Treasury Management for SBI JIBO Exam – Complete Detailed Notes

🔷 1. Introduction to Treasury Management

Treasury Management refers to the centralized function within a bank that manages its funds, liquidity, investments, and financial risks. It acts as the financial nerve center of a bank, ensuring optimal utilization of resources while maintaining regulatory compliance.

In modern banking, treasury is not limited to fund management—it also plays a key role in:

• Trading in financial markets
• Managing balance sheet risks
• Supporting profitability through arbitrage and hedging

🔷 2. Core Objectives of Treasury

🔹 1. Liquidity Management

Ensures that the bank has sufficient funds to meet:

• Withdrawal demands
• Loan disbursements
• Regulatory requirements

🔹 2. Profit Maximization

Treasury actively generates profits through:

• Trading in securities and forex
• Investment decisions
• Interest rate arbitrage

🔹 3. Risk Management

Manages key risks:

• Interest rate risk
• Foreign exchange risk
• Liquidity risk

🔹 4. Asset-Liability Management (ALM)

Balances:

• Cost of funds (liabilities)
• Returns on assets

🔹 5. Regulatory Compliance

Maintains:

• CRR (Cash Reserve Ratio)
• SLR (Statutory Liquidity Ratio)

🔷 3. Structure of Treasury

Treasury is divided into three specialized units:

🔹 (A) Front Office (Dealing Room)

Core Function: Execution of trades

Responsibilities:

• Buying and selling:
  • Foreign exchange
  • Government securities
  • Money market instruments
• Managing proprietary positions
• Participating in auctions (e.g., government securities)

👉 This is the profit center of treasury.

🔹 (B) Mid Office (Risk Management Unit)

Core Function: Monitoring and control

Responsibilities:

• Setting exposure limits
• Monitoring stop-loss limits
• Measuring risk (VaR, duration, gap analysis)
• Providing MIS reports to management

👉 Acts independently to ensure checks and balances.

🔹 (C) Back Office (Operations & Settlement)

Core Function: Processing and accounting

Responsibilities:

• Trade confirmation and settlement
• Accounting entries
• Reconciliation of accounts
• Maintaining:
  • Nostro accounts
  • RBI accounts
  • Demat accounts

👉 Ensures accuracy and regulatory compliance.

🔷 4. Treasury Products

Treasury deals with multiple financial instruments across markets:

🔹 (A) Foreign Exchange Market Instruments

• Spot transactions
• Forward contracts
• Futures
• Options
• Swaps
• Foreign currency loans
• Rediscounting of export/import bills

🔹 (B) Money Market Instruments

• Call/Notice/Term Money
• Treasury Bills
• Commercial Paper
• Certificate of Deposit
• Repo/Reverse Repo
• TREPS

🔹 (C) Capital/Securities Market Instruments

• Government securities
• Corporate bonds
• Debentures
• Equities

🔷 5. Foreign Exchange Market

🔹 Key Features

• Operates 24×7 globally
• Highly liquid market
• Transactions are electronic and instantaneous
• No geographical boundaries

🔹 Types of Transactions

1. Spot Transactions

• Settlement in 2 working days
• Most common transaction

2. Cash (TOD)

• Same day settlement

3. TOM (Tomorrow)

• Next working day settlement

🔹 Forward Contracts

• Agreement to buy/sell currency at future date
• Used for hedging exchange rate risk

👉 Forward rates depend on interest rate differentials between currencies.

🔹 Derivative Instruments

✔ Futures

• Standardized contracts
• Traded on exchanges
• Require margin maintenance

✔ Options

• Right (not obligation) to buy/sell
• Types:
  • Call option → Right to buy
  • Put option → Right to sell

✔ Swaps

• Combination of two transactions
• Example:
  • Spot + Forward
• Used for liquidity and risk management

🔷 6. Money Market

🔹 Definition

Market for short-term funds (maturity ≤ 1 year).

🔹 Call / Notice / Term Money

👉 Used for managing short-term liquidity mismatches.

🔹 Treasury Bills (T-Bills)

• Issued by Government
• Short-term instrument
• Issued at discount, redeemed at face value

Maturities:

• 91 days
• 182 days
• 364 days

🔹 Cash Management Bills (CMB)

• Ultra-short-term instruments
• Used by government to meet temporary cash mismatches

🔹 Commercial Paper (CP)

• Issued by corporates
• Unsecured instrument
• Requires high credit rating
• Higher yield than bank deposits

🔹 Certificate of Deposit (CD)

• Issued by banks
• Fixed maturity
• Tradable instrument
• No premature withdrawal

🔹 Repo and Reverse Repo

✔ Repo

• Banks borrow funds from RBI
• RBI provides liquidity
• Collateral: Government securities

✔ Reverse Repo

• Banks park surplus funds with RBI
• RBI absorbs liquidity

🔹 Liquidity Adjustment Facility (LAF)

Includes:

• Repo
• Reverse Repo

👉 Used by central bank to manage short-term liquidity.

🔹 Standing Deposit Facility (SDF)

• Absorbs liquidity without collateral
• Floor rate of interest corridor

🔹 Marginal Standing Facility (MSF)

• Emergency borrowing window
• Higher interest rate than repo
• Ceiling of interest corridor

🔹 TREPS (Triparty Repo)

• Collateralized borrowing/lending
• Third party acts as intermediary
• Eliminates counterparty risk

🔷 7. Securities Market

🔹 Government Securities (G-Secs)

• Issued by government
• Considered risk-free
• Used to meet SLR requirements

👉 Key Concept:
Bond price and yield are inversely related.

🔹 Investment Categories

🔹 Corporate Debt

• Issued by companies
• Higher returns than G-Secs
• Higher risk

🔹 Bonds and Debentures

• Long-term instruments
• May be:
  • Convertible
  • Non-convertible
  • Secured
  • Unsecured

🔹 Equities

• Ownership in company
• Higher risk, higher return
• Regulated exposure limits for banks

🔷 8. International Treasury Operations

🔹 ADR (American Depository Receipts)

• Traded in US markets
• Represent shares of foreign companies

🔹 GDR (Global Depository Receipts)

• Traded in European markets
• Denominated in foreign currency

🔹 External Commercial Borrowings (ECB)

• Loans raised from foreign markets
• Used for expansion and capital expenditure
• Subject to regulatory limits

🔷 9. CRR and SLR

🔹 CRR (Cash Reserve Ratio)

• Portion of deposits kept with central bank
• Maintained in cash

🔹 SLR (Statutory Liquidity Ratio)

• Portion of deposits invested in:
  • Cash
  • Gold
  • Government securities

🔹 Importance

• Ensures liquidity
• Controls inflation
• Maintains financial stability

🔷 10. Demand and Time Liabilities (DTL)

🔹 Demand Liabilities

• Savings account
• Current account

🔹 Time Liabilities

• Fixed deposits
• Recurring deposits

🔷 11. Risks in Treasury

🔹 1. Market Risk (Most Important)

• Interest rate fluctuations
• Price volatility

🔹 2. Credit Risk

• Default by counterparty

🔹 3. Liquidity Risk

• Inability to meet obligations

🔹 4. Operational Risk

• System failure
• Human error

🔷 12. Important Exam Concepts

• Arbitrage: Profit from price differences
• Spread: Difference between buying and selling price
• Open Position: Net exposure in forex
• Leverage: Using small capital for large exposure

🔷 13. High-Value Exam Points

• Repo injects liquidity; Reverse repo absorbs
• SDF = Floor rate; MSF = Ceiling rate
• TREPS replaced CBLO
• T-Bills issued at discount
• CP vs CD differences are frequently asked
• Front/Mid/Back office roles are very important