time situation. This study is an internal part of our MBA program and to do this project in a short period was a heavy task. Intention, dedication, concentration and hard work are very much essential to complete any

task. But still it needs a lot of support, guidance, assistance, co-operation of people to make it successful. I bear to imprint of my people who have given me, their precious ideas and times to enable me to complete the research and the project report. I want to thank them for their continuous support in my research and writing efforts. I wish to record my thanks and indebtedness to (Mrs) Prof. Rghukumari ± Faculty, college Aruna Manharlal Shah Institute of Management Research, whose inspiration, dedication and helping nature provided me the kind of guidance necessary to complete this project. I am extremely grateful to management of Institute of Technology & Management, Ghatkopar for granting me permission to be part of this college. I would also like to acknowledge my parents and my batch mates for their guidance and blessings.

Date: -June 2011


Table of contents:-



Page Nos. 1-5

CHAPTER 1:- Introduction to project CHAPTER 2:- Litrature Review CHAPTER 3:- Research Methodology
Objective of study Scope of study Research Methodology Research design


CHAPTER 4:- Company Profile CHAPTER 5:- Treasury Management
5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8 5.9 5.10 5.11 5.12 Overview of banking industry Principal regulation of Indian banking sector RBI - Regulation Hierarchy of banking industry in India TM an overview Functioning of treasury department in banks Objective of TM Financial aspect of a function of a treasurer Organizational structure of treasury Elements of TM Nature of treasury Assets & Liabilities Treasury products & services

12-16 17-78



Types of risks associated with treasury & their mitigation Risk management ± RBI Guidelines/Norms Future Scope/Challenges in TM Role of IT in TM COMPARISION BETWEEN TWO BANKS

5.14 5.15 5.16

& CASE STUDY :1 1.1 1.2 1.3 1.4 1.5 CASE STUDY : 2 2.1 2.3 STATE BANK OF INDIA Overview of TM in SBI Forex Treasury (FX) Overseas treasury operations Portfolio Management & Custodial Services Analysis of SBI ICICI BANK Treasury department of ICICI bank Analysis of ICICI


Data anaylsis


Finding Recommendations And Suggestions Conclusion

79-80 80-81 82 83


organizational structure of treasury. which should be properly functioned by treasurer. statutory liquidity ratio. The project deals with risk involved in these treasury assets and liabilities and their mitigation. etc. 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. The project also includes risk management guidelines which are laid down by RBI. and control interest rate risk and currency exposure to an acceptable level. dates government securities. The project includes nature of treasury assets and liabilities and treasury products & services which plays an important role in very banks. Risks are of two types¶ operational risk & financial risk. role of information technology in treasury management and a study on SBI¶s treasury and ICICI treasury. The project covers the future scope / challenges in treasury management. minimize the financing cost of the business. 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.` Executive Summary:The project is all about Treasury managementoperations in banks. . This project covers functions of treasury management operations in banks.


and. If we examine the balance sheets of Commercial Banks (Public Sector Banks. The reasons for such developments appear to be as under:  Poor credit off-take coupled with high increase in NPAs. resulting in high profit to commercial banks. Thus treasury operations seek to maximize profit and earning by investing available funds at an acceptable level of risks. inventory 2 . Interest income from investments has overtaken interest income from loans/advances.  Capital adequacy requirements.  Banks' reluctance to cut-down the size of their balance sheets. real or opportune.1 Introductionof Treasury Management: In general terms and from the perspective of commercial banking.` 1. There is no profit or reward without attendant risk.  Government's aggressive role in lowering cost of debt. typically). invested. The special feature of such bloated portfolio is that more than 85% of it is invested in government securities. we find investment/deposit ratio has by far overtaken credit/deposit ratio. treasury refers to the fund and revenue at the possession of the bank and day-to-day management of the same. Returns and risks both need to be managed. and deployed with intent to improve profitability. thereby need to be managed. Idle funds are usually source of loss.

dealing/trading rooms engaged in the same trading activity are brought under same policy. The basic purpose of integration is to improve portfolio profitability. 3 . as the latter is size ably a book-entry. risk-insulation and also to synergize banking assets with trading assets. all existing and diverse trading and arbitrage activities are brought under one control with one common pool of funding and contributions. both horizontal and vertical. In this context. In horizontal integration. has come to the attention of the corporate. technological and accounting platform. treasury operations are becoming more and more important to the banks and a need for integration.`  The income flow from investment assets is real compared to that of loan-assets. while in vertical integration.

4 . Treasury management modules are available for many larger enterprise software systems. At one end of the spectrum it manages balance sheets and liquidity. All banks have departments devoted to treasury management. It has an increasingly important job to do. and does good things to enhance the yield on assets and minimize the cost of liabilities. asset/liability management. minimize the financing cost of the business. and control interest rate risk and currency exposure to an acceptable level. mostly through the clever and intelligent use of derivatives.3 MEANING AND DEFINITION Meaning: Treasury is the glue binding together liquidity management. treasury can help restructure the balance sheet and provide new products.` 1. At the other end of the spectrum. capital requirements and risk management. as do larger corporations. 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.

The reforms that were initiated in 90s made domestic markets closely linked to global markets.debt market. which has raised the need for integration of micro level units.money market. Relaxation of regulations has almost integrated different segments of financial markets.Treasury management (or treasury operations) includes management of an enterprise' holdings in and trading in government and corporate bonds. at the macro level and integration of treasury operations at the operational level of banks. capital market. Once capital account convertibility is fully materialized. The domestic market is integration with global market at the micro level. debt and capital market and forex market. financial futures.` In other words. 1. Increased demands from their clients in tandem with high competition forced banks to operate in all these markets.4Integrated Treasury: We see integration of segmented financial markets. payment systems and the associated financial risk management. The term µintegration¶ means merger or centralization or consolidation. etc. forex market. which enabled free flow of money from one market to another.. currencies. 5 . options and derivatives. etc. money market.. the markets will become fully integrated.

` CHAPTER 2: Litrature Review 6 .

Among the services provided by banks include automated clearing house (ACH) transactions.Literature Review j Kane . businesses can reduce errors and costs. Ways on how banking clients can find a bank that offer treasury and cash management services at a competitive price are discussed. The article offers information on treasury and cash management services provided by banks that public accounting firms should consider to ensure that they are getting the most from their banks.` 2. lockbox and zero-balance account (ZBA). as well as lessen exposure to check fraud. Joe Money Machinery Co. It states that with automated accounts payable and receivable systems. It expects the Internet to drive the future of such systems and services. It comments on the use of automated clearinghouse networks and purchase cards as alternatives to paper checks.Senior vice president global service at. Jack and Wolfi (May 2011) This article looks forward to the future of cash and treasury management systems and services in Europe. It highlights the importance of cloud computing and downloadable applications to the sector. (June 2010). 7 .The article focuses on the use of electronic treasury management in maximizing liquidity. j Lagre. Birmingham. It mentions the use of remote deposit service to scan checks and transmit an electronic image of the check to banks for deposit.Jay(Oct2006). It comments on the use of imaging technology in other check transfer services j CFO and CIO..

` CHAPTER 3: Research Methodology 8 .

` 3. To know what are the RBI guidelines formulated for Treasury Management. j j To have knowledge of how ICICI Bank manages its treasury. To have a broader view on nature of treasury assets & liabilities and to know what are their products and services involved in Treasury Management.1 Objective of the Study: j The objective of undertaking a project on Treasury Management operations in banks is to have in-depth knowledge about the meaning of Treasury Management. 9 . j j j To understand the risk associated with Treasury Management and their mitigation. j j To understand the elements of Treasury Management and the functions of treasurer. organizational structure and objective of Treasury Management in Banks. To know the future scope involved in Treasury Management & role of information technology in Treasury Management. To have knowledge of how SBI manages its treasury as SBI is the major contributors in money and for-ex market. j To know about the functions.

´ It is a careful investigation for search of new facts in any branch of knowledge. ³A research design is the specification of methods and procedures for acquiring the information needed.4 RESEARCH DESIGN:According to Kerlinger. Its purpose is to find answers to questions through the application of the scientific method. 10 .3 Research Methodology:REDMEN & MORY defines.` 3. It is the overall operational pattern or framework of the project that stipulates what information is to be collected from which sources by what procedures. data collection and procedure of analysis of research instrument. 3. Research always starts with a question or a problem. It includes research design. sample size. It is a systematic and intensive study directed towards a more complete knowledge of the subject studied. 3. ³Research design n is the plan structure & strategy of investigation conceived so as to obtain answers to research questions and to control variance. The purpose of research methodology section is to describe the procedure for conduction the study.´Research as a systematized effort to gain now knowledge.2 Scope of the Study: The scope of the research includes the working of treasury management in banking sector by making a comparison between two banks that is ICICI bank and STATE BANK OF INDIA by following the RBI guidelines formulated for Treasury Management. According to Green and Tull.

Research design is broadly classified into: Exploratory research design  Descriptive research design  Casual research design This research is an exploratory research .The major purpose of this research is to understand the working of treasury management. 11 .` It is found that research design is purely and simply the framework for a study that guides the collection and analysis of required data.

` CHAPTER 4: Company Profile 12 .

co.in http://www. : 4. South Africa. Exporter & Supplier 130 Rs. Ramswaroop R Thard 2003 Phone Fax Email ID Website Name of CEO Year of Establishment Nature of Business No. Bhuleshwar. Dr.40 Cr India. Office No. Kuwait 13 . of Employees Annual Turnover Market Covered Manufacturer. Australia.partywareproduct. UAE. Jaihind Building. Atmaram Merchant Road. Mumbai +91-22-22019380/32995190 +91-22-22010011 info@formpack.com Mr. Ramswaroop R Thard 3c.` Rajshree Industry Contact Person Address Mr.

RAJSHREE INDUSTRIES is a Mumbai based company that is a house of various disposable plastic products. Disposable products are greatly in demand because of their convenience of use. etc. South Africa and Australia. Trays. Mr. Biodegradable Tablewares. customer confidence & meet all the deadlines set by our customer on the quality front and provide them with the best of service. We are recognized as one of the Plastic Drinking Cups Manufacturers and Food Packaging Trays Exporters from India. we have been able to conquer an esteemed clientele in India as well as in other parts of the world like India. Our range of Plastic Dinnerware is made from first rate raw materials. We are growing at a consistent rate since our commencement in the year 2003 under the guidance of our visionary CEO. Our products are highly biodegradable and safe to use. USA. As disposable ware is easy to use and have no maintenance they have demand worldwide. Our ultimate aim is to gain the goodwill.` RAJSHREE INDUSTRIES is a Mumbai based company that is actively engaged in the manufacturing. The products are made under hygienic conditions that assure their purity. The different products that we provide include Party Disposable Plates. They are available in different sizes to meet the requirements of the clients. We offer a range of disposable products like disposable Plastic Cups. Ramswaroop. Bowls. Disposable Trays. 14 . Disposable Containers Disposable Bowls. Thard. We take immense pleasure to be counted among the renowned Disposable Serving Trays Manufacturers in Maharashtra. exporting and supplying of various disposable food service products. India. cup-lids. Disposable Cups. Plates. etc. Our trademarks ³Natraj´ ³Satyam´ ³Samrat´&"King" has a strong presence in the Indian market. R. Kuwait. containers.

Thard and MR. Sunil Sharma  Production & Quality Control Mr. J. SarojBakshi and Mr. three at Daman & one at Bombay Nasik highway. RamswaroopThard and Mr. These machines can run at double the speed of the conventional machines.ft.000sq.Printing (inks procured from Zellar. Mr. We have eighteen forming machines which are latest of its kind and are called as high speed all servo machines. RaghunandanThard and Mr. Harish Thard  Marketing Mr. For the decoration on the cups we have five printing machines (printing capacity 10 lac pieces / day) which can do a job of six colors U. Our Team:: The key members involved in managing our company chores are :  Account & Finance  Mr. printing machine and the variety of moulds. Our machines are procured from best available source in India & China. Germany). Narayan Jha 15 . We are equipped to print on PS and PP material. Naresh Kumar Thard. We have manufacturing facility located at four different locations. We are equipped with seven extruders with total combined capacity to extrude 1500kg/hr.V. Vijay Kumar Thard  Administration Mr. Radheshyam. We have a total constructed area of 60.` Infrastructure:: our infrastructure includes the extruders. thermoforming machines.

Donalds Mother Dairy Mother Dairy Baroda Dairy Orissa Dairy Walke Dairy Metro Dairy Hindustan Coco-Cola Beverages 15 16 17 18 19 20 21 Patna Dairy Muzaffarpur Dairy Barauni Dairy Barauni Dairy Dinshaw¶s Aristo Pharmaceuticals Ltd Cafe Coffee Day 13 14 Aditya Birla Retail Hindustan Lever Limited Note::Apart we have a network of distributors in all the major cities in India and in various parts of the world 16 .` Our Clients::We have established an esteemed clientele that includes: 1 2 3 4 5 6 7 8 9 10 11 12 GCMMF (Amul) Reliance Dairy Ltd Good Day Foods Nestle India Ltd Mc.

` CHAPTER 5: Treasury Management In Banking sector 17 .

respectively. stricter prudential and supervisory of the financial system. 5. the financial sector problems encountered in Latin American economies and more recently. The banking sector world over has come into increased focus in the recent years. in some central European economies have provided an evidence of how a weak banking sector can undermine confidence in macroeconomic policies. 194 j Foreign Exchange Management Act. 1934 j Banking Regulation Act. have led to strengthening of the banking sector in the last decade.A bank is an institution that deals in money and its substitutes and provides other financial services. in the country. Developing countries including India. Banks accept deposits and make loans and derive a profit from the difference in the interest rates paid and charged. The problems in Southeast Asian economies. The financial sector reforms as part of the broader canvas of economic reforms.1 Overview of Banking Industry:Introduction Definition:Britannica defines a bank as: . the recessionary trends in the Japanese economy. 1999 j Reserve Bank of India (µRBI¶) Circulars & Notifications j Policy of Government for Foreign Direct Investment (µFDI¶) in Banking Sector 18 . have been focusing attention on introduction of structural reforms.2 Principal Regulations of Indian Banking Sector: j Reserve Bank of India Act.` 5. The banking sector accounts for over half of the assets of the financial sector and remains dominant in India.


5.3 Reserve Bank of India- the Regulator:-

The Reserve Bank of India (µRBI¶) is the primary regulator of banks in India, which are governed by the Banking Regulation Act, 1949. Banks are also acquired to conform to the provisions of the Reserve Bank of India, 1934, the Foreign Exchange Management Act, 1999, the Companies Act, 1956 and the guidelines of the Foreign Exchange Dealers¶ Association of India and the Fixed Income and Money Market Dealers Association.

The RBI continuously monitors developments in the financial markets in India and abroad and takes monetary and administrative action as may be considered necessary. The RBI conveys its policies and instructions to the banks through the circulars issued from time to time.



5.4 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 one¶s 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. 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.


only with variation of the degree of participation. to globalize the economy. tenor & cost) and yield expected in credit and investment. All players and regulators had been actively participating. Duration Analysis is used as a tool to monitor the price sensitivity of an investment instrument to interest rate charges. A treasury department of a bank is concerned with the following functions: (a) Reserve Management & Investment: It involves (i) meeting CRR/SLR obligations. This is where. integrated treasury operations have emerged as a basic tool for key financial performance. (ii) having an appropriate mix of investment portfolio to optimize yield and duration. 23 . With burgeoning forex reserves.` 5. Indian banks and Financial Institutions have no alternative but to be directly affected by global happenings and trades. the prime movers of financial intermediaries and services have been the policies of globalization and reforms. Duration is the weighted average µlife¶ of a debt instrument over which investment in that instrument is recouped. (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.5 Functions Of Treasury Department In Banks Since 1990s.

A good working capital management maximizes the liquidity and profitability of the organization. Since cash surplus as well as cash deficit is not recommendable for and organization. and Foreign Investors etc.` (c) 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. Institutional investors. the treasurer must take various matters into consideration like debt structure of the organization. structure of the debt portfolio. strengthening and maintaining better interaction with interested members of the financing and investing community such as: y y y y (f) Individual investors. etc. Professional Fund Managers. the treasurer has the responsibility to maintain an optimum cash level. (d) 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. Good Banking Relationships: 24 . While determining the best source of finance. and advantages and shortcoming of short-and long ±term financing. (e) Better Investor Relations: This involves establishing.

desirable and suitable banking services is the responsibility of the individuals responsible for cash management. (j) Capital Structure Formulation: The treasurer must formulate the capital structure for the organization in accordance to business goals and implement the same. (g) Short-term Investments: Idle cash incurs opportunity costs as time passes. The treasurer has the authority to utilize surplus cash of the organization in short-term beneficial investments. selection of appropriate. further includes establishing of company policy with respect to decision on trade discounts and vendor payment ageing. The excessive surplus cash in the business may arise due to various factors such as cyclical. who fall under the treasury belt. seasonal to temporary business trends. risk management (hedging) involves the utilization of financial instruments to cushion the company against interest rate. On the other hand.` In general. The international treasurer has to ensure liquidity in foreign exchange funds without compromising profitability. (i) Establishing the Company Policy: Functions of the treasurer. He has the responsibility of taking appropriate debt 25 . commodity and currency exposures. This includes cash transmission and bank account and bank relationship management. the importance of risk and forex management has been spurring. (h) Risk (Hedging) and Forex Management: Due to increasing globalization of business.

The treasurer must identify and undertake such transactions that will result in reduction/elimination of tax liabilities of the business. Even reconciliation of relevant accounts is an important function of the treasurer. The market risk of liabilities pertains to floating interest rate risk for assets & liability mismatches. 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. (m) 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. 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 26 . (l) Internal Treasury Controls: The treasurer acts as a cashier.` vs. (k) 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. equity financing decisions. undertakes the role of an authorized signatory on payment cheques including the authority to approve such cheques. (n) Risk Management: Integrated treasury manages all market risks associated with a bank¶s liabilities and assets. A wrong or inappropriate capital structure decision may through the business into irrecoverable losses.

without sacrificing yield or liquidity. (q) 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. (p) Derivative Products: Treasury can developInterest Rate Swap (IRS) and other Rupee based/ cross. Hence. the Treasury would monitor the cash inflow impact from changes in assets prices due to interest rate changes by adhering to prudential exposure limits. credit market).` derivates etc.currency derivative products for hedging Bank¶s own exposures and also sell such products to customers/other banks. after assuming market risk. capital market. 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. to various business groups and product categories about the correct business strategy to adopt. while the credit risk assessment continues to rest with Credit Department. (o) Transfer Pricing: Treasury is to ensure that the funds of the bank are deployed optimally. (r) Capital Adequacy: 27 . forex market. ideally treasury should provide benchmark rates.

with Return on Assets (ROA) being a key criterion for measuring the efficiency of deployed funds. The amount and variety of such embezzlements have been directly relatable to the operational level. options. (u) Fraud Protection: The decade of nineties has witnessed more frauds in trading than banking books. forward rate agreements and the like. Dealing operations could include cash/spot.` This function focuses on quality of assets. futures. forward. An integrated treasury is a major profit centre. It has its own P&L measurement. All the centers undertake similar transactions with differing volumes. (s) Coordination: Banks do operate at more than one money market centers. interest and currency liability swaps. 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. (t) Control and Development: Treasury operates as the focal point of dealing operations. Treasury is the sole owner and performer of these transactions. 28 . The ground level task of this kind is to be undertaken at the treasury. The task of coordination of foreign exchanges positions is no different. 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).

j To assess. 29 . j To deploy and invest the deposit liabilities.as mandated by the RBI on current and forward planning basis. j To maintain statutory reserves. clearing. j To fund the balance sheet on current and forward basis as cheaply as possible taking into account the marginal impact of these actions.6 Objectives of the Treasury Management Treasury of a commercial bank undertakes various operations in fulfillment of the following objectives: j To take advantage of the attractive trading and arbitrage opportunities in the bond and forex markets. advise and manage the financial risks associated with the non-treasury assets and liabilities of the bank j To adopt the best practices in dealing. To manage and contain the treasury risks of the bank within the approved and prudential norms of the bank and regulatory authorities. settlement and risk management in treasury operations. 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. j j To effectively manage the forex assets and liabilities of the bank.` 5.CRR and SLR.

interest on loans.g. dividend on equity). debentures. etc.. 30 . and what part of this can be met by funds generated internally and how much will have to be mobilized from external sources. The average cost of all the funds mobilized should be kept as low as possible.  From where/whom to mobilize: A firm has access to different sources of finance. The treasurer has to decide which will be the most appropriate source of finance for his firm. 5.7 Financial Aspect of Functions of a Treasurer The Treasury in the finance department Deals with the liquid assets. both long-term and short-term. he has a major responsibility of being a custodian of cash and other liquid assets. 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.  At what costs: all funds have a cost associated with them (e.` j To deploy profitably and without compromising liquidity the clearing surpluses of the bank j To identify and borrow on the best terms from the market to meet the clearing deficits of the bank j To offer comprehensive value-added treasury and related services to the bank¶s customers j To act as profit center for the bank. since the treasurer is the head of the treasury.

defined as those convertibles into cash usually within a year. and (ii) the second involving short-term assets or current assets is popularly called working capital management. Accordingly. asset selection decision is also of two types: (i) the first involving long-term assets are popularly called capital budgeting. The investment decision relates to the selection of assets in which funds will be invested by firm. 31 . A proper balance should be achieved between fixed and current assets.`  When to mobilize:The treasurer has to estimate when a shortfall of funds will occur and raise funds accordingly.(i) long-term assets (ii) short-term or current assets. which can be acquired. 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.  Investment Decision: The funds generated in the course of business need to be put to further use. fall into two categories. The assets.

This department independently inspects daily operations in the treasury department to ensure internal/regulatory system and procedures.` 5. Monitoring and Reporting Office (Audit group): This department looks after the activities relating to accounting. Depending on the responsibilities assigned and power delegated. stock. and send regular reports to authorities concerned. it can be aptly structured. operations would be carried out by separate and independent set of dealers in each market. operations would be done by one or more dealers jointly in all the markets. Indeed. the back office undertakes settlement and reconciliation operations. Accountants¶ record all deals in the books of accounts. 32 . for a relatively smaller treasury.money. Tier II ± Settlement Desk (Back Office): Once the deals are concluded.8Organizational Structure of Treasury: There is no standard structure for treasury department of a bank. Tier III ± Accounting. The number of dealers depends on the size and frequency of the operations.operate in their respective areas. banks maintain three independent tiers at the functional/operational level:Tier I ± Dealing Desk (Front Office): The dealers and traders in different markets. They are the first point if interface with other participants in the market. Typically. In case of larger in each bank. derivatives and forex. it is for the back office to process and settle the deals. auditing and reporting. debt. while auditors and inspectors closely monitor all deals and transactions done by the front and the back office. But. commodity.

Merchant/ Service 33 . DealerFor-ex. Currenc y/ DealerCorp. Mkt. Intelligence Research and Analysis Head of Settlemen ts Head of Accounting Monitoring and Manager Funds/ Reserve Manager Settlements Documentatio n Audit / Reporting Manager Settlemen ts Custodian Accounts/ Monitorin g Dealer Rupee.` Head of Treasury Chief Dealer Mkt.

for monitoring of risks. or cash reserve ratio. refers to the portion of deposits that banks have to maintain with RBI. This serves two purposes. Besides CRR. 2. and thereby. and activities undertaken by the bank. Although the bonds are long-term in nature. Second. banks are required to invest a portion (8. For example. The government securities (also known as gilt-edged securities or gilts) are bonds issued by the Central government to meet its revenue requirements. The date of maturity is specified in the securities therefore it is known as dated government securities. 34 . they are liquid as they have a ready secondary market.9 Elements of Treasury Management 1. developing and marketing innovative instruments/products. the treasury may have separate individuals/managers for monitoring funds movement. it ensures that a portion of bank deposits is totally risk-free. it enables RBI control liquidity in the system.25 per cent now) of their deposits in government securities as a part of their statutory liquidity ratio (SLR) requirements. A treasury can have more functional desk depending on the size and structure of the bank. 5. First. Dated Government Securities: The Government securities comprise dated securities issued by the Government of India and state governments. Cash Reserve Ratio/Statutory Liquidity Ratio Management: CRR. inflation. The heads of each section reports directly to the Head of the Treasury.` The three departments should be compartmentalized and they act independently.

They are not generally in the form of securities but in the form of entries in RBI's Subsidiary General Ledger (SGL). FIs. c) Till recently. 35 . the interest in government securities has gone up tremendously and trading in these securities has been quite active. with a good number of banks setting up active treasuries to trade in these securities. though the government sometimes issues zero coupon instruments and floating rate securities also. liquidity in gilts is also aided by the primary dealer network set up by RBI and RBI's own open market operations. In one of its first moves to deregulate interest rates in the economy. where the central bank decides the coupon or discount rate based on the response received. insurance companies. Most of these securities are issued as fixed interest bearing securities. 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. Since then. Perhaps the most liquid of the long term instruments. provident funds and trusts. b) The investors in government securities are mainly banks. RBI adopted the market driven auction method in FY 1991-92. This has been changing of late. These securities are issued through auctions conducted by RBI.` a) The Government borrows funds through the issue of long term-dated securities. These investors are required to hold a certain part of their investments or liabilities in government paper. a few of the domestic players used to trade in these securities with a majority investing in these instruments for the full term. the lowest risk category instruments in the economy.

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'. Some of these instruments are as follows: A. Intervening holidays and/or Sundays are excluded for this purpose.maturity is in 14 days. 100 cr. No collateral security is required to cover these transactions. 100 cr. j 91-day T-bill. the lowest risk category instruments are the treasury bills. Treasury Bills Market In the short term. Call Money Market Call/Notice money is an amount borrowed or lent on demand for a very short period. Its auction is on every alternate Wednesday (which is not a reporting week). 100 cr. 36 . The notified amount for this auction is Rs. There are four types of treasury bills:j 14-day T-bill.` 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.maturity is in 91 days. Its auction is on every Friday of every week. The notified amount for this auction is Rs. j 182-day T-bill .maturity is in 182 days. RBI issues these at a prefixed day and a fixed amount. The notified amount for this auction is Rs. B. Its auction is on every Friday of every week.

should stimulate the evolution of term money market sooner than later.` j 364-Day T-bill. coupled with the proposals for Nationalization of reserve requirements and stringent guidelines by regulators/managements of institutions. the growing desire for fixed interest rate borrowing by corporate. The specified entities are not allowed to lend beyond 14 days.maturity is in 364 days. etc. The notified amount for this auction is Rs. Inter-Bank Term Money Interbank market for deposits of maturity beyond 14 days and up to three months is referred to as the term money market. the volatility in the call money market with accompanying risks in running asset/liability mismatches. C. The declining spread in lending operations. the move towards fuller integration between forex and money markets. are all the driving forces for the development of the term money market. Its auction is on every alternate Wednesday (which is a reporting week). in the asset/liability and interest rate risk management. The development of the term money market is inevitable due to the following reasons j Declining spread in lending operations j Volatility in the call money market j Growing desire for fixed interest rates borrowing by corporate j Move towards fuller integration between forex and money market j Stringent guidelines by regulators/management of the institutions 37 . 500 cr. These. The DFHI. The market in this segment is presently not very deep. as a major player in the market. is putting in all efforts to activate this market.

This is also a money market instrument and unlike a fixed deposit receipt. is not less than Rs. 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. Highly rated corporate borrowers. it is suitable to mainly institutional investors and companies. E.4 crore and (c) the borrower account of the company is classified as a Standard Asset by the financing bank/s. (b) the working capital (fund-based) limit of the company from the banking system is not less than Rs.(a) the tangible net worth of the company. 4 crore. it is a negotiable instrument and hence it offers maximum liquidity. 38 . 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. A company shall be eligible to issue CP provided .` D. Certificates of Deposits The scheduled commercial banks have been permitted to issue certificate of deposit without any regulation on interest rates. Since the denomination is very high. it has secondary market too. As such. as per the latest audited balance sheet. Commercial Paper (CP) Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note.

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. These bills are called trade bills. whether a given agreement is termed as Repo or a Reverse Repo depends on which party initiated the transaction. will be received by the bank. 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 trade bills are called commercial bills when they are accepted by commercial banks. G. from the drawee. 39 . The maturity proceeds or face value of discounted bill. 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. 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. Thus.` F. 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. Ready Forward Contracts It is a transaction in which two parties agree to sell and repurchase the same security. 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.

Commercial Banks. Development Financial Institutions. So the need for physical transfer of bills has been waived and the bank that originally discounts the bills only draws DUPN. is the Inter-bank Participation Certificate. 5. commercial banks can rediscount the bills. Under the scheme.). An example of treasury asset/liability which is created by corporate/treasury actions/decisions on funding/deployment but is not tradable. 40 . With the intention of reducing paper movements and facilitate multiple rediscounting. There is a clear distinction between the two groups.` The RBI introduced the Bills Market scheme (BMS) in 1952 and the scheme was later modified into New Bills Market scheme (NBMS) in 1970. with approved institutions (viz. Treasury assets are marketable or tradable subject to meeting legal obligations such as payment of applicable stamp duty. discounted by the discounting bank.10 Nature of Treasury Assets and Liabilities: Bank¶s balance sheet consists of treasury assets and liabilities on the one hand and nontreasury assets and liabilities on the other. which were originally discounted by them. In general. the RBI introduced an instrument called Derivative UsancePromissory Notes (DUPN).. Primary Dealer. it becomes a part of the treasury portfolio of the bank. etc. another characteristic of treasury assets is that they can (and often are required to be marked to market. Mutual Funds. These DUPNs are sold to investors in convenient lots of maturities (from 15 days up to 90 days) on the basis of genuine trade bills. etc. if a specific assets or liability is created through a transaction in the interbank market and/or can be assigned or negotiated.

(b) Issued by State Governments. It is. j Reverse Repos/CBLO. it would become part of treasury activity).backed Lending through CCIL. a treasury asset. an investment in G-Secs can be traded in the market. (c) Guaranteed by Government of India.` Loans and advances are specific contractual agreements between the bank and its borrowers. therefore. 41 . Domestic Treasury 1. j Inter-bank Participation Certificates. as they are not created by market borrowing. (a) Issued by the Government of India as securities and T-bills. j Derivative Usance promissory Notes/ Bankers¶ or Corporate Acceptances. Assets Products/ Instruments: j Call/Notice Money lending. be securitized and sold in the market. j Investment in CDs. Deposits (current and savings accounts and fixed deposits) are not treasury liabilities. j Term money Lending/Inter-bank Deposits. On the other hand. (They can however. j Commercial Paper. Treasury liabilities are distinguished from other liabilities by the fact that they are borrowings from the money (or bond) market. j SLR Bonds (notified as such by the RBI). although these are obligations to bank. and do not form a part of the treasury assets. List of Bank¶s Treasury Products: A. If a bank were to take a position in such securitized debts.

(b) Banks/NBFCs (Tier II Capital). Floating Rate Bonds. Inter-bank Participation Certificates. NABARD. Exim Bank. Liability Products/Instruments: j j j j j j j Call/Notice Money Borrowing. NHB). Mutual Funds. Tier II Bonds (issued by bank). (e) Infrastructure Projects. Term Money Borrowing. Tax-free Bonds. 42 .` (d) Guaranteed by State Governments. (c) Corporate. Refinance (RBI. (d) State-level Enterprises. Private Placements. SIDBI. Preference Shares. j j j j j j j Assets-backed Securities (PTCs). Listed/Unlisted Equity. 2. Repos/CBLO-backed Borrowing through CCIL. CD Issues. (a) Financial Institutions. j Non-SLR Bonds (issued by).

Arranged By For-ex Treasury) j j j j j Preshipment Foreign Credit (PCFC). Interbank: j j j j Spot Currencies. j Foreign Currency Placements.` B. 2. Derivatives j Interest Rate Swaps (IRSs). Foreign Currency Bills Purchased (FCBP). j Currency Options. C. Cash. Forward and Forward-Forward (simultaneous purchase and sale of a currency for two different forward maturities). Tom. D. j Interest Rate Options. Merchant(Initiated In Branches. Post shipment Foreign Credit (PSFC). 43 . Investments and Borrowings (in accordance with RBI guidelines). Foreign Currency Loans (FCLs)/FCNR (B) Loans. j Forward Rate Agreements (FRAs). Foreign Exchange 1. 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. External Commercial Borrowing (ECB).

he can buy an FRA whereby he can fix interest rate for the loan. 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).` 5. In short. if a borrower is going to borrow FC loan for 6 months at LIBOR rate after 3 months.Premium/Discount 2. The basic purpose of the FRA is to hedge the interest rate risk. 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 44 . this is a contract whereby interest rate is fixed now for a future period. The essential idea of entering into a forward contract is to peg the price and thereby avoid the price risk. 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. Forward Rates = Spot Rate +/. For example. 3.11 Treasury Products & Services: 1.

EUR & GBP). the customer has to pay specified amount upfront to the counterparty which is known as premium. New York market and early Asian market. 5. during the tenure and at the end of the transaction. Periodic interest payments (either fixed or floating) are exchanged throughout the life of the contract.` 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. Currency Swap: It is an agreement between two parties to exchange obligations in different currencies at the beginning. 4. though not obligatory. This is in contrast of the forward contract in which both parties have a binding contract. The minimum amount of the contract is 250. The principal is exchanged invariably on termination at the exchange rate decided at the start of the transaction. 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. This facility helps the customer to en cash the currency movements in late European market. In this contract. 45 .in respective base currencies (for e. USD. At the start. By means of currency swap. but has no obligation to do so. the counterparties can reduce the cost of funding. initial principal is exchanged.000/. This is a facility offered to customers to enable them to book Forward Contracts in Cross Currencies at a target rate or price.g.

For mitigation of such risks. liquidity risks. compliance risk. j Non-compliance with laid-down procedures and authorizations for dealing. Financial Risk and Operational Risk. Operational risk can again be divided into those arising from: j System deficiencies. various prudential guidelines prescribed by the regulators and internal policies and procedures laid down by the management are to be followed 1. Operational risks include systemic risk. Legal risks due to inadequate definitions and coverage of covenants and responsibilities of the bank and counterparty in contracts and agreements. authorizations. hardware uptime. legal risks. price risk.` 5. fraud risks. j j j Fraudulent practices involving deals and settlements. settlement and custody. must integrate with work and document flows. Operational Risk: This covers the entire gamut of the transaction cycle from dealing to custody. basis risk). This ensures that individual payments and deliveries by the bank are entirely deal/transaction supported. IT risks. Mitigation 46 . Financial risks include market risks (interest rate risk. credit risks. etc.12 Types of Risks Associated With Treasury and Their Mitigation Risk profile of the treasury activities consists of two broad categories viz. IT involving software quality. based on approved delegation of powers. etc.

In equity transactions. portfolio and prudential limits set for the instrument and counterparty. Settlement must be of the delivery against payment type. j j Counterparty authorizations/powers of attorney must be kept current. the broker is the counterparty. Custodial relationships should be only with those with the highest credit rating. They should be put through periodic stress tests to determine their ability to cope with increased volumes and external data combinations. j Computer systems. networks and software should have adequate backups. 47 .hardware. j Custodian¶s creditworthiness is paramount in demat systems of records of ownership and transfer. The list of approved brokers should be reviewed periodically to satisfy the bank¶s credit standards and ethics.` j Dealers must operate strictly within the single deal. j The prescribed settlement systems in each product/instrument and market must be followed. Stop loss and risk norms of duration and value at risk should be adhered to all times. j The necessary authorizations must accompany documents as they pass from one stage of the transaction cycle to the next. j Delegation of powers must be strictly adhered to. Deviations from delivery and payment practices should not be allowed. Deals or transactions exceeding powers must be immediately and formally ratified in accordance with management/board edicts on ratification. j No deviation from approved and implemented work and document flows should be allowed.

Careful analysis of cash flows of the business before investing. But. escrow accounts etc. 2. transaction and legal documentation should be adequate to protect the bank. Guarantees/letters of credit from rated entities Adequate financial and/or physical assets as security Exposure limits by counterparty. business group. refers to the possibility of the issuer of a debt instrument being unable to honor his interest payments and/or principal repayment obligations. in modern financial markets. it includes non-performance by counterparty in a variety of off-balance sheet contracts such as forward contracts. industry. These have necessitated prescribing maximum exposure limits for individual counterparties for fund and non-fund exposures. Mitigation j Better credit appraisal. Financial Risks: The following identifies and defines individual financial risks: (a) Credit Risk: The oldest of all financial risks in its simplest form. especially in one-off transactions and structured deals. location. on and off balance sheet 48 . j j j j j j Investing only in rated instruments Risk pricing Credit enhancement through margin arrangements.` j Deal. interest rate swaps and currency swaps and counterparty risk in the inter-bank market.

selling securities or forex. Apart from interest rate risk originating from the disparity in the maturities of assets and liabilities. for example.` j j j j (b) Diversification by industry. when the RBI deliberately tightens liquidity. even though there is no liquidity shortage in the market. by increasing CRR. because interest rate determination may differ. reputation and image Securitize loan portfolio of large as well as small borrowers Interest Rate Risk(Balance Sheet): This affects both the assets and liabilities of a bank. 49 . There is also the risk of scarcity of funds in the market. sector. A third situation is when a bank¶s creditworthiness becomes suspect and there are no willing lenders. 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 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. 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. On an overall basis. This could happen. Mitigation j j j j (c) Increase the proportion of investments in liquid securities Increase the proportion of investments in near-maturity high quality instruments Maintain credit rating. there is also basis risk.

it will have to increase duration by buying long-dated securities. futures and FRAs. subject to market liquidity. Increasing duration makes the bond portfolio more sensitive to interest rates while decreasing duration reduces it. while liabilities are fixed rate and MIBOR falls. if the bank expects interest rates to fall. As bond prices and interest rates are inversely related. (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). compressing the spreads. their prices go up. the bank will lower duration by selling long-dated securities. The opposite happens when interest rates rise. Instruments used are interest rate swaps. given historic data on the price behavior of the security (exchange rate) or assessment of likely future market movements. The most price-affected bonds in response to rate movements are those of long maturity. if assets are MIBOR-linked (floating rate). Conversely. assets yields also do. Duration measures the price sensitivity of a bond to changes in interest rates.` For example.indeed maturity and price changes are strongly positively correlated. 50 . Mitigation of basis risk will involve converting (in the above instance) assets to fixed rate (or converting liabilities to MIBOR-linked). in anticipation of a rise in interest rates. When interest rates come down. (d) Interest Rate Risk (Investment/Trading Book): The prices of bonds are affected by changes in interest rates.

3. Settlement Risk. 51 . Open Positions. and Closing loss positions. equity share or a portfolio of these instruments. While it offers enormous scope for making profits. Legal Risk. if stop loss limits/VAR are breached. Counterparty (Credit) Risk. Country Risk. 7. 5. 3. Gap (Interest Rate/ Swap) Risk. foreign exchange position. 2. it is necessary to have adequate data gathering systems in place to measure currency wise exposures and their maturities. 6. Value-at-Risk. 8. Fixing exposure limits by currency and maturity Continuous market monitoring with reference to the bank¶s open positions. Operational Risk. 4. This necessitates and effective forex risk management system involving: 1. 2.` The concept is applied to calculate the risk content of an individual security. (f) Forex (Market) Risk: The forex market is probably the most consistently volatile of all financial markets. The following determine the forex risk exposure of the bank: 1. For supporting the above. the other side of the coin is the risk of big losses from unexpected swings in exchange rates.

` (g) Settlement Risk: Settlement risk arising from time differences between trading zones.International Foreign Exchange Nostro Agreement (IFENA) ii. iii. (i) Legal Risk: Standard agreements govern forex contracts in the domestic and international markets.e. debit and credit are not synchronized.. (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. 52 . For spot and forward foreign exchange . It requires specific responsibility and accountability in the organization structures of the bank for country risk management. 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. To some extent (but not completely). i. The RBI has asked banks to measure monitor and control country exposures. the main being: i. Foreign Exchange Options ± International Currency Options Agreement (ICOM). which may result in one of the parties to a transaction having to settle ahead of the other party. this is mitigated by the exposure limits fixed for each inter-bank counterparty.

` (j) Operational Risk and Concurrent Audit: As required by the RBI. Compliance with overnight exposure limits. Auditors are required to give daily and monthly reports covering: j j j j Compliance with approved open position limits. Compliance with aggregate and individual gap limits. the banks carry out concurrent audit of all forex transactions. Compliance with value at risk norms. 53 .

(a) Banks are required to send monthly reports covering liquidity mismatches and interest rate sensitivity.. extent of liabilities from forex sources. interest rate.e. c) Stop loss levels are fixed for both SLR and non-SLR securities. i.e. (b) Banks are required to pay special attention to liquidity risk and management and monitor the following: j j j j j j j Call Borrowing/Lending Purchased Funds vis-à-vis liquid Assets Core Deposits vis-à-vis Core Assets. i. 54 . Risk management in banks a) Banks have an Assets-Liability Management Committee (ALCO).13 Risk Management: RBI Guidelines/Norms The RBI has circulated detailed guidance notes on Market Risk Management. liquidity and currency risks of the treasury and non-treasury balance sheets. According to these. 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.. b) The banks submit monthly statements to the Board and RBI on liquidity mismatches and interest rate sensitivity. Asset Liability Management and Credit Risk Management.` 5. which manages gap. CRR.

e) The investment committee reviews the investment portfolio every half-year. i) The functions of front-office. with emphasis on rating migration and portfolio quality. The software package used by treasury is system-audited at regular intervals to test its ability to cope with new products and instruments. l) A bank will fully comply with all the RBI¶s guidelines. These findings/reports are put up to the Audit Committee of the Board every quarter. The panel of brokers is reviewed annually. k) Defaults/arrears in interest/principal on bonds are monitored and reported to appropriate authorities. regulations and rules governing the investment portfolio. 55 . f) g) h) The treasury Department is subject to periodic inspection. m) The RBI has now finalized norms for risk-based internal audit system from the first quarter of 2003. and office memos containing approvals by competent authority. scale of operations and outlying data and conditions. settlement back-office. j) Deals are backed by deal slips.` d) Bank undertakes concurrent audits of securities and funds management transactions. mid-office and accounts are completely segregated.

While foreign firms are busy trying to get a foothold on Indian soil.` 5. Indian companies do not lag behind in attempting to penetrate foreign markets. The transformation process that began in the early 1990s has been put into overdrive. 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. Treasury management asks for expertise on capital markets. are fast vanishing. both domestic and international. Careers in treasury and forex management have suddenly been pitch-forked into the limelight. In this increasingly integrated and interdependent financial environment. instruments & investment avenues. which has resulted in volatile exchange rates and more financial constraints. the corporate and banking worlds are paying greater attention to treasury and foreign exchange management. Banks have been 56 . money markets. There has been an unexpected rise in exports as well as imports.14 Future Scope/Challenges In Treasury Management Treasury Management is increasingly being viewed as a specialized function in many corporate companies. the links between money and capital markets have become extremely close. To better understand this interlinking and manage business in a better way. and has already been assigned a separate status from the general financial functions. treasury & risk management and related areas. firms are hiring persons who can handle Treasury Management and forecast rates accurately. Given the inconsistency of exchange rates.

it is necessary to handle forex and treasury related functions carefully. banks and financial institutions are also seeking professionally qualified persons to look after the treasury and forex management functions. 57 . To minimize these risks. Corporate are on the look out for people with professional qualifications to handle all aspects pertaining to treasury and for-ex management. They are also raising funds abroad. Thus. If neglected.` scouting campuses of Indian B-schools with a view to recruiting for their treasury and forex functions. Clients are transacting more and more business with banks in foreign currencies. exposing them to greater risk due to deregulation of interest and exchange rates. Inconsistencies in lending rates require continuous monitoring and management of the assetliability gap of these institutions. 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. Opportunities chiefly exist in the areas of: Corporate Finance:Many Indian corporate are doing business internationally. it may lead to profit erosion.

b. and security control. Opportunities as consultants are not only well paid but also satisfying. Exposure to treasury workstation. research of accounting data. They are also responsible for the documentation of all support processes. end user training. Treasury Analyst As a Treasury Analyst. Functional Support Analyst Functional Support Analysts are responsible for directly supporting treasury workstation functions. these positions demand sound experience. you will support the Cash Management and Capital Markets department of the company. Some of them are: a. maintaining database. reviewing old processes. However. reporting and billing systems is an additional advantage. It is very natural to be curious about the kind of openings or careers that Treasury and ForexManagement offers. ledger system. clinching new business deals. upgrading systems. 58 . He should be able to use these skills to develop sophisticated models and apply them to the treasury and accounting systems. Financial Support Analysts will also respond to client support requests by resolving and diagnosing problems.` Treasury and For-ex Consultancy: Corporate and banks are roping in experienced professionals as consultants for risk management. This includes modifying existing processes. 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. The candidate is expected to have a degree in business/finance and should demonstrate advanced analytical and system skills.

and assist in credit card charge backs and drafting of monthly reports. They will maintain and strengthen the account¶s relationship while minimizing risk and maximizing profitability. d. 59 . troubleshooting of credit card and direct debit problems as well as maintaining a database of quarterly and ad-hoc payments made. 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. Cash Analysts will also follow up on sales and refinance distributions from partnerships. foreign exchange transactions and transfer of currency between accounts. e. They also use their knowledge of treasury/business functions in association with IT experience to transform business requirements into software solutions.` c. Treasury Analyst-Business Solutions In this capacity. treasury analysts will act as visionaries for world class business process reengineering. Cash Analyst Cash Analysts are responsible for every day cash management for the company and its subsidiaries. They will analyze the benefits of using existing and future platforms to ensure that the Treasury Organization is an enterprise solution and is compatible with existing Treasury processes and requirements. They are also responsible for bank charge analysis. They will also serve as support to Treasury Operations. derivatives. They will focus their efforts on creating a world-class treasury organization through documentation of business process flows and analysis of Treasury functions.

The Indian debt market has gone through sweeping changes with the introduction of the Negotiated Dealing System (NDS).` 5. This is an electronic trading platform for the following instruments: j j j j j j j 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. Negotiated Dealing System Negotiated Dealing System (NDS) is an electronic platform for facilitating dealing in government securities and money market instruments.15 Role Of Information Technology In Treasury Management 1. this covers the following: j j j j j Banks Financial Institutions Primary Dealers Insurance Companies Mutual Funds 60 . At present.

membership to the NDS is restricted to members of INFINET. both outright and repos. and custody on a single. Current examples of electronic trading platforms are those of NSE. 3. a closed user group network as communication backbone. The system of submission of physical SGL transfer form for deals done between members on implementation of NDS has been discontinued. Membership of INFINET entails holding SGL and/or current account with RBI or as may be prescribed from time to time. bonds or equities. settlement. NDS use INFINET. clearing. end-to-end hardware and software platform. RBI. Other Trading Platforms/System Trading is done electronically through networked computers/workstations. and thereby facilitating settlement of transactions in Government Securities including treasury bills. be it forex. Hence. Straight-through-processing (STP) STP is latest technological wave to hit financial markets. This electronic system enables trading. The system electronically matches bids and offers. BSE and foreign exchange (through the Reuters electronic dealing system).` Banks and Primary Dealers are obliged to become members of the NDS. Market participants and players are part of secure WAN and make bids and offers. NDS facilitates electronic submission of bids/application by members for Primary issuance of government securities by RBI through auction and floatation. 2. 61 . documentation. NDS also provides interface to Securities Settlement System (SSS) of Public Debt Office.

Buyers receive securities in their custodial accounts and sellers receive funds. which is a completely electronically propelled countrywide payment system. GBP/USD. through transfers of funds from and to Nostro accounts..` This is a natural extension of electronic trading whereby individual traders. In G-Secs. c. the NDS enables this through the intermediation of the CCIL. etc.CDSL.) Similarly. i. 62 .e.e. i. maintains an account with the apex depository (NSDL. maintained with a depository participant (DP)..Conversion of Physical Securities to Demat:The RBI and SEBI have now made it mandatory for almost all securities to be in demat.Custody:Electronic records of ownership of securities are held by DPS. electronic record of ownership and transactions in securities. once approved and authorized by the buyer and seller. credits and debits the respective cash and securities accounts of the buyer and seller as required. Euro/USD. Electronic Form a. Real Time Gross Settlement [RTGS] has already been introduced. are also settled electronically through CCIL or SWIFT. Such securities do not exist in physical form. The SGL depository of the RBI maintains custody and ownership of SLR securities in electronic form. which. Settlement:Post-approval of a deal.. USD/JPY. the system used. etc. b. 4. For-ex deals in USD/INR and cross-currencies. in turn. are settled automatically by the system through its connectivity with a Clearing House.


The TMG monitors the investment. The Rupee Treasury also manages the bank¶s position regarding statutory requirements like the cash reserve ratio (CRR) and the statutory liquidity ratio (SLR). 64 . Broadly. The Rupee Treasury deals in the domestic money and debt markets while the For-ex Treasury deals mainly in the local foreign exchange market. these include asset liability management. SBI's treasury operations are channeled through the Rupee Treasury. RUPEE TREASURY The Rupee Treasury carries out the bank¶s rupee-based treasury functions in the domestic market. investments and trading.` STATE BANK OF INDIA OVERVIEW OF TREASURY MANAGEMENT IN SBI SBI's relationships with over 700 correspondent banks are leveraged in extracting maximum value from treasury operations. risk and asset-liability management aspects of the Bank's overseas offices. as per the norms of the Reserve Bank of India. the For-ex Treasury and the Treasury Management Group.

corporate bonds. 65 . thus providing you a dynamic substitute for traditional credit options. SBI is the biggest lender in call. 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. securitized paper. These products allow you to leverage the flexibility of financial markets. non-convertible debentures. call money and other instruments.` PRODUCTS AND SERVICES j Asset Liability Management (ALM): The ALM function comprises management of liquidity. They can also be customized in terms of tenors and liquidity options. enable efficient interest risk management and optimize the cost of funds. j 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. SBI invests in primary and secondary market equity as per its own discretion. maturity profiles of assets and liabilities and interest rate risks. fixed and floating rate products. SBI invests in these instruments issued by your company. preference shares.

` 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. skilled and professional dealers can tailor customized solutions that meet your specific requirements and extract maximum value out of each market situation. rupee-foreign currency interest rate swaps and cross currency swaps. 66 . The bank¶s dealing rooms provide 24-hour trading facilities and employs state-of-theart technology and information systems.The FX Treasury can also structure and facilitate execution of derivatives including long term rupeeforeign currency swaps. SBI¶s relationships with over 700 correspondent banks and institutions across the globe enhance the strength of the Forextreasury.The bank¶s team of seasoned.

67 . The main objectives of investment operations at our foreign offices. performance vis-à-vis the budgeted targets and the market value of the portfolio. maturity profiles of assets and liabilities and interest rate risks at the foreign offices. As the name implies the department monitors the management of treasury functions at SBI¶s foreign offices including asset liability management. (b) Optimization of profits from investment operations and (c) Maintenance of liquidity. j The activities include appraisal of the performance of the foreign offices broad parameters such as income earned from investment operations. Investment operations are conducted in accordance with the investment policy for foreign offices formulated by TMG. apart from compliance with the regulatory requirements of the host country. composition and size of the portfolio. are (a) safety of the funds invested. j Investments: Monitoring of investment operations of the foreign offices of the bank is one of the principal activities of TMG. Products and Services j Asset Liability Management (ALM): The ALM function comprises management of liquidity. investments and forex operations.` 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).

and is based at Mumbai. The PMS forms part of the Treasury Dept. even the most sophisticated investors are finding it difficult to address day to day investment concerns. 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. j Reciprocal Lines: The department is also responsible for maintenance of reciprocal lines with international banks. foreign currency interest rate swaps. of SBI. such as j j j Adherence to stated investment objectives Security selection quality considerations Conformity to policy constraints 68 . PMS was set up exclusively for management of investments of Social Security funds and custody of the securities related thereto.` j Forex monitoring: Monitoring of forex operations of our foreign offices is done with the objective of optimizing of returns while managing the attendant risks. marketing. Commodity hedging is one of the recent activities taken up by TMG. In the increasingly complex regulatory and investment environment of today.foreign currency swaps. facilitating execution of foreign currency derivatives including currency options. cross currency swaps and forward rate agreements. j Forex and Interest rate (Foreign Currency) derivatives: TMG also plays an important role in structuring. long term rupee .

who have the required depth of knowledge to handle large investment portfolios and address the concern of large investors. j SBI has their own procedure for treasury management which is followed very well by them. Percentage of income is not disclosed by them to anyone. 1. j SBI bank has an integrated treasury management.5ANALYSIS OF SBI j SBI is the first treasury operator. they don¶t have any competitors as such because it is well maintained and functioned. j 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 69 . SBI do follow RBI guidelines for treasury management properly which they think that it is well formulated.` j Investment returns The team manning the PMS Section consists of highly experienced officers of SBI. The capabilities of the team range from Investment Management and Custody to Information Reporting.

` with low risk and proper function of treasury assets and liabilities. 70 . It also has good career opportunities.

bank earned commission exchange and brokerage of 15. With the liberalization of the financial markets in India.27 % on OperatingExpense and 14.75 % on Interest Expense. Bank also earned from the Forex and Derivatives and some other Interest Income. Local Currency Money Market & Debt Securities. Bank also spent Dividend andTax on dividend. The Treasury business is responsible for managing the returns and market risk on this investment portfolio. Bank spent 39. the bank is required to hold 25% of its deposits in government securities. As we discuss above that balancing is must between these two foreveryorganization 71 .` ICICI Bank Treasury Department of ICICI Bank ICICI BANK is the very consistent player in the new private sector banks.14 % µInterest from Investment¶ 27. Tax. ICICI BANK earned from the µInterest from Advances¶ 51. advice and product structures.Within this business. 30. the bank has three main product areas Foreign Exchange and Derivatives. New private sector banks to withstand the competition frompublic sector banks came up with innovative products and superiorservice. To comply with statutory reserve requirements. These are the major earningsources of the bank. corporate need more sophisticated risk management information. and Equities. These and fine pricing on various treasury products are provided through the bank's Treasury team.12 %.58 % on Provision.25 %. Loss on Investment.

` especially in the era of globalization where thereare stiff competition among various market players. ANALYSIS OF ICICI: y Treasury management of ICICI Bank is managing assets and liabilities of treasury.6 crore in the corresponding of last year fiscal while income from foreign exchange and derivative business dipped to Rs137.4 crore.8 crore from Rs157. 72 . The procedures for treasury management operation in bank are different from other organization. managing working capital and also managing foreign currency. managing deposits and advances. But foreign exchange is managed at a higher risk. y The bank has an integrated organization structure where in they have sub processes at each level. y y They believe in customer satisfaction most rather than competition in treasury market. Management of banks is quite similar to organizations but in case of organization they have to look into at company¶s interest more and bank has to look overall. ICICI Bank¶s treasury income through sale of investments saw a profit of Rs256 crore in 2009 against a loss of Rs77.

y The bank never compares it process with any other bank because every bank has some or the other risks involved and you may find in banks almost same processes are required. they aim the management at a peak. .` y The banks set their processes according to RBI guidelines and follow them in daily transactions of treasury. RBI has formulated guidelines keeping in mind that our economy should not suffer. 73 . y They have entered in each process and found themselves at a success. y The guidelines which provided by RBI are not strictly formulated.

` CHAPTER 6: Data Analysis 74 .

Manager. Shah Designation :: Asst.  Secondary data:: Secondary data is the data which is already collected by someone and complied for different purposes which are used in research for this study. These banks are 1) Central Bank of India. 2) State Bank of India.G. Contact Person :: A.ArunIndulkar Designation :: ASM. Khar Branch.1 DATA COLLECTION:-  Primary Data:: Primary data is based on interview conducted in various banks. It includes: Magazine  Journal  Newspaper 75 . BKC Branch Contact Person :: IrranaMangalure Designation :: Asst Manager 3) ICICI Bank:: Mahim Branch Contact Person :: Mr.` 6.

So we can¶t have a comparative study with other countries. j Time allotted for making project is very limited. If time permits then there would be a vast scope of study of different organizationaltreasury management or having a comparative study between two banks. j There is no space horizon. As study is restricted only to a specific area. The information required for in-depth study is not possible.` 6.2 Limitation of the Study: j Study allotted has a page constraint. So study on treasury management is restricted only to Indian scenario. 76 .


j There is a future scope in treasury management and role of information technology in treasury management.1 FINDINGS:The project has given an insight into the various aspects of treasury management namely: j Treasury operations of every bank are most probably same. j 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. j SBI has their own procedure for treasury management which is followed very well by them. Percentage of income is not disclosed by them to anyone. 78 . The process may differ from one bank to another bank as every bank has the own policies for management of treasury. j Mainly there is 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.` 7. j ICICI has their own procedure for treasury management which is followed very well by them. j SBI bank has an integrated treasury management. j Risk involved in treasury management is very high because of which they do not disclose most of the information. SBI do follow RBI guidelines for treasury management properly which they think that it is well formulated. they don¶t have any competitors as such because it is well maintained and functioned.

Training of 5 to 6 months is required for every employee of treasury department.` j 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 j The process is very complicated that one cannot understand it easily. j As treasury operations are important part of every bank they set certain rules and regulation as per RBI guidelines and which will become beneficial for the bank also. 79 .


FX positions can be offset. and put up the same before their respective Boards within a month. monitor the compliance with the laid down management policies and prescribed procedures and report the deficiencies directly to the management of the bank. 81 . As per the guidelines of the Reserve Bank. j The internal audit department should audit the transactions in securities on an ongoing basis. Further. j FX is an important area which can be improved by treasury. which may not be easy to quantify. and potentially significant foreign exchange risks across the organization. fraud and errors etc. i. a copy of the review report put up to the Bank¶s Board should be forwarded to the Reserve Bank. clearly indicate and certify adherence to laid down internal investment policy and procedures and Reserve Bank guidelines. Banks should undertake a half yearly review (as of 30 September and 31 March) of their investment portfolio. which should.` 8. reducing the cost of FX spreads. volatility.e. by end-April and end-October. banks should have sound internal controls. Rather than business units converting currency locally to meet their needs. apart from other operational aspects of investment portfolio. j As per the RBI guidelines. FX rates can be improved and risk mitigated by managing FX centrally. j Banks should have strong internal control systems in place considering the various factors such as the volume. and ensuring a global view of FX risk.1 Recommendations And Suggestions:j As per RBI guidelines every bank should frame and implement a suitable investment policy to ensure that operations in securities are conducted in accordance with sound and acceptable business practices.


To sum up. Treasury operations have become more significant and complex today than what it was few years back. the role of treasury has undergone a sea change and it is a major profit center for better performing banks. Unless informational expectations are clarified and met with. Ensuring that there are no defaults in central bank account and that the borrowings are minimal were the focal issues addressed to. 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. a thorough understanding of the various operations on its assets/ liabilities becomes essential. The dynamism with which the Treasury Market moves needs to be fully understood which is integrated in the Banks. treasury operations can seldom be successful in terms of revenue acceleration. has definitely led to treasury management assuming a center stage. But to have a proper treasury management function in place. With the globalization process. the treasury operations were oriented more toward compliance of the regulatory prescriptions in terms of cash reserve ratio and statutory liquidity ratio. 83 . the paradigm shift in the risk exposure levels of the financial institutions.` CONCLUSION Historically. Undoubtedly all financial institutions need to perform treasury management. The role of information technology is pivotal particularly because huge funds are handled by comparatively a few people in each bank. 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.

SharadPadwal& Dr. VasantGodse j Theory And Practice Of Treasury And Risk Management In Banks Indian Institute Of Banking & Finance (Taxman) j Treasury Management Indian Institute Of Banking & Finance (Taxman) VARIOUS JOURNAL j Various journal from Escob database. VARIOUS NEWS PAPERS j Times of India j Business Standard 84 .` 10. BIBLIOGRAPHY:- BOOKS j Transformation Of Indian Banks With Information Technology Prof.

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