Chapter-1 introduction

Concept of Treasury Management

The art of managing, within the acceptable level of risk, the fund of the bank optimally and profitability is
called Treasury Management. In other words Treasury Management includes a firm’s collection, disbursement,
concentration, investment and funding activities. In larger firms, it may also include trading in bonds,
currencies, financial derivatives and associated financial risk management.
Most of banks whole departments devoted to treasury management and supporting their clients need in this
area. Until recently, a large banks had the stronghold on the provision of treasury management products and
service. However smaller banks are increasingly launching and expanding their treasury management functions
and offerings, because of the market opportunity afforded by the recent economic environment. For non-
banking entities, the terms treasury management and cash management are sometimes used interchangeably,
while in fact, the scope of treasury management is larger.in general , a company’s treasury operations comes
under the control of the chief financial officer(CFO) or treasury and is handled on a day to day basis by the
organization’s treasury staff, controller.
 Generally, treasury is a place where treasures are stored, the place of deposit, care, and disbursement of
collected funds.
 To plan, organize, and control cash and borrowings to minimize cost and maximize return.
 Involves the management of sources and uses of funds. Management of total available resources/ funds.
 All about handling the banking requirements, the funding for the business and managing financial risks.
 Scope of Treasury Management
i. Liquidity Management
• Maintenance of liquidity position
• Short position and long position

ii. Money Market Transactions

• Short maturity securities
• Highest liquidity and low risk

iii. Capital Market Transactions

• Longer maturity securities
• Lowest liquidity and high risk
iv. Correspondent Banking
• Maintain relation with other national and international banks

v. Foreign Exchange Management

• Determine exchange rate for its bank

vi. Rate Determination

• Pricing of deposits and loans
Role and Function of Treasury Management
1) Cash Management
 Collection and repayment of cash
 Manages internal capital market by investing and lending to subsidiaries
 Works with business to optimize cash flow, working capital & minimize idle cash

2) Funding management
 Manages short, medium and long term investment
 Ensures adequate liquidity to support the business and to meet obligation
 Manages portfolio of debt, derivatives and investment

3) Currency management
 Manage foreign currency risk, exchange rate risk etc
 Advise on currency to be used for overseas billing
4) Investment Management
 Maximum return on investment
 Matching the maturity dates of investments with a company’s projected cash needs; and
 Not putting funds at risk

5) Treasury Risk Management

 Manages liquidity, operational, financial risks
 Creates risk management strategies and implement hedging tactics while anticipating;
o Market’s interest rates
o Foreign exchange rates

6) Bank Relation
 Maintains good inter-bank relationship; initial negotiation with them for any short-term loan
 Frequent meetings with the representatives to: discuss the company’s financial condition, the
bank’s fee structure, foreign exchange transactions, hedges, wire transfers, cash pooling, and so on

 7) Corporate Finance

 Advise and involves in mergers and acquisition, capital structure, right issue etc.
Principles of Treasury Management

Principle of Safety

Principle of Liquidity

Principle of Profitability

Principle of Investment
Principle of Safety
• Funds mobilized in least probabilities of default areas (safe sector)
• Refund depositors after certain time or at demand
Principle of Liquidity
• Should have adequate funds to meet various requirements
• Have to pay obligation to their depositors and creditors
• Need sufficient resources as liquid fund
• Create asset which can be liquidated (converted into cash) as required
Principle of Profitability
• Maximum return as possible
• Objective: to maximize profit
• Assets allocated in such a manner that increases profitability
Principle of Investment
• Portfolio Investment
 grouping of financial assets such as stocks, bonds and cash equivalents, as
well as their funds counterparts, including mutual, exchange-traded and closed
fund

• Minimize risk and maximize profit