Executive summary

Cash Management is concerned with the managing of: 1. Cash flows into and out of the firm 2. Cash flows within the firm 3. Cash balances held by the firm at a point of time by financing deficit or investing surplus cash. Cash Management service is perhaps both art and science. One needs to judge it in terms of current market practices and existing milieu of the economy under consideration, as well as in terms of analytical foundations. The goal of cash management service is to convert hard cash within a minimum time and with minimum cost. The fundamental objective of cash management is optimization of liquidity through an improved flow of funds. The dominant feature of the Indian banking system is its branch-centred banking. The vast network of branches implies that the logistics of collection and delivery of paper payment instruments becomes formidable. Each member bank in a centre is represented in the clearing house by its service branch which collects all the instruments from various branches and consolidates them for presentation to all the banks in the clearing house. Similarly, it receives and distributes among its branches all the instruments drawn upon its branches by other banks in the clearing house. The service branch of a bank performs a crucial intermediary role between the clearing house and the branch of a bank. The Clearing process begins with the deposit of a cheque in a bank. The cheque (along with other cheques) is delivered to the bank/branch where it is drawn. The cheque is passed for payment if the funds are available and the banker is satisfied about the genuineness of the instrument. The cheques that are unpaid are returned to the presenting bank through another clearing called the Return Clearing. The realization of the funds occurs after the completion of return clearing and by the absence of an unpaid cheque. The total clearing cycle including the return clearing introduces a time lag in the payment process. The need for physical presentment of the cheque at the branch where it is drawn on requires the movement of cheques from one place to another. As a result, the recipient of payment has to wait until the collection banker is fully satisfied that the cheque has been paid. This time will continue irrespective of the level of technology and improvements in process, so long as the physical presentment of the cheque is necessary as per the banking law. In this way the cheque clearing takes place conventionally in the system. The cheque clearing takes place conventionally in the system.

Electronic payment is the term used for any kind of payment processed without using cash or paper cheques. Forms of electronic payment include use ACH or Automated Clearing House, e-checks, direct debit, debit cards, and credit cards. The most contemporary and popular electronic modes are: Electronic Clearing Service (ECS) Electronic Funds Transfer (EFT) Real Time Gross Settlement (RTGS) National Electronic Funds Transfer (NEFT) National Electronic Clearing Service (NECS)

Godrej has a tie-up with the Citibank which helps in the cheque clearing processes and transactions. The present scenario has the normal cheque clearing process which takes a couple days for conversion to cash. It now wants to scrap this paper work and decrease the transaction time. Direct Debit: The Direct Debit facility is currently being offered by Citibank to corporate through their correspondent banking network for capturing domestic inflows electronically. As a part of this solution, the company obtains a debit mandate from their dealers, which is sent for validation by Citibank. On receipt of confirmation from the Drawee bank, the customer dials up a transaction through Citibank for pulling funds from the specified accounts. This is a more efficient and hassle free mechanism to pull funds, compared to the traditional collections mechanism of collecting funds though cheques & drafts.

INDEX
Serial No. Particulars number 03 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. Executive Summary Objective Company profile Introduction Literature Review Commercial Banking Cash Management Basics Payment & Settlement Process Cheque Clearance Research Methodology Findings & Limitations Conclusions & Recommendations References/Bibliography 04 07 08 11 13 18 20 25 30 34 51 60 62 1. Acknowledgement Page

Objective of the project

The Main objectives of this project are: To study the Cash Management Products & Services To study the current scenario of the Cash Management Services To study the Payment and Clearing systems in India To study the new electronic modes of Cash Management Services Analyze the Cash Management Services used by Godrej & Boyce Mfg. Co. Ltd.

Company Profile
History The Company celebrated its centenary in 1997. In 1897 a young man named Ardeshir Godrej gave up law and turned to lock-making. Ardeshir went on to make safes and security equipment of the highest order, and then stunned the world by creating toilet soap from vegetable oil. His brother Pirojsha Godrej carried Ardeshir's dream forward, leading Godrej towards becoming a vibrant, multi-business enterprise. Pirojsha laid the foundation for the sprawling industrial garden township (ISO 14001- certified) now called Pirojshanagar in the suburbs of Mumbai. Godrej touches the lives of millions of Indians every day. To them, it is a symbol of enduring ideals in a changing world. Incorporation Established in 1897, the Company was incorporated with limited liability on March 3, 1932, under the Indian Companies Act, 1913. Sales - Subsidiaries and Affiliates The Company is one of the largest privately-held diversified industrial corporations in India. The combined Sales (including Excise Duty) of the Company, its subsidiaries and affiliates, during the Fiscal Year ended March 31, 2008, were about Rs. 90,000 million (US$ 1,900 million) Board of Directors Chairman & Managing Director: J. N. Godrej Other Executive Directors: P. D. Lam, K. A. Palia, V. M. Crishna, A. G. Verma Non-executive Directors: A. B. Godrej, N. B. Godrej, K. N. Petigara, B. A. Hathikhanavala,F. P. Sarkari, P. P. Shah, A. Ramachandran Shareholders Since its inception, the Company is controlled by the GODREJ family based in Mumbai, India. Its shares are not listed on any Stock Exchange. About onefourth of the Company's share capital is held by Pirojsha Godrej Foundation, a public charitable trust.

Branches (Sales & Service) And Branded Retail Chain (Godrej Lifespace)

Mumbai, Ahmedabad, Bhopal, Dombivli, Indore, Jabalpur, Nashik, Pune, Raipur, Thane New DelhiI, Chandigarh, Faridabad, Ghaziabad, Gurgaon, Jaipur,Jalandhar, Jammu, Kanpur, Lucknow, Noida Chennai, Bangalore, Coimbatore, Hyderabad, Kochi, Secunderabad,Trivandrum, Visakhapatnam Kolkata , Bhubaneswar, Guwahati, Ranchi, Patna The Company has a network of 60 Company-operated GODREJ LIFESPACE Retail Stores, more than 2,200 Wholesale Dealers, and more than 18,000 Retail Outlets. The Company has Representative Offices in Sharjah (UAE), Riyadh (Saudi Arabia)

Employees 10,200 (including 2,000 in Sales and Service) Bankers Central Bank of India, Union Bank of India, Citibank N.A., ICICI Bank Ltd., State Bank of Patiala, and Axis Bank Ltd. Statutory Auditors KALYANIWALLA & MISTRY, Chartered Accountants Sales (Unconsolidated) Sales including Excise Duty (Fiscal Year 2007-08): Rs. 37,556 million (US$ 780 million) Business: The Company has the following businesses (with respective certifications), which manufacture and/or market a wide range of consumer durables and industrial products: Appliances (ISO 9001/14001) Refrigerators, Washing Machines, Air Conditioners, Microwave Ovens and DVD Players Interio Office And Home Furniture (ISO 9001/14001) Office Furniture - Desking, Seating, Open Plan Office Systems, Computer furniture and Storages; Home Furniture - Living, Dining and Bedroom

furniture; Kitchen cabinets. Laboratory furniture; Marine accommodation; Healthcare furniture; Turnkey interiors; Carpet tiles; Mattresses Locks (ISO 9001/14001,OHSAS 18001) Padlocks, Furniture locks, Mechanical and electromechanical door locks, Door Controls, Architectural and Glass Hardware, Customized solutions and Cartini range of Scissors, Knives and Kitchen Accessories Security Equipment & Solutions : (ISO 9001 / 14001, OHSAS 18001) Strong Room Doors, Safe Deposit Lockers, Cash Boxes and Coffers, Data/ATM Safes, Burglary and Fire Resisting Safes, Record& Filing Cabinets, Electronic Coffers, Currency Sorters and Cash Counting Machines, Fire/Security/Marine Doors, Entranza Home Doors, Fire and Burglar Alarm/Premises Security Systems, Video Door Phones, CCTV System, Access Control Systems Prima (ISO 9001) Vending Machines and Services; Conferencing Products and Solutions Storage Solutions (ISO 9001/14001) Shelving and Racking systems (Static and Mobile), Drive-in System, Cantilever System, Mezzanine Floors, Gravity Flow System, Special Warehousing Solutions, Tool Storage Cabinets, Work surfaces, Trolleys & Warehousing Consultancy Material Handling Equipment (ISO 9001/14001, OHSAS 18001) Forklift Trucks ( Diesel, Electric and LPG ) and Attachments, Container Handling Trucks, Telehandlers, Warehousing, Industrial Cleaning and Personnel Access Equipment, Spare Parts, Service and Maintenance Contracts Industrial Products (ISO 9001/14001) Precision Toolings (Press Tools/ Vacuum Forming Moulds/Pressure Die-Casting Dies), Special Purpose Machines, High Precision Components/Equipment for Engineering and allied industries, Sheet Metal Working Machines Sales and Service Process Equipment (ISO 9001; ASME U, U2, U3, S; AD-2000 Merkblatt HP0; Chinese SELO) Heavy Walled Reactors, High Pressure Vessels, High Pressure Shell and Tube Heat Exchangers, Reactor/Tower Internals and Trays Construction And Real Estate (ISO 9001/14001, OHSAS 18001) Ready Mix Concrete, Construction Projects, Property Development, Real Estate Services

Electrical And Electronics (ISO 9001/14001, OHSAS 18001) Busbar Power Distribution Systems, Compressors and Compressed Air Control Systems, Industrial Electronics and Automation, Energy Conservation and Green Building Services, Turnkey Electrical/MEP Contracts and Power Infrastructure Projects

Introduction
Cash is the most important current asset for the operations of the business. Cash is the basic input needed to keep the business running on a continuous basis, it is also the ultimate output expected to be realized by selling the service or product manufactured by the firm. The firm should have sufficient cash, neither more nor less. Cash shortage will disrupt the firms manufacturing operations while excessive cash will simply remain idle, without contributing anything towards the firms profitability. Cash is the money which a firm can disburse immediately without any restriction. The term cash includes coins, currency, cheques held by the firm, balances in its bank accounts, bank time deposits and marketable securities. Cash Management is the proper use of an entitys cash resources. It serves as the means to keep an organization functioning by making the best use of cash or liquid resources of the organization. At the same time the organization have the responsibility to use timely, reliable and comprehensive financial information systems. Simply put, cash management allows business customers to receive and send information to and from banks and to initiate payments. The internet has facilitated those processes and also has opened up competition and leveled the playing field, allowing even the smallest community banks to offer sophisticated cash management accounts. Cash management can be seen from two different perspectives depending on how many responsibilities it includes: treasury management (or basic cash management) and advanced cash management. Specifically, treasury management handles actual cash management at companies, and one of its main functions is to establish the proper operation of the company. The second concept includes not only treasury management per se but also other tasks such as treasury forecasting, negotiation and establishment of relationships with financial institutions and financial risk management. It is essential to establish the right level of disposable assets to short-term financial investments at companies. Holding the wrong amount in cash or cash equivalent may interrupt the normal flow of business activities. Moreover, the wrong safety margin may result in financial difficulties, with firms unable to meet needs that may arise at any given time or unable to take advantage of 8

unexpected investment opportunities. Maintaining a cash surplus that has a number of advantages. On one hand it enables companies to carry on the normal transactions that arise in the course of their activities and avoid any treasury gaps. On the other hand it helps them cover any unexpected needs for cash by acting as preventive balance. However there are also disadvantages in being too conservative, as reflected in the opportunity costs entailed by assets with little or no profitability. Good cash management is a conscious process of knowing when, where and how a companys cash needs will occur; knowing what the best sources for meeting additional cash needs; and being prepared to meet these needs when they occur by keeping good relationships with bankers and other creditors. Scientific cash management results in significant saving in time, decrease in interest cost, less paper work and greater accounting accuracy. Proper cash management creates more control over time and funds; provides timely access to information; enables easy employee related payments; supports electronic payments; produces faster electronic reconciliation; allows for detection of book keeping errors reduces the number of cheques issued and earns interest income or reduces interest expenses Corporations with subsidiaries worldwide, can pool everything internationally so that the company can offset the debts with the surplus from various subsidiaries. The end result will transform treasury function as a profit-centre by optimizing cash and put it to good use. Creative and pro-active cash management solutions can contribute dramatically to a companys profitability and to its competitive edge. The ultimate purpose of proper management of liquidity, needless to emphasize, is to improve the overall productivity of funds. The purpose of this project is to examine the changing nature of cash management services. We will first look at what are the earlier works done on Cash management services, what is the future of cash management services, how it is done in Godrej & Boyce Manufacturing Company Ltd.

LITERATURE REVIEW
There are two primary strands of academic literature relating to corporate cash holdings. The first is concerned with the cross-sectional differences and general descriptive statistics in actual cash holdings. The second analyzes the cash management problem faced by a firm with both transactions and precautionary demands for cash holdings. 1. Actual Cash Holdings: Although academic interest in corporate cash holdings dates back to 1945, it is generally sparse and mainly descriptive. Chudson (1945) studied the balance sheets of a cross section of industrial corporations in the 1930s. He found that as the size of the firm increased, the ratio of cash to total assets decreased but the ratio of government securities to assets increased. The result of this substitution of cash into near cash securities was a finding of no monotonic pattern of the liquid assets to total assets ratio with respect to size. He also found that profitable companies had higher cash ratios than unprofitable companies. In a 1967 study, Vogel and Maddala examine panel data for US industrial firms. They provide a critique of the techniques and conclusions of previous work that was based purely on cross-sectional examinations. They argue that ignoring time series data in examining cash ratios misses important dynamic components. They confirm Chudsons findings that as size increases, there is increased substitution of government securities for actual cash and that the ratio of total liquid assets to total assets increases. Finally, the decreased on average. This is consistent with improvements in cash management and transaction payment technology to a reduction in the transactions demand for cash. While much of the previous literature has focused on the transactions and precautionary demands for cash, Baskin (1987) takes a different approach. He develops a model in which liquidity is used strategically in an oligopolistic setting. He shows that firms can use liquidity to commit fight entry quickly. His tests support the implications of the model in that industry with more oligopolistic structures characterized by larger liquid holdings.

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John (1993) examines whether variation in the costs of financial distress can explain cross-sectional differences in liquid holdings. She uses research and development expenditures and asset specificity as proxies for the costs of financial distress. Her findings support the hypothesis that firms with higher costs of financial distress hold more liquid assets. She also finds some indications that firms substitute into alternative forms of liquidity, such as inventory and longer cash cycles (which implies high account receivables). Opler, Pinkowitz, Stulz and Williamson (1997) examine the 1994 cross-section of industrial firms on Compustat. They find a negative relation between each ratios and size and strong support for precautionary demand explanations of cash holdings. While the negative relation with the size differ from previous literature, it is most likely due to the fact that they use regression frameworks that control for many factors while earlier work was primarily univariate. They repeat their tests on panel data for robustness. They also show that there is mean reversion in individual firm cash holdings over time. They take that as evidence that firms have a target ratio around which they manage their cash holdings. 2. Cash Management The other strand of literature with respect to corporate holding of cash focuses on cash management. Much of this work was done in the 1960s, building on Baumols 1952 treatment of the cash management problem as an inventory management problem. Baumol applied techniques developed for inventory optimization to the problem of covering transactions demand for cash in a deterministic environment. Miller and Orr (1966) followed this approach in an environment with stochastic cash flows. In their model, the underlying problem facing the manager is to keep enough cash on hand to meet daily transactions demand, while minimizing the opportunity cost from not holding a return-yielding asset. Cash flows follow a random walk with a fixed jump size and an equal opportunity of going up and down. Their problem is concerned with two boundaries: an upper one that, if crossed, triggers a transfer out of cash and into an interestbearing asset, and a lower one that triggers a transfer into the cash account. The lower limit is zero and the upper limit is determined by the parameters of the model. Their approach assumes the same fixed cost to a transfer in either direction and no variable transfer costs. Within this framework, anytime a transfer is made in either direction, the transfer will be in an amount sufficient to return the cash balance to a pre-determined middle value. Cash is then allowed to wander again from there until it hits either bound and is reset. They derive the optimal average cash balance as a function of the variability

11

of cash flows, opportunity cost of holding cash and transfer cost. Thus, the set up and solution resembles an {s,s,S} inventory policy. Miller and Orr built on their own work in a 1968 paper. They considered the sensitivity of their results to particular assumptions, such as symmetric Bernoulli process for cash flow, fixed transfer costs only, and a two asset environment. They show that with both fixed and variable costs to transfer, their model will produce two different return points, instead of the original single point. They also note that in this case, an analytical solution becomes intractable and turn to simulation to show that their earlier results were generally robust to this change. Eppen and Fma (1968, 1969) first show that in the presence of both fixed and variable transfer costs, the optimal cash management policy will be of the (u,U;D,d) form, meaning that there is a lower boundary ,u, and a lower return point, U and an upper boundary ,d, and upper return point, D. They then show that analysis through simulation and linear programming techniques produces such an optimal policy. Up through Eppen and Famas work all of the models had been discrete time with either deterministic cash flows (Baumol) or stochastic cash flows (Miller and Orr, Eppen and Fama). In 1972, Vial extended the analysis to continuous time with stochastic flows and showed that a policy of the form (u,U;D,d) is still optimal. Contantinides (1976) considered the problem in continuous time with cash flows governed by a Wiener process, allowed for analytical results. Hans G. Daellanbach (1974) studied Are cash management optimization models worthwhile? The objective was to determine upper bounds of the potential savings that can be realized by the application of cash management optimization models. These upper bounds were found by simulation performance of a hypothetical treasurer who uses simple heuristic cash management rules as informally practices by many treasurers, based on prediction of random cash flows. The results of this analysis leave serious doubts as to profitability of cash management optimization models. Frenkel and Jovanovic (1980) also apply continuous time techniques to determine the optimal money holdings in the presence of both transactions and precautionary demands. They derive close-form solutions for the optimum as a function of the interest rate, the mean and variance of net disbursements and the cost of portfolio adjustments. Further, they show that the solution derived from minimizing the net present value of cash management costs is better than that derived from analyzing the steady-state.

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Two papers have attempted to examine the valuation implications of cash management programs. Morris (1983) showed that cash management can be value-relevant if the costs of cash management and the return on the market are correlated. Borrowing to meet obligations can increase the systematic risk of the firm and holding large stocks of liquid assets can decrease the risk. Thus, cash management affects systematic risk and valuation. Gilmer (1985) also looks at the relation between cash management and value by testing whether the market acts as if there is an optimal level of cash for a given firm. He estimates ex-post regressions of CAPM residuals on cash and cash squared. The estimates support the existence of a concave function between value and cash holdings, which he interprets as consistent with the existence of an optimal level of cash. Palom and Prat (1984) studied that having liquid assets available constitutes an opportunity cost for a company, as the return on these assets is lower than the return on productive investments, but there may still be transaction costs arising from the sale or purchase of financial assets, and disadvantages in terms of taxation. The particular importance of disposable asset management as a responsibility of the company treasurer should lead companies to conduct an overall analysis of this point, covering management of the collection circuit, cash and payment circuit. This overall analysis should strive to shorten collection periods, lengthen payment periods and avoid idle resources that do not generate returns. Kamath et al., (1985); Srinivasan and Kim (1986) studied that to prevent breaks or gaps in the trading cycle due to lack of cash, administrators must calculate the cash amount best suited to their level of activity, plan the timing of the relevant payments and collections and draw up a policy of investment in asset with high liquidity that can be converted to cash at a low transactional cost to serve as support foe the treasury finds maintained by the company. Pindado (2001) argues that basic cash management refers to that part of the working capital that makes up the optimal level needed by a company treasury. However, if the profit opportunities available in the process of cash flow creation are to be maximized, this scope must be broadened to take in more operational decisions, since optimum cash levels are influenced by other factors outside the restrictive concept of treasury. Linking these concepts with the concepts of monetary theory reveals that the initial reasons for cash management were transaction and precaution, and those reasons were then joined by speculation, taking it closer to the overall concept of treasury management in the broad sense of the term (Maseda and Iturralde, 2001). Casanovas and Fernandez (2001) defined the idea put forward by Palom and Prat (1984), and indicate that treasury management is seen as 13

administration of the treasury circuit, enabling chiefly the analysis, study and review of the three circuits indicated (payments, collections and cash holding). However, taking basic treasury principles as their reference, these authors identify and determine more complex techniques, instruments and functions, which they also integrate into treasury management of short term investments, short-term financing and bank relationships. Therefore, although they stress the essence of treasury management, they analyze and set out more advanced management techniques and tools, which are considered as characteristic of cash management. Leire San Jose, Txomin Iturralde and Amaia Maseda (2008) in International Research Journal of Finance and Economics presented a paper on Treasury Management Versus Cash Management. Using a database of Spanish companies, this paper analyses the treasury management responsibilities assumed by financial departments and develops a model to confirm those responsibilities. They have developed an explanatory model that brings together the main functions of the treasurer by means of two concepts: (i) basic cash management, which groups the management of collections and payments, liquidity monitoring in banking operations, short-term treasury forecasts, the management of banking balances on value date and negotiation with financial organizations; and (ii) advanced cash management, which includes the management of the financing of treasury deficits, the management of the positioning of treasury peaks and the management of financial risks.

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COMMERCIAL BANKING
1. Commercial Banks in India are broadly categorized into Scheduled Commercial Banks Unscheduled Commercial Banks The Scheduled Commercial Banks have been listed under the Second Schedule of the Reserve Bank of India Act, 1934. The selection measure for listing a bank under the Second Schedule was provided in Section 42 (60 of the reserve bank of India Act, 1934). RBI in turn includes only those banks in this schedule which satisfy the criteria laid down vide section 42 (60 of the RBI Act, 1934). Some co-operative banks are scheduled commercial banks albeit not all co-operative banks are. Being a part of the second schedule confers some benefits to the bank in terms of access to accommodation by RBI during the times of liquidity constraints. At the same time, however, this status also subjects the bank certain conditions and obligation towards the reserve regulations of RBI. For the purpose of assessment of performance of banks, the Reserve Bank of India categorize them as Public sector banks Old private sector banks New private sector banks Foreign banks Public sector banks have either the Government of India or Reserve Bank of India as the majority shareholder. This segment comprises of: 1.1. State Bank of India and its Subsidiaries The State Bank of India has been, over the years, the flagship of Indian banking. State Bank of India is the largest bank in India in terms of profits, assets, deposits, branches and employees. With a network of over 9,000 branches in India and 51 foreign offices in 32 countries, the Bank commands about one-fifth of the total deposits and loans in all scheduled commercial banks in the country. 1.2. Other Nationalized banks like Allahabad bank, Andhra bank, Bank of Baroda, Bank of India, Bank of Maharashtra, Canara Bank, Central Bank of India, Corporation Bank, Dena Bank and Indian bank. 2. Introduction of Banking: 15

Banking operations started in India as early as 1870 with the establishment of the Bank of Hindustan, considered as the first bank of India. The second development in the banking sector happened with the incorporation of the India. The reserve Bank of India was engaged in the performance of central banking activities before the establishment of the Reserve bank of India. 3. Activities of Commercial Banks: The modern Commercial banks in India cater to the financial needs of different sectors. The main functions of the commercial banks comprise of transfer of funds, acceptance of deposits and then offering those deposits as loans for the establishment of industries, purchase of houses, equipments, capital instrument purposes etc. The banks are allowed to act as trustees. On account of the knowledge of the financial market if India the financial companies are attracted towards them to act as trustees to take the responsibility of the security for the financial instrument like a debenture. The Indian Government presently hires the commercial banks for various purposes like tax collection and refunds, payment of pensions etc. 4. Modern Banking Techniques: The immense growth of the IT sector is reflected in the banking operation of the Commercial Banks in India. Presently, the IT companies are engaged in creating software packages to facilitate, accelerate and organize the banking operations. The Rangarajan Committee and the Reserve Bank of India has played a major role in popularizing the concept of computer application in banking activities. The computerization process has reached its peak in the present scenario with the use of Total Branch Automation Packages. 5. Products and Services offered by Commercial Banks of India: The Commercial Banks in India offer variety of products and services like Investment Advisory Services, Tax Advisory services, Cash Management services, debit cards, ATM cards, credit cards, personal loans, education loans, housing loans, car loans, Investment Advisory Services, and consumer durable loans. 6. Corporate Banking Corporate Banking is defined as financing (often unsecured), cash management, and other banking services custom-tailored for large firms. Corporate Banking represents the wide range of banking and financial services provided to domestic and international operations of large local corporate and local operations of multinational corporations. Services include assess to commercial banking products, including working capital facilities such as domestic and international trade operations and funding, channel financing, 16

and overdrafts, as well as domestic and international payments, INR loans (including external commercial borrowings in foreign currency), letters of guarantee etc.

CASH MANAGEMENT BASICS

Cash management is concerned with the meaning of: 1. Cash flows into and out of the firm. 2. Cash flows within the firm. 3. Cash balances held by the firm at a point of time by financing deficit or investing surplus cash. It can be represented by a Cash management cycle as shown in figure 1. Sales generate cash which has to be disbursed out. The surplus cash has to be invested while deficit has to be borrowed. Cash management seeks to accomplish this cycle at a minimum cost. At the same time, it also seeks to achieve liquidity and control. Cash management assumes more importance than other current assets because cash is the most significant and the least productivity asset that a firm holds. It is significant because it is used to pay the firms obligations. However cash is unproductive. Unlike fixed assets or inventories, it does not produce goods for sale. Therefore the aim of cash management is to maintain adequate control over cash position to keep the firm sufficiently liquid and to use excess cash in some profitable way. Business Operation Cash Collections Deficit/ Surplus Borrow/ Invest

Information & Control

Cash Payments

1. Cash Management Cycle

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A manufacturing concern needs finance not only for acquisition of fixed assets but also for its day-to-day operations. It has to obtain raw materials for processing, pay wage bills and other manufacturing expenses, store finished goods for marketing and grant credit to its customers. It may have to pass through the following stages to complete its operating cycle:1. Conversion of cash into raw materials- raw materials may be procured either on payment of cash or on credit. Even if procured on credit, cash may have to be paid after a certain period. 2. Conversion of raw materials into stocks-in-process. 3. Conversion of stocks-in-process into finished goods. 4. Conversion of finished goods into receivables/debtors or cash. 5. Conversion of receivables/debtors into cash. A non-manufacturing trading concern may not require funds for purchase of raw materials and their processing, but it also needs finance for storing goods and providing credit to its customers. Similarly, a concern engaged in providing services may not have to keep inventories, but it may have to provide credit facility to its customers. Thus all enterprises engaged in manufacturing or trading or providing services require finance for their dayto-day operations. The amount required to finance day-to-day operations is called working capital.

CASH

RECIEVABLES

RAW MATERIALS

WORKING CAPITAL

FINISHED GOODS

STOCKS-IN

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2. Working Capital Cycle In order to resolve the uncertainty about cash flow prediction and lack of synchronization between cash receipts and payments, the firm should develop appropriate strategies for cash management. The firm should evolve strategies regarding the following four facets of cash management: Cash planning cash inflows and outflows should be planned to project cash surplus or deficit for each period of the planning period. Cash budget should be prepared for this purpose. Managing the cash flows the flow of cash should be properly managed. The cash inflows should be accelerated while, as far as possible, the cash outflows should be decelerated. Optimum cash level The firm should decide about the appropriate level of cash balances. The cost of excess cash and danger of cash deficiency should be matched to determine the optimum level of cash balances. Investing surplus cash The surplus cash balances should be properly invested to earn profits. The firm should decide about the division of such cash balance between alternative short term investment opportunities such as bank deposits, marketable securities, or intercorporate lending.

MANAGING CASH COLLECTIONS & DISBURSEMENTS

Once the cash budget has been prepared and appropriate net cash flow established, the financial manager should ensure that there does not exist a significant deviation between projected cash flows and actual cash flows. To achieve this, cash management efficiency will have to be improved through a proper control of cash collection and disbursement. The twin objectives in managing the cash flows should be to accelerate cash collections as much as possible and to decelerate or delay disbursements as much as possible. 1. Accelerating Cash Collections A firm can conserve cash and reduce its requirements for cash balances if it can speed up its cash collections. The first hurdle in accelerating the cash collection could be the firm itself. It may take a long time to process the invoice. Days taken to get the invoice to buyers add to order processing delay. In India, yet another problem is with regard to the extra time enjoyed by the buyers in clearing the bills, particularly, the government agencies take time beyond what is allowed by sellers in paying bills. Cash collections can be

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accelerated by reducing the lag or gap between the times a customer pays bill and the time the cheque is collected and funds become available for the firms use. The amount of cheques sent by customer which are not yet collected is called collection or deposit float. Within this time gap, the delay is caused by the mailing time, i.e. the time taken by cheque in transit and the processing time, i.e., the time taken by the firm in processing cheque for internal accounting purposes. This also depends on the processing time taken by the bank as well as the inter bank system to get the credit in the desired account. The greater the firms deposit float, the longer the time taken in converting cheques into usable funds. In India, these floats can assume sizeable proportions as cheques normally take a longer time to get realized than in most countries. An efficient financial manager will attempt to reduce the firms deposit float by speeding up the mailing, processing and collection times. A firm can use decentralized collection system to speed up cash collections and reduce deposit float. 2. Decentralized Collections A large operating over wide geographical areas can speed up its collections by following a decentralized collection procedure. A decentralized collection procedure, called concentration banking, is a system of operating through a number of collection centers, instead of a single collection center centralized at the firms head office. The basic purpose of the decentralized collections is to minimize the lag between the mailing time from customers to the firm and the time when the firm can make use of the funds. Under decentralized collections, the firm will have a large number of bank accounts operated in the areas where the firm has its branches. All branches may not have the collection centers. The selection of the collection center will depend upon the volume of billing. The collection centers will be required to collect cheques from customers and deposit in their local bank accounts. The collection center will transfer funds above some predetermined minimum to a central or concentration bank account, generally at the firms head office, each day. A concentration bank is one where the firm has a major account- usually disbursement account. Funds can be transferred to a central or concentration bank by a wire transfer or telex or fax or electronic mail. Decentralized collection procedure is thus, a useful way to reduce float. Decentralized collection system saves mailing and processing time and, thus, reduces the deposit float, and consequently, the financing requirements. For example, suppose a company has credit sales of Rs 146crore per year. Its collections will average Rs 40 lakh per day (146crore/365). If the company could reduce its mailing and processing time from five days to three days and deposit cheques into the bank two days earlier, outstanding balance would be reduced by Rs80 lakh. If the annual borrowing rate was 18%, the company 20

has saved an opportunity cost of Rs 14.40 lakh on annual basis. Thus, a decentralized collection system results in potential savings which should be compared with the cost of maintaining the system. The system should be adopted only when savings are greater than costs. 3. Cash Collection Instruments in India The main instruments of collection in India are: Cheques, drafts, documentary bills, trade bills and letter of credit. 4. Controlling Disbursements The effective control of disbursement can also help the firm in conserving cash and reducing the financial requirements. Disbursements arise due to trade credit, which is a (spontaneous) source of funds. The firm should make payments using credit terms to the fullest extent. There is no advantage in paying sooner than agreed. Be delaying payments as much as possible, the firm makes maximum use of trade credit as a source of funds- a source which is interest free. To illustrate the point, supposed that a company purchased raw materials worth Rs 730 million in 2004 and followed the policy of paying within credit terms offered by the supplier. If the company paid one day earlier, creditors balance would decline by one days purchase. Trade credit would decrease by Rs 2 million (Rs 730million/365) and financing requirement from other sources will increase by this amount. If the interest rate is 18%, the companys interest costs will increase by Rs 360,000 on an annual basis. Delaying disbursements result in maximum availability of funds. However, the firms that delay in making payments may endanger its credit standing. This can put the firm in difficulties in obtaining enough trade credit. Also, the suppliers may build implicit costs in the prices of goods supplied, and may also reduce the quality. On the other hand, paying early may not result in any substantial advantage to the firm unless cash discounts are offered. Thus, keeping in view the norms of the industry, the firm should pay within the terms offered by the suppliers. While, for accelerated collections a decentralized collection procedure may be followed, for a proper control of disbursements, a centralized system may be advantageous. The payments of bills will be made from a single central account. For the local payees, who are far from the central account, the transit time will increase and the firm will gain by this delay. Some firms use the technique of playing the float to maximize the availability of funds. When the firms actual bank balance is greater than the balance shown in the firms books, the difference is called disbursement or payment float. The difference between the total amounts of cheques drawn on a bank

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account and the balance shown on the banks books is caused by transit and processing delays.

PAYMENT AND SETTLEMENT SYSTEMS

The history of the payment system can be said to be virtually co-terminus with the evolution of money. The earliest form of payment system could perhaps be traced back to the pre-historic days of barter trade when the settlement of consideration took place through exchange of conch shells, goods, cattle and later commodities. Such a system, in the absence of money as a medium of exchange, was obviously very cumbersome due to highly improbable coincidence of wants of the two parties to a barter transaction. Subsequently, more formalised payment instruments, such as coins, developed. The earliest payment instruments known to have been used in India were coins, which were either punch-marked or cast in silver and copper; even leather is known to have been used for making coins. Thus, with the advent of institutionalised forms of money, initially in the form of coins and later as paper money, the barter trade withered away and the usage of currency became the order of the day. Paper money, in the modern sense, has its origin in India in the late 18th century with the note issues of private banks as well as semi-government banks. Amongst the earliest issues were those by the Bank of Hindustan, which was the first joint stock bank established in 1770, the General Bank in Bengal and Behar, and the Bengal Bank. Later, with the establishment of three Presidency Banks since 1809, the work of issuing notes was taken over by them and each Presidency Bank had the right to issue notes within certain limits. The private banks and the Presidency Banks introduced other payment instruments in the Indian money market and cheques were introduced by the Bank of Hindustan. Buying and selling bills of exchange became one of the items of business to be conducted by the Bank of Bengal from 1839. The Paper Currency Act of 1861 conferred upon the Government of India the monopoly of Note Issue, thus, bringing to an end the note issues of private and Presidency Banks. In 1881, the Negotiable Instruments Act (NI Act) was enacted, formalising the usage and characteristics of instruments like the cheque, the bill of exchange and promissory note. The NI Act provided a legal framework for non-cash, paper payment instruments in India and continues to be an operative legislation even today. While the modern cheques came into being in India only in the 19th century, it is noteworthy that India had pioneered the use of non-cash based payment systems long ago, which established themselves as strong mechanism for the conduct of trade and business. The most important form of credit instrument

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that evolved in India was termed as Hundis and their use was reportedly known since the twelfth century. Hundis were used as instruments of remittance, credit and trade transactions, and were of various types, each type with its own unique features. However, with the steady rise in volumes of trade and commerce and the growing confidence of the public in the usage of cheques, etc., there was also rapid growth in the payment transactions using these instruments. With the development of the banking system and higher volume of cheques used, the need for an organised cheque clearing process emerged amongst the banks. Clearing associations were formed by the banks in the Presidency towns and the final settlement between member banks was effected by means of cheques drawn upon the Presidency Banks. With the setting up of the Imperial Bank in 1921, settlement was done through cheques drawn on that bank. After the establishment of the RBI in 1935, the Clearing Houses in the Presidency towns were taken over by the RBI, and continued with it for more than five decades. It is noteworthy that the volume of paper-based clearing we handle is the sixth largest in the world and during the year April 2007 to March 2008 about 1.46 billion cheques were cleared in the country. The total number of cheques cleared and the value during the last three years in India are as follows: Type Volume (in billion) Value (Rupees in lakh crore) (April March) 2005-062006-072007-082005-06 2006-07 2007- 08 Total Cheques 1.29 1.37 1.46 113.29 120.42 133.96 Of these: a) MICR 1.03 1.14 1.22 94.74 104.35 115.29 b) Non MICR 0.026 0.023 0.024 18.55 16.07 18.67 Objectives of payment system: As some of you might recollect, a monograph on Payment Systems in India was prepared by the RBI in 1998 to increase the awareness, both within the country and abroad, of the payment systems existing in India. The monograph also detailed the objectives that needed to be achieved. To that end, a Payment System Vision Document for 2001-04 was prepared to draw up the roadmap for consolidation, development and integration of payment systems in the country. Once these objectives were achieved, a Vision Document for 200508 was published in May 2005, articulating the Reserve Banks vision for the coming four years for the payment and settlement area. The mission enshrined in the Vision Document is the establishment of safe, secure, sound and efficient payment and settlement systems for the country, towards which all the upgradation efforts are focused. Whereas safety in payment and settlement systems relates to risk reduction measures, security pertains to 23

confidence in the integrity of the payment systems. All payment systems are envisaged to be on sound footing with adequate legal backing for operational procedures and transparency norms. Efficiency enhancements are envisaged by leveraging the benefits of technology for cost-effective solutions. Thus, as part of its public policy objectives, the Reserve Bank has played a major role in the design, development and functioning of payment and settlement systems, and the multidimensional efforts of the RBI over the years have been geared to realise this vision. Role of RBI in Payment Systems The development of a payment system is one developmental role that is common to most of the central banks. It is well recognised that an efficient payment and settlement system is essential for efficient functioning of the modern financial system. The Reserve Bank as, therefore, played a catalytic role, over the years, in creating an institutional framework for development of a safe, secure, sound and efficient payment system for the country. It has also initiated a variety of institutional, procedural and operational measures to strengthen and refine the payment system. In order to place the efforts of the RBI in a proper perspective, some of the salient developments are explained chronologically. 1. Remittance Facilities Scheme One of the earliest mechanisms for movement of settlement funds of banks between the clearing centres was provided by the Reserve Bank as far back as in 1940. Since October 1, 1940, the Reserve Bank has been operating an integrated Remittance Facilities Scheme, which facilitates transfer of funds between banks located at different centres in the country, expeditiously and with a minimum cost. The Scheme is operated by the Reserve Bank and the public sector banks as its agents, including treasuries and subtreasuries of the government. In other centres, the SBI operates a remittance scheme to enable banks to fund and draw upon their various settlement accounts. In the absence of the SBI, its associate banks or the public sector banks managing the clearing house, provide the remittance facility. The Scheme has served us well and enables smooth movement of settlement funds between all the clearing centres.

2. Clearing House Regulations The bankers clearing houses constitute the critical nodes in the entire payment system of the country and their efficient and orderly functioning is crucial for a robust payment system. However, prior to 1986, there were no 24

formal regulations and rules governing the transaction of business in the clearing houses and each clearing house had its own rules and regulations, based on local conventions and convenience. Hence, in case of disputes, resolution of the problem proved to be difficult. In 1986, therefore, the Reserve Bank formulated a set of guidelines known as the Uniform Regulations and Rules (URR) for the Bankers' Clearing Houses, so as to harmonise, across the country, the framework governing the conduct of the clearing houses. These guidelines had also become necessary in the backdrop of increasing computerisation in the banking industry and the consequential changes in the functioning of the clearing houses. The Regulations have since been adopted individually by the general body of each clearing house in the country. Individual clearing houses are free to frame their own rules consistent with the broad framework provided by the Regulations. The Uniform Rules and Regulations represent a significant step forward in providing a formal institutional framework for the payment system in the country. 3. The Board for Payment & Settlement System In order to strengthen the institutional framework for the payment and settlement systems in the country, the Reserve Bank constituted, in 2005, a Board for Regulation and Supervision of Payment and Settlement Systems (BPSS) as a Committee of its Central Board. The Board is chaired by the Governor, RBI while all the four Deputy Governors and two external Directors of the Central Board are its members. The role of the BPSS is to lay down policies relating to the regulation and supervision of all types of payment and settlement systems, set standards for existing and future systems, approve criteria for authorisation of payment and settlement systems, and determine criteria for membership to these systems, including continuation, termination and rejection of membership. Thus, the BPSS is the highest policy making body in regard to the payment and settlement systems in the country and encompasses electronic, non-electronic, domestic and cross-border payment and settlement systems which affect the domestic transactions. In its relatively short span since its inception, the BPSS has provided valuable guidance in shaping the emerging contours of the payment and settlement system in the country and has helped widen the reach of the payment services of the banks to the hinterland areas.

4. Payment and Settlement Systems Act 2007 It is internationally acknowledged that payment and settlement systems should function on a well-founded legal basis. This entails among other things, proper authorisation requirement for setting up and payment systems, legal 25

recognition for netting, settlement finality, providing for regulation and oversight of the payment and settlement systems. Many countries have either provided for these requirements in their central bank statutes or have drafted separate and comprehensive laws for this purpose. In India where the economy is growing at a fast pace increasingly large volumes and values are being handled by payment systems. Non-bank entities who are outside the explicit regulatory purview of the central bank are running is likely to run important payment systems. A number of innovative payment instruments systems have been introduced by unregulated entities. While large payment systems which are unregulated present risks to the stability of the financial systems, unauthorised retail payment systems without proper management and operational structures can undermine public confidence in the efficacy of the payment systems as a whole. The Reserve Bank and the Government felt that there should be an explicit law to regulate the payment and settlement systems. The Parliament has enacted the Payment and Settlement Systems Act in December 2007. This Act empowers the Reserve Bank to regulate and supervise the payment and settlement systems and provides a legal basis for multilateral netting and settlement finality. The Act empowers the Reserve Bank to lay down the policies for regulation and supervision of the payment and settlement systems, authorise their setting up/continuance, for issuing directions, laying down standards, calling for information/data, initiating prosecution/levying penalties for violation of the provisions of the Act, its regulations and directions etc.

CHEQUE CLEARING PROCESS

All payment instructions made through the medium of cheques are debit transactions. A debit transaction occurs when the intended recipient initiates 26

the payment transaction by depositing the instrument in his bank. During the course of a business day a number of instruments are deposited with a bank for collection by its customers. These instruments may be drawn on different branches of various banks and a collecting bank has to physically present the instruments for collection to each drawee bank/branch. The clearing system provides a convenient and well established institutional mechanism to take care of the problem of physical delivery of instruments as well as funds transfer between different banks. In India, the clearing system is local and confined to a defined jurisdiction covering all the banks and branches situated in the area under a particular zone. The clearing house is a voluntary association of banks under the management of a bank where the settlement accounts are maintained. Wherever Reserve Bank of India has its office (and a banking department), the clearing house is managed by it. In the absence of an office of the Reserve Bank, the clearing house is managed by the State Bank of India, its associate banks and in a few cases by public sector banks. State Bank of India (SBI) has the widest network of branches in the country and acts as an agent of the Reserve Bank in centres where the RBI does not have its offices. It is therefore, natural that a vast majority of the clearing houses in the country are managed by the SBI. The rest of the clearing houses are managed by the associate banks of the SBI in the areas of their concentration and in some cases by other public sector banks. The membership of the clearing house includes both direct members and submembers. All the branches of a member bank within the clearing house jurisdiction are eligible to present and receive cheques drawn on any other member bank/branch within the jurisdiction. The sub-members, who are sponsored by a member bank, participate in clearing in the same way as a branch of a member bank. Settlement of Funds: The settlement of funds in clearing occurs at several levels. The aggregate amount or value of cheques presented by a bank on other banks represents the claim by that bank on other banks. Similar claims are made by all the banks on every other bank in the clearing. A net settlement is arrived at the clearing house and the debit or credit position of the bank is determined. These are booked in their current accounts maintained by the settling bank. This represents the inter-bank settlement. The settlement of funds between the service branch and the branch concerned represents the transfer of funds to the branch level. The payment process is completed only when the funds are debited from the drawer's account and credited to the payee's account. This occurs after the completion of the return clearing mentioned earlier.

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Figure 3 - The movement of cheques in local clearing Return Clearing: Realization of a cheque i.e. payment occurs after the cheque that is returned unpaid takes place in this clearing. The aggregate of all items unpaid is debited to the original presenting bank and credited to the drawee bank. The same process is mirrored in the inter-branch settlement at the service branch of a bank. The credit given to the payee on account of the cheque is reversed. Inter-branch clearing: Cheques presented by customers drawn on different branches of the same bank need not be sent to the clearing house as the transfer of funds is internal to the bank. The service branch usually acts as a settlement branch for the branches and the instruments are sent to the drawee branches while the inter-branch accounts are credited or debited internally. Time lag: The total clearing cycle including the return clearing introduces a time lag in the payments process. The need for physical presentment of the cheque at the branch where it is drawn on requires the movement of cheques from one place to another. As a result, the recipient of payment has to wait until the collecting banker is fully satisfied that the cheque has been paid. This time lag will continue irrespective of the level of technology and

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improvements in process, so long as the physical presentment of the cheque is necessary as per the banking law.

Fig. 4. Settlement Process in Clearing Collection of outstation instruments: As the clearing jurisdiction is local, a separate procedure has evolved for the collection of cheques drawn on banks outside the clearing house area. In this case, the cheques are sent by post for collection to the representative branch or correspondent branch for presentation in the clearing house in the outstation centre. Once the cheque is realized, the proceeds are remitted to the original presenting bank for credit to the customer account. This leads to a significant delay in the payment of these cheques and there is considerable uncertainty regarding the time of realization. The National Clearing system, described elsewhere, has considerably reduced the time taken for realization at designated centers. Settlement of funds for outstation Items: Due to delays in collection of outstation cheques, various alternative forms of payments instruments are widely used to settle outstation payments. Some of the payment items such as demand drafts, payable at par warrants etc., have been described in the previous chapter. In all these cases, whether cheques or drafts, the question of settlement between paying bank and the collecting bank remains. In the case of demand drafts, the payment is usually internal to the bank and is settled by book transfers using an internal pipe line account maintained in the bank. In the case of 'At par' items, a single account maintained in any branch is debited and various paying branches are paid. Sometimes the layers of intermediation increase as the funds move from a paying bank to its branch at

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other centre to a collecting bank at that centre. In all these cases, the delays involved in the payments transaction are considerable both for the recipient of the funds as also for the banks involved. Thus in a nutshell the Cheque Clearing process involves: Acceptance of the cheque for collection Presentment of the cheque to the clearing house by the presenting bank Processing of the cheque to the clearing house by the presenting bank Collection of the cheque by the paying banks from the clearing house and processing the same for payment Inter-bank settlement of the presented instruments Presenting bank crediting the payees account and paying bank debiting the drawers account Return of cheques(if any) if the same cannot be paid Final release of funds by the presenting/collection bank on expiry of return schedule (if no returns are made)

RESEARCH METHODOLOGY
Primary Source:Cash Management Services of Godrej & Boyce have a tie up with Citibank. The products of Citibank used by Godrej & Boyce for CMS are Citiclear, Citispeed, Citicheck and Citianywhere. The Cash management services are for getting 30

faster with minimum cost and minimum time lag. The pricing of Cash Management Services products is variable depending on the monthly volumes, average cheque amount etc. Godrej & Boyce have Day 0 Day 1 credit plan with Citibank. Day 0 Day of receipt and Processing Day 1 Day of credit given to Godrej & Boyce CITI Bank Citiclear This provides quick realization of local cheques deposited at the same location. It means the cheques are collected and deposited in the same city, so no cost for clearing those cheques. Citispeed Citispeed offers faster processing and credit of local cheques at 300+ locations through data communications network and backup systems. Citibank has correspondent Banking arrangement with multiple banks to use their branch network. Courier from Citibank goes to local clearing instead of hub. There is an arrangement with the correspondent bank so time is saved here. Godrej & Boyce is not using this service much. Citicheck - Citicheck allows one to have outstation cheques picked up from ones office/designated pick up points and sent for processing. Funds cleared are electronically transmitted into ones account. This product is available at 1700+ locations. Citibank have an arrangement with the correspondent bank. Citibank picks up the cheques from Godrej & Boyces office at Ahmedabad and sends it to thei processing hub at Mumbai e.g. ABC Ltd. gives a cheque to Godrej & Boyce at Ahmedabad, a cheque drawn on Bank of India, Rajkot. Now Godrej & Boyce have a tie up with Citibank, so Citibank will be suppose to collect the cheque on 1st September from the collection point of Godrej & Boyce which is at Ahemdabad. On 2nd September i.e. Day 0 Citibank will send the cheque for processing to their clearing hub in Mumbai. On 3rd September i.e. Day 1 Citibank will credit the amount to Godrej & Boyces account. On 3rd September Citibank is out of money. On 10th September suppose the money is credited to Citibanks account form the Bank of India account, so on this day Citibank has money. Godrej & Boyce is getting money 7 days early, for this it have to pay some charges to Citibank. There charges are customized depending upon the product one chooses. CitiAnywhere A facility for processing outstation cheques clearing drawn on any location in the country. This facility is available at 20000+ locations. There could be a possibility wherein the location where the outstation cheques is drawn on is not covered under banks extended network with correspondent 31

banks. Citibank still can offer under banks extended network with correspondent banks. Citibank still can offer to collect the same and send it directly to the drawee location for realization. This cost is highest as cheques are collected from anywhere in India where even Citibank is not present and do not have any correspondent bank arrangement. E.g. XYZ Ltd. gives a cheque drawn on State Bank of India Dahej near Baruch where there is no Citibank and no correspondent bank. Here under Citianywhere, Godrej & Boyce gets money credited on the Day 1 by Citibank. Citibank collects the cheque and sends it to the SBI Dahej and then gets the money credited. The charge for this product is highest. The pickup points of Godrej & Boyce Mfg. Co. Ltd. are East Bhubaneshwar Kolkatta Guwhati Patna Ranchi West Ahmedabad Bhopal Indore Jabalpur Mumbai Pune Raipur North Chandigarh Delhi Jaipur Jalandhar Kanpur Lucknow South Bangalore Chennai Coimbatore Cochin Hyderabad Pondicherry Thiruvananthpuram Vizag

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Citibank processing hubs are located at Mumbai Lucknow Delhi Chennai

Bangalore Bhubaneshwar

The present study was conducted for financial years (FY2004 FY2008) transactions of cheques of Godrej & Boyce with Citibank under the CMS services. From the table we can see that approx. 66% of the cheques are local cheques which need no tie up with bank. But to increase the efficiency and productivity Godrej & Boyce can think over to move electronically for their local cheques. The amount of cheques under Citispeed has been reduced from 2.58% in 2004-05 to 0.78% in 2007-08. The amount of cheques is highest under Citicheck services which were Rs. 499.75 crores in 2004-05 and Rs. 832.50 crores in 2007-08. This is the major part where one has to pay attention so as to realize the cash faster with minimum possible cost. Citianywhere also have the major part of Rs. 212.99 crore in 2007-08 which should also be considered.

Secondary Source: CASH MANAGEMENT SERVICES Although cash management has been around for years, it is still a very basic service that most businesses, even small to mid-sized businesses, need to keep their operations running smoothly. As community banks and traditional thrifts expand into the commercial arena, a cash management product is a necessity.

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If an organization is multi-locational, managing outstation fund collections and payments can often become time consuming and expensive. Delays of days or even weeks in realizing 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. Banks offer a comprehensive range of collections and payments solutions under Cash Management Services (CMS) umbrella to meet the corporate needs and put the corporate in control of their cash position. Banks collection services is aimed at ensuring quick realization of local and outstation cheques and providing the funds in a central collection account. This enables to manage funds flow position most effectively from a central location. Cash management services can be costly but usually the cost to a company is outweighed by the benefits. Benefits of Cash Management Services are Lower interest costs Banks collection services enable corporate to receive funds in their main (concentration) account with the bank with a minimum transit time thereby reducing interest costs Improve liquidity Savings of transit time enables corporate to realize cheques and use funds earlier and therefore gives enhanced liquidity. It helps in eliminating idle cash balances. Improving clients liquidity, by ensuring the availability of funds through timely, cost-effective collection schemes and by effecting the due payments in an effective way 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 Interconnectivity E-net is internets based software, which allows viewing current account balances, download statements, view CMS collections, effect payments/receives payments online etc. CMS helps in monitoring exposure and reducing risks CMS helps in ensuring timely deposit of collections and properly timing the disbursements Achieve Overall Operational Convenience CMS enables corporate to derive convenience in banking operations thereby facilitating management of cash positions through a central treasury Cash management services help corporate in reducing the borrowing requirements and related costs through decreased collection periods

The fundamental objective of cash management is optimization of liquidity through an improved flow of funds. In todays highly competitive environment, where time is considered as money, deployment of staff to render basic routine tasks does not make economic sense. As a sequel, cash 34

management today is not what it used to be. Electronic banking, which began as a passive desktop access to bank balances, is emerging into complex processes of liquidity management through numerous techniques. Almost all of the corporations in advanced countries are now planning to use the services of banks to help them collect payments on monthly bills they issue to consumers and other types of cash management services. In an urge to consolidate and expand customer relationships and to stay ahead of the competition, wholesale banks have turned to the next generation of personalized and uniform online cash management services. The ultimate cash management solution as seen by many corporate is a fully centralized management of financial and commercial payments where intra-group companies have no external bank accounts, except a local account for pretty cash. The next logical question is why the banks should be so excited about the subject. Deregulation and new technology have eroded banks comparative advantages and made it easier for non-bank competitors to enter into hitherto exclusive banks domain. Banks want such services to be their primary profit source for certain reasons. This revenue is more stable over time, assures a steady income and more importantly, leads to a strong relationship with the corporate client. Types of Cash Management Services The menu of cash management services offered by banks abroad is indeed diverse and tempting. The services broadly fall under collection services, disbursement services, information and control services, services related to electronic data interchange (EDI), commercial web banking services, sweep services, fraud detection solutions, global trade solutions and investment solutions. Collection Services accelerate receipt of payments from sales and quickly turn them into usable cash in accounts. Disbursement Services make efficient payments by reducing or eliminating idle balances in companys accounts. Information and Control Services receive the data and provide the management capability needed to monitor company cash picture, control costs, reconcile and audit bank accounts, and reduce exposure to fraud. Financial Electronic Data Interchange (EDI) is a computerised exchange of payments between a companys business and its customers and vendors. Commercial Web Banking Services give a wide range of services from any Internet connection, which can help streamline banking process quickly and efficiently. Sweep Services maintain liquidity and increase earnings without having to actively monitor accounts and move money in and out of them. Information reporting solutions assist companies, which need to receive account data that is timely, precise, and easy to access and interested in 35

initiating online transactions. Investment solutions help to minimise excess balances and maximise return on available funds. It is gratifying to note that a number of banks in India are offering wideranging cash management services to their corporate clients. All the three categories of banks viz., nationalized banks, private banks, and foreign banks operating in India are active in the cash management segment. SBI, PNB, ICICI Bank, GTB, HDFC Bank, Centurion Bank and Vysya Bank, are some of the active Indian banks in this segment. Citi Bank, Standard Chartered Bank, ABN Amro Bank, BNP, ANZ Grindlays and HSBC are the foreign banks operating in India, which are prominent among the cash management services providers. Currently, the turnover of cash management services in Indian market is estimated over Rs.25,000 crore per month. State Bank of India alone is estimated to handle over Rs.12, 000 crore per month through its product called SBI-FAST. The Reserve Bank of India has been taking a number of initiatives, which will facilitate the active involvement of commercial banks in the sophisticated cash management segment. One of the pre-requisites to ensure faster and reliable mobility of funds in a country is to have an efficient payment system. Considering the importance of a robust payment system to the economy, the RBI has taken numerous measures since mid Eighties to strengthen the payments mechanism in the country. Introduction of computerized settlement of clearing transactions, use of Magnetic Ink Character Recognition (MICR) technology, provision of inter-city clearing facilities and high value clearing facilities, Electronic Clearing Service Scheme (ECSS), Electronic Funds Transfer (EFT) scheme, Delivery vs. Payment (DvP) for Government securities transactions, setting up of INdian FInancial NETwork (INFINET) are some of the significant initiatives which highlight the seriousness with which the Reserve Bank has taken up the reforms in Payment systems. Introduction of a Centralized Funds Management System (CFMS), Securities Services System (SSS), Real Time Gross Settlement System (RTGS) and Structured Financial Messaging System (SFMS) are the top priority items on the agenda to transform the existing systems into a state-of-the-art payment infrastructure in India by the Reserve Bank. Internet and Corporate Banking Strategy: As a result of the advent of the Internet, banks and other Financial Institutions are rethinking their corporate banking strategy. The Internet opens a new channel for delivering services to corporate clients and helps these institutions remove cumbersome and expensive paper processes. It is significantly cheaper and much more flexible. With the Internet, large multinational companies that always used EDI can save more money by eliminating the old systems expensive private networks and expand reach to 36

include more businesses on the supply chain. Small-to-medium size companies, too, can conduct business-to-business transactions. The Internet simply provides a two-way electronic linkage that never existed before. So, banks can now offer a trusted solution to their corporate customers via the low-cost delivery channel i.e., the Internet. And corporations will enjoy the ability to manage cash held by their strategic banking partners in real time via a secure, efficient, Web-enabled communication system. The expected shift in volume from paper-based transactions to electronic ones would determine the path of future technology investments in banks and orient it towards electronic payment delivery systems. This shift is also driven by banks perception that electronic transactions contribute higher margins than paper-based transactions. How a Corporate selects a bank for sourcing Cash Management Services? It is normally the client-bank relationship, which is a main consideration in choosing a bank for cash management. Pricing, obviously, is a very dominant factor. Making a choice between the local banks and the more highly priced foreign banks usually depends on how cost savings are presented by the banks. Multinational corporate with complex treasury operations admire their respective banks expertise and ability to offer creative solutions. There are some common requirements related to basic cash management systems. Flexibility, reliability, security and stability have been cited as vital parameters for any electronic banking system. The systems should be tailored to provide pertinent reports and the ability to upgrade easily in future. The technology should allow real-time cash management with strategic banking partners. It should integrate easily with legal framework in place. It should lower operating costs and resolve disputes quickly by providing secure and legally enforceable audit trails. It should be capable of reducing risk of fraud in electronic funds transfers and other treasury activities. It should also be able to use a low-cost public network infrastructure like Internet, which eliminates the need for dedicated leased lines. Challenges to Companies in Availing Management Services from Banks Technology-oriented Cash

Corporate do face some challenges in putting in place new cash management structures. Analysts believe that companies will increasingly demand online real-time cash-management services. The commercial need for Internet delivery of cash management will be driven by the increasing number of businesses using the Internet and other networks. 37

 Electronic Communication with a Bank The first challenge facing a treasury is how to communicate electronically with a bank, although this is often dictated by cost limitations, security concerns and the infrastructure peculiarities of different countries. It is likely that the company itself may be lacking the necessary expertise to choose an appropriate form of communication where the company needs bankers advice. Economic Considerations Costs associated with the new services do pose a challenge to small and medium companies. A host-to-host connection is a sophisticated, direct, twoway link between the banks and the customers computers, which is expensive to set-up and maintain. However, it is highly automated and allows the corporate to use more of the banks services. Small companies, unfortunately, may not be able to afford host-to-host connection. Concerns associated with high costs may be effectively addressed once the Internets security apprehensions have been resolved. Limitations of the Services All said and done, the Internet as it operates today has its limitations as a medium for banking and finance. For this reason, the conventional means of delivering electronic banking services will be maintained in parallel with online systems at least in the medium term. We all agree that the technology is only as good as its underlying services. There is no such thing as one-sizefits-all when it comes to electronic banking products. No one product can provide an absolute solution to all the customers. An electronic banking product is a means of delivering banking services to the customer and is only as good as all the operations and processes that underpin those services. Provision of CMS by Banks - Challenges and Issues The conventional formal line between treasury and control and between cash and accounting strategies is fading. Now, bankers and controllers are working together closely in seeking solutions in the complex cash management function. In todays world, the key differentiator between a successful bank and other bank is the stress each lays on technology. As such, let me turn your attention to the numerous challenges bankers need to address squarely, while gearing up to provide cash management services in a technology dominated environment. Provision of Customised Services One important ingredient of a treasury system is customisation. Banks ability to customise a treasury system is critical. The user interface is very personal and users want to be comfortable with the look and feel of the system. Deployment, configuration and database options need to be flexible. 38

New system should be capable of easily getting synchronised with enterprise resource planning (ERP) and other corporate systems. Need to Comprehend the Clients Line of Activity Bankers need to really understand the accounting and control side of its client business. The bankers should see themselves as strategic partners in companys growth and need to spend a lot of time learning about the concerned industry. They have to use that knowledge to propose solutions that never would have occurred to the client. Banks cant go out and propose good ways to re-engineer a companys business processes until they have developed a really sophisticated understanding of the cash and accounting practices. Bankers, no doubt, are sharp but the technology and services are getting so complex that an officer often will need to call in a specialist from a key area. Provision of Other Advisory Services to Clients Companies would like to see banks solve certain other related problems. For instance, a company may like someone to tell it exactly what is wrong with their MIS department. Changing systems is a major initiative with far-reaching implications to the companies so banker cannot afford to make a mistake. As the technology changes almost monthly, companies do expect bankers to tell them what to do and where to spend their money. Bankers cannot build a standard solution always, because the customers do not pose standard problems. Bankers have to customise the solution that will resemble what the customer is wishing for.

Shift to Web-enabled Services Web-enablement may be fashionable, but what treasurers really want is the functionality in products that help them perform optimally. After all, the web is only a delivery channel. Most corporate electronic banking systems currently used are based on old technology architecture. Banks, now, have to gradually turn to open systems architecture, wherein a Web-server accesses the banks back-end systems with adequate security features in place. Concerns About Security and Risk Management Corporate treasury information is quite sensitive. Corporations lose large amounts due to internal and external fraud. Security and trust are critical issues when it comes to electronic transmission and retrieval of important and sensitive information such as corporate treasury data. Commercial cash management is one of the most risky forms of Internet banking, therefore, it requires strong security and trust elements. These trust elements may include 39

the authentication and authorization, preventing others from eavesdropping on confidential communications, ensuring that the information is not altered in transit and providing integrity and authentication that is legal-grade, so it can stand in a court of law. So, corporate clients do have questions about the security of information and transactions. Companies want to know what the likely security implications are. Banks are handling corporate funds and their vital information. Bankers priority must be to build systems that reduce the risk of fraud, the risk of error, the risk of systems failure to very low levels, provide a secure environment for the processing of transactions and sharing of information. As a matter of fact, when the value delivered is very high and the risk is very low, you have a viable and secure system. Operational Reliability Security is important, but there is also the whole issue of operational reliability. One of the biggest challenges in this context is taking a flexible tool like the Internet and making it a reliable business system so things that are sent arrive not only secure but on time. Internet, probably, is still a long way from being a reliable way to deliver time-critical transactions and reports. However, natural evolution really dictates moving to the Net. How to be sure that the back-up server is working? How to be confident that the system would not choke due to heavy message traffic? Those are legitimate questions, but there have to be answers, even if we cant see them all today. The good news is that the technology exists, and we use it every day.

Electronic Mode of Payment: Electronic payment is the term used for any kind of payment processed without using cash or paper cheques. Forms of electronic payment include use ACH or Automated Clearing House, e-checks, direct debit, debit cards, and credit cards. The most contemporary and popular electronic modes are: Electronic Clearing Service (ECS) Electronic Funds Transfer (EFT) Real Time Gross Settlement (RTGS) National Electronic Funds Transfer (NEFT) National Electronic Clearing Service (NECS)

1. Benefits of using Electronic Mode of Payment

40

When a cheque is issued in electronic form instead of its normal physical form by use of digital signature, it is called electronic cheque. It contains exact mirror image of the paper cheque and is generated, written and signed in a secured system by ensuring the safety. Some of using electronic mode of payment are Convenience and effortless receipt Reduce the usage of currency and paper based payment instruments Avoiding loss of instruments and fraudulent encashment Increase the efficiency with safety and security arrangements Facilitate faster movement of funds in the economy 2. Electronic Clearing Service (ECS) It is a mode of electronic funds transfer from one bank account to another bank account using the services of a Clearing House. This is normally for bulk transfers from one account to many accounts or vice versa. This can be used both for making payments like distribution of dividend, interest, salary, pension, etc. by institutions or for collection of amounts for purposes such as payments to utility companies like telephone, electricity, or charges such as house tax, water tax, etc or for loan installments of financial institutions/banks or regular investments of persons. There are two types of ECS called ECS (Credit) and ECS (Debit) 1. ECS (Credit) is used for affording credit to a large number of beneficiaries by raising a single debit to an account, such as dividend, interest or salary payment. 2. ECS (Debit) is used for raising debits to a number of accounts of consumers/ account holders for crediting a particular institution.

3. Electronic Fund Transfer (EFT) RBI EFT is a Scheme introduced by Reserve Bank of India (RBI) to help banks offering their customers money transfer service from account to account of any bank branch to any other bank branch in places where EFT services are offered. RBI EFT system is an inter-bank oriented system. RBI acts as an intermediary between the remitting bank and the receiving bank and effects inter-bank funds transfer. The customers of banks can request their respective branches to remit funds to the designated customers irrespective of bank affiliation of the beneficiary. 4. Real Time Gross Settlement (RTGS) 41

The payment system in the country largely follows the deferred net settlement regime, under which the net amount is settled between the banks, on a deferred basis. Such a dispensation entails an element of settlement risk. Hence, as a step towards risk mitigation in the large value payment systems, the RTGS was operationalised by the RBI in March 2004, which enables settlement of transactions in real time, on a gross basis. Almost all the interbank transactions in the country and many time-critical customer transactions are now settled through this system. RTGS is fully secured electronic funds transfer system where banks and customers can receive payments on real time basis. The outreach of RTGS transactions has also grown geographically. Out of about 75,000 bank branches in the country, more than 48,300 bank branches now accept requests for remittance through RTGS system for customer transactions as well as inter-bank transactions. A minimum threshold of rupees one lakh has been prescribed for customer transactions to ensure that RTGS system is used only for large value transactions and retail transactions take an alternate channel of electronic funds transfer. The daily average of transactions is over 34,000 by volume and over Rs.2 lakh crore by value. The RBI also provides collateralised Intra-Day-Liquidity (IDL) support to the member banks for the RTGS operations. With the progressive expansion of the RTGS volume, a view needs to be taken on the continued need and relevance of the high-value clearing system since the two systems have a functional overlap on account of the same value threshold and the target clientele. RTGS system is a funds transfer mechanism where transfer of money takes place from one bank to another on a real time and on gross basis. This is the fastest possible money transfer system through the banking channel. Settlement in real time means payment transaction is not subjected to any waiting period. The transactions are settled as soon as they are processed. Gross settlement means the transaction is settled on one to one basis without bunching with any other transaction. Considering that money transfer takes place in the books of the Reserve Bank of India, the payment is taken as final and irrevocable. 5. National Electronic Funds Transfer (NEFT) Yet another product innovation by the RBI was the National Electronic Funds Transfer System, which was introduced in November 2005 as a more secure, nation-wide retail electronic payment system to facilitate funds transfer by the bank customers, between the networked bank branches in the country. It is a deferred net settlement system and is an improvement over other modes in terms of security and processing efficiency. It provides six settlement cycles a day and enables funds transfer to the beneficiaries account on T+0 basis. This facility is currently available at over 46,300 bank branches throughout the country. The daily average of the transactions is over 80,000 by volume and 42

over Rs.500 crore by value. It is envisaged that all the RTGS-enabled bank branches would also be NEFT-enabled and the customer would have a choice between the RTGS or the NEFT systems, based on time criticality, value of the transaction and willingness of the customer to pay different charges for the two systems. With the introduction of NEFT, the Electronic Funds Transfer system, introduced in 1994 for retail funds transfer, is now available only for Government payments. NEFT infrastructure, the system of one-way remittance from India to Nepal has been implemented by the RBI since 15th May 2008. The objects of the NEFT System are: 1. to establish an Electronic Funds Transfer System to facilitate an efficient, secure, economical, reliable and expeditious system of funds transfer and clearing in the banking sector throughout India, and 2. to relieve the stress on the existing paper based funds transfer and clearing system 6. National Electronic Clearing Scheme (NECS) The Scheme is called as National Electronic Clearing Service and is referred to as NECS herein after. NECS has two variants NECS (Credit) and NECS (Debit). It started in India from 29th September 2008. The National ECS is a product being developed by the RBI to enable centralised processing of the ECS transactions, in contrast to the existing ECS system that has decentralised operations at 70 locations, spread all over the country. Under the National ECS, the processing of all the ECS transactions would be centralised at the National Clearing Cell at Nariman Point, Mumbai and sponsor banks would need to only upload the relative files to a web server, with online data validation facility. Destination banks would receive their inward clearing data / file at a central location, through the web server. The National ECS would leverage the Core Banking platform of the commercial banks, to enable around 50,000 core-banking-enabled branches of the various banks, to avail of this service. The system would facilitate end-to-end seamless posting of the NECS transactions in a straight-through-processing (STP) environment. This would help the users and member banks to send, receive and process the data files at one centralised place, thereby improving the efficiency of the payment system. The objective of the system is to facilitate centralised processing for repetitive and bulk payment instructions. Sponsor banks shall submit NECS data at a single centre viz. at Mumbai. While NECS (Credit) facilitates multiple credits to beneficiary accounts at destination branch against a single debit of the account of a User with the sponsor bank, the NECS (Debit) shall facilitate multiple debits to destination account holders against single credit to user account. 43

The system would leverage on Core-Banking solution of member banks for centralised posting of inward NECS transactions. NECS services for either bulk payment or bulk collection Sponsor Bank means the bank which shall act as the agent of the User to upload the NECS data on to the web-server of the designated agency/Clearing House (CH). The sponsor bank shall also submit a mandate to operate its account to Reserve Bank of India (to be referred to as RBI herein after)/ Clearing House designated by RBI. CH shall refer to the local Bankers Clearing House or such other agencies which shall process the NECS data received from the Sponsor Bank and generate relevant clearing reports for settlement of accounts of banks at RBI. Destination Bank Branches would refer to the bank branches where the Destination Account Holders maintain their bank accounts. Destination Account Holder shall refer to the beneficiaries or consumers holding accounts with destination bank branches, which shall be credited in the case of transactions pertaining to NECS (Credit) or debited relating to transactions received through NECS (Debit) schemes. Destination sort code means the MICR code of the destination branch wherein the concerned customer maintains his account. 7. Cheque Truncation Truncation is the process of stopping the flow of the physical cheque issued by a drawer to the drawee branch. The physical instrument will be truncated at some point en-route to the drawee branch and an electronic image of the cheque would be sent to the drawee branch along with the relevant information like the MICR fields, date of presentation, presenting banks etc. Thus with the implementation of cheque truncation, the need to move the physical instruments across branches would not be required, except in exceptional circumstances. This would effectively reduce the time required for payment of cheques, the associated cost of transit and delay in processing, etc., thus speeding up the process of collection or realization of the cheques. Cheque Truncation speeds up collection of cheques and therefore enhances customer service, reduces the scope for clearing related frauds, minimizes cost of collection of cheques, reduces reconciliation problems, eliminates logistics problems etc. With the other major product offering in the form of RTGS, the Reserve Bank created the capability to enable inter-bank payments online real time and facilitate corporate customer payments. The other product, National Electronic Funds Transfer, is an electronic credit transfer system. However, to wish away cheques is simply not possible and that is the reason why the Bank decided to focus on improving the efficiency of the Cheque Clearing Cycle. Cheque Truncation is the alternative. Moreover 44

contrary to perceptions, Cheque Truncation is a more secure system than the current exchange of physical documents in which the cheque moves from one point to another, thus, not only creating delays but inconvenience to the customer in case the instrument is lost in transit or manipulated during the clearing cycle. In addition to operational efficiency, Cheque Truncation has several benefits to the banks and customers which includes introduction of new products, reengineering the total receipts and payments mechanism of the customers, human resource rationalization, cost effectiveness etc., Cheque Truncation thus is an important efficiency enhancement initiative in the Payments Systems area, undertaken by RBI. 8. Image based Cheque Clearing A system that prevailed for over a century is finally set to change. Lakhs of cheques are transported every day from various financial institutions to reach the branches where the concerned accounts are maintained (upon which the cheques are drawn). The massive number of cheque-based transactions makes manual sorting a Herculean task. For instance, in Mumbai alone over eight lakh cheques come for inter-city clearance on a daily basis. This problem is compounded by Indias vast geography, cheques have to travel thousands of kilometers and they get routed through two or three processing centers on their way. The result is that clearing an outstation cheque can take up to 1520 days. Banks are latching on to a technology called Image-based clearing that lets banks clear inter-city cheques in two days flat. In an image-based cheque clearing system, the cheques image is captured using a scanner at the payee branch. This image is transmitted electronically to the payer branch or service branch where the system continuously receives and processes cheque information. The paying institution returns an image of the cheque to the presenting bank. The upshot of all this is that a physical cheque doesnt have to travel (within a bank, between different branches or between banks and the clearinghouse) for it to be cleared, the electronic image of the cheque is used instead and it is transmitted in a split second. This may seem to be a simple concept, but it has the potential to eliminate delays arising out of paper-based processing and transportation of physical cheques. The system reduces the time span for clearing cheques and it helps banks and the clearinghouse deploy their services in a more effective manner. 9. Mobile Banking With the rapid growth in the number of mobile phone subscribers in India, the banks have been exploring the feasibility of using mobile phones as an alternative channel of delivery of banking services. A few banks have also started offering, through the mobile phone, information-based services like balance enquiry, stop-payment instruction of cheques, record of last five 45

transactions, etc. Considering that the use of this technology for the banking services is relatively new and calls for appropriate safeguards to ensure security of financial transactions, the Reserve Bank has formulated the Draft Operating Guidelines for Mobile Payments in India', through a consultative process and placed them on the RBIs website in June 2008 for public comments. It is expected that the guidelines when operationalised, would help strengthen the operating environment for mobile banking in the country. 10. Satellite Banking The availability of reliable communication network is an important prerequisite for facilitating electronic modes of payment. However, the non-availability of the terrestrial communication link in many parts of the country, particularly the hinterland and hilly areas, poses a major constraint in securing greater penetration of electronic payment services in such areas. For such difficult terrain, which is not connected by terrestrial links, the satellite connectivity is considered to be the appropriate mode of connecting the branches in these areas, as also as a fallback system. In this background, a paper was prepared by a member of the Board for Payment and Settlement Systems of the Reserve Bank on the use of satellite communication technology to facilitate penetration of payment services to the rural areas which are denied these facilities due to non- availability of reliable communication links. A Technical Group constituted by the Reserve Bank has since examined the proposal and recommended the use of satellite connectivity as it would facilitate integration of the rural branches with the core banking solution platform of the banks and help them providing efficient funds-transfer facility to their customers. However, reckoning the cost implications involved in creating satellite connectivity for the bank branches, the Reserve Bank is considering provision of financial incentive to the banks for adopting this technology. Under the proposal, the RBI would be bearing a part of the leased rentals for the satellite connectivity, provided the banks use it for connecting their branches in the North Eastern States and in the under-banked districts in the rest of the country. A discussion paper on this scheme was placed on RBI website in June 2008 for public comments. The satellite communication link is the most disaster-proof, since the satellite, up in the sky, continues to function even in the face of major natural disasters on earth, such as floods or earthquakes. It is, therefore, ideally suited for use as a back-up communication link for the major centres in the country, where a disaster can otherwise disrupt the terrestrial connection.

46

FINDINGS
CURRENT INNOVATIONS IN CMS ENVIRONMENT OF INDIA Direct Debit facility offered by Banks The Direct Debit facility is currently being offered by Citibank to corporate through their correspondent banking network for capturing domestic inflows electronically. As a part of this solution, the company obtains a debit mandate from their dealers, which is sent for validation by their CMS Bank (e.g. Godrej & Citibank). On receipt of confirmation from the Drawee bank, the customer dials up a transaction through bank (e.g. Citibank & Godrej) for pulling funds 47

from the specified accounts. This is a more efficient and hassle free mechanism to pull funds, compared to the traditional collections mechanism of collecting funds though cheques & drafts. A brief process on the direct debit arrangement is as given below: Company (e.g. Godrej & Boyce) will send the debit instructions, in a prescribed format to its CMS tie-up bank (e.g. Citibank) through zipped files with password as well along with a summary file enlisting bank level details of records furnished for presentation on a given day Godrej & Boyce will ensure that instructions provided in the transaction file are only those pertaining to designated branches of the partner banks with which Citibank has bilateral tie up. Further, Godrej & Boyce also need to ensure that the instructions tie-in/agree with the valid mandates and exclude items where there is no valid mandate on record Godrej & Boyce needs to ensure that the instructions are sent to Citibank not later than 9:00 am one day prior to the desired settlement date Citibank would provide an update to company (Godrej & Boyce) on the status of all debit instructions (obtained from company by 9:00 am) by 11:00 am on the settlement date in a designed format. MIS will be sent through e-mail to the specified ids of company Company needs to ensure exclusion of records from the instructions file in the event of withdrawal instructions received from any dealer Citibank would provide company a monthly MIS of all debits initiated in a mutually agreed format

In short the Direct Debit process is Company Sends a file to bank for the Direct Debits within agreed cutoffs

Bank sends email alerts to the paying account parties covered under direct Day 0 debits

Bank generates and transfers debit files for each of the partner banks 48

Company Sends a file to bank for the Direct Debits within agreed cutoffs Day 1 Bank will email across statements/ MIS in desired formats for the days collections In case of discontinuance of dealerships, company would provide the list of mandates which needs to be cancelled to Citibank in a designated format to an identified e-mail ID On the receipt of this file, Citibank would promptly instruct the partner banks to initiate closure in their books Company to ensure that no further debit instruction for cancelled records in initiated post Closure/Cancellation Key advantages and features Direct Debit solution enables you to electronically pull money/funds from drawer accounts held with select drawee banks. Key issues faced in traditional channel of check collections process: Drawee bank issues (Collusion, late returns etc.) Restricted number of clearing locations High turnaround time between pick up and clearing timeliness and on cases High per check cost on account of increased collection points and transit time Following features of direct debit offset the limitations of traditional collection modes: Electronic solution with no requirement of cheque or any other paper based instrument for settlement of dues High location coverage due to increased adaptation of core banking systems(CBS) by local public and private sector banks Reduced clearing cycle across locations against uncertain timeliness at non-MICR locations No late returns

Speed Clearing Mechanism offered by RBI

49

Speed clearing refers to collection of outstation cheques through the local clearing. It facilitates collection of cheques drawn on outstation core-bankingenabled branches of banks, if they have a net-worked branch locally. As of now, outstation cheques are paid through two channels viz. On collection basis or through National Clearing (inter-city clearing). This requires movement of cheques from the presentation centre (city where the cheque is presented) to Drawee centre (city where the cheque is payable) which elongates the realization time for cheques. Speed Clearing aims to reduce the time taken for realization of outstation cheques. A person who has an outstation cheque with him deposits it with his banks branch. It is called presenting bank. This cheque is sent for collection to the city where it is payable/drawn called Destination centre or Drawee centre. The branch providing the collection service at the destination centre is called collection branch. On receipt of the cheque, the collecting branch presents it in local clearing to the Drawee branch or the Destination branch. Once the cheque is paid, the collection branch remits the proceeds to the presenting branch. On receipt of realization advice of the cheque from the collection branch, the customers account is credited. This, in short, is the process of collection. When a cheque is taken on collection basis by a bank, it credits the customers account after realization. Alternatively, in the absence of a collection arrangement at the destination centre, the presenting branch will send the cheque directly to the Destination branch payment. Generally, it takes around a week to three weeks time to get outstation cheques realized through collection basis. In case of National Clearing, it takes around a weeks time. National Clearing is an arrangement under which the Clearing Houses managed by RBI provide inter-city cheque collection service to member banks of those Clearing Houses. National Clearing is available at fifteen cities viz. Ahmedabad, Bangalore, Bhopal, Bhubaneshwar, Chennai, Guwhati, Hyderabad, Jaipur, Kanpur, Kolkatta, Mumbai, Nagpur, New Delhi, Patna and Thiruvananthapuram. We have already seen how local cheque clearing process works. Now we will see how the speed clearing work does. Banks have networked their branches by implementing Core Banking Solutions (CBS). In CBS environment, cheques can be paid at any location obviating the need for their physical movement to the Drawee branch. The concept Speed Clearing combines the advantages of MICR clearing with CBS. Cheques drawn on outstation CBS branches of a Drawee Bank can be processed in the Local Clearing under the Speed Clearing arrangement if the Drawee bank has a branch presence at the local centre. 50

As on date, the local cheques are processed on T+1 working day basis and customers get the benefit of withdrawal of funds on a T+1 or 2 bases. If we compare National clearing and speed clearing then we will find that in case of national clearing the cheque is realized in around a weeks time. Under the Speed clearing, it would be realized T+1 or 2 basis viz. Within 48 hours. National clearing is restricted to cheques drawn on the specified locations. Speed clearing has no geographical limitation. Cheques drawn on any location may be cleared as the branch is in CBS. National Clearing necessities movement of the cheques to the Drawee Centre. Speed clearing facilitates the clearing of such cheques locally without the need to move the cheques to the Drawee centre. Presenting branches are currently permitted to levy charges at a rate exceeding Rs. 150 per cheque (inclusive of all charges other than Service Tax) for cheques of above Rs. 1 Lakh presented through speed clearing. Speed clearing is currently available in 65 MICR centres given below in the table. (As on 2nd July 09)

No.
1 2 3 4 5 6 7 8 9 10 11

Name of MICR Centre

AHMEDABAD RAJKOT SURAT VADODARA BHAVNAGAR JAMNAGAR MANGALORE MYSORE BANGALORE HUBLI BELGAUM

State/Union Territory
GUJARAT GUJARAT GUJARAT GUJARAT GUJARAT GUJARAT KARNATAKA KARNATAKA KARNATAKA KARNATAKA KARNATAKA

RBI Jurisdiction
AHMEDABAD AHMEDABAD AHMEDABAD AHMEDABAD AHMEDABAD AHMEDABAD BANGALORE BANGALORE BANGALORE BANGALORE BANGALORE

51

12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55

RAIPUR JABALPUR GWALIOR INDORE BHOPAL BHUBANESWAR CUTTACK AMRITSAR JALANDHAR LUDHIANA CHANDIGARH CHENNAI PONDICHERRY TIRUCHIRAPALLI MADURAI TIRUNELVELI SALEM COIMBATORE TIRUPUR ERODE GUWAHATI HYDERABAD VIJAYAWADA VISAKHAPATNAM JAIPUR UDAIPUR BHILWARA JODHPUR KOTA JAMMU AGRA ALLAHABAD GORAKHPUR KANPUR LUCKNOW VARANASI DEHRADUN KOLKATA CPC PANAJI MUMBAI PUNE NASIK SOLAPUR KOLHAPUR

CHHATISGARH MADHYA PRADESH MADHYA PRADESH MADHYA PRADESH MADHYA PRADESH ORISSA ORISSA PUNJAB PUNJAB PUNJAB CHANDIGARH TAMILNADU PONDICHERRY TAMILNADU TAMILNADU TAMILNADU TAMILNADU TAMILNADU TAMILNADU TAMILNADU ASSAM ANDHRA PRADESH ANDHRA PRADESH ANDHRA PRADESH RAJASTHAN RAJASTHAN RAJASTHAN RAJASTHAN RAJASTHAN JAMMU & KASHMIR UTTAR PRADESH UTTAR PRADESH UTTAR PRADESH UTTAR PRADESH UTTAR PRADESH UTTAR PRADESH UTTARAKHAND WEST BENGAL GOA MAHARASHTRA MAHARASHTRA MAHARASHTRA MAHARASHTRA MAHARASHTRA

BHOPAL BHOPAL BHOPAL BHOPAL BHOPAL BHUBANESWAR BHUBANESWAR CHANDIGARH CHANDIGARH CHANDIGARH CHANDIGARH CHENNAI CHENNAI CHENNAI CHENNAI CHENNAI CHENNAI CHENNAI CHENNAI CHENNAI GUWAHATI HYDERABAD HYDERABAD HYDERABAD JAIPUR JAIPUR JAIPUR JAIPUR JAIPUR JAMMU KANPUR KANPUR KANPUR KANPUR KANPUR KANPUR KANPUR KOLKATA MUMBAI & GOA MUMBAI & GOA MUMBAI & GOA MUMBAI & GOA MUMBAI & GOA MUMBAI & GOA

52

56 57 58 59 60 61 62 63 64 65

AURANAGABAD NAGPUR NEW DELHI PATNA JAMSHEDPUR RANCHI KOZHIKODE TRICHUR ERNAKULAM TRIVANDRUM

MAHARASHTRA MAHARASHTRA DELHI BIHAR JHARKHAND JHARKHAND KERALA KERALA KERALA KERALA

NAGPUR NAGPUR NEW DELHI PATNA PATNA PATNA THIRUVANANTHAPURAM THIRUVANANTHAPURAM THIRUVANANTHAPURAM THIRUVANANTHAPURAM

Future of CMS in Indian Context: Core banking systems are making payments and cash management easier than ever. Cash management has grown rapidly in India over the past decade, and Indian banks are among the leading service providers in the region in terms of the variety and flexibility of cash management offering by banks. For most of the foreign banks operating in Asia Pacific, the transaction volumes in India are much higher compared to the rest of the countries in the region. In addition, India is the first choice of concept validation for implementation of new cash management solutions by foreign banks, due to the scope and the variety of business requirements emanating from the country. However, despite the many options in cash management services being offered by banks, the business of cash management in India is still very much a challenge. The issues faced include The large number of clearing locations in India, unreliable network connectivity and access to information, there are about 10,000 clearing locations in India, which are segregated into three categories of networks: 1. Reserve Bank of India (RBI) operated clearing centres: about 20 in number (about 0.2 percent) 2. State Bank of India (SBI) and associates operated clearing centres; about 1,000 in number (about 10 percent) 3. Direct clearing and through correspondent banks about 9,000 in number (about 90 percent) There has been much progress made in India, but there is still much more ground to cover. The cash management market in India is at an important threshold, juxtaposing both traditional paper-based mechanisms as well as new electronic means. However, substantial co-operation is needed at an industry level to set standards and processes for transacting information electronically. This is important to make the electronic payments medium the preferred choice for the bulk of small and medium enterprise segments. Significant investment and effort will also be required by large agencies such 53

as the DoT to improve connectivity and network bandwidth, as well as from industry leaders like SBI to transform and revolutionize the paper clearing processes. The prospect of moving to substantially more electronic cash management services is clearly possible and imminent. This will herald a new era of significantly more cost-effective and streamlined cash management services well integrated with the operational workflows of corporate. Corporate are increasingly demanding more efficient and cost-effective services from their banks and banks are responding to these demands more and more comprehensively, which testifies of the considerable importance of cash management revenues to them. Cash management services in India are expected to undergo major changes in the future. With various initiatives currently in the development phase, corporate customers in India can look forward to further improvements in the clearing and payment systems in years to come. With the RBI, introducing Real Time Gross Settlement (RTGS), an online environment with integration of the various payments and settlement systems, in the year 2003, cash management services in India will undergo a transformation. RTGS would help improve liquidity management and receivables management for corporate. Electronic clearing mechanisms would become increasingly prevalent, improving efficiency of payments. Commercial banks at present have more than 67000 branches throughout India. Taking the figure of Indias population as 1 billion and the number of branches to be 67000, there exists a ration of 1 branch per 1493 persons. Foreign banks have lesser number of branches than public sector banks. These branches are usually situated in metropolitan cities. Their penetration is more in urban areas unlike public sector banks that have penetrated the rural and semi-rural markets extensively. There are currently about 101 commercial banks in India, which include public sector banks, regional rural banks and private sector banks both domestic and foreign. Public sector banks account for only 27, while private sector includes 32 (24 old, 8 new) domestic banks and 42 foreign banks. Private Banks like HDFC bank, ICICI bank and foreign banks like Citibank, Standard Chartered bank, Deutsche bank, Bank of America, ABN Amro, J P Morgan Chase, BNP Paribas are less number compared to nationalised banks and they are 100% networked across the country. They are issuing at par cheques which can be cleared locally. Then there will be no scope for cash management services. But the presence of these bank locations is not wide in India. These banks are presently only at urban and semi-urban locations. Till all the remote locations get on network CMS have future. 54

Now more and more PSU (Public Sector Undertaking) Banks are migrating to core banking platform, e.g. Corporate Bank, Union Bank of India, State Bank of India, etc. As an outcome of which though the cheques are drawn on remote locations they can be cleared as a local cheque. E.g. Corporate Bank and Union Bank of India issues cheque where it is written payable at par at all branches in India and carry a transaction code 29 on MICR band which indicates payable at par instrument. But this facility is limited to only MICR locations e.g. State bank of India have branches located at remote towns like Sahibganj, Godda, Dumka, Pakur Bazar etc. in Uttar Pradesh, Bihar. SBI is offering core banking. So the cheque if deposited in any SBI bank branch but as they are non-MICR locations, the advantage of core banking is lost, if it is deposited in a bank other than SBI, because it is treated as an upcountry cheque. This could be overcome when India graduates to all clearing locations having MICR facility. Hence we can say that cash management services have a future till all the public, private and foreign banks spread across the country including the remote locations have MICR facility and the banks issue payable at par cheques which are treated as local cheques. Then corporate will think cheque is getting cleared locally with no cost and in minimum time frame then why to pay cost for CMS? But it will take some time to bring all remote locations spread over India on the same network. Hence Cash Management Services have future.

Suggestions recommended for the Direct Debit Solutions and Speed Clearing Mechanism for fast clearing of the cheques and decreasing the return cheque numbers: 1. Direct debit solution- (pull principal): Based on bilateral tieup by citi bank with 12 banks, namely Citi, Syndicate, Ing Vysaya, BOI, PNB, BOB, Axis, Kotak Mahindra, Centurion Bank of Punjab, HDFC, Vijaya, Bank of Rajasthan. Here Divisions to decide upon a credit Period. 2. Credits in G&B Banks A/c triggered by dealer ( Push Principal): Based on the credit period decided by the division, the dealer is expected to execute the process of electronically crediting our bank a/c. based on our business model and compulsions this is one of the most difficult and challenging idea required to be executed. 3. Open dedicated current A/c in Mumbai, with 6 banks, viz ; SBI, UBI, ICICI, CBI, Corporation Bank, SBOP, with whom G&B has an 55

existing relationship. Here all upcountry cheques of core banking branches of a bank to be deposited in to the dedicated current account of each respective bank. 4. Capitalize on cash management product introduced by Reserve Bank of India: Speed clearing refers to collection of out station cheques through local clearing at identified locations. This clearing facilitates collection of cheques drawn on out station core banking enabled branches of banks,if they have a net worked branch locally that is participating in local clearing. How does speed clearing work? PSU banks have networked their branches by implementing core banking solutions (CBS). In a CBS environment, cheques can be paid at any location obviating the need for their physical movement to the drawee branch. Cheques drawn on outstation CBS branches of a drawee branch can be processed in the local clearing under the speed clearing arrangement if a drawee has a branch presence at the local center. 5. Continue the existing CMS arrangement with Citi bank: because with the increasing reach and spread of CBS banks and their branches , more and more banks and banking towns would automatically move from traditional CMS arrangement and migrate to speed clearing platform. Secondly, RBI with its vision document on technology and payment solution would make this product more robust and technologically sound.

CONCLUSION & RECOMMENDATION

Cash Management service is perhaps both art and science. One needs to judge it in terms of current market practices and existing milieu of the economy under consideration, as well as in terms of analytical foundations. The goal of cash management service is to convert hard cash within a minimum time and with minimum cost. Cash Management Services require enhancement in efficiency which can be done through A smart and efficient MIS system both by the service provider Bank and Client An Intelligent Analysis and Interpretation of huge MIS information provided by Bank

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Immediate and effective correct action is required on part of corporate for any deficiency in service Information is to be followed upto a logical conclusion Banks and corporate should not be satisfied with the status and should always innovate through out of the box thinking Corporate should be knowledgeable about the CMS environment especially the advantages of Electronic Banking Platform In order to bring in uniform standard of cheques and to facilitate cheque truncation nation-wide, the remaining number of non-MICR cheques can be completely replaced with MICR cheques Another significant area of enhanced efficiency and customer services is the increase in the geographical jurisdictions of the Clearing Houses so that more and more number of bank branches and customers are catered too Increasing the reach of electronic modes of fund transfer at rural areas by providing variations of the various electronic modes of funds transfer, but with a rural bias Increasing the reach of payment services by means of tie-up and collaboration with other large coverage entities such as the Post Offices Customer education and awareness campaign should be periodically and regularly conducted through the media by the banks, bankers association and the Reserve Bank.

This project work can definitely solve the queries of the readers regarding the functioning of the Cash Management Services in India and about Cash Management Products. Through this project an attempt has been made to answer all the possible questions necessary to educate an individual about the Cash Management Products and Services that prevails in the country. This project report shows that the development has taken place in the Indian Financial Sector with respect to the Cash Management Services is remarkable as it is clear indicative of the efforts of the Reserve Bank of India to keep pace with the modern day technology to lead India to become one of the fastest growing economies on the Global Platform.

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REFERENCES/BIBLIOGRAPHY
Ball, Lawerence (2002); Another Look at Long-run Money Demand, NBER Working Paper, No. 9235 Godrej & Boyce website (www.godrej.com), study material, conversation with managers I. M. Pandey(9th Edition), Financial Management, Vikas Publishing House Pvt. Ltd., New Delhi, Pg. No. 640-646 L. A. Soenen, International Cash Management: A study of the particles of UK based companies, The International Executive Volume 28, Issue 3, Pg. No. 12-14 Y. V. Reddy (2001), Autonomy of the Central Bank: Changing Contours in India, RBI Bulletin, November, Pg. No. 1197-1211

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Sarda D.P. (1998), Handbook on Working Capital Finance, Govind Publication, Pg. No. 9-10 http://www.rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=3128 http://www.hdfcbank.com/wholesale/sme/non_funded_services/cash_management_service s/cash_management_services.htm http://rbi.org.in/scripts/FAQView.aspx?Id=59 http://rbi.org.in/scripts/ECSUserView.aspx?Id=20 http://rbi.org.in/scripts/FAQView.aspx?Id=1 http://rbidocs.rbi.org.in/rdocs/Content/PDFs/87706.pdf http://rbidocs.rbi.org.in/rdocs/content/pdfs/67253.pdf http://rbidocs.rbi.org.in/rdocs/RTGS/PDFs/FAQs%20on%20RTGS.pdf http://www.rbi.org.in/Scripts/bs_viewcontent.aspx?Id=1056 http://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=19175 http://www.expresscomputeronline.com/20040531/indiatrends01.shtml

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