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| Yadav: Partnerships are crucial | |
India has been the centre of attention for a few years now: for the success stories that emanate from there, for the enormous change that has been witnessed, for the untapped potential that lies there; sometimes also for the inefficiencies of the system. It is a nation in transition as it strives to blend the old with the new.
Cash management in India closely reflects this very dichotomy. The organized cash management business in India took its first steps back in 1986. Thereafter, the Reserve Bank of India (RBI), the central bank, in partnership with the local and foreign banks has taken giant strides to nurture it to its present form.
It is a fine balancing act for corporates to harmonize innovation with the different on-the-ground realities, from urbane, tech-savvy Tier 1 metropolises to archaic, infrastructure-lite Tier 2 and Tier 3 locales.
Against such a backdrop, there has been a revolution of sorts in the cash management space. Cash management players in India include the Indian private sector banks such as ICICI Bank, HDFC Bank, Industrial Development Bank of India (IDBI), Axis Bank and the larger foreign banks.
While the Indian private sector banks have the advantage of reach (owing to branch licensing norms) as compared to foreign banks, the latter have overcome the challenge by partnering with local private and public sector banks. Sudeep Yadav, cash and trade sales head at Citi says, “India being such a large country, bank partnerships are critical to the solution. No single bank has the capability to launch an efficient, self-contained cash management solution. It has to link with partner banks.” Such partnerships by local and foreign banks have proved vital in delivering better service and increasing reach and penetration - attributes that were sorely lacking previously.
Commenting on the transformation that he has witnessed in India, Chris Furness, global head for cash management at Standard Chartered says, “The environment in India is changing fast. It is a complex country because of the geography, the size and the fact that a lot of business is still paper-based.”
For the majority of the country, paper still rules the roost and the transition from paper to electronic means is occurring gradually.
Changing landscape
There has been a dramatic change in the way corporates are conducting their business. The electronic payments systems initiated by the RBI has completely altered corporate India. It has allowed corporate customers to streamline their payables and receivables processes using e-payment systems such as Real-Time Gross Settlements (RTGS) and National Electronic Fund Transfer (NEFT). The RTGS system allows all banks in India to make secure inter-bank payments across the country. The advent of the National Electronic Clearing Service (NECS) is another favourable step in this regard.
Commending the RBI initiatives, Natasha Patel, head of client management, global payments and cash management, Asia-Pacific, HSBC says, “The RBI has taken a number of positive steps in improving the overall cash management environment in India.”
The process of change has been challenging to say the least. However, a lot has been achieved over the last few years. Furness observes that “a lot of the clearing infrastructure in the past was not linked together and you had to work through correspondent banks to send or collect money in remote regions. This was true even for the local banks. Now, we have new electronic payments settlement systems in place - ACH (automated clearing house) for low-value transactions and RTGS for high value transactions.”
The logistical difficulties in a country like India cannot be overstated. “We have more than 1,047 clearing houses and approximately 14,000 clearing locations from where cheques could be drawn,” says Vijay Shankar, director for transaction banking, India & south-Asia at Standard Chartered.
Incomplete integration
It is clearly a work-in-progress and while the top tier cities have registered phenomenal success, the length and
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| | Furness: Changing environment |
breadth of the country remains largely unintegrated. “There is a great disparity between Tier 1 and Tier 2 or 3 towns and cities with regard to clearing efficiency,” says Shankar. Cheque truncation has been piloted out of New Delhi for the NCR region and four other metros are going to be covered in 2008, which will greatly compress cycle times. “But beyond the 59 MICR (magnetic ink character recognition) clearing locations, manual clearing is still the modus operandi.”
There is still some way to go in penetrating the remote parts of the country. Local banks are committed to increasing their reach in B and C class towns and they have put in local capabilities to monitor cheque clearing. The RTGS and NEFT systems now cover almost 40,000 of the nearly 70,000 bank branches in India. “Utilization on both these platforms is increasing fast, but cheques will be around for sometime to come,” believes Furness.
Outlining the benefits of the systems, he says that, “banks themselves were not electronically linked to their remote branches in the past but this has now changed. This has been very beneficial, as a bank can now pay another’s local branch for onward credit to a beneficiary at a remote branch of that other bank and the funds can be credited almost instantly because it is online.”
Even local public sector banks that have been laggards in adopting technology solutions have recently upgraded their systems to keep up. “The transformation is clearly happening and is driving automation and hence efficiency,” says Shankar.
The RBI has made it mandatory for any transaction between two institutions exceeding Rs 10 million to be settled by electronic means, which became effective from April this year.
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| Patel: Reducing overheads | |
While the automation of cash management is far from complete, there has been a sea-change in the last decade. According to Yadav, “If you were to look at the value, a majority of payments are being done electronically. But if you look at the volume of payments, the predominant part is still paper-based”. This, in a nutshell, sums up the present state of cash management in the country.
Driving innovations
With burgeoning demand, growing revenues and the internationalization of their business, the working capital needs of corporates have been stretched. Natasha Patel observes that, “Enabling STP (straight through processing) and reducing full time equivalent (FTE) consumption on processing payments and receivables has been the focus of most Indian corporate customers and to this end, they have begun to seek outsourcing solutions from their banking partners.”
Liquidity management has been another area of concern and companies are seeking to rationalize their banking channels as well. The rapidly increasing adoption rates of ERP systems by not just MNCs, but also by the smaller and medium enterprise segments of corporates is noteworthy. Dinesh Khanna, regional head, transaction banking, India and South Asia at Standard Chartered feels that the focus on electronic channels has “helped in much better treasury management for Indian corporates and has typically helped in reducing the float in the system.”
Cash management in India has traditionally centered on collections. Banks provide virtual account solutions, facilitating auto-reconciliation of their collections against outstanding receivables and thereby reducing financial overheads. The shared service centre proposition has been imported into India as well. However, there are growing demands for similar technological upgrades for payments across the country.
Focus on payments
Yadav believes that telecom, consumer goods, insurance and the asset management industry are driving most of the volumes in electronic payments today. Payments processes are more complex given the large population and the vastness of the country. However, banks have responded to the demand and have rolled out a variety of solutions.
HSBC launched its payables financing solution that allows customers to incorporate their vendor financing processes within their payables process, thereby unleashing cost efficiencies. HSBC has also tied up with nominated agency banks in India to offer customers an outsourcing proposition for their tax payables. Payment integration on Straight2Bank offered by Standard Chartered Bank has also been very high. ICICI Bank pioneered doorstep banking in India offering cash pickup/delivery services.
Card-based solutions are also being explored, wherein hand-held POS (point of sale) machines would be used for making payments.
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With the explosion of retail activity in India, cash management solutions have become even more relevant. Rajendra Kamath, assistant vice-president at Reliance Retail Limited (RRL), a nationwide chain of hypermarkets, supermarkets, convenience stores and specialty stores set up in 2006, elaborates the challenges it faced when it started out its retail business. “In India, most of the collections are in cash and a very small percentage in credit cards. Another challenge was to make payments to vendors and farmers who were located in far-flung areas,” he says. With the help of ICICI Bank, they were able to address their cash management problems.
India posseses some unique characteristics that need to be accounted for when formalizing solutions in the country. This makes it impossible for international solutions to be directly applied in-country. Conversely, there are local solutions that cannot be used elsewhere. For instance, Shankar points out that post-dated cheques are a unique Indian concept.
With regard to cheque collections, Yadav believes that “unlike other parts of the world where the lockbox or cheque collection systems are good solutions, India has a requirement for wide geographic spread, especially in areas like utilities, FMCG (fast moving consumer goods) etc.” As a result, customers are doing quasi-STP transactions, where they are outsourcing cheque issuance to banks. He foresees a two-pronged solution in which India will eventually evolve like the US model, where there are both paper and physical cheques in the system.
Supportive regulatory environment
Most bankers acknowledge the supportive and forward looking role played by the RBI in developing the cash management industry.
However, there are several issues that the RBI is faced with. Patel thinks that, “easing up of branch licensing norms, allowing foreign banks (who have been in the country for more than a century) to collect taxes directly on behalf of the government, exploring permissible modes for cross-border and notional pooling and setting up of foreign currency clearing in India are some of the points that RBI may wish to explore at different stages in the future based on the maturity of the market.”
At present, the entire foreign banking community accounts for less than 300 of the 70,000 odd bank branches in India. There is a consensus that this is an aspect that must change. Eventually, complete convertibility on the capital account would raise a fresh set of issues that will need to be tackled in the future.
There is no doubt that the future holds plenty of opportunities. From the banks’ perspective, the main focus now is on “how to increase distribution and penetration in India”, according to Khanna. He believes that pricing is secondary.
The local private banks are enormously resourceful and have a feet-on-street approach to their business. Players like ICICI Bank are intent on providing customized solutions to their clients. According to them, the organized retail segment is waiting to explode. With only 4% being in the organized space and estimated to grow to 40% for the next four years on a CAGR (compound annual growth rate) basis, retail could become a target segment for banks.
Mobile banking and phone banking have also experienced exponential growth, and could be the next frontiers in cash management in India. Foreign banks have an edge when it comes to their ability to leverage their global relationships. They agree that the cash management industry in India is ripe and ready to take off. There is certainly room for every player, and sky is the limit.
