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Project Report

Dimple Noronha
Guide: Prof. Kewal Handa

The focus of all corporates today in the highly deregulated and competitive
environment has been to cut costs optimise their operations and with the
realisation that only efficient structures which can cut their transactional costs
can survive in the current scenario. With the technology advent in all spheres it
would only follow that organisations would use it as a platform to cut their
operating cycles and to take advantage of all the available investment
opportunities which may arise. This can be done only with the help of better cash
management, which for long has been a neglected area, by Indian corporates.
The project attempts to understand the tolls offered by institutions today that
make this possible. Both side of the services of collections as well as payments
have sought to be examined with an emphasis on how these products have
developed and offered by banks in India.

“The world sometimes turns upside down and only those with light liquid assets float to
the top again.’ – Anthony H Allen.

Whenever any long-term investment is considered the future cash flows from the
project, the uncertainty of those cash flows, and the opportunity cost of the funds
invested in the project are evaluated. Investment in current assets are also
evaluated by all organisations in the same manner but over a short-term period.
The time value of money plays an important role in the valuation of long term
investments as these investments produce expected cash flows into the future. In
the case of current assets (cash, marketable securities, accounts receivables,
inventory) provide expected cash flows only in the short term, therefore the time
value of money is of lesser importance while evaluating current assets.
Whenever decisions are made for new product development and marketing there
is capital investment. Aside from the outlay for assets to produce the product the
investment requires:

 More cash to handle the increased volume of transactions.

 More inventory (raw materials, work in progress and finished goods)
 More accounts receivable ( because selling more goods on credit means increasing
credit to customers)

Investments made in current assets support the day to day operations of the firm.
Therefore investment in long term projects there has to be investment in current assets in
order to support the day to day operations that will be required by the project. Current
assets are the “Working Capital” put together to work in order to generate benefits
monetary or other wise from the investment made.

How much investment should be made in current assets? This is a difficult question as
this depends on various factors such as:

 The type of business and product

 The length of the operating cycle
 Customs, traditions, ad the industry practices
 The degree of uncertainty of the business

The type of business, whether extractive, retail, manufacturing or service, affects

the way an organisation invests. In some industries, large investments in
machinery and equipment are necessary. In other industries, such as retail firms
less is invested in plant and equipment and other long-term assets and more is
invested in current assets such as inventory and receivables. The firm’s
operating cycle – the time it takes the firm to turn its investment in inventory into
cash – affects how much the firm ties up its assets in current assets. The
operating cycle includes the time it takes to manufacture the goods sell, them,
and collect cash on their sale. The longer the operating cycle, the larger the
investment in current assets.

This can be explained with an international example that differences also arise from
customary business practice. Mac Donald’s does not extend credit to its customers, but
Chrysler, through its, financing subsidiary does. Chrysler’s major competitors, General
Motors and Ford, offer credit to their customers, but Mac Donald’s major competitors,
Wendys and Burger King do not offer credit.

Some generalisations about operating cycles:

 Firms in the retail industry tend to have shorter operating cycles; with firms dealing in
food products having the shortest operating cycles and firms dealing in luxury items
having the longest.
 Firms involved in manufacturing tend to have longer operating cycles than retailers
because of the amount of time necessary to produce goods for sale.
 Firms such as automobile manufacturers, which customarily extend credit to their
customers, tend to have longer operating cycles, but the length of time it takes
customers to pay varies among industries.

A firm’s investment in working capital (its current assets) depends on the length
of its operating cycle. The longer this cycle, the longer it takes to generate cash
from the firm’s investment in goods and services, This longer cycle increases a
firm’s risk and cost associated with its working capital investment.

And how much should a firm have in current assets anyway?

It was long believed that current capital / current assets – bears a direct relation to the
current liabilities. This can be traced to the practice of Scottish bankers in the seventeenth
century, who felt that each obligation must be backed by a like amount of current assets.
Developed from this was the notion in banking that the ratio of current assets to current
liabilities should be 2. During the twentieth century, grantors of credit have relaxed a bit
and no longer require such a definite, direct relationship between current assets and
current liabilities. Because firms can now raise capital in other ways than through bank
loans and because of the changing views about borrowers’ ability to generate cash flow,
the focus has shifted from a shift relation between current assets and current liabilities.
(Source: Arthur Stone Dewing The Financial Policy of Corporations, 5th Edition).

Customs and traditions developed over time also affect how much a firm invests in
current assets. Some industries, such as those selling raw materials, traditionally require
cash on delivery, this tradition developed when there was a small profit margin on these
goods that the seller could not bear the cost of extending credit. What competitors do is
also an influence, if competitors extend credit on generous terms, the firm may have to do
the same.
The greater is the uncertainty regarding the supply and the price of raw material the
larger will be the requirement of current assets. If the price of raw materials fluctuates
widely, a firm that requires these raw materials may have to keep either a large store of
these goods on hand or a sufficient supply of cash (or cash equivalents) ready in order to
take advantage of price fluctuations. If the supply of raw materials may be interrupted
(e.g. By a labour strike), the firm may want to keep a large quantity of raw materials
whose prices are volatile. Further, the greater the uncertainty firms face regarding the sale
of goods and services, the larger is the investment they tend to make in current assets to
ensure that there will be enough in case demand increases. The influence of the nature of
the business can be seen from the illustration I. The current assets have been broken up
into cash, marketable securities, accounts receivable and other current assets. In addition
to the precautionary balances, firms tend to keep cash on hand for unexpected future
opportunities. This is referred to as “Speculative Balance”. This is the amount of cash or
securities that can be easily turned into cash, above what is needed for transactions and
precaution, it enables an organisation to take advantage of investment opportunities on a
short notice and to meet extraordinary demands for cash. In addition to the cash balances
for transaction, precautionary and speculative needs, an organisation may keep cash in an
account in the form of a “Compensating Balance”- a cash balance required by banks in
exchange for banking services. By keeping a balance in an account, which is non-interest
bearing or low interest earning, the firm is effectively compensating the bank for loans
and other services it provides.

There is a cost to holding assets in the form of cash. Since cash does not generate
earnings, the cost of holding cash is referred to as “Holding Cost” which is an
opportunity cost, which is the profit the cash would have earned if it were invested in
another asset. If there is a requirement for cash there must be a sale of goods or services,
sale of an asset or borrowing of cash. There are transaction costs associated with both
selling of assets or borrowing. Transaction cost are the fees, commissions or other costs
associated with selling assets or borrowing, they are analogous to ordering costs for

The next step in the cash management process is how much cash should an organisation

Firms hold some of their assets in cash for several reasons. They need cash to meet
transactions of their day to day operations. Referred to as the transaction balance, the
amount of cash needed for this purpose differs from firm to firm depending upon the
particular flow of cash into and out of the firm. This amount depends upon:

1. The size of the transactions made by the firm

2. The firms operating cycle – which determines its cash outflow and inflow, both
depending upon the firms production process, purchasing process and collection

There is always some degree of uncertainty about future cash requirements, firms
typically hold additional cash called as precautionary balance just in case the transaction
needs exceed the transaction balance. But how much to keep as a precaution depends on
the degree of uncertainty of the transaction or how well the transactions can be predicted.
For transaction purposes, adequate to meet the day to day requirements of operations. To
determine what is adequate for day to day operations, the comparison between the cost of
having too much cash to the cost of getting cash or the transaction cost of getting cash is
compared. The holding cost and the transaction cost is compared. As the cash holding
increases the holding cost increases. With higher balances however the transactional cost
however declines due to economies of scale. This is due to the fact that with larger cash
balances , there are fewer transactions required for cash requirements.

There are two basic models that help in determining what levels of cash minimises the
sum of the cost of making transactions to get the cash and the opportunity cost of holding
more cash than required, they are :

(a) The Baumol Model

(b) The Miller Orr Model

The Baumol Model

The Baumol model is based on the economic order quantity (EOQ) model developed for
inventory management. Applied to the management of cash, the EOQ model determines
the amount of cash that minimises the sum of the holding cost and the transaction cost.
The holding cost includes the cost of administration and the opportunity cost of not
investing cash elsewhere. The transaction cost is the cost of getting more cash either by
selling marketable securities or by borrowing. The economic order quantity is the level of
cash infusion that minimises the total cost associated with cash. Putting the holding cost
and the transaction cost the total cost associated with a cash balance can be denoted as
Total cost = Holding cost + Transaction cost
= K Q/2 + K S/Q
The total costs are minimised at some value of Q. from calculus the EOQ is designated as
Q = /2 (cost per transaction ) (total demand for cash)

\/ Opportunity cost of holding cash

The cash Balancing Act

Holding cost Transaction cost

The EOQ model can be applied to any time frame whether the period is one year, a
month, a week or a day. It is only necessary to make sure that all the elements that
depend on the chosen unit of time the holding cost and the transaction demand are for the
same unit of time. The EOQ model can be modified to suit the circumstances of different
cash situations. For example the model can be modified to include a safety stock – a cash
balance for precautionary purposes. The safety stock is a level of cash that acts as a
cushion in case of a firms needs are suddenly greater than expected.
The Miller-Orr Model
The Baumol model assumes that cash is used uniformly throughout the period. The
Miller-Orr model recognises that cash flows vary throughout the period in an
unpredictable manner. This is illustrated in the illustration below:

Cash Upper Limit

Return Point

Lower Limit

The lower limit is really a safety stock of cash- the cash on hand must never fall below
this level. Experience and judgement is needed to determine the lower level.
Based on
a) How much needs are expected to vary each day
b) The cost of a transaction and
c) The opportunity cost of cash expressed on a daily basis

The model is able to indicate

1) The level of cash immediately after a new cash infusion. This level is referred to as
the return point (not to be confused with the level of safety stock). Levels of cash
below the safety stock cannot be tolerated; levels below the return point are tolerated
– until the hit the safety stock level.
2) The upper level of cash. If the cash balance exceeds this limit we invest in marketable
securities, so that the amount of cash on hand after the investment is the return point
balance. The retrun point and the upper limit are determined by the model as the
levels necessary to minimise costs of cash considering

• Daily swings in cash needs

• The transaction costs
• The opportunity costs of cash
The Miller-Orr model provides us with a few decision rules:
1. The cash balance can be at any level between the upper and the lower limit
2. There is a cash balance (the return point) that we aim for if our cash balance exceeds
the upper limit or falls below the lower limit.
If the cash balance exceeds the upper limit, any cash in excess of the return
point is invested in marketable securities. If the cash balance falls below the
lower limit, any deficiency upto the return point is made by selling marketeble
securities or borrowing.
The return point is a function of:
i. The lower limt
ii. The cost per transaction
iii. The opportunity cost of holding cash (per day0
iv. The variability of daily cash flows, which is measured as a variance of daily cash
Mathamatically this limit is defined as :
Return point = lower limit + 3 /.75(cost per transaction) (variance of daily cash flows)
\/ Opportunity cost per day

In the equation it is observed that :

 The higher is the safety stock (the lower limit) the higher is the return point
 The higher is the cost of making a transaction the higher is the return point
 The greater is the variability of the cash flows the higher is the return point
 The greater is the holding of cash, the lower is the return point
The upper limit is the sum of the lower limit and three times the return point :
Upper limit = lower limit + 3 [ 3 /.75(cost per transaction) (variance of daily cash flows) ]
\/ Opportunity cost per day

The Baumol and Miller-Orr models both try to help us minimise the cost of cash.
The Baumol model assumes a predictable, steady use of cash. The Miller-Orr
model incorporates an estimate of the volatility of cash flows. But there are other
factors that affect cash management. One is the seasonality of cash needs. If
sales and collections on sales are seasonal we must factor the pattern of cash
into the cash balance. However the Baumol model does not consider changing
cash needs.
Cash management has very simple goals:
♦ Have enough cash on hand to meet immediate needs, but not too much
♦ Get cash from debtors as soon as possible and pay it out to creditors as late
as possible
The Baumol and Miller-Orr models help in managing cash to satify the first goal,
but the second goal requires methods that speed up incoming cash and slow
down outgoing cash. This is illustrated later in the various collection models
defined later on in this project.

India has a population of more than a billion people and is the second most
populated economy in the world. India has a multi-tier clearing system controlled
by the Reserve Bank of India (RBI). It is a net settlement system that is sub-
divided into high value clearing (defined as transactions of more than INR
100,000 and payable at specific branches) and non-high value clearing. Transfer
of payments between banks is done via paper though the RBI is looking to have
a RTGS (real time gross settlement) system in place by end 2002.
Before we define cash management, we need to understand the difference
between activities and products.

• Activities are basic components of work done in a bank (e.g. account

opening, statement rendition, query handling, debiting an account, etc.)

• Products are aggregation of activities put together in such a way as to

motivate the customer to deal with the preferred bank.

Account Transaction
management management


Liquidity Delivery
management management

Some truths:

• It is products that satisfy customer needs and not activities.

• Customers value and pay for product and not activities

• Efficient performance of activities is not enough to motivate customers to

come to a particular bank in preference to another

Cash management is the effective planning, management and monitoring

cash and cash equivalent resources with a view to minimizing costs,
maximizing returns and controlling cash flows and risk.
In spite of the seemingly obvious advantage of the marketing concept, that is,
determining or filling customer needs or wants, not all organizations embrace this
approach. Kotler has identified five competing concepts of marketing activity in today’s
business organizations.

According to Kotler:
1. The production concept holds that consumers will favour those products that are
widely available and low in cost. Manager of production oriented organizations
concentrate on achieving high production efficiency and wide distribution
2. The product concept holds that consumers will favour those products that offer
most quality, performance and features. Managers in these product-oriented
organizations focus their energy on making good products and improving them
over time.
3. The selling concept holds that consumers, if left alone, will ordinarily not buy
enough of the organization’s products. The organization must therefore undertake
an aggressive selling and promotion effort.
4. The marketing concept holds that the key to achieving organizational goals
consists in determining the needs and wants of target markets and delivering the
desired satisfactions more effectively and efficiently than competitors.
5. The societal marketing concept holds that the organization’s task is to determine
the needs, wants and interests of target markets and to deliver the desired
satisfactions more effectively and efficiently than competitors in a way that
preserves or enhances the consumer’s and society’s well being.

It is clear that these 5 views have a dramatic impact on the marketing and
advertising methods, approaches, and even the style each organization chooses
to fit it’s needs in the market place.

How does PCM fit this cycle ?


Investments / Depository
•Term Deposits
•Certificates of Deposit
Cash Raw materials


Work in process
•Accounts Services

Finished Goods

The four “P’s” of marketing are the following

1. A product or service of some sort to be offered to customers and prospects.

2. A price at which the product or service is offered.
3. A place or distribution system through which the product or service is made
available to customers and prospects.
4. Some form of promotion or communication by means of which prospects or
customers are made aware of the product or service’s availability.

How does PCM fit this cycle ?

Raw materials

Work in process

•Cashier Orders/DD’s
Cash Raw materials •Smartcheque
Work in process
Receivable •COS
Finished Goods •TT Payouts

The actual task of marketing consists of the mixing and refining of these various
elements by the firm’s management to optimize the profitable exchange of it’s
products or services in the marketplace. In economic terms, firms in our society
take scarce resources in the form of capital, labour and raw materials, and
process them into product or services that they exchange in the marketplace,
hopefully at a profit.
This marketing mix of the four basic elements- product, price, place and promotion, is
what marketing managers adapt and/or replace.

As important as the four P’s are to marketing success, they are not the only elements
involved today. Present marketing managers must also deal with the four “C’s”.
1. The Consumer. With the fragmentation of the market place, there must be much
more emphasis on identifying and selecting the right consumer for marketing.
2. Cost. It is a big factor in any marketing plan-cost of the product or service
compared to competition; cost of the marketing program to be implemented; cost
of distribution etc.
3. Competition. In many cases the marketing mix is adjusted or adapted to moves
competitors make. No marketing organization exists within a vacuum. Marketing
plans must be developed with competitors’ action and reactions in mind.
4. Channels. The various forms of distribution namely, retailers, wholesalers,
distributors and brokers, which may be used to take the product to the consumer.
Today, as a result of the consolidation and concentration of the retail trade, more
and more attention must be paid to how the channel members will accept and
react to proposed marketing and promotion plans. This is in addition to the
attention paid to the consumers’ reaction.

How does PCM fit this cycle ?



Cash Raw materials •Quickencash

Payable •Quickcollect
Receivable Work in process •Lockbox
Finished Goods •Smartcollect

Because there are many customers, many firms, many products and many
markets, it quickly becomes evident that success for a product or service is
unlikely to occur without some form of planning. The planning process even more
vital when a firm’s management realizes that its limited resources are in demand
by other organizations in the economy and within the own organization. The
marketplace is wide, varied and constantly shifting. The demand for a product or
service is in a state of flux and competitors are offering similar products. Without
some sort of a plan the management stands little chance of successfully
marketing its products or services. The development of a plan usually involves a
series of considerations, evaluations and decisions by the management and
commonly includes consideration of the four P’s and C’s.


The way in which the organization will use its resources to successfully bring its
products or services to the market involves a carefully orchestrated strategic
planning process .A brief review of this business strategic planning process will
help us realize its significance.

Competition in the Cash Mgt. business

Foreign Banks Public Sector Banks Private Banks

•Technology driven • Offered by some • Recent entrants

PSU banks
•Efficient tracking & • Relatively high tech
MIS systems • Large branch & technology
network not all driven
•Limited branch
technology driven
network • Good branch
• MIS & tracking network
•Tie up with
mechanism not
efficient local • Price competitive
Banks & Couriers
• Similar to Foreign
to provide • Can be price
Banks in approach
collection/Payment competitive

Two forms of environmental analysis are done. The first looks at the external
environment in which the organization will compete. That includes the macro
environmental forces (economy, demography, political climate, legal system and
social norms) and the micro environmental forces (customers, competitors,
suppliers and channel members), which will impact on the company.

In addition, a review of the internal environment must be made. This review

includes factors such as financial strengths of the company, marketing
capabilities, level and quality of manufacturing facilities, and the management
skills of the organization. The key imperative of success in the cash management
is the ability to provide responsive and integrated solutions to customers. The
critical requirements are

 Processing Technology
 High level of client & service orientation
 Quick & error-free operations
 Responsiveness to client queries
 Effective information flow
 Proper control on instruments
 Quality orientation

In most cases these external and internal environmental reviews take the form of
lists of opportunities and threats that the organization faces or its significant
strengths and weaknesses.


Once the unit’s goals have been established, management then sets about
determining strategies to accomplish those objectives. Michael Porter has
identified three generic strategies that apply to most organizations.

1. Overall Cost Leadership. Become the lowest cost producer and distributor. Price
below competition. Achieve high market share.
2. Differentiation. Achieve superior performance in some important consumer
benefit area either through the product itself or through some form of marketing
3. Focus. Identify and target some segment of the total market. Develop expertise,
cost leadership and/or and a focused approach to serve that niche in the market.
Critical Success Factors for Cash Management

Reliable Efficient
courier service
PCM processing



All organizations operate within an environment that dictates what the firm can or cannot
do. The environment exists at both the macro and micro levels.

The macro environment generally consists of such elements as:

1. SOCIAL: These are the characteristics of people in society, namely, their values,
culture, social class life-style, and goals. Given the importance of socio-cultural
values on advertising, these are the key elements that the advertising planner must
2. NATURAL: They encompass the physical situations in the marketer operates,
including such factors as natural resources, climate, terrain, pollution and
population density.

3. ECONOMIC: The economic system in which the marketing organization

operates and how the system influences potential growth rate, inflation, raw
material availability, investment capital availability and even interest rates.

4. GOVERNMENT: The specific rules laid by the government that the marketer
must conform to. In addition, government actions influence economic and societal
conditions as well.

5. TECHNOLOGICAL: The increase in knowledge and ability and applications of

innovations and inventions can have either a stimulating or restraining effect on
the marketing activities of the firm. These factors, of course, influence the need
for and the value and impact of advertising campaign.

6. COMPETITIVE: There may be many or few competitors depending on the

economy, the product or service offered, the product category and so on. In
addition there are both direct and indirect competitors for almost all products or

7. CONSUMER: The users, purchasers and prospective customers have much to do

with the overall marketing environment in which the organization operates. There
have been dramatic changes in consumers in the past two decades, all of which
have had an impact on how and why advertising campaigns are planned and

Most of these macro forces are out of control of the organization. They exist and must be
dealt with by the managers as a vital part of the marketing activity. In addition the macro
environment for every firm is different. Thus individual analysis of is required by each
firm to develop an effective marketing program.

The microenvironment, or the situation within the firm, also dictates the type and form of
marketing actions that the organization can conduct. It consists of internal functions as
finance, credit, production and purchasing. They greatly influence the final marketing
activities that the firm can develop and use. Although the marketer has much more
control the micro environmental situations, they still dictate to a great extent, what can or
cannot be done in the firm’s marketing program.

The environment in which the firm operates is thus, one of the most basic considerations
in the overall performance of the organization.

A bank which believes in partnership, listens to customer
needs and offers end-to-end solutions

 Understanding customer needs

 Internal accounting ease
 Reconciliation related benefits
 Information availability
 Integration of information
 Single window capability
 Competitive pricing
 Contingency



Take P.O. Financing Invoice rendition Collect Payment Data Capture AR Mgt.

Re-engineering Across ORDER--TO--CASH--PURCHASE--TO--PAY--CYCLE

Value Chain

Reconcile Make
Payment Funding Receive Goods
Update AP Register Receive Invoice Make Purchase


The Indian market for cash management is a very competitive one with both
global and local banks offering a wide array of products. Citibank, Deutsche
Bank, ANZ Grindlays (which has recently merged with Standard Chartered)
HSBC being some of the strong global contenders with HDFC, ICICI, State Bank
of India emerging as the strong local banks. HDFC and ICICI are very aggressive
banks which being late entrants are trying to increase their market share by
selling products at a very low price and also by being the first to market company
cheques making the payments business largely fee income driven. Float sharing
is not legal in India and hence the players cannot offer float sharing to circumvent
selling company cheques like the rest of the region.

Business Environment - Competitor map


Deutsche ABN HSBC
Product ICICI Bk
B of A UTI Bank


Established Customer Base (CBA)

C ash M gt. P rod u ct P ortfolio


Receivable Mgmt. Payment Services Liability management

ChequeMate SmartCheque CUA

SmartPay TMD / CD

Autopay Smart move


COS / TT Payout. Try products

Cluster Deposit

♦ No. of drawee bank locations > 10,000
♦ No. of locations where clearing takes place > 860
♦ No. of locations where MICR clearing takes place: 14
♦ No. of locations where H/V clearing takes place : 7
♦ No. of locations covered by Electronic Funds Transfer : 4
♦ No. of locations where clearing is through the RBI : 15

The Clearing System in India

♦ Paper based
♦ Cheques are the most common method of fund transfer
♦ Wide geographical spread of locations on which cheques can be drawn
 Banks have about 65,000 branches
 About 860 independent clearing houses exist – 14 sponsored by RBI and
others by SBI and its associates

Dynamic changes in the country system

Initiatives driven by the Reserve Bank of India

♦ Increase in the number of centres offering MICR clearing
♦ Introduction H/V clearing at additional centers
♦ Electronic clearing services – debits and credits
♦ Electronic funds transfers
♦ Real time gross settlement systems (RTGS)

Initiatives driven by the banks

♦ Internet banking
♦ MIS in a soft format through e-mail/floppy
♦ Mobile banking

Cashier Orders:
♦ Payable at par
♦ Very profitable as the float income is based on anywhere from 4 to 8 days float.
♦ SUC currently is Rs.23. Market price can be anywhere from 0 to Rs.30.
♦ Float sharing is not legal in India and hence the popularity of company cheques.
♦ Cannot issue post-dated cashier orders. However for customers who send forward
dated cashier orders we should have the ability to debit a day before the mail out
date or debit the account on Day 1 with Day 10 as the mail out date and store it in
a secure manner (deferred date of debit).
♦ In India the following details are printed on a cashier order-
 Paid by the order of
 Amount (figures/words)
 Date
 Payee name

Company cheques:
♦ Single location. For single location can be paid at only 1 particular location where the
account is maintained. Not very popular as customers find it restrictive.
♦ Payable at par
♦ Cannot print client logos on the face of the cheque due to restrictions by RBI. Client
logo can only be printed on the top middle portion of the first page and on the
following payment advices.
♦ Can print only up to Rs.999 million digits in the value field in a cheque/CO in India.
♦ Do not need to use MICR ink for printing company cheques in India as you can use
pre-printed stationery, as the customer’s account is not reflected in the MICR line.
♦ Post-dated company cheques are allowed. Customer should assign the value date but
the bank should assign the processing date.

MICR Line for company cheques in India:

A cheque number in India looks as follows: 001001 000039000 110051 29. In this the
information included is as follows:

♦ 001001 is the Cheque number and printed on the top right hand of the payment
♦ 000 039000 is a combination of the City code, Bank code and Branch code.
♦ 11 is the account code. Basically you have the numbers available from 11 to 19 and
under each number you can issue up to 1 million cheques. RBI only recognizes up to
6 digits for the account code.
♦ 29 is the2 digit transaction code. In this example 29 stands for cheques payable at par.
Other transaction codes could be savings account or current account.
Demand Draft:
Local currency DD
♦ Both Local currency and multi-currency are required. Currently customers due to the
stringent RBI regulations do not issue a lot of multi-currency DDs.
♦ Details which are included in a DD in India are as follows:
 Beneficiary name
 Amount (figures and words)
 Date
 Drawee bank
 Drawee bank address
 Signature
♦ Drafts drawn on correspondent bank normally give ceiling limit of cheques which
can be issued
♦ Pricing is also done based on urban and semi-urban locations.
♦ A minimum balance needs to be maintained at the correspondent bank.
♦ The correspondent bank sends back a monthly report on outstanding and
cancelled DD that leads to reconciliation issues.
♦ Income earned is fee based.
♦ Need to build interfaces with these correspondent banks as all the correspondent
banks require the information in electronic formats as specified by them.

Demand Drafts - The process flow

DD request

DD to beneficiary
Customer BANK Beneficiary
Funding with DD
issued report
DD deposit

nt bank DD sent for
confirmation DD sent for

Confirmation Beneficiary
Clearing Credit to s bank
House benef.. bank
Multi- Currency DD

♦ The Indian market is heavily regulated and customers cannot have a

foreign currency account unless it is an EEFC (Exchange Earners Foreign
currency account) wherein an individual can maintain this account
provided he is getting paid in USD.
♦ Currencies supported in this account are USD/GBP/HKD/DB/Euro and Yen.
♦ Customers currently issue FCY TT over Internet or from a branch.

Interest/dividend warrant:

♦ This is a niche product, which arises due to the statutory regulations in India.
♦ This product is very profitable, as customers have to pre-fund the account.
♦ The product is used for either making payments towards fixed deposits or to pay
dividends, which is an annual activity.
♦ Warrants are issued whilst making these payments. Warrants are like cheques but
the SUC is much lower than that of a cheque. The SUC for warrants is Rs.3 as
compared to the SUC for cheques, which is Rs.23.
♦ For dividends the payments need to be payable at par at 50 odd locations where
the clearinghouses are situated. Hence normally a need for a correspondent bank
tie-up is required as most foreign banks have branches in limited locations.
♦ Income is generated both through fee income and float income. Bank make
anywhere from Rs.5 to 10 per instrument.
♦ The registrar prints the warrants and mails them out. Problems usually faced by
customers are in reconciliation of paid and un-paid warrants given that this
information needs to be gathered from 50 odd locations across India.
♦ It is a pre-funded instrument so the risk is lower. It never gets rejected unless the
instrument is fraudulent.
TT Payout

TT Payout - process flow

Customer instruction
CUSTOMER Funding +
Cr to A/C /
CO issued TT instruction



♦ This product is only offered as a deal clincher to niche corporates. This gives the
customers the ability to make payments at non-branch locations using
correspondent bank premises rather than issuing a LCY DD.
♦ It is mostly for large value time critical payments like custom duty payments
♦ The cut-off time is 10.30, as the corr bank account needs to get funded by that
time. RBI in turn needs to get funded by 11 a.m. If the instruction is received
before 10.30 a.m. then the beneficiary gets credited the same day if not it is the
next day.
♦ The correspondent bank charges a fee of 50 paise per Rs.1000 for payments
where RBI does the clearing.
♦ For non-RBI locations the charge is 30 paise per Rs.1000
♦ The charge for the customer is around Rs.1.50 per Rs.1000
♦ This is a fee based income product.
Electronic Payment Types

Electronic Funds Transfer:

♦ It is available in select locations across India.

♦ In order for this product to succeed the beneficiary bank has to be a part of this
♦ Member banks have direct connection to Reserve Bank of India.
♦ Bank on receiving the instruction from the customer creates a transaction in a
front-end, which is installed in their premises, and this file is sent to RBI
♦ Beneficiary gets the funds on Day 1 This product is a fee based product and
currently customers are being charged Rs.10 per transaction.
♦ The H/W required at the bank’s end includes a UNIX server, which is connected
to RBI.

Electronic Clearing Services:

Why do clients need such structures?

♦ Ensure prompt disbursements / collections
♦ Avoid reconciliation problems
♦ Eliminate frauds and errors
♦ Reduce administrative load in having to deal with too many agencies


♦ Is offered by the Reserve Bank of India and have two products, viz, ECS credit
and ECS debit.
♦ These products complement the offerings - IW / DW and Bulk Collections
♦ The products are expected to become more popular with RBI removing the
minimum charge of Rs.2500/- per presentment and allowing ECS files for all
locations to be handed over at Mumbai, New Delhi or Chennai.
♦ Available at 44 locations for ECS Credit and 4 locations for ECS Debit.
♦ Initially proposed to be handled at only our branch locations.
♦ Instruments have a cap of INR 500,000/- for debits and INR 500,000/- for credits.
♦ Our charges - mandated by RBI to be Re 3/- per instruction. The initiating bank
gets Re 1/- per instruction in both ECS Credit and Debit.
♦ Higher charges can be realized through value added activities, e.g., reconciliation.
♦ Credit limits need to be provided for customers that do not prefund the account.
♦ Returns, in practice, keep flowing much after Day 6.

Workflow Cycle:

 Prior to Day 1: User hands floppy to bank for validation.

 Day 1: Floppy provided by bank to RBI
 Day 2: Details provided by RBI to dest banks
 Day 3: Reports provided by service branches of dest banks to the
branches of account.
 Day 4: Accounting entries passed to customers account and in the RBI
account of bank / HSBC.
 Day 5: Unpassed entry info passed back to RBI.
 Day 6: Unpassed amt credited to bank and to User

Comparative Analysis of Payment Products

NAME Product Name No. Of centers Total

No. Of centers - – Facility centers
Facility offered offered thru
thru At Par DDs/Funds
Cheques Transfers
Citibank PAYLINK 7 93 100
Corporation Bank CORPREMIT 0 100 100
StanChart Grindlays PAYMENTS No information No information
ICICI Bank PAYMENTS 25 Over 100 Over
HSBC Cheque 7 165 172
Deutsche Bank
HDFC Bank PAYMENTS 17 100 117
Case studies

1. Wockhardt Pharmaceuticals:

 Currently using Deutsche Banks DB-Direct (using thin client version).

 They issue around 600 cheques a week totaling Rs.10 crores.
 They currently use company cheques and their account gets debited when the cheques
hit the counter. This service is available at non-DB locations also.
 The cheques are payable at par at correspondent locations and this is known as “back
ended funding”.
 The Deutsche Bank product has a multi-currency module.
 The cutoff time for LCY DD is 11a.m.
 Customers like the fact that after a transaction is initiated a reference is sent back to
the customer.
 DB does not have multiple delivery modes. Only option is mail back to customer.
 DB has an in-house technical team that assists with building the interface, which aids
in the reconciliation process.
 DB has correspondent bank relationships with Vijaya and State Bank of Patiala.


 Customer has subsidiaries around the region creating payments but they do not need a
multi-client functionality, as operations are very de-centralized.
 Customer does not want the operator to make amendments to make a file after it has
been uploaded from the A/P.
 Customer does not want authorizer to have the ability to edit/amend.
 Would like authorization to be sequential.
 Customer felt that the ability to remotely access transactions would be a useful
 Customer’s workflow has an operator/verifier who is the credit controller and does
not have authorization rights. An individual authorizer does the authorization across
 They use SBI for their dividend warrants payments. Main problem faced is
reconciliation, as they do not get information on lost cheques. Out of a total of 35,000
payments issued worth 12-15 crores they lose around 100-150.
 Reconciliation is done on a monthly basis and the customer would like transaction
level details.
 Statement of charges is sent monthly and has transaction level details.
 Customer does not have any limits set up at their end.
 Want only limits based authorization matrix.
2. Infrastructure Leasing Finance Company (Finance):

 Citibank does collections while HDFC/State Bank of India handles the dividend
 They maintain a lot of surplus cash in their main operating account, as they do not
know when the cheques that they have issued will hit the counter. This is in the case
when they issue dividend warrants.
 They would like to get interest on the surplus funds lying in the account.
 They use ECS to make payments. HDFC currently has 41 branches and they have
access to another 60 locations via Vijaya Bank.
 Salary payments are done via HSBC. However they are facing problems due to the
lack of locations and their staff does not always have access to a branch.
 They issue around 70000 warrants in April and another 30000 in June.
 Interest warrants are issued once a year whilst the dividend warrants are paid out
around 3-4 times a year.
 The customer would like time bound reconciliation so that they know when the
cheques are presented and which cheques are outstanding.
 HDFC do the reconciliation via a floppy, which enables the customer to get a knock
off and tell them which transactions are outstanding and what has been presented.
They also know when they are going to get the reconciliation diskette.

3. Wyeth Lederie Ltd (Pharmaceutical):

 They are currently looking for a complete cash management RFP and the 3 banks that
have been singled out include HDFC/HSBC and Citibank.
 Main issues are availability of time critical data, ease of reconciliation and cost-
effectiveness of solution.
 Will be ready to transact over the Internet in 2001. Would like to start using thick
client and shift later.
 Issue around 1100 cheques a month and would like the ability to make cheques
payable at par in 8 locations across India.
 Main cities of interest are Baroda/Surat/Indore. The number of cheques issued out of
these cities is around 5-7 on a weekly basis.
 Citibank has made an offer of “free of charge” cheques and local currency demand
drafts to get issued out of Citi and non-Citi locations.
 Mentioned that other banks in the running are not offering company cheques rather
are only offering cashier orders.
 Need a lot of flexibility, as there are only 2 authorizers in the organization. Do not
need a verifier feature.
 Do not wish to set up limits at their end
 Would not want authorizer to make amendments.
 Have JD Edwards account payable system.
 Payment fields to be included in the payment advice include the following: -
 Purchase number
 Paid date
 Invoice number
 Invoice amount
 Remarks
 They have their finance operations centralized out of the Bombay office even though
they have individual depots making emergency payments.
 Need payable at par cheques because currently they have to change the stationery
based on the correspondent bank and the location that they have make the payment
out to.
 Would like to make amendments in the A/P rather than the FES, as that would
complicate the reconciliation process.
 Would like reconciliation to be done on a cheque-by-cheque level. Would like cheque
level details.
 Would like sequential authorization.

4. ACC (Cement):

 Would like to outsource but are awaiting the installation of an ERP. Given it is a very
large corporate there are a lot of stages of approval and the treasury department
cannot expedite the process unless proper infrastructure is in place.
 There is some resistance from senior management because there will be redundancy,
which cannot be accounted for, and there will be issues with unions. Also the treasury
manager feels that the savings achieved by outsourcing are intangible and it is
difficult to get senior management buy-in.
 Suggested that we do a consultative approach and assist them in calculating what the
cost savings will be so that they can make a presentation to senior management.
 Currently use continuous stationery to print cheques. This is very cumbersome.
 Main problems currently being faced are lack of MIS and reconciliation is a problem.
 Customer spends around 8-12 hours’ daily preparing/printing cheques and would like
to expedite the process.

Assessment of Relationship Managers

ICICI and HDFC are currently offering company cheques in the market. As a result more
and more customers are asking for the same and there is less profits to be made with the
product, as banks cannot offer float sharing.
 Outsourcing is a huge mind-shift for corporate, as union laws do not permit these
organizations to make redundant extra staff
 Due to the mind-block mentioned above, a lot of the banks are focusing on new
market entrants as they do not have the set-up currently visible in corporates
either multinational or Indian. Main stumbling block on completing a sale is the
cost of Oracle software as most corporates refuse to pay it and banks has to incur
the cost. They are willing to do it in the scenario they are offering cashier orders
and they can make a profit on the float.
 There is no market potential for payroll outsourcing.
 Relationship managers of foreign banks feel that IW/DW is a must have and are
happy that product are addressing this gap. They feel that as the account has to be
pre-funded they can enjoy the float earnings. Citibank allows corporates to fund
the account in bits like 45% up-front and the remainder over a pre-defined period.
 They believe that local currency DD and TT payouts on the new product are a
great proposition for corporates. However in order to be successful it is critical to
tie up with more correspondent banks, as location becomes an important asset.
 Customers are still not very comfortable transacting on the net. Till such time a
thick client solution is being provided to them that allows the customers to send
the file across the modem and the net.
 Currently there is no demand for an integrated AP/AR.

New initiatives

 HSBC would like to set up an “excellence center” in India and would be happy to
liase with the vendor to ensure deliverables and quality of output.
 Centralized BOS engine conceptually is a very good one but there will be huge
cost implications as bandwidth is very expensive in India. The reason that the
centralized database would cost a lot is because the cheque images along with the
signatures have to travel from the server to the branch of transaction to get printed
in the location of choice. In order to get away from this, signatures can be stored
at local sites. But in order to have remote printing, you need intelligence checking
for signatures for which you would need to attach servers to the printers. This
again has cost implications.
 Inter-city transmission is expected to be enhanced in 2001 making remote printing
a technological possibility though business would need to think through the
product offering due to cost implications.
 Firewalls and PSDN are in place by 2001 providing flexibility to customers in
terms of using both the Internet and the modem.
 There is no need to auto mailers in India and it is cheaper to do things manually.
The main problem of using the auto-mailer is that the nearest repair center is
Singapore making it very expensive to maintain.

Customer Needs
• Speed – transit times
• Coverage of sales/collection points
• Information
o Positive confirmation
o Reconciliation
o Returned items
o Debtor control
o Stock dispatch
• Security and control
• Liquidity
• Interest costs
• Reconciliation/administrative ease
• Long-term commitment

Conventional collection systems


Office Credit to
Local Bank Receiving Bank

Local clearing
Processing Deposit Clearing Remittance Processing
Float Float Float Float Float
 More than 10,000 drawee centers
 Largely paper-based
 Extremely competitive market
o Falling margins
o Fee vs. float revenue

Types of clearing
 MICR and non-MICR clearing
 H/V clearing
 Banker’s clearing
o Electronic clearing
o Returns


• Collections of local cheques

• Cheques can be picked up from customers office or deposited at the bank
• MIS provided at a consolidated level for all cities
• Funds are normally paid out at a central collection account of the customer
• Cheque level information available

Day 0 Day 0 Day 0/1

Pick up Cheques Local Clearing Customers

at Metros Concentration
A/C credited
Competitions brand names for Local Cheque Collection Facility:
Citibank - Citiclear for their own center collections
Citispeed for collections thru correspondent banks
Stanchart Grindlays - GIFTS (Grind lays Instant Fund Transfer Service)
HDFC - National Collections
SCB - National Collections
Corp. Bank - Fast Collection Service
SBI - Cash Management Product
HSBC - Chequemate


• Local clearing of cheques through non-branch locations across India

• Integrated MIS with customization for select relationships
• Concentration of funds in a central account
• Cheque pick-ups at the center with return cheque deliveries also the same center
• Flexibility to define credit arrangements for each customers

Local clearing at non-branch locations

Day 0 Day 0
Courier Local clearing
Courier picks deposits site RBI/SBI
up cheques at cheques at
location designated

Day 1/3 Day 1/3

Funds Customers
transfer to Concentration
our Control A/C credited

• Utilities and arrangements with correspondent banks to enable faster

clearing of cheques
• Allows the customer to receive credit on a fixed day, say, day 0 for discounted
cheques and day 8 for regular collections
• Interest charged on return cheques for period for which the bank is out of funds
• Consolidated MIS provided
• Courier pickup provided for select relationships


Upcountry collections through a correspondent bank

Day 0 Day 0
Designated Local Clearing at
Pick-up of Checks
Corbank’s local Upcountry
at Metro locations
branch locations

Day x Day x
Banks Control Customer’s
branch Concentration A/c
credited Credited

• Collection of upcountry cheques drawn on any location in the country

• In the case of instant credit of such cheques, customer liability released upon
receipt of clear funds or 90 days whichever is earlier
• Consolidated MIS provided
• Cheques can be picked up from the customer’s office or deposited at the bank


Collection of checks not drawn on our corbank network

Day 0 Day 0/1 Day 10/28

Pick-up of customer’s Draft drawn on our
Mailed directly to
Checks from Metro location mailed to
Drawee Bank
locations banks control branch

Day 12/30
concentration A/c Local Clearing

• Efficient collection of USD / foreign currency cheques

• Discounting of foreign currency cheques
• Credit within 3 working days to Nostro account.
• Credit to customer on the 12th (for New York cheques) / 21st calendar day (other
cheques) from the date of processing in Mumbai for USD cheques.
• Credit on realization for all other currency cheques
• MIS not linked to local currency collections (only HUB statement information

SmartCollect process

Day 0
Courier picks
cheque from

Day 0 Day 0/1 Day 2 Day 3

Deposits with Sent to Local clg in Credits Bank


Cheques returned in 7 Days for NYK & 15 Days for Day 3

Clients A/C
Comparative Analysis
NAME Competitors No. Of Competitors product No. Of
product name for centres name for the product centres
the product similar similar to
Corporation Bank FAST 120 CORPCLEAR 600
ANZ Grind lays Bank GIFTS XT 62 GIFTS 700
Standard Chartered NATIONAL 75 OUTSTATION 800
Deutsche Bank D-Corr 88 UCC 1200
HSBC Lockbox 100 QuickCash 1200

State Bank of India Cash Management 100 No product Nil