Published: March 01, 2011
The Cash Management University included presentations from companies with operations in a variety of regions.
The Cash Management University included presentations from companies with operations in a variety of regions, including Asia and Central & Eastern Europe, who shared their experiences on how they manage common challenges. The presentation by Srinivasan Varadarajan of Bharat Petroleum Corporation Limited (BPCL) together with Indrajeet Maitra, Head of Cash Management, Asia Pacific, BNP Paribas centred around optimising collections in India, and is adapted in the following article.
The Burmah Shell Group of Companies, first formed in 1890, was nationalised in 1976 by the Government of India, and ultimately renamed the Bharat Petroleum Corporation Limited (BPCL).The company is one of the largest state-owned oil and gas companies in India, and ranked 307 in the Fortune Global 500 (2009). Its primary interests are in downstream petroleum activities, including refining and retailing of petroleum products.
Headquartered in Mumbai, BPCL saw 2009 revenues in excess of US$30bn, and is ranked as the seventh largest brand in India. It is also considered to be a pioneer of industry in India, and its implementation of SAP in 2001 was one of the largest and most successful projects in Asia.
Bearing in mind the critical nature of our products and services, BPCL receives a subsidy from the Indian government in lieu of under-recoveries on the sale of petroleum products. However, as this subsidy falls short of the actual losses, we were facing pressure on the working capital front. In India, we have a primarily paper-based collection model (figure 1), resulting in a long cash conversion cycle with delays at each stage of the collection process of two to four days.
Furthermore, we recognised the operational risks associated with paper-based payment instruments and processes which might result in governance issues. Currently, despite the benefits of electronic payment methods, as figure 1 (‘Payment by EFT’) illustrates, electronic payments are unpopular and patchy in their implementation, often as a result of a lack of remitter information and lack of familiarity by bank branches in remote locations. Furthermore, customers are often reluctant to migrate to electronic payment methods as they lose the benefit of cheque float, and they need to change their operational processes. Consequently,until we implemented our new collection solution, only 30 of over 500 BPCL locations were using EFT, representing only 5-10% of customers.
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Despite the challenges, our aim was to implement a collection solution that could be rolled out across the customer base of over 10,000 partner-operated retail outlets across more than 500 locations in India. We needed to manage our working capital effectively with more rapid cash conversion. In addition, we sought to implement greater automation, including integration with SAP, and automatic upload of debtor records into SAP, with a high degree of accuracy in remitter identification for operational risk mitigation.We worked with BNP Paribas to create a new collection solution that would achieve our objectives and facilitate further growth in the future. There were various challenges in its design:
We needed to manage our working capital effectively with more rapid cash conversion.
The solution that the combined BPCL and BNP Paribas team devised is known as eReceipt, and was the result of extensive co-operation between diverse disciplines such as Cash Management, IT,Organisation and Method, and Compliance and Operation (figure 2). eReceipt is a secure online solution that provides a high degree of convenience,transparency and automation for BPCL Treasury, BPCL depots and locations. The solution is based on a unique target account number (TAN) which allows immediate identification of remitters.On request from the customer, external payments are generated using RTGS by the customer’s bank, and sent to BNP Paribas India, which then validates and transmits the relevant data to BPCL.The validation processes conducted by BNP Paribas ensure that data is complete and correct before being sent to BPCL,maintaining data and process integrity.This information about remitter and funds remitted by them is communicated almost on an online basis in XML format through the host-to-host connection between BPCL and BNP Paribas. This helps to update respective receivable debtor accounts in BPCL’s internal systems for clear information to BPCL depots and for easy reconciliation. BPCL distribution locations, storage depots and treasury retain full visibility over collections, and with no delays from customer payment to its receipt by BPCL, cash conversion is prompt and forecasting becomes easier.
Once the eReceipt solution had been validated by the IT team, mandate forms were issued to customers to create a unique TAN, and a pilot project was undertaken with one BPCL location. Based on the feedback from this process, we then embarked on a roll-out process involving training for BPCL customers, locations and banks, with additional assistance from a BNP Paribas call centre.
The implementation of this project has been a huge undertaking, but the benefits, both direct and indirect, have also been considerable. In the first year alone, we made savings in interest costs and fees of around $11m, which we expect to continue in subsequent years. We are now receiving around 1.8m collections each year through RTGS, with a value of US$20bn, with a faster and more predictable cash conversion rate. Processes are more efficient, and treasury has far greater visibility and control over current and projected cash flow.
In addition to the direct financial benefits, there are also a variety of indirect benefits, both to BPCL and to our customers.We have been able to enhance the efficiency of our logistics management process, increasing the automation at a warehouse and depot level. Our operational risks are better mitigated as we do not need to deliver products against cheques. The number of unpaid or dishonoured collections has reduced significantly, with a fall of 52% over two years in number of collections,and 64% by value. Furthermore, as we have greater visibility and management reporting of collections, we are able to follow up efficiently on non-paying customers, and address customer queries more quickly and efficiently.Our customers are also seeing the benefits. No longer do they need to deliver cheques or drafts physically to our depot, which saves on costs, but those using on demand drafts are saving around US$30 in bank charges for each transaction, with total annual savings often exceeding US$1m.Visibility and control over payments is also increased.
The implementation of eReceipt is just one step in our ongoing efforts to increase efficiency and transparency for the company and for our customers.
A company of BPCL’s size and reputation is a pioneer in the country, and consequently, there are wider social and environmental implications of our decision to automate customer collections. Our objectives and achievements are closely aligned with those of the Indian Central Bank, specifically to move to electronic payments and reduce reliance on cheques. Not only do users of payment instruments become more familiar with electronic payments, but so too do their banks, particularly smaller branches in more remote locations. From an environmental perspective, BPCL’s decision to move to electronic collections has saved paper on around 2.5m cheques and associated documentation each year, and reduced CO2 emissions for physical conveyancing.
The implementation of eReceipt is just one step in our ongoing efforts to increase efficiency and transparency for the company and for our customers.We have established a shared service centre to process electronic payments, improving process efficiency and control. From the perspective of internal processes, we are able to monitor performance more effectively, and we have been able to rationalise LPG cylinder procurement, and enhance inventory management through a more efficient financial supply chain, resulting in savings of $120m per year. We have enhanced our business to business transaction processes, with an annual value of US$10bn, with closer integration in SAP.In addition, we have been able to enter into the microfinance space, through partnerships with banks and other financial players such as mutual funds, in order to support our business partners more effectively.
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