Fund Transfer Pricing


 
 
Concept Explanation
 

Fund Transfer Pricing

Funds Transfer Pricing (FTP) : Funds Transfer Pricing is a process used in banking to measure the performance of different business units of a bank. The most important units of a bank are deposits, raising units and funds, and advancing units.FTP is a mechanism to measure the relative contributions to the bank's profitability and hence, shareholder's value. An intermediary is created within the organisation, usually treasury or central office. All the fund-raising units raise funds from the market at a particular rate and lend the same to the central office at a higher rate. All the lending units borrow the funds from the central office at a particular rate and lend the same to the borrowers at a higher rate. The central office rate is notional in nature and is aligned to market conditions.

Thus, for all the units, there are two rates available to measure the performance.

  • For a deposit-raising unit, the difference between interest paid to the deposit-holders and interest receivable from the central office is the contribution to the bank's profitability.
  • For a lending division, the difference between interest payable to the central office and the interest received from the borrowers is the contribution to the bark's performance.
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