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Cash Management (1)

Cash Management (1)

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Published by: Rishabh Verma on Dec 18, 2011
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  • Cashier Orders:
  • Company cheques:
  • Demand Draft:
  • Electronic Payment Types
  • Comparative Analysis of Payment Products
  • Case studies
  • 2. Infrastructure Leasing Finance Company (Finance):
  • 3. Wyeth Lederie Ltd (Pharmaceutical):
  • 4. ACC (Cement):
  • Comparative Analysis

Summer Project On Cash Management

Project Guide: Mr. Ashish S Noel Amity School of Business Amity University, Noida

Submitted by: Rishabh Verma A3923009022 (B.B.A+M.BA)

There are certain quarters without whose guidance and support this project would have not seen the light of the day. My sincere thanks are to due to all of them. First of all, I am immensely grateful to Prof. Alka Munjal, Director, Amity School of Business, who has been a constant source of inspiration and motivation for me. She has always been the guiding force in holistic development of her students in all walks of life. While undergoing this project work, I have drawn immensely from her able guidance and leadership. She has always provided considerable flexibility and freedom to her students in successful and timely completion of their dissertation / research projects. I am also thankful to my project guide Mr. Ashish S Noel for his unstinting guidance and support throughout the project. My sincere thanks are also due to the Library staff of Amity School of Business for their constant support during my occasional visits to the departmental library for consulting related literature on the subject. My special thanks are also to all other members of faculty, and staff of Amity School of Business, my friends and batch mates for extending their helping hand whenever I needed it the most. Rishabh Verma IMBA-21


The focus of all corporates today in the highly deregulated and competitive environment has been to cut costs optimize their operations and with the realization that only efficient structures which can cut their transactional costs can survive in the current scenario. With the technology advent in all spheres it would only follow that organizations would use it as a platform to cut their operating cycles and to take advantage of all the available investment opportunities which may arise. This can be done only with the help of better cash management, which for long has been a neglected area, by Indian corporates. The project attempts to understand the tolls offered by institutions today that make this possible. Both side of the services of collections as well as payments have sought to be examined with an emphasis on how these products have developed and offered by banks in India.


“The world sometimes turns upside down and only those with light liquid assets float to the top again.’ – Anthony H Allen. Whenever any long-term investment is considered the future cash flows from the project, the uncertainty of those cash flows, and the opportunity cost of the funds invested in the project are evaluated. Investment in current assets are also evaluated by all organisations in the same manner but over a short-term period. The time value of money plays an important role in the valuation of long term investments as these investments produce expected cash flows into the future. In the case of current assets (cash, marketable securities, accounts receivables, inventory) provide expected cash flows only in the short term, therefore the time value of money is of lesser importance while evaluating current assets. Whenever decisions are made for new product development and marketing there is capital investment. Aside from the outlay for assets to produce the product the investment requires:  More cash to handle the increased volume of transactions.  More inventory (raw materials, work in progress and finished goods)  More accounts receivable ( because selling more goods on credit means increasing credit to customers) Investments made in current assets support the day to day operations of the firm. Therefore investment in long term projects there has to be investment in current assets in order to support the day to day operations that will be required by the project. Current assets are the “Working Capital” put together to work in order to generate benefits monetary or other wise from the investment made. How much investment should be made in current assets? This is a difficult question as this depends on various factors such as:     The type of business and product The length of the operating cycle Customs, traditions, ad the industry practices The degree of uncertainty of the business

and collect cash on their sale. large investments in machinery and equipment are necessary. manufacturing or service. The firm’s operating cycle – the time it takes the firm to turn its investment in inventory into cash – affects how much the firm ties up its assets in current assets. retail. them. The operating cycle includes the time it takes to manufacture the goods sell. In some industries. such as a retail firm less is invested in plant and equipment and other long-term assets and more is invested in current assets such as inventory and receivables. In other industries. The longer is the operating cycle. the larger the investment in current assets. .The type of business. affects the way an organization invests. whether extractive.

Mac Donald’s does not extend credit to its customers. A firm’s investment in working capital (its current assets) depends on the length of its operating cycle. which customarily extend credit to their customers. . through its. What competitors do is also an influence. this tradition developed when there was a small profit margin on these goods that the seller could not bear the cost of extending credit. direct relationship between current assets and current liabilities. the focus has shifted from a shift relation between current assets and current liabilities. This can be traced to the practice of Scottish bankers in the seventeenth century. Wendy’s and Burger King do not offer credit. traditionally require cash on delivery. General Motors and Ford.This can be explained with an international example that differences also arise from customary business practice. but the length of time it takes customers to pay varies among industries. but Mac Donald’s major competitors. Customs and traditions developed over time also affect how much a firm invests in current assets. Some industries. 5th Edition). Developed from this was the notion in banking that the ratio of current assets to current liabilities should be 2. During the twentieth century. but Chrysler. grantors of credit have relaxed a bit and no longer require such a definite. The longer this cycle.  Firms such as automobile manufacturers. if competitors extend credit on generous terms. the firm may have to do the same. offer credit to their customers. with firms dealing in food products having the shortest operating cycles and firms dealing in luxury items having the longest. And how much should a firm have in current assets anyway? It was long believed that current capital / current assets – bears a direct relation to the current liabilities. (Source: Arthur Stone Dewing The Financial Policy of Corporations. Chrysler’s major competitors. financing subsidiary does. Some generalizations about operating cycles:  Firms in the retail industry tend to have shorter operating cycles. Because firms can now raise capital in other ways than through bank loans and because of the changing views about borrowers’ ability to generate cash flow. This longer cycle increases a firm’s risk and cost associated with its working capital investment. the longer it takes to generate cash from the firm’s investment in goods and services.  Firms involved in manufacturing tend to have longer operating cycles than retailers because of the amount of time necessary to produce goods for sale. such as those selling raw materials. who felt that each obligation must be backed by a like amount of current assets. tend to have longer operating cycles.

g. They need cash to meet transactions of their day to day operations. the larger is the investment they tend to make in current assets to ensure that there will be enough in case demand increases. If the price of raw materials fluctuates widely. Transaction cost are the fees. This amount depends upon: 1. marketable securities. they are analogous to ordering costs for inventory. Further. above what is needed for transactions and precaution. In addition to the precautionary balances. By keeping a balance in an account. Referred to as the transaction balance. the firm is effectively compensating the bank for loans and other services it provides. This is the amount of cash or securities that can be easily turned into cash. The size of the transactions made by the firm 2. both depending upon the firms production process. purchasing process and collection policies. sale of an asset or borrowing of cash. a firm that requires these raw materials may have to keep either a large store of these goods on hand or a sufficient supply of cash (or cash equivalents) ready in order to take advantage of price fluctuations. In addition to the cash balances for transaction. If the supply of raw materials may be interrupted (e. Since cash does not generate earnings. The influence of the nature of the business can be seen from the illustration I. the amount of cash needed for this purpose differs from firm to firm depending upon the particular flow of cash into and out of the firm. If there is a requirement for cash there must be a sale of goods or services. the cost of holding cash is referred to as “Holding Cost” which is an opportunity cost. This is referred to as “Speculative Balance”. By a labor strike). the firm may want to keep a large quantity of raw materials whose prices are volatile.The greater is the uncertainty regarding the supply and the price of raw material the larger will be the requirement of current assets. an organisation may keep cash in an account in the form of a “Compensating Balance”. which is the profit the cash would have earned if it were invested in another asset. commissions or other costs associated with selling assets or borrowing. There is a cost to holding assets in the form of cash. . There are transaction costs associated with both selling of assets or borrowing. The next step in the cash management process is how much cash should an organisation hold? Firms hold some of their assets in cash for several reasons. precautionary and speculative needs. it enables an organisation to take advantage of investment opportunities on a short notice and to meet extraordinary demands for cash. which is non-interest bearing or low interest earning. the greater the uncertainty firms face regarding the sale of goods and services. The firms operating cycle – which determines its cash outflow and inflow.a cash balance required by banks in exchange for banking services. accounts receivable and other current assets. firms tend to keep cash on hand for unexpected future opportunities. The current assets have been broken up into cash.

the comparison between the cost of having too much cash to the cost of getting cash or the transaction cost of getting cash is compared. The economic order quantity is the level of cash infusion that minimizes the total cost associated with cash. The holding cost includes the cost of administration and the opportunity cost of not investing cash elsewhere. It is only necessary to make sure that all the elements that depend on the chosen unit of time the holding cost and the transaction demand are for the same unit of time. the EOQ model determines the amount of cash that minimizes the sum of the holding cost and the transaction cost. it is adequate to meet the day to day requirements of operations. The EOQ model can be modified to suit the circumstances of different cash situations. a month. from calculus the EOQ is designated as Q = 2 (cost per transaction) (total demand for cash) \/ Opportunity cost of holding cash The cash Balancing Act Holding cost Transaction cost The EOQ model can be applied to any time frame whether the period is one year. With higher balances however the transactional cost however declines due to economies of scale. there are fewer transactions required for cash requirements. To determine what is adequate for day to day operations. There are two basic models that help in determining what levels of cash minimizes the sum of the cost of making transactions to get the cash and the opportunity cost of holding more cash than required. firms typically hold additional cash called as precautionary balance just in case the transaction needs exceed the transaction balance. Putting the holding cost and the transaction cost the total cost associated with a cash balance can be denoted as Total cost = Holding cost + Transaction cost = K Q/2 + K S/Q The total costs are minimized at some value of Q. a week or a day. Applied to the management of cash. For example the model can be modified to include a safety stock – a cash .There is always some degree of uncertainty about future cash requirements. they are : (a) The Baumol Model (b) The Miller Orr Model The Baumol Model The Baumol model is based on the economic order quantity (EOQ) model developed for inventory management. The holding cost and the transaction cost is compared. The transaction cost is the cost of getting more cash either by selling marketable securities or by borrowing. As the cash holding increases the holding cost increases. This is due to the fact that with larger cash balances. For transaction purposes. But how much to keep as a precaution depends on the degree of uncertainty of the transaction or how well the transactions can be predicted.

Levels of cash below the safety stock cannot be tolerated. The cash balance can be at any level between the upper and the lower limit 2. The Miller-Orr model recognizes that cash flows vary throughout the period in an unpredictable manner. If the cash balance exceeds the upper limit. Based on a) How much needs are expected to vary each day b) The cost of a transaction and c) The opportunity cost of cash expressed on a daily basis The model is able to indicate 1) The level of cash immediately after a new cash infusion. . The Miller-Orr Model The Baumol model assumes that cash is used uniformly throughout the period. There is a cash balance (the return point) that we aim for if our cash balance exceeds the upper limit or falls below the lower limit. The return point and the upper limit are determined by the model as the levels necessary to minimize costs of cash considering • Daily swings in cash needs • The transaction costs • The opportunity costs of cash The Miller-Orr model provides us with a few decision rules: 1. any deficiency up to the return point is made by selling marketable securities or borrowing. The safety stock is a level of cash that acts as a cushion in case a firm’s needs are suddenly greater than expected. 2) The upper level of cash. any cash in excess of the return point is invested in marketable securities. levels below the return point are tolerated – until the hit the safety stock level.the cash in hand must never fall below this level. Experience and judgment is needed to determine the lower level. This level is referred to as the return point (not to be confused with the level of safety stock).balance for precautionary purposes. so that the amount of cash on hand after the investment is the return point balance. If the cash balance exceeds this limit we invest in marketable securities. If the cash balance falls below the lower limit. This is illustrated in the illustration below: Cash Balance Upper Limit Return Point Lower Limit Time The lower limit is a safety stock of cash.

The variability of daily cash flows. but not too much ♦ Get cash from debtors as soon as possible and pay it out to creditors as late as possible The Baumol and Miller-Orr models help in managing cash to satify the first goal. One is the seasonality of cash needs. The cost per transaction iii. but the second goal requires methods that speed up incoming cash and slow down outgoing cash.75(cost per transaction) (variance of daily cash flows) ] \/ Opportunity cost per day The Baumol and Miller-Orr models both try to help us minimise the cost of cash. The lower limit ii. If sales and collections on sales are seasonal we must factor the pattern of cash into the cash balance.The return point is a function of: i. The Miller-Orr model incorporates an estimate of the volatility of cash flows. However the Baumol model does not consider changing cash needs. This is illustrated later in the various collection models defined later on in this project. . BACKGROUND India has a population of more than a billion people and is the second most populated economy in the world. India has a multi-tier clearing system controlled by the Reserve Bank of India (RBI). which is measured as a variance of daily cash flows Mathematically this limit is defined as : Return point = lower limit + 3 /. steady use of cash. It is a net settlement system that is subdivided into high value clearing (defined as transactions of more than INR 100. the lower is the return point The upper limit is the sum of the lower limit and three times the return point : Upper limit = lower limit + 3 [ 3 /. The Baumol model assumes a predictable. The opportunity cost of holding cash (per day) iv.75(cost per transaction) (variance of daily cash flows) \/ Opportunity cost per day In the equation it is observed that :  The higher is the safety stock (the lower limit) the higher is the return point  The higher is the cost of making a transaction the higher is the return point  The greater is the variability of the cash flows the higher is the return point  The greater is the holding of cash. Cash management has very simple goals: ♦ Have enough cash on hand to meet immediate needs. But there are other factors that affect cash management.000 and payable at specific branches) and non-high value clearing. Transfer of payments between banks is done via paper though the RBI is looking to have a RTGS (real time gross settlement) system in place by end of 2002.

) Products are aggregation of activities put together in such a way as to motivate the customer to deal with the preferred bank. debiting an account. maximizing returns and controlling cash flows and risk.g. Customers value and pay for product and not activities Efficient performance of activities is not enough to motivate customers to come to a particular bank in preference to another Cash management is the effective planning. Transaction management Account management CM Liquidity management Some truths: • • • Delivery management It is products that satisfy customer needs and not activities. . we need to understand the difference between activities and products. • • Activities are basic components of work done in a bank (e. management and monitoring cash and cash equivalent resources with a view to minimizing costs.WHAT IS CASH MANAGEMENT? Before we define cash management. etc. statement rendition. account opening. query handling.

MARKETING ENVIRONMENT In spite of the seemingly obvious advantage of the marketing concept. The production concept holds that consumers will favour those products that are widely available and low in cost. . According to Kotler: 1. Manager of production oriented organizations concentrate on achieving high production efficiency and wide distribution coverage. that is. not all organizations embrace this approach. 2. The product concept holds that consumers will favour those products that offer most quality. Managers in these product-oriented organizations focus their energy on making good products and improving them over time. performance and features. Kotler has identified five competing concepts of marketing activity in today’s business organizations. determining or filling customer needs or wants.

3. 5. 4. wants and interests of target markets and to deliver the desired satisfactions more effectively and efficiently than competitors in a way that preserves or enhances the consumer’s and society’s well being. The marketing concept holds that the key to achieving organizational goals consists in determining the needs and wants of target markets and delivering the desired satisfactions more effectively and efficiently than competitors. The selling concept holds that consumers. A price at which the product or service is offered. A product or service of some sort to be offered to customers and prospects. Some form of promotion or communication by means of which prospects or customers are made aware of the product or service’s availability. How does PCM fit this cycle ? Cash Investments / Depository •Term Deposits •Certificates of Deposit Cash Raw materials Payable Receivable Finished Goods Work in process •SmartMove •Accounts Services The four “P’s” of marketing are the following 1. The societal marketing concept holds that the organization’s task is to determine the needs. The organization must therefore undertake an aggressive selling and promotion effort. 4. 3. approaches. and even the style each organization chooses to fit it’s needs in the market place. A place or distribution system through which the product or service is made available to customers and prospects. if left alone. It is clear that these 5 views have a dramatic impact on the marketing and advertising methods. 2. will ordinarily not buy enough of the organization’s products. .

product. firms in our society take scarce resources in the form of capital. This marketing mix of the four basic elements. labour and raw materials. . place and promotion. is what marketing managers adapt and/or replace. hopefully at a profit.How does PCM fit this cycle ? Raw materials Payable Work in process Payments •Cashier Orders/DD’s Cash Raw materials Payable Receivable Finished Goods Work in process •Smartcheque •Autopay •COS •TT Payouts The actual task of marketing consists of the mixing and refining of these various elements by the firm’s management to optimize the profitable exchange of it’s products or services in the marketplace. In economic terms. and process them into product or services that they exchange in the marketplace. price.

The various forms of distribution namely. more and more attention must be paid to how the channel members will accept and react to proposed marketing and promotion plans. cost of the marketing program to be implemented. 1. Channels. In many cases the marketing mix is adjusted or adapted to moves competitors make. 3. The Consumer. distributors and brokers. This is in addition to the attention paid to the consumers’ reaction. Competition. With the fragmentation of the market place. there must be much more emphasis on identifying and selecting the right consumer for marketing. cost of distribution etc. Today. as a result of the consolidation and concentration of the retail trade. No marketing organization exists within a vacuum. wholesalers. Cost. It is a big factor in any marketing plan-cost of the product or service compared to competition.As important as the four P’s are to marketing success. Marketing plans must be developed with competitors’ action and reactions in mind. 4. How does PCM fit this cycle ? Receivable Receivable •Chequemate Cash Raw materials Payable Receivable Finished Goods Work in process •Quickencash •Quickcollect •Lockbox •Smartcollect . Present marketing managers must also deal with the four “C’s”. 2. they are not the only elements involved today. retailers. which may be used to take the product to the consumer.

Because there are many customers. business Foreign Banks •Technology driven •Efficient tracking & MIS systems •Limited branch network •Tie up with efficient local Banks & Couriers to provide collection/Payment Services Public Sector Banks • Offered by some PSU banks • Large branch network not all technology driven • MIS & tracking mechanism not efficient • Can be price competitive Private Banks • Recent entrants • Relatively high tech & technology driven • Good branch network • Price competitive • Similar to Foreign Banks in approach . it quickly becomes evident that success for a product or service is unlikely to occur without some form of planning. evaluations and decisions by the management and commonly includes consideration of the four P’s and C’s. The development of a plan usually involves a series of considerations.A brief review of this business strategic planning process will help us realize its significance. COMPETITIVE STRATEGIES The way in which the organization will use its resources to successfully bring its products or services to the market involves a carefully orchestrated strategic planning process . many products and many markets. The demand for a product or service is in a state of flux and competitors are offering similar products. varied and constantly shifting. The marketplace is wide. The planning process is even more vital when a firm’s management realizes that its limited resources are in demand by other organizations in the economy and within the own organization. Without some sort of a plan the management stands little chance of successfully marketing its products or services. many firms. Competition in the Cash Mgt.

Achieve high market share.ENVIRONMENTAL ANALYSIS Two forms of environmental analysis are done. The critical requirements are        Processing Technology High level of client & service orientation Quick & error-free operations Responsiveness to client queries Effective information flow Proper control on instruments Quality orientation In most cases these external and internal environmental reviews take the form of lists of opportunities and threats that the organization faces or its significant strengths and weaknesses. The key imperative of success in the cash management is the ability to provide responsive and integrated solutions to customers. competitors. Michael Porter has identified three generic strategies that apply to most organizations. and the management skills of the organization. Differentiation. Become the lowest cost producer and distributor. This review includes factors such as financial strengths of the company. cost leadership and/or and a focused approach to serve that niche in the market. 2. which will impact on the company. 3. GENERIC STRATEGIES Once the unit’s goals have been established. 1. Identify and target some segment of the total market. management then sets about determining strategies to accomplish those objectives. Achieve superior performance in some important consumer benefit area either through the product itself or through some form of marketing excellence. demography. legal system and social norms) and the micro environmental forces (customers. marketing capabilities. a review of the internal environment must be made. The first looks at the external environment in which the organization will compete. Overall Cost Leadership. Price below competition. suppliers and channel members). level and quality of manufacturing facilities. That includes the macro environmental forces (economy. . Develop expertise. Focus. political climate. In addition.

Critical Success Factors for Cash Management Extensive corbank network Reliable courier service PCM Efficient processing setup Integrated system .

social class life-style. the product or service offered. The macro environment generally consists of such elements as: 1. GOVERNMENT: The specific rules laid by the government that the marketer must conform to. terrain.THE MARKETING ENVIRONMENT ANALYSIS All organizations operate within an environment that dictates what the firm can or cannot do. In addition there are both direct and indirect competitors for almost all products or services. NATURAL: They encompass the physical situations in the marketer operates. These factors. ECONOMIC: The economic system in which the marketing organization operates and how the system influences potential growth rate. In addition. 5. 4. investment capital availability and even interest rates. these are the key elements that the advertising planner must understand. culture. inflation. . and goals. influence the need for and the value and impact of advertising campaign. namely. SOCIAL: These are the characteristics of people in society. government actions influence economic and societal conditions as well. 3. COMPETITIVE: There may be many or few competitors depending on the economy. TECHNOLOGICAL: The increase in knowledge and ability and applications of innovations and inventions can have either a stimulating or restraining effect on the marketing activities of the firm. the product category and so on. their values. 6. 2. of course. pollution and population density. raw material availability. The environment exists at both the macro and micro levels. including such factors as natural resources. climate. Given the importance of socio-cultural values on advertising.

Although the marketer has much more control the micro environmental situations. also dictates the type and form of marketing actions that the organization can conduct. They exist and must be dealt with by the managers as a vital part of the marketing activity. It consists of internal functions as finance.7. what can or cannot be done in the firm’s marketing program. They greatly influence the final marketing activities that the firm can develop and use. In addition the macro environment for every firm is different. The microenvironment. all of which have had an impact on how and why advertising campaigns are planned and implemented. credit. one of the most basic considerations in the overall performance of the organization. production and purchasing. purchasers and prospective customers have much to do with the overall marketing environment in which the organization operates. A bank which believes in partnership. There have been dramatic changes in consumers in the past two decades. Thus individual analysis of is required by each firm to develop an effective marketing program. The environment in which the firm operates is thus. listens to customer needs and offers end-to-end solutions ORGANISATIONAL GOALS         Understanding customer needs Internal accounting ease Reconciliation related benefits Information availability Integration of information Single window capability Competitive pricing Contingency . they still dictate to a great extent. CONSUMER: The users. Most of these macro forces are out of control of the organization. or the situation within the firm.

Float sharing .THE VALUE CHAIN SALE Take P. ANZ Grindlays (which has recently merged with Standard Chartered) HSBC being some of the strong global contenders with HDFC. ICICI. State Bank of India emerging as the strong local banks. Deutsche Bank.O. Re-engineering Across Value Chain ORDER--TO--CASH--PURCHASE--TO--PAY--CYCLE Reconcile Make Accounts Paymen t Funding Receive Goods Update AP Register Receive Invoice Make Purchase PURCHASE COMPETITIVE LANDSCAPE: The Indian market for cash management is a very competitive one with both global and local banks offering a wide array of products. Invoice Financing renditi on Collect Payment Data Capture AR Mgt. Citibank. HDFC and ICICI are very aggressive banks which being late entrants are trying to increase their market share by selling products at a very low price and also by being the first to market company cheques making the payments business largely fee income driven.

Business Environment .is not legal in India and hence the players cannot offer float sharing to circumvent selling company cheques like the rest of the region.Competitor map Citibank HDFC Bk Deutsche ABN Amro Stanchart ICICI Bk HSBC Product Depth (PCM) B of A UTI Bank Corporation SBI Established Aspirants Customer Base (CBA) .

ChequeMate Payment Services Liability management SmartCheque SmartPay Autopay CUA TMD / CD Smart move Try products Cluster Deposit QuickEncash Lockbox COS / TT Payout. SmartCollect Quickcollect eBanking . P rod u ct P ortfolio Products Receivable Mgmt.C ash M gt.

of locations where clearing takes place > 860 No.FOCUS – PAYMENTS Environment ♦ ♦ ♦ ♦ ♦ ♦ No.000 No.000 branches  About 860 independent clearing houses exist – 14 sponsored by RBI and others by SBI and its associates Dynamic changes in the country system Initiatives driven by the Reserve Bank of India ♦ Increase in the number of centres offering MICR clearing ♦ Introduction H/V clearing at additional centers ♦ Electronic clearing services – debits and credits ♦ Electronic funds transfers ♦ Real time gross settlement systems (RTGS) Initiatives driven by the banks ♦ Internet banking ♦ MIS in a soft format through e-mail/floppy ♦ Mobile banking . of locations where clearing is through the RBI : : 4 15 7 The Clearing System in India ♦ Paper based ♦ Cheques are the most common method of fund transfer ♦ Wide geographical spread of locations on which cheques can be drawn  Banks have about 65. of locations where MICR clearing takes place: 14 No. of drawee bank locations > 10. of locations covered by Electronic Funds Transfer : No. of locations where H/V clearing takes place No.

Bank code and Branch code. ♦ Payable at par ♦ Cannot print client logos on the face of the cheque due to restrictions by RBI. Customer should assign the value date but the bank should assign the processing date. ♦ Do not need to use MICR ink for printing company cheques in India as you can use pre-printed stationery. RBI only recognizes up to 6 digits for the account code. as the customer’s account is not reflected in the MICR line.23. SUC currently is Rs. ♦ Post-dated company cheques are allowed. In this the information included is as follows: ♦ 001001 is the Cheque number and printed on the top right hand of the payment advice. Other transaction codes could be savings account or current account. Not very popular as customers find it restrictive. ♦ 11 is the account code. ♦ 29 is the2 digit transaction code. ♦ 000 039000 is a combination of the City code. Market price can be anywhere from 0 to Rs. Basically you have the numbers available from 11 to 19 and under each number you can issue up to 1 million cheques.999 million digits in the value field in a cheque/CO in India.30. Client logo can only be printed on the top middle portion of the first page and on the following payment advices. Float sharing is not legal in India and hence the popularity of company cheques. For single location can be paid at only 1 particular location where the account is maintained. MICR Line for company cheques in India: A cheque number in India looks as follows: 001001 000039000 110051 29. ♦ In India the following details are printed on a cashier order Paid by the order of  Amount (figures/words)  Date  Payee name Company cheques: ♦ Single location.Cashier Orders: ♦ ♦ ♦ ♦ ♦ Payable at par Very profitable as the float income is based on anywhere from 4 to 8 days float. Cannot issue post-dated cashier orders. ♦ Can print only up to Rs. In this example 29 stands for cheques payable at par. However for customers who send forward dated cashier orders we should have the ability to debit a day before the mail out date or debit the account on Day 1 with Day 10 as the mail out date and store it in a secure manner (deferred date of debit). .

The process flow DD request Customer DD to beneficiary BANK Funding with DD issued report Beneficiary DD deposit Corresponde nt bank DD sent for confirmation DD sent for clearing Confirmation Clearing House Credit to benef. bank Beneficiary s bank . ♦ Income earned is fee based.. ♦ A minimum balance needs to be maintained at the correspondent bank. ♦ Details which are included in a DD in India are as follows:  Beneficiary name  Amount (figures and words)  Date  Drawee bank  Drawee bank address  Signature ♦ Drafts drawn on correspondent bank normally give ceiling limit of cheques which can be issued ♦ Pricing is also done based on urban and semi-urban locations. Demand Drafts . ♦ Need to build interfaces with these correspondent banks as all the correspondent banks require the information in electronic formats as specified by them. Currently customers due to the stringent RBI regulations do not issue a lot of multi-currency DDs. ♦ The correspondent bank sends back a monthly report on outstanding and cancelled DD that leads to reconciliation issues.Demand Draft: Local currency DD ♦ Both Local currency and multi-currency are required.

Problems usually faced by customers are in reconciliation of paid and un-paid warrants given that this information needs to be gathered from 50 odd locations across India. ♦ Customers currently issue FCY TT over Internet or from a branch. Bank make anywhere from Rs. It never gets rejected unless the instrument is fraudulent.23.Currency DD ♦ The Indian market is heavily regulated and customers cannot have a foreign currency account unless it is an EEFC (Exchange Earners Foreign currency account) wherein an individual can maintain this account provided he is getting paid in USD. which arises due to the statutory regulations in India. ♦ Warrants are issued whilst making these payments. ♦ This product is very profitable. which is Rs. . The SUC for warrants is Rs. ♦ It is a pre-funded instrument so the risk is lower. ♦ Income is generated both through fee income and float income. which is an annual activity. ♦ For dividends the payments need to be payable at par at 50 odd locations where the clearinghouses are situated. ♦ The product is used for either making payments towards fixed deposits or to pay dividends. ♦ The registrar prints the warrants and mails them out.5 to 10 per instrument. ♦ Currencies supported in this account are USD/GBP/HKD/DB/Euro and Yen. Hence normally a need for a correspondent bank tie-up is required as most foreign banks have branches in limited locations. Interest/dividend warrant: ♦ This is a niche product.3 as compared to the SUC for cheques.Multi. Warrants are like cheques but the SUC is much lower than that of a cheque. as customers have to pre-fund the account.

1000 ♦ This is a fee based income product. LOCAL CORBANK BRANCH ♦ This product is only offered as a deal clincher to niche corporates.50 per Rs.TT Payout TT Payout . RBI in turn needs to get funded by 11 a.1000 ♦ The charge for the customer is around Rs. ♦ The correspondent bank charges a fee of 50 paise per Rs. then the beneficiary gets credited the same day if not it is the next day.m. ♦ It is mostly for large value time critical payments like custom duty payments etc ♦ The cut-off time is 10. This gives the customers the ability to make payments at non-branch locations using correspondent bank premises rather than issuing a LCY DD.1.30 a. ♦ For non-RBI locations the charge is 30 paise per Rs. If the instruction is received before 10.30.1000 for payments where RBI does the clearing.m. as the corr bank account needs to get funded by that time.process flow Customer instruction BANK CUSTOMER Cr to A/C / CO issued Funding + instruction TT instruction BENEFICIARIES CORBANK BRANCH AT PAYOUT LOC. .

♦ The products are expected to become more popular with RBI removing the minimum charge of Rs. and this file is sent to RBI electronically.. ♦ Beneficiary gets the funds on Day 1 This product is a fee based product and currently customers are being charged Rs. ECS credit and ECS debit. which is connected to RBI. Electronic Clearing Services: Why do clients need such structures? ♦ Ensure prompt disbursements / collections ♦ Avoid reconciliation problems ♦ Eliminate frauds and errors ♦ Reduce administrative load in having to deal with too many agencies FEATURES ♦ Is offered by the Reserve Bank of India and have two products.g.000/. ♦ Available at 44 locations for ECS Credit and 4 locations for ECS Debit. . viz. reconciliation.IW / DW and Bulk Collections respectively.Electronic Payment Types Electronic Funds Transfer: ♦ It is available in select locations across India. e.per presentment and allowing ECS files for all locations to be handed over at Mumbai. ♦ The H/W required at the bank’s end includes a UNIX server. which is installed in their premises. The initiating bank gets Re 1/.mandated by RBI to be Re 3/. New Delhi or Chennai. ♦ Member banks have direct connection to Reserve Bank of India.2500/.for credits.for debits and INR 500. ♦ Initially proposed to be handled at only our branch locations.000/. ♦ In order for this product to succeed the beneficiary bank has to be a part of this network.10 per transaction. ♦ These products complement the offerings . ♦ Higher charges can be realized through value added activities. ♦ Instruments have a cap of INR 500.per instruction.per instruction in both ECS Credit and Debit. ♦ Bank on receiving the instruction from the customer creates a transaction in a front-end. ♦ Our charges .

in practice. ♦ Returns. Of centers – Facility Facility offered offered thru thru At Par DDs/Funds Cheques Transfers 7 93 0 100 No information No information 25 7 17 Over 100 165 100 Total centers Citibank Corporation Bank StanChart Grindlays Bank ICICI Bank HSBC Deutsche Bank HDFC Bank PAYLINK CORPREMIT PAYMENTS PAYMENTS Cheque Outsourcing PAYMENTS 100 100 Over 125 172 117 .  Day 5: Unpassed entry info passed back to RBI.  Day 4: Accounting entries passed to customers account and in the RBI account of bank / HSBC. Of centers No. Day 1: Floppy provided by bank to RBI Day 2: Details provided by RBI to dest banks Day 3: Reports provided by service branches of dest banks to the branches of account. Workflow Cycle: Prior to Day 1: User hands floppy to bank for validation.  Day 6: Unpassed amt credited to bank and to User     Comparative Analysis of Payment Products NAME Product Name No. keep flowing much after Day 6.♦ Credit limits need to be provided for customers that do not prefund the account.

Case studies 1.  Want only limits based authorization matrix.  They currently use company cheques and their account gets debited when the cheques hit the counter.  Customer’s workflow has an operator/verifier who is the credit controller and does not have authorization rights.  Reconciliation is done on a monthly basis and the customer would like transaction level details.  Would like authorization to be sequential.  Customer felt that the ability to remotely access transactions would be a useful feature.m.  They use SBI for their dividend warrants payments. as they do not get information on lost cheques.000 payments issued worth 12-15 crores they lose around 100-150.  The cheques are payable at par at correspondent locations and this is known as “back ended funding”.  Customers like the fact that after a transaction is initiated a reference is sent back to the customer.  Customer does not have any limits set up at their end. Only option is mail back to customer. which aids in the reconciliation process. An individual authorizer does the authorization across limits. This service is available at non-DB locations also. . Wockhardt Pharmaceuticals:  Currently using Deutsche Banks DB-Direct (using thin client version).  Customer does not want the operator to make amendments to make a file after it has been uploaded from the A/P. as operations are very de-centralized.  They issue around 600 cheques a week totaling Rs.  The cutoff time for LCY DD is 11a. Main problem faced is reconciliation.10 crores.  Customer does not want authorizer to have the ability to edit/amend.  DB does not have multiple delivery modes. Out of a total of 35. MODUS OPERANDI  Customer has subsidiaries around the region creating payments but they do not need a multi-client functionality.  DB has correspondent bank relationships with Vijaya and State Bank of Patiala.  The Deutsche Bank product has a multi-currency module.  DB has an in-house technical team that assists with building the interface.  Statement of charges is sent monthly and has transaction level details.

 Main cities of interest are Baroda/Surat/Indore.  Will be ready to transact over the Internet in 2001. . Infrastructure Leasing Finance Company (Finance):  Citibank does collections while HDFC/State Bank of India handles the dividend warrants.  Citibank has made an offer of “free of charge” cheques and local currency demand drafts to get issued out of Citi and non-Citi locations.  They use ECS to make payments. which enables the customer to get a knock off and tell them which transactions are outstanding and what has been presented.  Issue around 1100 cheques a month and would like the ability to make cheques payable at par in 8 locations across India. Do not need a verifier feature.  Interest warrants are issued once a year whilst the dividend warrants are paid out around 3-4 times a year. ease of reconciliation and costeffectiveness of solution. However they are facing problems due to the lack of locations and their staff does not always have access to a branch.  They maintain a lot of surplus cash in their main operating account.  The customer would like time bound reconciliation so that they know when the cheques are presented and which cheques are outstanding. Would like to start using thick client and shift later. HDFC currently has 41 branches and they have access to another 60 locations via Vijaya Bank. Wyeth Lederie Ltd (Pharmaceutical):  They are currently looking for a complete cash management RFP and the 3 banks that have been singled out include HDFC/HSBC and Citibank. They also know when they are going to get the reconciliation diskette.2.  Main issues are availability of time critical data.  HDFC do the reconciliation via a floppy.  Mentioned that other banks in the running are not offering company cheques rather are only offering cashier orders.  They issue around 70000 warrants in April and another 30000 in June.  Need a lot of flexibility. as they do not know when the cheques that they have issued will hit the counter. The number of cheques issued out of these cities is around 5-7 on a weekly basis.  They would like to get interest on the surplus funds lying in the account. This is in the case when they issue dividend warrants. 3. as there are only 2 authorizers in the organization.  Salary payments are done via HSBC.

Assessment of Relationship Managers ICICI and HDFC are currently offering company cheques in the market.  Main problems currently being faced are lack of MIS and reconciliation is a problem. This is very cumbersome. which cannot be accounted for. Would like to make amendments in the A/P rather than the FES. Need payable at par cheques because currently they have to change the stationery based on the correspondent bank and the location that they have make the payment out to.  Suggested that we do a consultative approach and assist them in calculating what the cost savings will be so that they can make a presentation to senior management.  Customer spends around 8-12 hours’ daily preparing/printing cheques and would like to expedite the process. Have JD Edwards account payable system. and there will be issues with unions. Given it is a very large corporate there are a lot of stages of approval and the treasury department cannot expedite the process unless proper infrastructure is in place.              Do not wish to set up limits at their end Would not want authorizer to make amendments. Also the treasury manager feels that the savings achieved by outsourcing are intangible and it is difficult to get senior management buy-in. ACC (Cement):  Would like to outsource but are awaiting the installation of an ERP. Would like sequential authorization. as banks cannot offer float sharing.  There is some resistance from senior management because there will be redundancy. 4. As a result more and more customers are asking for the same and there is less profits to be made with the product. as that would complicate the reconciliation process. Would like reconciliation to be done on a cheque-by-cheque level. Payment fields to be included in the payment advice include the following: Purchase number Paid date Invoice number Invoice amount Remarks They have their finance operations centralized out of the Bombay office even though they have individual depots making emergency payments. Would like cheque level details. .  Currently use continuous stationery to print cheques.

signatures can be stored at local sites. The reason that the centralized database would cost a lot is because the cheque images along with the signatures have to travel from the server to the branch of transaction to get printed in the location of choice.  There is no need to auto mailers in India and it is cheaper to do things manually. In order to get away from this. Citibank allows corporates to fund the account in bits like 45% up-front and the remainder over a pre-defined period. Outsourcing is a huge mind-shift for corporate. you need intelligence checking for signatures for which you would need to attach servers to the printers. New initiatives  HSBC would like to set up an “excellence center” in India and would be happy to liaise with the vendor to ensure deliverables and quality of output.  Currently there is no demand for an integrated AP/AR.  Customers are still not very comfortable transacting on the net.  Firewalls and PSDN are in place by 2001 providing flexibility to customers in terms of using both the Internet and the modem. The main problem of using the auto-mailer is that the nearest repair center is Singapore making it very expensive to maintain. Main stumbling block on completing a sale is the cost of Oracle software as most corporates refuse to pay it and banks has to incur the cost. as location becomes an important asset.  They believe that local currency DD and TT payouts on the new product are a great proposition for corporates.  Inter-city transmission is expected to be enhanced in 2001 making remote printing a technological possibility though business would need to think through the product offering due to cost implications.  Relationship managers of foreign banks feel that IW/DW is a must have and are happy that product are addressing this gap. a lot of the banks are focusing on new market entrants as they do not have the set-up currently visible in corporates either multinational or Indian. Till such time a thick client solution is being provided to them that allows the customers to send the file across the modem and the net. They feel that as the account has to be pre-funded they can enjoy the float earnings.  There is no market potential for payroll outsourcing. as union laws do not permit these organizations to make redundant extra staff  Due to the mind-block mentioned above. However in order to be successful it is critical to tie up with more correspondent banks. But in order to have remote printing. They are willing to do it in the scenario they are offering cashier orders and they can make a profit on the float. .  Centralized BOS engine conceptually is a very good one but there will be huge cost implications as bandwidth is very expensive in India. This again has cost implications.

COLLECTIONS Customer Needs • • • Speed – transit times Coverage of sales/collection points Information o Positive confirmation o Reconciliation o Returned items o Debtor control o Stock dispatch Security and control Liquidity Interest costs Reconciliation/administrative ease Long-term commitment • • • • • Conventional collection systems Cheques Office Local Bank Receiving Bank Credit to account Local clearing Processing Float Deposit Float Clearing Float Remittance Float Processing Float .FOCUS .

000 drawee centers Largely paper-based Extremely competitive market o Falling margins o Fee vs.Environment    More than 10. float revenue Types of clearing    MICR and non-MICR clearing H/V clearing Banker’s clearing o Electronic clearing o Returns CHEQUEMATE • • • • • Collections of local cheques Cheques can be picked up from customers office or deposited at the bank MIS provided at a consolidated level for all cities Funds are normally paid out at a central collection account of the customer Cheque level information available Day 0 Pick up Cheques at Metros Day 0 Local Clearing Day 0/1 Customers Concentration A/C credited .

GIFTS (Grind lays Instant Fund Transfer Service) HDFC National Collections SCB National Collections Corp. Bank Fast Collection Service SBI Cash Management Product HSBC Chequemate DEUTSCHE H/V MICR LOCKBOX • • • • • Local clearing of cheques through non-branch locations across India Integrated MIS with customization for select relationships Concentration of funds in a central account Cheque pick-ups at the center with return cheque deliveries also the same center Flexibility to define credit arrangements for each customers - Local clearing at non-branch locations Day 0 Courier picks up cheques at location Day 0 Courier deposits cheques at designated Corbank branch Local clearing site RBI/SBI Day 1/3 Funds transfer to our Control Account Day 1/3 Customers Concentration A/C credited .Competitions brand names for Local Cheque Collection Facility: Citibank Citiclear for their own center collections Citispeed for collections thru correspondent banks Stanchart Grindlays .

say. day 0 for discounted cheques and day 8 for regular collections Interest charged on return cheques for period for which the bank is out of funds Consolidated MIS provided Courier pickup provided for select relationships QuickEncash Upcountry collections through a correspondent bank Day 0 Pick-up of Checks at Metro locations Day 0 Designated Corbank’s local branch Local Clearing at Upcountry locations Day x Banks Control branch credited Day x Customer’s Concentration A/c Credited .QUICKENCASH • • • • • Utilities and arrangements with correspondent banks to enable faster clearing of cheques Allows the customer to receive credit on a fixed day.

customer liability released upon receipt of clear funds or 90 days whichever is earlier Consolidated MIS provided Cheques can be picked up from the customer’s office or deposited at the bank QuickCollect Collection of checks not drawn on our corbank network Day 0 Pick-up of customer’s Checks from Metro locations Day 0/1 Mailed directly to Drawee Bank Day 10/28 Draft drawn on our location mailed to banks control branch Day 12/30 Customer’s concentration A/c credited Local Clearing .QUICKCOLLECT • • • • Collection of upcountry cheques drawn on any location in the country In the case of instant credit of such cheques.

Credit to customer on the 12th (for New York cheques) / 21st calendar day (other cheques) from the date of processing in Mumbai for USD cheques.SMART COLLECT • • • • • • Efficient collection of USD / foreign currency cheques Discounting of foreign currency cheques Credit within 3 working days to Nostro account. Credit on realization for all other currency cheques MIS not linked to local currency collections (only HUB statement information available) SmartCollect process Day 0 Courier picks cheque from client Day 0 Deposits with Bank Day 0/1 Sent to MMB NYK Day 2 Local clg in NYK Day 3 Credits Bank Cheques returned in 7 Days for NYK & 15 Days for others Day 3 Clients A/C credited .

Of product name for centres the product similar to LOCAL COLLECTIONS CITISPEED 100 FAST 120 COLLECTION SERVICE GIFTS XT 62 LOCAL CHEQUE 53 COLLECTIONS CHEQUE COLLECTIONS NATIONAL COLLECTIONS D-Corr Lockbox Cash Management Product 48 75 88 100 100 Competitors product name for the product similar to OUTSTATION COLLECTIONS CITICHECK CORPCLEAR GIFTS UPCOUNTRY CHEQUE COLLECTIONS UPCOUNTRY CHEQUE COLLECTIONS OUTSTATION CHEQUE COLLECTIONS UCC QuickCash No product No. Of centres Citibank Corporation Bank ANZ Grind lays Bank ICICI Bank HDFC Bank Standard Chartered Bank Deutsche Bank HSBC State Bank of India 1100 600 700 425 400 800 1200 1200 Nil .Comparative Analysis NAME Competitors No.

com www. M.com . Pandey Financial Management by Ashish Kalra www.studyfinance.finance.BIBLIOGRAPHY Financial Management by I.panemgroup.com www.mapsofworld.

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