Cash Management and Payments in India

8/6/2019 Cash Management and Payments in India

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* President, Head – Global Sales & Marketing, Nucleus Software, New Delhi

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CAB CALLING July-September, 2008

Cash management is a broad term that refers to the

collection, concentration, and disbursement of cash. It

encompasses a company’s level of liquidity, its management

of cash balance, and its short-term investment strategies. In

some ways, managing cash flow is the most important job of

business managers.

Having a traditional paper-based clearing system involving

not only high processing cost but also 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 towards the

customer. And, success is all about bringing 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 all services possible, efficiency, coupled

with innovative value added solutions, have emerged as the

key business differentiators that affect a bank’s bottom line.

Confronted with shrinking deposits/margins, rising customer

expectations, and intensifying competition, banks must at all

times strive to be a step ahead of industry standards. At the

Cash Management and Payment Developmentsin India :Bank Offeringsand New CorporateBest Practices

Niraj Vedwa*



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same time, they cannot lose sight of credit risk, a natural by - l House cheque collections

product of the increasingly complex relationships in today’s l Outside network cheque collectionsdynamic markets. l · Cash collections

l · ECS-DebitFor some time now, technology has been the key driving

l Post dated cheque collectionsforce behind every successful bank. In such an

l Invoice collectionsenvironment, the ability to recognize and capture marketl Capital market collectionsshare depends entirely on the bank’s competence to evolve

technically and offer the customer a seamless process flow.

The objective of a cash management system is to improve

revenue, maximize profits, minimize costs and establish

efficient management systems to assist and accelerate

growth.l Demand drafts/banker’s cheques

l Customer chequesToday a corporate treasurer’s dilemma is multifaceted. With

l Locally payablemore movement towards the regional/central liquidityl Payable at par management in the complex structure of rules andl RTGS/NEFT/ECSregulations, further complication is caused by taxation

issues. l Cash disbursement

l Payments within bankWe describe what a corporate treasurer needs as ‘VOC’ -

l Capital market paymentsVisibility of funds, Optimised returns on funds, and

Control over receivables and payables.Cash collection systems aim to reduce the

Treasury can face a number of issuestime taken to collect cash owed to a firm.

related to the slow movement of funds,Some of the sources of this delay are

locked working capital, loss of float mail float, processing float, and bankincome, high cost of funds, time

float. Three prime reasons for floatconsuming reconciliation and manual

could be – First, an envelope mailedprocesses. In India, the cash

by a customer containing payment to amanagement business primarily

supplier firm does not arrive at itsinvolves collections and payments

destination instantly. Second, likewiseservices.

the payment is not processed and deposited

into a bank account the moment it is received by

the supplier firm. And finally, when the payment is

deposited in the bank account, often the bank does not give

immediate availability to the fund.l Local cheque collections

l High value (0 Day clearing) Once the money has been collected, most firms thenl proceed to concentrate the cash into one center. TheMagnetic ink character recognition (MICR) (three day

rationale for such a move is to have complete control of cashclearing of cheques)

and to provide greater investment opportunities with larger l Outstation cheque collectionssums of money available as surplus. There are numerousl Cheques drawn on branch locationsmechanisms that can be employed to concentrate the cash -

l Cheques drawn on correspondent bank locationswire transfers, automated clearing house (ACH) transfers,

l Cheques drawn on coordinator locationsand cheques. The trade off is between cost and time.

Products Offered by Banks Under Payments(Paper and Electronic)

Products Offered by Banks Under Collections (Paper and Electronic)



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The Reserve Bank of India (RBI) has placed emphasis on corporates and banks have added technology to their

upgrading technological infrastructure. Electronic banking, processes, the issues surrounding connectivity security

cheque imaging, and real time gross settlement (RTGS) are have become much important.

just a few of the new initiatives. The evolution of payment

systems such as RTGS, has posed some tough challenges Today, treasurers need to ensure that they are equipped tofor cash management providers. It is important that banks make the best of decisions. For this, it is imperative that the

now look towards a shift to fees from float although all those information they require to monitor risk and exposure is

cash management providers who have factored in float accurate, reliable and fast. A strong cash management

money in their product pricing might take a hit. Of course, solution can give corporates a business advantage and it is

there are opportunities also attached like collection and very important in executing the financial strategy of a

disbursal of payments on-line across the banks. company. The requirement of an efficient cash management

solution in India is to execute payments, collect receivables

There are a number of regulatory and policy changes that and managing liquidity. In India, traditional or e-business

have facilitated an efficient cash management system objectives, there are different cash management solutions.

(CMS). Fox example, the enactment of Information

Technology Act gives legal recognition to electronic records

and digital signatures. The establishment of the Clearing

Corporation of India in order to establish a safe institutional Account reconciliation services: Balancing a cheque book

structure for the clearing and settlement of trades in foreign for a very large business can be quite a difficult process.

exchange (FX), money and debt markets has indeed helped Banks have developed a system to overcome this issue.

the development of financial infrastructure in terms of They allow companies to upload a list of all the cheques

clearing and settlement. Other innovations that have whereby at the end of the month, the bank statement will

supported in streamlining the process are: show not only the cleared cheques but also uncleared ones.

·l Introduction of the Centralised Funds Management Positive pay: An effective anti-fraud measure for cheque

Service to facilitate better management of fund flows disbursements. Using the cheque issuance data, updatedregularly with cheque issuance and payment, the bank

·l Structu red Fin anc ial Mess agi ng Sol uti on, a balances all cheques offered for payment. In the case of any

communication protocol for intra-bank and interbank discrepancies, the cheque is reported as an exception and is

messages returned.

Balance reporting services: Balance reporting provides help

in procuring a company’s current banking information from

One of the emerging cash management services in India is its accounts. With this service, the banks can offer almost all

payment outsourcing. Though cheques and drafts are a types of transaction-specific details.

popular mode of payment in India, it is obviously a time

consuming procedure because of the manual processing Lockbox: Facilitates the cash improvement where, instead

required. This is an area where payment outsourcing can of being delivered to business address, customer payments

help. It allows corporates to reduce their overheads and are delivered to a special post office (PO) box. It is only the

focus on their core competencies and, as a result, benefit customers’ payments that are delivered in the PO box and

from speed and accuracy. The enhanced security it offers the company’s own bank collects the amount and delivers

also allows for tighter fraud control. For the Indian payment them to the banks of the customers. The bank of the

system to become completely seamless, there are many customers opens and processes the payments for direct

variables that need to be tackled, such as regulatory and deposit to the bank account. Lockbox contents are regularly

legal issues, customer behavior, and infrastructure. As more removed and processed.

Cash Management Solutions Offered in India

Evolution of Services



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Wave of Innovation and Change

Some of the new corporate best practices include:

Best Cash Management Practices

businesses and in many cases diversifying. Efficient cash

management is a must to support an institution’s growth,

Historically, the relationship between the bank and its and therefore, adopting the best cash management

corporate clients has been built around the credit facilities practices is necessary.

provided by the bank. Times and customer needs havechanged and transactional banking services are of

paramount importance.l Bulk payments and vendors payments: Now

On a global basis, there is an aura of resentment that corporates are insisting on a solution which can work

corporate have been proactive in cash management and

payments. Electronic commerce and finance are growing l Cheque writing : In order to execute the payments

rapidly. New payments mechanisms designed to aid faster, banks are providing cheque writing facility to the

electronic commerce have become routine. Predictions are corporate customers wherein customer can print the

abound about the capabilities of the information and cheques locally at their own office with the facility of

communication technology to bring forth important tools for digital signatures and company logos.

conducting electronic commerce and payments. We are in

the midst of a wave of innovation and change. l Bin management of PDC : Corporates are outsourcing

the activity of post dated cheque (PDC) management

In a dynamic economy, markets need to play a key role in to the banks for further reducing the cost of operations,

guiding the development of infrastructure, including administration, and data maintenance.

mechanisms like payments systems. This means that

innovation and competition will be central to the future l Liquidity management: In order to have efficient

development of the payments system - as they are in other utilization of excess funds corporate today avail the

areas of the economy. facility of liquidity management. Liquidity management

system prudently manages various assets and

There are diverse payment systems functioning in the liabilities (on-and off-balance sheet) and ensures thatcountry, ranging from the paper based systems where the cash inflows have an appropriate relationship to the

instruments are physically exchanged and settlements approaching size of cash outflows. The system

worked out manually to the most sophisticated electronic ensures that necessary funds are available to entertain

fund transfer system which are fully secured and settle all cash outflows as they fall due.

transactions on a gross, real time basis.l Adequate cash management mechanisms ensure

The retail payment systems in the country comprise both ef f ic i en t co ll e ct io n sy st em s, sy st e ma ti c

paper based as well as electronic systems. They typically disbursements, and ideal deployment of idle funds,

handle transactions, which are low in value, but very large in tiding over immediate cash needs, and compensating

number, relating to individuals, firms and corporate. These the banks that support these activities of the company.

transactions relate mainly to settlement of obligations An advanced cash management system enhances the

arising from purchase of goods and services. possibilities of earning high net interest income,

creates efficient balance sheets, minimizes expenses

on resources, and reduces the company’s exposures

to potential risks related to seasonality of business and

Best cash management practices are the need of the hour debt repayments.

with the corporate world focused on expanding its existing

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Cash Management and Payments in India