Unit V_Presentation 1

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Treasury Management - Overview

NIIT University

March 22, 2013


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Agenda Introduction Function of Treasury Treasury Instruments Key Concepts/Terminologies


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Agenda Introduction


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Introduction Traditionally role of (rupee) Treasury in Indian Banks was limited to ensuring

the maintenance of RBI stipulated norms of CRR and SLR. Similarly activity in Foreign Exchange was confined to meeting merchants and

customers requirements for imports, exports, remittances and deposits. With gradual liberalization, de-regulation and various financial market reforms,

(freeing of bank deposit/lending rates, Repo/Open Market Operations to manageliquidity, determination of interest on Government securities in a more transparent andcompetitive manner by holding auctions, market determined exchange rates, volatility ininterest/exchange rates etc.) much vibrant money market, bond markets, exchangemarkets have evolved providing opportunities to Bank treasuries to earn profitsand thus resulted in transformation of Bank treasuries from mere CRR/SLRkeepers to a profit center.

Sources of profit for Treasury Investments, Spreads, Arbitrage, ProprietaryTrading (short term directional trades) etc.


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Agenda Functions of Treasury


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Functions of Treasury Domestic Operations

Liquidity and Balance Sheet Management Liquidity Management - ability to meet contractual obligations as and when

they arise and ability to satisfy funds requirements to meet new businessopportunities. Daily inflow/outflow management. Borrowing/Deployment ofFunds to meet the liquidity gaps in Inter Bank markets/Call Money/Repowindow etc.

Asset Liability Management Balanced and well diversified liability base tofund the various assets in the balance sheet of the Bank. Optimal mix of varioussources to ensure that there is no excessive dependence on any single categoryand maturity profile of assets conform broadly to that of the liabilities to avoidstructural mismatches that can lead to liquidity problems. Involves recording ofmaturity and Interest rate patterns of assets and liabilities (ALCO).

Reserve Management (CRR/SLR) and Investments Ongoing maintenance of CRR/SLR Investments of Surplus in various instruments viz. CDs, CPs, PSU Bonds,

Corporate Bonds etc. depending upon various factors viz. market conditions,liquidity position, tenure of funding available, market liquidity in variousinstruments. Investments can be held till maturity or can be traded (HTM/HFT)


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Functions of Treasury Domestic Operations

Transfer Pricing Interface between Assets and Liability Groups of the Bank Treasurer has to ensure that the funds of the Bank are deployed in the mot

appropriate manner without sacrificing either yield or liquidity Administered through Transfer Pricing mechanism Depending on the signals provided by the treasury in form of benchmark rates

for assets and liabilities, focus of the individual business groups can be shiftedfrom asset growth to liability growth or vice versa as dictated by the needs ofthe Bank.

Proprietary Trading & Arbitrage Focus is short term as opposed to investments, which is long term. Short term

directional trades. Aim is to earn trading profit from movement in security prices during a day or

a few days of trading

Risk Management Liquidity Risk (Asset Liability Mismatches), Interest Rate Risk etc.


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Functions of Treasury Forex Operations

Extending cover to foreign exchange trade transactions/remittances(Cash/TOM/Spot)

Funding and managing Foreign exchange assets and liabilities (FCDeposits, PCFC, PSFC, Foreign Currency Loans, Nostro Accounts etc.)

Proprietary Trading & Arbitrage Short term directional trades based on view on Currency movements

Hedge to Foreign Exchange Risks Forwards/Options/Swaps to cover Foreign Exchange Risks


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Agenda Treasury Instruments


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Treasury Instruments Domestic Treasury Asset Products/Instruments (Deployment of Funds)

Call/Notice Money Lending

Term Lending/Inter Bank Deposits

Investments in Certificate of Deposits/Commercial Papers

Inter Bank Participation Certificates

Reverse Repo/CBLO backed lendingSLR Bonds issued by GOI (T Bills/G Secs), State Governments

Bonds issued by FIs, Banks, Corporates etc.

Asset Backed Securities (PTCs)

Private Placement of Securities

Tax Free Bonds

Preference Shares/Listed Unlisted Equity Shares/Mutual Funds


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Treasury Instruments Domestic Treasury Liability Products/Instruments (Borrowings)

Call/Notice Money BorrowingTerm Money Borrowing

Issuance of Certificate of Deposits

Inter Bank Participation Certificates

Repo/CBLO backed borrowings

Refinance (RBI/SIDBI/NABARD etc.)

Bills Re Discounting

Tier I/Tier II Bonds issued by Banks


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Treasury Instruments Forex Treasury Inter-Bank

Cash/TOM/Spot Transactions for buy and sell of Foreign ExchangeForwards, Options, Swaps

Foreign Currency Placements, Investments & Borrowings

Merchant Transactions

PCFC/PSFC/FBP/FBDForeign Currency Loans


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Key Concepts/Terminologies Bid/Ask: Quote by Market Makers for both buying (bid) and selling (ask) . Bid

is generally lower than Ask as directed by normal profit motive. Differencebetween Bid and Ask is normally called as bid-ask spread.

Balance Tenor: Unexpired life of the Security. Basis Point: One Hundredth of a percentage (i.e. 0.01).

Call Money: Overnight Borrowing/Lending in the interbank market.Banks/PDs are allowed to participate in call market. Notice Money: Borrowing/Lending in interbank market upto 14 days. Term Money: Borrowing/Lending in interbank market > 14 days. Certificate of Deposit: Negotiable money market instrument issued in

demateralised form or Usance Promissory note for funds deposited at a Bank. Commercial Paper: Short term unsecured promissory note issued by the raiser

of debt to the investor. CP is issued at a discount to face value. Coupon: Rate of interest paid on a security, generally a fixed percentage of face

value, is called as coupon.


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Key Concepts/Terminologies Primary Market: Primary market is the financial market for the initial issue and

placement of securities Secondary Market: Secondary market is the market where securities (bonds,

shares, derivatives etc.) are traded. This market can be in form of Over theCounter (OTC) where the transaction takes place between two parties directlyand through an organized exchange.

Cash Reserve Ratio: Part of the Net Demand and Time Liabilities which IndianBanks are required to hold as cash in balance with RBI. Statutory Liquidity Ratio: Part of the Net Demand and Time Liabilities that a

bank is required by law to keep invested in approved securities. Day Count: Market conventions for calculation of the number of days that have

elapsed between two dates (A/360, A/365, A/A) Options: Call Option gives the buyer the right but not obligation to buy a given

quantity of underlying asset at a given price on or before a given future date.Put Option gives the buyer the right but not obligation to sell a given quantityof underlying asset at a given price on or before a given future date.


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Key Concepts/Terminologies Liquidity Adjustment Facility (LAF): Facility by which RBI adjusts the daily

liquidity in the domestic market either by injecting funds or by withdrawingthem out. Open Market Operations : One of the major instruments of monetary policy by

which the Central Bank of a country manipulates short term liquidity andthereby the interest rates to desired levels. Generally open market operationsinvolve purchase and sale of treasury bills in the open market or conductingrepos.

Primary Dealer: An entity licensed by RBI to carry on the business of securitiesand act at market maker in securities. A PD has to give an annual undertakingto RBI on his level of participation in the primary issues of governmentsecurities.

Repo: Short term money market instruments. In a repurchase agreement,securities are sold in a temporary sale with a promise to buy back the securitiesat a future date at a specified price. In Reverse Repo, securities are purchased ina temporary purchase with a promise to sell it back after a specified number ofdays at a pre-specified price.


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Key Concepts/Terminologies Treasury Bills: Short term obligations of upto 364 days of the

Treasury/Government. Current Yield: Is defined as coupon rate defined by the price of the Bond. Yield to Maturity: That rate of discount that equates the discounted value of all

future cash flows of a security with its current price. Bond: Is a promise in which the Issuer agrees to pay a certain rate of interest

(fixed, floating to a benchmark), usually a percentage of Face Value of the bond,to the investor at specific periodicity (monthly, quarterly, yearly, DeepDiscount) over the life of the Bond.

Convertible Bond: A bond that is partially or fully convertible into equitywithin a specified period of time from the date of issue.

Zero Coupon Bond : A bond that does not carry any coupon (interest). Normallythe specified return is paid in form of Redemption Premium.


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Thank You

Unit V_Presentation 1

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