Treasury Management

Treasury Management Operation in Banks
SYDENHAM INSTITUTE OF MANAGEMENT

STUDIES, RESEARCH AND
ENTREPRENEURSHIP EDUCATION
Report on
Treasury Management in Banks

Submitted By :
Name of the Guide
Himanshu Mehta
Prof. Sanjeev Jain
MMS 2010-12
M1028
FINANCE
Acknowledgements
Table of Contents
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Particulars
Annexure - D
Executive Summary
Introduction
Objectives of the Study
Research Methodology
Treasury Management - Overview
Functions of Treasury Management in Banks
Organizational Structure of Treasury Department
Objectives of Treasury Management
Elements of Treasury Management
Treasury Products and Services
Types of Risks associated with Treasury Management
RBI Guidelines
Future Scope/Challenges in Treasury Management
Role of IT in Treasury Management
State Bank of India Case Study
Overall Finding of the Study
Conclusion
Bibliography
Page Number
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EXECUTIVE SUMMARY
The project is about Treasury management operations in banks. Treasury management
is the management of an organizations liquidity to ensure that the right amount of
cash resources are available in the right place in the right currency and at the right
time in such a way as to maximize the return on surplus funds, minimize the
financing cost of the business, and control interest rate risk and currency exposure to
an acceptable level.
This project covers functions of treasury management operations in banks,
organizational structure of treasury, objectives and functions of treasurer which plays
an important role in banks.
The project also involves the elements in treasury management like cash reserve ratio,
statutory liquidity ratio, dates government securities, etc. which should be properly
functioned by treasurer.
The project includes nature of treasury assets and liabilities and treasury products &
services which plays an important role in very banks.
The project deals with risk involved in these treasury assets and liabilities and their
mitigation. Risks are of two types operational risk & financial risk. The project also
includes risk management guidelines which are laid down by RBI.
The project covers the future scope / challenges in treasury management, role of
information technology in treasury management and a study on SBIs treasury.
INTRODUCTION
In general terms and from the perspective of commercial banking, treasury refers to
the fund and revenue at the possession of the bank and day-to-day management of the
same. Idle funds are usually source of loss, real or opportune, and, thereby need to be
managed, invested, and deployed with intent to improve profitability. There is no
profit or reward without attendant risk. Thus treasury operations seek to maximize
profit and earning by investing available funds at an acceptable level of risks. Returns
and risks both need to be managed. If we examine the balance sheets of Commercial
Banks (Public Sector Banks, typically), we find investment/deposit ratio has by far
overtaken credit/deposit ratio. Interest income from investments has overtaken interest
income from loans/advances. The special feature of such bloated portfolio is that more
than 85% of it is invested in government securities.
The reasons for such developments appear to be as under:
Poor credit off-take coupled with high increase in NPAs.
Banks' reluctance to cut-down the size of their balance sheets.
Government's aggressive role in lowering cost of debt, resulting in high
inventory
profit to commercial banks.

Capital adequacy requirements.
The income flow from investment assets is real compared to that of loan-assets, as the
latter is size ably a book-entry.

In this context, treasury operations are becoming more and more important to the
banks and a need for integration, both horizontal and vertical, has come to the
attention of the corporate. The basic purpose of integration is to improve portfolio
profitability, risk-insulation and also to synergize banking assets with trading assets.
In horizontal integration, dealing/trading rooms engaged in the same trading activity
are brought under same policy, technological and accounting platform, while in
vertical integration, all existing and diverse trading and arbitrage activities are brought
under one control with one common pool of funding and contributions.
MEANING AND DEFINITION

Meaning:
Treasury is the glue binding together liquidity management, asset/liability
management, capital requirements and risk management. It has an increasingly
important job to do. At one end of the spectrum it manages balance sheets and
liquidity, and does good things to enhance the yield on assets and minimize the cost of
liabilities, mostly through the clever and intelligent use of derivatives. At the other
end of the spectrum, treasury can help restructure the balance sheet and provide new
products.
All banks have departments devoted to treasury management, as do larger
corporations. Treasury management modules are available for many larger enterprise
software systems. Banks do not disclose the prices they charge for Treasury
Management products.
Definition:
Treasury management is the management of an organizations liquidity to ensure that
the right amount of cash resources are available in the right place in the right currency
and at the right time in such a way as to maximize the return on surplus funds,
minimize the financing cost of the business, and control interest rate risk and currency
exposure to an acceptable level.
In other words,Treasury management (or treasury operations) includes management
of an enterprise' holdings in and trading in government and corporate bonds,

currencies, financial futures, options and derivatives, payment systems and the
associated financial risk management.
Integrated Treasury:
We see integration of segmented financial marketsmoney market, debt and capital
market and forex market, etc., at the macro level and integration of treasury
operations at the operational level of banks. The term integration means merger or
centralization or consolidation. The reforms that were initiated in 90s made domestic
markets closely linked to global markets. The domestic market is integration with
global market at the micro level, which has raised the need for integration of micro
level units. Relaxation of regulations has almost integrated different segments of
financial markets- debt market, money market, capital market, forex market, etc.,
which enabled free flow of money from one market to another. Increased demands
from their clients in tandem with high competition forced banks to operate in all these
markets. Once capital account convertibility is fully materialized, the markets will
become fully integrated.
OBJECTIVE OF THE STUDY
The objective of undertaking a project on Treasury Management operations in

banks is to have in-depth knowledge about the meaning of Treasury
Management.
To know about the functions, organizational structure and objective of Treasury

Management in Banks.
To understand the elements of Treasury Management and the functions of

treasurer.
To have a broader view on nature of treasury assets & liabilities and to know
what are their products and services involved in Treasury Management.
To understand the risk associated with Treasury Management and their

mitigation.
To know what are the RBI guidelines formulated for Treasury Management.
To know the future scope involved in Treasury Management & role of

information technology in Treasury Management.
To have an in-depth knowledge of how SBI manages its treasury as SBI is the
major contributors in money and forex market.
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RESEARCH METHODOLOGY
Gathering primary data through meeting key officials from the related area of
Treasury Management, collecting view points from them to arrive at meaningful
conclusion.
Gathering secondary data from books, periodicals, publications, newspaper,

survey reports, journals, websites, and internal website.
.
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TREASURY MANAGEMENT: AN OVERVIEW

Webster defines treasury as "a place where stores of treasures are kept; the
place of deposit, care, and disbursement of collected funds." Moreover, if one
considers the treasury functions in ones own organization; this definition would most
likely broadly describe it. Treasury and its responsibilities fall under the scope of the
Chief Financial Officer. In many organizations, the Treasurer will be responsible for
the treasury function and also holds the position of Chief Financial Officer. The CFO's
responsibilities usually include capital management, risk management, strategic
planning, investor relations and financial reporting. In larger organizations, these
responsibilities are usually separated between accounting and treasury, with the
controller and the treasurer each leading a functional area. Generally accepted
accounting principles and generally accepted auditing standards recommend the
division of responsibilities in areas of cash control and processing.
The specific tasks of a typical treasury function include cash management, risk
management, hedging and insurance management, accounts receivable management,
accounts payable management, bank relations and investor relations.
Following is a description of each of these tasks:
(a) Cash Management includes the control and care of the cash assets and liabilities
of the organization. This will include the selection of banks and bank accounts,
investment vehicles, investment brokers, methods of borrowing, cash management
information systems, and the development and compliance with cash and
investment policy and processes. All of these pieces of the cash management
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puzzle need to be coordinated and documented in a procedural manual in order to
control the risk associated with cash.
(b) Risk Management includes customer credit management, vendor/contractor
financial analysis, liability claims management, business disaster recovery, and
employee benefits program risk.. There are many risks associated with employee
benefit plans, and treasury should be an integral part of this process in order to
mitigate and control this risk.
(c) Insurance Management is the process of negotiation of insurance policies to
mitigate the risks that the organization does not want to assume. The normal types
of insurance that are usually obtained are General Liability, Workers'
Compensation, Automobile, Director & Officers Liability, Fiduciary Liability,
Employment Practices Liability, Crime & Theft (Securities), Property,
Transportation and Surety Bonds. Some companies substitute self-insurance or
captive insurance companies for some of this risk. If the organization does not
employ a full-time licensed insurance manager, they usually retain an insurance
broker to advice on insurance issues and obtain insurance in the open market.
Another method of risk mitigation is through hedging; this is normally used for
foreign exchange, interest rates and purchase of raw materials.
(d) Accounts Receivable Management includes the control of cash receipt systems
within the organization. This involves the management of customer disputes and
deductions, collections, and the systems and processes for control of accounts
receivable. It will usually include the establishment of credit card/purchasing card
settlement systems.
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(e) Accounts Payable Management includes the control of the cash disbursement
process. This function will include vendor relations, disputes and negotiation of
the disputes, and the systems and processes for control of accounts payable to
conserve cash while maintaining positive vendor relationships.
(f) Bank Relations is that function which is a delicate balancing act due to the normal
practice of having more than one lender involved in most credit arrangements, and
meeting their needs for services and information from your organization. These
lenders must be considered a partner to your business and must be treated fairly.
(g) Investor Relations is that area of treasury's responsibilities that can have a great
effect on the value of publicly traded organizations. To provide expedient
processing of stock trades, a competent shareholder service provider should be
retained by the organization.
A successful treasury function has the same attributes as any other function within the
organization that is considered successful. These qualities are:
* Teamwork
* Respect for Organization
* Forward Thinking
* Global Thinking
* Technological Advancement
* Customer Focused
* Finance/Accounting Knowledge
* Legal Knowledge
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* Reliability
The treasury function must work with all operations within the organization.
The operational functions they are working with should consider treasury to be an
internal consultant, with expertise in risk and finance.
Treasury is an exciting and interesting function of the organization that gets
involved in many diverse areas of the business that most other positions in the
company do not get the opportunity to be involved in. It is a natural progression in the
career of many who start out in credit management.
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FUNCTIONS OF TREASURY DEPARTMENT IN BANKS

Since 1990s, the prime movers of financial intermediaries and services have been the
policies of globalization and reforms. All players and regulators had been actively
participating, only with variation of the degree of participation, to globalize the
economy. With burgeoning forex reserves, Indian banks and Financial Institutions
have no alternative but to be directly affected by global happenings and trades. This is
where; integrated treasury operations have emerged as a basic tool for key financial
performance.
A treasury department of a bank is concerned with the following functions:
(a) Reserve Management & Investment: It involves (i) meeting CRR/SLR
obligations, (ii) having an appropriate mix of investment portfolio to optimise
yield and duration. Duration is the weighted average life of a debt instrument
over which investment in that instrument is recouped. Duration Analysis is used as
a tool to monitor the price sensitivity of an investment instrument to interest rate
charges.
(b) Liquidity & Funds Management: It involves (i) analysis of major cash flows
arising out of asset-liability transactions (ii) providing a balanced and welldiversified liability base to fund the various assets in the balance sheet of the bank
(iii) providing policy inputs to strategic planning group of the bank on funding
mix (currency, tenor & cost) and yield expected in credit and investment.
(c) Asset Liability Management & Term Money: ALM calls for determining the
optimal size and growth rate of the balance sheet and also prices the Assets and
liabilities in accordance with prescribed guidelines. Successive reduction in CRR
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rates and ALM practices by banks increase the demand for funds for tenor of
above 15 days (Term Money) to match duration of their assets.
(d) Risk Management: integrated treasury manages all market risks associated with a
banks liabilities and assets. The market risk of liabilities pertains to floating
interest rate risk for assets & liability mismatches. The market risk for assets can
arise from (i) unfavorable change in interest rates (ii) increasing levels of
disintermediation (iii) securitization of assets (iv) emergence of credit derivates
etc. while the credit risk assessment continues to rest with Credit Department, the
Treasury would monitor the cash inflow impact from changes in assets prices due
to interest rate changes by adhering to prudential exposure limits.
(e) Transfer Pricing: Treasury is to ensure that the funds of the bank are deployed
optimally, without sacrificing yield or liquidity. An integrated Treasury unit has as
idea of the banks overall funding needs as well as direct access to various market
( like money market, capital market, forex market, credit market). Hence, ideally
treasury should provide benchmark rates, after assuming market risk, to various
business groups and product categories about the correct business strategy to
adopt.
(f) Derivative Products: Treasury can develop Interest Rate Swap (IRS) and other
Rupee based/ cross- currency derivative products for hedging Banks own
exposures and also sell such products to customers/other banks.
(g) Arbitrage: Treasury units of banks undertake this by simultaneous buying and
selling of the same type of assets in two different markets to make risk-less
profits.
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(h) Capital Adequacy: This function focuses on quality of assets, with Return on
Assets (ROA) being a key criterion for measuring the efficiency of deployed
funds. An integrated treasury is a major profit centre. It has its own P&L
measurement. It undertakes exposures through proprietary trading (deals done to
make profits out of movements in market interest/ exchange rates) that may not be
required for general banking.
(i) Coordination: Banks do operate at more than one money market centers. All the
centers undertake similar transactions with differing volumes. There is a need to
coordinate the activities of these centers so that aberrations are avoided (situations
where one center is lending and the other one is borrowing at the same time). The
task of coordination of foreign exchanges positions is no different.
(j) Control and Development: Treasury operates as the focal point of dealing
operations. Dealing operations could include cash/spot, forward, futures, options,
interest and currency liability swaps, forward rate agreements and the like.
Treasury is the sole owner and performer of these transactions.
(k) Fraud Protection: The decade of nineties has witnessed more frauds in trading
than banking books. The amount and variety of such embezzlements have been
directly relatable to the operational level. The ground level task of this kind is to
be undertaken at the treasury.
All the aforesaid activities are funds management functions in a banking environment.
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ORGANISATIONAL STRUCTURE OF TREASURY

There is no standard structure for treasury department of a bank. Depending on the
responsibilities assigned and power delegated, it can be aptly structured. Typically,
banks maintain three independent tiers at the functional/operational levelTier I Dealing Desk (Front Office): The dealers and traders in different marketsmoney, stock, debt, commodity, derivatives and forex- operate in their respective
areas. They are the first point if interface with other participants in the market. The
number of dealers depends on the size and frequency of the operations. In case of
larger in each bank, operations would be carried out by separate and independent set
of dealers in each market. But, for a relatively smaller treasury, operations would be
done by one or more dealers jointly in all the markets.
Tier II Settlement Desk (Back Office): Once the deals are concluded, it is for the
back office to process and settle the deals. Indeed, the back office undertakes
settlement and reconciliation operations.
Tier III Accounting, Monitoring and Reporting Office (Audit group): This
department looks after the activities relating to accounting, auditing and reporting.
Accountants record all deals in the books of accounts, while auditors and inspectors
closely monitor all deals and transactions done by the front and the back office, and
send regular reports to authorities concerned. This department independently inspects
daily operations in the treasury department to ensure internal/regulatory system and
procedures.
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Head of Treasury
Chief Dealer
Head of Settlements
Head of Accounting
Mkt.
Monitoring and Reporting
Intelligence
Research and analysis
ManagerFunds/Reserve
Accounts/ Audit/Reporting
Manager-SettlementsManager
Documentation Settlements Monitoring
Custodian
Dealer- Rupee.Dealer- Forex. Dealer- Corpo.

M.Mkt.
Currency/
Merchant/
dept.
Invest.
Service
The three departments should be compartmentalized and they act independently. The
heads of each section reports directly to the Head of the Treasury. A treasury can have
more functional desk depending on the size and structure of the bank, and activities
undertaken by the bank. For example, the treasury may have separate
individuals/managers for monitoring funds movement, for monitoring of risks,
developing and marketing innovative instruments/products.
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OBJECTIVES OF THE TREASURY MANAGEMENT

Treasury of a commercial bank undertakes various operations in fulfillment of the
following objectives:
To take advantage of the attractive trading and arbitrage opportunities in the
bond and forex markets.
To deploy and invest the deposit liabilities, internal generation and cash flows
from maturing assets for maximum return on a current and forward basis
consistent with the banks risk policies/appetite.
To fund the balance sheet on current and forward basis as cheaply as possible
taking into account the marginal impact of these actions.
To effectively manage the forex assets and liabilities of the bank.
To manage and contain the treasury risks of the bank within the approved and
prudential norms of the bank and regulatory authorities.
To assess, advise and manage the financial risks associated with the nontreasury assets and liabilities of the bank
To adopt the best practices in dealing, clearing, settlement and risk
management in treasury operations.
To maintain statutory reserves- CRR and SLR- as mandated by the RBI on
current and forward planning basis.
To deploy profitably and without compromising liquidity the clearing
surpluses of the bank
To identify and borrow on the best terms from the market to meet the clearing
deficits of the bank
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ELEMENTS OF TREASURY MANAGEMENT

1. Cash Reserve Ratio/Statutory Liquidity Ratio Management: CRR, or cash reserve
ratio, refers to the portion of deposits that banks have to maintain with RBI. This
serves two purposes. First, it ensures that a portion of bank deposits is totally riskfree. Second, it enables RBI control liquidity in the system, and thereby, inflation.
Besides CRR, banks are required to invest a portion (8.25 per cent now) of their
deposits in government securities as a part of their statutory liquidity ratio (SLR)
requirements. The government securities (also known as gilt-edged securities or
gilts) are bonds issued by the Central government to meet its revenue requirements.
Although the bonds are long-term in nature, they are liquid as they have a ready
secondary market.
2. Dated Government Securities: The Government securities comprise dated
securities issued by the Government of India and state governments. The date of
maturity is specified in the securities therefore it is known as dated government
securities.
a) The Government borrows funds through the issue of long term-dated
securities, the lowest risk category instruments in the economy. These securities
are issued through auctions conducted by RBI, where the central bank decides the
coupon or discount rate based on the response received. Most of these securities
are issued as fixed interest bearing securities, though the government sometimes
issues zero coupon instruments and floating rate securities also. In one of its first
moves to deregulate interest rates in the economy, RBI adopted the market driven
auction method in FY 1991-92. Since then, the interest in government securities
has gone up tremendously and trading in these securities has been quite active.
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They are not generally in the form of securities but in the form of entries in RBI's
Subsidiary General Ledger (SGL).
b) The investors in government securities are mainly banks, FIs, insurance
companies, provident funds and trusts. These investors are required to hold a
certain part of their investments or liabilities in government paper. Foreign
institutional investors can also invest in these securities up to 100% of funds-in
case of dedicated debt funds and 49% in case of equity funds.
c)
Till recently, a few of the domestic players used to trade in these securities
with a majority investing in these instruments for the full term. This has been
changing of late, with a good number of banks setting up active treasuries to trade
in these securities. Perhaps the most liquid of the long term instruments, liquidity
in gilts is also aided by the primary dealer network set up by RBI and RBI's own
open market operations.
1. Money Market Operations: The bank engages into a number of instruments that
are available in the Indian money market for the purpose of enhancing liquidity as
well as profitability. Some of these instruments are as follows:
A. Call Money Market

Call/Notice money is an amount borrowed or lent on demand for a very short
period. If the period is more than one day and up to 14 days it is called 'Notice
money' otherwise the amount is known as Call money'. Intervening holidays
and/or Sundays are excluded for this purpose. No collateral security is required
to cover these transactions.
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B. Treasury Bills Market
In the short term, the lowest risk category instruments are the treasury bills. RBI
issues these at a prefixed day and a fixed amount.
There are four types of treasury bills: 14-day T-bill - maturity is in 14 days. Its auction is on every Friday of every
week. The notified amount for this auction is Rs. 100 cr.
91-day T-bill - maturity is in 91 days. Its auction is on every Friday of every
week. The
notified amount for this auction is Rs. 100 cr.
182-day T-bill - maturity is in 182 days. Its auction is on every alternate

Wednesday (which is not a reporting week). The notified amount for this
auction is Rs. 100 cr.
364-Day T-bill - maturity is in 364 days. Its auction is on every alternate
Wednesday (which is a reporting week). The notified amount for this auction
is Rs. 500 cr.
C. Inter-Bank Term Money

Inter bank market for deposits of maturity beyond 14 days and up to three
months is referred to as the term money market. The specified entities are not
allowed to lend beyond 14 days. The market in this segment is presently not
very deep. The declining spread in lending operations, the volatility in the call
money market with accompanying risks in running asset/liability mismatches,
the growing desire for fixed interest rate borrowing by corporate, the move
towards fuller integration between forex and money markets, etc. are all the
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driving forces for the development of the term money market. These, coupled
with the proposals for Nationalization of reserve requirements and stringent
guidelines by regulators/managements of institutions, in the asset/liability and
interest rate risk management, should stimulate the evolution of term money
market sooner than later. The DFHI, as a major player in the market, is putting
in all efforts to activate this market.
The development of the term money market is inevitable due to the following
reasons
Declining spread in lending operations
Volatility in the call money market
Growing desire for fixed interest rates borrowing by corporate
Move towards fuller integration between forex and money market
Stringent guidelines by regulators/management of the institutions
D. Certificates of Deposits
The scheduled commercial banks have been permitted to issue certificate of
deposit without any regulation on interest rates. This is also a money market
instrument and unlike a fixed deposit receipt, it is a negotiable instrument and
hence it offers maximum liquidity. As such, it has secondary market too. Since
the denomination is very high, it is suitable to mainly institutional investors and
companies.
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E. Commercial Paper (CP)

Commercial Paper (CP) is an unsecured money market instrument issued in the
form of a promissory note. CP was introduced in India in 1990 with a view to
enabling highly rated corporate borrowers to diversify their sources of shortterm borrowings and to provide an additional instrument to investors.
Highly rated corporate borrowers, primary dealers (PDs) and satellite
dealers (SDs) and all-India financial institutions (FIs) which have been
permitted to raise resources through money market instruments under the
umbrella limit fixed by Reserve Bank of India are eligible to issue CP.
A company shall 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) the working capital (fund-based) limit of the company from the
banking system is not less than Rs.4 crore and (c) the borrower account of the
company is classified as a Standard Asset by the financing bank/s.
F. Ready Forward Contracts
It 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 a 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 prospective of the seller of
securities (the party acquiring fund) and Reverse Repo when described from the
point of view of the supplier of funds. Thus, whether a given agreement is
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termed as Repo or a Reverse Repo depends on which party initiated the
transaction.
G. Commercial Bills
Bills of exchange are negotiable instruments drawn by the seller (drawer) of the
goods on the buyer (drawee) of the goods for the value of the goods delivered.
These bills are called trade bills. These trade bills are called commercial bills
when they are accepted by commercial banks. If the bill is payable at a future
date and the seller needs money during the currency of the bill then he may
approach his bank for discounting the bill. The maturity proceeds or face value
of discounted bill, from the drawee, will be received by the bank. If the bank
needs fund during the currency of the bill then it can rediscount the bill already
discounted by it in the commercial bill rediscount market at the market related
discount rate.
The RBI introduced the Bills Market scheme (BMS) in 1952 and the scheme
was later modified into New Bills Market scheme (NBMS) in 1970. Under the
scheme, commercial banks can rediscount the bills, which were originally
discounted by them, with approved institutions (viz., Commercial Banks,
Development Financial Institutions, Mutual Funds, Primary Dealer, etc.).
With the intention of reducing paper movements and facilitate multiple
rediscounting, the RBI introduced an instrument called Derivative Usance
Promissory Notes (DUPN). So the need for physical transfer of bills has been
waived and the bank that originally discounts the bills only draws DUPN. These
DUPNs are sold to investors in convenient lots of maturities (from 15 days upto
90 days) on the basis of genuine trade bills, discounted by the discounting bank.
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FUNCTIONS OF A TREASUER
The Treasury in the finance department Deals with the liquid assets; since the
treasurer is the head of the treasury, he has a major responsibility of being a custodian
of cash and other liquid assets. The other functions are:
(a) Funding: The treasurer has the responsibility of exploring and selecting best
source of finance for funding long-and short term cash requirements of the
business. While determining the best source of finance, the treasurer must take
various matters into consideration like debt structure of the organization, structure
of the debt portfolio, and advantages and shortcoming of short-and long term
financing, etc.
(b) Working Capital Management: The goal of the working capital management is
to maintain good balance between current assets and liabilities as per the
requirements of the business. Since cash surplus as well as cash deficit is not
recommendable for and organization, the treasurer has the responsibility to
maintain an optimum cash level. A good working capital management maximizes
the liquidity and profitability of the organization.
(c)
Better Investor Relations: This involves establishing, strengthening and

maintaining better interaction with interested members of the financing and
investing community such as:
Individual investors,
Institutional investors,
Professional Fund Managers, and
Foreign Investors etc.
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(d) Good Banking Relationships: in general, selection of appropriate, desirable and

suitable banking services is the responsibility of the individuals responsible for
cash management, who fall under the treasury belt. This includes cash
transmission and bank account and bank relationship management.
(e) Short-term Investments: Idle cash incurs opportunity costs as time passes. The
excessive surplus cash in the business may arise due to various factors such as
cyclical, seasonal to temporary business trends. The treasurer has the authority to
utilize surplus cash of the organization in short-term beneficial investments.
(f) Risk (Hedging) and Forex Management: due to increasing globalization of
business, the importance of risk and forex management has been spurring. The
international treasurer has to ensure liquidity in foreign exchange funds without
compromising profitability. On the other hand, risk management (hedging)
involves the utilization of financial instruments to cushion the company against
interest rate, commodity and currency exposures.
(g) Establishing the Company Policy: Functions of the treasurer, further includes
establishing of company policy with respect to decision on trade discounts and
vendor payment ageing.
(h) Capital Structure Formulation: The treasurer must formulate the capital structure
for the organization in accordance to business goals and implement the same. He
has the responsibility of taking appropriate debt vs. equity financing decisions. A
wrong or inappropriate capital structure decision may through the business into
irrecoverable losses.
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(i) Insurance and Tax Planning: A sound tax planning involves utilization of
various provisions of the statute that enables the organization to reduce the tax
liability without violating the latter and spirit of the law. The treasurer must
identify and undertake such transactions that will result in reduction/elimination of
tax liabilities of the business.
(j) Internal Treasury Controls: The treasurer acts as a cashier; undertakes the role of
an authorized signatory on payment cheques including the authority to approve
such cheques. Even reconciliation of relevant accounts is an important function of
the treasurer.
(k) Financing Decision: The financing decision relates to mobilization of funds to
ensure smooth business activity and healthy growth of an organization.
The financing aspect involves decision-making about the following:
How much to mobilize: The treasurer has to estimate the amount of funds that will
be required in future, and what part of this can be met by funds generated
internally and how much will have to be mobilized from external sources.
From where/whom to mobilize: A firm has access to different sources of finance,
both long-term and short-term. The treasurer has to decide which will be the most
appropriate source of finance for his firm.
At what costs: all funds have a cost associated with them (e.g., interest on loans,
debentures, etc. dividend on equity). The average cost of all the funds mobilized
should be kept as low as possible.
When to mobilize: the treasurer has to estimate when a shortfall of funds will
occur and raise funds accordingly.
32

l) Investment Decision: The funds generated in the course of business need to be put
to further use. The investment decision relates to the selection of assets in which
funds will be invested by firm. The assets, which can be acquired, fall into two
categories- (i) long-term assets (ii) short-term or current assets- defined as those
convertibles into cash usually within a year.
Accordingly, asset selection decision is also of two types: (i) the first involving
long-term assets are popularly called capital budgeting, and (ii) the second
involving short-term assets or current assets is popularly called working capital
management.
A proper balance should be achieved between fixed and current assets. The money
manager has to decide which kind of funds (long-term or short-term) should be
used for financing either of the two kinds of (fixed or current) assets.
33
NATURE OF TREASURY ASSETS AND LIABILITIES

Banks balance sheet consists of treasury assets and liabilities on the one hand and
nontreasury assets and liabilities on the other. There is a clear distinction between
the two groups. In general, if a specific assets or liability is created through a
transaction in the inter-bank market and/or can be assigned or negotiated, it becomes a
part of the treasury portfolio of the bank.
Treasury assets are marketable or tradable subject to meeting legal obligations such as
payment of applicable stamp duty, etc. another characteristic of treasury assets is that
they can (and often are required to be marked to market. An example of treasury
asset/liability
which
is
created
by
corporate/treasury
actions/decisions
on
funding/deployment but is not tradable, is the Inter-bank Participation Certificate.

Loans and advances are specific contractual agreements between the bank and its
borrowers, and do not form a part of the treasury assets, although these are obligations
to bank. (They can however, be securitized and sold in the market. If a bank were to
take a position in such securitized debts, it would become part of treasury activity).
On the other hand, an investment in G-Secs can be traded in the market. It is,
therefore, a treasury asset.
Treasury liabilities are distinguished from other liabilities by the fact that they are
borrowings from the money (or bond) market. Deposits (current and savings accounts
and fixed deposits) are not treasury liabilities, as they are not created by market
borrowing.
34
List of Banks Treasury Products

A. Domestic Treasury
1. Assets Products/ Instruments:
Call/Notice Money lending
Term money Lending/Inter-bank Deposits
Investment in CDs
Commercial Paper
Inter-bank Participation Certificates
Derivative Usance promissory Notes/ Bankers or Corporate Acceptances
Reverse Repos/CBLO- backed Lending through CCIL
SLR Bonds (notified as such by the RBI)
(a) Issued by the Government of India as securities and T-bills
(b) Issued by State Governments
(c) Guaranteed by Government of India
(d) Guaranteed by State Governments
Non-SLR Bonds (issued by)
(a) Financial Institutions
(b) Banks/NBFCs (Tier II Capital)
(c) Corporate
(d) State-level Enterprises
(e) Infrastructure Projects
Assets-backed Securities (PTCs)
Private Placements
35

Floating Rate Bonds
Tax-free Bonds
Preference Shares
Listed/Unlisted Equity
Mutual Funds
2.
Liability Products/Instruments
Call/Notice Money Borrowing
Term Money Borrowing
CD Issues
Inter-bank Participation Certificates
Repos/CBLO-backed Borrowing through CCIL
Refinance (RBI, SIDBI, NABARD, Exim Bank, NHB)
Tier II Bonds (issued by bank)
B.
Foreign Exchange
1. Interbank
Spot Currencies
Cash
Tom
Forward and Forward-Forward (simultaneous purchase and sale of a

two different forward maturities)
36
currency for
Foreign Currency Placements, Investments and Borrowings (in accordance with RBI
guidelines)
37

2. Merchant(Initiated In Branches, Arranged By Forex Treasury)
Preshipment Foreign Credit (PCFC)
Foreign Currency Bills Purchased (FCBP)
Foreign Currency Loans (FCLs)/FCNR (B) Loans
Postshipment Foreign Credit (PSFC)
External Commercial Borrowing (ECB)
C.
Derivatives
Interest Rate Swaps (IRSs)
Forward Rate Agreements (FRAs)
Interest Rate Options
Currency Options
D.
Certain corporate assets such as investments in subsidiaries and joint ventures are
reckoned as treasury assets although they are not traded and are permanent in nature.
38
TREASURY PRODUCTS & SERVICES

1. Forward Contract: It is a contract between the bank and its customers in which
the exchange/conversion of currencies would take place at future date at a rate of
exchange in advance under the contract. The essential idea of entering into a forward
contract is to peg the price and therebyavoid
Forward Rates
the
price
risk.
= Spot rate +/ Premium/Discount
2. Forward Rate Agreement (FRA): An FRA is an agreement between the Bank and
a Customer to pay or receive the difference (called settlement money) between an
agreed fixed rate (FRA rate) and the interest rate prevailing on stipulated future date
(the fixing date) based on a notional amount for an agreed period (the contract
period). In short, this is a contract whereby interest rate is fixed now for a future
period. The basic purpose of the FRA is to hedge the interest rate risk.
For example, if a borrower is going to borrow FC loan for 6 months at LIBOR rate
after 3 months, he can buy an FRA whereby he can fix interest
rate
for
the
loan.
3. Interest Rate Swap(IRS) : It is a financial transaction in which two counterparties
agree to exchange streams of cash flows throughout the life of contract in which one
party pays a fixed interest rate on a notional principal and the other pays a floating
rate on the same sum. The basic purpose of IRS is to hedge the interest rate risk of
constituents and enable them to structure the asset/ liability profile best suited to their
respective cash flows.
4. Currency Swap: It is an agreement between two parties to exchange obligations in
different currencies at the beginning, during the tenure and at the end of the
transaction. At the start, initial principal is exchanged, though not obligatory. Periodic
39

interest payments (either fixed or floating) are exchanged through out the life of the
contract. The principal is exchanged invariably on termination at the exchange rate
decided at the start of the transaction. By means of currency swap, the counterparties
can
reducethe
cost
of
funding.
5. Option: It is a contract between the bank and its customers in which the customer
has the right to buy/sell a specified amount of underlying asset at fixed price within a
specific period of time, but has no obligation to do so. In this contract, the customer
has to pay specified amount upfront to the counterparty which is known as premium.
This is in contrast of the forward contract in which both parties
have
binding
contract.
This is a facility offered to customers to enable them to book Forward
Contracts in Cross Currencies at a target rate or price. This facility helps the customer
to en cash the currency movements in late European market, New York market and
early Asian market. The minimum amount of the contract is 250,000/- in respective
base currencies (for e.g. USD, EUR & GBP).
40
TYPES OF RISKS ASSOCIATED WITH TREASURY AND THEIR

MITIGATION
Risk profile of the treasury activities consists of two broad categories viz. Financial
Risk and Operational Risk. Financial risks include market risks (interest rate risk,
price risk, basis risk), credit risks, liquidity risks, etc. Operational risks include
systemic risk, compliance risk, legal risks, IT risks, fraud risks, etc. For mitigation of
such risks, various prudential guidelines prescribed by the regulators and internal
policies and procedures laid down by the management are to be followed
1. Operational Risk: This covers the entire gamut of the transaction cycle from
dealing to custody. Operational risk can again be divided into those arising from:
System deficiencies, authorizations, based on approved delegation of powers,

must integrate with work and document flows. This ensures that individual
payments and deliveries by the bank are entirely deal/transaction supported;
Non-compliance with laid-down procedures and authorizations for dealing,

settlement and custody;
Fraudulent practices involving deals and settlements;
IT involving software quality, hardware uptime; and
Legal risks due to inadequate definitions and coverage of covenants and

responsibilities of the bank and counterparty in contracts and agreements.
Mitigation
41
Dealers must operate strictly within the single deal, portfolio and prudential
limits set for the instrument and counterparty. Stop loss and risk norms of
duration and value at risk should be adhered to all times.
No deviation from approved and implemented work and document flows

should be allowed.
The necessary authorizations must accompany documents as they pass from

one stage of the transaction cycle to the next.
Delegation of powers must be strictly adhered to. Deals or transactions

exceeding powers must be immediately and formally ratified in accordance
with management/board edicts on ratification.
The prescribed settlement systems in each product/instrument and market

must be followed. Deviations from delivery and payment practices should not
be allowed.
Computer systems- hardware, networks and software should have adequate

backups. They should be put through periodic stress tests to determine their
ability to cope with increased volumes and external data combinations.
Custodians creditworthiness is paramount in demat systems of records of

ownership and transfer. Custodial relationships should be only with those with
the highest credit rating.
Counterparty authorizations/powers of attorney must be kept current.

The list of approved brokers should be reviewed periodically to satisfy the
banks credit standards and ethics. In equity transactions, the broker is the
counterparty. Settlement must be of the delivery against payment type.
Deal, transaction and legal documentation should be adequate to protect the

bank, especially in one-off transactions and structured deals.
42
43

2. Financial Risks: The following identifies and defines individual financial
risks:
(a) Credit Risk

The oldest of all financial risks in its simplest form, refers to the possibility of the
issuer of a debt instrument being unable to honour his interest payments and/or
principal repayment obligations. But, in modern financial markets, it includes nonperformance by counterparty in a variety of off-balance sheet contracts such as
forward contracts, interest rate swaps and currency swaps and counterparty risk in the
inter-bank market. These have necessitated prescribing maximum exposure limits for
individual counterparties for fund and non-fund exposures.
Mitigation
Better credit appraisal. Careful analysis of cash flows of the business before
investing.
Investing only in rated instruments
Risk pricing
Credit enhancement through margin arrangements, escrow accounts etc.
Guarantees/letters of credit from rated entities
Adequate financial and/or physical assets as security

Exposure limits by counterparty, industry, location, business group, on and off
balance sheet
Diversification by industry, sector, location and so on

Exposure limits for individual bank counterparties for funded/non-funded
assets
Reputation and image of counterparties
44
Collateralization of transactions through repos
(b) Liquidity Risk

An asset that cannot be converted into cash when needed is liquidity note which is the
normal characteristic of the vast majority of bonds.
There is also the risk of scarcity of funds in the market. This could happen, for
example, when the RBI deliberately tightens liquidity, by increasing CRR, selling
securities or forex. A third situation is when a banks creditworthiness becomes
suspect and there are no willing lenders, even though there is no liquidity shortage in
the market.
Mitigation
Increase the proportion of investments in liquid securities
Increase the proportion of investments in near-maturity high quality
instruments
Maintain credit rating, reputation and image
Securitize loan portfolio of large as well as small borrowers
(c) Interest Rate Risk(Balance Sheet):

This affects both the assets and liabilities of a bank. On an overall basis, the maturity
gaps between assets and liabilities lead to the risk of a contraction of spreads if
interest rates fall and assets mature before liabilities or interest rates rise and liabilities
mature before assets.
Apart from interest rate risk originating from the disparity in the maturities of assets
and liabilities, there is also basis risk, because interest rate determination may differ.
45

For example, if assets are MIBOR-linked (floating rate), while liabilities are fixed rate
and MIBOR falls, assets yields also do, compressing the spreads.
Mitigation of basis risk will involve converting (in the above instance) assets to fixed
rate (or converting liabilities to MIBOR-linked). Instruments used are interest rate
swaps, futures and FRAs.
(d) Interest Rate Risk (Investment/Trading Book):
The prices of bonds are affected by changes in interest rates. When interest rates come
down, their prices go up. The opposite happens when interest rates rise. The most
price-affected bonds in response to rate movements are those of long maturity- indeed
maturity and price changes are strongly positively correlated.
Duration measures the price sensitivity of a bond to changes in interest rates.
Increasing duration makes the bond portfolio more sensitive to interest rates while
decreasing duration reduces it.
As bond prices and interest rates are inversely related, if the bank expects interest
rates to fall, subject to market liquidity, it will have to increase duration by buying
long-dated securities. Conversely, in anticipation of a rise in interest rates, the bank
will lower duration by selling long-dated securities.
(e) Value-At-Risk (VAR):
Value-at-risk indicates the possible maximum loss which will be suffered in a
specified period and at a specified confidence level from a fall in the price of a
security (or exchange rate), given historic data on the price behavior of the security
(exchange rate) or assessment of likely future market movements. The concept is
46

applied to calculate the risk content of an individual security, foreign exchange
position, equity share or a portfolio of these instruments.
(f) Forex (Market) Risk:
The forex market is probably the most consistently volatile of all financial markets.
While it offers enormous scope for making profits, the other side of the coin is the
risk of big losses from unexpected swings in exchange rates. This necessitates and
effective forex risk management system involving:
1.
Fixing exposure limits by currency and maturity
2.
Continuous market monitoring with reference to the banks open positions;

and
3.
Closing loss positions, if stop loss limits/VAR are breached.
For supporting the above, it is necessary to have adequate data gathering systems in
place to measure currency wise exposures and their maturities.
The following determine the forex risk exposure of the bank:
1.
Open Positions
2.
Gap (Interest Rate/ Swap) Risk;
3.
Counterparty (Credit) Risk;
4.
Settlement Risk;
5.
Country Risk;
6.
Value-at-Risk;
7.
Operational Risk; and
(g) Settlement Risk:

Settlement risk arising from time differences between trading zones, which may result
in one of the parties to a transaction having to settle ahead of the other party, i.e., debit
47

and credit are not synchronized. To some extent (but not completely), this is mitigated
by the exposure limits fixed for each inter-bank counterparty.
(h) Country Risk:
Country risk is the possibility that a country or bank in a country will not be able to
honour obligations due to shortage of foreign exchange or political risk.
The RBI has asked banks to measure monitor and control country exposures. It
requires specific responsibility and accountability in the organization structures of the
bank for country risk management.
(i) Legal Risk:
Standard agreements govern forex contracts in the domestic and international
markets, the main being:
i.
For spot and forward foreign exchange - International Foreign Exchange

Nostro Agreement (IFENA)
ii.
Foreign Exchange Options International Currency Options Agreement

(ICOM)
iii.
All others including Derivatives Internal Swap Dealers Association Master

Agreement ( ISDA Master Agreement)
Disputes and arbitration in international courts/tribunals will be governed by
covenants and obligations in the above agreements.
(j) Operational Risk and Concurrent Audit:

As required by the RBI, the banks carry out concurrent audit of all forex transactions.
Auditors are required to give daily and monthly reports covering:
48
Compliance with approved open position limit
Compliance with overnight exposure limits
Compliance with aggregate and individual gap limits
Compliance with value at risk norms.
49
RISK MANAGEMENT: RBI GUIDELINES/NORMS

The RBI has circulated detailed guidance notes on Market Risk Management, Asset
Liability Management and Credit Risk Management. According to these,
(a) Banks are required to send monthly reports covering liquidity mismatches and
interest rate sensitivity.
(b) Banks are required to pay special attention to liquidity risk and management
and monitor the following:
Call Borrowing/Lending
Purchased Funds vis--vis liquid Assets
Core Deposits vis--vis Core Assets, i.e., CRR, SLR and Loans
Duration of Liabilities and Investments
Maximum Cumulative Outflows across all time bands
Commitment Ratio on and off B/S
Swapped Funds Ratio, i.e., extent of liabilities from forex sources.
RISK MANAGEMENT IN BANKS

a) Banks have an Assets-Liability Management Committee (ALCO), which manages
gap, interest rate, liquidity and currency risks of the treasury and non-treasury
balance sheets.
b)The banks submit monthly statements to the Board and RBI on liquidity
mismatches and interest rate sensitivity.
c) Stop loss levels are fixed for both SLR and non-SLR securities.
50

d)Bank undertakes concurrent audits of securities and funds management
transactions. These findings/reports are put up to the Audit Committee of the
Board every quarter.
e) The investment committee reviews the investment portfolio every half-year, with
emphasis on rating migration and portfolio quality.
f) The treasury Department is subject to periodic inspection.
g)The panel of brokers is reviewed annually.
h)The software package used by treasury is system-audited at regular intervals to test
its ability to cope with new products and instruments, scale of operations and
outlying data and conditions.
i) The functions of front-office, settlement back-office, mid-office and accounts are
completely segregated.
j)
Deals are backed by deal slips, and office memos containing approvals by
competent authority.
k)Defaults/arrears in interest/principal on bonds are monitored and reported to

appropriate authorities.
l)
A bank will fully comply with all the RBIs guidelines, regulations and rules
governing the investment portfolio.
m) The RBI has now finalized norms for risk-based internal audit system from the
first quarter of 2003.
51
FUTURE SCOPE/CHALLENGES IN TREASURY

MANAGEMENT
Treasury Management is increasingly being viewed as a specialised function
in many corporate companies, and has already been assigned a separate status from
the general financial functions. Treasury management asks for expertise on capital
markets, money markets, instruments & investment avenues, treasury & risk
management and related areas. In this increasingly integrated and interdependent
financial environment, the links between money and capital markets have become
extremely close. To better understand this inter-linking and manage business in a
better way, firms are hiring persons who can handle Treasury Management and
forecast rates accurately.
Career Prospects in Treasury Management:
India is changing from an economy with strong socialistic leanings to a freemarket one where the barriers to trade, both domestic and international, are fast
vanishing. The transformation process that began in the early 1990s has been put into
overdrive. While foreign firms are busy trying to get a foothold on Indian soil, Indian
companies do not lag behind in attempting to penetrate foreign markets. There has
been an unexpected rise in exports as well as imports, which has resulted in volatile
exchange rates and more financial constraints. Given the inconsistency of exchange
rates, the corporate and banking worlds are paying greater attention to treasury and
foreign exchange management. Careers in treasury and forex management have
suddenly been pitch-forked into the limelight. Banks have been scouting campuses of
Indian B-schools with a view to recruiting for their treasury and forex functions.
Opportunities chiefly exist in the areas of:
52

Corporate Finance: Many Indian corporate are doing business internationally. They
are also raising funds abroad, exposing them to greater risk due to deregulation of
interest and exchange rates. To minimize these risks, it is necessary to handle forex
and treasury related functions carefully. If neglected, it may lead to profit erosion.
Corporate are on the look out for people with professional qualifications to handle all
aspects pertaining to treasury and forex management.
Banks and other Financial Institutions: Volatile exchange rate regimes and fickle
interest rates are posing stiff challenges to financial institutions and banking
organizations. They are also being offered myriad opportunities with the inter-linking
of financial markets. Inconsistencies in lending rates require continuous monitoring
and management of the asset-liability gap of these institutions. Clients are transacting
more and more business with banks in foreign currencies. Thus, banks and financial
institutions are also seeking professionally qualified persons to look after the treasury
and forex management functions.
Treasury and Forex Consultancy: Corporate and banks are roping in experienced
professionals as consultants for risk management. Opportunities as consultants are not
only well paid but also satisfying. However, these positions demand sound
experience. It is very natural to be curious about the kind of openings or careers that
Treasury and Forex Management offers. Some of them are:
a. Treasury Analyst
As a Treasury Analyst, you will support the Cash Management and Capital
Markets department of the company. The candidate is expected to have a degree in
business/finance and should demonstrate advanced analytical and system skills. He
should be able to use these skills to develop sophisticated models and apply them to
53

the treasury and accounting systems. Exposure to treasury workstation, ledger system,
reporting and billing systems is an additional advantage.
b. Functional Support Analyst
Functional Support Analysts are responsible for directly supporting treasury
workstation functions. This includes modifying existing processes, clinching new
business deals, reviewing old processes, upgrading systems, maintaining database,
research of accounting data, end user training, and security control. They are also
responsible for the documentation of all support processes. Financial
Support Analysts will also respond to client support requests by resolving and
diagnosing problems, and escalate (refer) complex ones to appropriate levels of
expertise. They also maintain knowledge about Treasury banking systems and will
serve as back-up support.
c. Cash Analyst
Cash Analysts are responsible for everyday cash management for the company
and its subsidiaries. They are also responsible for bank charge analysis,
troubleshooting of credit card and direct debit problems as well as maintaining a
database of quarterly and ad-hoc payments made. They will also serve as support to
Treasury Operations, and assist in credit card charge backs and drafting of monthly
reports. Cash Analysts will also follow up on sales and refinance distributions from
partnerships.
d. Treasury Analyst-Business Solutions
54

In this capacity, treasury analysts will act as visionaries for world class
business process reengineering. They will focus their efforts on creating a world-class
treasury organization through documentation of business process flows and analysis
of Treasury functions. They will analyze the benefits of using existing and future
platforms to ensure that the Treasury Organisation is an enterprise solution and is
compatible with existing Treasury processes and requirements. They also use their
knowledge of treasury/business functions in association with IT experience to
transform business requirements into software solutions.
e. Trade Specialist
The Trade Specialist provides support to Investment Managers and Clients
through timely and accurate processing of trade instructions and related transactions.
The varieties of trade instructions that require daily processing include global and
domestic securities, derivatives, foreign exchange transactions and transfer of
currency between accounts. They will maintain and strengthen the accounts
relationship while minimizing risk and maximizing profitability. They= will assist in
the investment of cash and the research of currency balances, idle and overdrawn
balance and the resolution of trade problems to ensure accurate client statements.
ROLE OF INFORMATION TECHNOLOGY IN TREASURY

MANAGEMENT
55

1.
Negotiated Dealing System
Negotiated Dealing System (NDS) is an electronic platform for facilitating dealing in

government securities and money market instruments.
The Indian debt market has gone through sweeping changes with the introduction of
the Negotiated Dealing System (NDS). This is an electronic trading platform for the
following instruments:
Government of India Dated Securities
State Governments securities
T-bills
Call/Notice/Term Money
Commercial Paper
Certificates of Deposit
Repos
Membership of the NDS is open to all institutions which are members of INFINET
and have Subsidiary General Ledger (SGL) accounts with the RBI. At present, this
covers the following:
Banks
Financial Institutions
Primary Dealers
Insurance Companies
Mutual Funds
Banks and Primary Dealers are obliged to become members of the NDS. NDS
facilitates electronic submission of bids/application by members for Primary issuance
56

of government securities by RBI through auction and floatation. The system of
submission of physical SGL transfer form for deals done between members on
implementation of NDS has been discontinued. NDS also provides interface to
Securities Settlement System (SSS) of Public Debt Office, RBI, and thereby
facilitating settlement of transactions in Government Securities including treasury
bills, both outright and repos.
NDS use INFINET, a closed user group network as communication backbone. Hence,
membership to the NDS is restricted to members of INFINET. Membership of
INFINET entails holding SGL and/or current account with RBI or as may be
prescribed from time to time.
2.
Other Trading Platforms/System
Trading is done electronically through networked computers/workstations. Market

participants and players are part of secure WAN and make bids and offers, be it forex,
bonds or equities. The system electronically matches bids and offers. Current
examples of electronic trading platforms are those of NSE, BSE and foreign exchange
(through the Reuters electronic dealing system).
57

3.
Straight-through-processing (STP)
STP is latest technological wave to hit financial markets. This electronic system
enables trading, documentation, clearing, settlement, and custody on a single, end-toend hardware and software platform.
This is a natural extension of electronic trading whereby individual traders, once
approved and authorized by the buyer and seller, are settled automatically by the
system through its connectivity with a Clearing House. Buyers receive securities in
their custodial accounts and sellers receive funds.
4.
Electronic Form
a. Settlement: Post-approval of a deal, the system suo motu, credits and debits the
respective cash and securities accounts of the buyer and seller as required. In G-Secs,
the NDS enables this through the intermediation of the CCIL.
Forex deals in USD/INR and cross-currencies, i.e., USD/JPY, Euro/USD, GBP/USD,
etc., are also settled electronically through CCIL or SWIFT, through transfers of funds
from and to Nostro accounts.
b. Custody: Electronic records of ownership of securities are held by DPS. Such
securities do not exist in physical form. The SGL depository of the RBI maintains
custody and ownership of SLR securities in electronic form.
c. Conversion of Physical Securities to Demat: The RBI and SEBI have now made it
mandatory for almost all securities to be in demat, i.e., electronic record of ownership
and transactions in securities, maintained with a depository participant (DP), which, in
turn, maintains an account with the apex depository (NSDL,CDSL, etc.)
58

Similarly, Real Time Gross Settlement [RTGS] has already been introduced, which is
a completely electronically propelled countrywide payment system.
Besides the above the application of sophisticated IT tools has made it
possible to calculate VaR, conduct thousands of scenario analysis through simulation,
carry out back testing/stress testing, and apply statistical tools for complicated
analysis in bond dynamics and exchange rate mechanisms.
59
CASE STUDY ON STATE BANK OF INDIA

TREASURY
Profile
Profile India's largest bank is also home to the country's biggest and most
powerful Treasury, contributing to a major chunk of the total turnover in the money
and forex markets. Through a network of state-of-the-art dealing rooms in India and
abroad, backed by the assured expertise of informed professionals, the SBI extends
round-the-clock support to clients in managing their forex and interest rate exposures.
SBI's relationships with over 700 correspondent banks are also leveraged in
extracting maximum value from treasury operations. SBI's treasury operations are
channeled through the Rupee Treasury, the Forex Treasury and the Treasury
Management Group.
The Rupee Treasury deals in the domestic money and debt markets while the
Forex Treasury deals mainly in the local foreign exchange market. The TMG monitors
the investment, risk and asset-liability management aspects of the Bank's overseas
offices.
RUPEE TREASURY
The Rupee Treasury carries out the banks rupee-based treasury functions in
the domestic market. Broadly, these include asset liability management, investments
and trading. The Rupee Treasury also manages the banks position regarding statutory
requirements like the cash reserve ratio (CRR) and the statutory liquidity ratio (SLR),
as per the norms of the Reserve Bank of India.
60
Products and Services
Asset Liability Management (ALM): The ALM function comprises management

of liquidity, maturity profiles of assets and liabilities and interest rate risks.
Investments: SBI offers financial support through a wide spectrum of investment

products that can substitute the traditional credit avenues of a corporate like
commercial papers, preference shares, non-convertible debentures, securitized
paper, fixed and floating rate products. SBI invests in primary and secondary
market equity as per its own discretion.
These products allow you to leverage the flexibility of financial markets,
enable efficient interest risk management and optimize the cost of funds. They can
also be customized in terms of tenors and liquidity options.
SBI invests in these instruments issued by your company, thus providing you a
dynamic substitute for traditional credit options. The Rupee Treasury handles the
banks domestic investments.
Trading
The banks trading operations are unmatched in size and value in the domestic
market and cover government securities, corporate bonds, call money and other
instruments. SBI is the biggest lender in call.
61

FOREX TREASURY (FX)
The SBI is the countrys biggest and most important Forex Treasury, both in
the Interbank and Corporate Foreign Exchange markets, and deals with all the major
corporate and institutions in all the financial centers in India and abroad. The banks
team of seasoned, skilled and professional dealers can tailor customized solutions that
meet your specific requirements and extract maximum value out of each market
situation.
The banks dealing rooms provide 24-hour trading facilities and employs stateof-the-art technology and information systems. SBIs relationships with over 700
correspondent banks and institutions across the globe enhance the strength of the
Forex treasury. The FX Treasury can also structure and facilitate execution of
derivatives including long term rupee-foreign currency swaps, rupee-foreign currency
interest rate swaps and cross currency swaps.
OVERSEAS TREASURY OPERATION

Treasury Management Group
The Treasury Management Group (TMG) is a part of the International
Banking Group (IBG) and functions under the Chief General Manager (Foreign
Offices). As the name implies the department monitors the management of treasury
functions at SBIs foreign offices including asset liability management, investments
and forex operations.
62

Products and Services
Asset Liability Management (ALM): The ALM function comprises
management of liquidity, maturity profiles of assets and liabilities and interest rate
risks at the foreign offices.
Investments: Monitoring of investment operations of the foreign offices of the
bank is one of the principal activities of TMG. The main objectives of investment
operations at our foreign offices, apart from compliance with the regulatory
requirements of the host country, are (a) safety of the funds invested, (b) optimization
of profits from investment operations and (c) maintenance of liquidity. Investment
operations are conducted in accordance with the investment policy for foreign offices
formulated by TMG.
The activities include appraisal of the performance of the foreign offices broad
parameters such as income earned from investment operations, composition and size
of the portfolio, performance vis--vis the budgeted targets and the market value of
the portfolio.
Forex monitoring: Monitoring of forex operations of our foreign offices is
done with the objective of optimizing of returns while managing the attendant risks.
Forex and Interest rate (Foreign Currency) derivatives: TMG also plays an
important role in structuring, marketing, facilitating execution of foreign currency

derivatives including currency options, long term rupee - foreign currency swaps,
foreign currency interest rate swaps, cross currency swaps and forward rate
agreements. Commodity hedging is one of the recent activities taken up by TMG.
Reciprocal Lines: The department is also responsible for maintenance of
reciprocal lines with international banks.
63

PORTFOLIO MANAGEMENT & CUSTODIAL SERVICES
The Portfolio Management Services Section (PMS) of SBI has been set up to handle
investment and regulatory related concerns of Institutional investors functioning in the
area of Social Security. The PMS forms part of the Treasury Dept. of SBI, and is
based at Mumbai.
PMS was set up exclusively for management of investments of Social Security
funds and custody of the securities related thereto. In the increasingly complex
regulatory and investment environment of today, even the most sophisticated
investors are finding it difficult to address day to day investment concerns, such as
Adherence to stated investment objectives
Security selection quality considerations
Conformity to policy constraints
Investment returns
The team manning the PMS Section consists of highly experienced officers of
SBI, who have the required depth of knowledge to handle large investment portfolios
and address the concern of large investors. The capabilities of the team range from
Investment Management and Custody to Information Reporting.
64
OVERALL FINDING OF THE STUDY
The project has given an insight into the various aspects of treasury management
namely
Meaning and definition of treasury management.
Different functions of treasury departments in banks like reserve management&
investment, liquidity & fund management, assets liability management, etc.
Organisational structure & objective of treasury management
Element of treasury management and functions of treasurer in these elements.
Nature of treasury assets and liabilities, treasury products and services, risk associated
in treasury, their mitigation and RBI guidelines for risk management.
Future scope in treasury management and role of information technology in treasury
management.
SBI,s treasury. SBI is the first treasury operator.
SBI bank has an integrated treasury management; they dont have any competitors as
such because it is well maintained and functioned.
SBI has their own procedure for treasury management which is followed very well by
them. Percentage of income is not disclosed by them to any one. SBI do follow RBI
guidelines for treasury management properly which they think that it is well
formulated.
Risk involved in treasury management for SBI is the same like operational risk and
financial risk and they aim for a well integrated and innovative management of
65

treasury with low risk and proper function of treasury assets and liabilities. It also has
good career opportunities.
LIMITATION OF THE STUDY
Time allotted for making project is very limited. As study is restricted only to
a specific area. If time permits then there would be a vast scope of study of different
organizational treasury management or having a comparative study between two
banks.
Study allotted has a page constraint. The information required for in-depth
study is not possible.
Due to lack of work experience, there is a disadvantage for making a project
as there is no in-depth practical information of the subject. If there would be work

experience, the project would have been of practical information.
Treasury management has awareness among the banking sector only which
restricts from getting information from public.
There is no space horizon. So study on treasury management is restricted only
to Indian scenario. So we cant have a comparative study with other countries.
66
CONCLUSION
Historically, the treasury operations were oriented more toward compliance of
the regulatory prescriptions in terms of cash reserve ratio and statutory liquidity ratio.
Ensuring that there are no defaults in central bank account and that the borrowings are
minimal were the focal issues addressed to. With the globalization process, the role of
treasury has undergone a sea change and it is a major profit center for better
performing banks.
Treasury operations have become more significant and complex today than
what it was few years back. The role played by the technology and the rapid changes
in the financial sector has brought in more flexibility in the funds deployment by
banks. The dynamism with which the Treasury Market moves needs to be fully
understood which is integrated in the Banks.
The role of information technology is pivotal particularly because huge funds
are handled by comparatively a few people in each bank. Unless informational
expectations are clarified and met with, treasury operations can seldom be successful
in terms of revenue acceleration.
To sum up, the paradigm shift in the risk exposure levels of the financial
institutions, has definitely led to treasury management assuming a center stage.
Undoubtedly all financial institutions need to perform treasury management. But to
have a proper treasury management function in place, a thorough understanding of the
various operations on its assets/ liabilities becomes essential. Such an understanding
67

will enable the financial institution to identify and unbundle the risks and further aid
in adopting and developing appropriate risk management models to manage risks.
68
BIBLIOGRAPHY
BOOKS
Transformation Of Indian Banks With Information Technology
-
Prof. Sharad Padwal & Dr. Vasant Godse
Theory And Practice Of Treasury And Risk Management In Banks

-
Indian Institute Of Banking & Finance (Taxman)
Treasury Management
-
Indian Institute Of Banking & Finance (Taxman)
INTERNET
www.indiainfoline.com
www.investopedia.com
www.treasury-management.com.
www.financialexpress.com
www.google.com
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Treasury Management Operation in Banks

SYDENHAM INSTITUTE OF MANAGEMENT