Banks’ treasury function

IIM Lucknow – Aug 2020

 Outline
 Fixed income markets

 Treasury management in banks

 Role of central bank (RBI)

 Corporate / Bank treasuries

Fixed income markets
Structure of the Indian financial system
Major participants in the Indian financial system

Category Institutions
Scheduled Commercial / Cooperative /
Banks Regional Rural
Non-Banking Financial Institutions
Financial Non Banking Financial Companies
Institutions Primary Dealers
Mutual Funds
Others Insurance Companies
Provident Funds, Pension Funds
Participants in the fixed income market
 Regulatory bodies

Market Regulatory Body

Banks
Money Market/ Debt Market RBI
Foreign Exchange Market
Capital Market (Primary,
Secondary & Depository) SEBI

Insurance (Life, General) IRDA

Mutual Funds AMFI / SEBI
Treasury management in banks
 Size of the banking system
 Deposit – INR 1,40,20,487 cr (Deposit to GDP of ~69%)
◦ Demand deposit – INR 14,91,857 cr
◦ Time deposit – INR 1,25,28,630 cr

 Credit – INR 1,02,19,462 cr (Credit to GDP of ~50%)

◦ Food credit – INR 86,355 cr
◦ Non-food credit – INR 1,01,33,107 cr

 Investments – INR 41,87,319 cr

◦ Government securities – INR 41,85,871 cr

* Outstanding as on July 17th, 2020

 -20.0%
-15.0%
-10.0%
0.0%
5.0%

-5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
12-Jan-01
27-Jul-01
8-Feb-02
23-Aug-02
7-Mar-03
19-Sep-03
2-Apr-04
15-Oct-04
29-Apr-05
28-Oct-05
12-May-06
24-Nov-06
8-Jun-07
21-Dec-07

Divergence
4-Jul-08
16-Jan-09
31-Jul-09
12-Feb-10
27-Aug-10
11-Mar-11

Deposit Growth
23-Sep-11
6-Apr-12
19-Oct-12
3-May-13
15-Nov-13
30-May-14
Credit Growth

12-Dec-14
26-Jun-15
8-Jan-16
22-Jul-16
Credit & Deposit growth trends

3-Feb-17
18-Aug-17
2-Mar-18
14-Sep-18
29-Mar-19
11-Oct-19
24-Apr-20
 Where are the deposits deployed?
140.00

120.00

100.00

80.00

60.00

40.00

20.00

0.00
0 0 1 2 3 3 4 5 6 6 7 8 9 9 0 1 2 3 3 4 5 6 6 7 8 9 9
n-0 t-0 l-0 y-0 b-0 v-0 g-0 y-0 b-0 v-0 g-0 n-0 r-0 c-0 p-1 l-1 r-1 n-1 t-1 l-1 y-1 b-1 v-1 g-1 y-1 r-1 c-1
a c Ju a e o u a e o u u a e e Ju Ap a c Ju a e o u a a e
4-J -O 7- -M -F -N -A -M -F -N -A 6-J -M -D -S 1- - 1-J -O 5- -M -F -N -A -M -M -D
0 2 3 7 7 13 18 4 6 8 2 1 5 1 6
1 2 14 20 27 1 24 31 2 1 1 11 18 25

Credit-Deposit Investment-Deposit Cash-Deposit

 Revenue stream of banks

 Interest Income (Lending) – Balance sheet exposure-Function of

capital availability

 Fee Income (Cash Management & Payment Services) – Non

balance sheet exposure

 Treasury Income (Investment & Asset-Liability Management)

◦ Domestic
◦ International
 Treasuries normally operate in an integrated manner across the rupee
and forex segments
Interest rate risk
Interest rate risk is the risk that arises for
bond owners from fluctuating interest rates.
 Bank treasuries – Segments & functions

 Money & bond market desk

 Capital market desk Treasury
segments
 Foreign exchange desk

 Proprietary trading
 Liquidity management
Treasury  Asset liability management
functions  Transfer pricing
 Sales
In taxation and accounting, transfer pricing refers to the rules
and methods for pricing transactions within and between
enterprises under common ownership or control.
 Asset-Liability Management Committee
(ALCO)

Provides input to the Treasury & Lending Department

(Pricing, Rate View)

Rate Sensitive Assets & Liabilities

 Cash flow within the time interval

 Interest rate reset contractually during the interval

 Contractually pre-payable or withdrawal before stated maturities

 Structural liquidity profile
1 to 14 Days
15 to 28 Days
29 Days to 3 Months
>3 Months to 6 Months
>6 Months to 1 Year
>1 Year to 3 Years
>3 Years to 5 Years
>5 Years
 Cash flows placed in the
maturity ladder as per
residual maturity
 Maturing liability – cash
outflow & maturing asset –
cash inflow
 Mismatches in shorter tenor
buckets to be restricted and
monitored more
 Individual banks fix the
tolerance levels for each of
the maturity buckets
 Liquidity Adjustment Facility
Instrument Rate Limit
Overnight Repo Fixed (4.00%) -
Overnight Reverse Repo Fixed (3.35%) -
Overnight Repo Variable RBI Assessment
Overnight Reverse Repo Variable RBI Assessment
Long-Term Repo (1–3 yr) Fixed RBI Assessment
Targeted Long-Term Repo Fixed RBI Assessment
Marginal Standing Facility Fixed (4.25%) Excess SLR + 2% Below
SLR
 RBI liquidity operations
Auction Tenor Maturity Amount Current /
date (days) date (INR cr) cut-off rate
Today’s operations

Fixed rate –
07-Aug-20 3 10-Aug-20 6,49,389 3.35%
Reverse repo

Fixed rate –
Repo

Variable rate –
Reverse repo

Variable rate –
Repo

Marginal
07-Aug-20 3 10-Aug-20 65 4.25%
Standing Facility

LTRO

TLTRO

TLTRO 2.0

Net liquidity -6,49,324

 RBI liquidity operations
Auction Tenor Maturity Amount Current /
date (days) date (INR cr) cut-off rate
Outstanding operations

LTRO 24-Feb-20 365 23-Feb-21 25,021 5.15%

17-Feb-20 1095 16-Feb-23 25,035 5.15%

02-Mar-20 1094 01-Mar-23 25,028 5.15%

07-Mar-20 1093 07-Mar-23 25,021 5.15%

18-Mar-20 1094 17-Mar-23 25,012 5.15%

TLTRO 27-Mar-20 1092 24-Mar-23 25,009 4.40%

03-Apr-20 1095 03-Apr-23 25,016 4.40%

09-Apr-20 1093 07-Apr-23 25,016 4.40%

17-Apr-20 1091 13-Apr-23 25,009 4.40%

23-Apr-20 1093 21-Apr-23 12,850 4.40%

Standing
33,610
liquidity facility

Net liquidity 2,71,627

 RBI liquidity operations

Net liquidity injected / absorbed =

Liquidity injected / absorbed (Today’s operations)

+
Liquidity injected / absorbed (Outstanding operations)

Net liquidity injected = -6,49,324 + 2,71,627 = -3,77,697

-ve sign indicates that the banking system is in surplus liquidity

 Liquidity Adjustment Facility (LAF)
 Reverse Repo O/N – Rate at which RBI absorbs liquidity from
the banking system
◦ Fixed Rate – No restriction (3.35%)
◦ Variable Rate – Based on RBI assessment / Auction based – rate capped at
Repo

 Repo O/N – Rate at which the RBI infuses liquidity into the
banking system
◦ Fixed Rate – (4.00%)
◦ Variable Rate – Based on RBI assessment / Auction based – rate floored
at Reverse Repo
 Liquidity Adjustment Facility (LAF)
 Marginal Standing Facility (4.25%) – Rate at which the banks access
liquidity from the RBI to the extent of excess SLR + 2% below SLR
holding i.e. Government Securities
 Quantitative caps to liquidity infusion & multiple windows is an
effort to develop the term structure under Rajan’s regime
 Recently the short term repo operations have been replaced with long
term repo operations of up to 3 years
 The targeted long term repo operations were conducted for banks to
purchase corporate bonds from primary / secondary markets (to
support liquidity in bond markets)
 Liquidity coverage ratio (LCR)
 LCR – Proposed by Basel Committee for Banking Supervision to
ensure adequate stock of unencumbered high quality liquid assets to
survive a significant liquidity stress lasting for up to 30 days
 LCR – Ratio of HQLA to the total net cash outflows estimated for
the next 30 calendar days (>= 100%)
 Level 1 HQLA – Excess CRR / SLR + Up to 10% of NDTL (2%
MSF + 13% FALLCR) – Need to be valued at market value
irrespective of the category of holding HTM / AFS /HFT

Starting January 1st 2015 2016 2017 2018 2019

Minimum LCR stipulated 60% 70% 80% 90% 100%
 What is the big deal in liquidity management?

Rupee Dollar System

liquidity liquidity liquidity

 INR liquidity – All inflows and outflows of government are

known but timing is uncertain
 Dollar liquidity – Inflows & outflows of ‘tom value’ deals are
exactly known but complete uncertainty beyond that
 Liquidity – Combination of structural & frictional factors
 Drivers & Management of liquidity
Autonomous drivers of
Management of liquidity
liquidity

RBI net purchase from ADs Liquidity impact of LAF

Currency with public Liquidity impact of OMOs

Cash balances of government Liquidity impact of MSS

Other residual Impact of CRR change

 Deposit seasonality
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

FY01 42.6% 57.4%

FY02 56.6% 43.4%
FY03 69.8% 30.2%
FY04 50.1% 49.9%
FY05 41.1% 58.9%
FY06 54.5% 45.5%
FY07 40.3% 59.7%
FY08 44.8% 55.2%
FY09 38.0% 62.0%
FY10 43.2% 56.8%
FY11 30.1% 69.9%
FY12 46.6% 53.4%
FY13 45.7% 54.3%
FY14 43.0% 57.0%
FY15 43.4% 56.6%
FY16 47.1% 52.9%
FY17 53.6% 46.4%
FY18 24.3% 75.7%
FY19 29.5% 70.5%
FY20 33.5% 66.5%

H1 H2
 Credit seasonality
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

FY01 41.7% 58.3%

FY02 23.7% 76.3%
FY03 51.2% 48.8%
FY04 5.6% 94.4%
FY05 30.7% 69.3%
FY06 43.2% 56.8%
FY07 34.8% 65.2%
FY08 24.7% 75.3%
FY09 45.7% 54.3%
FY10 21.1% 78.9%
FY11 25.6% 74.4%
FY12 23.0% 77.0%
FY13 23.8% 76.2%
FY14 47.2% 52.8%
FY15 24.2% 75.8%
FY16 19.8% 80.2%
FY17 40.2% 59.8%
FY18 15.7% 84.3%
FY19 27.0% 73.0%
FY200.6% 99.4%

H1 H2
 Instruments used by Banks
 Call/Notice/Term (Interbank & Primary Dealers)
 CBLO (Tri party Repo) – Collateralized Borrowing & Lending
Obligation (Non-bank participants) financial entities can avail short term loans by providing prescribed
securities as collateral. In terms of functioning and objectives, the CBLO market is almost similar to the call money market.

 LAF – Reverse Repo/Repo/Marginal Standing Facility/Export Credit

Refinance
 T-Bills (91/182/364 Day)
 Cash Management Bills (<91 Day)
 Certificates of Deposit (CD) / Commercial Paper (CP)
 Liquid / Money Market Funds – Mutual Funds
 Call/Notice/Term Money
 Call – Overnight Borrowing for Banks/Primary Dealers (PD) –
Only Banks & Primary Dealers can utilize the Call Money
Market – Call Rates represent the rate in the Inter-Bank market
(Mutually agreed rates)
 Notice – Any borrowing beyond a day but less than 14 days
 Term – Any borrowing beyond 14 days
 Represents the unsecured lending in the money market
Collateralized Borrowing & Lending Obligation
 CBLO – Collateralized Borrowing & Lending Obligation
(Secured Lending)
 Operated by -Clearing Corporation of India (CCIL) – Central
Counterparty to all CBLO trades
 Participants – Banks, PDs, FIs, MFs, Insurance Companies, etc.
 RBI approved money market instrument – Backed by gilts as
collateral (Central government securities & T-Bills)
 CBLO has been replaced with Tri party repo from Nov
2018
 Treasury Bills (T-Bills)

 Issued by the RBI on behalf of the GoI

 Used to manage the temporary cash mismatches
 Maturities – 91/182/364 Days
 Qualify for the SLR purpose
 Mainly used for ALM requirements
 Auctions held every Wednesday – Multiple Price Auction
 Cash Management Bills
 For matching any short term liquidity mismatches (<91 days) of
the GoI / Tighten liquidity in the system
 Can be issued at any time for any maturity less than 91 days –
No specific schedule
 Qualify for the SLR
 Multiple Price Auction
 Other Instruments
 Certificates of Deposit - Marketable, Transferable, Bulk form
of Deposit – Issued by banks (Wholesale funding)
 Commercial Paper – Short term funds raised by corporates –
Requires a credit rating
 Liquid Funds – Historic Purchase Facility
 Derivative instruments – MIBOR linked overnight indexed
swaps, forward rate agreements, etc.
 Central Government Securities (G-Secs)
 Issued by the RBI on behalf of the GoI (Dated Securities)
 Maturities – 1-40 Years
 Qualify for SLR purpose
 Type – Fixed
 Single / Multiple Price Auction (Yield based)
 Underwritten by the PDs – Underwriting commission
 Auction held on Friday
 Current outstanding – INR 58,54,058 cr (As on Sep 17th, 2019)
 State Development Loans (SDLs)
 Issued by the RBI on behalf of the States
 Maturity – Mostly Up to 10 years, certain states up to 30 years
 Qualify for SLR
 Not underwritten – Failure to attract bids will result in failure of
auction
 Usually at a higher yield than the Central Government
Securities
 Current outstanding – INR 28,75,429 cr (As on 31st Aug, 2019)
 Investment Accounting & Categorization
 Held to Maturity (HTM) – No Mark-to-Market
 Available for Sale (AFS) – Marked-to-Market
 Held for Trading (HFT) – Marked-to-Market – Classification to
be used up to 90 days

SLR Securities Non SLR Securities

Government Securities Equity Shares
Debentures & Bonds
Other Approved Securities Subsidiaries / Joint Ventures
Commercial Paper, Mutual Fund
Units, etc.
 Treatment of investment book & income
 Building reserves to guard against adverse market movements
(Investment Fluctuation Reserve) – Capital Charge
 Excess depreciation provision in the AFS & HFT credited to
P&L account (Investment Reserve Account) – Charge on
Profits
 Recognize income from government securities / fixed rate
bonds on accrual basis & from mutual fund units on cash basis
 Investment in zero coupon bonds are normally disallowed
unless the entire accrued interest is credited into a sinking fund
& the same is held in liquid securities
 Valuation of securities as per the guidelines issued by
RBI/FBIL
Role of central bank (RBI)
 Roles & Functions of RBI
 Investment Banker for the GoI
 Regulator for the financial system
 Monetary Authority / Issuer of currency
 Maintain exchange rate stability
 Developmental role (Financial inclusion, debt recovery, etc.)
Monetary Policy Transmission

Quantum
Channel

Interest
Asset Price Monetary
Rate
Channel Policy
Channel

Exchange
Rate
Channel
 Central Bank’s ‘Impossible Trinity’

Inflation Control

Mitigation of
Interplay with
Balance of
Fiscal Policy
Payment Risks
Corporate / Bank treasuries
 Corporate treasuries
 Cash management  Front office

 Investment management  Mid office

 FX management  Back office

 Treasury as support function or profit center

 Treasury – Largely assets side / liabilities side (Fund
deployment vs. Fund raising)
 Treasury – Cash rich vs. cash starved companies
 Bank treasuries
 Money & bond market desk  Front office

 Capital market desk  Mid office

 Foreign exchange desk  Back office

 Proprietary desk vs. Client facing

 Business development & advisory led (Techno-commercial roles)
 Asset side vs. Liability side
Thank You