Treasury management.

TREASURY MANAGEMENT

INTRODUCTION

Treasury management is the science of managing treasury operations of a firm. Treasury in its literal sense refers to treasure or valuables of the Government. The valuables are nothing but the coins and the currency which are the medium of financial transactions in the country. In the earlier days when the level of governmental operations was comparatively smaller, there used to be a centralized treasury into which the revenue receipts of the government were credited and from which the payments of the government were withdrawn. In a federal set-up, both the central govt. and the state govts. had their treasuries for managing the inflows and outflows of government finances.

As the size and spread of government revenues grew, it became difficult to manage the flows of cash into a centralized treasury. The function of collecting revenues on behalf of the government was gradually shifted to State Bank of India and other nationalised banks. These banks also started making payments on behalf of the state governments through cash counters and through bank accounts of various government departments. Simultaneously with the increase in size of

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government revenues, the corporate sector in India also grew manifold in operations. There were companies with multi-locational set-up involving receipt and disbursement of cash and cash equivalents at more than one places. In all such companies, the function of treasury management developed analogous to the transfer of government treasury functions to Banks. Along with this growth evolved the concept of profitable treasury management. The over-riding motive was to provide a platform for transactions and little effort was made to evaluate the costs and expenses associated with managing large amount of currency, cheques and other liquid instruments. Similarly, the opportunity available for making profits from holding large liquid funds was not recognized. But with the arrival of corporate treasuries, the function of treasury management was established as a profitable venture.

Today when we speak of treasury management, we refer to all activities involving the management of revenues, inflows and outflows of government, banks and corporates etc. It is a general concept applicable to overall fund management.

Government as the sovereign power is the fountainhead of all treasury operations. It creates money by printing currency and minting coins. This money flows into various channels which take money to various users of currency and coinage as a medium of exchange. Thus at the macro level, the treasury operations revolve around Reserve Bank of India. RBI as a banker to the govt. creates the currency on behalf of the govt. and manages public debt. It is also a banker to the banks and in this role, it controls the credit creation of banks.

At the micro level the concept of treasury and its management is mirrored in small corporate units which manage the cash flows on a daily basis. As we move from the macro level to the micro level, the nomenclature of treasury management becomes diffused. The terms treasury management and fund management are used almost synonymously. Conceptually, the latter is a general term, applicable to the business sector, while treasury management refers to the management of cash, currency and credit of sovereign power of the country. The term currency here includes both national currency and the foreign currencies dealt with by the government.

Historically, the treasury of a sovereign included gold, silver and other precious metals which were used as a medium of exchange. As a ruler, the sovereign exercised un-challanged rights over all the precious metals extracted from the earth. The booties earned from wars, foreign exploits and domestic plundering kept on adding to the treasure chest of the sovereign. These metals were circulated in the form of coins which became a medium of all commercial transactions in due course, replacing the earlier system of barter. The practice continued till the nineteenth century when paper currency began to be issued.

Reserve Bank of India manages the macro treasury management of the country. This is done through

Issue of Currency notes

Distribution of small coins, one, two and five rupee coins and rupee notes on behalf of the government

Maintenance of currency chests.

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The currency is issued by the Reserve Bank of India in terms of the Indian Currency Act whereas the small coins and rupee coins are issued under the provisions of the Indian Coinage Act. The provision of adequate supply of currency and coins is the responsibility of the government which was at first discharged by providing currency chests at the branches of Issue Department of RBI and at branches of Imperial Bank of India (which later became State Bank of India). SBI carried out the business of Government treasury and maintained the currency chests at all district headquarters. Later on all the nationalized banks were also entrusted with the task of maintenance of currency chests.

The basic objective of keeping the currency chests at various places in India is to facilitate quick disbursement of currency and coins to far flung places and also to facilitate remittance to banks. This way, the banks can remit surplus cash to the currency chests located in their region and avoid transportation of cash over long distances. Also, the banks can draw from the currency chests during time of need. Currency chests are the agents of the Reserve Bank of India for keeping custody of currency and coins. Any deposit of currency and coins into these chests implies that the money circulation has been curtailed to that extent. Similarly, any disbursal from these chests would expand their supply. Thus expansion and contraction of currency takes place on continual basis due to operation of the currency chest.

Government as a sovereign power has control on cash and currency circulated in the country. The issue of currency and coins is based on the treasures of the government in the form of gold and silver stocks which are supposed to back such issue. More recently, government securities and their promissory notes became the basis of such issue. In fact, the coins of gold and silver were first replaced by the paper currency on the one hand and coins of base metals like copper, nickel, bronze, zinc etc., on the other. To supplement the available currency and to facilitate trade and business, credit instruments came into vogue in the form of promissory notes to pay at a future date by the trade and industry. Thus on the one hand, the government promissory notes became the basis for coins and currency rather than precious metals like gold and silver; and on the other hand, the promissory notes of trade and industry became the source of credit instruments. These credit instruments, particularly the safest among them such as government securities, in fact became the medium of parking of liquid funds over a period of time. Thus apart from handling cash and currency and bank funds, the liquid investment in government securities and mutual funds became another function of treasury management.

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