Published: November 01, 2011
The degree of economic volatility in India is less than in many other markets in the world today, in part thanks to the support of the huge domestic economy, with GDP growth predicted to be at around 8%. Within this current environment in India, what are the cash management challenges and opportunities for corporates?
Historically, if you think of cash management in India, most people will immediately think of paper-based instruments and processes. While this perception is based in fact, things are changing. Between March 2009 and March 2011, there has actually been a 19% drop in the use of paper-based instruments for cash management in India. Approximately 40% of total settlement in the country is done electronically. And while 60% is still paper-based, this number is made up of a huge volume of cheques.
A lot of the momentum behind the move to automation is coming from large corporates, who are trying to move to electronic settlement for their payments and collections. As a response to this need, banks such as BNP Paribas India are also pushing in this direction, investing much more in solutions and technology required for electronic settlement, while at the same time continuing to provide solutions for paper-based cash management as well.
Mid-market corporates are, on the whole, not as proactive in pushing for electronic solutions in cash management. There are a couple of reasons for this. First, most corporates of this size and smaller either prefer or can only accept paper-based instruments such as cheques. Second, mid-market corporates in India don’t want to lose the float in their accounts. If you write a cheque to pay your supplier, by the time the funds come out of your account you’ve enjoyed the float for at least one or two days. However, making an electronic payment means that the funds leave your account instantly. Many mid-size corporates are worried about losing the float. By contrast, large corporates are focused on creating a paperless environment and true straight-through processing (STP).
The right payments infrastructure has to be in place for automation to be truly successful. To address this, The Reserve Bank of India established the National Payments Corporation of India (NPCI) in 2005. NPCI is the umbrella organisation for all payment systems in the country. Going forward, they will be progressively building infrastructure as well as the settlement systems in India. One example of how NPCI is facilitating the move away from paper-based settlement is through the cheque truncation system. This is midway between electronic and paper-based settlement and will be familiar to those with a working knowledge of the US payments infrastructure - while cheques still exist, they are now scanned by the corporate, and only the image of the scanned cheque needs to be submitted to the bank. The cheque does not have to travel physically to the bank, which makes the process much more efficient, especially when you consider the geographically vast nature of India. So far the cheque truncation system has been successfully implemented in the NCR (National Capital Region) in and around Delhi. NPCI plan to take the system to other cities around India, starting with Chennai and then other large cities.
So far, we have not seen many multinational corporations setting up regional treasury centres for Asia in India, with the exception of one very large manufacturer in the confectionary industry. There are a number of reasons for this: the regulatory environment remains restrictive; India’s currency is not fully convertible; and it is extremely difficult to carry out cross-border pooling from India.
But despite the extreme difficulty in carrying out cross-border cash pooling, domestic cash pooling is allowed. There are some legalities around this that need to be taken care of, which is why BNP Paribas India provides a comprehensive advisory service to our clients, ensuring that they have the correct cash pooling structure in place to minimise any tax and legal issues.
While complete treasury centres may not be taking off in India, corporates are increasingly setting up shared service centres and payment factories very effectively. These are much simpler to set up in India as they are purely a back-office function focused on processing. Banks can provide a variety of solutions to corporates for shared service centres and payment factories, including host-to-host connectivity, an ability to handle large volumes of payments, and comprehensive processing capabilities.[[[PAGE]]]
There are some key reasons why corporates are choosing to invest in back-office operations in India. First, India has a well educated and hard working workforce in the main business centres, so multinationals coming to the country can easily recruit intelligent and multilingual staff. Second, India has a time advantage over the western world that complements the 24-hour processing cycle in the West.
Lots of Indian corporates are looking for expansion beyond domestic borders. A major trend here is that these corporates are not just looking to expand to developed countries, they are also very keen on expanding their presence in regions where they see great potential - particularly in Africa and Asia, where China, Hong Kong, Vietnam and Taiwan are leading examples.
For some reason, Indian banks have not expanded across the globe in the same way. Corporates that bank with Indian banks domestically find it difficult to replicate the services and the support that they require from these banks once they go abroad.
Corporates can log on and see their balances across the world in one view.
There are a number of challenges to expanding abroad. A prime example is in acquisition settlement, where the Indian corporate has to settle the money for the acquisition within a defined timeframe. Sometimes this timeframe may be as short as four hours, which can be extremely difficult, especially when considering the time zones involved.
Beyond that, corporates need to have a comprehensive view of the funds they have across all accounts in all countries - and how these funds are flowing - from their headquarters in India. This can be difficult to achieve when working purely with Indian banks. However, international banks such as BNP Paribas, which have a global footprint, can service these corporates. This might be through working with partner banks, depending on the geographies involved. As we have an Internet-based cash management portal, corporates can log on and see their balances across the world in one view. Not only does this cover BNP Paribas accounts, but also those of all the partner banks through the same system.
Another challenge faced is that, much as western corporates faced problems with trapped cash when coming to Asia, Indian corporates are now looking to see how to free trapped cash in some African countries, such as Ghana. We have an advisory approach to liquidity management for these corporates, and will also look at any pooling we can provide.
Looking at the western world, BNP Paribas obviously has a very large presence in the major business centres across Europe, and is in a strong position to support Indian corporates that are expanding here. Last year we were part of one of the largest ever acquisitions by an Indian company outside India. To give you a flavour of this acquisition, a huge cash amount needed to be settled - around US$10bn - represented in various currencies and countries, within a defined timeframe of eight hours. Thanks to the global footprint and scale of BNP Paribas, we were able to settle the full amount in every currency and country within this timeframe. As Indian corporates continue to expand around the world, this type of support from global banking partners is essential.
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