AFM Term Paper on Receivables Management Services Of Banks

Submitted to, Prof. GVM Sharma Submitted by, Vaishnu Krishnamurthy MBA 3rd Sem D

1PB12MBA70
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Index Particulars Abstract Introduction Literature review Discussion - Cash Management Services Core Banking Solutions Collections and Payments & Transactions Tools Conclusion Reference Page Number 3 4 5 7 10 11 12 13

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Abstract
The report emphasizes on the importance of Receivables Management Services and core banking solutions in the corporate world and analysis of the credit facilities offered by the various bankers, and the implications of it. It is a mechanism to efficiently manage cash flow in order to reduce risks, minimize costs and maximize profits. Generally receivables management comprises integrated collection, payments, liquidity management, and receivables functions. Speedy collection of outstation instruments is one of the major products under RMS. Receivables Management is the process of optimizing receivable and payables while ensuring predictability in the cash flows. Efficient receivables Management is about getting funds in time, quick transfers, quick realization of local and outstation cheques, easy disbursements, account reconciliation, controlled processes and customized MIS. Thus Cash Management Services (CMS) eliminates the inherent delays of a funds transfer mechanism, thus enhancing liquidity. These days, most business transactions are in credit. Most companies, when they face competition, use credit sales as an important tool for sales promotion. As a sales promotion tool, credit sale enhances firm's sales revenue and ultimately pushes up the profitability. But after the credit sale has been made, the actual collection of cash may be delayed for months. As these late payments stretch out over time, they may cause substantial drop in a company's profit margin. Since the extension of credit involves both cost and benefits, the firm's manager must be able to measure them to determine the ultimate effect of credits sales. In this prospective, receivable management is defined as the aspect of a firm's current assets management, which is concerned with determining optimum credit policy associated to a firm, such that the benefit from extension of credit is greater than the cost of maintaining investment in accounts receivables. Receivable management is constantly changing to meet the needs of the corporate treasurer. The challenge for both corporation and provider is to keep up with developments, technology, changing regulations and fitting these in with normal business. A changing regulatory environment, new technology and mergers that expand the scope of traditional banking are redefining the traditional treasury management paradigm for both banks and corporations.

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Introduction
A receivables management services is a simply a product to the bank, which is offering it in order to make money, but for the corporate, it is a way of corporate culture and management techniques. The main objective of receivables management is to reduce the uncertainty in cash inflows and outflows. This in turn helps to reduce the transaction cost and improve profitability. Cash being an important and crucial asset it does not earn any return if it is in the safe vault of the corporate or current account of the bank. Banks are playing a crucial role in cash management of the corporate. We may say that the banks, by extending the cash management services, are becoming the managers of the working capital of the corporate. Apart from lending and investment, a banks main activity is collection and payment of cheques. The entire corporate sector is dependent on the banking system for the transfer of funds. The lead time for funds transfer used to be 7-15 days a decade ago. Now, electronic banking services are providing a fast delivery mechanism. Through CMS, the lead time is reduced to 3-6 days. By outsourcing Cash Management Services, corporate are able to reduce their costs and improve their profits and ensure that CMS would help it to maximize the profits, minimize costs, and establish an efficient cash management system and overall working capital management system within the corporate. A vast country like India presents a challenge to the receivables manager. Considering the present Indian scenario, where Cheques are the basic form of payment and cheque clearing takes a long time, cash management services need to devise innovative methods and means to expedite to benefit the corporate customer. With the Indian economy becoming an open market economy, residents may maintain accounts in other countries and non-residents may hold accounts in India. As a result, Indian treasures may often find themselves managing cash across geographies and time zones. In India the transactions types run from the classic paper cheque to the latest Internet initiated electronic payment. Corporations initiate and receive paper-based transactions, as well as high value and low value electronic transactions on a daily basis. Expectations from new services may not eliminate or fully replace the older traditional services. Changes will be gradual but, probably, it will be firm.

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Literature Review
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 is also evaluated by all organizations 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 otherwise from the investment made. The level of investment made in current assets 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, and the industry practices The degree of uncertainty of the business

The type of business, whether extractive, retail, manufacturing or service, affects the way an organization invests. In some industries, large investments in machinery and equipment are necessary. In other industries, such as retail a firm 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 firms 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 Page | 5

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 Donalds does not extend credit to its customers, but Chrysler, through its, financing subsidiary does. Chryslers major competitors, General Motors and Ford, offer credit to their customers, but Mac Donalds major competitors, Wendys and Burger King do not offer credit. Cash is the important asset for the operation 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. Cash storage will disrupt the firms manufacturing operations while excessive cash will simply profitability. Thus a major function of the financial manager is to maintain a sound cash position.

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Cash Management Services Offered:

The following is a list of services offered by banks and utilized by larger businesses and corporations: Account Reconcilement Services: Balancing a checkbook can be a difficult process for a very large business, since it issues so many checks it can take a lot of human monitoring to understand which checks have not cleared and therefore what the company's true balance is. To address this, banks have developed a system which allows companies to upload a list of all the checks that they issue on a daily basis, so that at the end of the month the bank statement will show not only which checks have cleared, but also which have not. More recently, banks have used this system to prevent checks from being fraudulently cashed if they are not on the list, a process known as positive pay. Advanced Web Services: Most banks have an Internet-based system which is more advanced than the one available to consumers. This enables managers to create and authorize special internal logon credentials, allowing employees to send wires and access other cash management features normally not found on the consumer web site. Automated Clearing House: services are usually offered by the cash management division of a bank. The Automated Clearing House is an electronic system used to transfer funds between banks. Companies use this to pay others, especially employees (this is how direct deposit works). Certain companies also use it to collect funds from customers (this is generally how automatic payment plans work). This system is criticized by some consumer advocacy groups, because under this system banks assume that the company initiating the debit is correct until proven otherwise. Balance Reporting Services: Corporate clients who actively manage their cash balances usually subscribe to secure web-based reporting of their account and transaction information at their lead bank. These sophisticated compilations of banking activity may include balances in foreign currencies, as well as those at other banks. They include information on cash positions as well as 'float' (e.g., checks in the process of collection). Finally, they offer transaction-specific details on all forms of payment activity, including deposits, checks, wire transfers in and out, ACH (automated clearinghouse debits and credits), investments, etc. Cash Concentration Services: Large or national chain retailers often are in areas where their primary bank does not have branches. Therefore, they open bank accounts at various local banks in the area. To prevent funds in these accounts from being idle and not earning sufficient interest, many of these companies have an agreement set with their primary bank, whereby their primary bank uses the Automated Clearing House to electronically "pull" the money from these banks into a single interest-bearing bank account.

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Positive Pay: Positive pay is a service whereby the company electronically shares it Check register of all written checks with the bank. The bank therefore will only pay checks listed in that register, with exactly the same specifications as listed in the register (amount, payee, serial number, etc.) This system dramatically reduces check fraud. Reverse Positive Pay: Reverse positive pay is similar to positive pay, but the process is reversed, with the company, not the bank, maintaining the list of checks issued. When checks are presented for payment and clear through the Federal Reserve System, the Federal Reserve prepares a file of the checks' account numbers, serial numbers, and dollar amounts and sends the file to the bank. In reverse positive pay, the bank sends that file to the company, where the company compares the information to its internal records. The company lets the bank know which checks match its internal information, and the bank pays those items. The bank then researches the checks that do not match, corrects any misreads or encoding errors, and determines if any items are fraudulent. The bank pays only "true" exceptions, that is, those that can be reconciled with the company's files. Wire Transfer: A wire transfer is an electronic transfer of funds. Wire transfers can be done by a simple bank account transfer, or by a transfer of cash at a cash office. Bank wire transfers are often the most expedient method for transferring funds between bank accounts. A bank wire transfer is a message to the receiving bank requesting them to effect payment in accordance with the instructions given. The message also includes settlement instructions. The actual wire transfer itself is virtually instantaneous, requiring no longer for transmission than a telephone call. Controlled Disbursement: This is another product offered by banks under Cash Management Services. The bank provides a daily report, typically early in the day, that provides the amount of disbursements that will be charged to the customer's account. This early knowledge of daily funds requirement allows the customer to invest any surplus in intraday investment opportunities, typically money market investments. This is different from delayed disbursements, where payments are issued through a remote branch of a bank and customer is able to delay the payment due to increased float time.

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Importance of Receivables management Services:

Liquidity management: Through receivables and payments management, there will be certainty of the cash flows enabling the corporate to plan out for their liquidity. The assured date of service offered through CMS will minimum idle funds. Cost of funds: The working capital cycle will be compressed, as there will be faster collections. This will reduce the dependence of the firm on the CC limits and will thereby reduce the cost of funds for the corporate. MIS: There will be a central account and all transactions will be routed through this account. Using this MIS, corporate can have records of their sales, turnover, dealers payment details, product-wise/region-wise contribution etc. Risk reduction: Primarily, CMS provides better liquidity management which in turn enables the corporate to reduce their liquidity risk. Added to this, corporate can track the payment process of their dealers and decide on credit extension. This will enable it to reduce the credit risk. Business growth: CMS offers both wide reach and speedy collection process. Corporate can now offer cheque payment facility to most of their dealers, which in turn will augment the turnover.

It also results in time saving, decrease in interest costs, less work and greater accounting accuracy. Proper cash management creates more control over time and funds provide timely access to information reduces interest expense. The ultimate purpose of proper management of liquidity, needless to emphasize, is to improve the overall productivity of funds

Benefits to the Corporate

Funds available as per need on day zero, day one, day two, day three etc. Corporate can plan their cash flows Bank interest saved as instruments are collected faster Affordable and competitive rates MIS reports customized to meet individual Corporate requirement Single point enquiry for all queries Pooling of funds at desired locations

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Core Banking Solutions:

Core banking solution is networking of branches, which enables customers to operate their accounts, and avail banking services from any branch of the bank on CBS network, regardless of where he maintains his account. The customer is now no more part of a branch; they now are the banks customer. Thus CBS is a step towards enhancing customer convenience through anywhere and anytime banking. The various services offered through CBS are: To make enquires about the balance; debit or credit entries in the account To obtain cash payment out of his account by tendering in the account. To deposit a cheque for credit into his account. To deposit cash into the account. To deposit cheque / cash into account of some other person who has account n a CBS branch To get statement of account. To transfer funds from his account to some other account- his own or of third customer, provided both accounted are in CBS branches. To obtain demand drafts or bankers cheque from any branch on CBS amount shall be online debited to his account. Customers can continue to use ATMs and other Delivery channels, which are also interfaced with CBS platform. Similarly, facilitates like Bill payment, I Bob, M-Bob etc, shall also continue to be available. Bank is in the process of launching Internet-banking facility shortly.

A CBS branch is like a Sales & Service Delivery Center. Back office processes/activities are handled through technology at some other site, called Data Center. Branch therefore, has more time for serving customers. This improves the quality and efficiency of the services rendered and the customer is directly benefited by way of satisfying and happy banking experience.

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Collection and Payments

One of the most unique and significant activities is that of collection and payment. The entire funds transfer for the purpose of payment is routed through the banking sector. The need for such transfer of funds arises from various sources, chief among which are the business entities. Due to the spatial spread of their business activities, the suppliers of goods and the buyers of goods of these entities will be widely disbursed. They have to rely extensively on banking services for making payments for the goods bought and for the collection of funds from their dealers. In the case of collections, the dealers of the firm will give checks drawn at various locations and for various dates. The firm will present these for the purpose of collection with its bankers. Depending on the location and the date, some cheque may be realized within the first week while some (outstation collections) may take a months time. This leads to a lot of uncertainty involved in the cash flow position of the firm. Due to this, the firm had to draw on for its CC limits for its working capital purpose till the time the cheque are completely realized. This increased the cost of funds for the firms.

Real Time Gross Settlement and National Electronic Fund Transfer

The RBI, in recent times had intensified its efforts towards making payment transactions simpler, faster and more affordable. These facilities are available to both corporate customers and the general public. But these facilities are not marketed by various banks due to some very clear cut reasons. NEFT (National Electronic Fund Transfer) and RTGS (Real Time Gross Settlement) are such transactions, which are being utilized heavily by corporate customer but yet to pick up by retail customer of the banks. NEFT and RTGS are two tools which are used for superfast real time money transfer of money in banks in India. These tools are very popular amongst the corporate customer but are no yet popular amongst the general public. The NEFT and RTGS are message based mode of funds transfer means for transfer of funds. The message is sent by the senders branch (where account will be debited) to the receivers branch where the customer has the account. The transfer is through a public key infrastructure based security system.

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Conclusion
It is astonishing to note that a number of banks in India are offering wide-range of cash management services to their corporate clients. All the three categories of banks that is nationalized segment. SBI, PNB, ICICI Bank, GTB, HDBC 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 grind lays 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. 25000 crore per month. Indian banks are offering services like electronic funds transfer services, cash pooling services, guaranteed credit arrangements, sweep products, tax payment services, receivables and payable management. Foreign banks operating in India are offering and global treasury management services, liquidity management services, card services, electronic banking services, e-commerce solutions, account management services, collection management services, cash delivery management services and investment solutions. Going by the gamut of these services, the cash management services offered to Indian corporate is comparable to what their counterparts are getting in advanced countries. Banks in India need to continuously monitor international trends in innovation taking place in providing cash management services and swiftly offer similar services to their corporate clients.

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References
Information has taken from the below mentioned websites. http://www.scribd.com www.wikipedia.com

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