Published: January 01, 2000
Over the past three years, treasury in Asia has undergone something of a transformation. Before the global financial crisis, structures tended to be decentralised and the work of treasury staff largely centred around executing transactions. Fast forward three years, and the picture looks very different. Treasuries have been streamlined, nuts and bolts tasks have been outsourced and there is increasing interest in the use of innovative technology to improve visibility and control.
The global financial crisis did not originate in Asia and as such, the impact across the region was less severe than in Europe and the U.S. Nevertheless, in today’s globalised market, a significant impact was inevitable. Many multinationals have subsidiaries in Asia, which often felt the same liquidity squeeze as their parent companies. Repercussions were also apparent in international trade, with Asian exporters feeling the pinch when their western customers reacted to the economic downturn by tightening their belts.
Central banks across the region became more cautious, although this was more in a bid to pre-empt the effects of the crisis from spreading, and to combat inflation, than in response to actual financial conditions in Asia. Meanwhile, companies across the region began to review their workforce, albeit to a lesser extent than in the US. For some companies this was a necessity, while others took advantage of an opportunity to rationalise manpower. Treasury staff were not excluded from these cuts.
The combination of these conditions has led to some fundamental changes in the mind-set of the Asian treasurer, which continue to reshape treasury practices across the region today.
Pre-crisis, cash management in Asia was typically undertaken on a decentralised basis, with pockets of cash dispersed across different countries throughout the region. Local subsidiaries often had responsibility for cash without any central mechanism for viewing the company’s overall cash position. Treasury staff tended to focus on executing transactions and were less likely to be involved in legal, risk and strategy related tasks. And while risk policies were in place, they attracted far less attention than they do today.
As market conditions changed, treasurers began to adapt their processes and policies to the new environment. For many, the first and most fundamental task was to improve visibility of cash balances held in accounts across the region.
One way of achieving this is for local subsidiaries to simply report balances to the central treasury. Greater efficiencies can be gained, however, by using technology to achieve visibility across the region on an automated, real time basis. Asian companies are increasingly investigating the benefits of corporate access to SWIFT, which had traditionally been more of a priority for large multinationals in the U.S. and Europe. For smaller- and medium-sized corporations, however, the costs of a SWIFT connection may still be prohibitive. As an alternative, multi-bank platforms provided by banks may be an attractive means of achieving visibility of cash balances held across financial institutions in the region – although these do not bring the same absolute bank-agnostic benefits as SWIFT.
Companies are also looking for more accurate information on future cash and capital requirements. With banks lending less, there is a greater incentive for companies to pare back their financing needs as far as possible. Sophisticated cash flow forecasting solutions can give companies a more accurate view of their future funding requirements and this is another area that has seen increased attention from treasurers.
While visibility into cash is useful, the more important question is what companies do with that information. If a company has a cash deficit in one country and a surplus in another, the logical next step is to move funds from one country to the other, but in regulated countries in Asia this is far from straightforward. Treasurers are increasingly leaning on their bankers to advise how regulated cash can be released – either temporarily, via a loan, or permanently.
Corporations in Asia are increasingly looking to concentrate their cash – both local currency funds and U.S. dollars – on a larger scale than in the past. This extends into countries like China and India, where specific regulatory constraints apply to pooling and inter-company loans. The drive towards concentration of cash has become much more important since the crisis, with companies increasingly looking to concentrate as much cash as possible into a concentration account.
New structures and initiatives are continuously emerging to help treasurers concentrate cash more effectively, including in the more regulated countries. Developments in Malaysia over the past two to three years have simplified the process of lending to affiliated companies outside of the country. Meanwhile, in Korea, equally important progress is being made. Traditionally, Korean corporations are required to hold numerous accounts with local banks in order to pay their suppliers. An automatic sweeping product has now been introduced enabling corporations to open an account with their global bank, which then maintains sub-accounts with the local banks on behalf of the corporation.[[[PAGE]]]
One effect of taking a more centralised approach to treasury is the increased need for centralised information. Companies looking for more sophisticated reporting capabilities are looking into solutions that provide a central view of the company’s FX exposures, for example.
They are also taking a growing interest in products like electronic bank account management (eBAM), which is gaining significant momentum in Asia – even in comparison to Europe and the US. For the larger Asian companies, which may hold several hundred bank accounts across the region, the simple tasks of opening, closing and amending bank accounts can be virtually impossible to manage effectively in a manual fashion. With companies looking to improve visibility, streamline their account structures and shut down dormant accounts, solutions like eBAM are well positioned to achieve these goals.
One of the fundamental shifts in the mind-set of treasurers in Asia is the increased focus on bank counterparty risk. At the height of the crisis, high-profile bank failures made exposures impossible to ignore, and this focus has remained even as the crisis has receded. In practical terms, this has led to a change in the approach taken by corporates to structuring their bank relationships. Whereas before the crisis treasurers were looking to concentrate their cash with fewer banks if not a single bank, this trend has abruptly reversed. Keeping all your eggs in one basket is no longer considered a best practice. Treasurers today are more likely to seek to diversify counterparties and keep pockets of cash with multiple banks. At the same time companies have introduced exposure limits for specific banks, capping the funds that can be held with any particular institution.
Where cash management is concerned, corporates have readjusted their strategies to mitigate counterparty risk. While companies setting up pooling arrangements are looking at the full spectrum of options available, from physical cash concentration to cross-border notional pooling, there is nevertheless a clear movement away from notional pooling towards physical cash concentration.
In the past, notional pooling was often viewed as an ideal option, due to the fact that there is no physical movement of funds and consequently less administrative work. The counterparty risk concerns raised by the financial crisis led many to reassess this argument. In a notional pooling arrangement surplus balances are left in subsidiary accounts, which means that in the event of the bank failing, companies would have to enter a creditors’ queue in order to reclaim their funds. Secondly, accounting treatment of notional pool balances remains under active discussion. In contrast, in a physical pooling arrangement funds are pooled up to the header account and then typically invested in a range of vehicles.
This increased focus on risk has led many companies to revise their investment policies and priorities. Pre-crisis, companies were more likely to focus on yield, with risk coming second. Today risk is very much the top priority, with higher yielding investments likely to be rejected in favour of those which offer greater security.
Regulatory risk has become another concern in the wake of the crisis, in response to the increased regulatory activity among central banks in Asia. As a result of the changing regulatory environment, the governance work done by treasurers continues to increase. As companies meet new information reporting requirements , the increase in the treasurer’s workload has been significant.
At the same time, however, staff cuts during the crisis have taken their toll on treasury. Inevitably this has led to a change in how many treasurers approach their workload, with a growing trend in Asia for treasuries to outsource certain functions and activities, such as intercompany reporting and bank account management, to third party providers.
By outsourcing these types of functions, treasurers have brought about a shift in the focus of their own roles and departments. While outsourcing their more transactional activities, treasurers have sought to keep control within the treasury organisation. In-house treasury staff have retained the more strategic tasks and as a consequence, the focus of their role is changing significantly.
The shift taking place in the mind-set of treasurers in Asia continues to lead to increased efficiencies and a more centralised approach to cash management across the region. This trend is set to continue, with companies setting up regional if not global treasuries in the region, increasingly exploring the possibilities opened up by the latest technology solutions and regulatory developments. Pressure on staffing has resulted in treasurers taking on an ever more strategic role, outsourcing transactional activities where possible, a trend which is unlikely to be reversed. While the immediate impact of the financial crisis subsided in Asia relatively quickly in comparison to Europe and the US, the repercussions for treasury are here to stay.
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