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The Business School

MBA Department

Management Of Financial Services

Assignment On Cash Management Services

Submitted To: Ms. Amisha Gupta

Submitted By:

Taresh Baru
Roll No. : 37

Date: 20/10/2011


Cash Management
Cash management refers to the collection, concentration, and disbursement of cash. It encompasses a companys level of liquidity, its management of cash balance, and its short-term investment strategies. Cash management is a broad term that covers a number of functions that help individuals and businesses process receipts and payments in an organized and efficient manner. Administering cash assets today often makes use of a number of automated support services offered by banks and other financial institutions. The cash management services range from simple check book balancing to investing cash in bonds and other types of securities to automated software that allows easy cash collection. When it comes to cash collections, there are a few popular options today that can make the process of receiving payments from customers much easier. Automated clearing houses make it possible to transact a business to business cash transfer that deducts the payment from the customer account and deposits the funds in the vendor account. Generally, this service is available for a fee at local banks. Lockbox services are also often used by businesses to speed up the Accounts Receivable process. Cash management by lockbox requires the establishment of a post office box for the client. The vendor uses this post office address as the remittance address on all invoices. As payments are received, the financial institution collects the payments, posts them to the operating account for the customer. The customer can usually access daily reports that can be downloaded and used for posting payments into the company Receivables.

Because of the increased incidence of check fraud, the concept of account reconcilement services has become a must for many companies. Essentially, an ARC

will keep the check book for an operating account balanced at all times. As an additional level of protection, the ARC allows the client to upload a daily listing of checks that have been issued on the account. In the event a check is presented that is not included on the authorized lists, the bank will reject the check. When it comes to investing cash, many banks offer the ability to transfer a fixed amount of funds into mutual funds or other investments as part of the overall cash management strategy. The automated debit allows the client to incrementally increase the value of the corporate investment portfolio without having to spend a great deal of time working through complicated investment strategies. There are a number of cash management options offered by local banks. In some instances, the cost for the services can be costly. However, many businesses find that the savings in time coupled with the high degree of accuracy more than make up for the charges associated with cash management support services.

Cash Management in India

Products offered by banks under collections (paper and electronic):
o o o o o o o o o o o o o o Local cheque collections. High value (0 Day clearing). Magnetic ink character recognition (MICR) (three day clearing of cheques). Outstation cheque collections. Cheques drawn on branch locations. Cheques drawn on correspondent bank locations. Cheques drawn on coordinator locations. House cheque collections. Outside network cheque collections. Cash collections. ECS-Debit. Post dated cheque collections. Invoice collections. Capital market collections.

Products offered by banks under payments (paper and electronic):

Demand drafts/bankers cheques. Customer cheques. Locally payable. Payable at par. RTGS/NEFT/ECS. Cash disbursement. Payments within bank.

Capital market payments.

The Reserve Bank of India (RBI) has placed an emphasis on upgrading technological infrastructure. Electronic banking, cheque imaging, enterprise resource planning (ERP), real time gross settlements (RTGS) are just few of the new initiatives. The evolution of payment systems such as RTGS has posed some tough challenges for cash management providers. It is important that banks now look towards a shift to fees from float although all those cash management providers who have factored in float money in their product pricing might take a hit. But of course there are opportunities also attached like collection and disbursal of payments on-line across the banks. There are a number of regulatory and policy changes that have facilitated an efficient cash management system (CMS). Fox example, the Enactment of Information Technology Act gives legal recognition to electronic records and digital signatures. The establishment of the Clearing Corporation of India in order to establish a safe institutional structure for the clearing and settlement of trades in foreign exchange (FX), money and debt markets has indeed helped the development of financial infrastructure in terms of clearing and settlement. Other innovations that have supported in streamlining the process are: Introduction of the Centralised Funds Management Service to facilitate better management of fund flows. Structured Financial Messaging Solution, a communication protocol for intrabank and interbank messages.

Evolution of Services
One of the emerging cash management services in India is payment outsourcing. Though cheques and drafts are a popular mode of payment in India, it is obviously a time consuming procedure because of the manual processing required. This is an area where payment outsourcing can help. It allows corporate to reduce their overheads and focus on their core competencies and, as a result, benefit from speed and accuracy. The enhanced security it offers also allows for tighter fraud control. For the Indian payment system to become completely seamless there are many variables that need to be tackled, such as regulatory and legal issues, customer behaviour and infrastructure. As more corporate and banks have added technology to their processes, the issues surrounding connectivity security have become much important. Today, treasurers need to ensure that they are equipped to make the best decisions. For this, it is imperative that the information they require to monitor risk and exposure is accurate, reliable and fast. A strong cash management solution can give corporates a business advantage and it is very important in executing the financial strategy of a company. The requirement of an efficient cash management solution in India is to execute payments, collect receivables and managing liquidity. Traditional or e-business objectives, in India there are different cash management solutions.

General Cash Management Services

The following is a list of services generally offered by banks and utilised by larger businesses and corporations:

Account Reconcilement Services: Balancing a checkbook can be a difficult process for a very large business, since it issues so many checks it can take a lot of human monitoring to understand which checks have not cleared and therefore what the company's true balance is. To address this, banks have developed a system which allows companies to upload a list of all the checks that they issue on a daily basis, so that at the end of the month the bank statement will show not only which checks have cleared, but also which have not. More recently, banks have used this system to prevent checks from being fraudulently cashed if they are not on the list, a process known as positive pay.

Advanced Web Services: Most banks have an Internet-based system which is more advanced than the one available to consumers. This enables managers to create and authorize special internal logon credentials, allowing employees to send wires and access other cash management features normally not found on the consumer web site.

Armoured Car Services (Cash Collection Services): Large retailers who collect a great deal of cash may have the bank pick this cash up via an armoured car company, instead of asking its employees to deposit the cash.

Automated Clearing House: services are usually offered by the cash management division of a bank. The Automated Clearing House is an electronic system used to transfer funds between banks. Companies use this to pay others, especially employees (this is how direct deposit works). Certain companies also use it to collect funds from customers (this is generally how

automatic payment plans work). This system is criticized by some consumer advocacy groups, because under this system banks assume that the company initiating the debit is correct until proven otherwise.

Balance Reporting Services: Corporate clients who actively manage their cash balances usually subscribe to secure web-based reporting of their account and transaction information at their lead bank. These sophisticated compilations of banking activity may include balances in foreign currencies, as well as those at other banks. They include information on cash positions as well as 'float' (e.g., checks in the process of collection). Finally, they offer transaction-specific details on all forms of payment activity, including deposits, checks, wire transfers in and out, ACH (automated clearinghouse debits and credits), investments, etc.

Cash Concentration Services: Large or national chain retailers often are in areas where their primary bank does not have branches. Therefore, they open bank accounts at various local banks in the area. To prevent funds in these accounts from being idle and not earning sufficient interest, many of these companies have an agreement set with their primary bank, whereby their primary bank uses the Automated Clearing House to electronically "pull" the money from these banks into a single interest-bearing bank account.

Lockbox - Retail: services: Often companies (such as utilities) which receive a large number of payments via checks in the mail have the bank set up a post office box for them, open their mail, and deposit any checks found. This is referred to as a "lockbox" service.

Lockbox - Wholesale: services: are for companies with small numbers of payments, sometimes with detailed requirements for processing. This might be a company like a dentist's office or small manufacturing company.

Positive Pay: Positive pay is a service whereby the company electronically shares its check register of all written checks with the bank. The bank therefore will only pay checks listed in that register, with exactly the same specifications as listed in the register (amount, payee, serial number, etc.). This system dramatically reduces check fraud.

Reverse Positive Pay: Reverse positive pay is similar to positive pay, but the process is reversed, with the company, not the bank, maintaining the list of checks issued. When checks are presented for payment and clear through the Federal Reserve System, the Federal Reserve prepares a file of the checks' account numbers, serial numbers, and dollar amounts and sends the file to the bank. In reverse positive pay, the bank sends that file to the company, where the company compares the information to its internal records. The company lets the bank know which checks match its internal information, and the bank pays those items. The bank then researches the checks that do not match, corrects any misreads or encoding errors, and determines if any items are fraudulent. The bank pays only "true" exceptions, that is, those that can be reconciled with the company's files.

Sweep accounts: are typically offered by the cash management division of a bank. Under this system, excess funds from a company's bank accounts are automatically moved into a money market mutual fund overnight, and then moved back the next morning. This allows them to earn interest overnight. This is the primary use of money market mutual funds.

Zero Balance Accounting: can be thought of as somewhat of a hack. Companies with large numbers of stores or locations can very often be confused if all those stores are depositing into a single bank account. Traditionally, it would be impossible to know which deposits were from which stores without seeking to view images of those deposits. To help correct this problem, banks developed a system where each store is given their own bank account, but all the money deposited into the individual store accounts are automatically moved or swept into the company's main bank account. This allows the company to look at individual statements for each store. U.S. banks are almost all converting their systems so that companies can tell which store made a particular deposit, even if these deposits are all deposited into a single account. Therefore, zero balance accounting is being used less frequently.

Wire Transfer: A wire transfer is an electronic transfer of funds. Wire transfers can be done by a simple bank account transfer, or by a transfer of cash at a cash office. Bank wire transfers are often the most expedient method for transferring funds between bank accounts. A bank wire transfer is a message to the receiving bank requesting them to effect payment in accordance with the instructions given. The message also includes settlement instructions. The actual wire transfer itself is virtually instantaneous, requiring no longer for transmission than a telephone call.

Controlled Disbursement: This is another product offered by banks under Cash Management Services. The bank provides a daily report, typically early in the day, that provides the amount of disbursements that will be charged to the customer's account. This early knowledge of daily funds requirement allows the customer to invest any surplus in intraday investment opportunities, typically money market investments. This is different from delayed

disbursements, where payments are issued through a remote branch of a bank and customer is able to delay the payment due to increased float time.

In the past, other services have been offered the usefulness of which has diminished with the rise of the Internet. For example, companies could have daily faxes of their most recent transactions or be sent CD-ROMs of images of their cashed checks. Cash management aims at evolving strategies for dealing with various facets of cash management. These facets include the following: Optimum Utilization of Operating Cash

Implementation of a sound cash management programme is based on rapid generation, efficient utilization and effective conversation of its cash resources. Cash flow is a circle. The quantum and speed of the flow can be regulated through prudent financial planning facilitating the running of business with the minimum cash balance. This can be achieved by making a proper analysis of operative cash flow cycle along with efficient management of working capital. Cash Forecasting

Cash forecasting is backbone of cash planning. It forewarns a business regarding expected cash problems, which it may encounter, thus assisting it to regulate further cash flow movements. Lack of cash planning results in spasmodic cash flows. Cash Management Techniques:

Every business is interested in accelerating its cash collections and decelerating cash payments so as to exploit its scarce cash resources to the maximum. There are techniques in the cash management which a business to achieve this objective.

Liquidity Analysis:

The importance of liquidity in a business cannot be over emphasized. If one does the autopsies of the businesses that failed, he would find that the major reason for the failure was their unability to remain liquid. Liquidity has an intimate relationship with efficient utilisation of cash. It helps in the attainment of optimum level of liquidity. Profitable Deployment of Surplus Funds

Due to non-synchronization of ash inflows and cash outflows the surplus cash may arise at certain points of time. If this cash surplus is deployed judiciously cash management will itself become a profit centre. However, much depends on the quantum of cash surplus and acceptability of market for its short-term investments.

Economical Borrowings

Another product of non-synchronization of cash inflows and cash outflows is emergence of deficits at various points of time. A business has to raise funds to the extent and for the period of deficits. Rising of funds at minimum cost is one of the important facets of cash management.

Cash Management Services at HDFC BANK Overview
Cash Management is the stewardship or proper use of an entitys cash resources. It serves as the means to keep an organisation functioning by making the best use of cash or liquid resources of the organisation. At the same time the organisations have the responsibility to use timely, reliable and comprehensive financial information systems. Cash Management helps the organisation in: Eliminating idle cash balances. Monitoring exposure and reducing risks. Ensuring timely deposit of collections. Properly timing the disbursements.

Cash Management Services (CMS) is one of our thrust areas. Today, we have large number of satisfied CMS customers, many of whom are in the top segment of the Indian Corporate and Public Sectors. This has been a result of a robust, end to end cash management product which offers innovative and reliable solutions by combining an efficient Collections and Disbursements product, backed by state of the art systems to ensure customised delivery. The Bank has constructed a wide range of CMS products covering Collections and Disbursements of operating flows, as well as specialised cash flow streams such as rights/public issue collections, dividends, interest/principal repayments, excise and sales tax payments etc. We

operate out of a large and expanding network of over 780 outlets across the country. This is the largest network of online, electronically linked branches in the country. This provides us with a clear competitive advantage over the rest of the competition, which naturally translates into a lower cost and faster credit to corporates. In addition to our network, we have an extensive correspondent banking arrangement, which allows us to offer you Cash Management Services over 1486 locations covered for collections and over 4355 locations for Payments.

Benefits to Corporates If your organisation is multi-locational, managing outstation funds collections and payments can often be time consuming and expensive. Delays of days or even weeks in realising outstation cheques, constant tracking and follow-up to transfer funds from outstation collection accounts, uncertainty and delays regarding information on the fate of cheques etc., are common. At HDFC Bank we offer a comprehensive range of Collections and Payments solutions under our Cash Management Services (CMS) umbrella to meet your needs and put you in control of your cash position. HDFC Bank's Cash Management Services will enable you to : Lower Interest Costs Our collection services enable you to receive funds in your main (concentration) account with the bank with a minimum transit time thereby reducing interest costs.

Improve Liquidity Saving on transit time enables you to realise cheques and use funds earlier and therefore gives you enhanced liquidity. Better Accounting and Reconciliations Detailed information on cheques deposited are made available on a daily / weekly basis/periodically thus simplifying accounting, reconciliation and query resolution. HDFC Bank can also provide customised MIS as per your requirements. Achieve Overall Operational Convenience HDFC Bank's Collection Services enable you to derive convenience in banking operations thereby facilitating management of cash positions through a central treasury. Also, the same may be used for improved control over different business segments. The advantages of our Collection products can also be availed without opening a Current Account with HDFC Bank. Interconnectivity : Experience real-time online banking on E-Net with your CMS account. E Net is an Internet based software, which allows you to view current a/c balances, download statements, view CMS collections, effect payments / receive payments online, plus a host of other activities. Centralised Service Desk : HDFC Bank provides a dedicated service desk to ensure that your queries are resolved quickly and efficiently.

Collection Services
HDFC Bank's Collection services is aimed at ensuring quick realisation of local and outstation cheques and providing the funds in a central collection account. This enables you to manage your fundsflow position most effectively from a central location. This service can be availed with/without a current account with HDFC Bank.

HDFC Bank provides the following Collection Products : Local Cheque Collections This product provides quick realisation of local cheques deposited at the same location. This product is available at all locations of HDFC Bank ("SPEED") and over 190 locations of our correspondent Bank ("RAPID") . Outstation Cheque Collections This product enables you to deposit outstation cheques drawn on any HDFC Bank location at any HDFC Bank location ("SPRINT"). Similarly, cheques drawn on over 645 locations of our correspondent bank ("EXPRESS") can be deposited at any HDFC Bank locations. Transfer Cheque Collections This product provides quick realisation of local/outstation cheques drawn on any branch of HDFC Bank Ltd. This product is available at all locations of HDFC Bank ("HDFCTRF") locations.

Clean Collections Cheques drawn on any locations which are not covered by HDFC Bank or our correspondent bank are also collected at any of our locations and proceeds credited to your account as soon as credit is received by HDFC Bank. HDFC Bank's comprehensive MIS includes : Daily report of deposits made at various locations. Location wise report Credit Forecast report Monthly cumulative report - date wise / location wise Monthly charging statement Monthly cheque return statement Customised reports as per mutual agreement.

Payment Services
HDFC Bank can structure a number of Payment products to suit your various needs. Structures could include: Payable At Par Cheque Book This product enables you to issue local cheques at all HDFC Bank branch locations through one cheque book thereby eliminating the hassles of obtaining demand

drafts or opening current account at each location. At Par facility for Statutory Payments This facility can be utilised by you to make various statutory payments such as dividend, interest / redemption of debentures, IPO refunds etc. This facility is available for all HDFC Bank locations and 100 locations of our correspondent bank. This product includes the following features : HDFC Bank branch locations - cover over 80% of shareholders / beneficiaries for most of our clients. Hence reconciliation, query resolution and pricing is superior. In order to provide adequate coverage, HDFC Bank also provides 100 locations of our correspondent bank. However, there is sustained reduction in dependence on correspondent bank due to continuously increasing branch network. The maximum limit on warrant can be mutually agreed upon substantially reducing draft costs and efforts. Ability to meet your requirement of large number of drafts in a short time at very competitive rates. An At Par cheque book is provided on branch locations, after revalidation thereby eliminating the need for Demand Drafts on branch locations.

Pay Quick This product caters to your requirement of large volume of Demand Drafts/Payorders at over 1725 HDFC Bank and 1400 correspondent bank locations.

This product includes the following features: Option to forward data in soft copy form (floppy) in a secure environment. Easy data transferability from your office to HDFC Bank. Multiple payment instructions through one file. Upload option for bulk issuance resulting in quick and error free delivery. Payment instrument to include payment details. Facility to mail to beneficiary directly. Also the committed courier turn around time enables you to make payments as close as possible to the payment date - resulting in additional cost savings. Various value added MIS. One Stop dedicated Service Desk at our Centralised Cash Management Operations Unit for prompt attention to your queries. Extensive coverage - over 780 locations. Status of DD - paid / unpaid - can be provided on HDFC Bank location on a case to case basis.

ECS Credit & Debit

RBI offers Electronic Clearing System (ECS) for faster collections (ECS Debit) and payments (ECS Credit). ECS Credit can be utilised for payments like interest / dividend etc. ECS Debit is normally used for collections which include payment of utility bills (electricity, telephone), collection of taxes etc. ECS credit/debit facility can be availed at all available locations. Following broad steps are common for both ECS Credit and ECS Debit: The company needs to obtain a mandate from the beneficiary / payee which would provide all the details as stipulated by Reserve Bank of India. The Company will have to route the ECS through a Sponsor Bank. The Company is required to submit a E1 form to get a User code from RBI through the Sponsor Bank. One user code is obtained for ECS at all RBI locations. The Company then submits the data in soft form for effecting the ECS. The data is provided in separate files sorted city wise. The data has to be provided to the Sponsor Bank atleast 7 working days before the settlement date. The settlement date is the date on which the account of the beneficiary will be credited (ECS Credit) or payee's account will be debited (ECS Debit). ECS Credit: Returns turn around time vary from T+1 to T+6 after the

settlement date for ECS credit, RBI provides a list of uncredited / returned items. ECS Debit: Returns turn around time vary from T+1 to T+6 after the settlement date for ECS Debit, RBI provides the final list of accounts debited and as per RBI regulations, no late rejects are accepted by RBI. NECS Credit: It is a centralised process and turn around time for data submission is 2 days prior to settlement date and Returns is provided on next working day of the settlement date. All the documentation is similar to ECS credit and only single E1 form is required.