This presentation broadly covers Mumbai University MMS Semester IV - Elective - Treasury Management. It starts with History; factors leading to modern treasury management; main objectives; Integrated treasury; departments of treasury - Front, Middle and Back office. www.abhijeetdeshmukh.com

1. Treasury Management –
A Perspective
ABHIJEET DESHMUKH
WWW.ABHIJEETDESHMUKH.COM

2. Treasury Management
Definition of Banking as per Banking Regulation Act 1949 Section 5 B :-
“the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable
on demand or otherwise, and withdrawable by cheque, draft, order or otherwise.”
 The department handles the bank's investments in securities, foreign exchange,
asset/liability management, risk management and cash instruments.
 The treasury department of a bank is also responsible for balancing and managing the daily
cash flow and liquidity of funds within the bank.
 Treasury generally refers to the funds and revenue at the disposal of the bank and day-to-
day management of the same.
 The treasury acts as the custodian of cash and other liquid assets.
Definition:
 The art of managing, within the acceptable level of risk, the consolidated fund of the bank
optimally and profitably is called Treasury Management.
 It is the window through which banks raise funds or place funds for its operations.

3. History of Bank Treasury
Traditionally in 70’s & Early 80’s the Role of Treasury in Indian Banks was confined to following
 To ensure CRR (Cash Reserve Reserve) maintenance
 SLR maintenance
 Investment in GOI & State Government bonds
 Forex confined Import & Export Finance & Remittances & Deposits
Market Conditions were :-
 Regulated Interest rates (Deposit & Lending rates) by RBI
 Regulated RBI auction system for Market Borrowing
 Presence of FERA & highly controlled Forex market
 No Liquid Money Markets
 No Risk Management tools and Derivative Products even for Hedgeing.

4. Factors Leading to Evolution of Banks Treasury
 1985 – Committee on Working of Monetary Systems
 1987 – Working Group on Money Markets
Above initiated various steps to reform the money market to develop a infrastructure and
instrument to widen and deepen the market which was not reflecting the position of true
liquidity in the system
 Discount and Finance House of India (DFHI), a money market maker, was formed to provide
institutional mechanism to market player by dealing in short term money market
instruments like T-Bill & Bill discounting
 Introduction of Commercial Paper and Certificate of Deposit
 Interest Rate (Bank Deposit and Lending Rates) Regulation was taken off in stages and
completely removed by May 1989
 LIC and All India Financial Institutions were allowed in Call and Notice money market as
lenders.
 Revised Repo’s were introduced

5. Factors Leading to Evolution of Banks Treasury
 Subsidiary General Ledger account (SGL), a demat account for holding Gsec was
introduced
 Delivery Vs Payment (DVP) was introduced to streaming online settlement & counterparty
risk of Gsec Deal along with NDS Platform for trading.
 RBI introduced transparent and competitive auctions, thus aligning yields to actual market
rates.
 RBI introduced monetary liquidity tools like OMO & LAF(Repo)
 Post Liberalization, the process of deregulation and financial market liberalization
expedited
 Introduction of FEMA in place of FERA
 De-regulation of market by shifting to market determined Exchange rates.
 Introduction of Derivatives products and permission to Corporates and Banks to use them
for Risk Management.

6. Factors Leading to Evolution of Banks Treasury
 Permission to India Corporates to raise funds in International Markets resulting financial
instruments like Global Depository Receipts (GDR); Foreign Currency Convertible Bonds
(FCCB) and External Commercial Borrowing (ECB)
 Permission to invest funds mobilized through Foreign Currency Non-Resident (FCNR);
Exchange Earner Foreign Currency Account (EEFC); Resident Foreign Currency Account
(REC) in overseas market. It was the key for Indian Banking system and for integrating the
markets.
 Permission to Banks to initiate Cross Currency positions overseas
 Allowing Banks to Borrow/Invest overseas 25% initially to now 100% of their unimpaired
Tier I capital as at the close of the previous quarter or USD 10 million (or its equivalent),
whichever is higher, without RBI permission.
 “The Investment portfolio was viewed as an alternative to the Credit portfolio,
which was historically source of profit for banks and it resulted in emergence of
specialized Treasury Management”

7. Globalization Lead to
 Introduction of FDI, opening of many sectors, FII Inflows as lead to massive cross border
financial inflow and emergence of diverse, deep, liquid and diligent Financial products and
Equity markets.
 Distinction between Short term and Long term interest rate is got blur. Corporates can
raise Long term funds at short term rates
 Integration of Indian and Global Financial Markets and both got in sync with each other.
 Narrow spreads between Bid and Offer rates & Forward rate is a now purely the Inflation
interest rate differential
 Interest Rate Volatility accurately captured by the Gsec yields Number of primary dealers
become active players resulted in deepening of debt markets and eliminating counterparty
risks
 Customized Financial & Derivative Products Innovations for Trading and Hedging
 Emergence of Indian Corporates in Global Markets by acquiring major companies in
overseas markets requiring advisory support like M&A, Merchant banking from Indian
Banks.

8. Objective of Treasury Management
Funds
Management
Profit Center
Liquidity
Management
Asset Liability
& Risk
Management

9. Fund Management
Fund Management is estimating the Liquidity Requirement of a Bank and meeting those in a
Cost Effective manner.
 Deployment of Surplus funds
 To raise resources at competitive rates from domestic & global markets on current and
forward basis.
 Effective manage Forex funds and liabilities
 Liquidity Requirement Planning for various periods with acceptable risk tolerance
 Effective daily Cash Management / working Capital management due to Deposit inflow
 Focusing on increasing CASA Deposits.
 Customizing Deposit Products
 Investing in various Financial Products from Fund management perspective

10. Liquidity Management
Liquidity Management is the ability of Fund the asset and meet the Financial Obligations
 Maintenance of Regulatory Reserves – CRR & SLR – as mandated by RBI on current and
planning basis.
 Raising of Tier I & Tier II
 Create the Capital Reserves and for NPA’s.
 Meeting Capital Adequacy Ratio as per Basel Norms
 Maintain the Liquidity Ratio by investing 30 days cash flow in Quality and unencumbered
Short term liquid instruments like CP and CD.
 Hedge the Liquidity Risk and have policy framework around it
 Managing short term funds across currencies

11. Asset Liability Management
ALM is a monitoring the institutions liquidity profile
 Constitute the ALCO (Asset Liability Committee) and draft ALCO Policy with acceptable risk
tolerance
 Monthly conduct ALCO meeting and assess Asset Liability mismatches against the risk limit.
 Strive for Funding Long term Assets through stable Long term liabilities
 Monitor the Liability patterns for Liquidity & maturity perspective and work for quality short
term funds.
 Regularly perform Liquidity profile of Investment Portfolio other than Liquid assets.
 Hedge against risky proprietary investment products & use derivatives to manage risks in
client’s business
 Maintain Transfer Pricing while dealing with own subsidiaries.

12. Profit Center
Profit Center includes all the activities directed towards increasing the profitability of the bank
with laid down Risk framework
 Investment – It is done with a Long term perspective. It includes investment in SLR, Non
SLR, Derivatives, Money Market, Equities, Forex. The aim is to earn higher yield than the its
cost of funds.
 Proprietary Trading – It is a short term perspective to make trading profit many a time
intra-day profit from underlying temporary movements in the securities and forex market.
For E.g. Gsec trading.
 Spreads – Hunting for opportunities of spreads with the intra-securities markets. For e.g.
Bank can borrow short term at 5% and invest is CP for 7%
 Arbitrage: Looking out for arbitrage opportunities in Forex market / inter-market
opportunities. For e.g. INR Deposits invested in LIBOR+Spread in US/INR using buy/sell
swaps
 Advisory / Customer Services – offer Fee based customized products and advisory servicers
like Merger and Acquisition; Merchant Banking, Derivative structures, Corporate Forex,
Import/Export Finance, Wealth Management & other services

13. Structure of an Integrated Treasury
 The treasury department is manned by the front office, mid office, back office and the
audit group. In some cases the audit group forms a part of the middle office only.
 The dealers and traders constitute the front office. In the course of their buying and
selling transactions, they are the first point of interface with the other participants in the
market (dealers of other banks, brokers and customers).
 They report to their department heads. They also interact amongst themselves to exploit
arbitrage opportunities.
 A mid office set up, independent of the treasury unit, responsible for risk monitoring,
measurement analysis and reports directly to the Top management for control.
 This unit provides risk assessment to Asset Liability Committee (ALCO) and is responsible
for daily tracking of risk exposures, individually as well as collectively.
 The back office undertakes accounting, settlement and reconciliation operations.
 The audit group independently inspects/audits daily operations in the treasury
department to ensure adherence to internal / regulatory systems and procedures.

14. Integrated Treasury Structure
Chief / Head
Dealer
Dealer
(Proprietary)
Forex
Money
Market
Investment
Desk
Hedge
Desk
Derivative
Desk
Securities
Trading
Equity
Trading
Advisory
Services
Chief
Risk Officer
Dealer
(Customer)
Forex
Money Market
Securities
Trading
Risk
(Dealing Room)
ALM Support
Group
Compliance
(Dealing Room)
Accounts
Training
Market
Research
Treasury Head
Policy and
MIS
Internal Audit
Market
Risk

15. Integrated Treasury function
SLR/CRR
Equity/MF/Venture
Raising of Tier
II capital.
Derivatives. Foreign
Exchange
Call/Notice/Term
Money, CP, CD,
Front office/Mid
Office./Back
office.
Management/L.A.F
/CB LO/Market
repo/FC Buy sell
swap/ALM
Corporate
Debt
/Debenture.

16. The Treasury Structure
FRONT OFFICE/
DEALING ROOM
BACK OFFICE/
TREASURY
ADMINISTRATION
MID OFFICE/
RISK
MANAGEMENT

17. The Front Office / Dealing Room
 The Treasury has a responsibility to manage market risk in accordance with
instructions received from the bank’s ALCO.
 The Dealing Room is the brain of the bank which manages Investment Portfolio of the
entire bank.
 This is undertaken through the Dealing Room which acts as the bank’s 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.
 The dealers has to follow strict Dealing room guidelines and ethics.

18. The 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

19. 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 bank’s books as defined
in bank policy and procedures.
 Monitoring and reporting (including Regulatory Reportinf) 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.
 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.

20. The Back Office
 Reporting prompt resolution of exceptions and excesses are vital responsibilities of the
Back and Middle Offices and key control considerations.
Key controls performed in Confirmation Management 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 dealer’s 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 (other bank money, held by us) and nostros
(our money, held by the other bank) 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.

21. Investment Committee
 The Investment Committee is constituted in terms of Board approved Investment
Policy every year.
 It is also mandated by RBI.
 The Committee is headed by the Executive Director. Other members are GM (Credit),
GM (Treasury), GM (MASD), GM (RMD), DGM (Treasury) and AGM/ CMs (Front Office,
Treasury).
 The Committee discusses/ reviews the prevailing market conditions, likely trends in the
financial markets, economic scenario, interest rate / liquidity scenario etc. and
accordingly formulates broad investment strategy every day.
 The decisions taken by Investment Committee are properly recorded and meticulously
complied with.

22. Statutory Liquidity Ratio (SLR)
 Sec 24 of BR Act
 Till recently could be stipulated to minimum of 21.5 % of NDTL
 Recent Amendment to BR Act has removed the lower ceiling for maintenance of SLR
 In Central/ State G.Secs and Other approved Securities, Cash balances with RBI, SBI, &
identified banks, cash in hand & Gold
 Approved Securities as mentioned in Sec 5 of BR Act
 SLR can be kept more than required

23. Cash Reserve Ratio (CRR)
 Under RBI Act Sec 42.
 Recent Amendment to RBI Act has removed the lower and upper ceilings for
maintenance of CRR
 Presently stipulated at 4.25% of NDTL
 CRR kept in Current A/c with RBI at 18 Designated Centers
 Daily minimum balance required to be maintained is 70% of average fortnightly
requirement.
 For e.g. if total CRR balance required to be maintained is Rs.100 cr per day, then on a
cumulative product basis, banks have to maintain at least Rs.1400 cr during a
reporting fortnight, but on any particular day the balance should not be less than Rs.
70 cr.
 RBI is not paying any interest on balances maintained as CRR.

24. Thank You