Chapter 1.
Introduction
Treasury: Department of organization responsible for managing its financial assets, liabilities, and
overall financial strategy. It is financial center of all corporation.
- Key role
(Safeguarding and stewardship of a corporation’s financial assets)
(Management of a corporation’s financial liabilities.)
- Focus Areas (External Issues)
-Financial Markets, Investors, Creditors, Financial Institutions, Rating Agencies and Debt issuers
- It is responsible of implementing various financial decision (Made by Management and BOD)
- It also has an important role in Risk Reduction and Mitigation of the corporation.
>Advise Alternatives
>Assess Risk Elements
> Execution of Decisions
Technology – Introduction of technology change the nature of treasury.
- Easily extract information and bank transaction
- Track real time financial rates and prices
- Automate routine reporting requirements, means individual can focus on more strategic value.
- However, cash and its management remain a central role for treasury.
Strategic financial center:
For Changing role of treasury as a strategic financial center.
It is important to forecast accurate cashflow & Management of working capital resources
Treasury Management: The art of managing, within the acceptable level of risk, and use the fund
of the bank optimally and profitably is called Treasury Management.
- Manage firm’s Liquidity,
- Mitigate Operational, Financial and Reputational Risk.
Functions:
It includes collections, disbursements, concentration*, investment and funding activites.
*Concentration – extent to which an investment portfolio is dominated by a few assets
It includes Trading in Bonds, Currencies, Financial Derivatives and the associated financial Risk
management.
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TMS (Treasury management System): Independent TMS like visual risk are available allowing enterprises
to conduct treasury management internally.
For Non-Banking Entities – Treasury management and Cash Management are used interchangeably.
In general Treasury operation are under control of CFO (Chief Financial Officer) or Treasurer and handled
on day-to-day basis by the organization’s treasury staff, controller (Private or Corporate sector) or
comptroller (GON and NPO).
SCOPE of Treasury Management :
One of the main functions of a treasury department is to control and manage the Bank’s money.
(Capital & Liquidity). Treasurer must monitor current and projected cash flows, funding needs
Use information to correctly invest excess funds and prepared for additional borrowings or Capital
Raises.
Also Safeguard existing assets and guarding against excessive losses on interest rates and Foreign
exchange position.’
Make Sure Cash available at all times to meet the needs of its primary business operations.
1. Liquidity Management: Liquidity is the ability of an organization to meet its short-term financial
obligations.
Liquidity Management is to maintain adequate level of liquidity and raise profitability of the
bank managing the surplus liquidity.
In case of Surplus Liquidity:
-Use in money market lending
-reverse repo
-buying T-bills and government securities
In case of Deficit o Liquidity:
-Interbank borrowings,
-borrowing against T-bills and bond or debentures
-Standing liquidity facility by NRB
-Liquidation of treasury bills and bonds
-Accepting and calling deposits
Importance of Liquidity:
a) Providing the ability to take advantage of opportunities (New products, timely invest)
b) Funding for future projects and acquisitions
c) Serve financial buffer against an unexpected decline in revenues or sales
d) Meeting the need for collateral against borrowing
e) Funding research and development
Methods to measure effectiveness of liquidity
a) Availability of liquidity
b) Working capital ratios
c) A/C receivables outstanding
d) Average cash balances
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2. Money Market Transactions: It is the wholesale market for cash, liabilities and short-term fixed
income securities. (Maturity 1 day to 1 Year)
It facilitates short-term investing of excess cash and short-term funding for borrowers.
Character/Attributes of Money Market:
-Relatively short term to maturity
-Low-risk, high-credit quality
-High liquidity
-Low transaction cost
Money Market securities are subject to market risk, primarily
1.Market Risk
-Interest rate risk,
-Foreign exchange risk &
2.Credit Risk.
3. Capital Market Transactions: Market where long-term securities are traded. Buying and selling
of long-term debt and equity. Composed of both market (Primary + Secondary Market)
Eg: Government Bond, corporate bonds, preference share and equity shares.
4. Correspondent Banking: It provides credit, deposit, collection, clearing and payment services to
BFI. These services are limited to BFIs
Informal linkage between banks in different countries is set up when banks maintain
correspondent accounts with each other.
Purpose is to facilitate international payments and collection of customers. Helps their client in
their business abroad.
Disadvantages: Agency problem (Agent may not work in the best interest of principal). One bank
is agent for another.
5. Foreign Exchange Management: Forex market where currencies are traded. Large bank and
entities possess foreign exchange risk. Creation of foreign currency assets or liabilities.
Role and Function of Treasury Department:
1. Cash forecasting: Treasury staffs needs to compile the information of receipt and disbursement
of cash prepared by accounting staff into short range and long-range cash forecasts. Also
forecast shortage of cash availability to plan and raise additional fund through debt or capital.
2. Working Capital Management: Changes in the levels of current assets and current liabilities.
Treasurer should be aware of working capital levels and trends. Advice management on the
impact of proposed policy changes in working capital levels.
3. Cash Management: Treasury staff use information to ensure availability of sufficient cash for
operational needs.
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4. Investment Management: Treasury staff is responsible for the proper investment of excess
funds. More important is not to put funds at risk, and also to match maturity dates with
projected cash flows rather than maximum return. Diversification of investment in necessary.
5. Treasury Risk Management: Hedging tactics for increase in interest rate and worsen in change
of foreign exchange rate.
6. Management Advice: Advice management on interest rate to pay on new debt offerings,
availability of debt, probable terms of equity investors.
7. Credit Rating Agency Relations: When a company issues marketable debt, it is likely that a credit
rating agency will review the company’s financial conditions and assign a credit rating to the
debt.
8. Bank Relationship: The treasurer meets with representative of any bank that provides various
services to company and discuss the financial condition, banks fee structure, foreign exchange
transactions, hedges etc. Long term and open relationship can lead to modest reduction in bank
fees.
9. Fund Raising: Treasurer analyses the need of fund requirements in an organization. Assess
various sources of funds and cost to raise it.
10. Credit Granting: Granting of credit to customer. It allows the treasurer some control overe the
amount of working capital locked up in accounts receivables.
11. Other Activities: During merger and acquisitions treasury should have expertise in integrating
treasury systems.
Principles of Treasury Management: (SLiPP)
1. Principles of Security: Bank should invest the investible funds in safe or secure areas where
default risk will be minimum.
2. Principles of Liquidity: Maintain adequate level of liquidity to meet short term requirements of
borrowers and depositor’s demand.
3. Principles of Profitability: The investments made by bank should maximize profit. The bank
should earn limited spread rate as directed by NRB.
4. Principle of Portfolio: Combination of investments in two or more financial assets. Objective of
portfolio is to minimize the risk or diversification of risk.
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