The Treasury department in a bank is very critical. The basic trading product for the banks is money. Simply stated, banks are intermediates between the borrower and the saver or Investor. Irrespective of how good the products offered to the customer are and whether there is top notch customer service in the bank, if the bank is not able to satisfy the investors and borrowers, then it is not in business. Broadly this is where the Treasury department of a bank comes into the picture.

It ensures that the investors and borrowers needs are met. Fundamentally the Treasury department plays a very important role in the continual functioning of a bank. Some of the important roles it plays are:

1. Liquidity position function by Treasury Department

It ensures that the liquidity position of the bank is sound. One of the conditions of the Central Bank as a regulatory authority to Banks is that banks maintain a deposit account with it.

This account should at all times be maintained at a certain set minimum balance. Failure to ensure compliance to this and the bank faces the risk of high penalty levied on it. The bank could even be placed under statutory management if the problem persists.

The basic function of this account is to ensure that the banks are able to settle their interbank obligations, as and when they fall due. This usually means cheque payment and funds transfer.

So Treasury department in the bank ensures that the account has sufficient money to meet its obligations, even through overnight borrowing from other banks. This quick loan in most cases charges high interest rate.

2. Investment decision by Treasury Department

Treasury department facilitates the investment decisions for surplus cash in the bank. The investment should be one with a good return. Risk should be taken into consideration, as holding idle cash is very unwise.

3. Treasury Department foreign currency policies

The department determines the exchange rate for foreign currencies against the local currency. This is dependent on the market forces of demand and supply of currency.

The department ensures that there is adequate supply of the foreign currencies and that the foreign accounts are adequately maintained to ensure they meet their obligations

4. Treasury Department interest rate policies

Depending on the cost of funds acquired for lending, Treasury department determines the interest rate that is charged to their customers who are borrowers.

The department through market analysis of the interest rates paid to investors, for example, Securities offered by Central Bank, helps determine the interest rate to be paid. Interest rates are paid for time deposit accounts like the call deposit account and the fixed deposit account.

Treasury department critically evaluates the financial activities, the risks and ways of mitigating the risks.