Introduction
A bank does not operate as a collection of independent branches or business units.
A loan generated by one unit may ultimately be funded by:
deposits mobilised elsewhere;
wholesale borrowing;
market funding;
capital; or
central treasury resources.
Similarly, a branch that mobilises stable deposits provides valuable funding to the entire bank.
If every business unit is judged only by the customer interest rate it earns or pays, its true profitability can be distorted.
Funds Transfer Pricing (FTP) solves this problem by assigning an internal value to funds:
units that use funds are charged an internal transfer price;
units that provide funds receive an internal transfer credit.
FTP therefore links:
Business Pricing + Funding Cost + Liquidity Risk + Interest-Rate Risk + ALM Strategy
The current 2026 IIBF CAIIB BFM syllabus includes Treasury and Asset-Liability Management, including ALM policy, the role of ALCO, transfer pricing and related treasury decisions.
RBI's current Commercial Banks – Asset Liability Management Directions, 2025 are the consolidated ALM framework for commercial banks. The framework places ALCO within liquidity-risk governance and specifically assigns it responsibility for deciding the bank's transfer-pricing policy and making liquidity costs and benefits part of strategic planning.
Learning Objectives
After studying this topic, you should be able to:
explain Funds Transfer Pricing in simple terms;
distinguish customer pricing from internal FTP;
understand how FTP affects loan and deposit profitability;
explain ALCO's role in funding, liquidity and transfer-pricing decisions;
analyse FTP and ALM policy cases; and
identify common CAIIB traps involving treasury, ALCO and business-unit profitability.
What Is Funds Transfer Pricing?
FTP is an internal pricing mechanism.
It places a value on funds:
supplied to the bank; and
consumed by business activities.
Consider two units.
Deposit Unit
Mobilises deposits.
It provides funding to the bank.
FTP may therefore give it an internal funding credit.
Lending Unit
Creates loans.
It consumes funding.
FTP therefore applies an internal funding charge.
The objective is to measure each unit more fairly.
Simple FTP Flow
The idea can be visualised as:
Deposit Unit → Funds → Central Treasury/FTP Pool → Funds → Lending Unit
The deposit unit receives an internal credit.
The lending unit pays an internal charge.
Treasury or the central FTP mechanism absorbs and manages the bank-wide funding and interest-rate position according to policy.
This allows customer-facing units to focus on:
customer acquisition;
credit quality;
service; and
appropriate product pricing
while the bank measures central balance-sheet risks separately.
Customer Rate and FTP Rate Are Different
This distinction is extremely important.
Customer Rate
The actual rate charged to a borrower or paid to a depositor.
FTP Rate
An internal rate used for:
profitability measurement;
performance evaluation;
product pricing; and
ALM purposes.
A borrower never pays the FTP rate merely because the bank uses it internally.
Similarly, a depositor does not receive an additional amount simply because a branch receives an internal FTP credit.
Why FTP Is Important
A sound FTP system helps the bank answer three questions.
Which Business Is Truly Profitable?
A loan earning 9% may appear attractive.
But if obtaining matched funding costs the bank close to that rate after liquidity and interest-rate effects, the true spread may be small.
Which Unit Is Creating Funding Value?
A branch mobilising stable deposits may provide substantial balance-sheet value even if its direct fee income is low.
Who Is Creating the Risk?
A business unit offering:
very long-tenor loans;
fixed-rate loans;
callable deposits;
undrawn commitments
may create funding or interest-rate risks that should influence internal profitability.
RBI's liquidity-risk principles require banks to incorporate liquidity costs, benefits and risks into internal pricing, performance measurement and significant new-product approval so that business incentives reflect the liquidity risk created for the bank.
FTP and Matched Maturity
One simple but important principle is:
Long-term funds and short-term funds should not automatically receive the same internal price.
Why?
A five-year loan creates a different funding requirement from a three-month loan.
Similarly:
a stable long-term deposit;
an overnight wholesale borrowing
do not provide the same funding value.
A more risk-sensitive FTP framework therefore considers characteristics such as:
tenor;
repricing;
liquidity;
behavioural maturity;
optionality; and
relevant market funding conditions.
The exact methodology is determined by the bank's approved FTP framework; RBI does not prescribe one universal FTP rate for every bank.
Case 1: Loan Appears Highly Profitable before FTP
A business unit books a long-term loan at an attractive customer rate.
Its manager calculates:
Loan Interest Income − Operating Cost = High Profit
No funding cost is assigned.
Analysis
This overstates profitability.
The loan consumes bank funding over its life.
The business unit should be assessed after an appropriate internal funding charge.
FTP separates:
customer credit spread and business margin
from
central funding and balance-sheet costs.
CAIIB Learning
Interest income alone does not measure true loan profitability.
Funding has a cost.
Case 2: Deposit Branch Appears Unprofitable
A branch mobilises large amounts of stable retail deposits.
Its direct income is low, while it incurs staff and operating expenses.
Management concludes that deposit mobilisation destroys value.
Analysis
The conclusion may be wrong.
Those deposits provide funding that can support:
lending;
investments; and
liquidity.
FTP can recognise this contribution through an internal funding credit.
CAIIB Learning
A liability-generating unit can create significant economic value even though it does not directly earn loan interest.
Case 3: Same FTP Rate Used for Three-Month and Five-Year Loans
The bank charges every lending unit one internal FTP rate regardless of loan tenor.
Analysis
This can create distorted incentives.
A five-year asset creates:
longer funding requirement;
greater repricing uncertainty; and potentially
more structural liquidity risk
than a three-month asset.
Using one rate may make long-term lending appear artificially profitable.
CAIIB Learning
A sound FTP system should reflect the economic characteristics of the funds used, not simply apply one rate to every asset.
Case 4: Five-Year Fixed Loan Funded with Short-Term Floating Deposits
A business unit books a five-year fixed-rate loan.
Short-term deposit rates subsequently rise.
The business unit argues that its profit should fall because deposit costs have risen.
Analysis
One purpose of FTP is to separate the original business decision from centrally managed interest-rate risk.
If the loan was internally priced using an appropriate matched-tenor FTP when originated, later changes in central funding costs may principally belong to the bank's ALM/treasury management process rather than being attributed entirely to the originating unit.
The exact allocation depends on the bank's FTP policy.
CAIIB Learning
FTP can transfer interest-rate and funding risk from customer-facing units to the central balance-sheet management function.
Case 5: Cheap Short-Term FTP Used for Long-Term Lending
A five-year loan is priced using the bank's current overnight funding cost because that rate is lower.
Analysis
This produces an artificially cheap customer price.
The bank is effectively assuming that cheap overnight funding can be rolled continuously for five years.
That creates:
rollover risk;
repricing risk; and
structural liquidity risk.
CAIIB Learning
Short-term funding rate is not automatically the correct cost for a long-term asset.
FTP should discourage maturity transformation from being treated as free.
Case 6: Stable Retail Deposit and Volatile Wholesale Funding Receive Same Credit
Two units raise equal amounts.
Unit A raises stable retail deposits.
Unit B raises very short-term wholesale funding.
Both receive identical FTP credit.
Analysis
The two funding sources do not necessarily provide equal liquidity value.
Stable, diversified funding may be more valuable from an ALM perspective than funding that:
matures quickly;
is concentrated; or
may disappear during stress.
RBI's liquidity framework emphasises diversification of funding sources and tenor and requires liquidity costs and benefits to influence internal incentives.
CAIIB Learning
FTP should recognise funding quality, not merely funding quantity.
Case 7: Product with Large Undrawn Commitment Is Priced Only on Drawn Amount
A business unit launches a facility under which customers may draw large amounts at short notice.
Initially, utilisation is very low.
The unit argues that there is almost no liquidity cost.
Analysis
The undrawn commitment can create a future liquidity requirement.
An ALM/FTP framework should consider significant off-balance-sheet liquidity risk where appropriate.
RBI's liquidity-risk principles require comprehensive cash-flow assessment covering assets, liabilities and off-balance-sheet activities.
CAIIB Learning
Low current utilisation does not necessarily mean low liquidity risk.
Case 8: New Product Is Profitable Only because Liquidity Cost Is Ignored
A proposed product offers customers:
long maturity;
easy withdrawal;
committed funding; and
attractive pricing.
Marketing expects high volumes.
Analysis
The product may create hidden ALM costs.
Before approval, the bank should consider:
liquidity consumption;
behavioural assumptions;
funding tenor;
optionality;
stress outflows; and
transfer price.
RBI's liquidity principles explicitly connect liquidity costs and risks with significant new-product approval.
CAIIB Learning
A product can be commercially attractive but economically unattractive after ALM costs are included.
What Does ALCO Do?
ALCO – Asset-Liability Management Committee is a senior-management committee responsible for implementing the bank's ALM and liquidity strategy within the Board-approved risk framework.
Under RBI's current ALM framework, ALCO's responsibilities include key decisions concerning:
maturity profile;
asset-liability mix;
funding sources;
fixed versus floating funding;
wholesale versus retail funding;
domestic versus foreign-currency funding;
liquidity-risk structure and controls;
stress-testing review;
contingency funding planning; and
transfer-pricing policy.
ALCO is therefore much broader than an FTP committee.
Case 9: Treasury Changes FTP without ALCO-Approved Policy
Market rates increase sharply.
Treasury immediately raises FTP for every business line without following the approved transfer-pricing governance process.
Analysis
Treasury may provide market inputs and administer the FTP mechanism.
But the transfer-pricing policy should operate under approved governance.
RBI places responsibility for deciding the transfer-pricing policy with ALCO.
CAIIB Learning
Treasury may operate FTP; ALCO governs the policy.
Do not confuse execution with policy authority.
Case 10: ALCO Fixes Customer Loan Rate Directly
ALCO determines that the five-year FTP rate should increase.
A branch interprets this as meaning every five-year borrower must automatically be charged exactly that rate.
Analysis
Incorrect.
FTP is an internal funding input.
The final customer price may also reflect:
credit risk;
operating cost;
capital usage;
customer relationship;
product cost;
competitive conditions; and
applicable pricing regulations/policies.
CAIIB Learning
FTP rate ≠ final customer lending rate
FTP is one component of pricing economics.
Case 11: Lending Unit Prices Below FTP to Win Business
The applicable internal funding rate is higher than the customer rate proposed by the lending unit.
The unit wants to proceed because the borrower is strategically important.
Analysis
The transaction may produce a negative funding spread even before:
credit cost;
operating expense; and
capital cost
are considered.
That does not automatically mean the transaction is prohibited, but the economic subsidy should be visible and approved according to policy.
CAIIB Learning
FTP promotes pricing transparency.
It makes under-pricing visible rather than hiding it inside treasury funding.
Case 12: Deposit Unit Demands Highest Credit for Every Deposit
A business unit argues that every deposit should receive the highest possible FTP credit because all deposits provide funds.
Analysis
Different deposits can have different:
maturity;
stability;
withdrawal behaviour;
rate sensitivity; and
liquidity value.
A current account balance that behaves stably may have a different economic value from a highly rate-sensitive bulk deposit.
CAIIB Learning
FTP should reflect economic behaviour, not merely legal product labels.
Behavioural Maturity and FTP
Contractual maturity does not always equal actual behaviour.
Examples:
current and savings balances may remain stable for long periods despite being withdrawable;
term deposits may be withdrawn before contractual maturity;
loans may be prepaid.
An FTP framework may therefore incorporate approved behavioural assumptions where appropriate.
But assumptions must be:
evidence-based;
reviewed;
consistent with ALM policy; and
stress tested.
Case 13: ALCO Uses Normal Conditions Only
ALCO approves an FTP curve based only on normal market funding costs.
The bank has no mechanism for recognising how liquidity value changes under stress.
Analysis
Normal pricing information is useful, but ALM also requires stress awareness.
Funding that appears cheap in normal markets may:
disappear;
become expensive; or
require more collateral
during stress.
RBI requires banks to conduct liquidity stress testing and maintain contingency funding arrangements.
CAIIB Learning
FTP and ALM decisions should not encourage business models that work only while markets remain normal.
Case 14: Structural Liquidity Gap Is Hidden by FTP Profit
A business line generates high accounting profit.
However, its rapid growth creates a large long-term funding gap.
Management argues that growth should continue because the unit's FTP-adjusted margin remains positive.
Analysis
FTP is important, but it does not replace ALM limits.
ALCO must still consider:
structural liquidity mismatch;
funding concentration;
stress capacity;
LCR/NSFR implications where applicable;
interest-rate exposure; and
Board-approved risk tolerance.
CAIIB Learning
Good FTP profitability does not override liquidity-risk limits.
Case 15: FTP Is Used to Punish a Business after Results Are Known
A product performs poorly.
Management retrospectively changes its FTP rate so that the business unit bears more cost.
Analysis
This damages the purpose of FTP.
An effective system should support:
transparent pricing;
consistent performance measurement; and
proper incentives.
Changing the rules after outcomes are known makes performance comparison unreliable.
CAIIB Learning
FTP should be governed by an approved and consistently applied methodology.
Case 16: ALCO Approves a High-Risk Funding Mix because It Is Cheapest
Short-term wholesale funding is currently much cheaper than stable long-term funding.
ALCO considers shifting most funding to the short-term market.
Analysis
Cost is only one consideration.
The bank must also assess:
refinancing risk;
concentration;
market access during stress;
maturity mismatch; and
liquidity tolerance.
RBI's liquidity principles require a diversified funding strategy across sources and tenor.
CAIIB Learning
Cheapest funding is not automatically the best ALM funding.
Case 17: ALCO Decision Conflicts with Board Risk Tolerance
ALCO wants to permit a larger structural liquidity mismatch because current markets are favourable.
The proposed position exceeds the Board-approved tolerance.
Analysis
ALCO implements strategy within the Board-approved risk framework.
It cannot treat favourable market conditions as authority to override the Board's risk tolerance.
CAIIB Learning
Governance hierarchy matters:
Board Risk Tolerance → ALCO Strategy → Treasury Execution
FTP, ALCO and Treasury – Do Not Confuse Their Roles
Area | FTP | ALCO | Treasury |
|---|---|---|---|
Main purpose | Allocate internal funding value | Decide ALM strategy and policy | Execute market and funding actions |
Customer-facing? | No | No | Mostly market-facing |
Funding-price input | Central function | Approves/governs policy | Provides market/funding information |
Liquidity strategy | Reflects cost/benefit | Decides strategy | Implements |
Performance measurement | Major use | Oversees framework | May manage central funding margin |
Risk limits | Reflects approved assumptions | Reviews/implements within Board limits | Must comply with limits |
Current Regulatory Position
As of September 2026, RBI lists the Reserve Bank of India (Commercial Banks – Asset Liability Management) Directions, 2025, issued on November 28, 2025, as the consolidated commercial-bank ALM framework.
The framework retains the central principles that:
ALCO operates within Board-approved liquidity-risk tolerance;
liquidity strategy must consider asset-liability and funding structure;
ALCO decides transfer-pricing policy;
liquidity costs and benefits should form part of strategic planning; and
liquidity costs, benefits and risks should influence business incentives and internal pricing.
For CAIIB, the important point is not to memorise one universal FTP formula.
Banks develop their FTP methodology according to:
their balance-sheet structure;
funding markets;
risk profile;
ALM policy; and
applicable RBI requirements.
CAIIB Exam Focus
FTP is an internal pricing mechanism.
Customer rate and FTP rate are different.
Asset-generating units normally consume funds and receive an internal funding charge.
Liability-generating units provide funds and may receive an internal funding credit.
FTP helps separate business margin from central funding and ALM effects.
Long- and short-tenor activities should not automatically have identical funding value.
Liquidity costs and benefits should influence internal pricing and performance measurement.
Off-balance-sheet activities can also create liquidity costs.
FTP can support new-product approval by revealing hidden funding and liquidity costs.
ALCO decides the bank's transfer-pricing policy under RBI's ALM framework.
ALCO is responsible for ALM strategy, not merely FTP.
Treasury executes funding and market transactions within approved ALCO/Board limits.
FTP profitability does not override liquidity or interest-rate risk limits.
Cheaper short-term funding may create greater rollover risk.
Behavioural assumptions should be realistic and governed.
Regulatory risk tolerance is not replaced by business profitability.
Common Exam Traps
Trap 1: FTP Is the Interest Rate Charged to the Customer
Incorrect.
FTP is an internal bank rate.
Trap 2: Deposit Units Only Create Cost
Incorrect.
Deposits can provide valuable funding and liquidity benefits.
Trap 3: Loan Interest Rate Alone Shows Profitability
Incorrect.
Funding, liquidity, credit, operating and capital costs also matter.
Trap 4: Same FTP Rate Should Apply to Every Tenor
Incorrect.
Different tenors can create different funding and liquidity costs.
Trap 5: Cheapest Market Funding Is Always Best
Incorrect.
Rollover, concentration and stress risks also matter.
Trap 6: ALCO and Treasury Are the Same
Incorrect.
ALCO sets/implements balance-sheet strategy within Board limits; treasury executes market actions.
Trap 7: Treasury Alone Decides FTP Policy
Incorrect.
RBI places transfer-pricing policy responsibility with ALCO.
Trap 8: FTP Replaces ALM Limits
Incorrect.
A profitable transaction can still create unacceptable liquidity or interest-rate risk.
Trap 9: Contractual Maturity Is Always the Correct FTP Tenor
Incorrect.
Approved behavioural assumptions may be relevant for some products.
Trap 10: Undrawn Commitments Have No Funding Cost
Incorrect.
They may create contingent liquidity requirements.
Trap 11: Customer Loan Rate Must Equal FTP Rate
Incorrect.
FTP is only one internal pricing input.
Trap 12: ALCO Can Exceed Board Risk Tolerance when Markets Are Favourable
Incorrect.
ALCO operates within Board-approved risk tolerance and limits.
Memory Technique
Remember FTP as:
Provide Funds → Receive Credit
Use Funds → Pay Charge
For governance, remember:
B-A-T-B
B – Board sets boundaries
A – ALCO sets ALM strategy and FTP policy
T – Treasury executes
B – Business units generate assets and liabilities
The central CAIIB principle is:
FTP makes the cost and value of funding visible, while ALCO ensures that business growth, pricing and treasury activity remain consistent with the bank's overall ALM policy.