The CAIIB BFM Treasury Management & Treasury Products topic is one of the most scoring yet conceptually rich areas for aspirants. This article explains every important concept in detail with exam perspective and provides a place to embed your YouTube video and a downloadable PDF for student reference.
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1. Introduction
In modern banking, the Treasury Department acts as both a profit center and a risk management hub. With financial globalization and dynamic markets, treasuries must manage liquidity, investments, foreign exchange, and regulatory ratios effectively. For CAIIB BFM students, mastering this chapter ensures a deep understanding of practical treasury operations.
2. Globalization & Capital Movement
Globalization has enabled free movement of capital across nations, linking interest rates and financial systems globally. Banks must now handle complex capital flows and exchange rate volatility.
- Capital flows include FDI, ODI, portfolio investments, ECBs, and short-term funds.
- Exposure to foreign currencies increases risk and requires hedging strategies.
- Arbitrage opportunities arise due to global interest rate differentials.
Understanding these flows is essential for CAIIB BFM Treasury Management preparation.
3. Convertible Bonds – How Debt Converts to Equity
A Convertible Bond starts as a debt instrument but gives the holder the option to convert it into equity at a predetermined price.
- Provides lower cost of capital for issuers.
- Defers dilution of ownership until conversion.
- Appeals to investors seeking fixed income plus equity upside.
It’s a hybrid instrument, important under Treasury Products in CAIIB syllabus.
4. Bank Treasury & Equity Investment – Caution Due to Volatility
Banks usually invest in government and fixed income securities. However, equity investments are high-risk due to market volatility and regulatory limits.
- Equities cause mark-to-market losses in volatile markets.
- Exposure limits and risk weights restrict excessive holdings.
- Liquidity and concentration risks must be monitored closely.
Hence, banks maintain a conservative approach toward equity holdings within their treasury portfolios.
5. Forex Market – Spot, TOM, and Forward Rates
The Forex Market operates through various settlement systems:
- Spot Rate (T+2): Settlement two business days after the trade.
- Tom Rate (T+1): Settlement on the next business day.
- Forward Rate: Rate fixed today for a future date to hedge exposures.
The Forward Premium or Discount depends on interest rate differentials between currencies. This is a critical area of CAIIB BFM Foreign Exchange study.
6. Integrated Treasury – Flexibility Across Markets & Currencies
An Integrated Treasury merges the operations of money market, foreign exchange, and securities divisions to optimize liquidity and profits.
- Allows fund reallocation across markets and currencies.
- Improves profitability and efficiency through centralized control.
- Requires strong systems, skilled manpower, and real-time monitoring.
This topic highlights synergy in Treasury Management across banking domains.
7. Overseas Direct Investment (ODI)
Indian companies investing abroad use rupee or foreign resources under RBI’s ODI norms. Treasury teams plan funding, hedging, and compliance under FEMA.
- Sources include internal accruals, borrowings, or ECBs.
- Currency risk management and repatriation of profits are critical.
- Approvals and sectoral caps apply under RBI guidelines.
8. FEMA – Capital vs Current Account
Under FEMA, all foreign transactions are divided into two broad types:
- Current Account: Trade in goods/services, remittances, interest payments – fully liberalized.
- Capital Account: Investments, borrowings, asset purchases – regulated and partly liberalized.
CAIIB aspirants must differentiate between both as it impacts permissible transactions and reporting norms.
9. SLR & RBI Powers – Investment Options and Approved Securities
Every scheduled bank must maintain the Statutory Liquidity Ratio (SLR) as a percentage of Net Demand and Time Liabilities (NDTL).
- SLR ceiling generally capped near 40% of NDTL.
- Eligible securities include Government Bonds, State Loans, and approved PSU instruments.
- RBI may modify eligible instruments or change SLR limits to control liquidity.
Beyond SLR, banks can invest in non-SLR securities to enhance returns under proper risk controls.
Encourage students to join your CAIIB BFM Full Course with access to live classes, MCQs, PDFs, and mock tests.
📝 Summary & Key Takeaways
- Treasury acts as profit and risk center of banks.
- Convertible Bonds blend debt and equity benefits.
- Banks maintain caution in equity investments due to volatility.
- Spot (T+2), Tom (T+1), and Forward rates manage FX exposures.
- Integrated Treasury enhances flexibility and profitability.
- ODI and FEMA regulate foreign investments and capital flows.
- SLR compliance ensures financial stability under RBI supervision.
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