Subrato B, Senior Consultant, TCS Financial Solutions
Fund Transfer pricing (FTP) has been a method used by bankers to evaluate profitability of deposits and loans. FTP is the price of money – opportunity costs of the resources, which is factored into accounting performance to measure the real profitability. Further, analytics based on FTP, helps the bank in understanding the profitability of customers, products, business units, channels, etc.
Analyzing such attributions leads to informed and precise decision making regarding product pricing and other key drivers and levers of profitability for the bank.
Till some time back, FTP was primarily a tool to manage interest rate risks. The purpose remains the same till today: to aggregate the interest rate exposure of the whole bank into a central location but also add liquidity and credit risk and, to some extent, operational risk.
In short, FTP has now evolved into a risk transfer pricing tool to centralize business-wide risks and effectively analyze and monitor such risks.