Cash Management in MNEs

(Working Capital)

This is something to do with both Transaction and operating

exposure risk management in MNEs

Sept 11, 2009 14.30 to 18.40 hours Slide 1

 Cash Management Practices in a MNC
 Decentralised operations Vs. Centralised operations
 Disadvantages of decentralised operations (Advantages of centralised cash Management)
• Multiple cash holding practices – loss of SOPs
• Management oversight over distributed cash is high
• Cash is dangerous cannon let loose
• Multiple and ineffective hedging
• Larger cash balances lying all over the place
 Positive advantages of centralisation
• Possibilities of exploiting currency movement correlations
 Payables & receivables in different currencies having positive correlations

 Payables/Receivables of different currencies having negative correlations

 Pooling of funds allows for reduced holding – the variance of the total cash flows for the entire group

will be smaller than the sum of the individual variances

Sept 11, 2009 14.30 to 18.40 hours Slide 2

 Cash Management Practices
 There is a need to strike the right balance in framing a cash holding policy across the group

 Accounting and financing efficiencies can never replace operating efficiencies of the business – do
not restructure the business to help accounting and finance – it is always the other way around

 Subsidiaries individually netting vs. centralised netting center

Sept 11, 2009 14.30 to 18.40 hours Slide 3

 Enablers and Impediments
 Facilitators for integration
• Globalised village with expanded connectivity infrastructure
• Expanding capabilities of the banking system

 Government restrictions (eg. withholding taxes)

• Prohibition on netting
• Prohibition on remittances
• Restrictions on remittances without payment of withholding taxes
• Unknown new tax imposts
 Ineffective Banking systems
• Multiple banking relationships
• Level of automation
• Capabilities and inclinations

Sept 11, 2009 14.30 to 18.40 hours Slide 4

 Wire Transfers
 Until 1973, all inter bank communications were by telephone, telex, courier, or mail (what we now refer to
snailmail).
 Presently, one of the most used messaging system by the banking world for wire transfer of funds is ‘SWIFT’
 SWIFT expands to Society for Worldwide Interbank Financial Telecommunication.
 It is a non-profit organization comprised of member financial institutions.
 Established in Belgium in 1973 by 7 European bankers who needed a more efficient and secure system for inter
bank communications and transfer of funds and securities. SWIFT has offices in 19 countries and operates in
209 countries now
 SWIFT handles more than 40 …. messages everyday today.
 SWIFT is a messaging service. It is NOT a funds transfer system. Each type of message is a condition of wire
transfer. Can be used by trained banking personnel only
 What does a SWIFT look like?
A SWIFT consists of a one-page document containing the name and code of the originating bank, the date and time, the
address and code of the receiving bank, the name and internal code of the officer initiating the transmission, the names and
numbers of the accounts involved in the transfer, a description of the asset being transferred, category of the transmission,
purpose of remittance, from whom to whom, beneficiary address……

Sept 11, 2009 14.30 to 18.40 hours Slide 5

 DETAILS OF NOSTRO ACCOUNTS MAINTAINED BY CANARA BANK
OFFICE NAME OF THE
MAINTAINING CORRESPONDENT BANK
CURRENCY ACCOUNT NO
THE NOSTRO  
ACCOUNTS  
TREASURY, JP MORGAN CHASE, NEW YORK
MUMBAI SWIFT: USD SWIFT: CHASUS33 001-1395969
CNRBINBB
BANK OF AMERICA, 6550791917 UID-
-DO- USD
NEW YORK SWIFT: BOFAUS3N 396491//CP 0959
CITI BANK, 36053796 UID-
-DO- USD
NEW YORK SWIFT:CITIUS33 259486//CP 0008
COMMERZ BANK,
-DO- EURO 400875020001
FRANKFURT SWIFT:COBADEFF
DEUTCHE BANK AG
-DO- EURO 100-9534587-1000
FRANKFURT SWIFT: DEUTDEFF
SOCIETE GENERALE,
-DO- EURO 001016201860
PARIS SIWFT: SOGEFRPP
GBP (BRITISH POUND) CANARA BANK,
-DO- 0001-120001-001
  LONDON SWIFT: CNRBGB2L
CHF (SIWISS FRANC) CREDIT SUISSE, 0835-891216-43-
-DO-
  SWITZERLAND SWIFT: CSFBCHZZ 003
CAD (CAN. BANK OF MONTREAL,
-DO- 3169 1035 502
DOLLAR) CANADA SWIFT: BOFMCAMZ
SEK (SWEDISK SKANDINAVISKA
-DO- ENSKILDA BANKEN, SWEDEN 5201-85-282-97
KRONER)
SWIFT:ESSESSESS
AUD (AUS. ANZ BANKING GROUP
-DO- 212894/00 001
DOLLAR0 MELBOURNE SWIFT: ANZBAU3M
SGD (SING. OCBC.,
-DO- 501-071575-001
DOLLAR) SINGAPORE SWIFT:OCBCSGSG
YEN (JAPAJESE YEN) BANK OF AMERICA,
-DO- 6064-18411019
  JAPAN SWIFT: BOFAJPJX
DKK (DANISH KRONER) DANSKE BANK
-DO- 3007530811
  COPENHAGEN SWIFT: DABADKKK
HKD (HK CANARA BANK,
-DO- 100 - 200054
DOLLAR) HONG KONG SWIFT IHIFHKHH

Sept 11, 2009 14.30 to 18.40 hours Slide 6

 Other Transfer Systems
 CHIPS: Clearing House Interbank Payments System: Private ownership of US Banks. An interbank
payment system related to international trade, CHIPS is used for the transfer of international trade
dollars. It is a netting engine and mainly used for high value, low time sensitive fund movements.

 CHAPS: Clearing House Automated Payments System. Operated by the Bankers Clearing House of
London, CHAPS is used for interbank messaging and wire transfer involving British Pounds.

 BOJNET: Electronic wire transfer system overseen by the Bank of Japan.

 FUNDS WIRING SERVICES: Although there are many wire transfer services, they must each use the
basic services such as Fedwire, S.W.I.F.T, or BOJNET. Examples of wire money transfer services are
Western Union, Moneygram, Eurigro, Sterling Draft Service, and the various payment services
available on the Internet.

Sept 11, 2009 14.30 to 18.40 hours Slide 7

 Precautions while transferring funds
 Read application for wire-transfer document completely, especially the small letters
 Give clear instructions to the Bank
 Write legibly (preferably in capital letters)
• The guy on the other side will never be able to decipher the names of persons, companies and corporates
 Every transfer should state the purpose of transfer clearly
 Take adequate care in writing the bank account number of the beneficiary – you cannot expect the
banker on the other side to exercise any reasonableness in your favour – the amount could be lying in
‘nostro/vostro accounts’ under ‘suspense’
 Inform the other party immediately on transfer of funds. Always instruct the remitting party to advise
you on remittance of funds
 Always try to understand from your banker the route along which the funds will move – it helps

Sept 11, 2009 14.30 to 18.40 hours Slide 8

 Nostro, Vostro and Loro Accounts
 “Ours”, “Yours” and “Theirs”
 Domestic Bank maintains a foreign currency account with a foreign bank in a foreign country
 SBI Mumbai, maintains a USD account with Philadelphia branch of Citibank
 SBI remits USD into its account – SBI would say “Credit our Nostro Account with you”
 If Citibank Philadelphia wants SBI Mumbai to pay INR 50 million to Indian PM’s Relief Fund, it
would instruct “Pay PM’s Relief Fund and debit Nostro Account No. …..”. To this, SBI would
respond as “Your Vostro Account Debited for INR Rs.50 mn”
 If Hyundai wants to pay USD 5 mn to its parent company in Seoul, it would instruct its bank SBI
Mumbai to remit the amount and debit its local INR Account. In turn, SBI will remit the funds to
Citibank, Seoul with an instruction to credit the amount to “Loro Account No. XXXXX”

 Thus, Nostro Account is “Our Account with You”

Vostro Account is “Your Account with us”
Loro Account is “Their Account with You”
(Note: Loro Account is a current account maintained by one bank with another)

Sept 11, 2009 14.30 to 18.40 hours Slide 9

 THE
END OF
CLASS

Sept 11, 2009 14.30 to 18.40 hours Slide 10