1.

In today’s era, due to the uncertainties in the economic environment, most

Organizations have increased their cash holding. As a part of the treasury team in an
organization, highlight some of the best practices in treasury operation with respect to
cash holdings.

Answer: Cash is a basic need of any business as we cannot survive in the market without it
even we may not operate routine activities without cash so it is clear that adequate cash
should be there to work smoothly. Here cash management system play a crucial role so
manage cash and related budgets. Cash management includes collection, concentration, and
disbursement of cash. With proper cash management system we can maximize the
availability of cash not invested in fixed assets or inventories and to do so in such a way as to
avoid the risk of insolvency. Business managers should work wisely to manage cash flow of
the organization. If the cash is not managed well then biggest consequence is the insolvency
of the corporation which nobody wants.

Managers should monitor the cash collection system i.e. cash collected from debtors, cash
paid to creditors, fixed assets purchased, other payments made etc. Everything should be
updated in real time so that we get the actual situation of cash and make our decisions
accordingly.

Cash is king; and maximising cash available for use is a major challenge for most companies.
This is done with the help of Cash management Systems (CMS). The key hurdle faced by a
CMS is ‘collection or deposit float’ meaning the amount of money that is collected but not
usable as it is in the pipeline. For instance customer in Bhatinda has given a cheque, but for it
to be credited to the company’s overdraft account in Mumbai it may take 12 days. An
efficient CMS that reduces this float is vital to a company’s control over cash.

Effective Management of Cash

The CMS of a company should enhance collection of receivables, control payments to trade
creditors and efficiently manage liquid cash. This can be done by enabling greater
connectivity to their branch network and providing better IT solutions and services in cash
management.

An effective cash management system looks at three things:

 Deciding and controlling the optimal cash balance to hold
 Planning inflows and outflows of cash
 Investment of surplus cash at the best returns and the least risk

It seeks to achieve these objectives by

 Building and operating a robust networking facility that connects different agencies
involved in the movement of cash and thereby cutting down the time taken between
any two agencies to the minimum
 Running a powerful information system that tracks cash online and ensures that
concerned managers act on the information quickly to resolve issues and prevent cash
getting stuck in the pipeline
 Making banks and other financial intermediaries partners in the process of finding
cost-effective solutions to the problem of inordinate time-lags in getting the cash
credited and available for use.
In the last two-and-a-half decades the banks in India have done remarkable work in this field
by introducing a number of innovative CMS products, and are now able to give their
customers credit the very next day even for local cheques deposited in some distant branches.
CMS features also include cheque collection, tracking of actual payment, and Management
Information System (MIS) on collection behaviour of parties. So much so, it is not just an
operational tool now, but a strategic device as well.

The benefits of a well-planned and efficiently managed CMS are:

 Online information on global cash balances all the time
 Anywhere and anytime banking without loss of controls
 Optimal utilisation of cash and minimal idle cash balances
 Quick and accurate compliance with external reporting requirements like bank
statements, Credit Authorisation Scheme (CAS) data etc.
 Ability to manage MBA (multi-banking arrangement) from one location
 Ability to generate better revenues from cash balances

Multinational Cash Management

A multinational company, viz. a company that has offices in many countries requires a CMS
that can handle the additional issues arising from the global exposure of the Treasury
function. The principal aim of such a CMS is to see how quickly and inexpensively money
available in one end of the world can be used by an office at the other end.

The answer to this lies in combining global strategy with local practices. The treasury
policies of an MNC will strive to blend the best practices of cash management available in
the countries in which they operate, but without hurting their global strategic intent. Thus a
company renowned for its “best paymaster” name may find cash movement logistics in a
third-world country very slow. Instead of damaging its reputation for prompt payment, the
company will work with the vendors to set up automatic transfers to the vendor’s bank
accounts in an international bank.

Another challenge in multinational cash management is exchange rate fluctuation. The

objective here is to minimise adverse impact of exchange rate changes on the company’s
bottom line.

A variety of strategies are adopted by MNCs to achieve this objective. These include
 Making contracts with customers and vendors that fix the exchange rate ‘band’ and
stipulate price change if exchange rate goes outside the band
 Establishing Exchange Earners’ Foreign Currency (EEFC) accounts i.e. bank
accounts in foreign currencies, with freedom to convert the balances to local currency
at the favourable time, or make foreign currency payments out of that account
 Linking accounts with one bank across geographies, making payment much easier and
in the process reducing idle cash

The multinational cash management system involves exchange rate riskwhich occurs when
the cash flow of one currency during transformation toanother currency the cash value gets
declined. It occurs due to the changein exchange rates. The exchange rates are determined by
a structure whichis called the international monetary system.For example, Wincor Nixdorf
played an innovative role in enhancing cashhandling between various countries. Wincor’s
focus was on the entireprocess chain which started from head office to stores, crediting to the
retailcompany's account, head office to branches and so on. Wincor Nixdorf'sserved several
countries with its innovative hardware and softwareelements, IT services to side operations
and consulting services to developcustom optimised solutions.

2. Mr.X has been appointed as a controller/Treasurer in a treasury Department. Discuss

the role of Mr.X in an organization as a Controller.

Answer: Treasury management is the process of planning, organising and managingthe

organisation’s holdings, trading’s, corporate bonds, currencies, financialfutures, associated
risks, options, derivatives, and payment systems. Ithandles all the financial matters including
external and internal funds forbusiness, complex strategies, and procedures of corporate
finance tooptimise interest and currency flows. It helps in planning and
executingcommunication programmes to enhance investors’ confidence in theorganisation.

The function of integrated treasury deals with financial sector in theorganisation. The
major functions of integrated treasury are:
 Reserve management and investments – This involves enforcingappropriate mix of
investment portfolio to optimise yield and duration.Duration refers to the weighted
average life of a debt instrument uponwhich the investments in that instrument is
earned. The durationanalysis is considered as the tool to monitor price sensitivity of
aninvestment instrument to the changes in interest rate.
 Liquidity and fund management – This function involves analysing majorcash
flows arising out of asset liability transactions. It also produces abalanced and well
diversified liability foundation to fund the variousassets. The policy inputs are
provided to strategic planning group oncurrency, tenor and cost to yield expected
credit and investment.
 Asset liability management (ALM) and term money – The integratedtreasury
provides ALM calls for determining the optimal size and growthrate of the balance
sheet, asset and liabilities in accordance withguidelines.

The financial world is inherently unstable and the treasury, therefore, is asignificant factor
when it comes to the success of a bank. The management ofa treasury includes building
effective interfacing within and outside the bank.The treasury manager has a multifaceted
role, which entails a huge responsibilityand accountability. Some of the main responsibilities
of a treasury manager are:
(i) Balance sheet management: A crucial element of balance sheetmanagement is the
pricing of treasury assets and liabilities. Besides this,balance sheet management is obviously
a proactive and continuousprocess. The treasury manager must conduct regular market
analysis interms of changes and controls and keep updating the balance sheetaccordingly.
One more factor in balance sheet management is liquiditymanagement. This particular
planning entails the scrutiny of all chief cashflows that happen in the bank due to fluctuations
in the assets and liabilitiesand accommodating these fluctuations into the plans for the future.
In thisway, the treasury manager can spot possible liquidity issues that maycome up, and plan
corrective action so that adequate liquidity is maintained.
(ii) Transfer pricing: Treasury acts as the interface for the bank and themarket. It also acts
as an interface among the various assets and liabilitygroups within the bank. It is the job of
the treasury manager to determinethat the resources of the bank are employed in the most
suitable mannerpossible such that neither yield nor liquidity is neglected. Accurate
transferpricing helps the treasury manager optimize the asset-liability mix and itsgenerated
returns.
(iii) Reserve management and investments: In a bank, a large portion ofthe money is used
up for statutory reserves. So, managing these reservesefficiently goes a long way in
maintaining the general success of the bank.Choosing the correct combination of maturity
patterns in the SLR andother securities portfolios is thus, a significant responsibility of the
treasurer.
(iv) Trading and distribution: A healthy treasury depends on the trading anddistribution
skills of the treasury manager. Effective tradability ensuresliquidity in the diverse instruments
available to the bank and helps generatenon-fund based profits.
(v) Customer focus: A bank treasury must always remember that customersremain its first
focus, in order to sustain its position among competitors.The customer should always be
made aware of the risks they mayencounter in the foreign exchange markets and be prepared
with
contingency plans. A good treasury manager does all this and also helpsclients manage the
possible risks.
(vi) Risk management: An important responsibility of a treasury manager ismanaging the
risks inherent in all kinds of financial transactions. The mostcommon of these risks include
counterparty risk, issuer risk, liquidity riskand price risk.

Treasurers are in a position where they can add value to an organisation. They often have a
knowledge base which can help other departments to perform more effectively and which is
therefore becoming increasingly useful to the organisation as a whole. As ERM becomes
more widespread, treasurers can be particularly suited to an active role in implementing such
risk management procedures, since they often have the benefit of relevant experience.

The treasurer can also play a more important role in mergers and acquisitions. Treasurers
usually have a thorough understanding of the company’s finances and are therefore able to
advise management and the board on the implications of any restructuring. As treasurers
become more involved in a greater variety of roles they demonstrate their versatility and
ability, proving themselves to be an indispensable part of any company.

Treasurers serve as financial risk managers that seek to protect a company's value from the
financial risks it faces from its business activities. Because these risks can arise from many
sources, the role requires an understanding of many areas of business and the ability to
communicate with a variety of financial professionals.Treasurers are increasingly assuming
more strategic roles in companies. They have moved beyond managing working capital to
becoming increasingly involved with working with a company's senior management to
manage risk and boost the bottom line.

3. A) You are working in cash Payment department of an Investment bank. Highlight

the advantages of Society for Worldwide Interbank Financial Telecommunication
(SWIFT) while making payments across borders.
3. B) Discuss on the mechanism of information transmission through SWIFTS.

Answer: a) SWIFT stands for Society for Worldwide Interbank

FinancialTelecommunication. SWIFT does not enable funds transfer, itsends payment orders,
which must be settled by correspondentaccounts that the institutions have with each other.
Each financialinstitution must have a banking relationship by either being a bank oraffiliating
itself with one so as to enjoy particular business features suchas exchange of banking
transactions. The SWIFT-messaging networkrun by the Society for Worldwide Interbank
Financial Telecommunicationhas operational centers located in the Netherlands and the U.S.
Theseprotected messaging centers share real-time information with each otherso that if one of
them runs into a problem, the other centre can take overthe operations of the entire network.
SWIFT conducts most of itsmessaging services in areas such as payments and cash
management,treasury, securities and trade services.

SWIFT does not enable funds transfer, itsends payment orders, which must be settled by
correspondentaccounts that the institutions have with each other. Each financialinstitution
must have a banking relationship by either being a bank oraffiliating itself with one so as to
enjoy particular business features suchas exchange of banking transactions. The SWIFT-
messaging networkrun by the Society for Worldwide Interbank Financial Telecommunication
has operational centers located in the Netherlands and the U.S. Theseprotected messaging
centers share real-time information with each otherso that if one of them runs into a problem,
the other centre can take overthe operations of the entire network.

Advantages of Society for Worldwide Interbank Financial Telecommunication

 Fastest data transfer speed. A message could be delivered to any part of the World
within 20 minutes or even within 5 minutes for priority messages. It’s faster than in
any other channel – for example, similar telegraph transmission would take
approximately 90 minutes. Delivery time is reduced through eliminating of in-
between network segments and when a sender can commute a recipient on-line the
data transfer will take few seconds.

 Since all payment documents have been inputted in the system in standard form this
facilitates data processing and increase efficiency. Transaction execution records
provide total control over all passing orders and enable automated preparation of daily
reports. Standardization helps to overcome language barrier and difference in national
financial practices.

 SWIFT provides financial guarantee to all its members, i.e. if any message is not
delivered to recipient within 24 hours due to platform failure the Society will cover all
direct and indirect losses inflicted to the customer.

 Accuracy of message transmission is achieved through network buildout, special

message input/output order with “on spot” reservation of network
segments.Multilevel combination of physical, technical and organizational protection
methods enables highest possible security and confidentiality of transmitted
data.Lower costs comparing with traditional telecommunication channels. Standard
message (up to 325 bites) cost does not depend on distance and is lower than telex or
telegraph expenses because of high density of information flows.

b) SWIFT system provides a high level of security. The given below are the key provisions
regarding the message security under SWIFT:
 Swift ensures a very high level of security and efficiency, i.e. safety, privacy,
accuracy, reliability and deliver of messages within certain specified time schedule.
 Swift assumes full financial liability for delivery of accurate, complete and validated
messages from the point of entry of the message at RP to the point of delivery of
 message to CBT. For ensuring this high level of security, Swift maintains a multi
level combination of physical, technical and procedural measures as under
 Access to the Swift network is through a very elaborate authorization process using
secret password codes to which every user bank has to confirm. Each message is
assigned an Input Sequence No (ISN) on entry of message and on Output Sequence
No (OSN) is given on exit.
 In case this sequence ISN is disturbed and/or gets disrupted for any reason, Swift
rejects the message and shows the status of message as rejected after which no further
action is taken by Swift.
 After being assigned ISN, all messages are ENCRYPTED (i.e., given some random
codes) and transmitted through the system in the form of those codes. These codes are
converted back automatically into original words at the receiving time. This ensures
that even while the message is flowing through Swift system, its privacy is ensured
and even the staff of Swift is not aware of the contents. Even the information stored
by Swift for future use/reference is stored in encrypted form.
 Each message is also assigned an Authentic on being given ISN to guarantee the
identity of sender and receiver.
 This authentication is based on a complex mathematical formula (algorithm) provided
by (a) Swift and (b) on bilateral codes exchanged between any two correspondent
banks.
 These "authenticator codes" for each different bank are automatically provided by
CBT on being commanded to do so by the CBT user and then exchanged between two
banks through postal/courier channels on confidential basis.

The extended and cost-efficient connectivity opportunities are the basis for the increasing use
of SWIFTNet by corporates, including the small and medium enterprise (SME) segment.
Initially, large international enterprises were the focus of SWIFT with their corporate
connectivity models SWIFT member administered closed user group (MA-CUG) and
Standardised Corporate Environment (SCORE). With the necessary SWIFT Alliance
Gateway (SAG), these options included to run quite complex systems. As an alternative,
SWIFT service bureaus could establish outsourcing services for the SWIFT technology, so
that the costly SAG was not necessary on-site at the corporates any more.

The benefits of SWIFT connectivity include the elimination of point-to-point linkages, which
helps to reduce redundant technology. SWIFT’s corporate connectivity models, such as
Alliance Lite, allow corporates to increase independence and flexibility in the choice of banks
via the standardisation of all current proprietary connections to different banks.