Question

“The role of treasury department is to manage the assets and liabilities of a financial institution to enhance earnings, profitability and shareholders’ wealth”.

In undertaking this role, the treasury management has not only to contend with the business cycles but also events and crises such as the COVID -19 global pandemic, low and fluctuating crude petroleum oil and other commodity prices. These events and happenings have brought uncertainties and volatilities in the financial markets and pose risks to the role and function of treasury management.

a) Discuss the challenges, the risks and impact faced by the Treasury Management including the strategies Bank Treasuries could effectively adopt to mitigate the risk to its earnings, profitability and shareholder value. (1000 words)

Answer 1

Certain events and happenings around the globe have brought uncertainties and volatilities in the financial markets and pose risks to the role and function of treasury management.

Following is an analysis as to the various aspects of a bank treasury in such a situation:

Challenges faced:

Considering the current covid situation as well as the other political, social as well as economic factors prevailing Banks have had a major role to play. Right from being largely affected by high level of uncertainty invloved to keeping up the economy this time is not easy for the Bank treasury team.

There have been multiple revision in bank policies to ease customer benefit and support them during this period. Such revisions as well as support has been a tough dribble for the banks as well. The cashflow uncertainty topped with large number of defaults have made decision making in the treasury departments of banks a major task and challenge.

Right from adhering to the guidelines of the Central body govering these banks to meeting it's set commitments and managing a delay in its prospective inflows the treasury department is having sleepless nights to keep the bank operations effective.

Risks faced:

The treasury department which entered into forward contracts or other contractual agreements before this depressing situation have a high risk of not being able to get it make good these contracts as parties may demand certain relaxation which will have an adverse impact on further course of action to either hedge or enter into further binding agreements.

Considering the current turmoil situation prevailing in the financial market where large number of entities are declaring bankruptcy and insolvency there is a high risk of npas I'm the banks balance sheet.

Unable to manage funds and liquidity to effectively cater to its customers needs iin such demanding situatios is a major risk which banks treasury team are facing.

Impact faced

Although there are two sides of coin but in the current situation it seems that bank have had to face the unbiased dark side of it. Not only has there been a challenge in meeting prior commitments and agreements but also being able to meet current ongoing operational neccescities in its business.

Certain banks have also themselves been unable to handle this hard time and themselves got into insolvency.

Although the impact is largely negative but banks have also seen a shoot in its customer base during this period. People who lost money duirng there times have appropached banks to taken overdraft or working capital loans as well.

This situation has also had an impact of banks entering into agreements wich techentrepeneurs to develop products and services and encouraged the cult of startup and creative thinking.

Following strategies could be effectively adopted by bank treasuries to mitigate the risk to its earnings, profitability and shareholder value :

A sneak peak and deep study of its internal controls in operations will have a major role to play. Banks investing resources to get these controls established and keeping a track of its design implementation and it's operating effectiveness will seek major benefits.

Strengthening it's customer management system as well as customer credit evaluation system will play a major role to avoid any npas in its books.

Understanding customer requirements and furnishing financial products which are tailor made for the various entities it caters to to help them revive out of this situation will prove to be a good strategy going forward.

A talented and dedicated team to manage liquidity and cashflows in operations as in this situation merely accoutung profit won't suffice and liquid ity got to play an important role for a banks success.

Banks may also resort to securitization and use of factors for its recovery processes.

Finally since its the entire mankind which is facing this disturbing situation banks treasury team got to consider humanitarian aspects as well while making relevant decisions.