WELCOME TO THE PRESENTATION

ON

TREASURY OPERATIONS
STRUCTURE OF A BANK

HEAD OFFICE

TREASURY

BRANCHES
STATUTORY GUIDELINES

BANKING REGULATION ACT, 1949 – SECTION 5 B

• Business of Banking

BANKING REGULATION ACT, 1949 – SECTION 18

• Maintenance of CRR by non-Scheduled banks.

RESERVE BANK OF INDIA ACT, 1934 – SECTION 42 (1)

• Maintenance of CRR by Scheduled banks.

BANKING REGULATION ACT, 1949 – SECTION 24

• Maintenance of SLR by all Banks.

BANKING REGULATION ACT, 1949
Section 5 B – Definition of banking business.

“Banking" means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on
demand or otherwise, and withdrawal by cheque, draft, or otherwise.

Section 18 - Cash Reserve Ratio

Every banking company, not being a scheduled bank, shall maintain in India by way of cash reserve with itself or by way of
balance in a current account with the Reserve Bank or by way of net balance in current accounts or in one or more of the
aforesaid ways, a sum equivalent, to at least three per cent. of the total of its demand and time liabilities in India as on the last
Friday of the second preceding fortnight and shall submit to the Reserve Bank before the twentieth day of every month a return
showing the amount so held on alternate Fridays during a month with particulars of its demand and time liabilities in India on
such Fridays or if any such Friday is a public holiday under the Negotiable Instruments Act, 1881(26 of 1881), at the close of
business on the preceding working day.

CRR WILL BE MAINTAINED BY SCHEDULED BANKS AS PER SECTION 42 (1) OF RBI ACT.

Section 24 - Statutory Reserve Ratio (Statutory Liquidity Ratio)

Every banking company shall maintain in India in cash, gold or unencumbered approved
securities, value at a price not exceeding the current market price, an amount which shall not at the
close of business on any day be less than 20 per cent. of the total of its demand and time liabilities in
India.
RBI MONETARY POLICY GUIDELINES
The Reserve Bank of India (RBI) uses the monetary policy to manage liquidity or money supply in a
manner that balances inflation and at the same time aids growth.

• POLICY REPO RATE (4%)

POLICY RATES
The tools used are :
• REVERSE REPO RATE ( 3.35%)
• MARGINAL STANDING FACILITY (MSF) (4.25%)
• BANK RATE ( 4.25%)

RESERVE RATES • CASH RESERVE RATIO (CRR) (4 %)

• STATUTORY LIQUIDITY RATIO (18%)

OTHER MEASURES • LIQUIDITY ADJUSTMENT FACILITY (LAF)

• MARKET STABILISATION SCHEME (MSS)
FORM A SCHEDULES (Amount in crores)
Schedule III to Section 29 of the Banking Regulation Act read with Section 129 Schedule III of the Companies Act 2013.

Schedule 1 - CAPITAL. 3277 Schedule 6 - Cash and Balances with RBI. 60930

Schedule 7 – Balances with Banks and 65763

Schedule 2 – Reserves & Surplus. 46861
money at call and short notice
Schedule 3 - Deposits 629099
Schedule 8 – Investments 191693
Schedule 4 – Borrowings 32464
Schedule 9 – Advances 367667
Schedule 5 – Other Liabilities
Schedule 10 – Fixed Assets. 9001
& provisions 21089
Schedule 11 – Other Assets. 37736
Total 732790
Total 732790

Schedule 12 – Bills for collection 25056

OTHER SCHEDULES

SCHEDULE 13 – Interest Income.

SCHEDULE 14 – Other Income.

SCHEDULE 15 – Interest expenditure.

SCHEDULE 16 – Operating Expenses.

SCHEDULE 17 - Significant Accounting policies.

SCHEDULE 18 – Notes forming part of Accounts.

Independent Auditor’s Report.

Basel III disclosures. DF 1 to DF 18

RESOURCES
RBI RESOURCES
OTHER RESOURCES BANK RESOURCES
Master Direction - Classification, Valuation
and Operation of Investment Portfolio of Investment Policy of the
Commercial Banks (Directions), 2021 dated FIMMDA guidelines. Bank.
25.8.21

Policy for conducting foreign

Master direction dated 5.7.2016 (updated FEDAI guidelines.
1.9.20) on Risk Management and Inter Bank exchange transactions.
dealings.
Clearing Corporation of India Policy on Prudential limits in
RBI Premier on Government Securities. money market, equity, forex
guidelines.
markets.
Guidance Note on Audit of Banks (2021
Edition) – ICAI publication. (pages 17 to
116) Clearcorp Dealing Systems (India) Derivatives policy.
Ltd.
Theory and Practice of Forex and Treasury RBI latest inspection report.
Management, (3 volumes) by ICAI

Books : Treasury Management, Bond and

Financial Benchmarks India (P) Ltd. Approved Board notes.
Money Markets by IIBF
MARKET HOURS AND DEALING SYSTEMS
MARKET TRADING HOURS DEALING MANAGED BY
SYSTEM
Call/notice/term money 9.00 am to 3.30 pm NDS - CALL RBI/CLEARCORP
Market repo in government 9.00 am to 3.30 pm CROMS CLEARCORP
securities
Tri-party repo in government 9.00 am to 3.30 pm TREPS CCIL//CLEARCORP
securities
Commercial Paper and Certificate of 9.00 am to 3.30 pm F-TRACK CLEARCORP
Deposit
Repo in Corporate Bonds 9.00 am to 3.30 pm FIMMDA FIMMDA
Government securities ( Central, 9.00 am to 3.30 pm E-KUBER RBI/CCIL
State and T Bills NDS – OM
Foreign Currency /Indian Rupee 9.00 am to 3.30 pm FX-CLEAR/ CCIL/CLEARCORP
Trades including forex derivatives FX-RETAIL/
FX-SWAP
Rupee Interest Rate Derivatives 9.00 am to 3.30 pm ASTROID CCIL
FUNCTIONS OF TREASURY

Statutory functions Subsidiary functions

1. Maintenance of CRR. 1. Funds and investment

Management – Domestic as well
2. Maintenance of SLR.
as Forex markets.

3. Submission of Reports. 2. Liquidity Management.

3. Capital Management.

The important function of the Treasury is to maximize profits by proper deployment of rupee resources.
SUBSIDIARY FUNCTIONS – ROLE IN FINANCIAL MARKETS
MONEY MARKET DEBT MARKET FOREX MARKET

REGULATOR : RBI REGULATOR : RBI FOR REGULATOR : RBI

SRO : FIMMDA GSEC AND SDLs. SRO : FEDAI
SEBI – CORPORATE BONDS

MUTUAL FUND DERIVATIVES MARKET

MARKET CAPITAL MARKET

REGULATOR : SEBI REGULATOR : SEBI REGULATOR : SEBI / RBI

SRO : AMFI SRO : ASSOCIATIONS SRO : FIMMDA
ORGANIZATIONAL STRUCTURE
FRONT OFFICE
1. Deals directly in money market,
forex market, stock market and
debt market
2. Consists of dealing screens
3. Deal timings : Forex : 9 am to 5
pm. Customer deals upto 4.30
pm
4. Money market : 9 to 5 pm.
Recently advised revised
timings.
BACK OFFICE
1. Settlement and
Accounting.
2. Deal confirmations.
3. Valuation of securities.
4. Reporting to RBI.
5. Nostro reconciliation.
6. Branch administration
including systems.
MID OFFICE
1. Implementation of Risk
Management policies.
2. Monitoring observance of
policy guidelines by front
office and back office.
3. ALM reports and analysis.
4. Risk return analysis and
management information
tool.
STATUTORY FUNCTIONS
STATUTORY FUNCTIONS – MAINTENANCE OF CRR

Cash Reserve Ratio (CRR) is one of the main components of the RBI's monetary policy, which is used to
regulate the money supply, level of inflation and liquidity in the country. The higher the CRR, the lower is
the liquidity with the banks and vice-versa.

1. To be maintained as per Section 42(1) of RBI act.

2. To be maintained as a percentage of Net Demand and Time Liabilities on reporting Fridays with cash
balances with RBI. No interest is paid on the balances.

3. The present rate is 4% from 22.5.21. Minimum maintenance of 90% on average daily basis.. Default for
one day 3% over Bank rate. Subsequent day 5% over BR.

4. Submission of Form A (CRR) provision within 7 days and final within 20 days from expiry of the relevant
fortnight.
STATUTORY FUNCTIONS – MAINTENANCE OF SLR

1.To be maintained as per Section 24 (1) of BR act.

2.To be maintained as a percentage of Net Demand and Time Liabilities as on

the last Friday of the second preceding fortnight. Penalty for non maintenance
as in CRR.

3.The present rate is 18.0%.

4.To be maintained in Cash, Gold or approved securities such as Dated Securities

(G-Sec), Treasury bills, State Development Loans. Any balances in excess of CRR
and balances in Standing Deposit Facility.

5.Return in Form VIII submitted before 20th of every month.

DEMAND AND TERM LIABILITIES
Demand Liabilities :
(1) Current Deposits.
(2) Demand portion of SB deposits.*
(3) Margins held against guarantees / LC.
(4) Balances in overdue fixed deposits.
(5) Outstanding Demand Drafts.
(6) Unclaimed deposits.
(7) Credit balances in CC accounts.
(8) Deposits held as security for advances.
(9) Money at call and short notice from outside the
banking system
TIME LIABILITIES :
(1) Fixed Deposits.
(2) Cash Certificates.
(3) Cumulative Deposits.
(4) Recurring Deposits.
(5) Time liabilities portion of SB
(6) Staff security deposits.
(7) Margin held against BG/LC
OTHER DEMAND AND TIME LIABILITIES
(1) Interest accrued on Deposits.
(2) Bills payable.
(3) Unpaid dividends.
(4) Suspense account balances.
(5) Net credit balances in branch adjustment account.
(6) Collection of bills on behalf of other banks.
(7) Cash collaterals received under collateralized derivate
transaction.
OTHERS
(1) Loans/borrowings from abroad by banks in India.
(2) Upper Tier II instruments raised and maintained abroad.
(3) Net balances maintained by Banks under arrangements with
Correspondent Banks.
(4) Liabilities to Banking system net of Assets.
*The average of the minimum balances maintained in each of the month during the
half year period shall be treated by the bank as the amount representing the "time
liability” portion of the savings bank deposits.
When such an amount is deducted from the average of the actual balances maintained
during the half year period, the difference would represent the "demand liability”
portion. The proportions of demand and time liabilities so obtained for each half year
shall be applied for arriving at demand and time liabilities components of savings bank
deposits for all reporting fortnights during the next half year.
EXAMPLE

Month Min balance Average balance

April 21 80 120
May 21 70 150
June 21 120 180
July 21 60 80
August 21 150 200
September 21 200 350
Average 680 / 6 = 113.33 1080 / 6 = 180
Time liability – 113.33 Demand liability = 180 – 113 = 67
 DEMAND AND TERM LIABILITIES - EXCLUSIONS
EXCLUSIONS
a)Paid up capital, reserves.
b)Refinance taken from Exim Bank, NHB, NABARD, SIDBI;
b) Net income tax provision.
c) Amount received from DICGC towards claims and held by banks pending adjustments thereof.
d) Amount received from ECGC by invoking the guarantee.
Amount received from insurance company on ad-hoc settlement of claims pending judgement of the Court.
f) Amount received from the Court Receiver.
g) The liabilities arising on account of utilization of limits under Bankers’ Acceptance Facility (BAF).
h) Subsidy from DRDA / NABARD.
j) Net unrealized gain/loss arising from derivatives transaction under trading portfolio.
k) Income flows received in advance such as annual fees and other charges which are not refundable.
l) Bill rediscounted by a bank with eligible financial institutions as approved by RBI

OTHER EXCLUSIONS
(1) Liabilities to the Banking system in India.
(2) Credit balances in ACU (US$) accounts.
(3) DTL in respect of their Offshore Banking units.
(4) Funds borrowed under Market Repo against G-Sec.. However repo against Corporate bonds/debentures to be included.
COMPUTATION OF CRR

31.7.21 to 14.8.21 to
13.8.21 27.8.21 28.8.21 to 10.9.21

4% of Rs.2500 cr. Rs.100 crores has

DTL to be maintained on average basis

2500 cr
during this period

During the time line of B and C, the bank has to maintain an average of Rs. 100 crores on daily
basis and had to maintain 90% of Rs.100 crores on each day i.e Rs. 90 crores
EXAMPLE

Day 1 88 crores Short fall (90 - 88) = 2 crores Penalty on 2 crores at Bank rate + 3 %
Day 2 95 crores No short fall. But excess balance Interest loss to the bank on CRR funds of Rs.5
does not get any interest crore.

Day 3 88 crores Short fall (90 - 88) = 2 crores Penalty on 2 crores at Bank rate + 3 %
Day 4 86 crores Short fall (90-86) = 4 crores Penalty on 4 crores at Bank rate + 5 %
The bank is required to maintain total product of 14 days x 100 cr = Rs. 1400 crores.

Let us suppose in a 13 days’ time they maintained Rs. 1300 Crores (88, 95, 88, 86+ so on), on the 14 th
days they have to maintain Rs. 1400 - 1300 crores = Rs.100 crores to meet the RBI requirement of
average of Rs. 100 crores on daily basis.
The Treasury has to manage CRR so well that no penalty is paid on shortfall and excess funds are not
kept so that interest is lost. Reporting is very important.
AUDIT POINTS

1. Call for the statement of calculations.

2. Call for Form VIII (SLR) and Form – A CRR submitted by the Treasury.

3. Check any short fall is observed and interest paid for such short fall. Any interest has been
charged by RBI.

4. Inclusions and exclusions are properly taken while calculating the amount eligible for CRR/SLR.

5. Check the balance in RBI account as per the statement submitted for CRR calculations.
MONEY MARKET OPERATIONS
MONEY MARKET OPERATIONS

This is a short term money market which is very liquid in nature.

CALL MONEY – means borrowing or lending in unsecured funds on overnight basis.

NOTICE MONEY – means borrowing and lending in unsecured funds for tenors up to and inclusive of 14 days
excluding overnight borrowing/lending. The borrower or lending institution must convey its intention to repay
/ recall with atleast 24 hours notice. Monies can all be borrowed / lent with a specified maturity date

TERM MONEY – Term Money means borrowing and lending in unsecured funds for period exceeding 14 days
and up to one year.

Participants :

Scheduled Commercial banks, Payment Banks, Small Finance banks, RRBs, State Cooperative banks, DCCBs
and Urban Cooperative banks and Primary Dealers.
MONEY MARKET OPERATIONS

PRUDENTIAL LIMITS FOR OUTSTANDING BORROWING TRANSACTIONS

SCB, including 100% of capital funds on a daily average basis in a reporting fortnight and 125%
Small Finance of capital funds on any given day.
Banks Term money : Internal board approved limit within the prudential limits for inter-
bank liabilities
Payment Banks Call, Notice and Term Money:
and RRBs (i) 100% of capital funds, on a daily average basis in a reporting fortnight, and
(ii) 125% of capital funds on any given day.
Cooperative bank 2% of aggregate deposits at the end of previous financial year.
Primary Dealers Call and Notice Money : 225% of Net Owned Funds as at the end of previous financial
year on a daily average basis in a reporting fortnight
Term Money : 225% of Net Owned Fund (NOF) as at the end of the previous financial
year.

Banks are advised to fix both lending and borrowing limits with the approval of the board. The limits will be
conveyed to Clearcorp Dealing System Ltd for setting up limits in NDS-CALL.
MONEY MARKET OPERATIONS

• Board approved prudential limits should be in place. Limits to be conveyed to CCIL for setting up limits in
NDS-CALL system (Negotiated Dealing System).

• NDS is a screen based dealing system where order matching is done automatically. SGL account of the
Bank maintained with RBI is debited for the transactions.

• Dealing timings are 9 am to 5 pm.

• Participants should have executed documentation as per FIMMDA.

• Settlements done outside NDS-CALL should be reported within 15 minutes.

• A daily return should be sent to RBI through Email.

FIMMDA GUIDELINES ON INTEREST RATES
Eligible participants are free to decide on interest rates in Call / Notice money market.

FIMMDA has given guidelines with reference to calculation of interest rates which are as under :

(1) Interest to be calculated on a daily / 365 days as year basis.

(2) Interest to be payable on maturity and rounded-off to the nearest rupee.

(3) In case of Maturity of Term Money falling on a holiday the repayment will be made on the next
working day at the contracted rate.

Calculation of Interest = Amount borrowed or lent x no. of days x Rate of interest / 365 x 100

If the borrower defaults in repayment of the amount borrowed along with interest on due date, then the
interest for the delayed period will be at the rate of daily overnight FBIL-MIBOR + 5 percentage points.

In case of an unscheduled holiday : Roll over of call deals may happen if there is a strike, natural
calamity, etc.
AUDIT POINTS

1. Check the prudential limits set by the Bank’s Board.

2. Whether they are maintained on daily basis.

3. Any approval has been taken for deals done outside NDS-CALL.

4. Check the FIMMDA agreement executed by the Bank.

5. Check the interest paid /received.

MONEY MARKET INSTRUMENTS
BILLS REDISCOUNTING SCHEME.
COMMERCIAL PAPERS / NON CONVERTIBLE DEBENTURES
CERTIFICATE OF DEPOSITS
PRIORITY SECTOR LENDING CERTIFICATES.
TREASURY BILLS.
REPOS.
BILLS REDISCOUNTING SCHEME
The trade bills raised by the customers are discounted / purchased by the bank.

RBI has provided a money market window for the Banks to get the bills rediscounted which were
discounted by them. The bills discounted by them originated out of genuine trade transactions and are not
accommodation bills or kite flying bills.

Minimum period is 15 days and maximum period is 90 days. Incase holiday has been declared under NI act,
the repayment of the rediscounted amount should be made on the preceding day.

Discounting is calculated on Actual / 365 days method. The amount payable to the borrower is the principal
amount less the discount /interest.

While discounting a bill, the amount of discount is to be deducted at the time the bill is issued. The
discount is rounded off to the nearest rupee.

On maturity the borrowing Bank would repay the principal amount.

FRONT END AND REAR END INTEREST RATES

Front end interest

Interest is applied upfront on the transaction amount and the amount given to the borrower is amount
borrowed minus interest for the loan period.

Money lender normally lends amount after deducting the interest for the loan repayment period.

Rear end interest.

In the rear end interest, the principal is given upfront and recovered with interest at the end of the
repayment period.
COMMERCIAL PAPER AND NON CONVERTIBLE DEBENTURES
COMMERCIAL PAPER– is an unsecured money market instrument issued at a discount to face value in the form of
promissory note. The tenor of a CP shall not be less than seven days and more than one year.

NON-CONVERTIBLE DEBENTURE (NCD) means a secured, coupon-bearing money market instrument evidencing a
debt with an original or initial maturity upto one year. The tenor of an NCD shall not be less than ninety days and more
than one year.

Minimum amount is Rs. 5 lakhs and multiples thereof. (I)CPs and NCDs shall be issued in dematerialised form and held
with a depository registered with SEBI.

ISSUERS

(I)Companies, including Non-Banking Finance Companies (NBFCs) and All India Financial Institutions (AIFIs).

(ii) Any other body corporate with a minimum net worth of ₹100 crore or higher, provided that the body corporate is
statutorily permitted to incur debt or issue debt instruments in India

(III) Co-operative societies/unions and limited liability partnerships with a minimum net worth of ₹100 crore or higher,

Subject to that all fund-based facilities availed by the issuer from bank(s) and/or financial institutions are classified as
Standard at the time of issue.
 COMMERCIAL PAPER AND NON CONVERTIBLE DEBENTURES
Rating requirement

(i) Eligible issuers shall obtain credit rating for issuance of CPs and NCDs from at least one Credit Rating Agency
(CRA).

(ii) Eligible issuers, whose total CP and/or NCD issuances during a financial year is ₹1000 crore or more, shall
obtain credit rating for issuance of CPs from at least two CRAs and shall adopt the lower of the two ratings.
Where both ratings are the same, the issuance shall be for the lower of the two amounts for which ratings are
obtained.

(iii) The minimum credit rating for issue of CPs and NCDs shall be ‘A3’

End use

Funds raised through CPs and NCDs shall be used to finance current assets and operating expenses. The specific
end use shall be disclosed in the offer document of the CPs and NCDs.
COMMERCIAL PAPER AND NON CONVERTIBLE DEBENTURES

• The issue of CPs and NCDs is not permitted to be underwritten or co-accepted.

• CPs and NCDs are traded either on OTC or Electronic Trading Platforms approved by RBI.

• Buy back of CPs permitted after 30 days from the date of issue and NCDs after 120 days. Buyback of CPs
and NCDs shall be at the prevailing market price

• Secondary market trades are permitted and to be reported in F-TRAC maintained by Clearcorp Dealing
systems (India) Ltd.

Repayment of CPs / NCDs

(a) There will be no grace period for repayment of CPs/NCDs.

(b) Issuers shall fix the maturity period of CPs/NCDs in such a manner that the maturity date does not
coincide with a scheduled holiday. (c) If an unscheduled holiday is declared and falls on the maturity date,
the issuer shall make payment on the immediate preceding working day.
AUDIT POINTS

1. Check the Investment policy of the bank regarding investment in CPs.

2. Approval by the competent authority / committee.

3. The status of the company account with the Bank.

4. Details of reporting made.

5. Details of outstanding with repayment. Any are Non Performing.

6. Documentation obtained.
MONEY MARKET INSTRUMENTS – CERTIFICATE OF DEPOSIT
Is a negotiable, unsecured money market instrument issued by a bank as a Usance Promissory Note against
funds deposited at the bank for a specific time period. They can be issued on fixed or floating rate basis.
Discount is calculated on Actual / 365 day basis. Discount to be calculated on a rear-ended basis.

Eligible issuers - (i) Scheduled Commercial Banks (excluding Regional Rural Banks); (ii) Small Finance Banks
and the All India Financial Institutions.

Min amount is Rs. 5 lakh and multiples thereof. Min period is 7 days max is one year.

CRR and SLR to be maintained.

Banks are not permitted to grant loans against the CDs.

Buy back of the CDs is permitted 30 days after the date of issue and Buyback of CDs shall be at the prevailing
market price. There will be no grace period for repayment of CDs. The maturity date should be so fixed that it
does not fall on a Bank’s declared holiday.

Issuance of CD shall be reported on F-Track of Clearcorp Dealing System by 5.30 pm. So also all secondary
market transactions.
PRIORITY SECTOR LENDING CERTIFICATES
Banks have priority sector lending targets – Priority sector – 40 % of ANBC. Micro Enterprises – 7.5%, Small and
Marginal Farmers 8%, Weaker Sections 10%.

There are four types of PSLC. They are (1) PSLC – Agriculture. (2) PSLC - SF/MF. (3) PSLC – Micro Enterprises and
(4) PSLC - General (PS)

Buyers and Sellers : Scheduled Commercial Banks (SCBs), Regional Rural Banks (RRBs), Local Area Banks
(LABs), Small Finance Banks (when they become operational) and Urban Co-operative Banks.

Lot size is Rs.25 lakhs and multiples thereof. Normally for 90 days.

There is no transfer of risks or loan assets.

All PSLC expire on 1ST April. The fee paid for purchase of the PSLC would be treated as an ‘Expense’ and the fee
received for the sale of PSLCs would be treated as ‘Miscellaneous Income’.

The settlement of funds through e-Kuber portal.

Bank A may sell PSLCs with a nominal value of Rs.100 crores to Bank B on July 15, 2020. Bank B will reckon
Rs.100 crore towards its priority sector achievement as on the reporting dates of September 30, 2020,
December 31, 2020 & March 31, 2021, while Bank A will subtract the same from its achievement figures for
the respective reporting dates. The PSLC will expire by 1 April 2021.
OUTSTANDING PSLCs

The total trading volume of PSLCs recorded a growth of 25.9 per cent and stood at Rs.5.89 lakh crore in
2020-21 as compared with 43.1 per cent growth a year ago.

Among the four PSLC categories, the highest trading was observed in the case of PSLC-general and PSLC-
small and marginal farmer with the transaction volumes being Rs. 2.26 lakh crore and Rs.1.98 lakh crore,
respectively, for the year ended March 31, 2021.
AUDIT POINTS

1. PSLC shown in Balance Sheet in Schedule 17.

2. Underlying certificate about standard assets is obtained.

3. Auditor’s certificate about the assets included obtained.

MONEY MARKET INSTRUMENTS – TREASURY BILLS
Treasury Bills are short-term (maturities less than one year), discounted, government securities.

They are issued for different maturities viz. 14-day, 28 days, 91 days, 182 days and 364 days or such periods
as may be introduced by RBI from time to time. 14 days and 28 days T-Bills are called Cash Management
Bills.

T-bills are available for a minimum amount of Rs.25,000 and in multiples of Rs. 25,000. T-bills are issued at
a discount and are redeemed at par. While 14-day and 91-day T-bills are auctioned every week on Fridays,
182-day and 364-day T-bills are auctioned every alternate week on Wednesdays.

The bids are submitted in E-Kuber system of RBI. The deal and settlement are done through NDS-OM and
OTC deals reported on the NDS.

They qualify for SLR investments. .

REPO TRANSACTIONS

1.REPO TRANSACTIONS BY RBI – UNDER POLICY RATES.

2.TARGETED LONG TERM REPO OPERATIONS.

3.ON TAP TLTRO

4.TREPS – TRIPARTY REPO

REPO TRANSACTIONS
A repo is a transaction in which two parties agree to sell and repurchase the same security. Under such an
agreement the seller sells specified securities with an agreement to repurchase the same at a mutually
decided future date and price.

Similarly the buyer purchases the securities with an agreement to resell the same to the seller on an
agreed date in future at a predetermined price. Such a transaction is called a Repo when viewed from the
perspective of the seller of securities (the party acquiring funds) and Reverse Repo when described from
the point of view of the supplier of funds.

Repo is called a ready forward transaction. Security is sold on spot basis and repurchased on a forward
basis.

RBI has issued guidelines for conducting repo transactions and these guidelines are applicable to
repurchase transactions (Repo), undertaken on recognized stock exchanges, electronic trading platforms
(ETP) and Over-the-Counter (OTC)
MONEY MARKET INSTRUMENTS - REPOS
REPO TRANSACTIONS BY RBI

Overnight repo. Window open from Monday to Friday. Fixed rates by RBI – Repo -
4.00% Reverse Repo – 3.35%. Underlying security is G-Sec.

Borrower of funds is called Repo Seller. And Lender of funds is called Repo Buyer.

The repo seller shall continue to accrue the coupon/discount on the securities sold
under repo even during the repo period while the repo buyer shall not accrue the
same.
In case the interest payment date of the security offered under repo falls within the
repo period, the coupons received by the buyer of the security (Repo buyer) should be
passed on to the seller of the security on the date of receipt as the cash consideration
payable by the seller in the second leg does not include any intervening cash flows.

After the second leg of the repo / reverse repo transaction is over.

The difference between consideration amounts of the first leg and second leg of the
repo shall be reckoned as Repo Interest Income / Expenditure in the books of the repo
buyer / seller respectively.
TARGETED LONG TERM REPO OPERATIONS

Targeted Long-Term Repo Operations (TLTRO) 2.0 at the policy repo rate for tenors up to three years for a
total amount of up to ₹ 1.00,000 crores, to begin with, in tranches of appropriate sizes.

2. The funds availed under TLTRO 2.0 shall be deployed in investment grade bonds, commercial paper (CPs)
and non-convertible debentures (NCDs) of Non-Banking Financial Companies (NBFCs). At least 50 percent of
the total funds availed shall be apportioned as given below:

10 per cent in securities/instruments issued by Micro Finance Institutions (MFIs);

15 per cent in securities/instruments issued by NBFCs with asset size of ₹ 500 crore and below; and

25 per cent in securities/instruments issued by NBFCs with assets size between ₹ 500 crores and ₹ 5,000
crores.

Investments made under this facility will be classified as held to maturity (HTM) even in excess of 25 per cent
of total investment permitted to be included in the HTM portfolio. Exposures under this facility will not be
reckoned under the Large Exposure Framework (LEF).
ON TAP TLTRO

Government of India had announced ECLGS 2.0 SCHEME (EMERGENCY CREDIT LINE GUARANTEE SCHEME) to provide
100 per cent guaranteed collateral free additional credit to entities in 26 (earlier five plus new 26 sectors) stressed sectors
( auto, aviation, construction, hospitality, power, real estate and tourism. )identified by the Kamath Committee of
RBI plus health care sector with credit outstanding of above ₹50 crore and up to ₹500 crore as on 29.2.2020.

Liquidity availed by banks under the scheme should be deployed in corporate bonds, commercial papers, and non-
convertible debentures issued by the entities in specific sectors over and above the outstanding level of their investments
in such instruments as on September 30, 2020.

The liquidity availed under the scheme can also be used to extend bank loans and advances to these sectors. Investments
made by banks under this facility will be classified as held to maturity (HTM) even above the 25 per cent of total
investment permitted to be included in the HTM portfolio.

All exposures under this facility will also be exempted from reckoning under the large exposure framework (LEF).
TREPS – TRIPARTY REPO

Tri-party repo or TREPS is a type of repo contract where a third entity (apart from the borrower and lender), called a tri-party
agent, acts as an intermediary between the two parties to the repo to facilitate services like collateral selection, payment and
settlement, custody and management during the life of the transaction. This is in place of CBLO which was discontinued wef
November 2018. This is now being managed by CCIL.

TENOR

Tenor of the Repo is one day to one year. Minimum size is Rs. 5 lakhs.,

ELIGIBLE PARTICIPANTS

Public Sector Banks, Private Banks, Foreign Banks, Co-operative Banks, Financial Institutions, Insurance Companies,
Mutual Funds, Primary Dealers, Bank cum Primary Dealers, NBFCs, Corporates, Provident/ Pension Funds, Payment
Banks, Small Finance Banks, etc.
TREPS – TRIPARTY REPO
ELIGIBLE SECURITIES

a) Government securities issued by the Central Government or a State Government. (b) Listed corporate bonds and
debentures, subject to the condition that no participant shall borrow against the collateral of its own securities, or
securities issued by a related entity.(c) Commercial Papers (CPs) and Certificate of Deposits (CDs). (d) Any other
security of a local authority as may be specified in this behalf by the Central Government.

DEALING SYSTEM : TREPS Dealing System is an anonymous order matching System provided by CCDS to
enable Members to borrow and lend funds.

BORROWING LIMITS :

Borrowing limit is a limit given to a member against the value of collateral deposited by them, net of
haircut, to enable them to borrow funds using Tri party Repo dealing System.
 TREPS – TRIPARTY REPO
Pricing of collateral, haircut and margining

(a) Collaterals shall be priced transparently at prevailing market prices, in the first leg of a repo.

(b) The price for the second leg will be the price for the first leg plus interest.

(c) Haircut/ margins will be decided either by the clearing house or may be bilaterally agreed upon, in terms of the
documentation governing repo transactions, subject to the following stipulations:

i Listed corporate bonds and debentures shall carry a minimum haircut of 2% of market value. Additional haircut may be
charged based on tenor and illiquidity of the security.

ii CPs and CDs shall carry a minimum haircut of 1.5% of market value.

iii Securities issued by a local authority shall carry a minimum haircut of 2% of market value. Additional haircut may be
charged based on tenor and illiquidity of the security.

Funds borrowed under repo including tri-party repo in government securities shall be exempted from CRR/SLR computation
and the security acquired under repo shall be eligible for SLR provided the security is primarily eligible for SLR

Participants shall enter into standard bilateral master repo agreements as per the documentation finalized by FIMMDA,
MARGINAL STANDING FACILITY
Bank are allowed to avail funds from RBI on overnight basis, under Marginal Standing Facility (MSF), against
their excess SLR holdings upto 2%.

Additionally, they can also avail themselves of funds, on overnight basis below the stipulated SLR, up to one
per cent of their respective Net Demand and Time Liabilities outstanding at the end of second preceding
fortnight.

Present MSF rate is 4.25%.

The eligible securities are G-SEC., SDL and T-Bills.

The window is open between 3.30 pm and 4.00 pm.

Minimum amount is Rs. One crore and multiples thereof.

STANDING DEPOSIT FACILITY SCHEME (SDF)
In 2018, the amended Section 17 of the RBI Act empowered the Reserve Bank to introduce the Standing Deposit Facility (SDF)
– an additional tool for absorbing liquidity without any collateral. By removing the binding collateral constraint on the RBI, the
SDF strengthens the operating framework of monetary policy. The SDF is also a financial stability tool in addition to its role in
liquidity management.

1. Effective Date : This facility will be effective from April 08, 2022.
2. Eligibility Criteria : All liquidity adjustment facility (LAF) participants will be eligible to participate in the SDF
scheme.
3. Tenor : Under the SDF, the eligible entities can place deposits with the RBI on an overnight basis. The RBI,
however, retains the flexibility to absorb liquidity for longer tenors under the SDF with appropriate pricing, as
and when the need arises.
4. Timing : The overnight SDF facility will be available between 17:30 hrs to 23:59 hrs on all days, including
Sundays and holidays and would be reversed on the following working day in Mumbai.
5. Rate of Interest : The rate of interest on amount deposited under this facility will be as decided by the RBI
from time to time. Effective April 8, 2022, it will be at 25 basis points below the policy repo rate, i.e., at 3.75 per
cent.
6. CRR and SLR Eligibility : Deposits under the SDF shall not be reckoned as balances eligible for the
maintenance of the cash reserve ratio (CRR), but shall be an eligible asset for maintenance of the statutory
liquidity ratio (SLR)
The minimum bid size is Rs. 1 crore. Bids submitted in E-Kuber.
DEBT MARKET OPERATIONS
DEBT MARKET INSTRUMENTS

SLR SECURITIES

Government Securities or G-Sec.

State Development Loans (SDL)

Other approved securities. (Sovereign Gold Bonds)

NON SLR SECURITIES

PSU Bonds.

Corporate Debentures/Bonds.
DEBT INSTRUMENTS – GOVT. SECURITIES / STATE DEVELOPMENT LOANS
• Issued by Central Govt. and State Govt. as a strategy for government borrowing. G.Sec and Treasury Bills are issued by
Central Govt. and SDLs are issued by State Government.

• Dated G-Secs are securities which carry a fixed or floating coupon (interest rate) which is paid on the face value, on half-
yearly basis. Generally, the tenor of dated securities ranges from 2 years to 40 years .

• Issued through e-auction on E-Kuber platform of RBI. Half yearly calendars released in advance.

• The auction is conducted on yield based or fixed rate. New G-Sec are on yield based.

• The auctions will be either on uniform price auction method or multiple price based auction. The securities with tenor
2,3,5,10 and 14 year will be on uniform price auction method and the 30 and 40 years will be on multiple price based
auction.

• The PDO of RBI acts as the registry and central depository for G-Sec.

• Secondary market sales are conducted through NDS-OM managed by CCIL.

• The timings for T-Bills is 1.30 pm whereas for GOI securities it is 2.00 p.m. If the coupon payment date falls on a
Sunday or any other holiday, the coupon payment is made on the next working day. However, if the maturity date falls
on a Sunday or a holiday, the redemption proceeds are paid on the previous working day.
GOVERNMENT SECURITIES
• The Public Debt Office (PDO) of the Reserve Bank of India acts as the registry / depository of G-Secs and deals with
the issue, interest payment and repayment of principal at maturity. Most of the dated securities are fixed coupon
securities.

• For example, - 7.17% GS 2028 would mean:

Coupon 7.17% paid on face value

Name of Issuer Government of India

Date of Issue January 8, 2018

Maturity January 8, 2028

Coupon Payment Dates Half-yearly (July 08 and January 08) every year

Minimum Amount of issue/ sale ₹10,000

Sometimes same security with same coupon rate, maturity date are issued during same year but in
different months. In such cases, the nomenclature shall be 7.49%GS201 JAN. Year shown in the
nomenclature is the year of maturity of the bond.
TYPES OF AUCTIONS IN GSEC
• Yield Based Auction: A yield-based auction is generally conducted when a new G-Sec is issued.
Investors bid in yield terms up to two decimal places (e.g., 8.19%, 8.20%, etc.). Bids are arranged in
ascending order and the cut-off yield is arrived at the yield corresponding to the notified amount of the
auction. The cut-off yield is then fixed as the coupon rate for the security. Successful bidders are those
who have bid at or below the cut-off yield. Bids which are higher than the cut-off yield are rejected.
Yield based auction of a new security
 Maturity Date: January 11, 2026
 Coupon: It is determined in the auction (8.22% as shown in the illustration below)
 Auction date: January 08, 2016
 Auction settlement date/Issue date: January 11, 2016*
 Notified Amount: ₹1000 crore
* January 9 and 10 being holidays (Saturday and Sunday), settlement is done on January 11, 2016
(T+1 settlement).
YIELD BASED AUCTION
Details of bids received in the increasing order of bid yields

Amount of bid Cumulative amount

Bid No. Bid Yield Price* with coupon as 8.22%
(₹ Cr) (₹ Cr)
1 8.19% 300 300 100.19
2 8.20% 200 500 100.14
3 8.20% 250 750 100.13
4 8.21% 150 900 100.09
5 8.22% 100 1000 100
6 8.22% 100 1100 100
7 8.23% 150 1250 99.93
8 8.24% 100 1350 99.87

The issuer would get the notified amount by accepting bids up to bid at sl. no. 5. Since the bid number 6
also is at the same yield, bid numbers 5 and 6 would get allotment on pro-rata basis so that the notified
amount is not exceeded. In the above case each of bidder at sl. no. 5 and 6 would get ₹ 50 crore. Bid
numbers 7 and 8 are rejected as the yields are higher than the cut-off yield.

*Price corresponding to the yield is determined as per the relationship given under YTM calculation
PRICE BASED AUCTION
• A price based auction is conducted when Government of India re-issues securities which have already
been issued earlier. Bidders quote in terms of price per ₹100 of face value of the security (e.g.,
₹102.00, ₹101.00, ₹100.00, ₹ 99.00, etc., per ₹100/-). Bids are arranged in descending order of price
offered and the successful bidders are those who have bid at or above the cut-off price. Bids which are
below the cut-off price are rejected

Price based auction of an existing security 8.22% GS 2026

 Maturity Date: January 11, 2026
 Coupon: 8.22%
 Auction date: January 08, 2016
 Auction settlement date: January 11, 2016*
 Notified Amount: ₹1000 crore
* January 9 and 10 being holidays (Saturday and Sunday), settlement is done on January 11, 2016
under T+1 cycle.
PRICE BASED AUCTION

Details of bids received in the decreasing order of bid price

Amount of bid Cumulative amount

Bid no. Price of bid Implicit yield
(₹ Cr) (₹ Cr)

1 100.19 300 8.19% 300

2 100.14 200 8.20% 500

3 100.13 250 8.20% 750

4 100.09 150 8.21% 900

5 100 100 8.22% 1000

6 100 100 8.22% 1100

7 99.93 150 8.23% 1250

8 99.87 100 8.24% 1350

The issuer would get the notified amount by accepting bids up to 5. Since the bid number 6 also is at the same price, bid numbers 5 and 6 would
get allotment in proportion so that the notified amount is not exceeded. In the above case each of bidders at sl. no. 5 and 6 would get securities
worth ₹ 50 crore. Bid numbers 7 and 8 are rejected as the price quoted is less than the cut-off price.
UNIFORM PRICE VS. MULTIPLE PRICE

In a Uniform Price auction, all the successful bidders are required to pay for the allotted quantity of
securities at the same rate, i.e., at the auction cut-off rate, irrespective of the rate quoted by them.

On the other hand, in a Multiple Price auction, the successful bidders are required to pay for the
allotted quantity of securities at the respective price / yield at which they have bid.

In the example above, if the auction was Uniform Price based, all bidders would get allotment at the
cut-off price, i.e., ₹100.00.

On the other hand, if the auction was Multiple Price based, each bidder would get the allotment at the
price he/ she has bid, i.e., bidder 1 at ₹100.19, bidder 2 at ₹100.14 and so on.
WHEN ISSUED AND SHORT SALE IN GOVT. SECURITIES
"When, as and if issued“
(commonly known as ‘When Issued’)
security refers to a security that has been
authorized for issuance but not yet
actually issued. When Issued trading takes
place between the time a Government
Security is announced for issuance and
the time it is actually issued. All 'When
Issued' transactions are on an 'if' basis.
Both new and reissued Government
securities issued by the Central
Government are eligible for ‘When Issued’
transactions.
Not exceeding 25% of the notified
amount in auction.
Short Sale of securities
Prudential limits – Liquid securities – 0.75% of the total outstanding
stock of each security or Rs. 600 cr. Whichever is lower. Other
securities 0.25%.
The transactions must be tagged in NDS OM as short sale
transaction. Short sale shall be covered within 3 months.
On the settlement date delivery should be given.
A separate account “Securities Short Sold” should be created .
Short sales, as well as purchase transactions to cover short sales,
shall be accounted in the Held For Trading (HFT) category.
All short sale transactions shall be audited on a daily basis to ensure
compliance with all regulatory and internal requirements.
STRIPS

Separate Trading of Registered Interest and Principal of Securities. - STRIPS are the securities created by way
of separating the cash flows associated with a regular G-Sec i.e. each semi-annual coupon payment and the
final principal payment to be received from the issuer, into separate securities.

They are essentially Zero Coupon Bonds (ZCBs). However, they are created out of existing securities only
and unlike other securities, are not issued through auctions. Stripped securities represent future cash flows
(periodic interest and principal repayment) of an underlying coupon bearing bond. Being G-Secs, STRIPS
are eligible for SLR. All fixed coupon securities issued by Government of India, irrespective of the year of
maturity, are eligible for Stripping/Reconstitution, provided that the securities are reckoned as eligible
investment for the purpose of Statutory Liquidity Ratio (SLR) and the securities are transferable.

For example, when

Rs. 100 of the 8.60% GS 2028 is stripped, each cash flow of coupon (Rs.4.30 each half year) will become a
coupon STRIP and the principal payment (Rs.100 at maturity) will become a principal STRIP. These cash
flows are traded separately as independent securities in the secondary market.
OPEN MARKET OPERATIONS
OMOs are the market operations conducted by the RBI
by way of sale/ purchase of G-Secs to/ from the market
with an objective to adjust the rupee liquidity
conditions in the market on a durable basis. When the
RBI feels that there is excess liquidity in the market, it
resorts to sale of securities thereby sucking out the
rupee liquidity. Similarly, when the liquidity conditions
are tight, RBI may buy securities from the market,
thereby releasing liquidity into the market.
Repurchase (buyback) of G-Secs is a process whereby
the Government of India and State Governments buy
back their existing securities, by redeeming them
prematurely, from the holders.
LIQUIDITY ADJUSTMENT FACILITY
LAF is a facility extended by RBI to the
scheduled commercial banks (excluding
RRBs) and PDs to avail of liquidity in case of
requirement or park excess funds with RBI
in case of excess liquidity on an overnight
basis or for longer periods against the
collateral of G-Secs including SDLs.
Basically, LAF enables liquidity management
on a day to day basis. The operations of LAF
are conducted by way of repurchase
agreements (repos and reverse repos )

Simultaneous purchase and sale of government

securities under OMOs is popularly known as
Operation Twist. It involves buying long-end debt while
selling short-tenor bonds to keep borrowing costs
down.
RETAIL DIRECT

Retail Direct scheme is a one-stop solution to facilitate investment in Government Securities by Individual
Investors. Under this scheme Individual Retail investors can open Gilt Securities Account – “Retail Direct Gilt
(RDG)” Account with the RBI.

The RDG account can be opened singly or jointly with another retail investor (both residents and non residents who meets the
eligibility criteria.

RDG Account holders have been allowed to participate in the primary issuance of CG/SG/T-bill/SGB. CCIL will act as the
Aggregator for receiving bids for Primary Auctions from such Retail Direct (RD) Investors;

CCIL will also act as the Receiving Office for receiving bids for Sovereign Gold Bonds (SGB) from such RD Investors;
RETAIL DIRECT

No fee will be charged for opening and maintaining ‘Retail Direct Gilt account’ with RBI. No fee will be charged by the aggregator
for submitting bids in the primary auctions. Fee for payment gateway etc., as applicable, will be borne by the registered investor.

Participation in the Scheme of non-competitive bidding is open to to eligible Retail Direct Investors as prescribed by RBI. As the
focus is on the small investors lacking market expertise, the Scheme will be open to those who do not have current account (CA) or
Subsidiary General Ledger (SGL) account with the Reserve Bank of India and do not require more than Rs.two crore (face value) of
securities per auction

Non-competitive bidding means the bidder would be able to participate in the auctions of dated government securities without
having to quote the yield or price in the bid.
NON SLR SECURITIES

1. Debentures and Bonds.

2. Bonds issued by Discoms under Financial Restructuring Plan.

3.Zero Coupon Bonds.

Bank must have a Board approved policy for
4.Preference Shares. dealing in these instruments.

5.Equity Shares. Auditors need to go through the Investment

Policy and confirm with the investments made
by the treasury are in conformity with the
6.Mutual Funds. policy.

7.Commercial Papers Any deviations need to be reported.

8.Investment in RRBs.
PRUDENTIAL LIMITS – NON SLR INVESTMENTS
Investment in Non-SLR securities of original
maturity less than one year.
However CPs and CDs and NCDs.
Unlisted non SLR securities
Investment in Liquid/short term debt schemes of
mutual funds with maturity profile of not more one Bank.
year
Exposure to Capital markets
Direct investment in shares
Investment in Long Term Bonds issued to Finance
Infrastructure & affordable housing.
Not allowed.
Allowed.
Not to exceed 10% of total investment in
non SLR securities.
No to exceed 10% of net worth of the
40% of net worth of the Bank.
20% of net worth of the Bank.
Not to exceed 2% of Bank’s Tier I or 5% of
issue size.

Unrated non SLR Not permitted.

Unrated Bonds in infrastructure With in 10% permitted.
NET WORTH OF THE BANK

ADD DEDUCT

Paid up capital Revaluation Reserves.

Free Reserves Debit balances in P & L Account and accumulated losses.

Share Premium Intangible Assets.

Investment Fluctuation Reserve NOT TO INCLUDE

Credit balances in P & L Account. General or specific provision.

CLASSIFICATION OF INVESTMENTS (BOTH SLR & NON SLR)
• Held to Maturity.
• Available for Sale.
• Held for Trading.
BALANCE SHEET CLASSIFICATION
• Government Securities.
• Other approved securities.
• Shares.
• Debentures and Bonds.
• Subsidiaries / Joint ventures.
• Others (CPs, Mutual Fund units etc.)
HELD TO MATURITY SECURITIES
• Category of investment at the time of acquisition
and noted on the investment proposal.
• HTM securities upto 25% of total investments.
• Banks can exceed the above limit provided the
excess comprises of
• SLR securities are allowed upto 23% upto 31.3.23
should be brought down to 19.50 by 31.12.24.
and
• Investments made under TLTRO.
• Profit on sale taken to P & L then transferred to
“Capital Reserve Account” and then to Statutory
Reserves.
SECURITIES IN HELD TO MATURITY CATEGORY
• Banks are permitted to exceed the limit of 25% under HTM, provided the excess comprises of only SLR
securities and the SLR securities so held are not more than 22% of their NDTL. This facility is available
upto 30.6.2023. (2) Investments made by Banks in specified Institutions under TLTRO.

HTM SECURITIES INCLUDE THE FOLLOWING

• SLR securities upto the extent permitted.

• Non SLR securities included under HTM as on 2.9.2004. Further not permitted.

• Recapitalisation Bonds issued by GOI.

• Investment in the equity of Subsidiaries and joint ventures

• Investment in long term bonds with a min residual maturity of seven years issued by companies in
infrastructure activities. ( marked in RED not quoted in 25% limit)

• Unquoted shares/bonds/units of Venture Capital funds for an initial period of 3 years.

CLASSIFICATION OF INVESTMENTS (BOTH SLR & NON SLR)

HELD FOR TRADING

The securities acquired with the intention to trade by taking advantage of the shortterm price/interest rate
movements shall be classified under ‘Held for Trading (HFT)’. The investments classified under HFT shall be
sold within 90 days.

AVAILABLE FOR SALE (AFS)

• The securities which do not fall under HTM or HFT categories shall be classified under ‘Available for Sale
(AFS).

• However, quoted equity shares / bonds/ units of Category I and II AIFs (Alternate Investment Funds) ; and
equity, debentures and other financial instruments acquired by way of conversion of outstanding
principal and / or interest amount shall always be classified in the AFS category

• Profit or Loss is taken to P & L

ALTERNATE INVESTMENT FUNDS
Alternative Investment Fund or AIF means any fund established or incorporated in India which is a privately pooled
investment vehicle which collects funds from sophisticated investors, whether Indian or foreign, for investing it in
accordance with a defined investment policy for the benefit of its investors.

Category I AIFs - AIFs which invest in start-up or early-stage ventures or social ventures or SMEs or infrastructure or
other sectors or areas which the government or regulators consider as socially or economically desirable and shall
include venture capital funds, SME Funds, social venture funds, infrastructure funds

Category II AIFs - AIFs which do not fall in Category I and III and which do not undertake leverage or borrowing other
than to meet day-to-day operational requirements and as permitted in the SEBI (Alternative Investment Funds)
Regulations, 2012. Various types of funds such as real estate funds, private equity funds (PE funds), funds for distressed
assets, etc. are registered as Category II AIFs.

Category III AIFs - AIFs which employ diverse or complex trading strategies and may employ leverage including
through investment in listed or unlisted derivatives.
SHIFTING OF SECURITIES

FROM TO REMARKS

HTM AFS / HFT At the beginning of the year.

The securities should be revalued and
provided for.

AFS / HFT HTM Should be at lower of the book value or

market value. Appreciation ignored.

AFS HFT Board approval. No valuation to be done.

HFT AFS Not allowed. Allowed in exceptional cases

when Bank is not able to dispose off due to
tight liquidity conditions/volatility.
AUDIT POINTS

1. Whenever shifting has been made from one category to the other,
Board, Investment Committee or Branch Head approval required.
Check the same.

2. While shifting whether the RBI guidelines are strictly adhered to be

checked.

3. Check the exceptional transaction reports for this and call for the
approved notes.
 VALUATION OF SECURITIES
HELD TO MATURITY Need not be marked to market
and will be carried at acquisition
cost
AVAILABLE FOR SALE Individual securities are marked
to market at quarterly intervals.
Shall be valued scrip wise.
HELD FOR TRADING M to M on monthly basis.
INVESTMENT FLUCTUATION RESERVE (IFR)
If the acquisition cost is more than face value, the
premium should be amortised over the period upto
maturity.
Investment in subsidiary, joint venture, valuation
has to be done and provision for impairment has to
be provided for.
Appreciation / depreciation to be aggregated
classification wise (as per Balance Sheet
classification) and Net depreciation has to be
provided for.
Net depreciation has to be provided for.

2% of the AFS & HFT investment portfolio to be maintained. Considered as Tier II capital.

INVESTMENT RESERVE ACCOUNT

Provisions created on account of depreciation in AFS and HFT securities if found in excess than required, the excess
should be credited to P &L and equivalent maintained as IRA account. Eligible for Tier II.
INVESTMENT RESERVE ACCOUNT

• In the event, provisions created on account of depreciation in the ‘AFS’ or ‘HFT’ categories
are found to be in excess of the required amount in any year, the excess should be credited to
the P&L Account.

• An equivalent amount (net of taxes, if any and net of transfer to Statutory Reserves as
applicable to such excess provision) should be appropriated to an IRA Account in Schedule 2
– “Reserves & Surplus” under the head “Revenue and Other Reserves”.

• They would be eligible for inclusion under Tier-II within the overall ceiling of 1.25 per cent of
total Risk Weighted Assets prescribed for General Provisions/ Loss Reserves.
VALUATION OF SECURITIES
G Sec and SDL Bench mark rates available on FBIL (Financial
Benchmarks India Pvt. Ltd.
Unquoted G Sec /SDL YTM rates given by PDAI/FIMMDA
Treasury Bills At carrying cost.
Unquoted SDL 25 bps above Unquoted G sec rate.
Debentures / bonds Upto 50 bps above G-Sec rate depending upon the
credit rating of the debentures/bonds.
Bonds issued by Discoms 75 bps to 100 bps. Over G sec rates.
Preferential shares YTM rates for G-Sec.
Equity shares On daily basis or on weekly basis based on closing rates.
Mutual funds Latest repurchase basis declared.
Commercial Paper/Zero At the carrying cost.
coupon bonds/CDs
RBI DRAFT GUIDELINES ON CLASSIFICATION AND VALUATION OF INVESTMENT
PORTFOLIO
RBI issued a discussion paper in January 2022. The revised guidelines will be implemented from 1.4.2023.

The proposals in a nutshell are as under :

(1)The categorisation will be HTM, AFS and Fair Value through Profit and Loss Account (FVTPL). HFT will be a subcategory under
FVTPL.

(2) Only debt instruments with fixed or determinable payments and fixed maturity shall be held under HTM. Even corporate bonds
meetings the criteria can be classified.

(3) The ceiling of 25% in HTM category and SLR stipulation to be dispensed with.

(4) Debt instruments with the bank holds till maturity or sold before maturity can be held in AFS.

(5) FVTPL is a residual category. - which do not have any contractually specified periodic cash flows that are Solely Payments of
Principal and Interest on principal outstanding (‘SPPI criterion’) shall be classified as FVTPL

(6) Securities held in HTM category need to be valued quarterly and any impairment in value should be debited to P and L
Account.
RBI DRAFT GUIDELINES ON CLASSIFICATION AND VALUATION OF INVESTMENT
PORTFOLIO

7) Securities held in AFS shall be marked to marked once in a quarter. Gains or losses be adjusted through
AFS – Reserve without routing through P & L account. It will be reckoned for CET 1 capital.

8) The amounts under AFS – Reserve are not eligible for distribution of Dividend. Upon sale or maturity of a
debt instrument in AFS category the accumulated realised gain / loss shall be credited to P & L account.

9) The securities held in FVTPL shall be valued on daily basis and accounted through profit and loss

10)Investment Reserve Account will be discontinued and the balance shall be transferred to Revenue and
Other reserves.

11)Investment Fluctuation Reserve will continue.

NON PERFORMING INVESTMENTS

• Classification as applicable to advances.

• In the case of preference shares, if fixed dividend not paid.

• In the case of equity shares, the shares of company are valued at Rs.1 (notional value).

• In case credit facility of the borrower is NPA , investment in that company will be treated as
NPI.

• Debentures also same treatment.

 TYPES OF INVESTMENTS BY BANKS
Type of Name of financial Sub-category
security security
Equity shares Issued by Corporates, Issued by Banks/ NBFC, Listed, Unlisted, Partly paid/Fully
paid, Equity in subsidiaries
Equity Preference shares Perpetual / Non-perpetual, Redeemable / Non-redeemable, Cumulative / Non-
cumulative
Mutual funds Equity oriented, Open ended, Close ended
Convertible Partially convertible,
Quasi- debentures Fully convertible
equity Mutual funds Balanced funds ( equity + debt)
Bonds / debentures Issued by Central / State Govt / Corporates / PSU / Banks / NBFCs / NABARD /
Zero coupon, SLR / Non-SLR
Mutual funds MMMF
Debt oriented funds
Debt Money Commercial Paper, Interbank participation certificates, PS lending certificates,
market instruments Securitised assets (ABS, MBS)
Certificate of Deposit, Treasury bills
Borrowing / Lending Call money / Notice money / Term Money
Repo / Reverse repo / CBLO / CDO, Refinance
Derivatives Interest rate derivatives, Foreign currency derivatives, Equity derivatives, Credit
Off-Balance derivatives (CDS / CLN), Commodity derivatives 79
sheet items Credit substitutes BG / LC / Line of Credit
NON-PERFORMING INVESTMENT

Fixed Income securities e.g. • Interest / principal / fixed dividend on preference shares
Bond / Debentures / Preference (including maturity proceeds) is due and remains unpaid
Shares for more than 90 days

• The equity shares of a company have been valued at

Equity Shares Re.1/- per company, on account of the non-availability of
the latest balance sheet

• If credit facility is NPA the security issued would be treated

Issuer of securities availing as NPI.
credit facility from bank • If Preference shares alone is NPI, other investments /
credit to borrower need not be treated as NPA / NPI

Conversion of credit facilities on

• Converted securities would be NPI if credit facilities are
restructuring into equity,
NPA on restructuring.
debentures, bonds
80
AUDIT POINTS

1. Call for the report of holdings and recovery of interest in the case of
bonds/debentures.

2. Take out a list of outstanding shares and check from the market reports.

3. Wherever investments were made in Commercial papers/Bonds of the

company availing facilities from Banks call for status report.

4. Check the classification as per advances and provisions made thereon.

ADMINISTRATIVE FUNCTIONS

• Allocation of duties.

• Voice recording – backup and checking.

• Broker approvals and limits.

• Settlement of payments and payment of interest.

• Control over the returns submitted to RBI periodically.

• Maintenance of systems, backup, control and preservations of records.

AUDIT POINTS

1. Brokers are on the approved list.

2. Transactions between one bank and another bank should not be put through broker’s
account.

3. Board approval required if any transaction is put through a broker

4. Auditor should scrutinize the deals through brokers and commission paid. Total
transactions through one broker not to exceed 5% of total transactions through
brokers.

5. Voice recording should be checked once in a month.

FOREX MARKETS
• Buying and selling foreign
currencies.
• Borrowing and lending
operations.
• Opening of Nostro Accounts and
Nostro reconciliation.
• Providing card rates for forex
transactions.
• Dealing in various foreign
exchange derivative transactions.
• Booking Forward contracts
for Importers and
Exporters.
• Cross currency options (not
involving rupee)
• Foreign Currency – INR
options.
• Foreign Currency – INR
Swaps.
• Hedging of Borrowings in
foreign exchange
• Interest rate swaps.
• Cross currency swaps.
• Interest rate cap or
collar
• Forward Rate
Agreement.
EXPOSURE LIMITS
1. Net overnight Open Position
Limit (NOOPL) not to exceed
25% of T I and II.
2. Net Open Position Limit on a
Single currency.
3. Net Spot Position Limits.
4. Net Forward Position Limits.
5. Net Options Position Limits.
6. Aggregate Gap Limits. – not to
exceed 6 times of T I and II
GAP LIMITS

•Individual Gap Limit: This determines the maximum mismatch for any calendar month; currency-wise.

•Aggregate Gap Limit: Is the limit fixed for all gaps, for a currency, irrespective of their being
long or short. This is worked out by adding the absolute values of all overbought and
all oversold positions for the various months, i.e. the total of the individual gaps, ignoring the signs.
This limit, too, is fixed currency-wise.

•Total Aggregate Gap Limit: Is the limit fixed for all aggregate gap limits in all currencies.
DERIVATIVE TRANSACTIONS
BANKS are permitted to be market makers for their customers in providing the following OTC derivatives :

a. Forward rate agreement. (FRA)

b. Foreign exchange forward. (Forward contracts) DRAFT guidelines for introduction of

CREDIT DERIVATIVES in India
c. Interest rate swap. (IRS) have been issued by RBI on
JANUARY 2021
d. Foreign exchange swap.

e. Currency swap.

f. Credit default swap.

g. Interest rate call / put option (European).

h. Interest rate cap (European) i. Interest rate floor (European)

j. Foreign exchange call / put option (European).

DERIVATIVES DEFINITIONS

‘Credit default swap’ means an OTC derivative in which one counterparty (protection seller) commits to pay to
the other counterparty (protection buyer) in the case of a credit event with respect to a reference entity and
in return, the protection buyer makes periodic payments (premium) to the protection seller until the maturity
of the contract or the credit event, whichever is earlier.

‘Currency swap’ means an OTC derivative which commits two counterparties to exchange streams of interest
payments and/or principal amounts in different currencies on specified dates over the duration of the swap
at a pre-agreed exchange rate.

‘Foreign exchange forward’ means an OTC derivative involving the exchange of two currencies on a specified
date in the future (more than two business days later) at a rate agreed on the date of the contract.
DERIVATIVES DEFINITIONS

‘Foreign exchange call option (European)’ means an OTC derivative that gives the buyer the right, but not the
obligation, to buy an agreed amount of a certain currency with another currency at a specified exchange rate
on a specified date in the future.

Foreign exchange put option (European)’ means an OTC derivative that gives the buyer the right, but not the
obligation, to sell an agreed amount of a certain currency for another currency at a specified exchange rate
on a specified date in the future.

‘Foreign exchange swap’ means an OTC derivative involving the actual exchange of two currencies (principal
amount only) on a specified date (the short leg) and a reverse exchange of the same two currencies at a date
further in the future (the long leg), at rates agreed at the time of the contract.
DERIVATIVES DEFINITIONS

‘Forward rate agreement’ means a cash-settled OTC derivative between two counterparties, in which a buyer
will pay or receive, on the settlement date, the difference between a pre-determined fixed rate (FRA rate) and
a reference interest rate, applied on a notional principal amount, for a specified forward period.

‘Interest rate cap’ means a series of interest rate call options (European) (called caplets) in which the buyer of
the option receives a payment at the end of each period when the underlying interest rate is above a rate
agreed in advance. ‘Interest rate floor’ means a series of interest rate put options (European) in which the
buyer of the option receives a payment at the end of each period when the underlying interest rate is below
a rate agreed in advance.

‘Interest rate call option (European)’ means an OTC derivative that gives the buyer the right, but not the
obligation, to buy an interest rate instrument or receive an interest rate on a notional principal at a pre-
determined price/rate on a specified date in the future.
DERIVATIVES DEFINITIONS

‘Interest rate put option (European)’ means an OTC derivative that gives the buyer the right, but not the
obligation, to sell an interest rate instrument or pay an interest rate on a notional principal at a pre-
determined price/rate on a specified date in the future.

‘Interest rate swap’ means an OTC derivative in which two counterparties agree to exchange one stream of
future interest payments for another, applied on a notional principal amount, over a specified period
GUIDELINES FOR BANKS
1. Banks have to classify a customer as per the User Classification Framework provided by RBI.. They have to
classify the user as Retail user or as non-retail user. Non retail users are entities regulated by Financial Sector,
Exim Bank, NABARD, NHB, SIDBI, Companies with minimum net worth of Rs.500 cr and Persons resident
outside India other than Individuals.

2. Eligible products for retail users are Forwards, Call and Put Options (European), purchase of call and put
spreads, Swaps.

3. The Banks must ensure that the following :

1. The contract is for the purpose of hedging.

2. The notional and tenor of the contract does not exceed the value and tenor of the exposure.

3. The same exposure has not been hedged using another derivative contract.

4. Where the value of exposure can not be ascertained with certainty, derivative contracts may be booked on
the basis of reasonable estimates.

5. The users are allowed to freely cancel and rebook derivative contracts. The net gains will be passed on only
at the time of cash flow of the anticipated transaction.
ROLE OF INTERNAL AUDITORS – DERIVATIVE TRANSACTIONS
Derivative business shall be subjected to internal audit to review the adequacy and test the effectiveness
of the risk management system and internal controls.

An illustrative list of focus areas is as follows:

a. Investigate unusual occurrences such as significant breaches of limits, unauthorized trades and
unreconciled valuation or accounting differences.

b. Evaluate the reliability and timeliness of information reported to senior management and the board of
directors.

c. Trace and verify information provided on risk exposure reports to the underlying data sources.

d. Appraise the effectiveness and independence of the risk management process.

ROLE OF INTERNAL AUDITORS – DERIVATIVE TRANSACTIONS

e. Evaluate and independently verify whether model risk management practices

are comprehensive, rigorous, and effective.

f. Evaluate the adequacy of the derivative valuation process and ensure that it
is performed by parties independent of risk-taking activities.

g. Test derivative valuation reports for accuracy.

h. Evaluate the product disclosure statements and risk disclosure statements

provided to users.
 FOREX REPORTS TO RBI
1. Daily statement of Foreign Exchange Turnover in FORM FTD and Gaps., Position and Cash balances in FORM
GPB

2. Half yearly report on cross currency derivatives.

3. Quarterly return on exposures in FE.

4. A Weekly report Option transactions (FCY-INR).

5. Monthly report on total outstanding FC borrowings under all categories.

6. Monthly report on forward contracts sanctioned and utilized.

7. Fortnightly statement in form BAL of all foreign currencies held.

8. Monthly statement of cover taken by FPIs. 9. Yearly report of Vostro accounts.

10. Quarterly report of forward contracts booked by SMEs and resident individuals.

11. A quarterly report on doubtful transaction of hedge transactions.

ASSET LIABILITY MANAGEMENT - ALM

ALM is a process to manage market risk to protect the NIM.

Process used to calculate the Liquidity Risk and Interest Rate Risk.

Preparation of Liquidity Gap Statement based on the maturity pattern of assets and
liabilities.

Preparation of Interest Rate gap statement based on repricing of assets and liabilities.

Preparation of structural liquidity statement.

Gaps in each bucket to be within the stipulated limits by the Board.

ALM STATEMENTS
MATURITY PATTERN (LIQUIDITY RISK) REPRICING PATTERN (INTEREST RATE RISK)

1 DAY. (to be bifurcated into Sensitive and non sensitive)

2 – 7 DAYS 1 TO 28 DAYS
8 – 14 DAYS
OVER 28 DAYS TO 3 MONTHS
16 TO 28 DAYS
OVER 3 MONTHS TO 6 MONTHS
OVER 28 DAYS TO 3 MONTHS
OVER 6 MONTHS TO ONE YEAR
OVER 3 MONTHS TO 6 MONTHS
OVER ONE YEAR UPTO 3 YEARS
OVER 6 MONTHS TO ONE YEAR

OVER 3 YEARS UPTO 5 YEARS.

OVER ONE YEAR UPTO 3 YEARS

OVER 3 YEARS UPTO 5 YEARS. OVER 5 YEARS

OVER 5 YEARS Non sensitive

AUDIT POINTS

1. Check the statements submitted by the ALCO to the Board.

2. Check the gaps in each time bucket and they are as per laid down bank’s Policy.

3. Check for strategies approved by the board for interest rate changes, build up of
liquidity gaps.

4. Reporting to RBI done regularly.

5. Meetings are conducted on regular basis.

RBI GUIDELINES ON CONCURRENT AUDIT OF TREASURY FUNCTIONS
(i) Whether branch has acted within HO instructions for purchase and sale of securities.

(ii) Periodic confirmation of Derivative contracts with counterparties.

(iii) Adherence to regulatory guidelines with respect to Treasury deals/structured deals.

(iv) Controls around deal modification/cancellation/deletion, wherever applicable.

(v) Cancellation of forward contracts and passing/recovery of exchange gain/loss.

(vi) Gaps and OPL (Open Position Limits) maintained in different currencies vis-à-vis prescribed limit for
the same.

(vii) Reconciliation of Nostro and Vostro accounts. Balances in Nostro accounts in different foreign

currencies are within the limits prescribed by the bank.

(viii) Collection of underlying documents for Derivative & Forward contracts. Delays, if any.
RBI GUIDELINES ON CONCURRENT AUDIT OF TREASURY FUNCTIONS

(ix) Instances of booking and cancellation of forward contracts with the same counterparty
within a span of couple of days or a few days.

(x) Sample check some of the deals and comment on the correctness of computation.

(xi) Checking of application money, reconciliation of SGL account, compliance to RBI norms.

(xii) Checking of custody of unused BR Forms & their utilization in terms of Master Circular on
Prudential Norms on Classification, Valuation and Operations of Investment Portfolio by
banks.

(xiii) To ensure that the treasury operations of the bank have been conducted in accordance
with the instructions issued by the RBI from time to time.
CHECKLIST
1. Investment Policy and other policies.

2. Observance of prudential norms.

3. Verification of investments – classification, valuation and shifting.

4. Accounting entries for repo transactions.

5. Reconciliation of Subsidiary General Ledger (SGL) and CSGL (Constituents SGL) and account with RBI.

6. Deal verification with rate scan. Voice recorder occasionally.

7. Broker-wise deals and payment made to them.

8. NPI in equity, debenture and bonds and provisions thereof.

9. Regulatory returns – CRR, SLR, Forex returns. 10. Nostro reconciliation.

NEW LFAR GUIDELINES – AUDIT POINTS AND VERIFICATIONS

• Merit of Investment Policy and adherence to RBI guidelines.

• Adherence to guidelines issued by FIMMDA/FIBIL/FEDAI.
• System of sale and purchase of investments, delegation and reporting.
• Segregation of Front / Mid / Back Office functions.
• Classification of Investments into HTM/AFS/HFT.
• Proper accounting of depreciation in investments.
• IT software being used by Treasury for investment functions.
• SLR/CRR requirements, calculations, compliance to RBI guidelines.
• ALM policy and strict adherence to RBI guidelines.
THANK YOU