TREASURY MANAGEMENT.

K.Eswar
Asst. General Manager (Treasury)
Central Bank of India.
An overview of Integrated
Treasury function.
SLR/CRR
Equity/MF/Venture
Fund.
Funds
Management/L.A.F/
CBLO/Market
repo//FC Buy sell
swap/ALM
Raising of Tier
II capital.
Corporate Debt
/Debenture.
Derivatives. Foreign Exchange
Call/Notice/Term
MoneyCP,CD,IBPC,.
Front office/Mid
Office./Back
office.
Reserve Requirements.

SLR : Section 24 of Banking
Regulations1949.
CRR: Section 42(2) of RBI Act 1934 and
Sec 24(2-A) of BR act.
CRR
Maintenance of CRR: Scheduled
Commercial Banks required to maintain
with RBI on an average cash balance of not
less than 3 % of Net Demand and Time
Liabilities NDTL.
On fortnightly basis.
RBI can increase the same not exceeding
20%.

Liabilities not to be included in
NDTL.
Paid up capital.
Credit Balance in P&L
Refinance from RBI
Refinance Exim Bank, IDBI, NABARD, NHB.SIDBI.
Amount of prov made for IT in excess of actual estimated
liabilities.
DICGC claim.
Claim received from ECGC.
Amount received from insurance company.
Inter bank term deposits /borrowings with original
maturity of 15 days and above and upto one year.


Procedure for calculation.
Lag of one fortnight .
CRR based on NDTL of last Friday of the
second preceding fortnight.
Minimum CRR upto 70% of total CRR
requirements on daily basis.
SLR.
Sec 24 of BR Act scheduled Commercial
Banks are required to maintain in
a. Cash or
b. In gold valued at price not exceeding
current market price or
c. In unencumbered approved securities
valued at a price specified by RBI from
time to time.

SLR.
AN AMOUNT OF 25% OF
DEMANDAND TIME LIABILITIES.
PROCEDURE FOR CALUCATION IS
SAME EXCEPT THE INTERBANK
DEPOSITS AND INTER BANK LOANS
OF15 DAYS TO ONE YEAR ARE
INCLUDED.
PENALTY
3 % OVER BANK RATE FOR FIRST
DAY OF DEFAULT
5 %OVER BANK RATE FOR
SUBSEQUENT PERIOD.
Call market.
Instrument is completely unsecured. But has
high liquidity. The platform is provided by
the CCIL under aegis of RBI. Indicates the
rate for short term lending of funds.
Commercial banks, co operative banks and
primary dealers.
Call /Notice/Term Market.
Limits

Avg. Daily
limits
Fortnightly
Average.
Lending
Limits
50% of total
capital
funds.
25% of total
capital
funds.
Borrowing
limits
125%of total
capital limits
100% of
total capital
funds.
Sr. No. Participant Borrowing Lending
1 Scheduled
Commercial Banks
On a fortnightly
average basis,
borrowing
outstanding should
not exceed 100 per
cent of capital funds
(i.e., sum of Tier I
and Tier II capital)
of latest audited
balance sheet.
However, banks are
allowed to borrow a
maximum of 125
per cent of their
capital funds on any
day, during a
fortnight.
On a fortnightly
average basis,
lending
outstanding should
not exceed 25 per
cent of their capital
funds; however,
banks are allowed to
lend a maximum of
50 per cent of their
capital funds on any
day, during a
fortnight.
2 Co-operative Banks Borrowings outsta
nding by State Co-
operative
Banks/District
Central Co-
operative Banks/
Urban Co-op.
Banks in call/notice
money market on a
daily basis should
not exceed 2.0 per
cent of their
aggregate deposits
as at end March of
the previous
financial year.
No Limit
3 Primary Dealers
(PDs)
PDs are allowed to
borrow, on average
in a reporting
fortnight, up to 200
per cent of their net
owned funds (NOF)
as at end-March of
the previous
financial year.
PDs are allowed to
lend in call/notice
money market, on
average in a
reporting fortnight,
up to 25 per cent of
their NOF.
CBLO.
A Product developed by CCIL for the
benefit of entities who have restricted
participation in terms of ceiling on call
borrowing and lending borrowings or who
do not have access to call money market.
CBLO is discounted instrument available in
electronic book entry form for the maturity
period ranging from one day and above.
CBLO
Borrower is under obligation to return the
money that had borrowed at a specified
future date.
As an underlying charge , securities are held
in custody ( with CCIL) .
Eligible securities are Central Government
securities including T Bills as specified by
CCIL from time to time.
Accounting.
Net funds obligation comprising the member
wise pay in pay out position is sent
electronically to RBI for effecting debits and
credits in the members current accounts
through the settlement account of CCIL.
RBI completes the settlement and sends funds
settlement confirmation to CCIL.
After receiving settlement confirmation,
CCIL posts the CBLO to the respective
members CBLO account.

Government Securities
Primary Market: Two types of auctions are
held by RBI. Price based and Yield based.
RBI pre specified an approximate amount
of dated securities that it intends to issue
through a given year.
CERTIFICATE OF DEPOSITS.
Certificates of Deposit (CDs) is a negotiable
money market instrument and issued in
dematerialised form or as a Usance Promissory
Note, for funds deposited at a bank or other
eligible financial institution for a specified time
period. Guidelines for issue of CDs are presently
governed by various directives issued by the
Reserve Bank of India.

CERTIFICATE OF DEPOSITS.
Eligibility CDs can be issued by (i)
scheduled commercial banks excluding
Regional Rural Banks (RRBs) and Local
Area Banks (LABs); and (ii) select all-India
Financial Institutions that have been
permitted by RBI to raise short-term
resources within the umbrella limit fixed by
RBI.
CERTIFICATE OF DEPOSITS
Aggregate Amount
Banks have the freedom to issue CDs depending on their requirements.

An FI may issue CDs within the overall umbrella limit fixed by RBI,
i.e., issue of CD together with other instruments, viz., term money,
term deposits, commercial papers and inter-corporate deposits should
not exceed 100 per cent of its net owned funds, as per the latest audited
balance sheet.
Minimum Size of Issue and Denominations Minimum amount of a
CD should be Rs.1 lakh, i.e., the minimum deposit that could be
accepted from a single subscriber should not be less than Rs. 1 lakh
and in the multiples of Rs. 1 lakh
CERTIFICATE OF DEPOSITS
Who can Subscribe
CDs can be issued to individuals, corporations, companies,
trusts, funds, associations, etc. Non- Resident Indians
(NRIs) may also subscribe to CDs, but only on non-
repatriable basis which should be clearly stated on the
Certificate. Such CDs cannot be endorsed to another NRI
in the secondary market.


CERTIFICATE OF DEPOSITS
Maturity
The maturity period of CDs issued by banks should be not less than 7
days and not more than one year.
The FIs can issue CDs for a period not less than 1 year and not
exceeding 3 years from the date of issue.
Discount / Coupon Rate CDs may be issued at a discount on face
value.. The issuing bank / FI are free to determine the discount /
coupon rate.
CERTIFICATE OF DEPOSITS
Reserve Requirements
Banks have to maintain the appropriate reserve requirements, i.e., cash
reserve ratio (CRR) and statutory liquidity ratio (SLR), on the issue
price of the CDs.

Transferability
Physical CDs are freely transferable by endorsement and delivery.
Dematted CDs can be transferred as per the procedure applicable to
other demat securities. There is no lock-in period for the CDs.

Loans / Buy-backs Banks / FIs cannot grant loans against CDs.
Furthermore, they cannot buy-back their own CDs before maturity.
There will be no grace period for repayment
of CDs. If the maturity date happens to be
holiday, the issuing bank should make
payment on the immediate preceding
working day. Banks / FIs may, therefore, so
fix the period of deposit that the maturity
date does not coincide with a holiday to
avoid loss of discount / interest rate.
COMMERCIAL PAPER.
Introduction
Commercial Paper (CP) is an unsecured money market
instrument issued in the form of a promissory note. CP, as
a privately placed instrument, 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. Subsequently, primary dealers, and all-India
financial institutions were also permitted to issue CP to
enable them to meet their short-term funding requirements
for their operations.
COMMERCIAL PAPER
Who can Issue Commercial Paper (CP)

Corporates, primary dealers (PDs) and the all-India financial
institutions (FIs) that have been permitted to raise short-term resources
under the umbrella limit fixed by the Reserve Bank of India are
eligible to issue CP.

A corporate would be eligible to issue CP provided: (a) the tangible net
worth of the company, as per the latest audited balance sheet, is not
less than Rs.4 crore; (b) company has been sanctioned working capital
limit by bank/s or all-India financial institution/s; and (c) the borrowal
account of the company is classified as a Standard Asset by the
financing bank/s/ institution/s.


COMMERCIAL PAPER
Rating Requirement
All eligible participants shall obtain the credit rating for
issuance of Commercial Paper from either the Credit
Rating Information Services of India Ltd. (CRISIL) or the
Investment Information and Credit Rating Agency of India
Ltd. (ICRA) or the Credit Analysis and Research Ltd.
(CARE) or the FITCH Ratings India Pvt. Ltd. or such
other credit rating agencies as may be specified by the
Reserve Bank of India from time to time, for the purpose..

The minimum credit rating shall be P-2 of
CRISIL or such equivalent rating by other
agencies. The issuers shall ensure at the
time of issuance of CP that the rating so
obtained is current and has not fallen due
for review
COMMERCIAL PAPER
Maturity
CP can be issued for maturities between a minimum of 7
days and a maximum up to one year from the date of issue.
The maturity date of the CP should not go beyond the date
up to which the credit rating of the issuer is valid.
Denominations

CP can be issued in denominations of Rs.5 lakh or
multiples thereof. Amount invested by a single investor
should not be less than Rs.5 lakh (face value).

COMMERCIAL PAPER.
Limits and the Amount of Issue of CP

CP can be issued as a "stand alone" product. The aggregate amount of
CP from an issuer shall be within the limit as approved by its Board of
Directors or the quantum indicated by the Credit Rating Agency for
the specified rating, whichever is lower. Banks and FIs will, however,
have the flexibility to fix working capital limits duly taking into
account the resource pattern of companies financing including CPs.

COMMERCIAL PAPER.


The total amount of CP proposed to be issued should be raised within a
period of two weeks from the date on which the issuer opens the issue
for subscription. CP may be issued on a single date or in parts on
different dates provided that in the latter case, each CP shall have the
same maturity date.

Every issue of CP, including renewal, should be treated as a fresh
issued.
Investment in CP
CP may be issued to and held by individuals, banking companies,
other corporate bodies registered or incorporated in India and
unincorporated bodies, Non-Resident Indians (NRIs) and Foreign
Institutional Investors (FIIs). However, investment by FIIs would be
within the limits set for their investments by Securities and Exchange
Board of India (SEBI).
Mode of Issuance
CP can be issued either in the form of a promissory note (Schedule I)
or in a dematerialised form through any of the depositories approved
by and registered with SEBI.
CP will be issued at a discount to face value as may be determined by
the issuer.




Commercial paper.
No issuer shall have the issue of CP underwritten or co-
accept
Preference for Dematerialisation
While option is available to both issuers and subscribers to
issue/hold CP in dematerialised or physical form, issuers
and subscribers are encouraged to prefer exclusive reliance
on dematerialised form of issue/holding. However, with
effect from June 30, 2001, banks, FIs and PDs are required
to make fresh investments and hold CP only in
dematerialised form.

Commercial paper.
Stand-by Facility

In view of CP being a 'stand alone' product, it would not be
obligatory in any manner on the part of the banks and FIs
to provide stand-by facility to the issuers of CP. Banks and
FIs have, however, the flexibility to provide for a CP issue,
credit enhancement by way of stand-by assistance/credit,
back-stop facility etc. based on their commercial
judgement, subject to prudential norms as applicable and
with specific approval of their Boards.

Procedure for Issuance
Every issuer must appoint an IPA for issuance of CP. The
issuer should disclose to the potential investors its financial
position as per the standard market practice. After the
exchange of deal confirmation between the investor and
the issuer, issuing company shall issue physical certificates
to the investor or arrange for crediting the CP to the
investor's account with a depository. Investors shall be
given a copy of IPA certificate to the effect that the issuer
has a valid agreement with the IPA and documents are in
order.
Understand the terminologies
used in Treasury.
Coupon.
Maturity.
Current Yield.
YTM.
Duration.
Measures of Central Tendency: Mean.
Measures of dispersion: Variance/Standard Deviation.
Value at Risk.



A.Current Yield of 10 year bond (12%
coupon) with par value of 1000 selling for
950 . What is current yield.



12.63

Bond value 1000
Coupon 10%
Maturity 5 years
Current makt intt : 8%
Bond Price ?.

Solution.
100
.926
92.60
100
.857
85.70
100
.794
79.40
100
.735
73.50
1010
.681
687.81
1019.01
Stock returns of the company are as under. What is std. dev.
Year Returns Deviation from
mean
Deviation Squared.
1 10% -10 100
2 20 0 0
3 5 -15 225
4 30 10 100
5 35 15 225
650
Mean=100/5=20
Standard deviation: (650/5)^.5=11.40
7/19/2014 . 42
Interest Rates
Yield Curve
5.0000%
6.0000%
7.0000%
8.0000%
9.0000%
10.0000%
11.0000%
0 1 2 3 4 5 6 7 8 9 10
Time Period in Years
Y
T
M
7/19/2014 . 43
Yield Curve Parallel Shifts
Yield Curve - Parallel Shifts
5.7500%
6.2500%
6.7500%
7.2500%
7.7500%
8.2500%
8.7500%
9.2500%
9.7500%
10.2500%
1 2 3 4 5 6 7 8 9 10
Tenor in Years
Y
T
M
YC1 YC-Rate Rise YC-Rate Fall
7/19/2014 . 44
Yield Curve Stiffening &
Flattening

Yield Curve -Stiffening & Flattening
6.0000%
7.0000%
8.0000%
9.0000%
10.0000%
11.0000%
1 2 3 4 5 6 7 8 9 10
Tenor in Years
Y
T
M
YC1 YC-Stiff YC-Flat
7/19/2014 SPBT COLLEGE. 45
7/19/2014 SPBT COLLEGE. 46
DURATION
A methodology is required for following purposes:
To assess ALM mis-matches between assets
and liabilities
To compare two portfolios - Both can be
assets / liabilities or one asset and one
liability portfolio
To decide between various options for
contracting assets or liabilities
DURATION ANALYSIS
7/19/2014 SPBT COLLEGE. 47
DURATION
In financial analysis, any intermittent cash flow
earned from a financial asset is presumed to be
reinvested at current interest rates.
Thus, when current interest rates go up, price of a
bond falls while the reinvestment income will go up
for period to maturity. Thus capital loss and higher
income occur together.
At some point of time in the life of the asset, the
capital loss will equal the rise in reinvestment
income This point of time is defined as Duration of
the Asset.
7/19/2014 SPBT COLLEGE. 48
DURATION
Duration is also termed as effective life of an
asset / liability or as weighted average life.
Duration can be applied to any asset /
liability that is of fixed income type. It
cannot be applied to floating rate
instruments.
Duration is a direct outcome of maturity (to
term) and interest rates.
Hence Duration is also viewed as primary
measurement of price sensitivity.
Duration measure (D) is expressed in years.
7/19/2014 SPBT COLLEGE. 49
DURATION ANALYSIS An Example
Year (Y) Inflow DF at 8% PV PV*Y
(1) (2) (3) (4)=(2*3) (5)=(1*4)
1 6 0.92593 5.55556 5.55556
2 6 0.85734 5.14403 10.28807
3 6 0.79383 4.76299 14.28898
4 6 0.73503 4.41018 17.64072
5 6 0.68058 4.08350 20.41750
6 6 0.63017 3.78102 22.68611
7 6 0.58349 3.50094 24.50660
8 6 0.54027 3.24161 25.93291
9 6 0.50025 3.00149 27.01344
10 106 0.46319 49.09851 490.98510
Total 86.57984 659.31497
D= 7.61511
Discouting Factor is arrived at by "1/(1+r)^n"
Duration is arrived at by dividing total of Col 5 by
total of Col 4.
Calculate Duration of a bond of Rs 100 carrying coupon at
6.00%, payable annually and maturity of 10 years. Principal
to be repaid upon maturity. Current expectation of Interest
Rate is 8.00%
7/19/2014 SPBT COLLEGE. 50
Duration
Duration in expressed in years and is
comparable across portfolios.
Duration of a Zero Coupon Bond is equal to its
maturity.
Duration is additive. Hence, Duration of a
portfolio is the weighted average duration of
all instruments of the portfolio.
Duration of a coupon paying bond / asset is
less than its maturity.
Longer the maturity of a bond, longer is
Duration.
Duration is inversely related to Coupon.

7/19/2014 SPBT COLLEGE. 51
Duration
Duration is directly related to market interest
rates / Yield.
Higher the frequency of coupons, lower the
Duration.
Duration of a Floating Rate bond is equal to
its interest reset period or the period
remaining to next reset of interest.
For small changes in yield, Duration
multiplied by percentage change in yield
gives percentage change in price for bonds.

7/19/2014 SPBT COLLEGE. 52
Duration & Price Change
If current price of a bond is Rs 98.50, its Duration is
2.7613 and yield is likely to change from 6.00% to
5.80%, then the likely price of the bond is computed
as under:
% change in Price = D*(percentage change in Yield)
= 2.7613 * (6.00 - 5.80)
= 0.55226%
Absolute change in Price = 98.50 * 0.55226%
= 0.54398.
As Yield has come down, price will increase and
therefore, expected bond price will be
Rs 99.04398.
7/19/2014 SPBT COLLEGE. 53
Modified Duration
Duration is not preferred to compute price changes
when change in yield is large. For this purpose,
Modified Duration (MD) is used.
MD = Duration / (1+Yield)
In our Bond example, D=2.76129 and yield is 6.00%.
Therefore, MD = 2.76129/(1+0.06) or 2.60500. Let
current market price be Rs 98.50.
If yield changes from 6.00% to 5.80%, percentage
change in price will be 0.52100% and absolute change
in price will be 0.51318.
Hence changed price will be Rs 99.01318.

7/19/2014 SPBT COLLEGE. 54
Duration & Interest Rate Risk
In a banks balance sheet, If D
A
= D
L
, there is
no IRR faced by the bank. IRR manifests itself
if D
A
> D
L
or D
A
< D
L
, depending on the
direction of movement of interest rates.
Hence, the strategy for containing IRR will be
to aim at a mix of assets and liabilities in
such a way that their Duration matches.
Duration Gap is the difference between the
Duration of Assets less the effective Duration
of Liabilities.

7/19/2014 SPBT COLLEGE. 55
Duration & Interest Rate Risk
If a bank has Asset Duration of 3 years, Assets
of Rs 200 crore and Liabilities (excluding
Equity) of Rs 150 crore, the bank should
target Liability Duration of 4 years
(200*3/150).
In that case, Duration of Equity will be
(3*200) (4*150) = 0.
In other words, banks net worth is
immunized against changes in interest rates.