1c. Detailed Hand Out - Topic 1.pdf

TREASURY
MANAGEMENT IN
MICROFINANCE
INSTITUITIONS
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INTRODUCTION TO TREASURY MANAGEMNET
SUB TOPICS
The relevance of treasury management function in an entity.
The treasury department and what treasures do.
The treasury resource
Treasury and Corporate Strategy.
Treasury management best practices
Treasury ERP software.
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• A bank’s markets division, also known as its Treasury, is part of its
wholesale banking business. It is a highly specialized area that seeks
to meet institutional and corporate customers’ investment and risk
coverage needs. The retail banking area serves individual customers
and also receives support from the markets area to design and
manage products and manage the associated risks.
• A bank’s Treasury is part of its investment banking business (also
known as wholesale or corporate banking) and other business areas
like mergers and acquisitions, project finance, syndicated loans and
global transactional banking. But without a doubt, the Treasury – or
the markets area – is a fundamental part of a bank’s investment
banking structure.
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• TREASURY THE HEART OF BANKING.
• Banks help their customers manage their money, but who manages a
bank's money? How does a bank decide where to invest its capital
across its business and how much to hold back in reserve? How does
a bank make sure that each of its business areas has enough cash to
serve its clients and function efficiently while keeping enough cash
available centrally at all times to cover any unexpected market
developments? Why have these questions become more important to
the finance world in recent years, and why could working in these
areas be a great career choice
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What Is Treasury Management?
Treasuries are the custodians of cash in a business, they control this
through 1) the amount held and 2) its liquidity. The two levers of this
are through the sheer size of the balance sheet and the relative
stickiness (liquidity) of assets and liabilities held. Their management
of this enables the basic fundamentals of an organization: allowing
teams to operate and conduct activities by ensuring that there is cash
on hand, be it in the petty cash box or an opportunistic M&A raid.
Treasury Management can be understood as the planning, organizing
and controlling holding, funds and working capital of the enterprise in
order to make the best possible use of the funds, maintain firm’s
liquidity, reduce the overall cost of funds, and mitigate operational
and financial risk.
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FUNCTIONS OF A TREASURY MANAGEMENT
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Cash Management: Treasury Management includes cash
management, and so it ensures that there are an effective collection
and payment system in the organization.
Liquidity Management: An optimum level of liquidity should be
maintained in the business, for the better and smooth functioning of
the business, i.e. the company must be able to fulfil its financial
obligation when they become due for payment, such as payment to
suppliers, employees, creditors, etc.And to do so, cash flow analysis
and working capital management act as the most important tool for
treasury management, to achieve its strategic goals.
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• Availability of funds in adequate quantity and at the right time: The
treasury manager has to ensure that the funds are available with the
organization in sufficient quantity, i.e. neither be more nor less, to
fulfil the day to day cash requirement for the smooth functioning of
the enterprise.Further, timely availability of funds also smoothens the
firm’s operations, resulting in the certainty as to the amount of
inflows available with the company at a particular point in time.
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• Deployment of funds in adequate quantity and at the right time:
The deployment of funds has to be done in right quantity such as the
acquisition of fixed assets, purchase of raw material, payment of
expenses like rent, salary, bills, interest and so forth. For this purpose,
the treasury manager has to keep an eye on all receipts of funds and
the application thereof.Further, the funds must be available at the
time of need, which may be different for different firms and also for
the purpose for which they are used. The period may differ from a
week to month when it comes to acquisition of the fixed assets and
two to three days in case of working capital requirement.
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• Optimum utilization of resources: Treasury Management also aims at
ensuring the effective utilization of the firm’s resources, to reduce the
operating costs and also prevent liquidity shortage in the coming
time.
• Risk Management: One of the primary objectives of the treasury
management is to manage financial risk to allow the enterprise to
meet its financial obligations, as they fall due and also ensure
predictable performance of the business. It tends to identify,
measure, analyse and manage risk in order to mitigate losses, that
has the potential to affect the company’s profitability and growth in
any way.Hence, treasury management is accountable for all types of
risk that can influence the business entity.
3/15/2021 11

WHAT IS TM in FSPs?
A bank’s markets division, also known as its Treasury, is part of its
wholesale banking business. It is a highly specialized area that seeks to
meet institutional and corporate customers’ investment and risk
coverage needs. The retail banking area serves individual customers and
also receives support from the markets area to design and manage
products and manage the associated risks.
A bank’s Treasury is part of its investment banking business (also known
as wholesale or corporate banking) and other business areas like
mergers and acquisitions, project finance, syndicated loans and global
transactional banking. But without a doubt, the Treasury – or the
markets area – is a fundamental part of a bank’s investment banking
structure.
3/15/2021 12

What is treasury management?
• Treasury management includes management of an enterprise's
holdings, with the ultimate goal of managing the firm's liquidity and
mitigating its operational, financial and reputational risk. Treasury
Management includes a firm's collections, disbursements,
concentration, investment and funding activities.
• Treasury Management can be understood as the planning, organizing
and controlling holding, funds and working capital of the enterprise in
order to make the best possible use of the funds, maintain firm’s
liquidity, reduce the overall cost of funds, and mitigate operational
and financial risk.
3/15/2021 13

NTRODUCTI
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3/15/2021 15

TREASURY MANAGEMENT IN FSPs.
• A bank’s treasury management/cash management division, is a highly
specialized area designed to meet the unique investment and risk
coverage needs of institutional and corporate customers. As part of
an investment banking business, the treasury provides innovative and
collaborative services that aim to better manage your company’s daily
financial planning and functions. There are numerous ways that
treasury management services help businesses, such as by addressing
account efficiencies, automating account receivable functions, and
integrating bank data into the internal systems to improve
forecasting, decision making, and cash management. Treasury
management can also be useful for guarding against fraud by making
use of fraud prevention products.
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TREASURY MANAGEMENT IN FSPs
• Treasuries are the custodians of cash in a business, they control this
through 1) the amount held and 2) its liquidity. The two levers of this are
through the sheer size of the balance sheet and the relative stickiness
(liquidity) of assets and liabilities held. Their management of this enables
the basic fundamentals of an organization: allowing teams to operate and
conduct activities by ensuring that there is cash on hand, be it in the petty
cash box or an opportunistic M&A raid.
• In addition to enabling business-as-usual (BAU) activities, treasuries
partake in the macro-financial direction of a company and oversee the
execution of company-wide strategies. For example, if the board decides to
buy a business or expand into new territories, Treasury will help to
determine the fit of the company from a balance sheet perspective and
find the cash (or issue stock) to purchase it ultimately.
• By actively managing liquidity, treasuries ensure that businesses stay alive,
save money, and can respond quickly to change.
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• Treasury plays an two critical roles in FSPs.
Liqudity creation
Liqudity risk management
• Why is treasury management important?
Treasuries manage the balance sheet of a business and enable its
functions to run smoothly. By optimizing liquidity and cost of capital, it
actually has a core role in increasing return on equity and driving
shareholder returns.
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• Skills needed in Treasury Management.
1. Risk management
2. Strategic skills
3. relationship management
4. Technological awareness
5. Underlying business sense
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• Characteristics of a Good Treasurer
be capable of handling figures and cash;
have an orderly mind and methodical way of thinking;
have experience in dealing with large sums of money and
budgets;
have experience of financial control and budgeting;
have an eye for detail;
be available to be contacted for ad hoc advice;
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• Organisational Structure of Treasury
Organisational structure of a commercial bank treasury should facilitate the
handling of all market operations, from dealing to settlement, custody and
accounting, in both the domestic and foreign exchange markets.
1. Front- Office:
• Dealing – Risk Taking.
2. Mid-Office: Risk Management and Management Information.
3. Back-Office:
• Confirmations, Settlements, Accounting and Reconciliation.
• The organisation of a treasury depends on the volume of activities handled. It is
important that the above three functions are distinct and work in water-tight
compartments. The dealers are not supposed to handle settlement or accounts.
The Back-Office should not perform dealing but may perform accounting func-
tion, and accounting section should not perform dealing but may perform Back
Office function.
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• The corporate treasury is headed by an appropriate senior executive who directs,
controls and co-ordinates the activities of the treasury. He/She also co-ordinates
the work between the chief dealer, the Head of Back Office, Head of Research,
and is totally responsible for the management of funds, investments and forex
activity.
• He/She will also be a member of Assets Liability Management Committee (ALCO)
and help the committee in deciding on various policies on treasury management.
Banks which have separate forex operations, will have dealers for forex
operations.
• Treasury will have a separate research division. Head of Research will be assisted
by officers to carry out research activities/analysis in various types of securities.
Research department may be common for money market, debt, equities and
forex. Market analysis would also be provided by the research Department.
• Appropriate Information technology (process, package and infrastructure) is
necessary for treasury management as the operations/transactions are distinct
from branch banking and are also very critical. As software packages available in
the market may not be adequate, banks may have to modify the software to suit
it is needs, changing circumstances and volatility.
3/15/2021 23

• The fund manager looks into the liquidity position, fund flows, and
maintenance of reserve requirement/s. Risk managers should be
posted in treasury for facilitating the evaluation of scenarios,
independent review of line/limit excess, reviews of transactions to
ensure compliance with regulations, monitor risk factors – credit risk,
liquidity risk, interest rate risk, operational risk – in the transactions
and give guidance to the front line, viz. dealers to remain in touch
with product and market developments.
3/15/2021 24

1. Front – Office:
• The front office of a treasury has a responsibility to manage investment and
market risks in accordance with instructions received from the bank’s ALCO. This
is undertaken through the Dealing Room which acts as the bank’s interface to
international and domestic financial markets. The Dealing Room is the center for
market and risk management activities in the bank.
• It is the clearing house for risk and has the responsibility to manage the treasury
risks taken in all areas of the bank, on behalf of customers, and on behalf of the
bank, within the policies and limits prescribed by the Board and Risk
Management Committee.
• For this reason significant authority is given to the ‘Treasurer’ and the Dealing
Room staff to commit the bank to market. Treasury also functions as a profit
center of the bank. It is therefore important that the treasury is managed
efficiently. In view of this, control over the activities of the treasury and its staff
are critical to ensure that the bank is protected from undue market risk.
3/15/2021 25

• 2. Mid Office:
• Mid-office is responsible for onsite risk measurement, monitoring and
management reporting.
• The other functions of Mid Office are:
• (a) Limit setting and monitoring exposures in relation to limits;
• (b) Assessing likely market movements based on internal assessments
and external/internal research;
• (c) Evolving hedging strategies for assets and liabilities;
• (d) Interacting with the bank’s Risk Management Department on
liquidity and market risk;
3/15/2021 26

• (e) Monitoring open currency positions;
• (f) Calculating and reporting VAR;
• (g) Stress testing and back testing of investment and trading
portfolios;
• (h) Risk-return analysis; and
• (i) Marking open positions to market to assess unrealized gain and
losses.
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• 3. Back Office Functions:
• The key functions of back-office are:
• (a) Deal slip verification;
• (b) Generation and dispatch of interbank confirmations;
• (c) Monitoring receipt of confirmations from counterparty banks;
• (d) Monitoring receipt of confirmations of forward contracts;
• (e) Effecting/receiving payments;
• (f) Settlement through CCIL or direct through nostro as applicable;
• (g) Monitoring receipt of forex funds in interbank contracts;
• (h) Statutory reports to the RBI;
• (i) Management of nostro funds-to advise latest funds position to enable the F/O to take the
decision for the surplus/short fall of funds;
• (j) Reconciliation of nostro/other accounts;
• (k) Monitoring approved exposure and position limits; and
• (t) Accounting.
3/15/2021 28

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