TREASURY

MANAGEMENT
AND
ASSET
LIABILITIES
MANAGEMENT
 TREASURY
MANAGEMENT
 INTRODUCTION
 Traditional role of treasury was :
 Ensuring the maintenance of RBI
stipulated norms for Cash Reserve
Ratio (CRR)
 Ensuring the maintenance of RBI
stipulated norms for Statutory Liquidity
Ratio (SLR)
 Activity in foreign exchange was confined
to meeting merchants’ and customers’
requirements for imports, exports,
remittances and deposits
 INTRODUCTION Contd.
 Cash reserve ratio is a ratio which banks
have to maintain with it self in the form of
cash reserves or by way of current
account with the RBI, computed as a
certain percentage of its demand and time
liabilities. The objective is to ensure the
safety and liquidity of the deposits with
the bank.

 Statutory Liquidity Ratio is a ratio which
every banking company has to maintain in
the form of cash, gold or unencumbered
approved securities, an amount, which
shall not, at the close of business on any
day be less than such percentage of the
total demand and time liabilities as the
 INTRODUCTION Contd.
 Indian money market was characterized
by the imperfections arising out from
the administered interest rates and
therefore hardly reflected the position
of true liquidity in the system.
 RBI INITIATIVES
 Discount and Finance House of India was set
up to provide to the Market Participants an
institutional mechanism to meet their
liquidity requirements by dealing in short
term money market instruments like
treasury bills, bills rediscounting etc..
 Increasing the number of instruments by
introducing commercial papers and
certificates of deposits.
 To enable price discovery, cap on call money
interest rates was completely withdrawn
in May 1989.
 RBI INITIATIVES Contd.
 Call Money and Money at Short Notice:
loans given by one bank to an other,
repayable by the borrowers when a call
is made or after a short notice. This
asset has an advantage over cash
reserve as it satisfies both the
attributes of sound banking asset i.e.
profitability as well as liquidity
 RBI INITIATIVES Contd.
 Non-Banking Institutions like LIC, All India
Financial Institutions , Mutual Funds etc
were allowed to enter the Call Money
Market for lending only.
 Delivery Versus Payment (DVP) system was
introduced for securities settlement at
Public Debt Offices which substantially
reduced the counter party risk in security
transfers and infused confidence in the
introduction of REPOS and expansion of
REPOable securities.
 REPO is a contract under which the seller of
securities, such as Treasury Bills, agrees to
buy them back at a specified time and
price. This is also called repurchase
agreement or buyback.
 RBI INITIATIVES Contd.
 The RBI began using monetary intervention tools
such as REPOS and Open Market Operations
to manage liquidity in the financial system
and make the determination of interest rates
on G-Secs more transparent and competitive
by holding auctions.
 Post liberalization, deregulation and financial
markets reforms led to evolution of a vibrant
Bond Market.
 Just like equity prices and FOREX markets,
interest rates (yield ) on debt instruments are
determined through the interplay of various
economic, financial (liquidity, inflation,
government’s / RBI’s policies, growth, FOREX
demand and supply, domestic interest rates
etc) and political (local & international) factors
and events
 RBI INITIATIVES Contd.
 Market Makers are intermediaries between the end-
users and the financial system, but unlike general
financial intermediaries, they do not act as agents
to end-users. Instead they act as principals buying
and selling securities for their own account.
 They hold an inventory of securities on their books
which grows when they buy the securities and
vice versa.
 They are rewarded in one of the following two ways:
 1.Through the Bid Offer Spread-the difference
between the bid price at which they will buy a security
and a higher offer price at which they sell them.
 2.Through taking a position (speculation) i.e. if
they believe that prices will rise in the future, they will
increase their inventory holding and vice versa.

 RBI INITIATIVES Contd.
 The Rupee’s exchange rate has become
volatile. The fluctuations in interday
and intraday prices enables one to earn
trading profits on buying and selling
the currency.
 Cross-currency trading opportunities got
new impetus after liberalization.
 THUS…….
 The VOLATILITY in interest rates is at the
heart of the transformation of BANK
TREASURIES from mere CRR and SLR
keepers to a profit centre.
 Downward and upward movements in
the Gilt yields offer excellent scope
and opportunity for the Banks to
trade in the underlying securities and
earn profits and to take advantage of
currency variations in the FOREX
market.
 Volatility is the measurement of the
change in price over a given period of
time. It is often expressed as a
percentage and computed as the
 SOURCES OF PROFIT OF
TREASURY
 INVESTMENTS: Where banks earn a
higher yield than its cost of funds. Eg.
Buying a corporate bond yielding 7%
and maturing in three years, financed
by deposits costing only 6%.
 SPREADS: Between yields on money
market assets and money market
funding. E.g. The Bank may borrow
short term for 5% and deploy in
commercial papers with return of 6%.
 SOURCES OF PROFIT OF
TREASURY Contd.
 In the context of Over-the-counter
market, the term ‘Ask’ refers to the
lowest price at which a market maker
will sell a specified number of
shares/securities at any given time.
 The term ‘Bid’ refers to the highest price
a market maker will pay to purchase
the security.
 The ‘Ask’ price or The Offer Price will
almost always be higher than the Bid
Price. Market Makers make money on
this difference known as SPREAD.

 SOURCES OF PROFIT OF
TREASURY Contd.
 ARBITRAGE: Is a buy /sell SWAP in the FOREX
market, where the bank converts its Rupee
funds into a Dollar deposit, earns LIBOR
(London Inter Bank Offer Rate)and gets back
Rupee on deposit maturity. This generates a
risk free profit (ARBITRAGE) if LIBOR plus the
forward premium on Dollar/ Rupee is more
than the domestic interest rate.

 RELATIVE VALUE: This is a form of Arbitrage in
which bank exploits the anomalies of the
market prices. The bank may have an ’AAA’
bond, which yields 6%, compared to another
with the same rating and maturity, but of a
different issuer, which offers 6.5%. It is
worthwhile to sell the first bond and invest in
the second and improve the yield by 50 pbs
 SOURCES OF PROFIT OF
TREASURY Contd.
 LIBOR is the rate that the most credit worthy
international banks that deals in Euro-
Dollars charge each other for large loans.
It is equivqlent to the Federal Funds Rate
in the US.
 Arbitrage :

1. Is a process of buying a product/security in

one market and selling it in another, and
there by making profits
2. The act of obtaining risk free profits by
simultaneously buying and selling similar
instruments in different markets.
The process is known as Arbitrage and the

person as Arbitraguer.

 SOURCES OF PROFIT OF
TREASURY Contd.
 PROPRIETARY TRADING: In this the focus is
entirely on the short term , as opposed to
investment which is long term. The aim is
to earn trading profits from movements in
security and FOREX prices during a day
or a few days of trading.
 Under this, a dealer may buy for example
9.81% Government of India Security 2013 at
Rs. 116.5at a yield of 8.40% in anticipation of
the yield falling to 7.70%, on fundamental
grounds. If this happens, the bond
appreciates and the bank exits the position
with a profit.
 SOURCES OF PROFIT OF
TREASURY Contd.
 CUSTOMER SERVICES: Bank Treasuries offer
their products and services to customers /
non banking customers. The income of
banks from these activities comprises fees
and/or margins on trade execution. Profits
would be higher on structured (non
standard ) transactions compared to plain
vanilla (e.g. straight forward buy sell
USD/INR) deals.
 Treasuries are also involved in Investment
Banking where their responsibility covers
trade execution on behalf of the bank’s
clients in the cash or derivatives markets.
 SOURCES OF PROFIT OF
TREASURY Contd.
 Investment Bankers/merchant
bankers : These are
agencies/organizations regulated and
licensed by SEBI, the Capital Market
Regulator.
1. They arrange raising of funds through
equity and debt route and assist
companies In completing various
formalities like filing the prescribed
documents and other compliances with
the regulator(s).
2. They advise the issuing company on book
building, pricing of issue, arranging
 SOURCES OF PROFIT OF
TREASURY Contd.
BOOK BUILD: is a particular way of conducting


a float where the price at which shares are

sold is not fixed, but rather is determined
following a process in which interested
investors bid for the shares. This is quite a
common way of determining the price paid
for the shares by Institutional Investors.


BOOK BUILDING: is a process used to ascertain

and record the indicative subscription bids of
interested investors to a planned issue of
securities.
The advantages of this technique are that it
results in:
1. Optimal pricing

2. Removes uncertainty regarding the

 MONEY MARKET
 DEFINITION
 Money Market, in general parlance is
defined as a market for instruments /
transactions with an initial maturity
period of up to one year.
 Money market embraces the various
arrangements that are related with
issuance , Trading and redemption of low
risk, short term, marketable obligations.
 Essentially this market is for short term
financial assets that are close substitutes
for money.
NEED FOR MONEY MARKET
q It provides an equilibrating mechanism
for evening out short term deficits and
surpluses.
q It provides a focal point for central bank
intervention for influencing liquidity in
the economy.
q It provides reasonable access to users of
short term money to meet their
requirements at a realistic price.
 FUNCTIONS OF MONEY
MARKET
 To provide efficient facilities for adjustment
of liquidity positions of commercial banks,
non banking financial institutions,
business firms and other investors.
 It meets the short term fund requirements of
the borrowers and provides liquidity to the
lenders.
 Narrows the interest rates differentials, both
geographically and industrially.
 Fosters the flow of funds to the most
important uses throughout the nation and
the world, and throughout the range of
entire economic activity.
 FUNCTIONS OF MONEY
MARKET
 NON-BANKING FINANCIAL COMPANY: is a
financial intermediary that is engaged in
certain financing activities other that
banking. These activities are specified in
the Non-Banking Companies (reserve
Bank) Directions 1977 and amended
thereto.
 The activities include equipment leasing, hire
purchase, housing finance and
investments in financial securities, bill
discounting and factoring, fee based
services such as security issue
management, and advice on mergers and
acquisitions and capital restructuring etc.
 MONEY MARKETS –
INSTRUMENTS
 CALL MONEY: are those moneys which are lent where the
borrower has to repay the funds when called on to do
so by the lender.
 NOTICE MONEY: refers to those moneys where the lender
has to give a certain number of days’ notice, which has
been agreed on at the time of the contract, to the
borrower to repay the funds.


 However in Indian context it refers to that transaction

where in the money is lent/borrowed between participants,
permitted to operate in the call/notice money market, for
tenors ranging from overnight to transactions to a
maximum of 14 days.


 This market is used by participants to manage their daily

funding mismatches and to comply with CRR stipulations.
The participants who are surplus of funds lend money to
adjust the mismatch for the relative period and vice versa.
 Contd…
 The Call/Notice money market has been made a pure
inter bank market recently. Only Scheduled
Commercial Banks, Co-operative Banks and
Primary Dealers are permitted to operate in this
market as both borrowers and lenders.
 The placement of money/lending in the call/money
market is unsecured. As a prudential measure
therefore , each lender fixes a
placement/counterparty exposure for each
borrower. This limit denotes the maximum amount
the lender would lend to a specified borrower.
 In addition to the exposure limits there is also a
regulatory limit on the amount a bank can
lend/borrow in the call/notice money market. In a
reporting fortnight the average borrowing by a
bank cannot exceed 100% of its tier 1+tier 2
capital of the previous financial year and on any
given day the borrowing should not exceed 125%
of the same . In a reporting fortnight the average
lending by a bank cannot exceed 25% of its tier
1+tier 2 capital as of the previous financial year
and on any given day the lending should not
 Contd…
 PRIME LENDING RATE: The rate of
interest charged by the banks on
working capital and short term loans to
their most credit worthy borrowers. The
prime rate serves as a benchmark for
deciding on the interest rate to be
charged to other borrowers.
 Accordingly, major banks and financial
institutions periodically announce theis
PLRs depending on the their cost of
funds and competitive lending rates.
 Recently banks have been given the
freedom to have different PLRs for
different maturities.
 Contd…
 TIER I CAPITAL:
 1.Tier I capital in case of Indian Bank would comprise:
 a. Paid up Capital
 b. Statutory Reserves
 c. Disclosed free Reserves
 d. Cap[ital reserves representing Surplus arising out of sale
proceeds of assets.

 2. Equity investments in subsidiaries (intangible assets and
losses in the current year and those brought forward from
the previous period will be deducted from Tier I capital).
 3. The total of Tier II capital will be limited to a maximum of
100% of the total of Tier I capital for the purpose of
compliance with the Capital Adequacy Norm.
 4. Banks should mention on an ongoing basis additional Tier I
capital of 5% on foreign currency position limit approved
by the RBI.
 5. Banks keeping open position in Gold should mention Tier I
capital to the extent of 5% of the open position limit laid
down by banks with the approval of their B.o.Ds and with
the specific approval of the RBI.
 Contd…
 TIER II CAPITAL: TIER II CAPITAL will
consist of :
1. Undisclosed reserves and cumulative
perpetual preference shares.
2. General provisions and loss reserves.
3. Revaluation reserves.
4. Hybrid debt capital instruments.
5. Subordinated debt.
6. Limit on subordinated debts.



 CAPITAL ADEQUACY RATIO
 The Bank for International Settlement(BIS)
(Headquarters – Basel Switzerland) set up
a committee to examine the Capital
Adequacy of an international bank which
recommended it to be at 8%. The
Committee on Banking Regulations and
Supervisory Practices (The Basel
Committee) was headed by an Australian
Banker Mr. Peter Cooke is also known as
Cooke Committee)


 Narsimhan Committee has recommended

capital adequacy of 8% for Indian Banks.
 It is computed as CAPITAL FUNDS/
RISK WEIGHTED ASSETS+OTHER
EXPOSURE.

 Contd…
 TERM MONEY: It refers to those borrowing
and lending transactions between the
inter bank participants which have tenors
greater than 14 days. There is no
regulatory limit on the amount an inter-
bank participant may lend or borrow.


 BANK FIXED DEPOSITS: Scheduled

Commercial Banks and Cooperative Banks
accept term deposits for a period of 7
days and above. The rate of interest vary
from bank to bank. These are non
transferable but can be liquidated easily
subject to penalty which again varies from
bank to bank which is in terms of loss of
 Contd…
 CERTIFICATE OF DEPOSITS (CDs): is a
negotiable money market instrument and
issued in a dematerialized form or as a
Promissory Note, for funds deposited at a
bank or other eligible financial institution
for a specified time period under the
guidelines issued by the RBI.
 CDs can be issued by
 i) Scheduled commercial banks excluding
the RRBs and Local Area Banks.
 ii) select all-India FIs that have been
permitted by the RBI to raise short term
resources, within the permissible limits.(i.e.
issue of CD together with other instruments
viz term money, term deposits, CPs & inter
corporate deposits should not exceed 100 %
of its net owned funds as per last audited
balance sheet.
CERTIFICATE OF DEPOSITS
(CDs):
FEATURES
 The maturity period of CDs is sued by banks should not be
less than 7 days and not more than 1 year.
 The FIs can issue CDs for a period exceeding 1 year but
less than 3 years from the date of issue.
 CDs can be issued to the individuals, corporations,
companies, trusts, associations etc..
 CDs can either be in physical form or in a DEMAT form.
 CDs are freely transferable by endorsement with the
exception of NRIs who can not endorse it to another NRI
in a secondary market.
 There is no lock-in-period.(min. period 7 days)
 Minimum denomination is of Rs 100000 and in multiples
thereof, there after.
 The rate of interest is determined by the parties and on the
basis of demand supply factor.
 The instrument is to be stamped as per the regulations of
The Indian Stamp Act.
 Banks/FIs cannot grant loans against CDs. Further they can
not buy back them before maturity.

MONEY MARKET INSTRUMENTS Contd..
 COMMERCIAL PAPERS :
 Unsecured money market instrument issued in the form of
promissory note or in dematerialized form.
 Privately placed instrument enabling highly rated corporate to
diversify their sources of short term borrowings and to
provide additional instrument to investors.
 Corporate & Primary Dealers, NRIs ,FIIs, and All India FIs have
been permitted to issue CPs.
 All eligible participants shall obtain the credit rating for issuance
of CPs from either the Credit Rating Information Services of
India Ltd. (CRISIL) or the Investment Information & Credit
Rating Agency of India (ICRA) or the Credit Analysis &
Research Ltd.(CARE) or The FITCH Ratings India Pvt . Ltd. Or
any other credit rating agency as the RBI may notify from
time to time.
 CPs can be issued for a period of 7 days to 1 year. The maturity
date of the CP should not go beyond the date up to which the
credit rating of the issuer is valid.
 CP will be issued at a discount to face value as may be
determined by the issuer.
 Every issuer must appoint an IPA (Issue and Pay Agent ) for
MONEY MARKET INSTRUMENTS Contd..
 BILL REDISCOUNTING SCHEME (BRDS) : Banks
in their normal course of business discount
bill of exchange. To provide liquidity and to
promote bill culture in the economy the RBI
formulated a scheme whereby a bank may
raise funds by issue of UsancePromissory
Note (UPN) in convenient lots and
maturities ranging between 15 days to 90
days.
 Banks can only rediscount B/E which have the
following features:
 1. The B/E should have arisen on account of
bona fide trade transaction.
 2. The B/E should be unencumbered.
 3. The unexpired tenor of the bill should not
be more than 90 days.
 MONEY MARKET INSTRUMENTS

Contd..
The BRDS transaction is carried out on a
discounted basis and has the following
features:
 1. Interest is calculated on an actual/365
basis.
 2. Interest is calculated on a front end
basis and rounded of to the nearest rupee.
 3. The borrower receives an amount
which is the principal amount less the
interest/discount.
 4. The lender receives the principal
amount from the borrower on the maturity
of the transaction.
 5. The effective yield on the bills
discounting is higher than the discount
 MONEY MARKET INSTRUMENTS Contd..
INTER-BANK PARTICIPATION CERTIFICATES (IBPCs): A
short term money market instrument whereby
banks can raise/deploy short term deficit/surplus.
In case of IBPC the borrowing bank passes/sells on
the loans and credits that it has in its books, for
temporary period, to the lending bank. IBPC are of
two types
 1. With risk sharing
 2. Without risk sharing
q Only Scheduled Commercial Banks can issue them
. Minimum period shall be 91 days and maximum of
180 days in case of IBPCs on risk sharing basis and
under non risk sharing basis total period is limited to
90 days.
 Interest rate is determined between the issuing and
participating bank.
 These are non transferable.
 They cannot be redeemed before the due date.

MONEY MARKET INSTRUMENTS Contd..
 COLLATERALISED BORROWING AND LENDING
OBLIGATION (CBLO): This is a product
developed by CLEARING CORPORATION OF
INDIA LIMITED (CCIL) for the benefit of
entities who have either phased out from
inter bank call money market or have
been given restricted participation in
terms of ceiling on call borrowing and
lending transactions and who do not have
access to call money market.
 CBLO is a discounted instrument Available in
electronic book entry form for the maturity
period ranging from 1 day to 90 days
which can extend up to 1 year as per RBI
guidelines.
 MONEY MARKET INSTRUMENTS Contd..
 In order to enable the market participants to borrow and
lend funds, CCIL (Clearing Corporation of India)
provides the Dealing System through Indian Financial
Network (INFINET), a closed user group to the Members
of the Negotiated Dealing System (NDS) who maintain
Current Account with RBI and through Internet for other
entities who do not maintain Current Account with RBI.
 THUS:
 CBLO is a borrowing arrangement, against those
securities which are placed with the Clearing Corporation Of
India either as margin or otherwise. The process thus can
be summed up as under:
1. An obligation by the borrower to return money borrowed,
at a specified future date
2. An authority to the lender to receive money lent, at a
specified future date with an option/privilege to
transfer the authority to another person for value
received.
3. An underlying charge on the securities held in custody
(with CCIL) for the amount borrowed/lent.
 MONEY MARKET INSTRUMENTS Contd..
 TREASURY BILLS (T-BILLS) :
 Treasury Bill is a short term money market
instrument issued by the Govt. of India (GOI)
through RBI for tenures of 14 days, 28 days, 91
days, 182 days and 364 days.
 The T-Bill is a discounted instrument i.e. it is issued at
a discount to its face value which is usually Rs.
100.
 Investment in T-Bill is reckoned for the purpose of
SLR requirements.
 T-Bills are issued in the primary market by the RBI,
periodically. Normally there are T-Bill auctions
every week.
 The cut off is determined by the market forces under
normal circumstances.
 The T-Bills are moderately active In the secondary
market and are traded on a yield basis. The
transfer of T-Bills is through (SGL) Subsidiary
 MONEY MARKET INSTRUMENTS Contd..
REPURCHASE AGREEMENTS (REPOs):


 Is a money market instrument enabling collateralised

short term lending/borrowing through
sale/purchase operations in debt instruments.
 It is a process wherein a number of
instruments (G-Secs, PSU Bonds and other
securities) can be used as underlying
securities to borrow and lend money in the
market.
 It is essentially a lending/borrowing transaction
at an agreed rate of interest known as repo
rate. In view of this the forward clean price
of the bond is set, at the time of sale, at a
level which is different from the spot clean
price by adjusting the difference between
repo interest (known as repo rate) and
coupon income on the security.
 The rate of interest on repo will be market
related.
 MONEY MARKET INSTRUMENTS Contd..
 REPO RATE :
 Is the annualized interest rate for the funds lent by
the buyer of the securities (lender) to the seller of the
securities (borrower).
 A Repo is sometimes called a ready forward
action as it is a means of funding by selling a security
held on a Spot/ Ready basis and repurchasing the
same on a forward basis.
 When an entity sells a security to another entity on
repurchase agreement basis and simultaneously
purchase some other security from the same entity on
resell basis it is called a Double Ready Forward.
 The repo rate is lower than that offered on
unsecured / clean interbank loan for the reason that it
is a collateralised transaction and the creditworthiness
of the issuer of the underlying security is often than
the seller.

 MONEY MARKET INSTRUMENTS Contd..
 REPO is also undertaken by RBI for controlling liquidity in
the market as also to help banks in need of liquidity.
 The banks can borrow funds from RBI by doing REPO and
deposit with RBI by doing a Reverse REPO. For the RBI it is
REVERSE REPO on the former and REPO on the latter. This
is known as LAF (Liquidity Adjustment Facility).
 REPO is allowed in PSU bonds and private corporate
debts provided the debts are in dematerialized form.


 The Repo transaction should have:

a. Present sale or purchase with a commitment to
repurchase or resell respectively at a future date
b. Contract between same parties
c. Same securities with the same quantum
d. Transactions must be entered on the same day for both
legs*
 MONEY MARKET INSTRUMENTS Contd..
 The Ready Forward Transaction is in two legs:
READY LEG :

 The borrower of the funds sell securities at the prevailing

market price to the lender. (prevailing Market price is the
rate of return on risk free GOI securities)
 Before the sale the borrower and lender agree on the
tenor and the rate of the repo transaction.


 FORWARD LEG:
 The borrower of the funds buys back the securities sold
in the Ready Leg from the lender at a computed price so
that the lender (seller of the securities) gets an amount
which includes the amount lent on the Ready Leg plus the
interest for the amount lent at the agreed interest rate for
the TENOR of the Repo.



 MONEY MARKET INSTRUMENTS Contd..
 TYPES OF REPOS: Broadly there are four
types of REPOS available in the international market.
They are as follows:
 BUY-SELL BACK REPO: Here the lender
actually takes possession of the collateral.
Here a security is sold outright and bought
back simultaneously for settlement on a
later date. The ownership is passed on to
the buyer and hence he retains any coupon
interest due on the bonds.
 CLASSIC REPO: is an initial sale of securities
with a simultaneous agreement to
repurchase them at a later date. The start
and end prices of the security is the same
and a separate payment of interest is
made.
 MONEY MARKET INSTRUMENTS Contd..
 HOLD IN CUSTODY REPO: The counterparties enter into an
agreement where by the securities sold are held in
custody by the seller for the buyer until maturity of the
REPO thus eliminating the settlements requirements.
 BOND LENDING/BORROWING TRANSACTION: The
customer lends bonds for an open ended or fixed period
in return for a fee.
 TRIPARTITE REPOS: Under this kind of repo a common
custodian/ clearing agency arranges for a custody,
clearing and settlement of repo transactions. They
operate under a global master purchase agreement and
provide for DVP (delivery versus payment) system,
substitution of securities, automatic marking to market,
reporting and daily administration by single agency
which takes care of the risk by itself and automatic roll-
overs while does not insist on disclosing the identities
by counterparties. The system starts with signing of
agreement by all parties and the agreement includes
Global Master Repurchase and Tripartite Repo Service
Agreements. This type of arrangement minimizes credit
risk and can be utilized when dealing with clients with
low credit rating.
 INTEREST RATE QUOTATIONS AND
MARKET TERMINOLOGY
 There are different ways of calculating
interest amount on a money market / debt
instrument. They are as follows:
Ø FIXED and FLOATING RATE OF INTEREST