Meaning of Treasury Management

• Conceptually, Treasure refers to the gold, silver, jewelry, money and

similar important wealth and Treasury refers to the storage place of such
treasure.
• The competitive business environment resulting from the liberalization,
globalization and technological advancement created pressure to manage
the cash in an organization in optimum level.
• The optimum management of cash helps to stay an organization more
competitive and eradicate the opportunity cost of holding cash idol in an
organization.
• The demand for the funds for expansion increases with high interest rate,
increasing investment opportunity and growing volume of financial
transactions have necessitated efficient management of money in an
organization.
• Simply, Treasury management refers to the managing of daily cash
flow and liquidity of funds within the bank including the handling of
bank’ investment in securities, foreign exchange, assets/liabilities
management.
• Treasury management is an art of managing the fund of the bank
within the acceptable level of risk, optimally and profitably.
• Treasury management includes, management of the company’s
holdings, with the ultimate goal of managing the firms liquidity and
mitigating its operational, financial and reputational risk.
• Treasury management includes the firms collection, disbursement,
concentration, investment and funding activities.
• The key goal of the treasury management is planning, organizing,
and controlling cash assets to satisfy the financial objectives of an
organization.
• Every bank has the treasury department which acts as a custodian of
cash and other liquid assets.
• The treasury department functions under Chief Finance Officer or
Treasurer.
• Working capital management of the bank or financial institutions is
done by treasury department.
 Scope of Treasury Management
The prime function of the treasury management is to control and
manage the banks money. The scope defines the application area in
which treasury management is important in an organization. Following
are the scope of treasury management:
1) Liquidity Management :
• Liquidity management is the process of identifying low cost source of
fund and utilizing it in highly returnable sector which is subject to low
risk.
• Liquidity management is the management of CA and CL.
• Liquidity management function is very important for the bank
because the central banks closely monitors banks to ensure that they
are within the regulatory limit.
• The bank must ensure whether they have sufficient liquid fund to
smoothly run the day to day operation of the bank.
• During deficit of liquidity, treasury should go for any of the interbank
borrowing, borrowing against T-bill, Repo, liquidation T-bill and
bonds, Accepting and Calling deposit etc.
• And during surplus of liquidity, treasury should go for money market
lending, reverse repo, buying T-bills and Government securities.
2) Money market Transaction: The treasury department of the bank
highly involves in the money market transaction such as buying and
selling of T-bills, Certificate of deposits, Repurchase agreement and alike
for maintaining liquidity and profitability.
3) Capital Market Transaction: Treasury department shall make the
long term investment in capital market instrument like government bond,
corporate bond, municipal bond and common stock to maintain
profitability of the fund invested and maintain liquidity as per the limit
specified by Nepal Rastra Bank.
4) Foreign Exchange Management: Banks are the major player who
participate in the foreign currency market, to purchase and sell the foreign
currency as per their requirement. The banks must hold the certain foreign
currency at their account to meet the need of the customer within the limit
of NRB to perform the function of international trade.
5) Correspondent banking: Correspondent banking provides credit,
deposit, collection, clearing, and payment services to other banks and
financial institutions on behalf of their customer. They maintain cash at
each other's interbank account.
6) Rate determination: The rate determination is the determination of
exchange value between two countries currency. Treasury management
also determines the rate of one currency in comparison to another
currency. Generally the rate value of the currency is determined by the
interaction between demand and supply of currency. Further it is
determined by:
• Balance of Payment
• Purchasing Power Parity
• Interest rate
 Role and functions of treasury department
The roles and functions of treasury departments are:
1) Cash forecasting: Based on the record maintained by accounting
staff on cash receipt and disbursement, treasury department must ensure
the future need of the cash, the future payment (Cash outflow) required
and source of cash collection (cash inflow) in future and the variability
in cash needed must be ensured in advance.
2) Working capital Management: the key component of cash
forecasting is working capital, which involves change in level of current
assets and current liabilities in response to the company’s current level
of sales and various internal policies. The treasurer must be aware of
working capital levels and trends.
3) Cash management: The treasury staff uses the information it
obtained from its cash forecasting and working capital management to
ensure the sufficient cash is available for operational needs.
4) Investment management: The treasury staff is responsible for
proper investment of excess funds. The maximum return on this
investment is an important goal of an organization along with risk
diversification and maturity matching .
5) Management advice: treasury staffs monitors the market conditions
very closely in terms of liquidity in market, interest rate movements,
availability of debt, the probable terms that equity investors wants and
alike and therefore an important inhouse resource for management team
to consult on it.
6) Bank relationship: The treasurer meets with the representatives of
any bank that the company uses to discuss the company’s financial
conditions, the banks fee structure, and service related issues. The long
term and open relationship with the banks creates reputational value
addition to the bank.
7) Credit rating agency relation: when bank issues debt, it is likely
that the credit rating agency will review company’s financial conditions
and assign credit rating to the debt. The treasury staff responds to the
information requests by credit rating team and provides it with
additional information over time.
8) Fund raising: The treasurer has to maintain excellent relation with
the investment community for fund raising purpose with both sell side
and buy side. Sell side are broker and investment banker and buy side
are investors, mutual funds, pension funds and other sources of fund.
9) Other activities: If company engage in merger and acquisition, then
the treasury staff should have expertise in integrating the treasury
system of acquire into those of the company. Another activity is the
maintenance of all types of insurance on behalf of the company.
 Principles of Treasury Management
1) Principles of security:
• The treasurer should invest in the investable fund that is secure where
the default risk will be minimum
• Their focus must be on achieving more return at acceptable level of
risk
2) Principle of liquidity:
• The basic objective of the liquidity management is to maintain
adequate level of liquidity to meet borrowers and depositors demand.
• The banks should have adequate funds to meet their various
requirements and smooth functioning of the banking operations.
3) Principle of Profitability:
• The investment made by the bank should provide maximum possible
return.
• Therefore, banks assets must be allocated in such a way that increases
the profitability of the bank.

4) Principle of portfolio:
• The principle of portfolio focus to minimize the risk by diversifying
the investment.
• The treasury department should invest in the portfolio of various
assets with the objectives of risk mitigation.