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Cash Management Trendsin India

Niraj VedwaPresidentHead – Global Sales and MarketingNucleus Software(Original article published in gtnews.com)  

This article examines the cash management and payments developments in India, in terms of bankofferings and new corporate best practice.

Traditionally having a paper-based clearing system involving not only high processing cost but security risk,cash management in India has certainly undergone a paradigm change. From a product-centric approach,the focus for almost all banks today has shifted emphatically to the customer. And success is all aboutbringing the maximum possible delivery channels to the prospect's doorstep.

In the rapidly transforming world of business, banking faces its biggest challenge yet - constant change.With every bank seeming to offer service possible, efficiency coupled with innovative value added solutionshave emerged as the key business differentiators that affect a bank's bottom line. Confronted with shrinkingdeposits/margins, rising customer expectations and intensifying competition, banks must at all times striveto be a step ahead of industry standards. At the same time, they cannot lose sight of credit risk, a naturalbyproduct of the increasingly complex relationships in today's dynamic markets.

For some time now, technology has been the key driving force behind every successful bank. In such anenvironment, the ability to recognise and capture market share depends entirely on the bank's competenceto evolve technically and offer the customer a seamless process flow. The objective of a cash managementsystem is to improve revenue, maximise profits, minimise costs and establish efficient managementsystems to assist and accelerate growth.

Today a corporate treasurer's dilemma is multifaceted. With more movement towards the regional/centralliquidity management in the complex structure of rules and regulations, further complication is caused bytaxation issues.

I describe what a corporate treasurer needs as VOC - Visibility of funds, Optimised returns on funds, andControl over receivables and payables. Treasury can face a number of issues related to the slowmovement of funds, locked working capital, loss of float income, high cost of funds, time consumingreconciliation and manual processes. In India the cash management business primarily involves collections

and payments services.

Cash Management in India

Products offered by banks under collections (paper and electronic):

• Local cheque collections.• High value (0 Day clearing).• Magnetic ink character recognition (MICR) (three day clearing of cheques).• Outstation cheque collections.

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• Cheques drawn on branch locations.• Cheques drawn on correspondent bank locations.• Cheques drawn on coordinator locations.• House cheque collections.• Outside network cheque collections.• Cash collections.• ECS-Debit.•

Post dated cheque collections.• Invoice collections.• Capital market collections.

Products offered by banks under payments (paper and electronic):

• Demand drafts/bankers cheques.• Customer cheques.• Locally payable.• Payable at par.• RTGS/NEFT/ECS.• Cash disbursement.• Payments within bank.

• Capital market payments.

Cash Management In India

The Reserve Bank of India (RBI) has placed an emphasis on upgrading technological infrastructure.Electronic banking, cheque imaging, enterprise resource planning (ERP), real time gross settlement(RTGS) are just few of the new initiatives.

The evolution of payment systems such as RTGS has posed some tough challenges for cash managementproviders. It is important that banks now look towards a shift to fees from float although all those cashmanagement providers who have factored in float money in their product pricing might take a hit. But ofcourse there are opportunities also attached like collection and disbursal of payments on-line across thebanks.

There are a number of regulatory and policy changes that have facilitated an efficient cash managementsystem (CMS). Fox example, the Enactment of Information Technology Act gives legal recognition toelectronic records and digital signatures. The establishment of the Clearing Corporation of India in order toestablish a safe institutional structure for the clearing and settlement of trades in foreign exchange (FX),money and debt markets has indeed helped the development of financial infrastructure in terms of clearingand settlement. Other innovations that have supported in streamlining the process are:

• Introduction of the Centralised Funds Management Service to facilitate better management of fundflows.

• Structured Financial Messaging Solution, a communication protocol for intra-bank and interbankmessages.

Evolution of ServicesOne of the emerging cash management services in India is payment outsourcing. Though cheques anddrafts are a popular mode of payment in India, it is obviously a time consuming procedure because of themanual processing required. This is an area where payment outsourcing can help. It allows corporates toreduce their overheads and focus on their core competencies and, as a result, benefit from speed andaccuracy. The enhanced security it offers also allows for tighter fraud control. For the Indian paymentsystem to become completely seamless there are many variables that need to be tackled, such asregulatory and legal issues, customer behaviour and infrastructure. As more corporates and banks haveadded technology to their processes, the issues surrounding connectivity security have become muchimportant.

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Today, treasurers need to ensure that they are equipped to make the best decisions. For this, it isimperative that the information they require to monitor risk and exposure is accurate, reliable and fast. Astrong cash management solution can give corporates a business advantage and it is very important inexecuting the financial strategy of a company. The requirement of an efficient cash management solution inIndia is to execute payments, collect receivables and managing liquidity. Traditional or e-businessobjectives, in India there are different cash management solutions.

Cash Management Solutions Offered in India

Account reconciliation services

Balancing a chequebook for a very large business can be quite a difficult process. Banks have developed asystem to overcome this issue. They allow companies to upload a list of all the cheques whereby at the endof the month, the bank statement will show not only the cleared cheques but also uncleared ones.

Positive pay

An effective anti-fraud measure for cheque disbursements. Using the cheque issuance data, updatedregularly with cheque issuance and payment, the bank balances all cheques offered for payment. In thecase of any discrepancies, the cheque is reported as an exception and is returned.

Balance reporting services

Balance reporting provides help in procuring a company's current banking information from its accounts.With this service the banks can offer almost all types of transaction-specific details on activities related topayment like deposits, cheques, wire transfers etc. It also helps in an effective and efficient management ofregular cash flow.

Lockbox

Facilitates the cash improvement where, instead of being delivered to business address, customerpayments are delivered to a special post office (PO) box. It is only the customers' payments that are

delivered in the PO box and the company's own bank collects the amount and delivers them to the banks ofthe customers. The bank of the customers opens and processes the payments for direct deposit to thebank account. Lockbox contents regularly removed and processed.

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