Asset Liability management

Components of a
Bank Balance sheet

Liabilities Assets
Capital Cash & Balances with RBI
Reserve & Surplus Bal. With Banks & Money at

Deposits Call and Short Notices

Borrowings Investments

Other Liabilities Advances

Fixed Assets

6. Other Assets
Liabilities in more details
1.Capital:

Capital represents owner’s

contribution/stake in the
bank.
-It serves as a cushion for
depositors and creditors.
-It is considered to be a long term
sources for the bank.
-
Liabilities in more details

2. Reserves & Surplus

Components under this head
includes :
I. Statutory Reserves
II. Capital Reserves
III. Investment Fluctuation Reserve
IV. Revenue and Other Reserves
V. Balance in Profit and Loss Account
Liabilities in more details
3. Deposits
This is the main source of bank’s
funds. The deposits are classified as
deposits payable on ‘demand’ and
‘time’. They are reflected in balance
sheet as under:
I. Demand Deposits
II. Savings Bank Deposits
III. Term Deposits
Liabilities in more details
4 . Borrowings
( Borrowings include Refinance
/ Borrowings from RBI , Inter -
bank & other institutions )
I. Borrowings in India
i) Reserve Bank of India
ii) Other Banks
iii) Other Institutions & Agencies
II. Borrowings outside India
Liabilities in more details
5 . Other Liabilities &
Provisions
It is grouped as under:

I. Bills Payable
II. Inter Office Adjustments (Net)
III. Interest Accrued
IV. Unsecured Redeemable Bonds
(Subordinated Debt for Tier-II Capital)
V. Others(including provisions)
assets in more details
1 . Cash & Bank Balances with
RBI
I. Cash in hand
(including foreign currency notes)
II. Balances with Reserve Bank of India

In Current Accounts
In Other Accounts
assets in more details
2. BALANCES WITH BANKS AND MONEY AT
CALL & SHORT NOTICE
I. In India
i) Balances with Banks
a) In Current Accounts
b) In Other Deposit Accounts
ii) Money at Call and Short Notice
a) With Banks
b) With Other Institutions
II. Outside India
a) In Current Accounts
b) In Other Deposit Accounts
c) Money at Call & Short Notice
assets in more details
3 . Investments
A major asset item in the bank’s balance
sheet. Reflected under 6 buckets as under:
I. Investments in India in : *
i) Government Securities
ii) Other approved Securities
iii) Shares
iv) Debentures and Bonds
v) Subsidiaries and Sponsored Institutions
vi) Others (UTI Shares , Commercial Papers, COD &
Mutual Fund Units etc.)
II. Investments outside India in **
Subsidiaries and/or Associates abroad
assets in more details

4 . Advances
The most important assets for a bank.
A. i) Bills Purchased and Discounted
ii) Cash Credits, Overdrafts & Loans
repayable on demand
iii) Term Loans
B. Particulars of Advances :
i) Secured by tangible assets
(including advances against Book Debts)
ii) Covered by Bank/ Government Guarantees
iii) Unsecured
assets in more details
5. Fixed Asset
I. Premises
II. Other Fixed Assets (Including furniture and fixtures)

6. Other Assets
I. Interest accrued
II. Tax paid in advance/tax deducted at source
(Net of Provisions)
III. Stationery and Stamps
IV. Non-banking assets acquired in satisfaction of
claims
V. Deferred Tax Asset (Net)
VI. Others
Contingnt liability

Bank’s obligations under LCs,

Guarantees, Acceptances on behalf of
constituents and Bills accepted by
the bank are reflected under this
heads.
 Banks Profit & Loss Account

 A bank’s profit & Loss

Account has the following
components:
I. Income: This includes Interest
Income and Other Income.
II. Expenses: This includes Interest
Expended, Operating Expenses
and Provisions & contingencies.
 Components of Income

1. INTEREST EARNED
2.
I. Interest/Discount on Advances / Bills
 II. Income on Investments
 III. Interest on balances with Reserve Bank
 of India and other inter-bank funds
 IV. Others
 Components of Income
 2. OTHER INCOME


I. Commission, Exchange and Brokerage

II. Profit on sale of Investments (Net)
III. Profit/(Loss) on Revaluation of Investments
IV. Profit on sale of land, buildings and other
 assets (Net)
V. Profit on exchange transactions (Net)
VI. Income earned by way of dividends etc. from
subsidiaries and Associates abroad/in India
VII. Miscellaneous Income
Components of Expenses

1. INTEREST EXPENDED
2.
I. Interest on Deposits
II. Interest on Reserve Bank of India / Inter-Bank
 borrowings
III.
 Others
 Components of Expenses
 2. OPERATING EXPENSES


 I. Payments to and Provisions for employees

II. Rent, Taxes and Lighting
 III. Printing and Stationery
IV. Advertisement and Publicity
 V. Depreciation on Bank's property
VI. Directors' Fees, Allowances and Expenses
 VII. Auditors' Fees and Expenses (including Branch Auditors)
 VIII. Law Charges
 IX. Postages, Telegrams, Telephones etc.
 X. Repairs and Maintenance
 XI. Insurance
 XII. Other Expenditure
 ALM

Assets Liability Management

It is a d y n a m ic p ro ce ss o f
P la n n in g , O rg a n izin g &
C o n tro llin g o f A sse ts &
L ia b ilitie s - th e ir v o lu m e s ,
m ix e s , m a tu ritie s , y ie ld s
a n d co sts in o rd e r to
m a in ta in liq u id ity a n d N II.
Significance of ALM
 Volatility
 Product Innovations & Complexities

 Regulatory Environment

 Management Recognition
 Purpose & Objective of ALM
 An effective Asset Liability Management
Technique aims to manage the volume, mix,
maturity, rate sensitivity, quality and liquidity of
assets and liabilities as a whole so as to attain a
predetermined acceptable risk/reward ration.
 It is aimed to stabilize short-term profits, long-
term earnings and long-term substance of the
bank. The parameters for stabilizing ALM system
are:


 1. Net Interest Income (NII)

 2. Net Interest Margin (NIM)
 3. Economic Equity Ratio
 RBI DIRECTIVES
 Issued draft guidelines on 10th Sept’98.


 Final guidelines issued on 10th Feb’99 for

implementation of ALM w.e.f. 01.04.99.


 To begin with 60% of asset &liabilities will be covered;

100% from 01.04.2000.


 Initially Gap Analysis to be applied in the first stage of

implementation.


 Disclosure to Balance Sheet on maturity pattern on

Deposits, Borrowings, Investment & Advances
w.e.f. 31.03.01
 Liquidity Management
 Bank’s liquidity management is the
process of generating funds to meet
contractual or relationship obligations at
reasonable prices at all times.
 New loan demands, existing
commitments, and deposit withdrawals
are the basic contractual or relationship
obligations that a bank must meet.
Adequacy of liquidity position for
a bank
 Analysis of following factors
throw light on a bank’s adequacy
of liquidity position:
a.Historical Funding requirement
c.Current liquidity position
e.Anticipated future funding needs
g.Sources of funds
i. Options for reducing funding needs
k.Present and anticipated asset quality
m.Present and future earning capacity and
h. Present and planned capital position

 Funding Avenues

 To satisfy funding needs, a bank

must perform one or a
combination of the following:
a.Dispose off liquid assets
c.Increase short term borrowings
e.Decrease holding of less liquid
assets
g.Increase liability of a term nature
e. Increase Capital funds
Types of Liquidity Risk

 Liquidity Exposure can stem from

both internally and externally.
 External liquidity risks can be
geographic, systemic or
instrument specific.
 Internal liquidity risk relates largely
to perceptions of an institution in
its various markets: local,
regional, national or international
Other categories of liquidity risk
 Funding Risk
 - Need to replace net outflows
due to unanticipated withdrawals/non-
renewal
 Time Risk
 - Need to compensate for non-
receipt of expected inflows of
funds
 Call Risk

- Crystallization of contingent
liability
Statement of Structural Liquidity
All Assets & Liabilities to be reported as per
their maturity profile into 8 maturity Buckets :

i. 1 day
ii. 2 to 7 days
iii. 8 to 14 days
iv . 15 to 28 days
v . 29 days and up to 3 months
vi. Over 3 months and up to 6 months
vii. Over 6 months and up to 1 year
viii. Over 1 year and up to 3 years
ix . Over 3 years and up to 5 years
x . Over 5 years
STATEMENT OF
STRUCTURAL LIQUIDITY
 Places all cash inflows and outflows in the
maturity ladder as per residual maturity
 Maturing Liability: cash outflow
 Maturing Assets : Cash Inflow
 Classified in to 8 time buckets
 Mismatches in the first two buckets not to
exceed 20% of outflows
 Shows the structure as of a particular date
 Banks can fix higher tolerance level for other
maturity buckets.
 An Example of Structural Liquidity
Statement
15-28 30 Days- 3 Mths - 6 Mths - 1Year - 3 3 Years - Over 5
1-14Days Days 3 Month 6 Mths 1Year Years 5 Years Years Total

Capital 200 200

Liab-fixed Int 300 200 200 600 600 300 200 200 2600
Liab-floating Int 350 400 350 450 500 450 450 450 3400
Others 50 50 0 200 300
Total outflow 700 650 550 1050 1100 750 650 1050 6500
Investments 200 150 250 250 300 100 350 900 2500
Loans-fixed Int 50 50 0 100 150 50 100 100 600
Loans - floating 200 150 200 150 150 150 50 50 1100
Loans BPLR Linked 100 150 200 500 350 500 100 100 2000
Others 50 50 0 0 0 0 0 200 300
Total Inflow 600 550 650 1000 950 800 600 1350 6500
Gap -100 -100 100 -50 -150 50 -50 300 0
Cumulative Gap -100 -200 -100 -150 -300 -250 -300 0 0
Gap % to Total Outflow
-14.29 -15.38 18.18 -4.76 -13.64 6.67 -7.69 28.57
ADDRESSING THE MISMATCHES
 Mismatches can be positive or negative


 Positive Mismatch: M.A.>M.L. and Negative

Mismatch M.L.>M.A.

 In case of +ve mismatch, excess liquidity can be
deployed in money market instruments,
creating new assets & investment swaps etc.

 For –ve mismatch,it can be financed from market
borrowings (Call/Term), Bills rediscounting,
Repos & deployment of foreign currency
converted into rupee.
 STRATEGIES…
 To meet the mismatch in any maturity
bucket, the bank has to look into
taking deposit and invest it suitably
so as to mature in time bucket with
negative mismatch.
 The bank can raise fresh deposits of
Rs 300 crore over 5 years maturities
and invest it in securities of 1-29
days of Rs 200 crores and rest
matching with other out flows.

Maturity Pattern of Select Assets & Liabilities of A Bank
L ia b ility / A sse ts R upees In P e rce n ta g e
( In Cr )

I. D e p o sits 15200 100

a. Up to 1 year 8000 52.63
b. Over 1 yr to 3 yrs 6700 44.08
c. Over 3 yrs to 5 yrs 230 1.51
d. Over 5 years 270 1.78

II. Borrowings 450 100

a. Up to 1 year 180 40.00
b. Over 1 yr to 3 yrs 00 0.00
c. Over 3 yrs to 5 yrs 150 33.33
d. Over 5 years 120 26.67

III. Loans & Advances 8800 100

a. Up to 1 year 3400 38.64
b. Over 1 yr to 3 yrs 3000 34.09
c. Over 3 yrs to 5 yrs 400 4.55
d. Over 5 years 2000 22.72

Iv. Investment 5800 100

a. Up to 1 year 1300 22.41
b. Over 1 yr to 3 yrs 300 5.17
c. Over 3 yrs to 5 yrs 900 15.52
d. Over 5 years 3300 56.90
STATEMENT OF
INTEREST RATE SENSITIVITY
 Generated by grouping RSA,RSL &
OFF-Balance sheet items in to
various (8)time buckets.
RSA:
 MONEY AT CALL
 ADVANCES ( BPLR LINKED )
 INVESTMENT
RSL

 DEPOSITS EXCLUDING CD
 BORROWINGS

MATURITY GAP METHOD
(IRS)
 THREE OPTIONS:
 A) RSA>RSL= Positive
Gap
 B) RSL>RSA= Negative
Gap
 C) RSL=RSA= Zero Gap


 SUCCESS OF ALM IN BANKS :
PRE - CONDITIONS
1.Awareness for ALM in the Bank staff at all
levels–supportive Management & dedicated
Teams.
2.Method of reporting data from Branches/ other
Departments. (Strong MIS).
3.Computerization-Full computerization,
networking.
4.Insight into the banking operations, economic
forecasting, computerization, investment,
credit.
5. Linking up ALM to future Risk Management
Strategies.
Interest Rate Risk Management
 Interest Rate risk is the exposure of
a bank’s financial conditions to
adverse movements of interest
rates.
 Though this is normal part of
banking business, excessive
interest rate risk can pose a
significant threat to a bank’s
earnings and capital base.
 Changes in interest rates also affect
the underlying value of the bank’s
assets, liabilities and off-balance-
sheet item.
Interest Rate Risk

 Interest rate risk refers to volatility

in Net Interest Income (NII) or
variations in Net Interest
Margin(NIM).
 Therefore, an effective risk
management process that
maintains interest rate risk within
prudent levels is essential to
safety and soundness of the bank.
Sources of Interest Rate Risk
 Interest rate risk mainly arises from:
 Gap Risk
 Basis Risk
 Net Interest Position Risk
 Embedded Option Risk
 Yield Curve Risk
 Price Risk
 Reinvestment Risk

Measurement of Interest Rate
Risk
 Gap Analysis- Simple maturity/re-
pricing Schedules can be used to
generate simple indicators of interest
rate risk sensitivity of both earnings
and economic value to changing
interest rates.
 - If a negative gap occurs (RSA<RSL) in
given time band, an increase in market
interest rates could cause a decline in
NII.
 - conversely, a positive gap
(RSA>RSL) in a given time band, an
decrease in market interest rates could
cause a decline in NII.
Measurement of Interest Rate
Risk

 Duration Analysis: Duration is a

measure of the percentage
change in the economic value of a
position that occur given a small
change in level of interest rate.
Government securities
Structure of Bond Markets in India

 Central Government Securities



 State Government Securities



 Corporate Bond Market



 Securitised Debt
 Institutional Arrangements with RBI

 Banker and Debt Manager to Central

Government by Statute


 Banker to 26 State Governments and

Debt Manager to 28 State
Governments by Voluntary
Agreements
 

 Central Government
 Trends in Centre’s Budget Deficit
 Three Phases
Ø1991-92 to 1996-97: Sharp Fiscal
Correction
Ø1997-98 to 2001-02: Deterioration
Ø2002-03 onwards: Fiscal Correction
Resumed
1990- 1991- 1995- 2000- 2001- 2002- 2003- 2004- 2005- 2006-
91 92 96 01 02 03 04 05 06 07
 (RE) (BE)
Gross Fiscal 7.85 5.56 5.07 5.64 6.18 5.92 4.47 4.01 4.14 3.76
Deficit

Revenue Deficit 3.26 2.49 2.50 4.01 4.39 4.40 3.56 2.51 2.60 2.14

Gross Primary 4.07 1.49 0.86 0.93 1.47 1.11 -0.03 -0.06 0.46 0.22
Deficit



 Financing Pattern of Centre’s
Gross Fiscal Deficit
 Low Share of External Borrowings
 Substantial Increase in Share of
Domestic Open Market Borrowings


1990- 1991- 1995- 2000- 2001- 2002- 2003- 2004- 2005- 2006-
91 92 96 01 02 03 04 05 06 07
(RE) (BE)
External 7.1 14.9 0.5 6.3 4.0 -8.2 -10.9 11.8 5.1 5.6
Finance

Market 17.9 20.7 56.4 61.8 64.4 71.8 72.1 40.7 69.2 76.5
Borrowing

Others 49.5 45.5 26.8 32.9 32.7 35.2 42.0 54.0 15.4 17.9
Borrowing
 Trends in Government Debt-GDP Ratio
 Similar to the Trends in Budget Deficit

90
80

70
60
Per cent

50
40
30
20
10
0
1980-81 1990-91 1996-97 2000-01 2004.05 2006-07
(BE)

Centre States Total

 Centre’s Fiscal Responsibility Act
 Enactment of FRBM Act : August 26, 2003
 Came into force from July 5, 2004
 Elimination of RD by 2008-09 (3.6% in 2003-
04) and revenue surplus thereafter
 Containment of GFD to 3 % of GDP by 2008-
09 (4.5% in 2003-04)
 RD and GFD placed at 2.0% and 3.7% of GDP
in 2006-07 (RE)
 RD and GFD budgeted to decline to 1.5% and
3.3% of GDP in 2007-08
 RBI prohibited from Participation in Primary
Issuances of G-Secs


 Central G-Sec Market: Pre-Reform Period
 Features
 Administered and Low Interest Rates
 High Statutory Liquidity Ratio (SLR)
 Automatic Monetisation of Budget Deficit
 High Cash Reserve Ratio (CRR)

 Impact
 Preemption of Financial Savings
 No possibility of Price Discovery

 Dormant Debt Market


 Reforms in the Central G-Sec Market
 Three Phases
 First Phase (1992-95)
 Creation of Enabling Environment
 Elimination of Automatic Monetisation
 Introduction of Auctions
 SLR reduced

 Second Phase (1995-2000)

 Institutional Development
 DvP
 Primary
Dealers
 FIMMDA and PDAI
 Instrument Diversification
 Floating Rate Bonds
 Capital Indexed Bonds

Reforms in the Central G-Sec Market
(Cont’d)
 Third Phase
 Enhance Liquidity and Efficiency
 Indicative Auction Calendar
 Non-Competitive Bidding Facility

 Liquidity Adjustment Facility

 Repo and collateralised borrowing lending

system
 Negotiated Dealing System (NDS), STP and CCP

 Interest Rate derivatives

 Market Stabilisation Scheme

 Foreign investment in local currency debt

instruments
 Conversion of special securities into marketable
debt

Reforms in the Central G-Sec Market
(Concl’d)
 Reforms undertaken in the context of FRBM
Act
 Functional Separation of Debt and Monetary
Management: Creation of FMD
 Extension of PD business to Banks

 Revised Scheme of Underwriting by PDs: 100%

Underwriting by PDs
 NDS-OM

 Short-Sale

 When Issued market

 Considering Active Consolidation


 Snapshot of the Central G-Sec Market
 Increase in Stock and Turnover


1992 1996 2002 2003 2004 2005 2006

Outstanding stock (Rs. in billion) 769 1375 5363 6739 8,243 8,953 9,767
Outstanding stock as ratio of GD P (per 14.68 14.2 27.89 27.29
cent) 29.87 28.69 27.67
Turnover / GD P (per cent) -- 34.21 157.68 202.88 217.3 239.9 212.9
Average maturity of the securities
issued during the year (in Years) -- 5.7 14.3 13.8 14.94 14.13 16.9
Weighted average cost of the securities
issued during the year (Per cent) 11.78 13.77 9.44 7.34 5.71 6.11 7.34
Minimum and maximum maturities of
stock issued during the year (in Years) N.A. 2-10 5-25 7-30 4-30 5-30 5-30
 Maturity and Yield
 Elongation of Maturity Profile
 General Reduction in Weighted Average
Yield

18
16
 14
12
Per cent / Years

10
 8
6
4
2
0
1996-97

1998-99

1999-00

2000-01

2002-03
1995-96

1997-98

2001-02

2003-04

2004-05

2005-06
Weighted Average Yield (per cent) Weighted Average Maturity (years)
 Yield Curve
 Development of a Smooth Yield Curve


16
14
12
10
Per cent

8
6
4
2
0
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
M aturity (Years)

Mar-97 Mar-04 Jan-07

 Ownership Pattern of Central G-Secs
 More Diversification
 Chart 5:OwnershipPatternof Central G-Secs:
1991
Re
serveBa
nkofIn
dia(owna
ccou
nt)

 10% 5%
0% Com
mercia
l Ba
nks

13% 25%
LifeIn
sura
nceCorporationof In
dia#

Un
itTru
stofIn
dia

NABARD

Em
ploye
esProvide
ntFu
ndSch
eme

Coa
l Min
esProv
ide
ntFu
ndSch
eme

Prim
aryde
ale
rs
56%
Oth
ers

Chart 6:OwnershipPatternof Central G-Secs:

0% 2005
ReserveBankof India
0% (ownaccount)
7% Commercial Banks
2% 16%
LifeInsurance
0% Corporationof India#
Unit Trust of India
0%
NABARD

Employees Provident
20%
FundScheme
53% Coal Mines Provident
FundScheme
Primarydealers

Others
 External Borrowings
 Low Share of External Debt
 External Borrowings only from
Multilateral and Bilateral Sources


100.0

80.0
Per cent

60.0

40.0

20.0

0.0
1950-51 1980-81 1990-91 2000-01 2006-07
(BE)

Domestic Liabilities External Liabilities

 Measures to Deal with
External Account Pressures
 India Development Bonds (IDBs) (1991):
US$1.6 billion
 Resurgent India Bonds (RIBs) (1998): US$4.2
billion
 India Millennium Deposits (IMDs) (2000):
US$5.5 billion
State Governments
 Trends in Budget Deficit
 Strong Improvement since early part of
this decade
 Build up of Surplus Cash Balance in
Recent Years: Buyback of Securities
by some States
 1990- 1991- 1995- 2000- 2001- 2002- 2003- 2004- 2005- 2006-
91 92 96 01 02 03 04 05 06 07
(R E ) (B E )
GFD 3.3 2.89 2.65 4.25 4.21 4.17 4.46 3.5 3.23 2.68

R evenue D eficit 0.93 0.87 0.69 2.54 2.59 2.25 2.22 1.17 0.49 0.05

G ross P rim ary 1.78 1.22 0.8 0.09 -0.15 -0.61 -0.75 -1.65 -2.03 -2.47
D eficit
 Financing Pattern of Fiscal Deficit
 Share of Central Loans has reduced
 Share of Market Loans has increased
since early 1990s
 NSSF continues to predominate

1990 - 1991 - 1995 - 2000 - 2001 - 2002 - 2003 - 2004 - 2005 - 2006 -
91 92 96 01 02 03 04 05 06 07
(RE) (BE)
Loan Fro m 53.1 49.6 47.1 9.4 11.4 -0.9 11.5 -15.1 2.3 4.8
Central Gov.

Market 12.0 17.5 18.7 14.0 18.0 27.9 38.4 30.1 15.7 21.0
Borrowing

NSSF - - - 36.4 37.1 51.2 16.9 66.5 65.0 53.5

Others 33.3 32.9 34.2 40.2 33.5 21.9 33. 2 18.5 17.0 20.7
 Fiscal Reforms
 Twelfth Finance Commission
ØFiscal Restructuring Plan: Fiscal Discipline
ØIncentivised Enactment of FRL through Debt
Consolidation and Relief Facility (DCRF)
ØFinancial Disintermediation by Centre
 Experience
ØFRL Enactment – 24 States
ØRD to be nearly eliminated and GFD-GDP ratio
to decline to 2.7% in 2006-07
 Market Borrowings of State Governments

 Till1998-99: Tap Issuances

 States encouraged to adopt auction
route:
 100 % of market borrowing in 2006-07 so
far as against 48.5% in 2005-06 and 2%
in 2004-05 conducted through auctions
 Auction calendar proposed to be issued
by States

 State Government Securities - issues

 Negligible Secondary Market Liquidity

 Low level of outstanding stock
 Predominance of buy-and-hold investors
 Disconnect between the uniform coupon fixed in
tap issues and secondary market yield
 Fragmentation across issuers and securities
 Proposed Measures
 Non-competitive bidding
 Issuance calendar
 Use for Liquidity adjustment facility
Treasury Management:

Treasury management; concepts and functions; instruments in the

treasury market; development of new financial products; control

and supervision of Treasury management; linkage of domestic

operations with foreign operations.

Asset-liability management; Interest rate risk; interest rate futures;

stock options; debt instruments; bond portfolio strategy; risk

control and hedging instruments.

Investments – Treasury bills – Money markets instruments such

as CDs, CPs, IBPs; Securitization and Forfeiting; Refinance and

rediscounting facilities.
 Capital Management and Profit
Planning
 Prudential Norms- Capital Adequacy-Basel II-
Asset Classification-provisioning
 Profit and Profitability-Historical Perspective of
the Approach of Banks to profitability-Effects
of NPA on profitability-A profitability Model-
Share holders value Maximization & EVA-
Profit Planning-Measures to improve
profitability
 RISK MANAGEMENT
-Treasury Management


 Treasury Products
 Treasury Risk Management

 Derivative Products



Integrated Treasury
 Integrated Treasury refers to integration of
money market, securities market and
foreign exchange operations.
 -Meeting reserve requirements
 -Efficient merchant services
 -Global cash management
 -Optimizing profit by exploiting market
opportunities in forex market, money market
and securities market
 -Risk management
 -Assisting bank management in ALM
Treasury
Function Responsible for

Front office Dealing

Mid-Office Risk management, accounting
Back office Confirmations,
and management settlement and
information
reconciliation
 Dealing

settlement
MIS
Treasury
SLR
 SLR is to be maintained in the form of
the following assets:
 Cash balances (excluding balances
maintained for CRR)
 Gold (valued at price not exceeding
current market price)
 Approved securities valued as per norms
prescribed by RBI.
Principles
 Direct Quotation: Buy Low, Sell High:
 The prime motive of any trader is to make profit. By
purchasing the commodity at lower price and
selling it at a higher price a trader earns the profit.
In foreign exchange, the banker buys the foreign
currency at a lesser price and sells it at a higher
price.
 Indirect Quotation: Buy High, Sell Low:
 A trader for a fixed amount of investment would
acquire more units of the commodity when he
purchases and for the same amount he would part
with lesser units of the commodity when he sells.
Spot and Forward
Transactions


 ‘A’ Bank agrees to buy from ‘B’ Bank

USD 100000. The actual exchange of
currencies i.e. payment of rupees and
receipt of US Dollars, under the
contract may take place :
 on the same day or

 two days later or

 some day later, say after a month.

Interpretation of Quotation
 The market quotation for a currency consists
of the spot rate and the forward margin.
The outright forward rate has to be
calculated by loading the forward margin
into the spot rate. For example US Dollar is
quoted as under in the inter-bank market on
a given day as under :
 Spot 1 USD = Rs.44.1000/1300
 Spot/November 0200/0500
 Spot/December 1500/1800
TT Buying Rate
 TT Buying Rate (TT stands for Telegraphic
Transfer)
 This is the rate applied when the transaction
does not involve any delay in realization of
the foreign exchange by the bank. In
other words, the nostro account of the
bank would already have been credited.
The rate is calculated by deducting from
the inter-bank buying rate the exchange
margin as determined by the Bank.
Bills Buying Rate

 Thisis the rate to be applied when a

foreign bill is purchased. When a bill is
purchased, the proceeds will be
realized by the Bank after the bill is
presented to the drawee at the
overseas center. In the case of a
usance bill the proceeds will be
realized on the due date of the bill
which includes the transit period and
the usance period of the bill.
Problem
You would like to import machinery from USA
worth USD 100000
to be payable to the overseas supplier on 31st

Oct
[a] Spot Rate USD = Rs.45.8500/8600
Forward Premium

September 0.2950/3000

October 0.5400/5450
November 0.7600/7650

[b] exchange margin 0.125%

[c] Last two digits in multiples of nearest 25

paise
 Calculate the rate to be quoted by the bank ?

Solution
This is an example Forward Sale Contract .
Inter Bank Spot Selling Rate Rs. 45.8600

Add Forward Margin .5450

 --------------
 46.4050
Add Exchange Margin .0580
 ---------------
Forward Rate 46.4630
Rounded Off to multiple of 25 paise Rs.46.4625
Amount Payable to the bank Rs.46,46,250

Swap
A swap agreement between two parties
commits each counterparty to
exchange an amount of funds,
determined by a formula, at regular
intervals, until the swap expires.
 In the case of a currency swap, there is
an initial exchange of currency and a
reverse exchange at maturity.

Mechanics
 Firm A needs fixed rate loan –AAA
rated
 Firm B needs floating rate -A rated
 Firm A enjoys an absolute advantage in
both credit markets.
Firm A Firm B
 Fixed-
rate 9% 11%
finance
Floating- LIBOR LIBOR
rate
finance +0.0% +1%
Mechanics
STEP !
Firm A will borrow at Fixed rate 9%
Firm B will borrow at floating rate (LIBOR +1)%
STEP 2

Firm A will pay Floating rate [LIBOR] to Firm B

Firm B will Pay Fixed rate [9.5%] only


Gain
Net interest cost LIBOR- .5%

Net Interest cost 9+[ 1%+0.5%]=10.5%

THANK YOU