Cash Management Developments in Romania
Romania, as with all emerging economies integrating into the global market, has not escaped the knock on effects of the liquidity squeeze. Since the beginning of the year, market liquidity has decreased substantially. The minimum reserve requirement imposed by the National Bank has led to a 1-2% increase in liquidity cost and reduced the liquidity available in the market by 20-40%. Plus, overnight interest moved from 3-5% to 9-11% over the last 12 months.
The local banks have been the hardest hit during the credit crisis, mainly because they were not able to access funds from a parent company abroad to help improve the liquidity situation, i.e. their resources were limited to what funds they themselves controlled. Even the branches of international banks were affected by the liquidity turmoil; as assets were frozen, this affected liquidity costs. Yet the impact was not as devastating as in other parts of the world because the majority of foreign-owned banks in Romania are European, which were not directly hit by the credit crunch and effectively fared better than their US counterparts.
But specifically for Romania, as an emerging European nation, the global market disturbance has further ramifications because it has the potential to impact Romania’s future plans for adoption of the euro. Romania is expected to adopt the euro in 2014, yet there are a number of adoption criteria that must be met before this can happen. One of the hurdles is inflation. As world energy prices continue to rise, inflation also increases, and if Romania cannot curb this then there is a possibility that the 2014 deadline will be postponed. Inflation (expected to be over 6% in 2008) is the biggest macro economic problem, followed by a high current account deficit (10.9% increase in Q108) and increased trade deficit (9.9% increase in Q108), which makes integration with the eurozone more difficult.
On 13 June 2008, the European Commission (EC) advised the government of Romania to pursue “with determination” the consolidation of government finances while remaining on the path of economic reforms. This two-pronged approach addresses the growing imbalances in the economy, while allowing Romania to continue its fast convergence towards the average income levels in the EU. Joaquín Almunia, economic and monetary affairs commissioner, warned: “Romania needs a comprehensive strategy to accelerate structural reforms and fiscal consolidation. Coupled with structural reforms, budgetary consolidation will help address the overheating of the economy and promote a more balanced catching up process with the rest of the EU.”
It is the ‘catching up process’ that is key to Romania’s integration, but it is undermined by rising inflation and other contributing factors. The EC also pointed to signs of overheating in the Romanian economy, with high and rising net external borrowing (from 10.4% of GDP in 2006 to 13.4% of GDP in 2007), rising inflation, strong wage growth against a background of growing labour shortages, and a rapid increase in household borrowing. The EC warned: “For Romania to maintain its rapid convergence process towards the average income level in the EU (its GDP per capita is 40% of the EU average), it will be crucial to address the growing macroeconomic imbalances and to implement wide-ranging structural reforms.”
Although Romania may be facing obstacles in terms of joining the eurozone, it is already well integrated in terms of payment infrastructures. Almost 90% of Romanian trade is with the European Union (EU) member states and 80% of payments are made in euros. Following the lead of the major international banks, Romanian banks have already implemented the single euro payments area (SEPA) standards for euro payments.
The local banking community is in the process of debating whether to adopt SEPA standards for local currency clearing and settlement. Many banks aren’t in favour of this approach because they will have to make IT investments now that will become obsolete when Romania adopts the euro.
The solution to this problem lies somewhere in the middle – there will be some adjustments in the local clearing and settlement systems, which is already close to SEPA standards, in order to comply better, particularly in terms of information that is delivered via the clearing and settlement system. Also, the Payment Services Directive (PSD) will encourage the Romanian banking industry to align itself with the standards in the EU area.
The PSD has also caused some debate between the National Bank and commercial banks because it allows for some national variations. The goal is to harmonise payments systems and practices with other nations in the region – to adopt options that are in line with its processes and processes within the region. It would be in Romania’s best interest to have a common standard in the whole central and eastern European (CEE) region, which is where it does most of its business.
The banks also want a standardised methodology because they need to meet the requirements of their business clients, who are global and regional corporates that organise treasury at the CEE level. These banks want standards in the CEE region in order to have the same approach, product offerings, product standards, clearing and settlement, and standards in terms of validating information, etc. Although it probably won’t be the same in all countries, there still needs to be some alignment within the region.
The concept of the CEE as an entity, rather than separate countries, is a growing trend – regional treasuries organised in the CEE are overseeing operations in many, if not all, the countries. The large corporates are considering Internet solutions to cover as many countries in Europe as possible, as well as increase channels and capacity, while at the same time needing to be able to process a large number of payments. Some corporates are exploring the possibility of have a single point of entry. They want a bank who operates across the whole CEE region, not just country by country.
Romania is aligning with SEPA Direct Debits (SDD), with the project in the midst of implementation, but banks are finding that direct debits are not generating volumes locally. There are only a few transactions, particularly when compared to western countries where utility and telecom companies have become reliant on direct debits.
Large utility providers and international banks are putting pressure on the National Bank to change the direct debit framework in order to reduce cash transactions. There are up to 2,000 inter-banks direct debit transactions from a potential 15 million invoices issued monthly by the utility and telecoms providers. Banks are looking to promote direct debits because they are more cost effective and will encourage a broader take-up of electronic transfers, which, in turn, cuts down the use of cash. The transportation and processing of money is becoming more expensive because of labour, security and fuel costs, which are rising significantly in Romania.
From October, paper-based clearing will be replaced by the new electronic clearing system called PAID. With its new cheque and promissory notes (PN) clearing and settlement system, Romania hopes to begin dematerialising debit instruments and move completely to an electronic format. The country’s economy still relies on cheques and PNs, with around 13% of business-to-business transactions made with these instruments. Cheques and PNs are labour intensive, involving a lot of manual work, plus the clearing and settlement is slower compared to direct debits, which is why Romania is keen to reduce these instruments. It also wants to develop the same trend towards electronic transfers as in the western markets and to align itself with the growing trend across the CEE.
The new system, which has been in development for the past year and a half, will use imaging technology and character recognition to scan in the cheque or PN, so the system will automatically read, gather and process data on those paper instruments.
The local corporate segment is growing and there is now more demand from the large local corporates to process more payments in a way that they want, such as the ability to process large payment volumes. For the very large companies, in particular, that are processing thousands of payments per day, existing tools are not suitable in terms of speed or capacity.
What is interesting is that there is now an e-invoicing project initiated by the local banking community. The banks are joining forces to develop an e-invoicing initiative, with the aim of replacing paper with electronic statements and making it easier for clients to pay online, via the Internet or with direct debit. This is a necessary step for the banking industry because there is a clear trend to remove as much cash from physical circulation as possible to cut costs for banks and their clients. This initiative is still at an early stage and, as of yet, there is no clear deadline set.
The e-invoicing project has to go hand-in-hand with efforts towards automation, the Internet and electronic platforms. The big banks, of course, are moving towards web-based technology and solutions but local or regional banks are still not yet ready to spend money on the technology infrastructure. They will need to think carefully about their strategy, though, because the corporate community is quite clearly demanding this and the banks need to respond.