Chapter 2 – Treasury Products

Treasury products Treasury refers to the products available in the financial market for raising and deploying funds for (a) investment and (b) trading in foreign exchange and securities market

Products available in Forex Market:

The forex is a virtual market without physical boundaries. The information dissemination is very fast through electronic media such as Reuters, Money Line, Bloom-berg etc. The foreign exchange markets, as such, are as near-perfect with an efficient price discovery system. The products are explained as under:

  1. Spot Trades
  2. Forward Rates
  3. Swap
  4. Investment of foreign exchange surpluses
  5. Loans and advances
  6. Rediscounting of bills

 

  1. Spot Trade

The spot trading in foreign currencies refers to a situation where the settlement takes place up to T+2 days i.e. maximum on the 3rd day. The settlement may take place on same day (ready rate) or on T 1 day i.e. by the next day (TOM rate). The ready rate and TOM rate are less favourable to the buyer and more favourable to seller.

  1. Forward Rates

The forward in foreign currencies refers to a situation where the settlement takes place in future i.e. after T+2 days, on a pre-fixed rate and on a pre-fixed date, which are decided on the date of contract. Forward may be at a discount (where future rate of forex. is lower compared to present/spot rate) or at a premium (where future rate of forex. is higher).

  1. Swap

Swap represents a combination of spot and forward transactions. Buying one currency in the spot market and selling the same currency for the same quantity in the forward market, constitutes a swap. Though swap is used for funding of requirements but at times there is some element of arbitrage.

  1. Investment in forex surplus

The forex surplus arcing from (a) profits on treasury operations (b) profits from overseas branch operations (c) forex borrowings in overseas market (d) foreign currency convertible rupee deposits, are left at the disposal of the Treasury.

Banks are allowed to invest these surpluses in global money markets or short term securities.

(a) Inter bank loans: These loans arc of short term nature up to one year and many times, overnight lending to domestic or global banks.

(b) Short term investments: Banks invest in Treasury bills or gilt edged securities issued by the foreign govt. and other debt instruments.

(c) Balance in NOSTRO accounts: Banks also keep balances in these accounts, which do not earn interest. Some correspondent banks, however, offer the facility to invest automatically once the balance exceeds the floor limits.

  1. Loans and advances

Though Treasury does not undertake the loan granting function, but consent of Treasury is obtained by the credit appraisal department and disbursement function regarding availability of foreign exchange funds or credit lines, prior to sanction of such loans by the Credit Function.

  1. Rediscounting of bills

Rediscounting is an inter-bank advance and Treasury provides refinance for the foreign currency bills purchased or discounted by other banks. These are normally of a short term period ranging from 15 days to one year

Money Market Products

Call Money : This is lending or borrowing for one day i.e. overnight Call money transactions reflect the liquidity availability on any particular day. Call money rate is indicated by Mumbai Inter-bank offered Rate (MIBOR).

Notice money : Investment of funds for a period of more than one day but up to 14 days.

Term money : Investment of funds for a period of 15 days or above up to I year

Prudential Limits fixed by RBI for inter-bank money market

Participant

Borrowing

Lending

Schedule Commercial Bank

Avg- 100 % of Capital (Tyre-I and Tyre-II), Maximum-125 %

Avg-25 % of Capital (Tyre-I and Tyre-II)

Maximum- 50 %

Co Op Bank

Not exceed 2.0 % of Aggregate Deposit

No limit

Primary Dealers ( PDs)

Avg – 225 % of their net owne funds

Avg- 25 % of their net owned funds

 

Treasury Bills

          – 91 Days – Weekly on Each Wednesday

          – 182 Days – Fortnightly on Wednesday- Non Reporting Friday

          – 364 Days – Fortnightly on Wednesday- Reporting Friday

Commercial Paper (CP)

          – Corporates, Primary Dealers, Financial Institutions

          – 7 Days to 1 Year

          – Rs.5 Lakhs and multiples thereof

   Requirement – A3 Rating, Net Worth Not below Rs.4 Cr, Working Capital limit by bank, Standard assets classification

Certificates of Deposit (CD)

          – Negotiable instrument

          – Bank –> 7 Days to 1 Year

          – FI –> 1 Year to 3 Year

          – 1 Lakhs and multiples thereof

Repo

It refers to sale of a security (normally a Govt. security) with a commitment to repurchase of the same security at a later date. Whenever a bank is in need of short term funds?. it can enter into a repo transaction with other bank or RBI. The difference in the sale price and re-purchase price is similar to interest on cash advance. The effective rate on repo is marginally lower than the corresponding money market rate, as the lending bank has security in hand, till the loan is repaid. In the books of a bank, the transaction appears like a sale and purchase transactions

Bill Rediscounting

Bills discounting provides an investment opportunity to the Treasury. These bills are of short term nature with maturity, generally, of 3-6 months which are already discounted by other banks. The rediscounting is done at near market prevailing rates. The borrowing bank is able to maintain liquidity by getting these bills rediscounted. It also is in a position to reduce its capital requirement for capital adequacy purpose, as these bills are removed from credit portfolio and are added to the inter-bank liability

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