Introduction to

Treasury Management

The Concept Functions of Integrated Treasury The Process of Globalisation Evolving Role of Treasury as profit centre Organisation of Treasury

Intro.
Current challenges faced -by bank e/es? -by prospective bank e/es? New skill sets Understanding far beyond traditional banking functional knowledge

Concept
Treasury- traditional meaning: - A government department related to finance and taxation - A place where currency or precious items (gold, diamonds, etc.) is/are kept. Treasury: conventionally confined to Funds management - maintain cash balances for WC, use surplus funds in operations, obtain funds to meet the gaps in cash flow - In banks, apart from the above it is also responsible for meeting the reserve requirements (CRR, SLR)

Expanded Scope
Not confined to only Liquidity mgt. Profit centre (through trading & invst activity) Connected with financial mkts Into forex business and invst in securities

Functions of Integrated Treasury

Integrated Treasury refers to integration of money market, securities market and forex operations -due to reforms in financial sector (deregulation of int. rates, FDI encouragements, ECBs, ODIs etc) -also a well developed domestic financial mkts Above factors has led to growth of Intergrated Treasury and its operations possible across the sectors and across the currency mkts

Main functions
Meeting reserve requirements Efficient merchant banking services Global cash mgt (funds) Optimising profits by exploiting mkt opportunities in forex, money and securities mkt. Risk mgt Assisting bank mgt in ALM (advisory)

The Process of Globalisation

Globalisation an imp factor that has contributed to the integration of Treasury activity What is globalisation? Interaction between domestic and global mkts Process of integrating domestic mkt with global mkts, characterised by free flow of capital and minimum regulatory intervention

Three fold impact of Globalisation

Interest rates for lending, borrowing or investing are influenced by global interest rate trends, which in turn influences exchange rate. Competition is getting severe- support to financial markets by new institutional structure like NSDL,Credit rating agencies etc. Wide range of products are now offered by Treasury- forwards, futures, options etc Globalisation,has thus,expanded the scope of Treasury.

Evolving role of Treasury as PROFIT CENTRE

Conventionally, Treasury- a service centreoperated only in money market. Mgt of forex by one dept., invst by other deptso 3 diff treasuries operated in 3 diff mkts At present, Treasury is evolving as PROFIT Centre

Why are Treasury profits attractive?

Operates in inter-bank mkt- almost credit risk free, no huge capital reqd. High return on capital due to low operational costs.

Sources of Profit- Conventional

Foreign exchange business: buy/sell spread profit element Money market deals: interest on funds lent Investment activity: through SLR, CRR- meager returns from Govt securities with 0% risk.

Sources of ProfitContemporary(modern)
Interest Arbitrage- profits by way of favourable interest differentials. Borrow in USD and lend in Rupee or vice-versa depending on int. rates. Trading Activity: speculative- currencies/ mkts Treasury products: CDs, CPs, T-Bills etc

Organisation of Treasury
Can either be set up as Dept or as Specialised Branch controlled by HO. If given a Dept status- easier co-ordination with other depts possible. If given a Branch status- independently maintains its books of accounts. Most preferred to enjoy major benefits.

Members
Headed by DGM, GM, CTO- Chief Treasury Officer, VP or with some such designations. 3 main divisions: - Dealing Room (front office) - Treasury administration(back office) and - Risk mgt (mid office)

 Dealing Room- Chief Dealer; dealers buy/sell in the mkts, each dealer specialises in one of the mkts i.e. forex, money and securities. Back office- verification & settlement of the deals made by dealers; book-keeping and submission of periodical returns to RBI Mid office- info to mgt & implement risk mgt system Other Depts: Investment, Accounts % administration, systems administration, remittances etc