MAY 5TH, 2018 Chandigarh: Presenter: CA Akesh Vyas

TREASURY & INVESTMENT FUNCTION
MAY 5TH, 2018

CHANDIGARH
Presenter : CA Akesh Vyas

DISCLAIMER
The views expressed in the following presentation should not be
construed as the view of ICAI or my firm.
The views opined herein should not be considered as a

professional advice
This presentation should not be reproduced in part or in whole, in

any manner or form, without my written permission.
The failure of such may attract civil or criminal liabilities.
2
Treasury and Investment functions by CA Akesh Vyas
TREASURY
FUNCTIONS
3
• The basic function of the treasury department of a Bank is to efficiently
manage the funds of the Bank . The treasury acts as a custodian of cash and
other liquid assets of the bank.
• The major treasury functions include :
Maintenance of CRR (Cash Reserve Ratio) and SLR (Statutory Liquidity Ratio)
Funds management of the Bank
Investment functions of the Bank
Risk Management
Asset Liability Management
Participation in forex money and securities market
Managing the cost of funds- NIM, ROA
4
MAINTENANCE OF CRR
AND SLR
Need for maintenance of CRR AND SLR
Nature of operations : Banks are needed to maintain sufficient liquid assets in

their normal course of business. The failure of a bank to meet its liabilities to
depositors, as and when called upon to do so, undermines the confidence of
the depositors not in the particular bank alone but in the entire banking
system. Hence, the Banks are required to maintain :
Cash Reserve Ratio known as CRR under section 18 of the Banking

Regulation Act 1949
Statutory Liquidity Ratio : Investment in specified securities over and above

the above mentioned cash reserve - known as Statutory Liquidity Ratio
(SLR) required under Section 24 (2A) of the Banking Regulation Act 1949.
5
CASH RESERVE RATIO
6
Fixed by RBI by notification in the official gazette.
Presently, effective from the fortnight beginning February 9, 2013, the CRR
prescribed is 4% of Bank’s total Demand and Time Liabilities. (DTL)
No interest is paid by RBI on the CRR balance maintained by the Banks.
Incremental CRR :
In terms of RBI circular dated November 26, 2016 on Requirement for

maintaining additional CRR, Banks, effective from the fortnight beginning
November 26, 2016, are required to maintain with an incremental CRR of 100
per cent on the increase in NDTL between September 16, 2016 and
November 11, 2016.
7
DEMAND AND TIME
LIABILITIES
DEMAND LIABILITIES :
Demand liabilities of a bank are the liabilities which are payable on

demand and include :
Current deposits
Demand liabilities portion of savings bank deposits
Margin held against LC/BG
Overdue fixed deposits
Outstanding TT/MT/DD
Unclaimed deposits
Credit balance in cash credit accounts
8
TIME LIABILITIES :
Time liabilities of a bank are the liabilities which are payable otherwise than on demand
and include :
Fixed deposits
Cash Certificates
Time liability portion of Saving bank deposits
Staff security deposits
Margin held against LC/BG which are not payable demand
Gold deposits
9
Other Demand and Time liabilities include
Interest accrued on deposits

Bills Payable
Unpaid dividends
Suspense account balance representing amount due to other Banks
or public
Net credit balance in Branch Adjustment account , any amount due
to banking system which are not in the nature of deposits or
borrowings
10
LIABILITIES NOT TO BE INCLUDED FOR DTL COMPUTATION
Paid up capital, reserves and credit balance in Profit & Loss account
Loan taken from RBI
Refinance taken from EXIM Bank NABARD, SIDBI
Income tax provision
Claim received from DICGC pending adjustment
Claim received from ECGC pending adjustment
Amount received from court receiver
Amount received from insurance company on adhoc settlement of claims pending judgement of court
DRDA subsidy of Rs 10000/- kept in Subsidy Reserve account
Subsidy received from NABARD under Investment Subsidy Scheme
Income fee received in advance which are not refundable
Bills rediscounted by Banks
11
FORTNIGHTLY RETURNS OF CRR IN FORM A TO RBI
Provisional Return :
To be submitted within 7 days of the expiry of the relevant fortnight
Final Return :
To be submitted within 20 days of the expiry of the relevant fortnight
12
FAILURE TO MAINTAIN CRR
CRR to be maintained on daily basis. Prescribed minimum is 90% of total CRR

requirement.
Penal interest @ 3% per annum above the Bank rate on the amount of shortfall
on that day.
If default continues on next succeeding day/days , penal interest will be

recovered @ 5% per annum above the Bank rate on the amount of shortfall on
that day.
Particular of default
To be furnished to RBI along with action taken to avoid recurrence of such

default.
13
STATUTORY
LIQUIDITY RATIO
14
SLR
Fixed by RBI by notification in the official gazette.
Under Section 24(2A) of the Banking Regulation Act 1949, the value of assets under SLR
shall not be less than such percentage not exceeding forty per cent of the total of its demand
and time liabilities in India as on the last Friday of the second preceding fortnight in such form
and manner as the RBI may by notification in the official gazette, specify from time to time.
The last Friday referred above is known as “Reporting Friday”
SLR to be maintained with reference to the bank as a whole and not for individual branches.
The current rate of SLR is 19.50%.
15
Detail of specified assets for SLR :
(a) Cash or
(b) Gold as defined in Section 5(g) of Banking Regulation Act, 1949 valued at a price not exceeding the current
market price, or
(c) unencumbered investment in the following instruments which will be referred to as "Statutory Liquidity Ratio
(SLR) securities":
(i) Dated securities of the Government of India issued from time to time under the market borrowing programme
and the Market Stabilization Scheme;
(ii) Treasury Bills of the Government of India;
(iv) State Development Loans (SDLs) of the State Governments issued from time to time under the market
borrowing programme; and
(d) the deposit and unencumbered approved securities required, under subsection (2) of section 11 of the
Banking Regulation Act, 1949 (10 of 1949),to be made with the Reserve Bank by a banking company
incorporated outside India;
(e) any balance maintained by a scheduled bank with the Reserve Bank in excess of the balance required to be
maintained by it under section 42 of the Reserve Bank of India Act,1934 (2 of 1934);
16
Failure to maintain SLR
If a banking company fails to maintain the required amount of SLR, it shall

be liable to pay to RBI in respect of that default, the penal interest for that
day at the rate of three per cent per annum above the bank rate on the
shortfall and if the default continues on the next succeeding working day,
the penal interest may be increased to a rate of five per cent per annum
above the bank rate for the concerned days of default on the shortfall.
17
Furnishing of return with RBI in Form VIII
The banking companies are required to file a return in form VIII within 20
days after the end of the month to which it relates RBI incorporating the
following details :
I) Amount of SLR held on alternate Fridays during the preceding month

and
ii) its demand and time liabilities in India at the close of the business on
each alternate Friday during the month.
The banks should also submit a statement as annexure to the form VIII
giving daily position of –
(a) value of securities held for the purpose of compliance with SLR and
(b) the excess cash balances maintained by them with RBI in the
prescribed format.
( c ) The mode of valuation of securities.
18
Certification by the Central Statutory Auditors of the Bank
In terms of RBI circular dated 8th February 1993, the CSAs are
required to verify the compliance of SLR on 12 odd dates in
different months not being Fridays. The said compliance report is
required to be submitted to the top management of the Bank as
well as RBI.
The report of the statutory auditors in relation to compliance with

SLR requirements has to cover two aspects:
(a) correctness of the compilation of DTL position; and
(b) maintenance of liquid assets as specified in section 24 of the
Act.
19
AUDIT CHECK LIST
• Verification of cash balance on 12 odd dates to be selected by the

Auditors. The cash balance on 12 odd dates at the branches are to be
certified by the Branch Auditors.
• Test check of figures certified by the Branch Auditors.
• Test check of arithmetical accuracy of consolidation with the related

returns received from the branches.
• Test check of records maintained by HO/Large branches of approved SLR

securities to verify the amount of approved securities held by the Bank on
the dates selected by the Auditors.
• Checking of valuation of securities to confirm that the valuation is done as

per the guidelines prescribed by RBI.
20
CRR AND SLR PROVISIONS AT A GLANCE
CRR SLR
Legal Section 42(1) of RBI Section 24 (2a) of Banking
provision Act 1934 regulation Act 1949
Kept as Cash balance with RBI Cash in hand, gold and

investment in approved
securities
Basis As % of net demand As % of net demand time

time liability at liability on daily basis on last
fortnightly average Friday of 2nd preceding
basis fortnight
Interest No interest payable Interest payable as per
w.e.f.March 31st 2007 investment scheme
Return to Form A (Fortnightly) Form VIII (20th of each month)

RBI
21
Concurrent Audit of Banks- Loans and Advances by CA
Akesh Vyas
CORE FUNCTIONS OF
TREASURY OPERATIONS
FRONT OFFICE OPERATIONS
MIDDLE OFFICE OPERATIONS
BACK OFFICE OPERATIONS
22
FRONT OFFICE
OPERATIONS
Consist of dealing room operations where in the dealers
enter into the deals with other approved counter parties .
All deals details are noted in a manual deal pad and then
captured in front office system.
The same are passed on to the back office for authorization.
23
MIDDLE OFFICE OPERATIONS
Main functions of middle office operations are :
Fixing counter party , products and dealers limits

Providing MIS to top management
Conducting risk return analysis study
Implementation of risk management policy
Stress testing and back testing of investment
24
BACK OFFICE OPERATIONS
Main functions include :
Proper control and maintenance of records

Settlement and followup
Deal slip verification
Accounting
Confirmations
Statutory reports to RBI
Verification of Dealing room operations
Collection of interest on securities
25
NEED FOR SEPARATE FRONT OFFICE AND
BACK OFFICE- A CASE STUDY
26
Barings Bank
A British merchant bank that was started in 1762, and for centuries was considered the
largest and most stable bank in the world. In 1995, Barings - then the oldest bank in
Britain - collapsed after it was unable to meet its cash requirements following
unauthorized speculative trading in derivatives at its Singapore office by then-trader Nick
Leeson.
Nick Leeson
A former manager with England's Barings Bank, Leeson became a rogue trader while
heading up the company's Singapore division in the early 1990s. After originally earning
massive profits for Barings via several unauthorized trades in 1992, Leeson eventually
lost over $1 billion in company capital while hiding the losses in a little-used errors
account that was hidden from his superiors.
Conclusion
This was a wake-up call for many financial institutions all over the world.
Leeson had control over both the front office and the back office. Hence, he was able to
hide the losses in a numbered account 88888.
There was lack of internal control at Singapore office of the Bank. The auditors were
unable to detect the losses implying weak audit system in the Bank.
27
MCQS
28
Banks do not receive any interest on investment in
a) SLR securities
b) CRR
b)
c) Treasury bills
d) Certificate of deposits
Demand Liabilities do not include :
e) Cash certificates
f) Overdue term deposits
a)
g) Current deposits
h) Unclaimed deposits
29
Provisional CRR return is required to be filed by a
Bank with RBI within
a) 3 days from the end of fortnight

b) 7 days from the end of the fortnight b)
c) 7days from the end of the month
d) 15 days from the end of the fortnight
Final CRR return is required to be filed by a

Bank with RBI within
e) 3 days from the end of fortnight

f) 7 days from the end of the fortnight
g) 14days from the end of the fortnight d)
h) 20 days from the end of the fortnight
30
CRR is required to be maintained at minimum
c)
a) 50% of total CRR requirement
b) 75% of total CRR requirement
c) 90% of total CRR requirement
d) 100% of total CRR requirement
Penal interest for non maintenance of CRR is
e) 1% per annum
c)
f) 2% per annum
g) 3% per annum
h) 5% per annum
31
Return of SLR is required to be filed by Bank with
RBI within
a) 10 days from the end of the month b)

b) 15 days from the end of the month
c) 20 days from the end of the month
d) 30 days from the end of the month
The Central Statutory Auditors are required to

Verify the compliance of SLR on
e) 5 odd days
c)
f) 10 odd days
g) 12 odd days
h) 15 odd days
32
Statutory reports are to be filed by which office of a treasury department :
a) Front office c)
b) Middle office
c) Back office
d) All of above
SLR securities are issued by the :
e) Private companies d)
f) Financial institutions
g) Public companies
h) Issued/guaranteed by the Government
33
INVESTMENTS
34
INVESTMENT POLICY
IMPORTANT FEATURES OF INVESTMENT POLICY
• Each Bank to have a clear Investment policy duly approved by its Board of Directors.
• Banks to undertake a half yearly review ( as of 30 th September and 31st March) of their
investment portfolio and put the same before their respective Boards within a month i.e end April
and end October.
• Copy of the Review report put up to the Bank’s Board to be forwarded to RBI by May 15 and
November 15 respectively.
• Investment policy to ensure compliance of

i) total investment exposure to individuals/group
ii) exposure limit to capital market ( not to exceed 40% of the net worth of the Bank as on
March 31 of the previous year)
• Holding of shares of any company in compliance to Section 19 (2) of the Banking Regulation Act
1949.
35
PERMITTED INVESTMENTS
Investments to be disclosed as per following six classifications
i) Government securities
ii) Other approved securities
iii) Shares
iv) Debentures and bonds
v) Subsidiaries/Joint ventures/Associates
vi) Other investments such as commercial papers, certificate of
deposits, security receipts, pass through certificates, units of mutual
funds, venture capital funds etc
36
PROHIBITED
INVESTMENT
Investments in immovable properties for earning rentals though

permitted to gainfully deploy business premises which is not
being used for business
Thus banks will not have immovable properties as part of their

investment portfolio as per section 6 of the Banking Regulation
Act 1949.
37
LEGAL REQUIREMENTS
Valuation of Securities
Under Section 24 of the Banking Regulation Act 1949, the valuation of the securities is to be
done at cost price,market price, face value or combination of these methods as may be
specified by RBI from time to time.
Investments in the Shares of the Companies
As per Section 19 (2) of the Banking Regulation Act 1949, no banking company to hold shares
in any company, of an amount exceeding
30% of the paid up share capital of the company or
30% of its own paid up capital and reserves

Which ever is less
The above restriction applies to all shares whether held as investments or as pledgee
38
Declaration of Dividends
As per Section 15 (2) of the Banking regulation Act 1949, before declaration of dividend, a
Banking Company has to adequately provide for deprecation in the value of shares,
debentures and bonds to the satisfaction of its statutory auditors.
Investment in Own name
As per Section 187 of the Companies Act 2013, all investments made by a
banking company shall be made and held in its own name except in few
exceptions
39
IMPORTANT TERMS
APPROVED SECURITIES
Securities which are :
i) Issued or guaranteed by the Central Government or State
Government
ii) Securities authorized by the Central Government by
notification in the official gazette.
PRUDENTIAL EXPOSURE LIMITS

RBI permission required for investment in equity of financial
service ventures including stock exchanges, depositories etc.
40
Exemption
No approval required for Banks fulfilling the following conditions :
i) Having CRAR (capital adequacy ratio) of 10% or more

ii) Made net profit as of 31st March of the previous year
iii) After investment, the holding of the Bank remains less than 10% of the investee
company’s paid up capital
iv) After investment, the holding of the Bank along with the holding of its subsidiaries or
joint ventures remains less than 20% of the investee company’s paid up capital
41
SHORT SALES
Short Sales mean selling of securities without possession stock of such

securities.
Banks are allowed to undertake short sales subjected to conditions stipulated by
RBI. Securities which are sold short have to be delivered on settlement. Failure
to deliver securities short sold invites penalties from RBI.
Short sales position need to be covered within a maximum period of three
months including day of trade
Submission of report . Monthly report of short sale of Govt of India securities

with certificate from Concurrent/Internal that there is no violation of extant
guidelines regarding short sales is to be submitted to RBI
42
SUBSIDIARY GENERAL LEDGER (SGL)
Maintained by the Public Debt Office (PDO) of RBI .

Maintains accounts of different banks regarding their holding in Government
Securities.
Transactions through SGL account :

As per RBI guidelines :
a) Selling Bank and Paying Bank have to maintain current account with RBI for
conduct of purchase/sale of securities under Delivery versus Payment
system wherein transfer of securities take place simultaneously with the
transfer of funds
b) All transactions in Govt Securities for which SGL facility is available should
be put through SGL only.
43
c) In case of default on part of the selling bank to keep sufficient quantity and
bouncing of SGL transfer form , Cost of purchase will be debited to the current
account of the selling bank.
In case of default on part of the purchasing bank to keep sufficient balance in

the current account resulting in bouncing of SGL transfer form and creation of
overdraft , penal interest will be recovered by RBI.
d) In addition to penal interest, graded penalties with maximum penalty of Rs 5

lac per instance is leviable.
e) Defaulting banker is required to disclose in “ Notes to accounts” in its annual

Balance Sheet, the number of defaults as well as quantum of penalty imposed by
RBI during the financial year.
44
CLASSIFICATION OF INVESTMENTS
Held to Maturity (HTM)
Held for Trading (HFT)
Available for Sale (AFS)
45
HELD TO MATURITY (HTM)
Securities acquired by the Bank with the intention to hold them till maturity.
Investments under HTM category not to exceed 25% of the total investments of
the Bank excluding :
i) Investment in subsidiaries
ii) Recapitalization bonds issued by Government of India
iii) Long term bonds issued by Infrastructure companies wherein residual
maturity is not less than 7 years
w.e.f. 2nd Sept 2014, as per RBI circular, this limit of 25% can be exceeded
subjected to certain conditions.
46
HELD FOR TRADING (HFT)
Securities from which the bank expects to make gain by the

movement in market rates. These securities have to be sold
within 90 days. If due to exceptional circumstances unable to
sell, the securities to be shifted to AFS.
AVAILABLE FOR SALE (AFS)
Securities which do not fall in any of the above 2 categories.
47
SHIFTING OF CATEGORY
HTM TO HFT/AFS
Prior permission of Board of the Bank required.
Normally allowed only at the beginning of the year. No further shifting to/from
allowed during the year.
Valuation of transfer :
If securities were originally placed under HTM category at a discount, it may be

transferred at book value.
If securities were originally placed under HTM category at a premium, it may be
transferred at amortized cost.
48
AFS/HFT TO HTM
Prior permission of Board /ALCO (Asset Liability Committee) of the Bank
required.
In case of contingencies, head of ALCO authorized to approve the same
subjected to ratification by the Board
Valuation of transfer : To be made at lower of book value or market value.
HFT TO AFS
Generally not permitted. Permitted only in exceptional circumstances
Permission of Board /ALCO (Asset Liability Committee) of the Bank required.
Valuation of transfer : To be made at lower of book value or market value.
49
VALUATION OF INVESTMENTS
HELD TO MATURITY (HTM)
To be valued at the acquisition cost.
If the acquisition cost is more than face value, the premium to be

amortized over the period of residual maturity period
Amortization to be accounted for as a deduction under “ Income on

Investment- Interest earned”.
However, where there is permanent diminution , valuation to be made

on marked to market basis. (valuation at current market price rather
than at book value)
50
Meaning of permanent diminution.
This would include :
a) The company has defaulted in repaying its debt obligations

b) The loan amount of the company with any bank has been restructured.
c) The credit rating of the company has been downgraded to below investment
grade.
d) The company has incurred losses for a continuous period of three years and
the net worth has consequently been reduced by 25% or more
51
AVAILABLE FOR SALE (AFS)
Individual scrips to be valued on marked to market basis atleast on quarterly
basis
Net depreciation in respect of each categories to be provided for and net
appreciation to be ignored.
HELD FOR TRADING (HFT)
Valuation to be made on marked to market basis atleast on monthly basis

except in the following cases:
i) Equity shares should be marked to market preferably on daily basis,
but at least on a weekly basis;
ii) Banks which undertake short sale transactions, the entire HFT
portfolio including the short position should be marked to market on
daily basis.
52
PROFIT/LOSS ON SALE OF INVESTMENT
a) Held to Maturity (HTM) : Profit on sale of this category should be first

taken to Profit & Loss Account and thereafter be appropriated to “Capital
Reserve account”. Loss on sale will be recognized in the Profit & Loss
account.
b) Held for Trading (HFT) :
Profit or loss on sale will taken to Profit & Loss account.
c) Available for Sale (AFS)
Profit or loss on sale will taken to Profit & Loss account.
53
NON SLR INVESTMENTS
As per RBI guidelines, the Banks are permitted to invest in private placed bonds
and even in bonds issued by the corporates who are not their borrowers subjected
to :
a) Proper appraisal of investment proposal

b) Full disclosure in offer documents by the corporate . All disclosure standards
prescribed by SEBI to be adhered to.
c) Bank’s Investment policy to incorporate guidelines regarding investment in
SLR securities. To include same degree of credit risk analysis as any loan
proposal
d) Reference to List of defaulters/willful defaulters
e) Not to invest in Non SLR securities of original maturity of less than one year
other than commercial papers, Certificates of deposits and NCD with maturity
period upto one year
f) Banks investment in unlisted non SLR securities not to exceed 10% of its
total investment in non SLR securities as on March 31 st of the previous year
54
RESTRICTION ON EXPOSURE
TO CAPITAL MARKET
The aggregate exposure of a bank to capital market in all forms (both

fund based and non fund based) not to exceed 40% of its net worth as on
March 31st of the previous year.
Within the overall ceiling of 40%, the Bank’s investment in shares,

convertible bonds, units of equity oriented mutual funds not to exceed
20% of its net worth.
55
LIQUIDITY ADJUSTMENT
FACILITY (LAF)
56
PURPOSE :
To aid banks in adjusting the day to day mismatches in liquidity. LAF helps banks
to quickly borrow money in case of any emergency. Besides, it is a tool for RBI to
control short term money supply.
CONSIST OF : Repo and Reverse repo operations.
REPO (REPURCHASE OPTION) :

Banks borrow money from RBI to meet short term needs by selling securities to
RBI with an agreement to repurchase the same at a predetermined rate and
date. The interest rate charged by RBI for this transaction is called the repo rate.
Current repo rate is 6%.
REVERSE REPO :
RBI borrows money from Banks by lending securities. The interest rate
paid by RBI for this transaction is called the reverse repo rate.
Current reverse repo rate is 5.75%.
57
TERM REPO
A term repo is a repo for more than one day duration.It is way for
the banks to avail money from RBI for more than one day
duration. While repo is available from Monday to Friday, term
repo facility is available on days notified by RBI which is usually
twice a week.
58
REPO RISK-CASE STUDY
59
LEHMAN BROTHERS
Lehman Brothers : Fourth largest investment bank in USA . It
was operational for 158 years till 2008.
Bankruptcy : On September 15, 2008, the firm filed for
Chapter 11 bankruptcy protection following the massive
exodus of most of its clients, drastic losses in its stock, and
devaluation of assets by credit rating agencies. Lehmans
bankruptcy filing is the largest in US history
Reasons : One of the reason was REPOS 105
60
REPOS 105
Traditional repurchase agreement (Repos) involves the agreement between
two or more financial institutions where one of these institutions decides to
dispose of its short-term security for cash with the condition that after a
period of time,the seller will buy it back at a predetermined date and rates.
In a practice known within Lehman as Repo 105, bad assets were loaned to
other firms at the end of the quarter in exchange for short-term financing.
These transactions were classified as sales instead of loans The temporary
absence of the bad debt gave the illusion of a much healthier balance sheet.
But Lehman would quickly reclaim the assets, usually within days after the
end of the quarter. This way, Lehman hid $39 billion at the end of the fourth
quarter of 2007, $49 billion in the first quarter of 2008 and $50 billion in the
second quarter of that year.
61
MCQS
62
Banks have to undertake review of their Investment policy as on each
a) 31st March and 31st December
b) 30th June and 30th September c)
c) 30th September and 31st March
d) 30th September and 31st December
Copy of the review report has to be put up before the Board by
e) May 15th and November 15th

d)
f) July 15th and April 15th
g) October 15th and January 15th
h) April 30th and October 31st
63
Under section 19(2) of the Banking Regulation Act 1949,
no banking company can hold shares in any company
exceeding :
d)
a) 30% of the reserves of the company
b) 30% of its own paid up capital
c) 30% of paid up capital and reserves of the company
d) 30% of its own paid up capital and reserves
Short sale position need to be covered within
e) One month
c)
f) Two month
g) Three month
h) Six month
64
Subsidiary General Ledger (SGL) is maintained by :
b)
a) Investment committee of the Bank
b) Public debt office of RBI
c) Central accounts office of the Bank
d) Branches holding investments
Investments held under Held to Maturity category

Generally not to exceed :
c)
a) 10% of total investments of the bank
b) 20% of total investments of the bank
c) 25% of total investments of the bank
d) 50% of total investments of the bank
65
Securities Held for trading (HFT) are required to be sold within
a) 15 days
b) 30 days
c) 60 days d)
d) 90 days
In case of permanent diminution, securities held under HTM category

have to be valued at :
c)
e) Cost or market price which ever is lower
f) At acquisition cost
g) At marked to market price
h) As per the decision of investment committee of the Bank
66
Permanent diminution implies where :
a) The company has defaulted in repayment of its debt

b) The loan of the company has been restructured d)
c) Net worth has been reduced by 25% or more
d) All of above
Securities held under Available for Sale (AFS) have to be valued atleast on
e) Fortnightly basis
f) Monthly basis c)
g) Quarterly basis
h) Annual basis
67
Securities held under Available for Sale (AFS) have to be valued at
a) Acquisition cost
b) Lower of cost or market price
c)
c) Marked to market basis
d) Any of above
Securities held under Held for Trading (HFT) have to be valued atleast on
e) Fortnightly basis
f) Monthly basis
g) Quarterly basis
b)
h) Annual basis
68
•Investment policy is required to be approved by :
a) Board of Directors
b) Investment Committee a)
c) Audit Committee
d) Any of the above
69
MONEY MARKET
70
Market for short-term requirement and deployment
of funds - overnight to one year
Investment in instruments which are marketable, liquid and

bearing low-risk
It enables banks to reduce cost of liquidity by deploying their

short-term surpluses
71
Money Market – Important Instruments
Call and Notice Money

Treasury Bills
Commercial Papers (CPs)
Certificates of Deposit (CDs)
Colletralized Borrowing and lending obligation (CBLO)
72
CALL AND NOTICE MONEY
Maturity period : one to fourteen days
Call Money : which is lent for one day
Notice Money : which is lent for more than one day but less than 15 days
Purpose : lend by banks to each other to maintain Cash Reserve Ratio
Call Rate: Interest paid on call money . Highly sensitive and volatile and
fluctuates as per demand and supply
73
Participants in call money market :
Both as lenders and borrowers : All commercial banks

(including foreign banks), Cooperative Bank, Discount and
Finance House of India Ltd and Securities Trading Corporation
of India Ltd
As lenders only : LIC, UTI , NABARD
Major call money markets in India : Mumbai, Kolkatta, Delhi,

Chennai and Ahmedabad
74
TREASURY BILLS
Nature :
Short term borrowing by Government of India . For long term

funds, government bonds are issued.
Issued as promissory notes at discount. Interest received is the difference between the
price at which they are issued and their redemption value.
Investor Any one (including individuals).
Risk : Assured yield and negligible risk of default
Maturity : 91, 182 and 364 days
Minimum amount : Rs. 25000 and in multiples of Rs. 25000
75
COMMERICAL PAPERS
Commercial Papers :
Short term instruments introduced since 1990 onwards. Issued by high rated Corporates, and
select all India Financial Institutions in form of Promissory Notes.
Purpose : To avail short term monetary funds in the money market.
Maturity : 7 day to 1 year
Minimum issue size : Rs 5 lacs and in the multiple of Rs 5 lacs
Major Issuers of Commercial Papers :

i) Leasing and Finance Companies
ii) Manufacturing Companies
iii) Financial Institutions
76
Eligibility for issue of CP
a) The tangible net worth of the company, as per the latest audited
balance sheet, is not less than Rs. 4 crore;
b) The borrowal account of the company is classified as a Standard
Asset by the financing bank/s.
c) All eligible participants should obtain the credit rating for
issuance of Commercial Paper
The minimum credit rating shall be P-2 of CRISIL or such equivalent

rating by other agencies
77
CERTIFICATE OF DEPOSITS
The scheme was introduced in July 1989 to enable the Banks to
mobilize bulk deposits from the market. Issued by all commercial
banks except RRBs. The main features of CD are
Maturity period : Minimum 7 days Maximum 12 months
Amount of deposit :
Minimum Rs 1 lac from a single subscriber and in multiples of Rs
1 lac
Pre Mature Cancellation : Not permitted
Investment by NRIs : Permitted (but only on non repatriable
basis)
78
GILT EDGED SECURITIES
The government securities , all Bonds & T-bills issued by the
Central Government, and state governments. These securities
are normally referred to, as "gilt-edged" as repayments of
principal as well as interest are totally secured by government
guarantee.
79
COLLATERALISED BORR0WING AND LENDING
OBLIGATION (CBLO)
CBLO is an RBI approved money market instrument for the benefit

of the entities which do not have access to call money market.
Members: Banks including Cooperative Banks, Financial
institutions, Insurance companies, Mutual funds , NBFC etc
Important Features:
a) Issued at a discount to face value
b) Creates an obligation on the borrower to return borrowed
money with interest at a specified date
c) Under CBLO, securities of the borrower are held in their SGL
account with CCIL (Clearing Corporation of India Ltd) and not
transferred to the lender
80
AUDIT PROCESS OF
INVESTMENTS
81
VERIFICATION OF BASIC DOCUMENTS :
• Review of Investment policy of the Bank to ensure that the same conforms , in all material
aspects, the RBI guidelines and statutory provisions applicable to the Bank.
• Review of internal controls regarding Investments and their operational efficacy.
• Review the minutes of the Board of Directors for approval of Investment Policy
• Examining that the investments made by the Bank are in accordance with the laid down
investment policy of the Bank
• Verification the valuation of investments
• Perusing the concurrent audit and System Audit reports and the followup action taken by the
management.
• Perusing the half yearly review of portfolio done by the Board of Directors
82
Examination of reconciliation
Verification of reconciliation of investment balance as per
financial statements with the custodians (Depository for
investments held in dematerialized form)
Physical verification of Investments in hand with Investment

records
Obtaining direct balance confirmations
83
INSPECTION OF DOCUMENTS
•Examine if investments made provide unhindered right of ownership i e

the agreement of investments do not contain any conditions which
restrict the right of ownership of the Bank.
• Purchase/Sale of investments are made within the delegated authority.
• Purchase/Sales of investments to be duly supported by documents

such as broker’s contract note etc.
• Examine the cases of non receipts of income ,if any, against

investments for a long period or scrips being held without being
redeemed long after redemption date as these situations might be
indicative of scrips being forged or otherwise unrealizable.
84
EXAMINATION OF SHIFTING OF INVESTMENTS
Examine that :
i) Shifting of investments to/from HTM category is carried only once
in financial year at the beginning of the year except in cases
where exception provided by RBI
ii) Shifting is approved by the Board of Directors
iii) Shifting from AFS to HFT is approved by the Board of
Directors./ALCO/Investment Committee. In case of contingencies
where shifting is approved by the Chief Executive of Bank/Head of
ALCO, the same is ratified by the Board at a later stage.
iv) Shifting from HFT to AFS is done only in exceptional
circumstances like unable to sell scrip within 90 days due to tight
liquidity conditions etc, approval of Board of
Directors/ALCO/Investment Committee is obtained.
v) Valuation of transfers as per prescribed method.
85
OTHER POINTS FOR VERIFICATION BY THE AUDITORS
Verify that :
a) There is a clear segregation of duties between front, back

and mid office.
b) Rotation of duties of staff is being done at periodic intervals.
c) Transactions between one bank and another bank is not
put through the account of the broker whose role should be
restricted to bringing the two parties to deal together.
86
NON PERFORMING
INVESTMENTS (NPI)
Banks are required to follow norms for valuation of investments
and reckoning the income on such securities where
interest/principal is in arrears.
The norms of NPI classification are specified in RBI master

circular dated 1.7.2015 on Prudential Norms for classification,
valuation and operation of investment portfolio by Banks
87
Classification as NPI
An NPI is one where :
i) Interest/Instalment is due and remains unpaid for more than 90 days

ii) In case of investment in equity shares, in absence of availability of latest
Balance Sheet of that company, the shares have to be valued at Rs1/- in
accordance with RBI Master circular dated 1.7.15 on Prudential norms for
classification of Investment Portfolio. In such event, such equity shares will
be classified as NPI.
iii) In case where account of issuer in respect of credit facility availed is NPA in
the books of the Bank, the investment in any of the securities of the same
except preference shares will classified as NPI and vice versa.
iv) In case of investment in State Guaranteed securities, if the
interest/installment of such securities remain unpaid for more than 90 days,
such security shall be classified as NPI.
v) Bank’s investment in Central Government guaranteed bonds need not be
classified as NPI. However, this exemption is not extended to the norms of
Income recognition.
88
QUIZ
89
Call money is money lent by
a) Bank to a finance company

b) Bank to a company
c)
c) Bank to Bank
d) Company to a Bank
Call money is lent for
e) Overnight a)
f) Three days
g) Seven days
h) Fourteen days
90
The following are not eligible to subscribe for Treasury bills
a) Central Government
b) State Government
d)
c) Banks
d) None of above
Treasury bills are issued by :
e) Government of India a)
f) State Governments
g) RBI
h) Corporates
91
Commercial papers are issued by :
a) RBI c)
b) Government of India
c) Corporates
d) Banks
Minimum issue size of commercial papers is
b)
e) Rs 1 lac
f) Rs 5 lacs
g) Rs 50 lacs
h) Rs 100 lacs
92
Certificate of Deposits are issued by :
a) RBI d)
b) Government of India
c) Corporates
d) Banks
Minimum issue size of Certificate of deposits for a single

subscriber is
a)
e) Rs 1 lac
f) Rs 5 lacs
g) Rs 50 lacs
h) Rs 100 lacs
93
A Non Performing Investment (NPI) is where
a) Interest/Instalment remains unpaid for 90 days or more b)

b) Interest/Instalment remains unpaid for more than 90 days
c) Interest/Instalment remains unpaid for 180 days or more
d) Interest/Instalment remains unpaid for more than 180 days
In case of any credit facility availed by a company becomes

NPA, the investment in such company will become NPI
b)
except investment in
e) Equity shares
f) Preference shares
g) Convertible debentures
h) All of above
94
• The following investment will not be classified as NPI
a) Bonds issued by State Government

b)
b) Bonds issued by Central Government
c) Equity shares of a listed company
d) Commerical Papers
•Which of the following will be marked as Non-Performing Investments (NPI)?
a) Unlisted equity shares wherein the audited financials are not available
after completion of six months from the end of financial year;
b) Cumulative Preference shares wherein the dividend on preference shares is due for
more than 90 days
c) Listed Equity shares wherein the Term Loan granted to the issuer is NPA in the books of
account of the bank. d)
d) All the above
95
•Shifting of securities from HTM to AFS/HFT is generally permitted:
a) Once in a year at any time during the year.

b) Once in a year and at the beginning of the year
b)
c) As and when desired by bank
d) Not permitted
•A bank has sold of securities classified under HTM and earns net profit of Rs.100
crores.The current rate of income tax is presumed to be 30%. Which of the following
statement is correct as regards accounting treatment to be given by the bank?
a) An amount of Rs.70 crores will be credited to Capital Reserve Account with no effect to
be given in Profit & Loss Account
b) The amount of Rs.100 crores would be credited to Profit and Loss and Rs.100 crores
will be appropriated to Capital Reserve Account
c) The amount of Rs.100 crores would be credited to Profit and Loss account and Rs.70
crores will be appropriated to Capital Reserve Account.
d) The amount of Rs.100 crores would be credited to Profit and Loss Account
c)
96
•Which of the following statement is correct w.r.t scheduled commercial bank which
enters into a short sale of securities?

a) A bank can enter into a sale of securities only if the bank does not hold any stock
of securities;
b) A bank can enter into a short sale of securities only after obtaining prior approval
of Reserve Bank of India;
c) A bank can enter into a short sale of securities even if the bank holds stock of the
same securities;
d) A bank can enter into a short sale of securities only after obtaining prior approval
of Clearing Corporation of India(CCIL).
a)
97
Every bank is required to maintain at the close of business every day, a minimum
proportion of their Net Demand and Time Liabilities as liquid assets in the form of
cash, gold and un-encumbered approved securities which is known as

a) CRR
b) Repo Rate
d)
c)Reverse Repo Rate
d) SLR
Held to Maturity (HTM), Held for Trading (HFT) and Available for Sale (AFS) are
classification of

a) Advances Accounts b)
b) Investments
c) Fixed Assets
d) Demand & Time Liabilities
98
When banks have any shortage of funds, they can borrow it from Reserve Bank of
India. The rate at which the RBI lends money to commercial banks is called

a. Reverse Repo Rate
b. Repo Rate b)
c. Standard Lending Rate
d. LIBOR
When banks have surplus funds, they can invest with Reserve Bank of India. The rate at
which the investment with RBI is made is called

a. Reverse Repo Rate a)
b. Repo Rate
c. Standard Lending Rate
d. LIBOR
99
Which of the following method is permitted to be followed for valuation of securities
of a bank

a. Random Marking Method d)
b. Simple Average Method
c. Weighted Average Method
d. None of the above
Loss on Sale of securities under HTM category will be directly

a. debited to profit and loss account
a)
b. debited to Capital Reserve Account
c. debited to Investment Reserve Account
d. debited to Investment Fluctuation Account
100
Which of the following statements is correct:

a. In case of HTM securities, premium in book value over face value is amortised
over the residual period
b. In case of HTM securities, discount in book value over face value is amortised
over the residual period
c. In case of HTM securities, premium or discount in book value over face value is
accounted for on the date of maturity of the security
d. In case of AFS securities, the depreciation reserve is created of an amount
equivalent to premium in book value over face value
a)
101
• In case of bouncing of SGL form , the maximum penalty by RBI on
defaulting Bank per instance is
a) Rs 100000
b)
b) Rs 500000
c) Rs 800000
d) Rs 1000000
• An overall exposure of Bank to capital market is restricted to :
b)
a) 20% of its net worth
b) 40% of its net worth
c) 60% of its net worth
d) 80% of its net worth
102
• Within the above overall exposure of Bank to capital market ,
Bank’s investment in shares, convertible debentures etc are
restricted to
a) 20% of its net worth a)
b) 40% of its net worth
c) 60% of its net worth
d) 80% of its net worth
• Banks are not permitted to invest in non SLR securities with

maturity of less than :
a) 1 year a)
b) 2 years
c) 3 years
d) 5 years
103
•Banks investment in unlisted non SLR securities not to exceed …..of its total
investment in non SLR securities as on March 31st of the previous year :
a) 5%
b) 10%
c) 20% b)
d) 40%
Certificate of deposits are issued for minimum__ days and maximum___ days :
e) 7 days and 1 month

b)
f) 7 days and 12 months
g) 30 days and 6 months
h) 45 days and 6 months
104
•The following is not eligible to issue Certificate of deposit:
d)
a) A Cooperative Bank
b) A Regional Rural bank
c) A Financial Institution
d) All of above
• To be eligible for issue of commercial paper, the tangible net

worth of the company as per the latest audited Balance Sheet
should not be less than Rs.:
a) Rs 1 crore
d)
b) Rs 2 crore
c) Rs 3 crore
d) Rs 4 crore
105
•The minimum CRISIL credit rating required for issue of
Commercial paper must be :
a) P-1 b)
b) P-2
c) P-3
d) P-4
• The maturity period of treasury bills issued by Govt of India is

a) 14 and 91 days
b) 91 and 182 days d)
c) 14 and 182 days
d) 91, 182 and 364 days
106
When Repo rate is reduced by RBI, it leads to :
a) Reduction in cost of borrowing to the borrowers c)

b) Increase in cost of lending to the borrowers
c) Reduction in cost of borrowing by banks from RBI
d) Increase in cost of borrowing by banks from RBI
In case of change in CRR, the position of liquidity of Indian Bank is :
e) Increased on reduction of CRR a)

f) Increased on increase of CRR
g) Remains unchaged on increase of CRR
h) Remains unchanged on decrease of CRR
107
ANY QUESTIONS?
108
CONTACT DETAILS
CA AKESH VYAS
Email ID: avyasca@gmail.com
Mobile: +91 9818860081
109

MAY 5TH, 2018 Chandigarh: Presenter: CA Akesh Vyas

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

MAY 5TH, 2018 Chandigarh: Presenter: CA Akesh Vyas

Uploaded by

Copyright:

Available Formats

TREASURY & INVESTMENT FUNCTION

MAY 5TH, 2018

Presenter : CA Akesh Vyas

The views opined herein should not be considered as a

This presentation should not be reproduced in part or in whole, in

• The major treasury functions include :

Nature of operations : Banks are needed to maintain sufficient liquid assets in

Cash Reserve Ratio known as CRR under section 18 of the Banking

Statutory Liquidity Ratio : Investment in specified securities over and above

No interest is paid by RBI on the CRR balance maintained by the Banks.

In terms of RBI circular dated November 26, 2016 on Requirement for

Treasury and Investment functions by CA Akesh Vyas

Demand liabilities of a bank are the liabilities which are payable on

Treasury and Investment functions by CA Akesh Vyas

Interest accrued on deposits

To be submitted within 7 days of the expiry of the relevant fortnight

To be submitted within 20 days of the expiry of the relevant fortnight

CRR to be maintained on daily basis. Prescribed minimum is 90% of total CRR

If default continues on next succeeding day/days , penal interest will be

To be furnished to RBI along with action taken to avoid recurrence of such

The last Friday referred above is known as “Reporting Friday”

The current rate of SLR is 19.50%.

If a banking company fails to maintain the required amount of SLR, it shall

I) Amount of SLR held on alternate Fridays during the preceding month

The report of the statutory auditors in relation to compliance with

• Verification of cash balance on 12 odd dates to be selected by the

• Test check of figures certified by the Branch Auditors.

• Test check of arithmetical accuracy of consolidation with the related

• Test check of records maintained by HO/Large branches of approved SLR

• Checking of valuation of securities to confirm that the valuation is done as

Kept as Cash balance with RBI Cash in hand, gold and

Basis As % of net demand As % of net demand time

Return to Form A (Fortnightly) Form VIII (20th of each month)

MIDDLE OFFICE OPERATIONS

BACK OFFICE OPERATIONS

The same are passed on to the back office for authorization.

Main functions of middle office operations are :

Fixing counter party , products and dealers limits

Proper control and maintenance of records

Demand Liabilities do not include :

a) 3 days from the end of fortnight

Final CRR return is required to be filed by a

e) 3 days from the end of fortnight

Penal interest for non maintenance of CRR is

a) 10 days from the end of the month b)

The Central Statutory Auditors are required to

SLR securities are issued by the :

• Investment policy to ensure compliance of

Investments in immovable properties for earning rentals though

Thus banks will not have immovable properties as part of their

Investments in the Shares of the Companies

30% of the paid up share capital of the company or

30% of its own paid up capital and reserves

Investment in Own name

PRUDENTIAL EXPOSURE LIMITS

No approval required for Banks fulfilling the following conditions :

i) Having CRAR (capital adequacy ratio) of 10% or more

Short Sales mean selling of securities without possession stock of such

Submission of report . Monthly report of short sale of Govt of India securities

Maintained by the Public Debt Office (PDO) of RBI .

Transactions through SGL account :

In case of default on part of the purchasing bank to keep sufficient balance in