Iswar Padhan

Agenda for the Session

1. Role & Rationale for Treasury
2. Need for a Well-organised treasury
3. Set up of a Good Treasury System
4. Various segments of Treasury
5. Functions of various segments

Banking Definition
Banking is defined as the business of
accepting of deposits for the purpose of
lending ..
Core activity, combined with the rapid growth of
modern day banking activities necessitates a
well organised Treasury.

Financial Intermediation & Risk

Profile
Objectives:
Earn Profit
Enhance Value of Equity

Depositors /
Investors
Risk Associated are:
Credit Risk
Liquidity Risk
Int. Rate Risk
Forex Risk
Operational Risk

Bank

ALM mainly deals with liquidity, Int Rate & Forex Risks

Borrowers
[ Corporates /
Individuals ]
4

Risk Profile
Credit Risk : All risks related to a borrower/
counterparty not fulfilling his obligations on
time
Liquidity Risk : All risks arising out of the banks
inability to meet financial commitments when
due
Interest Rate Risk :Risk of loss in the banks NII
or Economic Value of Capital arising out of
changes in the level of interest rates
Currency Risk : Risk of loss due to changes in
forex rates
Operational Risk: Risk of loss due to failure in
system / deficiencies in process and procedures
5

Banking: Regulatory Requirements

Connected with Treasury
Statutory Pre-emption :
a) Cash Reserve Ratio 4% of NDTL
b) Statutory Liquidity Ratio 23% of DTL
ALM Guidelines :
a) Liquidity Gap Limits
b) Interest Rate Risk Limits
Capital Adequacy Guidelines :
a) Basel II Guidelines
b) Basel III Guidelines
Authorised Dealership :
a) Forex Services to Merchant
b) FX Interbank Dealing

Management of Statutory Pre-emption (CRR & SLR)

CRR Requirement :
CRR requirement : Daily average of 4% of NDTL to be
maintained in the RBI account on fortnightly basis with
individual days minimum at 95% of the CRR requirement
Issues & Challenges :
a) Zero return on CRR balance, hence avoid excess
b) Regulatory penalty in case of default in CRR
maintenance
SLR Requirement :
23% of DTL on fortnightly basis to be maintained mainly in
the form of SLR eligible Central, State Govt & other
approved securities
Issues & Challenges :
To optimize the balance between liquidity, return and risk

Money Market Operations

RBI Liquidity Supports :

Liquidity Adjustment Facility (LAF) : Repo, Reverse Repo,

MSF

Open Market Operation

Refinance

FC INR Swap facility

Lender of last resort

Money Market Products :

Call / Notice / CBLO

Market Repo

Term Money

Certificate of Deposits

Short term investments

TBs, CP, CD, MFs

Investment Operations
Objectives:

Regulatory compliance for SLR

Liquidity Management

Maximise Return on Investments

Make trading income

Manage risk credit, liquidity, interest rate, operational

Investment Products :

Risk Free Securities TBs and G-Secs

Bank , FI and PSU securities CP, CD, Bonds & Equity

Corporate Debts CP, Bonds and Equity

Issues

& Concerns:
Underdeveloped Debt Market
Underdeveloped derivatives market for hedging
Migration to IFRS

Investment Guidelines
Classification:

3 Categories HFT, AFS & HTM

HFT & AFS treated as trading

Defeasance period of 90 days for HFT

HTM is treated as permanent limit on HTM

Valuation & MTM Provisioning:

Fixed income securities valuation as per FIMMDA Price /

rates

Equity as per exchange price

HFT valuation on monthly

AFS valuation on quarterly

HTM valuation for MIS and RBI reporting

MTM loss on HFT & AFS to be provided

Shifting between Categories :

Shifting to / from HTM permitted once in a year , at

beginning

Shifting from HFT to AFS in exceptional situation

Shifting from AFS to HFT with ALCO approval

Investment Risk Management & Control

Policy

and Monitoring Framework:

Board approved Investment Policy and Framework
Segregation of book into banking and trading
Segregation of functions into dealing, back office and
mid office
Board approved limit structure: Book Size, Duration,
Loss Limit
Dealing in secured and recorded platform
Policy with dealings through brokers
Dealer-level control and monitoring
On-line, end-of-the day and periodic monitoring and
reporting
Overall supervision and control by ALCO

FOREX MANAGEMENT
Forex

Regulation
FEMA Act 1999
FEMA Guidelines by RBI
FEDAI Rules & Regulations
Banks Act as Authorissed Dealer (AD)
FX Brokers and Money Changers act as limited AD

FOREX Transactions

All FX remittances to be routed through Authorised

Dealers

RBI based on FEMA sets rules, regulations and limits on

FX transactions
Nature of FX Market

Closely regulated by RBI

Rupee is market determined , RBI regulates to control

volatility

Rupee is not fully convertible

FOREX OPERATIONS OF BANKS

Forex Services

To provide services to exporters, importers and

remittance facilities to resident & non-residents

To channelise foreign currency funds in deposits,

borrowings and investments to meet foreign currency
needs on the domestic market

To manage assets and liabilities in the various currencies

and time buckets

Provide foreign currency risk management products and

services to clients

Undertaking Trading in forex market

To raise Capital in Foreign Currency

Forex Accounts / Terms / Products

Forex

Accounts
Nostro Accounts
Vostro Accounts
Loro Account

FOREX Quotations

Direct quote USD / INR

Indirect Quote CHF / INR through USD / CHF & USD / INR

Bid (Buy) & Offer (Sell)

Forex

Transactions
Cash, Tom & Spot
Forward / Swap
Non-deliverable Forward (NDF)

FX Rates

Interbank Rates

Domestic Currency Rate & Cross Currency Rate

Merchant Rates

TT & Bills Rates

FOREX MARKET: Objective & Players

Objectives:
Remittance
Hedge
Arbitrage
Trading / Speculation
Major Players :
Corporates
Banks
FIIs
Hedge Funds
Pension Funds
Central Banks
Resident / Non-resident Individuals

SPECIAL FEATURES OF FX MARKET IN INDIA

MANAGED FLOAT
FLOW DRIVEN
TRADE FLOWS
CAPITAL FLOWS
OPTIONS HEDGING
REER / RBI
MONTH END SYNDROME
GLOBAL DOLLAR VALUE
IMPACT OF US DATA RELEASE
INFLUENCE OF NDF MARKET

Derivative Market
A contract whose price depends on the price of
the underlying instrument like :
a) Foreign Currency
b) Interest rate
c) Equity
d) Index
e) Commodity
etc
Products Traded : Options , Currency Swaps ,
Interest rate Swaps, FRA , Range accruals,
Futures, etc..

Need for Treasury in Banks

1. Maintenance of CRR and SLR

2. Judicious Funds Management
3. Quoting of Rates for Forex transactions
4. Management of Nostro Funds
5. Structuring and Selling of Derivatives
6. Proprietary Trading
7. Contribute Profit as a Profit Centre

Broad Classification of Treasury

1. Front Office -

To Strike Deals

2. Mid Office

Risk Management Policies,

Monitoring, MIS etc.

3. Back Office -

Settlement and Accounting

FX Sales

FX Interbank

Product
Structuring

TREASURY

Money Market

Equities

SLR & Non-SLR

Commodities, Bullion, Metals,

Money Market Desk

1. Maintenance of CRR and SLR
2. Investment of Surplus funds Call / Notice Money , Mutual Funds , USD/INR Swaps,
Commercial Papers, Certificate of Deposit, T Bills , G Secs ,
3. Raising Short Term Funds
Call / Notice Money , USD/INR Swaps, Term Money,
MIBOR Linked Deposits,
4. Quoting rates for Bulk Deposits
5. Monitoring of Maturity of Bulk Deposits
6. Keeping track of outflow on account of loan disbursement
7. Maintenance of RBI balances in various centres
8. Proprietary Trading

Forex Sales Desk

1.
2.
3.
4.
5.

Preparation of Card rates

Quoting of rates Export , Import , Remittances
Booking of forward contracts
Acceptance and monitoring of Customer Orders
Apprising customers of currency movements and
views on various currencies
6. Structuring and Sale of Derivative products
7. Always on the look out for new business
opportunities

FX Interbank Desk
1. Providing liquidity in the market by quoting in
USD/INR Spot , Forward and Cross Currency
2. Running proprietary trading position
3. Enabling cover operation for deals done by Sales
and Derivatives Desk
4. Management of Nostro Balances
5. Providing information on market developments and
currency views

Product Structuring Desk

1. Covering of Deals concluded by Sales desk in
interbank market
2. Structuring and pricing of new derivative products
3. Running USD/INR Option Book
4. Running Interest Rate Swap Book
5. Interact with Other banks in India and abroad to
devise new products

Derivative Products
Exchange Rate products
USD / INR options
Cross currency options
Put Options, Call Options
European , American
Interest Rate Products
Interest Rate Swaps
Currency Swaps Principal , coupon

Thank YOU
Wish You All Good Luck