UNIT 1:

INTRODUCTION
Meaning of treasury, Scope
of treasury management,
Role and function of
treasury department,
Principles of treasury
management.
 TREASUR
 Y:
A place where the funds of the government, of a
corporation, or the like are deposited, kept, and
disbursed is called treasury.

 the place of deposit and disbursement of collected

funds, especially : one where public revenues are
deposited, kept, and disbursed.

 Treasury is a key finance function that is vital to the

financial health and success of every business,
large or small.

 Treasury refers to the reserve, funds or bank

accounts to support day to day or emergency cash
flow need.
The treasury department of a bank is responsible for balancing and
managing the daily cash flow and liquidity of funds within the bank. The
department also handles the bank's investments in securities, foreign
exchange and cash instruments.

The treasury department must ensure that the bank has enough liquidity,
readily available cash to cover its net cash payments.

The treasury, essential in various sectors like government, corporations, and

finance, serves as the nerve center for financial management. It oversees
tasks such as revenue collection, expenditure allocation, cash flow
management, investment strategies, and risk mitigation. Whether it's
maintaining economic stability through fiscal policies, optimizing liquidity for
corporate operations, or managing risks in financial institutions, the
treasury's core objective remains consistent: safeguarding assets,
maximizing returns, and ensuring financial resilience to support
organizational goals.
 TREASURY MANAGEMENT:
Treasury management refers to the strategic
planning, execution, and control of an
organization’s financial resources. It
encompasses a range of activities aimed at
optimizing cash flow, mitigating risks, and
maximizing returns. The treasury
management process involves various tasks,
including cash forecasting, liquidity
management, payment processing, and
investment management.
 TREASURY MANAGEMENT
……. management (or treasury operations) includes management of
 Treasury
an enterprise's holdings, with the ultimate goal of managing the firm's
liquidity and mitigating its operational, financial and reputational risk.
Treasury Management includes a firm's collections, disbursements,
concentration, investment and funding activities. In larger firms, it may
also include trading in bonds, currencies, financial derivatives and the
associated financial risk management.
 Treasury Management can be understood as the planning, organizing
and controlling, holding funds and working capital of the enterprise in
order to make the best possible use of the funds, maintain firm’s
liquidity, reduce the overall cost of funds, and mitigate operational and
financial risk.

 It covers working capital management, currency management,

corporate finance and financial risk management.
Bank Treasuries may have the following
departments:
A Fixed Income or Money Market desk that is devoted
to buying and selling Interest bearing securities
A Foreign exchange or FOREX desk that buys and sells
currencies
A Capital Markets or Equities desk that deals in shares
listed on the stockentities,
For non-banking market the terms Treasury Management and
Cash Management are sometimes used interchangeably, while,
in fact, the scope of treasury management is larger (and
includes funding and investment activities mentioned above). In
general, a company’s treasury operations comes under the
control of the Chief Financial Officer (CFO), Vice-President /
Director of Finance or Treasurer, and is handled on a day-to-day
basis by the organization’s treasury staff.
SCOPE OF TREASURY
MANAGEMENT:
Treasury has developed as one of the core functions of
Banks and Financial institutions which has a strong
interrelationship with other departments like Deposit,
Credit, Finance, Assets, Liability Management.
1. LIQUIDITY MANAGEMENT
2. MONEY MARKET TRANSACTION
3. CAPITAL MARKET TRANSACTION
4. CORRESPONDENT BANKING
5. FOREIGN EXCHANGE MANAGEMENT
6. RATE DETERMINATION
 LIQUIDITY MANAGEMENT:

Liquidity is the term used to describe the liquid assets/cash a

company can use to meet its current and future debts and other
obligations, such as payments for goods and services. Some
assets are liquid, meaning that cash can be readily accessed
whenever it is needed. But other types of assets, such as longer-
term investments, may take longer to convert into cash – and if
such an asset has to be sold very quickly due to an unexpected
shortfall, the company may end up losing some of that asset’s
value.
Liquidity management is to maintain adequate level of liquidity
and raise profitability of the bank managing the surplus liquidity.
LIQUIDITY MANAGEMENT …………

Bank will follow raising cash on short notice with low cost
as possible in shortage of funds and convert funds in
earnings assets if surplus funds are available. In the
situation of surplus liquidity, the treasury should use in
money market lending, reverse repo, buying T-bills, and
government securities.
When the bank is in situation of deficit of liquidity, treasury
should go for any of interbank borrowings, borrowing
against T- bills and bond or debentures or Repo, Standing
liquidity facility by NRB, liquidation of Treasury bills and
bonds etc.
 MONEY MARKET
TRANSACTIONS:
The money market involves the purchase and sale of large
volumes of very short-term debt products, such as overnight
reserves or commercial paper.
The money market refers to trading in very short-term debt
investments. At the wholesale level, it involves large-volume
trades between institutions and traders.
Money market is market where high liquidity short term
security are traded.
It is used as a means for borrowing and lending in the short
term basis i.e. one year or less than one year.
The investment in Treasury bills shall be done for the purpose
of maintaining statutory liquidity ratio and managing returns
and liquidity.
The treasury department will purchase the Treasury bill within
 CAPITAL MARKET
TRANSACTIONS:
Capital markets are the market where long term securities are
traded. In capital market, long term debt and equity are
buying and selling.
This type of market is composed of the both the primary and
secondary markets.
Treasury department shall make the long term investment in
capital market instruments like government bond, corporate
bonds, preference shares and equity shares.
These investments should be done through primary as well as
secondary market under the directives issued by Nepal Rastra
Bank.
 CORRESPONDENT
BANKING:
A correspondent bank is a third-party financial institution that
acts as an intermediary between domestic and international
banks. Correspondent banks effectively act as an agent of a
foreign bank to conduct business transactions with the
domestic bank on its behalf.
A correspondent banking is established through a bilateral
contract with foreign bank to co-operate in such banking
services as money transfer, foreign exchange and trade
finance.
 Banks use correspondent banking relationship to deliver
services to customers on markets where the bank has no
physical presence.
A correspondent bank provides services to a respondent bank.
 FOREIGN EXCHANGE
MANAGEMENT:
 Foreign Exchange (FX or Forex) management is the process of managing
the exchange of foreign currencies. This includes the conversion of one
currency to another, the purchase and sale of foreign currency, and the
management of currency risk. FX management is a critical part of any
business that has international operations or deals in foreign currencies.
 The foreign exchange market or forex market as it is often called is the
market in which currencies are traded.
 Various Forex transactions like purchasing, selling, receipt of sums of
money, payments of money, etc. in foreign currency for the transactions
done with parties situated in other country is covered under Forex
trading.
 Banks have assets and liabilities in various currencies. Banks buy and sell
foreign currency both for transaction and speculative purpose. The
exchange rate is considered is volatile in nature.
 RATE
DETERMINATION:
 The determination of rate is the determination of exchange value
between two countries currency.

 Treasury management also determines the rate of one currency in

comparison to another country currency. Generally, the rate value of
currency is determined by the interaction between the demand and
supply of currency.

 Treasury should use to way pricing system to publish rates. Normally,

price will be moved freely on the basis of the forces of demand and
supply in the market. Dealers are responsible for issuing daily exchange
rates of each convertible foreign currency.
ROLE AND FUNCTION OF TREASURY
DEPARTMENT:
1. Cash forecasting
2. Working capital management
3. Cash management
4. Investment management
5. Risk management
6. Credit rating agency relations
7. Management advice
8. Bank relations
9. Fund raising
10. Credit granting
11. Merger and acquisition
CASH FORECASTING:
 Cash forecasting is the process of obtaining an estimate or
forecast of a company's future financial position.
 The accounting staff generally handles the receipt and
disbursement of cash, but the treasury staff needs to compile
this information from all subsidiaries into short - range and
long - range cash forecasts.
 These forecasts are needed for investment purposes, so the
treasury staff can plan to use investment vehicles that are of
the correct duration to match scheduled cash outflows.
 The staff also uses the forecasts to determine when more cash
is needed. so that it can plan to acquire funds either through
the use of debt or equity.
 Cash forecasting is also needed at the individual currency
level, which the treasury staff uses to plan its hedging
operations.
 WORKING CAPITAL MANAGEMENT
:
 Working capital management is a business process that helps companies
make effective use of their current assets and optimize cash flow. It’s
oriented around ensuring short-term financial obligations and expenses
can be met, while also contributing towards longer-term business
objectives. The goal of working capital management is to maximize
operational efficiency.
 A key component of cash forecasting and cash availability is working
capital, which involves changes in the levels of current assets and
current liabilities in response to a company's general level of sales and
various internal policies.

 The treasurer should be aware of working capital levels and trends, and
advise management on the impact of proposed policy changes on
working capital levels.
CASH
MANAGEMENT :
 Cash Management refers to the day-to-day
administration of managing cash inflows and
outflows. Because of the multitude of cash
transactions on a daily basis, they must be
managed.
 The ultimate goal of cash management is to
maximize liquidity and minimize the cost of
funds.

 The treasury staff uses the information obtained

from cash forecast and working capital
INVESTMENT
MANAGEMENT:
Investment management is the process of making decisions about
investments. It involves researching, selecting, and monitoring a
portfolio of assets that match an investor’s goals, risk profile, and
timeframes.

The treasury staffs are responsible for the proper investment of it. Three
primary goals of the role are:

(a)maximum return on investment

(b)matching the maturity dates of investments with a company’s
projected cash needs; and most importantly is
(c)not putting funds at risk.
 RISK MANAGEMENT :
 Risk management is the practice of mitigating money-related risks in
organizations, such as those in liquidity, investments, FX and interest
exposures, and payments. It involves examining risks posed by
treasury activities and developing appropriate response plans ahead of
time to reduce potential downsides.

 The interest rates that a company pays on its debt obligations may
vary directly with market rates, which present a problem if market
rates are rising.
 A company's foreign exchange positions could also be at risk if
exchange rates suddenly worsen.
 In both cases, the treasury staff can create risk management
strategies and implement hedging tactics to mitigate the company's
risk.
MANAGEMENT
ADVICE:
 The treasury staff monitors market conditions
constantly and therefore is an excellent in - house
resource for the management team.

 Advice about interest rates that the company is likely

to pay on new debt offerings, the availability of debt,
and probable terms that equity investors will want in
exchange for their investment in the company.
CREDIT RATING AGENCY
RELATIONS :
 When a company issues marketable securities ie.
Equity and debt, it is likely that a credit rating
agency will review the company's financial
condition and assign a credit rating to the debt. The
treasury staff responds to information requests
from the credit agency's review team and provides
it with additional information over time.
BANK
RELATIONSHIPS:
The treasurer meets with the representatives of any bank
that the company uses to discuss the company's financial
condition, the bank's fee structure, any debt granted to
the company by the bank, and other services such as
foreign exchange transactions, hedges, wire transfers,
custodial services, cash pooling, and so forth.

 A long - term and open relationship can lead to some

degree of bank cooperation if a company is having
financial difficulties, and may sometimes lead to modest
reductions in bank fees.
FUND RAISING
:
A key function is for the treasurer to maintain excellent
relations with the investment community for fund -
raising purposes.

This community is composed of the sell side, which are

those brokers and investment bankers who sell the
company's debt and equity offerings to the buy side,
which are the investors, pension funds, and other sources
of cash, who buy the company's debt and equity.
CREDIT
GRANTING :
 The granting of credit to customers can lie within the
preview of the treasury department, or may be handed
off to the accounting staff.

 This task is useful for the treasury staff to manage,

since it allows the treasurer some control over the
amount of working capital locked up in accounts
receivable.
MERGER AND
ACQUISITION :
 If a company engages in mergers and
acquisitions on a regular basis, then the treasury
staff should have expertise in integrating the
treasury systems of acquires into those of the
company.

 For larger organizations, this may require a core

team of acquisition integration experts.
PRINCIPLE OF TREASURY
MANAGEMENT:
The treasury management is based on certain
principles. They are as follows:

PRINCIPLE OF SECURITY
PRINCIPLE OF LIQUIDITY
PRINCIPLE OF PROFITABILITY
PRINCIPLE OF PORTFOLIO
PRINCIPLE OF SAFETY
PRINCIPLE OF SECURITY:
 The banks should invest the investible funds
in safe or secure areas in which default risk
will be minimum.

 Banks should refund the peoples' money at

their demand or after certain period of time
mention in the contract.

 Thus, the Treasury management of the bank

should decide to invest in the safe areas.
 PRINCIPLE OF
LIQUIDITY:
 The basic objective of liquidity management is to
maintain adequate level of liquidity to meet
borrower and depositor's demand.
 Cash management, working capital management,
organizing and managing borrowing facilities are
the key tools for managing liquidity

 The banks should have adequate funds to meet

their various requirements. To meet these
obligation banks need to have sufficient resources
as a liquid fund. .-

 The banks will create such assets which can be

liquidated (converted into cash) as required.
 PRINCIPLE OF
PROFITABILITY:
 The investments made by banks should provide the
maximum returns possible.
 Treasurer must ensure timely procurement of right
amount of funds and timely deployment of right
amount of funds to profit from such sourcing and
deployment

 Bank's main objective is to maximize profit since it is

a profit making business.

 Therefore, the bank's assets are allocated in such a

manner that increases profitability.
 PRINCIPLE OF
PORTFOLIO:
 Portfolio is the combination of investments in two
or more than two financial assets.

 The objective of the portfolio is to minimize the risk

or diversification of risk.

 The Treasury department should invest in the

portfolio of various assets with the objectives of
the risk mitigation.
PRINCIPLE OF SAFETY
 Treasury management should ensure that funds
are invested safely
 Treasurer needs to mobilize the funds in those
areas where there are least probabilities of
default
 Banks deal with others’ money which they need
to refund after certain period of time
 Hence they need to invest their funds in those
areas which are considered to be safe