FUND TRANSFER PRICING

Managing Pricing and Profitability for Banks

A report submitted by Vinit Mehta

Mumbai Educational Trust Bhujbal Knowledge Cetre, Bandra Reclamation, Bandra (West), Mumbai 400050.

A Project report on

FUND TRANSFER PRICING -Managing Pricing and Profitability for Banks

Submitted by: Vinit Mehta METIOM MMS (Finance) Roll No 90 Batch 2012-2014 Submitted on 5th August, 2013

A Report submitted to the University/Institute in partial fulfillment of the requirement of MMS for the year 2013.

Under the guidance of Mr. Arvind Girotra (Senior Manager-Business Advisory Services, Ernst & Young) & Mr. Amit Jha ( Senior Consultant-Business Advisory Services, Ernst & Young)

ACKNOWLEDGEMENT
My experience at Ernst & Young would not have been as fulfilling, if not for the guidance, motivation and support of all my mentors. I am indebted to everyone who made it possible for me to understand the application of Fund Transfer Pricing, learn the ways of a corporate organization which has augmented my professional growth, over the last two months. And I wish to express my sincere gratitude to all those people. First I would like to express my profound gratitude and deep regards to my mentor Mr Amit Jha (Senior Consultant-Business Advisory Services, Ernst & Young) for his exemplary guidance, monitoring and constant encouragement throughout the course of this project. The knowledge, help and guidance given by him time to time helped me understand this topic. I am grateful to Mr. Arvind Girotra (Senior Manager-Business Advisory Services, Ernst & Young) and Mr. Nilesh Naker (Associate Director - Financial Services, IT Advisory, Ernst & Young) for guiding me during my internship and patiently answering my many queries. I would like to thank Mr. Ashvin Parekh (Partner, Global Financial Leader, Ernst & Young) and Mr. Eric Anklesaria (Partner, Global Financial Leader, Ernst & Young) for giving me this opportunity to work with the organization and encouraging me throughout my project work. I also wish to thank my colleagues and friends at Ernst and Young for generously spending time with me, answering my queries and ensuring that this SIP would be an experience to cherish. I also take this opportunity to express a deep sense of gratitude to our institute MET for cordial support, valuable information and guidance, which helped me in completing this task through various stages.

Contents
Executive Summary ................................................................. Error! Bookmark not defined. About Ernst & Young .............................................................. Error! Bookmark not defined. 1 Introduction ...................................................................... Error! Bookmark not defined. 1.1 1.2 Traditional method for Evaluating Profitability ........ Error! Bookmark not defined. Drawbacks of traditional Method .............................. Error! Bookmark not defined. Bookmark not

1.3 Fund Transfer Pricing Method for calculating profitabilityError! defined. 1.4 1.5 2 3 4

The Need for Fund Transfer Pricing ......................... Error! Bookmark not defined. Objectives of Fund Transfer Pricing ......................... Error! Bookmark not defined.

Fund Transfer Pricing Implementation Process ............... Error! Bookmark not defined. Banking Products ............................................................. Error! Bookmark not defined. Fund Transfer Pricing Mechanism................................... Error! Bookmark not defined. 4.1 Selection of Transfer Curve ...................................... Error! Bookmark not defined.

Fund Transfer Pricing Methodologies ............................. Error! Bookmark not defined. 5.1 Pool Method. ............................................................. Error! Bookmark not defined. Single Pool Method............................................ Error! Bookmark not defined. Double Pool Method .......................................... Error! Bookmark not defined. Advantages and Drawbacks of Pool Method ..... Error! Bookmark not defined.

5.1.1 5.1.2 5.1.3 5.2

Multiple Pool Method ............................................... Error! Bookmark not defined. Advantages and Drawbacks ............................... Error! Bookmark not defined.

5.2.1 5.3

Matched Rate Method ............................................... Error! Bookmark not defined. Duration method ................................................ Error! Bookmark not defined. Weighted Average Cash Flow (WACF) ............ Error! Bookmark not defined. Zero Coupon Pricing .......................................... Error! Bookmark not defined. Straight Term Method ........................................ Error! Bookmark not defined. Redemption Curve method ................................ Error! Bookmark not defined.

5.3.1 5.3.2 5.3.3 5.3.4 5.3.5 6

Calculation Of FTP On Different Banking Products ....... Error! Bookmark not defined. 6.1 6.2 6.3 Calculation of FTP on CASA.................................... Error! Bookmark not defined. Calculation of FTP for Term Deposit ....................... Error! Bookmark not defined. Calculation of FTP for Loans .................................... Error! Bookmark not defined.

6.3.1 Calculation of FTP for Non Amortizing Loans bearing fixed interest .......Error! Bookmark not defined. 6.3.2 7 8 9 Calculation of FTP for Amortising Loans ......... Error! Bookmark not defined.

Building Fund Transfer Pricing System .......................... Error! Bookmark not defined. Future Outlook and Recommendation ............................. Error! Bookmark not defined. Conclusion ....................................................................... Error! Bookmark not defined.

References ................................................................................ Error! Bookmark not defined. Annexure 1 ............................................................................... Error! Bookmark not defined.

Abbreviations FTP LIBOR FSI OFSAA EY ALM TP CASA Fund Transfer Pricing London Interbank Offer Rate Financial Institutions Oracle Financial Services Analytical Applications Ernst & Young Asset Liability Management Transfer Price Current Account and Saving Account