Sie sind auf Seite 1von 91


Summer Internship Project Report
Study of Treasury Management Banking in Sector:
Reference To: SBI and ICICI Banks
In the partial fulfillment of the Degree of
Master of Management Studies under the University of Mumbai
Mr. Anand.P.Mishra
[Roll No: B-36]
Specialization: Finance

Under the Guidance of

(Mrs)Prof. Raghukumari
(Internal Guide)

Aruna Manharlal Shah Institute of Management and Research

Ghatkopar [W], Mumbai-86

Acknowledgement :-
No Learning is proper and effective without Proper Guidance Every study is incomplete

without having a well plan and concrete exposure to the student. Management studies are not

exception. Scope of the project at this level is very wide ranging. On the other hand it provide

sound basis to adopt the theoretical knowledge and on the other hand it gives an opportunities

for exposure to real time situation.

This study is an internal part of our MBA program and to do this project in a short period was

a heavy task.

Intention, dedication, concentration and hard work are very much essential to complete any

task. But still it needs a lot of support, guidance, assistance, co-operation of people to make it


I bear to imprint of my people who have given me, their precious ideas and times to enable me

to complete the research and the project report. I want to thank them for their continuous

support in my research and writing efforts.

I wish to record my thanks and indebtedness to (Mrs) Prof. Rghukumari Faculty, college

Aruna Manharlal Shah Institute of Management Research, whose inspiration, dedication and

helping nature provided me the kind of guidance necessary to complete this project.

I am extremely grateful to management of Institute of Technology & Management, Ghatkopar

for granting me permission to be part of this college. I would also like to acknowledge my

parents and my batch mates for their guidance and blessings.

Date: -June 2011


Table of contents:-
Particulars Description Page Nos.
CHAPTER 1:- Introduction to project 1-5
CHAPTER 2:-` Litrature Review 6

CHAPTER 3:- Research Methodology 8-11

Objective of study
Scope of study
Research Methodology
Research design
CHAPTER 4:- Company Profile 12-16

CHAPTER 5:- Treasury Management 17-78

5.1 Overview of banking industry

5.2 Principal regulation of Indian banking sector

5.3 RBI - Regulation

5.4 Hierarchy of banking industry in India

5.5 TM an overview

5.6 Functioning of treasury department in banks

5.7 Objective of TM

5.8 Financial aspect of a function of a treasurer

5.9 Organizational structure of treasury

5.10 Elements of TM

5.11 Nature of treasury Assets & Liabilities

5.12 Treasury products & services

5.13 Types of risks associated with treasury & their


5.14 Risk management RBI Guidelines/Norms

5.15 Future Scope/Challenges in TM

5.16 Role of IT in TM




1.1 Overview of TM in SBI

1.2 Forex Treasury (FX)

1.3 Overseas treasury operations


Executive Summary:-
The project is all about Treasury managementoperations 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


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 and ICICI treasury.



1.1 Introductionof Treasury Management:

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.




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.


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.

1.4Integrated Treasury:

We see integration of segmented financial markets- money 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.


Litrature Review


2.Literature Review

Kane ,Jay(Oct2006),Senior vice president global service at,The article focuses

on the use of electronic treasury management in maximizing liquidity. It states that

with automated accounts payable and receivable systems, businesses can reduce

errors and costs, as well as lessen exposure to check fraud. It comments on the use

of automated clearinghouse networks and purchase cards as alternatives to paper

checks. It mentions the use of remote deposit service to scan checks and transmit an

electronic image of the check to banks for deposit. It comments on the use of

imaging technology in other check transfer services

CFO and CIO, Joe Money Machinery Co., Birmingham, (June 2010), The article

offers information on treasury and cash management services provided by banks

that public accounting firms should consider to ensure that they are getting the most

from their banks. Among the services provided by banks include automated

clearing house (ACH) transactions, lockbox and zero-balance account (ZBA). Ways

on how banking clients can find a bank that offer treasury and cash management

services at a competitive price are discussed.

Lagre, Jack and Wolfi (May 2011) This article looks forward to the future of cash

and treasury management systems and services in Europe. It expects the Internet to

drive the future of such systems and services. It highlights the importance of cloud

computing and downloadable applications to the sector.


Research Methodology


3.1 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 knowledge of how ICICI Bank manages its treasury.

To have knowledge of how SBI manages its treasury as SBI is the major contributors

in money and for-ex market.


3.2 Scope of the Study:

The scope of the research includes the working of treasury management in banking sector

by making a comparison between two banks that is ICICI bank and STATE BANK OF

INDIA by following the RBI guidelines formulated for Treasury Management.

3.3 Research Methodology:-

REDMEN & MORY defines,Research as a systematized effort to gain now


It is a careful investigation for search of new facts in any branch of knowledge. The

purpose of research methodology section is to describe the procedure for conduction the

study. It includes research design, sample size, data collection and procedure of analysis of

research instrument.

Research always starts with a question or a problem. Its purpose is to find answers to

questions through the application of the scientific method. It is a systematic and intensive

study directed towards a more complete knowledge of the subject studied.


According to Kerlinger, Research design n is the plan structure & strategy of investigation

conceived so as to obtain answers to research questions and to control variance.

According to Green and Tull, A research design is the specification of methods and

procedures for acquiring the information needed. It is the overall operational pattern or


framework of the project that stipulates what information is to be collected from which

sources by what procedures.

It is found that research design is purely and simply the framework for a study that

guides the collection and analysis of required data.

Research design is broadly classified into:-

Exploratory research design

Descriptive research design
Casual research design

This research is an exploratory research - The major purpose of this research is to

understand the working of treasury management.


Company Profile


Rajshree Industry

Contact Person Mr. Ramswaroop R Thard

Address 3c, Jaihind Building, Office No. : 4, Dr. Atmaram

Merchant Road, Bhuleshwar, Mumbai

Phone +91-22-22019380/32995190

Fax +91-22-22010011

Email ID


Name of CEO Mr. Ramswaroop R Thard

Year of 2003

Nature of Business Manufacturer, Exporter & Supplier

No. of Employees 130

Annual Turnover Rs.40 Cr


Market Covered India, Australia, South Africa, UAE, Kuwait

RAJSHREE INDUSTRIES is a Mumbai based company that is actively engaged in the

manufacturing, exporting and supplying of various disposable food service products. As

disposable ware is easy to use and have no maintenance they have demand worldwide. We

offer a range of disposable products like disposable Plastic Cups, Plates, Trays, Bowls,

containers, cup-lids, etc. we have been able to conquer an esteemed clientele in India as

well as in other parts of the world like India, USA, Kuwait, South Africa and Australia.

Our products are highly biodegradable and safe to use.

Our trademarks Natraj Satyam Samrat&"King" has a strong presence in the Indian

market. Our range of Plastic Dinnerware is made from first rate raw materials. The

products are made under hygienic conditions that assure their purity. They are available in

different sizes to meet the requirements of the clients. Our ultimate aim is to gain the

goodwill, customer confidence & meet all the deadlines set by our customer on the quality

front and provide them with the best of service. We are recognized as one of the Plastic

Drinking Cups Manufacturers and Food Packaging Trays Exporters from India.

Disposable products are greatly in demand because of their convenience of use.

RAJSHREE INDUSTRIES is a Mumbai based company that is a house of various

disposable plastic products. The different products that we provide include Party

Disposable Plates, Biodegradable Tablewares, Disposable Containers Disposable Bowls,

Disposable Trays, Disposable Cups, etc. We are growing at a consistent rate since our

commencement in the year 2003 under the guidance of our visionary CEO, Mr.


Ramswaroop. R. Thard. We take immense pleasure to be counted among the renowned

Disposable Serving Trays Manufacturers in Maharashtra, India.


our infrastructure includes the extruders, thermoforming machines, printing machine and

the variety of moulds. We have manufacturing facility located at four different locations,

three at Daman & one at Bombay Nasik highway. We have a total constructed area of

60,000sq.ft. Our machines are procured from best available source in India & China. We

are equipped with seven extruders with total combined capacity to extrude 1500kg/hr. We

have eighteen forming machines which are latest of its kind and are called as high speed all

servo machines. These machines can run at double the speed of the conventional machines.

For the decoration on the cups we have five printing machines (printing capacity 10 lac

pieces / day) which can do a job of six colors U.V.Printing (inks procured from Zellar,

Germany). We are equipped to print on PS and PP material.

Our Team::

The key members involved in managing our company chores are :

Account & Finance

Mr. Radheshyam. J. Thard and MR. Vijay Kumar Thard
Mr. RaghunandanThard and Mr. Sunil Sharma
Production & Quality Control
Mr. Naresh Kumar Thard, Mr. SarojBakshi and Mr. Harish Thard

Mr. RamswaroopThard and Mr. Narayan Jha


Our Clients::We have established an esteemed clientele that includes:

1 GCMMF (Amul) 15 Patna Dairy

2 Reliance Dairy Ltd 16 Muzaffarpur Dairy
3 Good Day Foods 17 Barauni Dairy
4 Nestle India Ltd 18 Barauni Dairy
5 Mc. Donalds 19 Dinshaws
6 Mother Dairy 20 Aristo Pharmaceuticals Ltd
7 Mother Dairy 21 Cafe Coffee Day
8 Baroda Dairy
9 Orissa Dairy
10 Walke Dairy
11 Metro Dairy
12 Hindustan Coco-Cola

13 Aditya Birla Retail
14 Hindustan Lever Limited
Note::Apart we have a network of distributors in all the major cities in India and in various

parts of the world


Treasury Management In Banking sector

5.1 Overview of Banking Industry:-



Britannica defines a bank as: - A bank is an institution that deals in money and its

substitutes and provides other financial services. Banks accept deposits and make loans and

derive a profit from the difference in the interest rates paid and charged, respectively.

The banking sector world over has come into increased focus in the recent years. The

problems in Southeast Asian economies, the recessionary trends in the Japanese economy,


the financial sector problems encountered in Latin American economies and more recently,

in some central European economies have provided an evidence of how a weak banking

sector can undermine confidence in macroeconomic policies. Developing countries

including India, have been focusing attention on introduction of structural reforms, stricter

prudential and supervisory of the financial system.

The banking sector accounts for over half of the assets of the financial sector and remains

dominant in India. The financial sector reforms as part of the broader canvas of economic

reforms, in the country, have led to strengthening of the banking sector in the last decade.

5.2 Principal Regulations of Indian Banking Sector:

Reserve Bank of India Act, 1934

Banking Regulation Act, 194

Foreign Exchange Management Act, 1999

Reserve Bank of India (RBI) Circulars & Notifications

Policy of Government for Foreign Direct Investment (FDI) in Banking Sector

5.3 Reserve Bank of India- the Regulator:-


The Reserve Bank of India (RBI) is the primary regulator of banks in India, which are

governed by the Banking Regulation Act, 1949. Banks are also acquired to conform to the

provisions of the Reserve Bank of India, 1934, the Foreign Exchange Management Act,

1999, the Companies Act, 1956 and the guidelines of the Foreign Exchange Dealers

Association of India and the Fixed Income and Money Market Dealers Association.

The RBI continuously monitors developments in the financial markets in India and abroad

and takes monetary and administrative action as may be considered necessary. The RBI

conveys its policies and instructions to the banks through the circulars issued from time to


5.4 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


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 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.


(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


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.


5.5 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 optimize 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


(b) Liquidity & Funds Management:

It involves (i) analysis of major cash flows arising out of asset-liability transactions (ii)

providing a balanced and well-diversified 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) 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.

(d) 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.

(e) 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.

(f) 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


(g) 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.

(h) 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.

(i) 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.

(j) 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.

(k) 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.

(l) 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.

(m) 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 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.

(n) 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.

(o) 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.

(p) Derivative Products:

Treasury can developInterest 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.

(q) 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.

(r) 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.

(s) 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.

(t) 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


(u) 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.

5.6 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 non-treasury

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

To offer comprehensive value-added treasury and related services to the banks


To act as profit center for the bank.

5.7 Financial Aspect of Functions of a Treasurer

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 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.

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.


5.8Organizational 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 level:-

Tier I Dealing Desk (Front Office):

The dealers and traders in different markets- money, 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.

Head of Treasury

Chief Mkt. Head Head of

Deale Intelligenc of Accountin
r e Research Settlem g

Audit /
Mana Reportin
ger g

Manage Account
r 33 s/
Settlem Monitor

Deal Deale Dealer-

er - r- For- Corp.
Rup ex. Merchan

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


5.9 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 risk-free. 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


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. 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.

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


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

Interbank 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 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


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.

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 short-term 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 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 UsancePromissory

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 up to 90 days) on the basis of

genuine trade bills, discounted by the discounting bank.

5.10 Nature of Treasury Assets and Liabilities:


Banks balance sheet consists of treasury assets and liabilities on the one hand and non-

treasury 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.

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.

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.



Forward and Forward-Forward (simultaneous purchase and sale of a currency for two

different forward maturities).

Foreign Currency Placements, Investments and Borrowings (in accordance with RBI



2. Merchant(Initiated In Branches, Arranged By For-ex Treasury)

Preshipment Foreign Credit (PCFC).

Foreign Currency Bills Purchased (FCBP).

Foreign Currency Loans (FCLs)/FCNR (B) Loans.

Post shipment 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.

5.11 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

thereby avoid the price risk.

Forward Rates = 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 interest payments (either fixed or

floating) are exchanged throughout 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 reduce the 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 a 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,


5.12 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.

Legal risks due to inadequate definitions and coverage of covenants and

responsibilities of the bank and counterparty in contracts and agreements.



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


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.

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 honor his interest payments and/or principal repayment

obligations. But, in modern financial markets, it includes non-performance 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



Better credit appraisal. Careful analysis of cash flows of the business before


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

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.


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.

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 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.

8. Legal Risk.

(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 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:

Compliance with approved open position limits.

Compliance with overnight exposure limits.

Compliance with aggregate and individual gap limits.

Compliance with value at risk norms.


5.13 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.

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.

5.14 Future Scope/Challenges In Treasury Management

Treasury Management is increasingly being viewed as a specialized 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 free-market

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:

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

for-ex 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


Treasury and For-ex 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 For-

exManagement 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 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 every day 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

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 Organization 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.

5.15 Role Of Information Technology In Treasury Management

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


Government of India Dated Securities


State Governments securities


Call/Notice/Term Money

Commercial Paper

Certificates of Deposit


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



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 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


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).

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-to-end 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 used, 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.


For-ex 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.)

Similarly, Real Time Gross Settlement [RTGS] has already been introduced, which is a

completely electronically propelled countrywide payment system.






SBI's relationships with over 700 correspondent banks are leveraged in extracting

maximum value from treasury operations. SBI's treasury operations are channeled through

the Rupee Treasury, the For-ex Treasury and the Treasury Management Group.


The Rupee Treasury deals in the domestic money and debt markets while the For-

ex 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.


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.


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.


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.


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 state-of-

the-art technology and information systems. SBIs relationships with over 700


correspondent banks and institutions across the globe enhance the strength of the

Forextreasury.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.


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.

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


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.


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


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.



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 anyone. SBI do follow RBI

guidelines for treasury management properly which they think that it is well


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

treasury with low risk and proper function of treasury assets and liabilities. It also has

good career opportunities.



Treasury Department of ICICI Bank

ICICI BANK is the very consistent player in the new private sector banks. New private

sector banks to withstand the competition frompublic sector banks came up with

innovative products and superiorservice.Within this business, the bank has three main

product areas - Foreign Exchange and Derivatives, Local Currency Money Market & Debt


Securities, and Equities. With the liberalization of the financial markets in India, corporate

need more sophisticated risk management information, advice and product structures.

These and fine pricing on various treasury products are provided through the bank's

Treasury team. To comply with statutory reserve requirements, the bank is required to hold

25% of its deposits in government securities. The Treasury business is responsible for

managing the returns and market risk on this investment portfolio. ICICI BANK earned

from the Interest from Advances 51.14 % Interest from Investment 27.12 %, bank

earned commission

exchange and brokerage of 15.25 %. These are the major earningsources of the bank. Bank

also earned from the Forex and Derivatives and some other Interest Income.

Bank spent 39.75 % on Interest Expense, 30.27 % on OperatingExpense and 14.58 % on

Provision. Bank also spent Dividend andTax on dividend, Loss on Investment, Tax.

As we discuss above that balancing is must between these two foreveryorganization

especially in the era of globalization where thereare stiff competition among various

market players.

ICICI Banks treasury income through sale of investments saw a profit of Rs256 crore in

2009 against a loss of Rs77.6 crore in the corresponding of last year fiscal while income

from foreign exchange and derivative business dipped to Rs137.8 crore from Rs157.4




Treasury management of ICICI Bank is managing assets and liabilities of

treasury, managing deposits and advances, managing working capital and also managing

foreign currency. But foreign exchange is managed at a higher risk.

The bank has an integrated organization structure where in they have sub processes at each


They believe in customer satisfaction most rather than competition in treasury market.

The procedures for treasury management operation in bank are different from other

organization. Management of banks is quite similar to organizations but in case of

organization they have to look into at companys interest more and bank has to look


The banks set their processes according to RBI guidelines and follow them in daily

transactions of treasury.

The guidelines which provided by RBI are not strictly formulated. RBI has formulated

guidelines keeping in mind that our economy should not suffer.

The bank never compares it process with any other bank because every bank has some or

the other risks involved and you may find in banks almost same processes are required.

They have entered in each process and found themselves at a success; they aim the

management at a peak.



Data Analysis


Primary Data:: Primary data is based on interview conducted in various banks.

These banks are
1) Central Bank of India. Khar Branch.
Contact Person :: A.G. Shah
Designation :: Asst.Manager.

2) State Bank of India, BKC Branch

Contact Person :: IrranaMangalure
Designation :: Asst Manager

3) ICICI Bank:: Mahim Branch

Contact Person :: Mr.ArunIndulkar
Designation :: ASM.

Secondary data::


Secondary data is the data which is already collected by someone and complied for

different purposes which are used in research for this study. It includes:-


6.2 Limitation of the Study:

Study allotted has a page constraint. The information required for in-depth study is

not possible.

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

organizationaltreasury management or having a comparative study between two


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.




The project has given an insight into the various aspects of treasury management namely:

Treasury operations of every bank are most probably same. The process may differ from

one bank to another bank as every bank has the own policies for management of treasury.

Risk involved in treasury management is very high because of which they do not disclose

most of the information.

Mainly there is operational risk and financial risk and they aim for a well integrated and

innovative management of treasury with low risk and proper function of treasury assets

and liabilities.

There is a future scope in treasury management and role of information technology in

treasury management.

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 anyone. 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 treasury

with low risk and proper function of treasury assets and liabilities.

ICICI has their own procedure for treasury management which is followed very well by


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

The process is very complicated that one cannot understand it easily. Training of 5 to 6

months is required for every employee of treasury department.

As treasury operations are important part of every bank they set certain rules and

regulation as per RBI guidelines and which will become beneficial for the bank also.




8.1 Recommendations And Suggestions:-

As per RBI guidelines every bank should frame and implement a suitable

investment policy to ensure that operations in securities are conducted in

accordance with sound and acceptable business practices.

Banks should have strong internal control systems in place considering the various

factors such as the volume, volatility, fraud and errors etc. As per the guidelines of

the Reserve Bank, banks should have sound internal controls.

The internal audit department should audit the transactions in securities on an

ongoing basis, monitor the compliance with the laid down management policies

and prescribed procedures and report the deficiencies directly to the management of

the bank.
As per the RBI guidelines, Banks should undertake a half yearly review (as of 30

September and 31 March) of their investment portfolio, which should, apart from

other operational aspects of investment portfolio, clearly indicate and certify

adherence to laid down internal investment policy and procedures and Reserve


Bank guidelines, and put up the same before their respective Boards within a

month, i.e. by end-April and end-October. Further, a copy of the review report put

up to the Banks Board should be forwarded to the Reserve Bank.

FX is an important area which can be improved by treasury. Rather than business

units converting currency locally to meet their needs, and potentially significant

foreign exchange risks across the organization, which may not be easy to quantify,

FX rates can be improved and risk mitigated by managing FX centrally. FX

positions can be offset, reducing the cost of FX spreads, and ensuring a global view

of FX risk.




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


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



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


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 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.




Transformation Of Indian Banks With Information Technology

- Prof. SharadPadwal& Dr. VasantGodse
Theory And Practice Of Treasury And Risk Management In Banks
- Indian Institute Of Banking & Finance (Taxman)
Treasury Management
- Indian Institute Of Banking & Finance (Taxman)


Various journal from Escob database.


Times of India
Business Standard