How banks can turn treasury into a competitive advantage

Bank treasury strategy can drive profitability through capital efficiency, balance sheet efficiency and resilient treasury income.

For most of the past decade, treasury functions in Indian banks operated quietly in the background. However, the era of liquidity buffers, regulatory compliance and opportunistic yield capture is over. What is the role of treasury in Indian banks today? Increasingly, it is to connect funding, liquidity, capital and risk decisions with enterprise-wide performance.

The environment has changed in ways that are structural, not cyclical. Rate volatility has risen. Basel III and evolving RBI treasury regulations have sharpened the focus on Basel III capital efficiency. Deposit competition has compressed net interest margins to the point where treasury income is now a core profitability driver, not a secondary consideration. Banks that continue treating treasury as a back-office compliance function will find themselves at a growing disadvantage compared with those that have begun treating it as a strategic engine. Why treasury is becoming strategic for Indian banks is therefore clear: it now has a direct bearing on liquidity resilience, capital allocation and enterprise profitability. The question is no longer whether treasury should evolve. It is how to make that transition without taking on the risks that come with moving too fast or in the wrong sequence.

The instinct in many institutions is to move toward trading income and client solutions immediately because the returns appear more visible. Banks should consider reversing that sequence. Before a bank can capture higher-margin opportunities, it needs to get the fundamentals right: efficient funding, disciplined liquidity allocation and a well-structured funds transfer pricing framework that accurately reflects the true cost of capital across business lines. What is funds transfer pricing in banks? At its core, it is the mechanism through which funding costs, liquidity premiums and capital usage are allocated across businesses. A strong funds transfer pricing framework for banks can improve accountability and support better pricing, product and portfolio decisions. Banks should not skip this step, as they may find that trading gains mask underlying inefficiencies until market conditions turn.

Regulatory pressure under Basel III has not simply added compliance costs but has redefined where returns are generated. The strongest performers treat capital as a scarce resource to be allocated precisely. This changes how treasury interacts with the rest of the institution. Portfolio decisions should weigh return on risk-weighted assets, not just spread. Risk-weighted assets and treasury portfolio decisions are now closely linked, especially when banks assess the trade-offs between liquidity, yield and capital consumption. Hedging through interest rate and foreign exchange derivatives should be built around reducing balance sheet risk, not generating additional income. How Basel III impacts bank treasury strategy is evident in this shift from balance sheet growth to more disciplined capital deployment.

Treasury revenue built primarily on trading gains is inherently fragile. Markets reverse and positions that appeared low-risk in benign conditions can become significant sources of loss when volatility rises. Why trading gains are risky for bank treasury is that they can create a false sense of performance while leaving underlying funding, liquidity or capital inefficiencies unresolved. Resilient treasury earnings share a common characteristic. They are diversified across accrual returns and client-driven flows, and only then selective trading. How banks can diversify treasury revenue is by building recurring income streams linked to customer flows, structured liquidity solutions and disciplined asset-liability management rather than relying excessively on market timing. But what may appear as a conservative posture actually demonstrates how durable competitive advantage is built.

The transformation from a compliance-driven treasury to a value-generating treasury does not happen all at once. It is built in layers, creating credibility and stability to support the next phase. Treasury transformation should therefore begin with funding discipline, liquidity governance and balance sheet transparency before expanding into broader revenue opportunities. Funding discipline in banking treasury is especially important because it helps banks respond to deposit competition and net interest margin pressure without eroding pricing discipline or taking on disproportionate risk. Net interest margin improvement requires banks to allocate liquidity more deliberately, price internal funds more accurately and understand the impact of interest rate volatility on bank treasury.

The whitepaper, Making treasury an enabler of balance sheet growth, sets out how Indian banks can make that journey: deliberately, sequentially and with a clear view of where the real opportunity lies. A treasury transformation roadmap for banks should help institutions answer a set of strategic questions: How does treasury contribute to bank profitability? What is balance sheet improvement in banking? Why is funding discipline important for banks? How does deposit competition affect treasury strategy? Why is capital efficiency important under Basel III? How do RBI norms influence treasury operations? What are the risks of relying on trading gains in treasury? How can banks build resilient treasury income? How should banks sequence treasury transformation?

For banks that get these choices right, treasury can move from being a control function to becoming a central pillar of bank profitability strategy, liquidity management and long-term competitive advantage.

Contributors

• Hemal Shah, Partner, Consulting Services, EY India
• Rahul Pramanick, Partner, Risk Consulting, EY India
• Madhu Challagulla, Director, Risk Consulting, EY India

Summary 

Bank treasury is becoming a strategic driver of profitability for Indian banks as rate volatility, Basel III norms, RBI regulations and deposit competition reshape the operating environment. The whitepaper suggests that banks should prioritize balance sheet management, funding discipline, liquidity allocation, funds transfer pricing and capital efficiency before pursuing trading-led income. Reliance on trading gains can be fragile, whereas diversified treasury income, better risk management and a disciplined transformation approach can help banks build resilience, improve net interest margins and position treasury as a source of long-term competitive advantage.