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MODULE

Treasury and A.L. Management - Batch 2017-19

Track 1:17 MBA BF 442

Dr. Jnaneshwar Pai Maroor, Asst. Professor, JKSHIM

TREASURY MANAGEMENT

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WHAT IS TREASURY?

CONTENTS

 What is Treasury?
 Why management of money is needed?

 Scope of Treasury Management

 Role, Objectives and Functions of Treasury

Management
 Principles of Treasury Management

 Structure of Treasury

 Individual Task

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TREASURY

• Treasure - Gold, Silver, Jewelry, Money…

• Treasury - Storage place of Treasure

• Treasury generally refers to the funds and

revenue of the bank.

WHY MANAGEMENT OF MONEY IS

NEEDED?

 No major efforts were made to manage cash.

 Competitive business environment resulting from

the liberalization of the economy, there is a
pressure to manage cash.

 The demand for funds for expansions coupled

with high interest rates, foreign exchange
volatility and the growing volume of financial
transactions have necessitated efficient
management of money.
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INTERVIEW QUESTION

What Does Treasury Department do in a Bank?

TREASURY MANAGEMENT
 Treasury generally refers to the funds and revenue
at the disposal of the bank and day-to-day
management of the same.

 The treasury acts as the custodian of cash and

other Liquid assets.

 The art of managing, within the acceptable level

of risk, the consolidated fund of the bank
optimally and profitably is called Treasury
Management.

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INTERVIEW QUESTION
What Does Treasury Department do in a Bank?

 The treasury department of a bank is responsible for

balancing and managing the daily cash flow and
liquidity of funds within the bank.
 Treasury department also handles the bank's
investments in Securities, Foreign exchange,
Asset/liability management and Cash instruments.
 Includes a bank's collections, disbursements,
investment and funding activities.
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TREASURY MANAGEMENT - ROLE

 It is the window through which banks raise funds or
place funds for its operations.

 The corporate handling of all financial matters.

 The key goal of treasury management is planning,

organizing and controlling cash assets to satisfy the
financial objectives of the organization.

 Management of a company’s finances including its

Cash flow, Investments, etc.

 Working capital management of banks and financial

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institutions.

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INTERVIEW QUESTION

Does Every Bank has a Treasury Department?

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TREASURY MANAGEMENT - ROLE

 Every bank has a treasury department.

 Under the control of the chief financial officer (CFO)

or Treasurer.

 Handled on a day-to-day basis by the organization's

treasury staff, controller

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SCOPES OF TREASURY MANAGEMENT

1. Liquidity Management

2. Money Market Transaction

3. Capital Market Transaction

4. Correspondent Banking

5. Foreign Exchange Management

6. Rate Determination 13

SCOPE OF TREASURY MANAGEMENT

 Liquidity Management
To maintain the adequate level of liquidity and raise
the profitability.

 Money Market Transaction

The treasury department will purchase the treasury
bill within the approved limits.

 Capital Market Transaction

Treasury Department makes the long term investment
in capital market 14

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INTERVIEW QUESTION

What do you understand by NOSTRO A/c?

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SCOPE OF TREASURY MANAGEMENT

 Correspondent Banking
A correspondent banking is established through a
bilateral contract with foreign bank to co-operate in
such banking services as money transfer, foreign
exchange and trade finance.
Banks use correspondent banking relationship to
deliver services to customers on markets where the
bank has no physical presence.
A correspondent bank provides services to a respondent
bank. Both banks maintain correspondent balances in
each other’s interbank account.
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SCOPE OF TREASURY MANAGEMENT

 For instance, if you live in Dubai and you ask
your local bank to set up a Rupees A/C for you,
they will most likely open a “Nostro A/C” with a
correspondent agent bank in India that they have
banking relationship with for that specific
purpose.

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SCOPE OF TREASURY MANAGEMENT

 Foreign Exchange Management
Popularly referred as FOREX
The conversion of one country’s currency into that of
another.
It is the minimum number of units of one countries
currency required to purchase one unit of the other
countries currency.
Different countries have different currencies with
different values.
When international trade takes place payment is made
in their currencies.
For this purpose the concept of foreign exchange came
into operation. 18

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 Treasury management covers Foreign exchange

in it. Treasury management also does Foreign
exchange as per the need and requirement of
clients and financial institutions

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 Rate Determination
The determination of rate is the determination of
exchange value between two counties currency.

Treasury management also determines the rate of

one currency in comparison to another country
currency.

Generally, the rate value of currency is determined

by the interaction between the demand and supply
of currency. 20

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ORGANIZATIONAL STRUCTURE
 It should facilitate the handling of all market
operations from dealing to settlement, custody and
accounting, in both the domestic and foreign exchange
markets.
 As follows:
 Front Office: Dealing – Risk Taking
 Mid Office: Risk Management and Management
Information
 Back Office: Confirmations, Settlements, Accounting and
Reconciliation

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STRUCTURE OF AN INTEGRATED TREASURY

 The treasury department is manned by the front

office, mid office, back office and the audit group. In
some cases the audit group forms a part of the
middle office only.

 The dealers and traders constitute the front office. In

the course of their buying and selling transactions,
they are the first point of interface with the other
participants in the market (dealers of other banks,
brokers and customers).

 They report to their department heads. They also

interact amongst themselves to exploit arbitrage
opportunities.

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STRUCTURE OF AN INTEGRATED TREASURY

 A mid office set up, independent of the treasury unit,

responsible for risk monitoring, measurement analysis and
reports directly to the Top management for control.

 This unit provides risk assessment to Asset Liability

Committee (ALCO) and is responsible for daily tracking of
risk exposures, individually as well as collectively.

 The back office undertakes accounting, settlement and

reconciliation operations.

 The audit group independently inspects/audits daily

operations in the treasury department to ensure
adherence to internal/regulatory systems and procedures.

STRUCTURE OF AN INTEGRATED TREASURY

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FRONT-OFFICE FUNCTIONS
 It has a responsibility to manage investment and market
risks in accordance with instructions received from bank’s
ALCO.
 It is undertaken through the dealing room which acts as
the bank’s interface to international and domestic
financial markets.
 The dealing room is the center for market and risk
management activities in the bank.
 It is the clearing house for risk and has the responsibility
to manage the treasury risks taken in all areas of the
bank.
 In view of this, control over the activities of the treasury
and its staff are critical to ensure that the bank is
protected from undue market risk. 25

MID-OFFICE FUNCTIONS
 Responsible for onsite risk measurement, monitoring
and management reporting.
 Limit setting and monitoring exposures in relation to
limits.
 Assessing likely market movements based on internal
assessments and external/internal research.
 Evolving hedging strategies for assets and liabilities.

 Interacting with bank’s Risk management department

on liquidity and market risk.
 Monitoring open currency positions.

 Calculating and reporting VAR. 26

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MID-OFFICE FUNCTIONS (CONTD..)

 Stress testing and back testing of investment and
trading portfolios.
 Risk-return analysis.

 Marking open positions to market to assess unrealized

gain and losses.

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BACK-OFFICE FUNCTIONS
 Deal slip verification.
 Generation and dispatch of interbank confirmations.

 Monitoring receipt of confirmations from counterpart

banks.
 Monitoring receipt of confirmations of forward
contracts.
 Effecting / receiving payments.

 Settlement through CCIL.

 Monitoring receipt of forex funds in interbank

contracts.
 Statutory reports to the RBI. 28

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BACK-OFFICE FUNCTIONS (CONTD..)

 Management of nostro funds-to advise latest funds
position to enable the F/O to take the decision for the
surplus/short fall of funds.
 Reconciliation of nostro / other accounts.

 Monitoring approved exposure and position limits.

 Accounting

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ROLE AND FUNCTIONS OF A

TREASUSRY MANAGEMENT
The treasury department occupies a central role in the
finances of the modern corporation. The treasury
department is responsible for company’s liability. To meet
the goal, a treasury department would need to perform the
following roles over time:

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 Cash Forecasting
Dislike the accounting staffs who handle the
cash receipt and disbursement activities on daily
basis, treasury staffs need to draw all those
accounting staffs records (within the organization
including its subsidiaries if any), and compile it to
generate a cash forecast (short and long-range).

 Working Capital Management

The treasurer should be aware of working
capital levels and trends, and advise management
on the impact of proposed policy changes on
working capital levels.
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 Investment Management
The treasury staffs are responsible for the
proper investment of it. Three primary goals of the
role are:
(a) maximum return on investment;
(b) matching the maturity dates of
investments with a company’s projected cash
needs; and most importantly is
(c) not putting funds at risk.

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 Cash Management
The treasury staff uses the information
obtained from cash forecast and working capital
management activities to ensure sufficient cash is
available for operational needs.

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 Treasury Risk Management

The treasury staffs are also responsible to
create risk management strategies and implement
hedging tactics to mitigate the whole company’s
risk - particularly in anticipating
(a) market’s interest rates may rise and
leave the company pays on its debt obligations; and
(b) company’s foreign exchange positions
that could also be at risk if exchange rates
suddenly worsen.
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 Credit rating agency relations

The treasury staff shows the quick responds
to information requests from the credit agency’s
review team.

 Management Advice
Treasury staffs monitors the market
conditions and provide the necessary advice to the
company.

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 Bank Relations
The treasurers meets with the
representatives of bank that the company uses, to:
discuss the company’s financial condition, the
bank’s fee structure, any debt granted to the
company by the bank, and foreign exchange
transactions, hedges, wire transfers, cash pooling,
and so on.

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 Fund Raising
It maintains excellent relation with the
investment community for fund raising purposes
that is important - from the
(a) brokers and investment bankers who sell
the company’s debt and equity offerings; to the
(b) the investors, pension funds, and other
sources of cash, who buy the company’s debt and
equity.

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 Credit Granting
The treasury department grants credit to the
customer to manage the cash.

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BASIC TREASURY FUNCTIONS

Domestic Operations Forex Operations

 Maintenance of statutory  Extending cover to foreign

reserves
 Managing liquidity
 Profitability deployment of
reserves
 Trading and arbitrate
 Hedge and cover
operations
 Mid/Back – Office
function(s)
exchange trade
transactions
 Funding and managing
forex assets and liabilities
 Providing hedge to forex
risks proprietary and for
its constituents
 Trading and Arbitrage
 Mid/Back Office functions39

TASK - 1
Impact of Treasury (and Forex) Operations
on Bank’s Profitability – A Comparison

Deadline for Presentation:17/01/2019

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PRINCIPLES OF TREASURY
MANAGEMENT
 Principle of Security
Banks should invest the investable funds in safe
or secure areas in which default risk will be minimum.

 Principle of Liquidity
Maintain adequate level of liquidity to meet
borrower and depositor’s demand.

Principle of Profitability
Investment made by banks should provide the
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maximum returns possible.

 Principle of Portfolio
Invest in the portfolio of various assets with
the objectives of the risk mitigation.

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