Published: January 01, 2013
by Nadezhda Leitsinger, Working Capital and Treasury Manager, Kraft Foods RussiaMany companies have rationalised their bank relationships in recent years with a view to managing counterparty risk more effectively, streamlining connectivity and centralising liquidity. This is easier to achieve in countries with a well-developed banking system and a culture of electronic payments than in countries at an earlier stage in the development of their financial infrastructure. In this article, Nadezhda Leitsinger of Kraft Foods in Russia outlines how the company has approached bank relationships in Russia.
Kraft Foods has a centralised regional treasury located in Moscow supporting all legal entities in Russia, including cash management operations, risk management, including FX risk and insurance, together with short- and long-term cash flow forecasting and working capital management. We manage transaction execution from treasury and act as a centre for banking relationships across the country.
Until 2011, we had a large number of bank relationships, including both international and local banks. This made it difficult to centralise liquidity, manage our counterparty risk and achieve economies of scale. In 2011, we therefore embarked on a project to rationalise our bank relationships. We received a list of recommended banks from our global treasury team, but we were not obliged to select from these banks.
Most large multinational corporations have a preference for working with international banks. In Russia, however, this is not always possible, as we need to ensure local coverage across each region in which we operate, including proximity to our factories for accessing petty cash and other local cash management services. The banking sector in Russia is not yet fully developed so there is still a cash-based culture in many parts of the country. In addition, there remain some regulatory processes that still need to be performed manually for which we need local access. As international banks do not necessarily provide this local coverage, we need to work with a variety of banks with different regional expertise.
As a result of this process, we halved the number of banks that we work with. Our banking panel still includes several banks however, both to diversify our risk and support our operations across Russia. Balancing the need for local access and risk diversification, and a cohesive, centralised approach to cash and treasury management, we believe we have achieved an optimal banking structure. It would not be feasible to manage more bank relationships successfully, and there would be a negative impact on the consistency of reporting and cohesion of our technology strategy. At the same time, we would not achieve the local coverage we require with any fewer banks.
Local banking relationships tend to be less formal than those with international banks with more personal interaction; in contrast, we tend to have better electronic communication with our international banking partners.[[[PAGE]]]
Although there is an element of complexity associated with multiple banking partners, there are also some advantages; for example, we have the ability to select the best borrowing and investment rates as required. We have also still been able to centralise our cash management activities as far as possible. We have a centralised collections factory based in Moscow, and we conduct payments from two locations, one for each of our legal entities in Russia. Most salaries are paid electronically with the exception of some remote regions. In the future, we are considering implementing a shared service centre (SSC). We have an electronic banking system in place for each of our banks, and we keep manual processes to a minimum.
In addition to the banking review that we conducted in 2011, we review our bank relationships every year against criteria such as the quality and cost of services. This review includes both existing and potential banks, and every bank is considered equally. As a result, we typically change one or two of our banks every two years or so. Our criteria have changed in recent years, however, not least due to the crisis in the banking sector. In addition, our own financial situation has changed considerably. In 2008, we were cash negative in Russia, largely due to inadequacies in our working capital management. During 2009, we made a concerted effort to improve working capital and implement trade finance processes, which resulted in a shift to a positive cash position. Trade finance is now a priority for our business and therefore an important factor in our bank selection.
In addition to the commercial aspects of our bank relationships, however, the strength of partnership between a bank and its corporate customers is very important, with a strong commitment to co-operation on both sides. Both parties need to be able to rely on individuals’ ability and integrity in order to maximise the success of the relationship. This is an essential principle for us at Kraft Foods, and it is important to us that our banks share the same commitment. Looking forward, we do not expect that the way in which we work with our banks to change significantly. Most of our banks have already revaluated their customer risk profile in line with Basel III requirements, although we anticipate some change in pricing. By working with a selection of banks, we expect that we will still be able to source competitive pricing without compromising our risk requirements.
How Thought Leadership Can Reduce the Cost of Sales by Patrik Havander, Havander & Partners A focused attention on the costs incurred by the global sales and marketing processes is becoming increasingly important for corporate banks and their transaction banking departments. While the client/bank relationship remains vital, research has shown that in fact relationship selling […]
