WHAT IS TREASURY MANAGEMENT?

In today's highly competitive environment, the treasury plays a vital role in the viability and success of
a bank and calls for effective internal and external interfaces. It performs a myriad of function such as
balance sheet management, fund management , liquidity management, investments, reserves
management, capital adequacy , transfer pricing, technology and operations, risk management, trading
activities and offering hedge products.
The treasury department of a bank is responsible for balancing and managing the daily cash flow and
liquidity of funds within the bank. The department also handles the bank's investments in securities,
foreign exchange, asset/liability management and cash instruments.
The art of managing, within the acceptable level of risk, the consolidated fund of the bank optimally
and profitably is called Treasury Management.

OBJECTIVE OF THE TREASURY:

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 deposits liabilities,internal generation and cash flows from maturing
assets fro maximum return on a current and forward basis consistent with the bank's risk
policies/appetite.

To found 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 asset 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 ,advice and manage the financial risk associated with the non-treasury asset 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 RBI on current and forward
planning basis.

To deploy profitability and without compromising liquidity the clearing surplus of the bank.

To offer comprehensive value-added treasury and related service to bank's customers

To act as profit center for bank

FUNCTIONS OF TREASURY MANAGEMENT:

1)FUNCTIONS AS TREASURER:
Treasury operations of commercial bank consists of mainly of two vital function:
(a)Ensuring strict compliance with statutory requirement of maintaining the stipulated Cash Reserve
Ratio (CRR) and Statuary Liquidity Ratio(SLR) and
(b)Liquidity management by
(i)Ensuring the optimum utilization of residual resources through investments
(ii)Raisin addition resources required for meeting credit demands
(iii)Managing market and liquidity risks in the transactions
With financial market reforms , bank have been compelled too look for avenue for alternatives to
credit, the historical source of profit. It has been realized that credit function alone is not sufficient and
bank should look to investments for earning market related returns on funds. Investment have thus gain
importance as an equally important part of bank's balance sheet. Therefore , over and above the
statutory holdings of government securities, as SLR , a substantial portion of bank's resources are
deployed in government/corporate bonds and other products as an alternative credit.
The treasury operations also include providing cover to the customers of the bank in respect of their
foreign exchange exposures for their trade transactions like export,imports,remittance etc. and
extending products and services to its customers for hedging the interest rate risk. While doing so , the
treasury also takes care of the associated functions like liquidity management and asset liability
management of the domestic as well as foreign exchange resources and deployment.
Basic Treasury Operation:
(i)Maintain of statutory reserves
(ii)Managing liquidity
(iii)Profitability Deployment of reserves

(iv)Trading and arbitrate

(v)Hedge and Cover operations
(vi)Mid/back Office functions

2)RESERVE MANAGEMENT AND INVESTMENT:

In Indian Banking scenario, a large asset base of a bank consists of investments on account of
statutory reserves. Since such a large portion of funds are deployed in such reserves,management of
these reserves is very important factor in the over all profitability of the bank. It should ideally take in
to account both liquidity as well yield considerations. Even though the longer maturity securities offer
the highest yields,they are most susceptible to fall in price due to changes in the yield curve.
On the other hand , short dated securities have low price risk but the also gives lower returns.
Therefore the choice of an appropriate mix of maturity patterns in SLR portfolio is very important
function of the treasury manager. Along with this ,The market risk of the portfolio in terms of its price
sensitivity to interest rate changes needs to be quantified and periodically monitored by means of
analytical tools such as duration analysis. This will give measure of the precise risk profile of the
security holdings, and enable the portfolio manager to initiate suitable corrective action in line with the
treasury's overall investments strategy and risk return parameters.
Along with investments for statutory reserves, the treasury also makes investments in various
other kinds of instruments such as Certificates Of Deposits(CD),Commercial Paper(CP), Public
Sectors Bonds, Units ,Corporate Debts etc. These investments decision depend on factors such as
bank's liquidity positions, money market condition , tenure of funding available, market liquidity in
various instruments , yield and tax planning requirements. Treasury may hold investments in these
instruments till their maturity or it can trade on them to take advantage of market opportunities.

3)TRADING AND DISTRIBUTION:

Trading and Distribution skills are key to success of any treasury. Trade-ability provides
liquidity in various instruments and generates non-fund based revenues. With increasing
competition among banks , spreads in traditional banking products are decreasing
regularly. On the other hand cost of various liabilities is rising. As a consequences,
traditional fund based income of bank is gradually being eroded. With the onset of
reforms it is also seen that there is increasing trend towards dis-intermediation in the
financial market. Borrowers directly accessing market through the medium of debt
instruments like Cps , debentures etc or through FOREX/external borrowings.Moreover
fund based exposures require balance sheet growth and that in turn entails higher capital

adequacy requirement. In such a situation , non fund based revenue gains greater
importance .It is here that the strength of treasury lies. It can help to transform a
borrower of funds to issuer of debt. It can then distribute these debts instruments to
investors who were till now only depositors. This will enable the bank to earn a fee
income without any balance sheet growth and without locking up funds of its own.
Trading in instruments creates more liquidity and increase investor appetite. This has
been the trend in financial markets the world over. Securitization of debt is likely to be
an important growth area in the Indian market too in the near future.
4)LIQUIDITY AND BALANCE SHEET MANAGEMENT:
The ongoing reforms have provided the banks freedom to price most of their asset and
liabilities by themselves although there exists a broad band specified by the RBI. The
pricing of treasury assets and liabilities which form a critical mass of the balance sheet ,
is therefore ,very crucial to the balance sheet management. It is well known that the
balance sheet management is a dynamic and proactive process. It requires continuous
monitoring, analysis of market changes and controls.
An important aspect of balance sheet management is Liquidity Management.
Liquidity essentially means the ability to meet all contractual obligations as and when
they arise ,as well as the ability to satisfy funds requirement to meet new business
opportunities. Liquidity planning involves an analysis of all major cash flows that arise
in the bank as a result of changes in the assets and liabilities and projecting these cash
flows over the future. Ideally , balance sheet projections should be prepared for a twelve
month period on a monthly basis. This would be in the nature of a monthly rolling
forecast. This will enable treasury manger to identify any potential liquidity problems
that may arise in the future, such that corrective actions can be taken to maintain
adequate liquidity. Liquidity analysis involves a study of the maturity profile of existing
assets and liabilities over which is superimposed the impact of transactions that are
planned for the future.
Effective liquidity management requires careful attention to balance sheet
structure and growth. A balance sheet that is growing rapidly needs careful scrutiny to
determine whether the liquidity of the bank is being adversely affected. Very often banks
put up excessive asset in the form of cash credit loans or investments in securities
without having matching source of funds similar tenure. This mismatch in the maturities
of assets and liabilities may result in the bank being subjected to liquidity risk, because

the bank starts depending chronically and excessively on the most easily accessible
source of fund that is the inter bank call money market. This the bank may end up
funding long-term assets through overnight borrowing on an ongoing basis. It should be
borne in mind that dependence on the call market may be advisable due to the sharp
fluctuations in market rates as well as volatility in the availability of funds in the market.
4)FUND MANAGEMENT:
Fund management by treasury involves providing balanced and well diversified liabilities base to fund
the various assets in the balance sheet of the bank . Diversified liabilities imply raising funds from
variety of sources , through a variety of instruments and for variety of tenures. Customers deposits are
often the most suitable source of fund for bank , due to actuarial and behavioural reasons. At the other
end of the spectrum are the funds obtain from interbank money market which are very short term in
tenure and volatile as regards rate as well as availability. The treasury has to decide on an optimal mix
of funds from various sources to ensure that there is no excessive dependence on any single category. It
is also advisable that the maturity profile of assets conform broadly to that of the liabilities ,so that
there is no large structural mismatch in the balanced sheet that can lead to liquidity problems.

3)Asset-Liability Management
4)Risk Management
5)Transfer Pricing
6)Derivatives Trading
7)Arbitrage
8)Capital Adequacy

Structure Of Treasury:

Figure for treasury structure from ppt.

Figure for dealing room,mid office and back office

The Dealing Room:

The Treasury has a responsibility to manage market risk in accordance with instructions received from
the banks ALCO.
This is undertaken through the Dealing Room which acts as the banks interface to domestic and
international financial markets.
it is the clearing house for such risk and has the responsibility to manage the market risk taken in all
areas of the bank, on behalf of customers, and on behalf of the bank, within the policies and limits
prescribed by the Board and RMC.
For this reason significant authority is given to the Treasurer, and the Dealing Room staff to commit the
bank to market risk.
Thus controls over the activities of these staff are critical to ensure that the bank is protected from
undue market risk.

Middle Office:
The duties and responsibilities of the Middle Office vary from bank to bank.
Middle Office is a relatively new concept in the risk management structure, not all
banks will have formal Middle Office structures.
Middle Offices are in place primarily to provide market risk monitoring, evaluation and
reporting for ALCO and Treasury.
The Middle Office is the first line of review of dealing activities and it provides timely
assessment of dealing activities and consolidated market risk exposures of the bank.
The Middle Office must report to ALCO independent of the Treasury. It is inappropriate
that any access to Middle Office systems is given to Treasury staff.

As the Middle Office is the primary source for market risk analysis in the bank, it is

essential that segregation of duty principles are clearly maintained.

Middle Office provides key market risk analysis to Dealing Room management and
ALCO, its reporting line to the ALCO Secretariat must be separate from Treasury to
ensure independent risk evaluation.

THE BACK OFFICE:

The key controls over market risk activities, and particularly over Dealing Room
activities, are exercised by the Back Office.
It is critical that both a clear segregation of duties and reporting lines are maintained
between Dealing Room staff and Back Office staff, as well as clearly defined physical
and systems access between the two areas.
The Back Office and Middle Office, where present, are also entrusted with the
responsibility of ensuring the timeliness and completeness of data in regard to market
risk activities and providing ALCO and management with verified reports from the
banks books as defined in bank policy and procedures.
Key controls performed in this area are :
Key controls performed in this area are

The control over confirmations both inward and outward.

All confirmations must be verified by Back Office staff for consistency with Dealing
Room forms and reports. Any follow up of discrepancies between the two (including
confirmations received where no dealers record is provided) must be performed
independently by the Back Office in a timely manner.
Confirmations must under no circumstances be sent out by or received by the dealing
area.

The control over dealing accounts, vostros and nostros must also be timely, accurate and

discrepancies followed up independently and in a timely manner.

Revaluations and marking-to-market risk exposures, where required by policy and RBI
directives, must be carried out by the Back Office, for bank records, from rates received
independent of the Dealing Room
Monitoring and reporting of risk limits and usage including open positions, product
usage, counterparty settlement, overall limits and portfolio limits are the responsibility
of the Back Office or Middle Office, where in place.
Reporting prompt resolution of exceptions and excesses are vital responsibilities of
the Back and Middle Offices and key control considerations.
Control over payments systems, particularly those related to Dealing Room
activities is the responsibility of the Back Office. Under no circumstances should staff
with access and/or authority to the Dealing Room or dealing mechanism have any
authority, responsibility or access to bank payment systems

ADVANTAGES OF TREASURY MANAGEMENT:

Is to improve portfolio profitability, risk insulation and also to synergise banking assets
with trading assets.

This is achieved through efficient utilisation of funds, cost effective sourcing of

liability, proper transfer pricing, availing arbitrage opportunities, online and offline
exchange of information between the money and forex dealers, single window service to
customers, effective MIS, improved internal control, minimisation of risks and better
regulatory compliance.

An integrated treasury acts as a centre of arbitrage and hedging activities.

It seeks to maximise its currency portfolio and free transfer of funds from one
currency to another so as to remain a proactive profit centre.

RISK MANAGEMENT TECHNIQUE:

VAR Model- Estimated maximum potential loss of a portfolio
Back Testing - Method of examining whether the VAR numbers being produced
reasonably reflect reality
Stress Testing- overcome the shortfall of VAR models, manage risk better in more
volatile and less liquid markets

HOW MONEY MARKET IS RELATED TO TREASURY MANAGEMENT:

MONEY MARKET AND ITS IMPORTANT INSTRUMENT:

Call and Notice Money

Treasury Bills

Commercial Papers (CPs)

Certificates of Deposit (CDs)

Repurchase Agreements (Repos)

Collateralised Borrowing & Lending Obligation (CBLO)

FOREIGN EXCHANGE:

SOURRCE OF TREASURY PROFIT:

from pdf