Clearing and Technology in India
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 offerings 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:
There are about 10,000 clearing locations in India, which are segregated into three categories of networks:
A key issue faced by banks and corporates is managing liquidity across locations. Liquidity requirements, and the cost thereof, can be quite high. However, two recent developments promise to reduce this cost and lower the liquidity risk for banks:
With a centralised core banking and general ledger system it will be possible for SBI to offer services to its customer banks (for the locations where SBI and its associates are responsible for clearing), where instead of banks having to maintain balances in separate accounts with SBI for each of the locations, the same can be tracked centrally. SBI will be in a position to offer sweeping and pooling services with auto-sweeps and sweepbacks, to reduce the cost and risk of liquidity being maintained by individual banks in individual locations.
With the advent of RTGS, it is now also possible for banks to move money between RBI and SBI accounts according to their liquidity requirements in each location.
It is interesting to note how the automation of core banking functions at the largest nationalised bank in India, SBI, is driving change in the cash management industry across the country. SBI is a significant cash management player itself, addressing the needs of some of the largest corporates in India.
Cheque clearing in RBI and SBI locations is well organised, with fixed clearing cut-off times and settlement dates. However clearing in the direct clearing network, covering the remaining 9,000 locations, presents some significant issues to banks. In such un-defined settlement cycles, there is a risk for banks on both revenue recognition and asset classification. The added follow-ups that need to be done in case of lack of response by the clearing bank can also be time consuming, and add further cost to cash management services.
Despite transaction volumes under RBI and SBI locations contributing to almost 90 per cent of the current total volumes, the direct clearing category is very important as:
There is no easy solution in sight just yet, but we’re currently witnessing a gradual automation of large nationalised banks – significantly represented in these locations. More advanced mechanisms such as RTGS would focus initially only on linking key locations, and banks need to internally deploy integrated core banking solutions to link their branch locations together.
To bring efficiency into this wide clearing network, and also provide quality information services to their corporate customers, banks have been using courier or coordinator networks to collect paper-based instruments in locations where the bank does not have branches. These instruments are then deposited as local instruments in the clearing location, through their correspondent or partner banks. The funds collected and related information are then relayed back to the bank’s cash management processing hub for onward relay to the corporate. Frequently this information is sent by fax to the bank’s cash management hub. However, there is an increasing requirement from banks to enable the courier/ coordinator network to capture this information in a web environment and directly upload it into the bank’s cash management system, therefore allowing the information to be processed in a more automated and straight through environment.
While considerable progress has recently been made, there are still certain connectivity challenges that need to be addressed. In India, access to the primary Internet service provider, VSNL’s gateway, is via dial-up connections in the 19 cities where nodes are located, and access speeds are usually sufficient to allow access to Internet with graphical browsers, but sometimes could be as low as 14.4 kbps. The Department of Telecommunications (DoT) extends this network to 20 further cities, but for 4,300 other towns and cities, access to the Internet is through DoT’s I-net service, which is generally limited to 2.4 Kbps connections.
On the one hand, corporates are requesting that their banks capture rich information with all required validation, so this information can be directly uploaded into the relevant systems at both the bank and the corporate. On the other hand, the connectivity available may demand that such information be captured off-line, and then mailed to the bank for further upload into the bank’s systems on a deferred basis.
Considerable technology and process development is taking place, to improve the workflow and efficiency of the coordinator process. Most of this work is being done by banks independently rather than through industry forums, and is seen by the banks as a competitive edge in the business.
Large corporates are increasingly demanding their cash management banks to provide them with end-to-end STP services, as demonstrated in the example below:
One of the largest oil refineries in the country has set up an STP process on their sales and delivery organisation linked closely with the cash management systems at the bank. Each time the dealer of the refinery gives a payment instruction to the bank – including all the details required by the refinery – the dealer account is debited and the refinery account is credited, while the same information is uploaded into the ERP system of the refinery, through a host-to-host XML upload. The ERP system then plans the delivery to the dealer of the goods on an automated basis.
More such requirements are emerging on both the sales and purchase legs of the transaction, and at various transaction life cycle stages. However, achieving such STP requires the following:
Despite a host of available electronic clearing systems in India (RTGS, EFT, ECS etc), over 95 per cent of corporate settlement is still paper-based. One of the key challenges that CFOs of large corporates have to deal with is information reconciliation in an electronic payments cycle.
In the traditional paper-world, payment related information (such as invoice number, subscription number etc) is carried to the beneficiary along with the cheque, which helps the seller reconcile his account. In an electronic payment medium, information to the seller comes from two completely independent sources, from the buyer through a fax or mail advising the seller of the payment, and through the credit in the seller’s bank account statement. Reconciling these two items is a difficult task, and although large corporates are pushing their dealers to transact with them electronically – through a host of customised interfaces and processes – this challenge will need to be addressed at an industry level to move forward in a more comprehensive manner.
From an internet banking perspective, large Indian corporates have begun processing payment file uploads directly into the cash management systems of private and foreign banks, using host-to-host connectivity or an Internet banking front-end. Most of these transactions are for vendor payments and salary payments. For salary transfers, most transactions utilise the internal funds transfer capability of the core banking system of the bank. Most vendor payments still go through the check outsourcing route, where the bank prints cheques for its corporate customers, and then hands them over to the beneficiaries or the clients themselves.
Overall the comfort and security of transacting on the Internet is still an issue with many corporates, and the Internet platform is currently utilised in India mostly for information retrieval and reporting. To obtain added levels of security, some corporates are demanding digital signatures and non-repudiation mechanisms, a trend which is predicted to grow.
From an integration perspective, the larger corporates are beginning to feel comfortable exposing web services on their ERP for bank systems to in turn pass on information to their systems. This means the ERP system obtains feeds from the cash management systems of the banks, to automatically reconcile transactions.
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 the small and medium enterprises segment. Significant investment and effort will also be required by large agencies such as the DoT to improve connectivity and network bandwidth, as well as from industry leaders like SBI to transform and revolutionise 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 corporates. Corporates 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.