DRIVE-SPRING 2014
PROGRAM-MBADS (SEM 4/SEM 6) MBAFLEX/ MBAN2 (SEM 4) PGDBMN (SEM 2)
SUBJECT CODE & NAME-MA0042/MA0047 TREASURY MANAGEMENT
BK ID-B1813 CREDIT-4 MARKS-60
Q1. Cash management forms part of the treasury’s core functions either in banks or in
corporate institutions. Do you agree? Substantiate your arguments by differentiating bank
treasury and corporate treasury.
(Similarities, Differences) 5, 5
Answer.
Yes, I agree with this given statement. Today, treasurers need to extend their boundaries and take up
activities such as capital structuring, customers financing, IT integration and risk management. They are
also adding value and managing risk by integrating their treasury functions with the finance department.
In addition to dealing with payments management, a treasurer’s functions include planning, cash flow
monitoring, managing bank accounts and pooling and netting. He should have records of previous
recurring expenses and disbursement patterns.
Similarities
The core functions of treasury management in banks and corporate institutions are:
•
Cash management
•
Liquidity planning and control
•
Management of interest, currency and commodity risks
•
Procurement of finance and financial investments
•
Relationships with banks and rating agencies
•
Corporate finance
Differences
The difference between a treasury of a corporate and a bank
Bank Treasury
Corporate Treasury
A bank treasury is bound by many regulatory Internal controls in a treasury outfit of a corporate
responsibilities like cash reserve ratio and capital are not so strictly implemented.
adequacy requirements. Even the governance
structures are stricter.
A bank treasury is a market-maker.
The treasury outfit of a corporate is
mostly a market-taker.
A bank treasury is also a production unit for Treasury outfits of corporate institutions are rarely
derivatives in equity, Forex, commodities and involved in active trading.
interest rates. Proprietary trading is an important
activity for banks.
The corporate treasury funds the
activities of the business and is involved in working
capital management, factoring and money market
operations like issue of commercial papers and
corporate deposits.
It is involved in sourcing medium-term and longterm funds directly from capital markets or from
banks.
A corporate treasury is the direct customer of a
corporate treasury outfit of a bank.
Q2. Analyse how the repo reforms brought changes in the Indian bank’s treasury
landscape
(Explain Indian Repo market reforms)10
Answer.
Indian Repo market reforms
This money market instrument helps in collateralised short-term borrowing and lending through sale or
purchase operation in debt instruments. Here the securities are sold by the holders to the investors with
an agreement to repurchase them at a predetermined rate and date.
On the other hand, under the reverse repo transactions, securities are purchased with a simultaneous
commitment to resell at a predetermined rate and date.
Since 1999, reforms were undertaken to widen the repo market.
• Uniformity in trading and accounting practices was made with the help of the Fixed Income Money
Markets and Derivatives Association of India.
• To provide adequate safeguard and efficient operation, the Clearing Corporation of India Ltd. was set
up.
• Repo eligibility was extended to a select category of non-SGL account holders with adequate safeguards
to ensure delivery versus payment and transparency. This was carried out on the basis of the advice of
the technical advisory committee on money and government securities markets.
• Participation in market repo facility was extended to non-scheduled urban cooperative banks and
companies that have gilt accounts with scheduled commercial banks, subject to certain eligibility criteria
and safeguards in 2005.
The repo market provides liquidity to the securities market. It helps the traders to take long position in
securities. It also creates demand for the securities because the securities can serve as collateral. Stock
lending agreements can also provide securities as collateral. Lending the securities to the repo market is
carried out for a fee or in exchange of another security which is not used in the repo or both. Sometimes
the institutions that have securities are not permitted to participate in the repo market directly and thus,
they participate indirectly. This is common in the UK market. The repo market provides liquidity to the
security and in turn it receives the support of the securities market.
Q3. Discuss the role of interbank Mobile Payment services (IMPS) in India
(Explain Interbank Mobile Payment services (IMPS) in India)10
Answer.
Interbank Mobile Payment services (IMPS) in India
Interbank Mobile Payment Service (IMPS) seems to be gradually gaining ground in India as almost all
major banks have extended the service that enables account holders to access accounts and transfer
funds using mobile phones. Since February 2012, around 15 banks have extended the IMPS service to
their customer and the number of people adopting the service has gone up significantly.
Indian payment services provider Atom Technologies, a subsidiary of Financial Technologies (India)
Limited, has introduced Interbank Mobile Payment Service (IMPS) to its service, enabling merchants to
make Interbank payments on their mobile phones. The company has been a partner of YES Bank for this
initiative.
While the financial details of the deal remained undisclosed, Atom Technologies said some of its clients
would be integrating IMPS operations through this initiative, including companies like Reliance Energy
(through IVR), Next Retail India Limited, Univercell Telecommunications India Private Limited, Ferns N
Petals and Annamalai University among others. In September 2012, Dish TV had introduced a new
recharge option through Interbank Mobile Payments Service (IMPS), allowing Dish TV customers to use
the service through the company’s mobile application, Dish TV website and Interactive voice response
(IVR). The company had joined hands with YES Bank for this initiative, and it stated that any Dish TV
subscriber having an account with any of the banks that supports IMPS merchant payments can make
use of the service.
In July 2012, IRCTC had integrated IMPS to its railway ticket booking system and four banks, including
State Bank of India, Union Bank of India, Canara Bank and Kotak Mahindra Bank had enabled this
service at that point according to an e-mail sent out by the organization. However, it was worth noting
that the service included an additional step of one time password (OTP) to be generated by the bank
separately for making payments.
Other IMPS merchants encompass OxiCash, mobile operators like Tata Docomo, MTNL, Aircel, Loop
Mobile, Idea Cellular, and BSNL, internet service provider Tikona, and airlines such as SpiceJet.
In September 2012, IMPS had also extended the service to merchant payments, enabling mobile banking
customers to make payments to merchants and enterprises through this payment mode. National
Payments Council of India (NPCI) operating this service had claimed that eight of its member banks,
including State Bank of India, Union Bank of India, Canara Bank, ICICI Bank, Kotak Mahindra Bank,
HSBC Bank, Standard Chartered Bank and YES Bank had enabled the IMPS merchant payments service,
which seems to have increased now to 11 banks. The council also stated that four banks are in the testing
phase of introducing the service at present while 18 banks are currently in the development phase of
enabling the service.
Objectives of IMPS

To enable bank customers to use mobile instruments as a channel for accessing their banks
accounts and remit funds

Making payment simpler just with the mobile number of the beneficiary

To sub-serve the goal of Reserve Bank of India (RBI) in electronification of retail payments

To facilitate mobile payment systems already introduced in India with the Reserve Bank of India
Mobile Payment Guidelines 2008 to be inter-operable across banks and mobile operators in a
safe and secured manner
To build the foundation for a full range of mobile based Banking services.
Q4. Assume you are the treasurer of ABC bank. Discuss how bank should ensure liquidity
measures and manage the liquidity.
(Explain Liquidity management)10
Answer.
Liquidity management
Liquidity is a bank’s capacity to fund increase in assets and meet both expected and unexpected cash and
collateral obligations at reasonable cost. The banks need to avoid unacceptable losses and enhance profit.
An effective management of liquidity can increase cash efficiency of a bank by squeezing out the
maximum value from its cash resources and optimizing working capital performance. Much will depend
on the visibility a bank has on its business transactions. Similarly, it is important for a bank to get its
forecasting right. Overestimating surplus cash may force a bank from either pulling out of a project or
arranging for investments on a short notice. This is where a bank runs into liquidity risk, which can be
defined as the inability of a bank to meet its financial obligations. Liquidity management can, hence, be
defined as the science of managing market and resting order flow with minimum human interaction.
The Reserve Bank had issued guidelines on Asset Liability Management (ALM) system, covering inter
alia liquidity risk management system, in February 1999 and October 2007.
Methods to measure liquidity
The current assets include cash, accounts receivables, inventory and occasionally other line items such as
marketable securities. For banks and large corporate, liquidity management is about getting good return
on cash which they might need at short notice. They do this by borrowing and lending—using either
money market securities or deposits and loans—in what is called the inter-bank market.
While commercial banks can engage in liquidity management through inter-bank markets, central banks
use money markets to manage reserves and impact the prevailing money market rates. This is usually
achieved by manipulating the treasury bill, backed by the government with a maturity of less than one
year.
Q5. An integrated treasury acts as a centre of arbitrage and hedging activity. Substantiate
your reasons.
(Explain integrated treasury)10
Answer.
Integrated treasury
An integrated treasury means a dealing unit that has forex dealing operations and money and funding
departments housed in the same premises. Traditional money and funding operations were less evolved,
and the diversity of money and capital market instruments we see today were lacking, interest rate
movements were tardy and the operations were spread over numerous departments that often worked
independently and lacked coherence.
With the opening of the market, globally, the business of the treasury became more complex and crucial
to a financial institute. Its traditional role of working as a cost centre was now loaded with additional
charges of managing foreign exchange dealings and investment operations along with the functioning of
the domestic market. The treasury was also given the task of managing market risks in relation to a
company’s liabilities and assets. This integration of functions gave the treasury a larger role to play.
The primary objective of integration was to improve portfolio profitability, minimize risk and
establishing a synergy of banking assets with trading assets. An integrated treasury acts as a centre of
arbitrage and hedging activity. It seeks to maximize its currency portfolio and free transfer of funds from
one currency to another to retain profit-making capacity.
We must realize that foreign exchange is but another manifestation of money markets and funding
operations in foreign currencies could be executed through the foreign exchange route or the money
market route. Foreign exchange forward markets could be arbitraged through the money markets. Only a
well coordinated and integrated approach, both in money and in forex markets, would give banks the
necessary edge in profitability and competitiveness. The need for an integrated treasury also arose out of
deregulation of interest rates and liberalization in exchange control when business volumes increased
substantially and greater complexity was introduced in operations.
With the opening of the market, globally, the business of the treasury became more complex and crucial
to a financial institute. Its traditional role of working as a cost centre was now loaded with additional
charges of managing foreign exchange dealings and investment operations along with the functioning of
the domestic market. The treasury was also given the task of managing market risks in relation to a
company’s liabilities and assets. This integration of functions gave the treasury a larger role to play.
The primary objective of integration was to improve portfolio profitability, minimize risk and
establishing a synergy of banking assets with trading assets. An integrated treasury acts as a centre of
arbitrage and hedging activity. It seeks to maximize its currency portfolio and free transfer of funds from
one currency to another to retain profit-making capacity.
The integrated treasury performs the following specialized functions in addition to its traditional
functions as described earlier:

Reserve management—CRR and SLR management

Capital adequacy management

Transfer pricing

Liquidity and funds management

Derivative products
Q6. Discuss the role played by SAP – Treasury in treasury Management.
(Role of SAP-Treasury) 10
Answer.
Role of SAP-Treasury
Treasury management is responsible for all financial transactions—from deal creation, confirmation and
payment file generation via accounting entries. SAP applications simplify the task of the treasurer. It
manages debt and investments more effectively, and monitors and manages the full spectrum of financial
instruments with greater transparency and control. It streamlines the banking relationships with the
treasury and financial risk management, controls and monitors cash, and produce accurate and reliable
liquidity forecasts and plans. Treasury Management is linked to Cash Management, Market Risk
Management and Financial Accounting. The following graphic shows the components and interfaces of
SAP Treasury.
SWIFT
SWIFT (Society for Worldwide Interbank Financial Telecommunications) is a co-operative society which
was formed with the collaboration of seven major international banks in 1974. It opened its network
SWIFTNet for corporations with limited use in the late 90’s. Swift transfers confidential financial
messages in a secured format, which is a code. This lowers the costs, reduces operational risk and
eliminates operational inefficiencies. It, however, does not facilitate funds transfer. SWIFT has, in the
process, brought the financial community together to shape market practice, define standards and debate
issues of mutual interest.
Due to the legal complexities, SWIFT streamlined the interfacing and standardized the legal agreement
with the introduction of the Standardized Corporate Environment or SCORE.
SWIFT’s main advantage is that it makes electronic communication with banks more streamlined. A
company only needs one connection to SWIFTNet instead of installing multiple electronic connections.
One of its drawbacks is that SWIFT allows communication only with financial institutions that are its
members. This would mean, it does not allow you to communicate with other organizations via
SWIFTNet or, for example, with your trading platform directly.
SWIFT Codes: SWIFT codes are unique identification codes which are given to banks to facilitate
exchange of financial messages and transferring money. These codes have a standard format and are also
called bank identifier codes.