7may Treasury

8/12/2019 7may Treasury

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TREASURY MANAGEMENT.K.Eswar

Asst. General Manager (Treasury)

Central Bank of India.



An overview of Integrated

Treasury function.

SLR/CRR

Equity/MF/VentureFund.

FundsManagement/L.A.F/

CBLO/Marketrepo//FC Buy sell

swap/ALM

Raising of TierII capital.

Corporate Debt/Debenture.

Derivatives. Foreign Exchange

Call/Notice/TermMoneyCP,CD,IBPC,.

Front office/MidOffice./Back

office.



Reserve Requirements.

• SLR : Section 24 of Banking

Regulations1949.

• CRR: Section 42(2) of RBI Act 1934 and

Sec 24(2-A) of BR act.



CRR

• Maintenance of CRR: ScheduledCommercial Banks required to maintain

with RBI on an average cash balance of notless than 3 % of Net Demand and TimeLiabilities NDTL.

• On fortnightly basis.

• RBI can increase the same not exceeding20%.



Liabilities not to be included in

NDTL.• Paid up capital.

• Credit Balance in P&L

• Refinance from RBI

• Refinance Exim Bank, IDBI, NABARD, NHB.SIDBI.

• Amount of prov made for IT in excess of actual estimatedliabilities.

• DICGC claim.

• Claim received from ECGC.

• Amount received from insurance company.

• Inter bank term deposits /borrowings with originalmaturity of 15 days and above and upto one year.



Procedure for calculation.

• Lag of one fortnight .

• CRR based on NDTL of last Friday of the

second preceding fortnight.

• Minimum CRR upto 70% of total CRR

requirements on daily basis.



SLR.

• Sec 24 of BR Act scheduled CommercialBanks are required to maintain in

a. Cash or b. In gold valued at price not exceeding

current market price or

c. In unencumbered approved securitiesvalued at a price specified by RBI fromtime to time.



SLR.

• AN AMOUNT OF 25% OF

DEMANDAND TIME LIABILITIES.

• PROCEDURE FOR CALUCATION IS

SAME EXCEPT THE INTERBANK

DEPOSITS AND INTER BANK LOANS

OF15 DAYS TO ONE YEAR AREINCLUDED.



PENALTY

• 3 % OVER BANK RATE FOR FIRST

DAY OF DEFAULT

• 5 %OVER BANK RATE FOR

SUBSEQUENT PERIOD.



Call market.

• Instrument is completely unsecured. But has

high liquidity. The platform is provided by

the CCIL under aegis of RBI. Indicates therate for short term lending of funds.

Commercial banks, co operative banks and

primary dealers.



Call /Notice/Term Market.

• Limits

Avg. Dailylimits

FortnightlyAverage.

Lending

Limits

50% of total

capital

funds.

25% of total

capital

funds.

Borrowing

limits

125%of total

capital limits

100% of

total capital

funds.



Sr. No. Participant Borrowing Lending

1 Scheduled

Commercial Banks

On a fortnightly

average basis,

borrowing

outstanding should

not exceed 100 per

cent of capital funds

(i.e., sum of Tier I

and Tier II capital)

of latest audited

balance sheet.

However, banks are

allowed to borrow a

maximum of 125 per cent of their

capital funds on any

day, during a

fortnight.

On a fortnightly

average basis,

lending

outstanding should

not exceed 25 per

cent of their capital

funds; however,

banks are allowed to

lend a maximum of

50 per cent of their

capital funds on any

day, during a

fortnight.



2 Co-operative Banks Borrowings outsta

nding by State Co-

operativeBanks/District

Central Co-

operative Banks/

Urban Co-op.

Banks in call/notice

money market on adaily basis should

not exceed 2.0 per

cent of their

aggregate deposits

as at end March of

the previousfinancial year.

No Limit



3 Primary Dealers

(PDs)

PDs are allowed to

borrow, on average

in a reporting

fortnight, up to 200

per cent of their net

owned funds (NOF)

as at end-March of

the previous

financial year.

PDs are allowed to

lend in call/notice

money market, on

average in a

reporting fortnight,

up to 25 per cent of

their NOF.



CBLO.

• A Product developed by CCIL for the

benefit of entities who have restricted

participation in terms of ceiling on call borrowing and lending borrowings or who

do not have access to call money market.

• CBLO is discounted instrument available inelectronic book entry form for the maturity

period ranging from one day and above.



CBLO

• Borrower is under obligation to return the

money that had borrowed at a specified

future date.• As an underlying charge , securities are held

in custody ( with CCIL) .

• Eligible securities are Central Governmentsecurities including T Bills as specified by

CCIL from time to time.



Accounting.

• Net funds obligation comprising the member

wise pay in pay out position is sent

electronically to RBI for effecting debits and

credits in the member’s current accounts

through the settlement account of CCIL.

• RBI completes the settlement and sends funds

settlement confirmation to CCIL.

• After receiving settlement confirmation,

CCIL posts the CBLO to the respective

members CBLO account.



Government Securities

• Primary Market: Two types of auctions are

held by RBI. Price based and Yield based.

RBI pre specified an approximate amountof dated securities that it intends to issue

through a given year.



CERTIFICATE OF DEPOSITS.

• Certificates of Deposit (CDs) is a negotiable

money market instrument and issued in

dematerialised form or as a Usance Promissory Note, for funds deposited at a bank or other

eligible financial institution for a specified time

period. Guidelines for issue of CDs are presently

governed by various directives issued by theReserve Bank of India.



CERTIFICATE OF DEPOSITS.

• Eligibility CDs can be issued by (i)

scheduled commercial banks excluding

Regional Rural Banks (RRBs) and LocalArea Banks (LABs); and (ii) select all-India

Financial Institutions that have been

permitted by RBI to raise short-termresources within the umbrella limit fixed by

RBI.



CERTIFICATE OF DEPOSITS

• Aggregate Amount

Banks have the freedom to issue CDs depending on their requirements.

An FI may issue CDs within the overall umbrella limit fixed by RBI,

i.e., issue of CD together with other instruments, viz., term money,

term deposits, commercial papers and inter-corporate deposits should

not exceed 100 per cent of its net owned funds, as per the latest audited

balance sheet.

Minimum Size of Issue and Denominations Minimum amount of a

CD should be Rs.1 lakh, i.e., the minimum deposit that could beaccepted from a single subscriber should not be less than Rs. 1 lakh

and in the multiples of Rs. 1 lakh




• Who can Subscribe CDs can be issued to individuals, corporations, companies,

trusts, funds, associations, etc. Non- Resident Indians

(NRIs) may also subscribe to CDs, but only on non-

repatriable basis which should be clearly stated on the

Certificate. Such CDs cannot be endorsed to another NRI

in the secondary market.




• Maturity

The maturity period of CDs issued by banks should be not less than 7

days and not more than one year.

The FIs can issue CDs for a period not less than 1 year and not

exceeding 3 years from the date of issue.

Discount / Coupon Rate CDs may be issued at a discount on face

value.. The issuing bank / FI are free to determine the discount /

coupon rate.




• Reserve Requirements

Banks have to maintain the appropriate reserve requirements, i.e., cash

reserve ratio (CRR) and statutory liquidity ratio (SLR), on the issue

price of the CDs.

Transferability

Physical CDs are freely transferable by endorsement and delivery.

Dematted CDs can be transferred as per the procedure applicable to

other demat securities. There is no lock-in period for the CDs.

Loans / Buy-backs Banks / FIs cannot grant loans against CDs.

Furthermore, they cannot buy-back their own CDs before maturity.



• There will be no grace period for repayment

of CDs. If the maturity date happens to be

holiday, the issuing bank should make payment on the immediate preceding

working day. Banks / FIs may, therefore, so

fix the period of deposit that the maturitydate does not coincide with a holiday to

avoid loss of discount / interest rate.



COMMERCIAL PAPER

• Who can Issue Commercial Paper (CP)

Corporates, primary dealers (PDs) and the all-India financial

institutions (FIs) that have been permitted to raise short-term resources

under the umbrella limit fixed by the Reserve Bank of India are

eligible to issue CP.

A corporate would be eligible to issue CP provided: (a) the tangible net

worth of the company, as per the latest audited balance sheet, is not

less than Rs.4 crore; (b) company has been sanctioned working capitallimit by bank/s or all-India financial institution/s; and (c) the borrowal

account of the company is classified as a Standard Asset by the

financing bank/s/ institution/s.



COMMERCIAL PAPER

• Rating Requirement

All eligible participants shall obtain the credit rating for

issuance of Commercial Paper from either the Credit

Rating Information Services of India Ltd. (CRISIL) or theInvestment Information and Credit Rating Agency of India

Ltd. (ICRA) or the Credit Analysis and Research Ltd.

(CARE) or the FITCH Ratings India Pvt. Ltd. or such

other credit rating agencies as may be specified by theReserve Bank of India from time to time, for the purpose..



• The minimum credit rating shall be P-2 of

CRISIL or such equivalent rating by other

agencies. The issuers shall ensure at thetime of issuance of CP that the rating so

obtained is current and has not fallen due

for review



COMMERCIAL PAPER

• Maturity CP can be issued for maturities between a minimum of 7

days and a maximum up to one year from the date of issue.

The maturity date of the CP should not go beyond the date

up to which the credit rating of the issuer is valid.

Denominations

CP can be issued in denominations of Rs.5 lakh ormultiples thereof. Amount invested by a single investor

should not be less than Rs.5 lakh (face value).



COMMERCIAL PAPER.

• Limits and the Amount of Issue of CP

CP can be issued as a "stand alone" product. The aggregate amount of

CP from an issuer shall be within the limit as approved by its Board of

Directors or the quantum indicated by the Credit Rating Agency for

the specified rating, whichever is lower. Banks and FIs will, however,

have the flexibility to fix working capital limits duly taking into

account the resource pattern of companies’ financing including CPs.



COMMERCIAL PAPER.

•

The total amount of CP proposed to be issued should be raised within a

period of two weeks from the date on which the issuer opens the issue

for subscription. CP may be issued on a single date or in parts on

different dates provided that in the latter case, each CP shall have the

same maturity date.

Every issue of CP, including renewal, should be treated as a fresh

issued.



• Investment in CP

CP may be issued to and held by individuals, banking companies,

other corporate bodies registered or incorporated in India and

unincorporated bodies, Non-Resident Indians (NRIs) and Foreign

Institutional Investors (FIIs). However, investment by FIIs would be

within the limits set for their investments by Securities and Exchange

Board of India (SEBI).

Mode of Issuance

CP can be issued either in the form of a promissory note (Schedule I)

or in a dematerialised form through any of the depositories approved by and registered with SEBI.

CP will be issued at a discount to face value as may be determined by

the issuer.



Commercial paper.

• No issuer shall have the issue of CP underwritten or co-

accept

• Preference for Dematerialisation

While option is available to both issuers and subscribers to

issue/hold CP in dematerialised or physical form, issuers

and subscribers are encouraged to prefer exclusive reliance

on dematerialised form of issue/holding. However, with

effect from June 30, 2001, banks, FIs and PDs are requiredto make fresh investments and hold CP only in

dematerialised form.



Commercial paper.

• Stand-by Facility

In view of CP being a 'stand alone' product, it would not be

obligatory in any manner on the part of the banks and FIsto provide stand-by facility to the issuers of CP. Banks and

FIs have, however, the flexibility to provide for a CP issue,

credit enhancement by way of stand-by assistance/credit,

back-stop facility etc. based on their commercial judgement, subject to prudential norms as applicable and

with specific approval of their Boards.



• Procedure for Issuance

Every issuer must appoint an IPA for issuance of CP. The

issuer should disclose to the potential investors its financial

position as per the standard market practice. After theexchange of deal confirmation between the investor and

the issuer, issuing company shall issue physical certificates

to the investor or arrange for crediting the CP to the

investor's account with a depository. Investors shall begiven a copy of IPA certificate to the effect that the issuer

has a valid agreement with the IPA and documents are in

order.



Understand the terminologies

used in Treasury.• Coupon.

• Maturity.

• Current Yield.

• YTM.

• Duration.

• Measures of Central Tendency: Mean.

• Measures of dispersion: Variance/Standard Deviation.

• Value at Risk.



• A.Current Yield of 10 year bond (12%

coupon) with par value of 1000 selling for

950 . What is current yield.

• 12.63



• Bond value 1000

• Coupon 10%

• Maturity 5 years

• Current makt intt : 8%

• Bond Price ?.



Solution.

100 .926 92.60

100 .857 85.70

100 .794 79.40

100 .735 73.50

1010 .681 687.81

1019.01



Stock returns of the company are as under. What is std. dev.

Year Returns Deviation from

mean

Deviation Squared.

1 10% -10 100

2 20 0 0

3 5 -15 225

4 30 10 100

5 35 15 225

650

Mean=100/5=20

Standard deviation: (650/5)^.5=11.40



7/19/2014 . 42

Interest Rates

Yie ld Curve

5.0000%

6.0000%

7.0000%

8.0000%

9.0000%

10.0000%

11.0000%

0 1 2 3 4 5 6 7 8 9 10

Time Period in Years

Y T M

Yield Curve Parallel Shifts



7/19/2014 . 43

Yield Curve – Parallel Shifts

Yie ld Cu rve - Para l le l Sh i f ts

5.7500%

6.2500%

6.7500%

7.2500%

7.7500%

8.2500%

8.7500%

9.2500%

9.7500%

10.2500%

1 2 3 4 5 6 7 8 9 10

Tenor in Years

Y T M

YC1 YC-Rate Rise YC-Rate Fall

Yield Curve Stiffening &



7/19/2014 . 44

Yield Curve– Stiffening &

FlatteningYie ld Cur ve -S t i ffen ing & Fla tten in g

6.0000%

7.0000%

8.0000%

9.0000%

10.0000%

11.0000%

1 2 3 4 5 6 7 8 9 10

Tenor in Years

Y T M

YC1 YC-Stiff YC-Flat



7/19/2014 SPBT COLLEGE. 45

Duration nalysis




DURATION

A methodology is required for following purposes:

To assess ALM mis-matches between assetsand liabilities

To compare two portfolios - Both can be

assets / liabilities or one asset and one

liability portfolio

To decide between various options for

contracting assets or liabilities

“ UR TION N LYSIS”




DURATION

• In financial analysis, any intermittent cash flow

earned from a financial asset is presumed to be

reinvested at current interest rates.

• Thus, when current interest rates go up, price of a

bond falls while the reinvestment income will go up

for period to maturity. Thus capital loss and higher

income occur together.

• At some point of time in the life of the asset, the

capital loss will equal the rise in reinvestment

income This point of time is defined as Duration of

the Asset.




DURATION

• Duration is also termed as effective life of an

asset / liability or as weighted average life.• Duration can be applied to any asset /

liability that is of fixed income type. Itcannot be applied to floating rate

instruments.• Duration is a direct outcome of maturity (to

term) and interest rates.

• Hence Duration is also viewed as primary

measurement of price sensitivity.• Duration measure (D) is expressed in years.

DUR TION N LYSIS n Example




Year (Y) Inflow DF at 8% PV PV*Y

(1) (2) (3) (4)=(2*3) (5)=(1*4)

1 6 0.92593 5.55556 5.55556

2 6 0.85734 5.14403 10.28807

3 6 0.79383 4.76299 14.28898

4 6 0.73503 4.41018 17.640725 6 0.68058 4.08350 20.41750

6 6 0.63017 3.78102 22.68611

7 6 0.58349 3.50094 24.50660

8 6 0.54027 3.24161 25.93291

9 6 0.50025 3.00149 27.01344

10 106 0.46319 49.09851 490.98510

Total 86.57984 659.31497

D= 7.61511

Discouting Factor is arrived at by "1/(1+r)^n"

Duration is arrived at by dividing total of Col 5 by

total of Col 4.

Calculate Duration of a bond of Rs 100 carrying coupon at

6.00%, payable annually and maturity of 10 years. Principal

to be repaid upon maturity. Current expectation of Interest

Rate is 8.00%




Duration

• Duration in expressed in years and iscomparable across portfolios.

• Duration of a Zero Coupon Bond is equal to itsmaturity.

• Duration is additive. Hence, Duration of aportfolio is the weighted average duration of

all instruments of the portfolio.• Duration of a coupon paying bond / asset is

less than its maturity.

• Longer the maturity of a bond, longer is

Duration.• Duration is inversely related to Coupon.




Duration

• Duration is directly related to market interestrates / Yield.

• Higher the frequency of coupons, lower theDuration.

• Duration of a Floating Rate bond is equal toits interest reset period or the period

remaining to next reset of interest.• For small changes in yield, Duration

multiplied by percentage change in yieldgives percentage change in price for bonds.

Duration Price Change




• If current price of a bond is Rs 98.50, its Duration is2.7613 and yield is likely to change from 6.00% to

5.80%, then the likely price of the bond is computedas under:

% change in Price = D*(percentage change in Yield)

= 2.7613 * (6.00 - 5.80)

= 0.55226%Absolute change in Price = 98.50 * 0.55226%

= 0.54398.

As Yield has come down, price will increase and

therefore, expected bond price will beRs 99.04398.

Modified Duration




• Duration is not preferred to compute price changes

when change in yield is large. For this purpose,

Modified Duration (MD) is used.

MD = Duration / (1+Yield)

• In our Bond example, D=2.76129 and yield is 6.00%.

Therefore, MD = 2.76129/(1+0.06) or 2.60500. Let

current market price be Rs 98.50.

• If yield changes from 6.00% to 5.80%, percentage

change in price will be 0.52100% and absolute change

in price will be 0.51318.

• Hence changed price will be Rs 99.01318.

Duration & Interest Rate Risk





• In a bank’s balance sheet, If DA = DL , there is

no IRR faced by the bank. IRR manifests itselfif DA > DL or DA < DL , depending on thedirection of movement of interest rates.

• Hence, the strategy for containing IRR will be

to aim at a mix of assets and liabilities insuch a way that their Duration matches.

• Duration Gap is the difference between theDuration of Assets less the effective Duration

of Liabilities.




7/19/2014 SPBT COLLEGE 55


• If a bank has Asset Duration of 3 years, Assets

of Rs 200 crore and Liabilities (excludingEquity) of Rs 150 crore, the bank should

target Liability Duration of 4 years

(200*3/150).

• In that case, Duration of Equity will be

(3*200) – (4*150) = 0.

• In other words, bank’s net worth is

immunized against changes in interest rates.

7may Treasury

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