Treasury Management – Concepts
Banks not only lend money to customers but also invest in securities such as Bonds and Debentures of Government as well as Corporates. These instruments are easily tradable in the capital and money market. The tradability of securities makes investments an attractive option for banks for deployment of their funds. Further, banks buy securities not only to trade but also to hold them till maturity to take advantage of the attractive returns with relatively lower risk. Banks are allowed to invest in shares of companies. However, the volumes are low due to associated high risk besides regulatory restrictions. The investment portfolio of the banks broadly divided into three groups viz.,
Trading Book - Securities purchased with the intention of selling them within 90 days are held in the trading book. Trading opportunities arise in the market on account of fluctuation in interest rates and arbitrage opportunities.
Available for Sale (AFS) - Securities which are bought with the intention of selling them but not necessarily within 90 days is considered to be AFS securities. They are also part of the trading portfolio of the bank but only the time frame is different. Both the trading and AFS securities have to be "Marked to Market" every quarter while finalization of quarterly results.
Held to Maturity (HTM) - These securities are meant to be held till their date of maturity and the purpose investing in them is to earn reasonable steady income. These securities are carried in the books at cost or purchase price till maturity. Hence, HTM securities need not be "Marked to Market" as the bank is certain of receiving the maturity value on the specified date. Banks are not allowed to shift securities freely from trading and AFS to the HTM book as this may lead to overstating of profit figures. However, banks can opt for shifting only once in a year to adjust their overall portfolio. Banks are permitted to exceed the limit of 25% of total investments under HTM category provided (a) the excess comprises of only of SLR securities and (b) the total SLR securities held in the HTM category is not more than 23% by March 2014.
Call Money Markets:
Call and notice money market refers to the market for short term funds ranging from overnight funds to funds for a maximum tenor of 14 days. Under Call money market, funds are transacted on overnight basis where as in case of notice money market; funds are transacted for the period of 2 days to 14 days.
Coupon Rate:
It is a rate at which interest is paid, and is usually represented as a percentage of the par value of a bond. It refers to the periodic interest payments that are made by the borrower (who is also the issuer of the bond) to the lender (the subscriber of the bond) and the coupons are
stated upfront either directly specifying the number (e.g.8%) or indirectly tying with a benchmark rate (e.g. MIBOR+0.5%).
Zero Coupon Bond / Deep Discount Bond:
The bond is issued at a discount to its face value, at which it will be redeemed. When such a bond is issued for a very long tenor, the issue price is at a steep discount to the redemption value. The effective interest earned by the buyer is the difference between the face value and the discounted price at which the bond is bought. The essential feature of this type of bonds is the absence of intermittent cash flows.
Commercial Paper (CP):
It is a short-term instrument to enable non-banking companies to borrow short-term funds through liquid money market instruments. CPs is therefore part of the working capital limits as set by the maximum permissible bank finance (MPBF). CP issues are regulated by RBI Guidelines issued from time to time stipulating term, eligibility, limits and amount and method of issuance. 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. CP can be issued in denominations of Rs. 5 lakh and multiples thereof. It is mandatory that CPs should be rated by credit rating agencies. In a bid to make CPs attractive, the RBI has allowed issuers to buyback these instruments through the secondary market before maturity. It attracts stamp duty.
Certificates of Deposits (CDs):
It is a negotiable money market instrument and issued in dematerialized form or as a Usance Promissory Note, for funds, deposited at a bank or other eligible financial institutions to raise short-term resources within the umbrella limit fixed by RBI. CDs may be issued at a discount on face value. CDs differ from term deposit as they involve the creation of paper, and hence have the facility for transfer and multiple ownerships before maturity. Banks use the CDs for borrowing during a credit pickup, to the extent of shortage in incremental deposits.
Minimum amount of a CD should be one lakh and in multiples thereof. The maturity period of CDs should be not less than 7 days and not more than one year. However FIs are allowed to issue CDs not exceeding 3 years from the date of issue. Banks have to maintain the appropriate reserve requirements (CRR/SLR) on the issue price of the CDs. It attracts stamp duty. Banks/FIs cannot grant loans against CDs.
Securitization is an effective tool to reduce the mismatches in the maturities of assets and liabilities. It is a financing technique that involves pooling and re-packing of illiquid financial assets in to marketable securities. There are six players viz., Borrowers, Lending Banker (who becomes an originator for the Securitization transaction), Special Purpose Vehicle
(SPV), Credit Rating Agency, Investors and Service Providers. The process of securitization involves identification of financial assets, rating of these assets by the rating agency, creation of a SPV for handling the securitization transaction, assignment of future receivables in favour of the SPV, issuance of marketable securities based on these underlying financial assets and selling the same to the investors. The service providers recover the amount periodically and remit to the SPV and who in turn pass the benefit to the investors.
Asset and Liability Management:
RBI Guidelines: Of late, it is observed that PSBs have been accepting Bulk Deposits/Certificate of Deposits route to increase balance sheet size at very high interest rates, adversely affecting the profitability besides exposing the banks to ALM Risk. RBI directed banks not to accept Bulk Deposits beyond 10% of the total deposits and the total of Bulk Deposits & Certificates of Deposits should not exceed 15% of total deposits of the bank at any given point of time. An appropriate time-bound strategy for reduction of such existing bulk deposits should be put in place.
Adjusted Net Bank Credit (ANBC):
It denotes Net Bank Credit plus investments made by banks in non-SLR bonds held in HTM category. However, investments made by banks in the Recapitalization Bonds and Inter-bank exposures will not be taken into account for the purpose of priority sector lending targets/sub-targets.
Subordinate Debt:
It is a debt owed to an unsecured creditor that in the event of liquidation can only be paid after the claims of secured creditors have been met. Normally, subordinate debt ranks below other secured loans with regard to claims on assets or earnings.
Banks not only lend money to customers but also invest in securities such as Bonds and Debentures of Government as well as Corporates. These instruments are easily tradable in the capital and money market. The tradability of securities makes investments an attractive option for banks for deployment of their funds. Further, banks buy securities not only to trade but also to hold them till maturity to take advantage of the attractive returns with relatively lower risk. Banks are allowed to invest in shares of companies. However, the volumes are low due to associated high risk besides regulatory restrictions. The investment portfolio of the banks broadly divided into three groups viz.,
Trading Book - Securities purchased with the intention of selling them within 90 days are held in the trading book. Trading opportunities arise in the market on account of fluctuation in interest rates and arbitrage opportunities.
Available for Sale (AFS) - Securities which are bought with the intention of selling them but not necessarily within 90 days is considered to be AFS securities. They are also part of the trading portfolio of the bank but only the time frame is different. Both the trading and AFS securities have to be "Marked to Market" every quarter while finalization of quarterly results.
Held to Maturity (HTM) - These securities are meant to be held till their date of maturity and the purpose investing in them is to earn reasonable steady income. These securities are carried in the books at cost or purchase price till maturity. Hence, HTM securities need not be "Marked to Market" as the bank is certain of receiving the maturity value on the specified date. Banks are not allowed to shift securities freely from trading and AFS to the HTM book as this may lead to overstating of profit figures. However, banks can opt for shifting only once in a year to adjust their overall portfolio. Banks are permitted to exceed the limit of 25% of total investments under HTM category provided (a) the excess comprises of only of SLR securities and (b) the total SLR securities held in the HTM category is not more than 23% by March 2014.
Call Money Markets:
Call and notice money market refers to the market for short term funds ranging from overnight funds to funds for a maximum tenor of 14 days. Under Call money market, funds are transacted on overnight basis where as in case of notice money market; funds are transacted for the period of 2 days to 14 days.
Coupon Rate:
It is a rate at which interest is paid, and is usually represented as a percentage of the par value of a bond. It refers to the periodic interest payments that are made by the borrower (who is also the issuer of the bond) to the lender (the subscriber of the bond) and the coupons are
stated upfront either directly specifying the number (e.g.8%) or indirectly tying with a benchmark rate (e.g. MIBOR+0.5%).
Zero Coupon Bond / Deep Discount Bond:
The bond is issued at a discount to its face value, at which it will be redeemed. When such a bond is issued for a very long tenor, the issue price is at a steep discount to the redemption value. The effective interest earned by the buyer is the difference between the face value and the discounted price at which the bond is bought. The essential feature of this type of bonds is the absence of intermittent cash flows.
Commercial Paper (CP):
It is a short-term instrument to enable non-banking companies to borrow short-term funds through liquid money market instruments. CPs is therefore part of the working capital limits as set by the maximum permissible bank finance (MPBF). CP issues are regulated by RBI Guidelines issued from time to time stipulating term, eligibility, limits and amount and method of issuance. 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. CP can be issued in denominations of Rs. 5 lakh and multiples thereof. It is mandatory that CPs should be rated by credit rating agencies. In a bid to make CPs attractive, the RBI has allowed issuers to buyback these instruments through the secondary market before maturity. It attracts stamp duty.
Certificates of Deposits (CDs):
It is a negotiable money market instrument and issued in dematerialized form or as a Usance Promissory Note, for funds, deposited at a bank or other eligible financial institutions to raise short-term resources within the umbrella limit fixed by RBI. CDs may be issued at a discount on face value. CDs differ from term deposit as they involve the creation of paper, and hence have the facility for transfer and multiple ownerships before maturity. Banks use the CDs for borrowing during a credit pickup, to the extent of shortage in incremental deposits.
Minimum amount of a CD should be one lakh and in multiples thereof. The maturity period of CDs should be not less than 7 days and not more than one year. However FIs are allowed to issue CDs not exceeding 3 years from the date of issue. Banks have to maintain the appropriate reserve requirements (CRR/SLR) on the issue price of the CDs. It attracts stamp duty. Banks/FIs cannot grant loans against CDs.
Securitization is an effective tool to reduce the mismatches in the maturities of assets and liabilities. It is a financing technique that involves pooling and re-packing of illiquid financial assets in to marketable securities. There are six players viz., Borrowers, Lending Banker (who becomes an originator for the Securitization transaction), Special Purpose Vehicle
(SPV), Credit Rating Agency, Investors and Service Providers. The process of securitization involves identification of financial assets, rating of these assets by the rating agency, creation of a SPV for handling the securitization transaction, assignment of future receivables in favour of the SPV, issuance of marketable securities based on these underlying financial assets and selling the same to the investors. The service providers recover the amount periodically and remit to the SPV and who in turn pass the benefit to the investors.
Asset and Liability Management:
RBI Guidelines: Of late, it is observed that PSBs have been accepting Bulk Deposits/Certificate of Deposits route to increase balance sheet size at very high interest rates, adversely affecting the profitability besides exposing the banks to ALM Risk. RBI directed banks not to accept Bulk Deposits beyond 10% of the total deposits and the total of Bulk Deposits & Certificates of Deposits should not exceed 15% of total deposits of the bank at any given point of time. An appropriate time-bound strategy for reduction of such existing bulk deposits should be put in place.
Adjusted Net Bank Credit (ANBC):
It denotes Net Bank Credit plus investments made by banks in non-SLR bonds held in HTM category. However, investments made by banks in the Recapitalization Bonds and Inter-bank exposures will not be taken into account for the purpose of priority sector lending targets/sub-targets.
Subordinate Debt:
It is a debt owed to an unsecured creditor that in the event of liquidation can only be paid after the claims of secured creditors have been met. Normally, subordinate debt ranks below other secured loans with regard to claims on assets or earnings.
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