Whats Treasury Management?

Treasury management means To plan, organize

and control cash and borrowings so as to
optimize interest and currency flows,
and minimize the cost of funds
or in other words
the handling of all financial matters,
the generation of external and internal funds for
business,
the management of currencies and cash flows,
and the complex strategies, policies, and
procedures of corporate finance
 It involves ensuring that
proper funds are available with the company
at the time of outflow required & also
that funds are not kept unutilized for a long
time.
This requires the management of cash flows,
banking, money-market and capital-market
transactions;
the effective control of the risks associated
with those activities;
and the pursuit of optimum performance
consistent with those risks.
 Objectives of Treasury Management:
Availability of right quantityIt
ensures that the funds have been
arranged in the required quantity.
This quantity is available to the firm
either as external loans/source or as
internal generation.
Availability at right timeThe
requisite funds for day to day working of
the firm are available in time
in addition to being available in
quantity.
 Deployment of fund in right quantityIt
ensures that right quantity of funds is deployed.
For deploying the right amount of funds,
the treasury manager keeps track of all receipts
of funds and time table of deployment of
funds is to be drawn up.
Deployment of fund in right timeA logical
corollary of sourcing funds at the right time is
that
funds should be deployed at the right time.
The treasury manager has to honor the
outstanding commitments on working capital
account within a short span of time
 Profiting from availability and
deployment
One of the prime objectives of a treasury
manager is to ensure timely procurement of right
amount of funds
and timely deployment of right amount of funds.
The objective results in administrative
smoothening and paves way for registered
achievement of performance targets of the firm.
Modern day treasury manager has another
objective which is to profit from such sourcing
and deployment.
 Scope of Treasury Management:
Treasury management is concerned with both
macro and micro facets of the economy.
At the macro level, the inflows and outflows of
cash, credit and other financial instruments
are the functions of the government and the
business sectors.
These inflows are arranged by them as
borrowing from the public.
The micro units utilize these inflows and build
up their capacities for production of output
 This leads to establishment of a production system
which logically leads us to the natural consequence
i.e. the establishment of distribution and consumption
systems.
Once the production, distribution and consumption
systems are in place at the micro level,
the generation of surpluses at the units begins.
These surpluses are channeled back into the macro
system as outflows from the micro system.
The inflows are the taxes paid to the government and
repayment of loans made to the banks and financial
institutions.
These inflows into the macro level have to be
managed by the treasury managers at the macro
level.
 Functions of Treasury Management:
Cash Management:The Treasury Manager controls the
cash assets and liabilities of the organization.
Liquidity & Funds Management:Analysis of cash flow
arising out of asset liability transaction and funding various
asset of balance sheet is the function of treasury
management.
It also involves policy inputs to strategic planning and
yielding expected returns in credit and investment.
Risk Management:Treasury management plays an active
role in risk management by managing the impact of the
changes in interest rates, credit risk due to increasing
NPAs.
It includes customer credit management, vendor/contractor
financial analysis, liability claims management, business
disaster recovery, and employee benefits program risk.
Reserve Management & Investment:
It includes selection of investment products
investment brokers and methods of borrowing.
The treasury manager develops cash
management information system and investment
policy and processes.
Maintaining good relations with supplier of
funds, particularly the investors and shareholders.
looking after the financial implications of
strategic and policy decisions.
Interaction with financial market in general and
with capital market in particular
 Introduction to T.M
It is necessary to understand and
appreciate the three distinct roles
Treasury of an Institution plays.
a. Liquidity Management: Treasury is
responsible for managing short term
funds across currencies, and also for
complying with reserve requirements
(CRR and SLR) in case of Banks.
 b.Proprietary Positions: Treasury may
trade in currencies, securities and other
financial instruments, including
derivatives, in order to contribute to
Banks profits.
c. Risk Management: Treasury will aid
Management on one hand and Banks
clients on the other hand, in managing
market risk, using derivativ instruments
 The multiple roles necessitate Treasury
to manage an;----
ALM Book for internal risk management.
Merchant Book for client-related
currency and derivative transactions.
Trading Book for managing its
proprietary positions.
ALM Book also includes traditional role
of Treasury in liquidity management.
 Treasury operates in markets which are
almost free of credit risk, and hence
requires very little capital allocation.
Secondly, the treasury activity is
highly leveraged the risk capital
allocated to Treasury may range
between 2% to 5% of the size of
transactions handled, hence the return
on capital is quite high.
 Role of treasury after
Theeconomicliberalisation
liberalisation in Indiarefers to
ongoingeconomic reformsinIndiathat started
on 24 July 1991. , after India faced a
balance of paymentscrisis, it had to pledge 20
tonnes of gold toUnion Bank of Switzerlandand
47 tonnes toBank of Englandas part of a bailout
deal with theInternational Monetary Fund(IMF).
In addition, the IMF required India to undertake
a series of structural economic reforms.
As a result of this requirement, the government
started breakthrough reforms, although they did
not implement many of the reforms the IMF
wanted.
 The newneo-liberalpolicies included
opening for international trade and
investment,deregulation, initiation of
privatisation, tax reforms, and inflation-
controlling measures.
Before the process of reform began in
1991, the government attempted to close
the Indian economy to the outside world.
The Indian currency, the rupee, was
inconvertible and high tariffs and import
licencing prevented foreign goods reaching
the market.
 . India also operated a system of
central planningfor the economy, in
which firms required licences to invest
and develop.
The government often led to absurd
restrictionsup to 80 agencies had to be
satisfied before a firm could be granted a
licence to produce and the state would
decide what to produce, how much, at
what price and what sources of capital
were used
 A Balance of Payments crisis in 1991 pushed the country
to near bankruptcy.
In return for an IMF bailout, gold was transferred to
London as collateral, the rupee devalued and economic
reforms were forced upon India.
That low point was the catalyst required to transform the
economy through badly needed reforms to unshackle the
economy.
Controls started to be dismantled, tariffs, duties and
taxes progressively lowered, state monopolies broken, the
economy was opened to trade and investment,
private sector enterpriseand competition were
encouraged and globalisationwas slowly embraced.
.
 GLOBAL SCENARIO IN T.M
The integration of national and foreign
exchange market has taken place due
to liberalization and deregulation of
economies by various countries.
The emergence of global unified
financial market has resulted in the
removal of distinction between national
and off shore markets.
Indian financial markets also started
showing signs of integration since
1991 ,the year of starting of financial
 Financial Sector Reforms
Mixed picture in different segments
Sea change compared to financial repression of
pre-reform era
Interest rates largely deregulated
Greater competition from private banks and
foreign banks
Government pre-empts reduced significantly
Establishment of autonomous Board of
Financial Supervision
Residential norms on capital adequacy
Improved debt recovery and restructuring
mechanism
Government Securities Market with primary
dealers as market matures
Delivery Version Payment System
Establishment of Clearing Corporation of India
 Financial Sector Reforms

Improvements in reach and depth of banking

sector, its balance sheet, capital structure,
net profits and NPAs.
New financial products introduced
Government Security Market has
experienced increases in market size, lower
yields and longer maturities
Monetary Policy more independent and
based on indirect instruments
Turnover in foreign exchange markets
increased
Despite achievements problems remain Risk
Assessment mechanisms not up to standard
Not ready for Basel-II
Public ownership a major problem
Success in reforming of equity markets
 Following changes have been brought since 1991In
the Banking system and financial system as a
process of reforms
Deregulation of interest rates.
Liberalisation of exchange control Regulations
FERA TO FEMA regulations.
Permission to Banks and corporates to use
derivatives as risk management measure.
Introduction of market determined Exchange rates.
Iuntroduction of REPO/REVERSE REPO to regulate
call rates.
Removal of interbank borrowing from perview of
CRR/SLR etc.
 The Government of India borrows from public by
issue of securities, to finance its deficit which
is the difference between Governments income
and expenses.
RBI uses government securities to control
liquidity in the market in order to influence the
interest rates.
RBI may absorb liquidity by selling the securities
in the market and may infuse liquidity by buying
back the securities from the public.
These are known as open market operations
(OMO) of the central bank.
 RBI, as lender of last resort, provides liquidity to
the banks through Repo auction, where RBI
purchases securities from banks with an
agreement to sell back the securities after a
fixed period.
The difference in sale and purchase prices
constitutes interest received by RBI.
In case of excess liquidity, banks lend funds to
RBI under Reverse Repo in similar manner and
receive interest by way of price differentials.
All the securities are held in the SGL account of
the bank with RBI, hence no physical transfer of
securities takes place either way
 All security dealings now take place on NDS
through screen based trading, with anonymous
order matching.
The securities clearing against assured payment is
handled by Clearing Corporation of India Ltd. (CCIL)
a specialized institution promoted by major banks.
Physical delivery of cheques and written
confirmations are no longer necessary for
settlement.
All inter-bank money market deals are to be
necessarily done through the NDS and reported to
CCIL.
Negotiated security transactions may also be
reported on NDS.
 Real Time Gross Settlement System
(RTGS) has been fully activated by RBI
from October2004.
All inter-bank payments and customer
remittances are settled instantly under the
RTGS.
Banks accounts with all the branch
offices of RBI are also integrated.
Most of the urban centres of public and
private sector banks are already
partyicipating in the RTGS.
 Since RTGS involves instant payments,
banks need to maintain adequate funds
with RBI throughout the day.
To meet any shortfall in funds, RBI has
put in place systems to provide intra-
day liquidity through automatic repo
against securities lodged by respective
banks.
 The Institute for Banking Research and
Development of Technology (IBRDT) has
developed the Indian Financial Net Work
(INFINET) as a secure communication
backbone for the banking and financial
sectors.
The INFINET has helped introduction of
Structured Financial Messaging System
(SFMS) which facilitates domestic
transfer of funds and authenticated
messages, similar to the SWIFT used by
banks for international messaging
 Depository Institutions like NSDL (National
Security Depository Ltd.) and CSDL
(Central Security Depository Ltd.) provide
delivery vs. payment (DVP) for secondary
market deals in equity and debt paper.
Since the funds transfer and securities
transfer takes place between the buyer
and seller on the electronic platform
simultaneously, the settlement risk is
eliminated.
 NEFT and on-line Payments All inter-bank and
intra-bank remittances can now be effected on
the same day by electronic funds transfer using
the National Electronic
Funds transfer system introduced by RBI.
RBI has developed Structured Financial
Messaging System (SFMS) similar to SWIFT
adopted banks for international funds transfer
etc. where interbank transfers are sorted out
and cleared by National Clearing Cell of RBI.
Banks which are fully computerized can access
any account at any branch on line and remit /
credit funds, instantly for inter-bank transfers,
without using paper
 In view of the growing complexities in
payment systems, the RBI has
constituted Board for Regulation and
Supervision of Payment and Settlement
Systems at the highest level, as a sub-
committee of Central Board.
India today has sophisticated payment
and settlement systems on par with
developed markets
Thank
you