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.

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Financial Intermediation & Risk Financial Intermediation & Risk ProfileProfile

Depositors / Investors

Bank

Borrowers[ Corporates / Individuals ]

Risk Associated are:•Credit Risk•Liquidity Risk•Int. Rate Risk•Forex Risk•Operational Risk

ALM mainly deals with liquidity, Int Rate & Forex Risks

Objectives:•Earn Profit•Enhance Value of Equity

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Risk ProfileRisk Profile Credit RiskCredit Risk : All risks related to a borrower/ : All risks related to a borrower/

counterparty not fulfilling his obligations on counterparty not fulfilling his obligations on timetime

Liquidity RiskLiquidity Risk : All risks arising out of the : All risks arising out of the bank’s inability to meet financial bank’s inability to meet financial commitments when duecommitments when due

Interest Rate RiskInterest Rate Risk :Risk of loss in the bank’s :Risk of loss in the bank’s NII or Economic Value of Capital arising out of NII or Economic Value of Capital arising out of changes in the level of interest rateschanges in the level of interest rates

Currency RiskCurrency Risk : Risk of loss due to changes in : Risk of loss due to changes in forex ratesforex rates

Operational RiskOperational Risk: Risk of loss due to failure in : Risk of loss due to failure in system / deficiencies in process and system / deficiencies in process and proceduresprocedures

Banking: Regulatory Requirements – Connected with Treasury

Statutory Pre-emption :a) Cash Reserve Ratio – 4% of NDTLb) 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 day’s 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:RemittanceHedgeArbitrageTrading / Speculation

Major Players :

CorporatesBanks

FIIsHedge FundsPension FundsCentral BanksResident / Non-resident Individuals

SPECIAL FEATURES OF FX MARKET IN INDIA

• MANAGED FLOAT• FLOW DRIVEN

TRADE FLOWSCAPITAL FLOWSOPTIONS 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 Currencyb) Interest ratec) Equityd) Indexe) 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 SLR2. Judicious Funds Management3. Quoting of Rates for Forex transactions4. Management of Nostro Funds5. Structuring and Selling of Derivatives6. Proprietary Trading7. 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

TREASURY

FX Sales ProductStructuringFX Interbank

Money Market Equities SLR & Non-SLR

Commodities, Bullion, Metals, ……

Money Market Desk

1. Maintenance of CRR and SLR2. 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 Deposits5. Monitoring of Maturity of Bulk Deposits6. Keeping track of outflow on account of loan disbursement7. Maintenance of RBI balances in various centres8. Proprietary Trading

Forex Sales Desk

1. Preparation of Card rates2. Quoting of rates Export , Import , Remittances3. Booking of forward contracts4. Acceptance and monitoring of Customer Orders5. Apprising customers of currency movements and

views on various currencies6. Structuring and Sale of Derivative products7. 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 position3. Enabling cover operation for deals done by Sales

and Derivatives Desk4. Management of Nostro Balances5. 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 products3. Running USD/INR Option Book4. Running Interest Rate Swap Book5. Interact with Other banks in India and abroad to

devise new products

Derivative Products

Exchange Rate productsUSD / INR optionsCross currency options

Put Options, Call OptionsEuropean , American

Interest Rate ProductsInterest Rate SwapsCurrency Swaps – Principal , coupon

Thank YOUThank YOU

Wish You All Good LuckWish You All Good Luck