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Date:27th November 2008		Compiled by Mr. M. Sathya Kumar
	Cash Management Practices in India - An Analysis Cash management in India is changing in order to help corporates compete in the global market. This article explores some new initiatives originating both from the bank side and the corporate side. Corporates operating in today's competitive climate understand the importance of liquidity. A corporate treasurer needs to have a clear statistical view of the funds available within their organisation and the overall market. This will help them to take a better position in terms of understanding the exact working capital requirement of the organisation, reduce loss of float and discover better investment avenues. With Indian businesses trying their hands in the global business environment, liquidity management occupies the top priority for an Indian corporate treasurer. The bank operations team is under constant pressure from their customers to release liquidity for addressing the customer needs. In addition, the bank's cash management processing team has to take into consideration different parameters when addressing customer needs. These parameters include processing high volumes, making payments to correspondent banks, reconciliation of the payments received against schedules processed by correspondent banks, meeting audit standard requirements, etc. With competition intensifying every minute, banks are heavily dependent on technology to meet the ever-growing customer requirements. Traditional cash management is falling short of meeting the requirements of banks, as well as corporates, and the primary reason for the shortfall is the lack of infrastructure and legal backing to support new forms of businesses. A radical change is required in the way cash management is provided by banks and how it is anticipated by the corporate. With the expansion of globalisation, the saying 'change is constant' is beginning to have a lasting impression on banks, as well as corporates. Emerging cash management practices in India will not only help customers gain optimum flexibility in achieving a stable position in terms of liquidity, but also help banks meet customer requirements without hampering quality standards. Traditional Cash Management Business Cash management in India is heavily dependent on paper-based instruments, i.e. cheques. Although the electronic movement of funds has slowly gained pace over the past couple of years, fundamentally cheques still remain a major way to transfer money within the Indian banking system. The dependency on paper-based instruments have given rise to continuing problems, such as high cost and time involved in processing of the instruments. List of Current Cash Management Products Offered in India Collection Local high value cheques. MICR/non-high value cheques. Upcountry own branch location cheques. Upcountry correspondent bank branch location cheques. Ad hoc location cheques. Correspondent bank branch location - local cheques. Co-ordinator location cheques. Transfer cheques. Cash collections. ECS direct debit. Capital market IPO collection. Payment Own bank branch location demand drafts. Correspondent bank branch location demand draft. Pay orders. Cheques. Real time gross settlement (RTGS). National electronic funds transfer (NEFT). ECS credit Capital market IPO payment Intra-bank payments Emerging Cash Management Initiatives Bank initiatives As the saying goes: "In order to enjoy the fruit of profit, it is important to sell your product at a price which is three to five time greater than its cost." Banks are realising that although it is not possible to follow the saying in today's competitive environment, at least they can go the other way, i.e. instead of increasing the prices they can reduce the cost. In addition, effective time management is also a very important aspect to consider while serving customers. Below are some initiatives that banks have taken as part of the emerging cash management exercise. Cheque truncation - Under Check 21 guidelines, with the basic aim of reducing the time and cost involved in the processing of paper-based instruments, the India's banking authority has taken initiatives whereby images of cheques are used for transferring information to the clearing location for clearing. The system is maturing, with implementation currently restricted to primary cities in India only. Co-ordinator location processing - With more banks carrying out a cost benefit analysis, they are realising that in locations where they do not have a branch presence, co-operating with coordinators in those particular locations is more beneficial than opening a branch. This coordinator acts on behalf of the branch and represent the bank in that locality. The scope of its work includes picking up cheques from the customer, which have been acquired by the bank for that particular location, sending the cheques to the clearing house, collecting information about cheques returned from the clearing house, sending the return cheques to the customer or the head office of the bank, and creating management information system (MIS). Correspondent bank/co-ordinator courier tracking - As part and parcel of the service level agreement between banks providing cash management services and the correspondent banks/coordinators, it has become important to track the regular flow of information in the form schedules, cheques, etc between the concerned parties using an efficient courier tracking facility. The banks have initiated a discussion whereby a separate courier tracking facility would be in place to address this situation. This facility would help in providing a statistical data in terms of number of instruments processed by the parties, which further will help in calculating charges required to be paid to the correspondent bank/coordinator for the services rendered. It also helps in preparing the MIS for keeping a check on the time stamp aspect of the courier agency. Positive pay - Positive pay acts as a compliance management tool to track the processing of cheques issued by the customer. In the simplest form, it is a service that matches the account number, cheque number and the amount of each cheque presented for payment against a list of cheques previously authorised and issued by the company. Reconciliation engine - The bank operation has to keep track of the payments received from the correspondent bank and the exact number of schedules of instruments against which it has received the payments. This further helps the bank create a comprehensive MIS, giving visibility regarding the possible bank defaulters, amount of pending payments, number of days they have been pending, etc. The bank can then reduce the exposure towards the default bank accordingly. To address this problem, banks are in the process of creating an automated tool, which will help reconcile payments received against instrument sent for clearing, thus further reducing operation workload. Corporate initiatives - Corporates in today's competitive business scenarios are adopting various innovative cash management initiatives to efficiently managing cash without hampering the primary goals of improving core competency and providing quality services to customers. Looking at the initiatives, it is evident that much of the stress revolves around outsourcing cash management to banks. The primary advantages that the corporate foresees in such a step are: professional guidance at an affordable price; optimum allocation of time for developing and enhancing core competencies; a single window view of overall cash flow; help in research for better investment avenues; and availability of proper detailed MIS for the purpose of cash forecasting. Balance reporting - With the help of balance reporting, a customer can have a single window for getting information pertaining to their accounts. This service can be restricted to all accounts belonging to the bank that provides the cash management service, or it can be further enhanced to accommodate all accounts held by the customer with different banks (provided the customer can obtain a notification of change (NOC) from the other banks where they maintain their accounts). Many cash management vendors have already started working on the said guidelines. Cheque printing outsourcing - Although cheques and drafts are a popular mode of payment in India, it is a time-consuming procedure because of the manual processing required. This is an area where payment outsourcing can help. It allows a corporate to reduce its overheads and focus on its core competencies and, as a result, benefit from speed and accuracy. Cash pooling - When expanding a business, it is increasingly important for corporate treasurers located at the corporate headquarters to have a centralised view of the total amount of funds actually available/floating within the organisation across globe. The objective of cash pooling is to bring together debit balances and credit balances. The two alternative approaches are as follows: Cash concentration - With this technique, the actual fund are transferred between accounts. This activity normally takes place at the end of the day/middle of the day. Notional pooling - In notional pooling, the close of day balances across all corporate accounts are notionally netted. This can be technically implemented by having parent-child relationships across the company, with the parent is a dummy account that caters for notional balance entries. This type of pooling is famous in southeast Asian and European countries. The customers are interested in this type of pooling because of the notional fund transfer flavour to it. Incidentally, the same is not allowed in India. Both approaches have a multicurrency flavour attached to it and are done basically to achieve the basic component of 'interest advantage'. Cash forecasting - This acts as a single window for corporate treasurers giving them an idea about expected cash flow. This helps them take a better internal position in terms of understanding cash position of the organisation, the exact working capital requirement of the organisation, reduce loss of float and discovering better investment avenues. Invoice reconciliation outsourcing - The customer can outsource reconciliation of the payments received against the invoices raised to prepare a comprehensive list of default drawers. They can ask the bank to send the requisite MIS and even expand the reach by asking the bank to send reminders to the drawers for making the payment. Conclusion The overall banking framework, comprised of both corporates and the banks, should be proactive enough to accommodate the emerging cash management practices. From a bank's point of view, it will help them manage time effectively and reduce cost involved in transaction processing. They will also be able to provide better services to customers, thus indirectly earning a cutting edge reputation in the competitive world of cash management. From the customer's point of view, by adapting these practices they can concentrate more on their competencies and core expertise. They can also manage their liquidity more efficiently by reducing the cost involved in external borrowings, speeding up the receivable management system, effectively managing payables without hampering the actual credit worthiness of the corporate, forecasting the cash flow, and searching for better investment avenues. Article by Mr.Ajinkya Mantri currently works as a business analyst in HSBC GLT for liquidity management (pooling and cash concentration) worldwide implementation. He has been involved in cash management analysis and implementations in India and across Asia during his tenure as a business analyst with CashTech Solutions. The article earlier appeared in the famous finance news website.
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