Page 44 - Banking Finance July 2022

ARTICLE

and gets back rupee on deposit maturity. This generates Risk Management: As treasury deals with high volumes at
a risk-free profit. highly volatile market, it associates itself with very high risk.
So managing various risk like counterparty risk (risk of
vi) Customer Services: Bank treasuries offer their products
payment default by counterparty), market risk, operational
and services to customers/non-banking customers. The
risk automatically becomes an integral part of treasury. This
income of banks from these activities comprises fees for
and/or margins on trade execution. Profits would be task is being executed by treasury mid-office in close
association with Risk Management department of the
higher on structured (i.e. non-standard) transactions
compared to plain vanilla (e.g. a straightforward buy banks.
sell USD/INR) deals.
Liaison with Regulatory Bodies: The treasury department
Treasuries are also involved in investment banking where
of banks is highly regulated. Since they are the ones that
their responsibility covers trade execution on behalf of
are supposed to maintain the capital adequacy ratios and
the bank's clients in the cash or derivatives markets.
reserve ratios, they are also the ones that are supposed to
These may generate good margins, depending on the
maintain cordial relationship with regulatory agencies like
complexity and skills required to design and put through
RBI, SEBI and Finance Ministry etc. Executives from the
customized structures in the market.
treasury department are usually invited by the government
when decisions regarding the banking industry need to be
Other Services of Treasury:
made.
Capital and Reserve Requirements: As already discussed,
Treasury in banks is also responsible for setting aside reserves
Back Office Functions: Treasury departments also have to
to meet the reserve requirements prescribed by the Central
perform a lot of normal back-office activities. They are
Bank. Also, the capital requirements prescribed by the Basel
supposed to regularly communicate with their branches
norms have to be met. Failing to meet these requirements
regarding the extent of deposits that have been taken and
has detrimental consequences since penalties are levied by
the extent of loans that can be made. Back office also settles
the Central Bank. Apart from these during infusion of capital
all the deals made by the dealers at the end of the day and
by government into public sector banks, transactions take
reconcile the data.
place through treasury only and they also deal with the
deployment of such funds.
Conclusion:
Asset Liability Management: It is the job of the treasury The treasury department has, therefore, become the heart
department in cooperation with Asset Liability Committee of the banking industry. It contributes substantially nowadays
(ALCO) to prepare various financial models which help on towards the profits of the banks. Officers working in this
forecasting the amount of net interest income that the bank department get a bird's eye view of the operations of a bank
plans to achieve. It is also the job of the treasury that are spread out over cities, nations and even continents.
department to predict exactly how sensitive this non- These experts understand the concept of cost of funds and
interest income is to external shocks like changes in the oversee its application. In coming days, it is expected that
interest rate. this department will grow much bigger, more people will
understand the complexities of its business and trading will
The treasury department collates this critical information
emerge as one of the prime activity in banks.
and then passes the same on to decision makers who then
decide the kind of assets that they want on the banks
References:
balance sheet. These decisions are then further translated
¢ Analyst Presentations on financial statements 2021 of
into loan targets which bank officials have to meet. Also,
various PSBs
based on the information received from the treasury, the
¢ RBI Policies on Treasury Operations, Bonds
bank refrains from using certain kinds of deposit liabilities.
Hence, treasury department profoundly influences both ¢ Information on Bank Treasury on various portals like
deposit taking and loan sanctioning functions of the bank. managementstudyguide.com, processmaker.com etc.

44 | 2022 | JULY | BANKING FINANCE