Cash Management An Introduction

Cash Management- An Introduction
Sep 2016
Copyright 2015 Tech Mahindra. All rights reserved.
What is cash Management?

Cash management comprises a series of activities aimed at efficiently handling the inflow and outflow of cash
Cash Management represents optimization of cash balances and short-term investments

Cash, in this context, may refer either to cash in the form of currency, or to other equivalents such as cheques,
drafts and deposits, among others
Three main motives of Cash Management

Holding of cash to meet routine cash management
Transaction Motive
requirements
Purchases, payment of dividend and taxes
Precautionary Motive
Speculation Motive
Copyright 2015 TechM. All rights reserved.
Unanticipated cash requirements

Floods, strikes
To take advantage or opportunity

Purchase of raw materials at reduced cost
Cash Management
Profits are always considered as a
key indicator for a business success ;

while it is true, more fundamental to
the business is Cash .
Cash is the King for any Business
and how the businesses utilize or
manage
their working capital
requirements determines their
longevity and sustainable profits.
Banks provide various services to
Corporates to manage their Working
Capital Cash requirements
Reporting
and MIS
FX
Management
Collections
Working Capital
Management
Trade Finance
Liquidity
Management
Working Capital
Management
Payments
Importance of Cash Management

Effective cash management is important for the businesses for the smooth
functioning.
Companys cash position is said to be the better indicator of the financial health
of the company, rather than profit and loss statement. Knowing the cash position is
therefore very crucial for business for following
Forecast when, how, and where cash needs may arise
Determine which would be the best source for additional cash needs
Be prepared to meet cash needs when they arise

It empowers businesses with the ability to forecast cash flows, plan future
business strategies, and manage cash accordingly
Principles of Cash Management
Manage cash flows Effectively
Forecast cash flows Accurately
Manage the long term and short term cash flow transactions
efficiently
Establish an Appropriate Investment Policy
Implement Effective Investment Management
Cash Management A
Corporates Basic Need
Storyboard 1
Tom starts a Company First Stop Auto Parts, which produces new age designer Auto
Interiors and the 4-wheeler, LMV, SUV and 2-Wheeler accessories and components .
He envisages to build a native brand for the Auto Accessories and targets the South
East Asia market for his products to be sold. He establishes his business out of his
native country Singapore
Tom
His Company
Products
Storyboard 2
To run his business, Tom needs to do the following on a day in and day out basis
Source Raw Materials from the Suppliers
Use resources like electricity, waged-workers, telecom services etc
Sell the finished products to wholesalers
Raw Materials
Sourcing
Resources and
Staff
Sell the
Finished Goods
8
Storyboard 3
For the smooth functioning of the business, Tom starts a relationship with an international
bank ABC Bank in Singapore
ABC Bank assigns a new relationship manager Laura to assist Tom to fully utilize the Cash
Management services provided by ABC Bank
The Companys
Bank
The Appointed
Relationship
Manager
Corporate
Customer for
the Bank
Customer On boarding
ABC bank classifies First Stop Auto Parts as sole proprietor business. Laura gets a CASA
account with OD limits opened for First Stop Auto Parts and on boards the company to the
ABC Banks Corporate Online Portal to conduct all the relevant transactions and manage the
funds.
Laura explains to Tom that ABC Banks corporate online portal shall act as a one stop
platform for subscribing and monitoring all the Cash Management needs Payables,
Receivables, Liquidity Management related requirements of First Stop Auto Parts.
Corporate
Customer for
the Bank
Fulfils KYC
Norms
Corporate Online Portal
10
Customer On boarding
ABC bank classifies First Stop Auto Parts as sole proprietor business. Laura gets a CASA
account with OD limits opened for First Stop Auto Parts and on boards the company to the
ABC Banks Corporate Online Portal to conduct all the relevant transactions and manage the
funds.
Laura explains to Tom that ABC Banks cash management portal shall act as a one stop
platform for subscribing and monitoring all the Cash Management needs Payables,
Receivables, Liquidity Management related requirements of First Stop Auto Parts.
Corporate
Customer for
the Bank
Fulfils KYC
Norms
Corporate Online Portal
11
Cash Management Portal

Tom insists on Laura to explain the various
functions that the banks provide as part of their

cash management portal
Laura highlights few functions which she
mentions are critical from a corporate cash
management operations and reporting
Beneficiary
Management for
Payables
Common Corporate
onboarding
Payment Transaction
Initiation through
form or upload
Customised MIS Reports in

formats like MT940, Multi
Cash Statements
Cash positions across
various accounts
Cash Flow Forecasting
Audit Trails
Self Service Corporate User

Management
Authorisation matrix for

transactions as per
corporate board resolution
Liquidity
Hierarchy
Structure view
Inter company lending

management and
reporting
Transaction status
updates and
dashboards
Single Customer View
Services in compliance with

the regulatory requirements
of cash management
Reports to enable
faster reconciliation
for corporates
12
Cash Management - Payables
13
Introduction to Payments System

What is Payments System?
A payment system is a system used for transferring money from
payers to the payees, usually through exchange of debits and
credits among financial institutions.
It consists of a paper-based mechanism for handling checks and
drafts, and paperless mechanism (such as electronics funds
transfer) for handling electronic commerce transactions.
14
Traditional payment system
Traditional Payment System
Sellers
Bank
Seller
Deposits
Info Flow for Notional

Changes
Goods and Services
Payments
Buyers
Bank
Buyer
The above is simplified diagram for both cash and non-cash transactions. Cash moves from the buyers
bank to sellers bank through face-to-face exchange in the market. If a buyer uses a non-cash method of
payment, payment information instead of cash flows from the buyer to the seller.
15
Payments
First Stop Auto Parts has many suppliers and service providers
Steel, Plastic fabrics, PVC and other finishing materials from a trader in UK
Leather , Primer and Paints from a trader in India
Other ancillary tools and machinery parts from a trader in SG
also has outsourced employers from a Service Provider in SG, who work along with the
First Stop Auto Parts , permanent staff force
First Stop Auto Parts has to make the payments to
All the suppliers for the raw materials sourced for its manufacturing
It has to pay for the resources being used like electricity, telecom bills etc
It has to pay the wages for the employees working for it
Pay for Raw

Materials
Pay for Tools
Pay for Office

Space
Pay for Utility

Bills
Pay for Taxes
Pay for
Employee
Salaries
16
Payments
First Stop Auto Parts has many suppliers and service providers
Steel, Plastic fabrics, PVC and other finishing materials from a trader in UK
Leather , Primer and Paints from a trader in India
Other ancillary tools and machinery parts from a trader in SG
also has outsourced employers from a Service Provider in SG, who work along with the
First Stop Auto Parts , permanent staff force
First Stop Auto Parts has to make the payments to
All the suppliers for the raw materials sourced for its manufacturing
It has to pay for the resources being used like electricity, telecom bills etc
It has to pay the wages for the employees working for it
Pay for Raw

Materials
Pay for Tools
Pay for Office

Space
Pay for Utility

Bills
Pay for Taxes
Pay for
Employee
Salaries
17
Payments (Contd..)
Broadly any payment process will include
Payment
Initiation
Payment
Authorisation
Clearing
Settlement
Payment Initiation - This activity is performed by the Customer. Banks enable the provision
to initiate the payments from various channels/ modes
Payment Authorisation This activity will involve authorisation from the Customer and the
Bank ( for Compliance Checks. Sufficient Balance etc)
Clearing - Processing or transfer of a payment instruction from a payer bank to payee bank
according to predefined rules and operating procedures. It is a term used to refer to the
process of transmitting, reconciling and in some cases confirming payment orders before
settlement.
Settlement - It is the actual transfer of funds between the payer's and payee's bank.
Settlement discharges the obligation of the payer bank to the payee bank in respect of the
transfer. Settlement that is irrevocable and unconditional is described as final settlement.
18
Payments
RTGS
ACH
Cross Border Transfers
On-US/Book Transfers
Based on the Clearing and the Settlement Mechanisms the above distinction
has been made
Below is an ancillary service provided to the corporates to initiate the

payments
Payment Initiation Services
19
Domestic RTGS Payments - Singapore

Domestic RTGS Systems provide immediate clearing and settlement (R-Real Time
G-Gross S-Settlement) for the payments cleared via it.
Laura advises Tom to enable his company for RTGS payments in the Corporate
Online Portal and make the payments for Ancillary Tools and Machinery providing
trader (SG Tools Ltd.) via RTGS, as the amount of money getting transferred are of
large value and the trader demands immediate settlement of the dues, post
supply of material to First Auto
Dr. First Stop Auto Parts CASA Account
Cr. RTGS Mirror Account maintained in ABC books
2
MEPS + (RTGS)
First Stops Bank
Credit Notification
Received SG Tools
SG Tools Bank
Dr. ABC Bank Settlement Account with MEPS+

Cr. Citibank Settlement Account with MEPS+
4
SG Tools
Ltd.
Dr RTGS Mirror Account maintained in Citibank Books

Cr. SG Tools CASA Account with Citibank
20
RTGS Clearing and Settlement
RTGS Y- Copy
RTGS V - Copy
21
RTGS Clearing and Settlement
RTGS L- Copy
RTGS T- Copy
1.
2.
3.
Message from Remitting Bank is

sent to Bene bank directly
The settlement request is sent
by the network to Central bank
which confirms to beneficiary
bank
Beneficiary Bank awaits for this
confirmation before proceeding
22
RTGS Other Aspects

Remitting Customer
An ideal scenario is to get the confirmation that final beneficiary has been credited.
However it is rare to see this supported in an RTGS System

Remitting Bank
Close Monitoring of the Intra day liquidity is required by the banks ALM team. It is
possible that the daylight O/D may have to be arranged with the central bank for
settling the high value corporate payments or funds would have to be arranged through
inter-bank
Very often corporates give advance notice of huge payments (of the order of several
million dollars) are given by the customers so that the remitting bank may arrange for
the large volume of the funds
Sometimes the Customers may not have funds in their respective CASA account with the
bank at the time of initiating the Payments, but the expected funds will be available
before the end of the day . Remitting Banks would have to provide intra-day liquidity
judiciously to its corporate customers.
Remitting banks generally maintain a threshold based release mechanism for the RTGS
payments. Based on the availability of the funds in the Central Bank Settlement Account
held by the bank, low value RTGS transactions will be released directly for clearing while
high value RTGS payments will be routed via Treasury or the ALM Desk.
Generally there is surge in the RTGS Payments during the Cut off time , due to its high
liquidity requirements
23
RTGS Other Aspects

Central Banks
While it is not a necessary function of a Central Bank to operate and maintain the
Systems for Clearing and Settlement / a Customer Payment facilitator, in many countries
Central Banks are maintaining and operating the RTGS Systems directly or indirectly. The
Up time and the down time for the RTGS Systems are Crucial and have to be maintained
without any lapse.
Beneficiary Banks
Optimum utilization of the Liquidity available with the Central Banks. Excess liquidity to
be monitored and utilized accordingly
Not exposed to any settlement risk, as the Customer Credit is provided once the funds
are covered in the Central Bank books
Returns are processed on a near real time basis
Beneficiary
The Customer will receive detailed alerts for the credit received
24
RTGS Other Aspects

Central Banks
While it is not a necessary function of a Central Bank to operate and maintain the
Systems for Clearing and Settlement / a Customer Payment facilitator, in many countries
Central Banks are maintaining and operating the RTGS Systems directly or indirectly. The
Up time and the down time for the RTGS Systems are Crucial and have to be maintained
without any lapse.
Beneficiary Banks
Optimum utilization of the Liquidity available with the Central Banks. Excess liquidity to
be monitored and utilized accordingly
Not exposed to any settlement risk, as the Customer Credit is provided once the funds
are covered in the Central Bank books
Returns are processed on a near real time basis
Beneficiary
The Customer will receive detailed alerts for the credit received
25
ACH Clearing - Singapore

Low value clearing which can be cleared on the same day or can have a T+1 cycle
are done through ACH (Automated Clearing Houses) or (Deferred/ Designated Net
Settlement Systems)
Laura advises Tom that, payments which are not very urgent and are of low value
can be cleared through this mode, as generally the ACH clearing has a lower fee
model/ in some countries no fee model. Tom can also use the same mode for
Employees Salary transfers , if the employee holds an account with other bank.
Dr. First Stop Auto Parts CASA Account
Cr. ACH Mirror Account maintained in ABC books
2
G3 Bulk/eGIRO
First Stops Bank
Credit Notification
Received SG Paints
3
SG Paints Bank
Defered Net Settlement of all Pay ins and Pay outs

In as per the Settlement Cycle
4
SG Paints
Dr ACH Mirror Account maintained in Citibank Books

Cr. SG Tools CASA Account with Citibank
26
ACH Settlement Models

Bilateral Netting
one transaction per party at the end of each period
From Bank
(Debit)
For Bank
(Credit)
Amount
Time
Citibank
ABC Bank
SGD 5,000,000
0910 hrs
Citibank
ABC Bank
SGD 2,000,000
1014 hrs
HSBC
Citibank
SGD 6,000,000
1142 hrs
Citibank
ABC Bank
SGD 3,000,000
1228 hrs
ABC Bank
Citibank
SGD 4,000,000
1453 hrs
ABC Bank
Citibank
SGD 5,000,000
1756 hrs
Net transfer to ABC from 0900 to1200 hrs

SGD 5,000,000
+ SGD 2,000,000
- SGD 6,000,000
SGD 1,000,000
Similarly, we can calculate that between
1200 hrs to 1800 hrs, the net result is that ABC
has to pay SGD 6,000,000 to Citibank
Multilateral Netting
only one transaction at
the end of each period
always needs a clearing
house
/
central
institution
27
Cheques
Tom mentions to Laura that some of the suppliers, do not want the remittances to
be made via electronic mode, but have requested for the remittances via Cheque.
Hence Tom requests for a Cheque Book from ABC Bank.
Laura provides an alternative to Tom; Instead of First Stop drawing Cheques one
by one for all the Suppliers and sending the same to the Suppliers, the details of
Payee Name, Payee Account Number and Transaction Amount can be entered in
the Corporate Internal Banking Portal
Either ABC Bank can print these Cheques with the Authorized Signature and send
the same to the individual Payee OR First Stop can opt for an Offsite printing
where the Cheques will be printed in the First Stop preferred location, from
where First Stop can dispatch the Cheques.
Advantage of using the Corporate Internet Banking for printing the Cheques are
that ABC will capture the Cheque Details using specific systems like Paybase and
when the Cheque is submitted for the Claim, fraud check or any other Sanity
Check will be performed basis the data already stored with ABC. This will also
ensure easy reconciliation for First Stop; Specific reports for the same can be
provided to First Stop by ABC Bank
Fist Step
Corporate Internet Portal
ABC Bank
Cheque Printing and delivered to

Supplier
28
Cheques (Contd)
29
Cheque Returns
When a Cheque ( SGD 1000) is deposited by the Payee into his bank, the
bank gives forwarded date credit to his account for SGD1000. This offset
is dependent on the float days
Depending on the Clearing Houses rules, the cheque could be
truncated(i.e. sent as image), or physical cheque movement or OCR
based feed plus physical movement of Cheques needs to be sent to the
clearing house
At the Clearing House the Cheques are sorted by the Drawee Bank and
the accounting entries are posted on a net basis
The Drawee bank can examine the Cheque details and identify any
deficiencies (like Signature mismatch or account balance insufficiency)
If the Cheque needs to be returned , then the details are sent back to the
Clearing house which posts the Counter Balancing entries
The Payees bank reverses the forward date credit to the payees account
30
Cashier Orders and Demand Drafts

Sometimes the Supplier might demand for a Cashier Order (CO i.e.
Managers Cheque / Bankers Cheque) or a Demand Draft (DD) as a
payment mode
In case of a CO
The Cheque is issued by ABC Bank and drawn on ABC Bank
The customer is debited upfront and CO A/C on which the CO is drawn is credited
When the cheque comes for the clearing , this CO A/C is debited after the sanity cheque
and the clearing mirror A/C is credited
31
Cashier Orders and Demand Drafts (Contd..)

In case of Demand Drafts i.e. DD payable to possibly a remote location
where ABC Bank does not have a branch and cannot participate in the
local clearing
The Cheque or DD is issued by the ABC Bank and is drawn on its Local/ Currency
Correspondent say a German Bank for EUR Cheque Clearing

The Customer is debited upfront and a draft payables A/C is credited
All the drafts are summed up and a consolidated payment made via RTGS to German
Bank if the Bank branch is locally available (in case of Cross Border Drafts it is MT 202)
The details of such drafts are sent to the Local Clearing Correspondent via secured
channel as mandated in the Local Clearing Schema. In case of the Correspondent being
an Foreign Bank a separate SWIFT message MT110 is sent with all the draft details
Based on the MT110 details or the Cheque details sent by ABC Bank, the German Bank
verifies and does the sanity check once the DD is received for Clearing by the German
Bank. The German Bank debits the ABC Banks Vostro A/C maintained with it and Credits
the Clearing Mirror A/c / Customer Account if Customer belongs to the German Bank
32

SENDER'S BIC :UBSWCHZH80A
MT :
103
RECEIVER'S BIC :CITIUS33
20:
23B:
32A:
50K:
59:
70:
71A:
PAY/001
CRED
041004USD1500,
LILY PHILIPS
TALSTRASSE 101
8022 ZURICH
/98765430771924764
JOHN PHILIPS
42ND STREET
NEW YORK, NY 10022
/RFB/EXP.11/04
SHA
33
SENDER'S BIC :
MT :
RECEIVER'S BIC :
20:
23B:
32A:
50K:
59:
70:
71A:
UBSWCHZH80A
103
CITIUS33
PAY/002
CRED
041004CHF2600,
LILY PHILIPS
TALSTRASSE 101
8022 ZURICH
/98765430771924764
JOHN PHILIPS
42ND STREET
NEW YORK, NY 10022
/RFB/EXP.11/04
SHA
34

This may involve FX deals and multiple banks
Via Serial Method
MT 103 Customer
Credit Transfer
Dr. Auto Parts CASA Account in SGD

Cr. FX Spot Account in SGD
Dr. FX Spot Account in GBP
Cr. Nostro Mirror A/C in GBP
Engine
Components
Supplier
Dr. ABC Banks Vostro in GBP

Cr. CHAPS Mirror Clearing
Account
Raw Material
Suppliers Bank
Dr. CHAPS Clearing Mirror A/C
Cr. Suppliers Account with CITI
ABC Bank SGs UK

GBP Correspondent
UK Clearing Agency via

Central Bank
Dr. Lloyds Banks Clearing
Account
Cr. Citibanks Clearing Account
35
Cross Border Transfers (Contd..)

Payments can also be routed as a Cover Method
MT 202 COV
FI Transfer
MT 103 Customer
Credit Transfer
Dr. Auto Parts CASA Account in SGD

Cr. FX Spot Account in SGD
Dr. FX Spot Account in GBP
Cr. Nostro Mirror A/C in GBP
ABC Bank SGs UK

GBP Correspondent
Dr. ABC Banks Vostro in GBP

Cr. CHAPS Mirror Clearing
Account
MT 103
Engine
Components
Supplier
Raw Material
Suppliers Bank
Dr. CHAPS Clearing Mirror A/C
Cr. Suppliers Account with CITI
UK Clearing Agency via

Central Bank
Dr. Lloyds Banks Clearing
Account
Cr. Citibanks Clearing Account
36
Cross Border Transfers FX Booking

Many countries do not allow the banks to keep any open positions on
their FCY Holdings i.e. each transaction must be covered by a
corresponding FX deal on a daily basis
For Retail or Small ticket customers . Banks generally use the sheet rates
with the applicable margins as applicable as per the Customer Segments;
the treasury team aggregates this periodically during the day and makes
the FX deals. In some automated cases there may be direct connectivity
to the Centralized Treasury Desk for deal booking
For large size customers or high value payments
The Customer may directly call up the Treasury and book a deal or utilize a forward at
rates that may be better than Sheet Rates with Segment level margins
The Treasury Desk will book individual FX deals
The Payments Operations team may also deal with the Treasury directly on behalf of the
Customers deal with the Treasury team
37
Cross Border Funding

Typical Funding for the Spot deal will be as below
Customer has a SGD account with ABC Bank SG and wants to make a GBP
payment of GBP 1000

For the Customer Leg ABC buys the SGD 2000 from the Customer and Sells GBP
1000 to the Customer (Bank Buys at a Lower Rate and Sells at a Higher Rate as
per the applicable margins for the Customer Segment)
The Bank in parallel through its treasury desk creates a corresponding leg in
the FX market for selling SGD and buying GBP.
For the Sell SGD Leg in the FX Market, ABC Bank makes an RTGS Payment or a
MT202 to the SGD Correspondent of the UK Bank, the Counter Party (in our
Case say Citibank Bank SG may be the SGD Correspondent for Citibank UK)
For the GBP buy leg in the FX market, the Counter Party (in our case the
Citibank UK) makes a GBP payment to AB Banks UK GBP Correspondent i.e.
Lloyds Bank for the equivalent GBP amount via CHAPS.
When the Customers original payment is effected , the Nostro A/C is debited
by the UK Correspondent (Lloyds Bank) for GBP 100 and the beneficiary is
credited via CHAPS/BACS / any other means
Thus the FX positions gets squared off
38
Cross Border Funding (Contd..)

ABC Bank SG
Sells SGD and Buys GBP
MT 210 Advance Notification
for the receipt of GBP 1000
from Citibank UK
Transfers Via RTGS or

MT205 for the Settlement
of SGD 2000
MT 300 (FX deal

confirmation between
ABC Bank SG and Citibank
UK)
ABC Banks GBP

Correspondent in UK
MT 910 Confirmation
for Nostro Credit with
GBP 1000
Citibank UKs SGD

Correspondent in SG
4
MT 910 Confirmation for
Nostro Credit with SGD
2000
Sells GBP and Buys SGD
Transfers Via RTGS or

MT205 for the Settlement
of GBP 1000
MT 210 Advance Notification for

the receipt of SGD 2000 from
ABC Bank
Citibank UK
Note: Instead of Local RTGS the whole transaction can

also be settled via CLS , which in turn has connectivity
with local RTGS for Liquidity
39
Cross Border Transaction Charges/Fees

Charges
Sender
Receiver
OUR
Sender Collects the Charges from

the Payers Account
If the Sender has not settled the

charges upfront, the receiver can
take the below action
In case the Sender Banks Nostro
is with Receiver, debit the Charges
as agreed or as applicable
In case the Receiver has a Nostro
with the Sender Bank or there is
no Nostro/Vostro relationship, an
MT191 is generated and sent to
Sender Bank for Charges Claim,
which is settled as an MT202 via a
Correspondent
Correspondent in turn notifies the
receiver with a
MT910/MT940/MT942/MT950 as
applicable based on Nostro Credit
Charges
are borne
by the
Sender
If there is an agreement with the

receiver bank for the transaction
charges, the same is settled
upfront or is settled later and is
mentioned as Receiver's Charge in
the Message
40
Cross Border Transaction Charges/Fees (Contd..)

Charges
Sender
Receiver
BEN
The Senders Charges are taken

from the Remittance Amount i.e.
Beneficiary
The Receiver's Charges are taken

from the amount settled by the
Sender i.e. from the beneficiary
The Senders Charges are taken

from the Originating Customer
The Receivers Charges are taken

from the amount settled by the
Sender i.e. from the Beneficiary
Charges
are borne
by the
Beneficiary
or Creditor
SHA
Charges
are borne
by the
Payee and
Payer both
41
Book Transfers/ ON US transfers

Fast Stop employees hold an account with the ABC Bank , SG itself .
Similarly there are some utility providers, who have their accounts with
ABC Bank itself. Laura Suggests Tom to utilize a product offered by ABC
Bank Book Transfers for the remitting the payments instead issuing
Cheques/ remittances by Cash
Dr. Fast Stop CAS Account

Cr. Employee 1
Cr. Employee 2
Cr. Employee 3
42
Faster Payments _ Hybrid Systems

Laura informs Tom that in Singapore a new Faster Payments has been
launched which is being marketed as FAST . Laura mentions that First
Stop should enable this payment type in Corporate Portal. The option is
available for both Retail and Corporate Customers for low value payments
Tom shows interest and asks how different is FAST from the current GIRO
payments and RTGS
Laura explains that Faster Payments facilitates instant Fund Transfers
between the banks , the recipients receive the fund on a near real time
basis . The cap for such transactions are on the Total Transaction amount
per day per customer. Any urgent low value payments required can be
remitted through this option. Generally Faster Payments options are priced
less than the RTGS transactions
43
Hybrid Systems Other Aspects

Since the RTGS settlement is transaction by transaction, each participant is
required to hold huge amount in settlement accounts to cover outgoing
credits - Huge liquidity requirement
This is reflected in the tendency of the financial institutions to use funds as
much as they can delaying transmission of payment instructions to RTGS
system which results in entering payments into RTGS system just before
system cut-off.
It requires banking system to be more efficient and the payment system
might get exposed to liquidity risk because of lesser time to get liquidity
and settle instructions.
Hybrid systems are designed for efficient liquidity management with low
settlement risk to participants.
With funding worth say for $100 million at the start of day in settlement
account, a participant can clear as much as or even more than trillion dollar
worth of transaction
44
Hybrid Systems Other Aspects (Contd..)

The relative advantages of DNS and RTGS systems have led to the
development of Hybrid systems
Hybrid systems combine the bilateral or multilateral offsetting features
with RTGS to reduce liquidity requirements
The maximum benefits from a hybrid system arise when the system
operates at the lowest possible level of liquidity, all payments are cleared in
full at the time they are made, and all payments are made early in the day
Features of hybrid clearing systems
settles the bank positions over multiple netting processes

gives near real time final payment
efficient liquidity handling with economical rates
minimal funding maximum processing
Examples: CHIPS in US, TARGET2 in Europe , Faster Payment models
45
Payment Initiation (H2H Model)

As the business for First Stop grows and it adopts an ERP package for managing its operations
and finances . The number of remittances being made by First Stop increases on a day to day
basis.
Tom speaks to Laura to discuss on the manual effort being put by the First Stop employees for
creating these remittance instructions over web.
Laura advices Tom to migrate First Stop from a ABC Banks Web Customer to H2H Customer.
The H2H solution will provide direct connectivity between the bank and the ERP system
without the need to type the payments manually to the Web Interface
First Stop can either opt for using SWIFT Message MT101 or a Pain.001 format or any be-spoke
file uploads via SFTP for making these remittances. All types of payments can be initiated as a
single file and the instruction can be given as one shot. Future Value dated transactions can
also be uploaded, which will be scheduled by the ABC Banks Systems on the appropriate day
Cross Border
Cashier Order/
Cheque
Faster Payments
FCY DD
Book Transfer
ACH Clearing
RTGS Clearing
Payment Initiation
46
Cash Management
Receivables/Collections
47
Collections management services

Collections management services refers to funds collected at various locations on behalf of the client. These funds are
pooled to a centralized account or multiple accounts, based on the customer's requirements. Banks can arrange
collections for both local and outstation cheques with cheque pickup and guaranteed credit facility.
Products offered by banks under collections (paper and electronic):

Local cheque collections
High value Transactions (0 Day clearing)
Magnetic ink character recognition (MICR) clearing of cheques

Upcountry own branch location cheques
Upcountry correspondent bank branch location cheques
Cash collections
Direct Debit
Post dated cheque collections
Invoice collections
Lockbox/Drop box
48
Receivables/Collections
First Stop has grown over a period of time and has finished goods delivery being made in SG ,
MY , India and other ASEAN countries.

Tom meets Laura and explains that lately there is a huge surge in the Payments being received
from different wholesale buyers and retail outlets for the goods that First Stop delivers, in
domestic and international markets.
Laura understands the different segment of the clients which make payments to First Stop
First Stop has big number of Wholesale dealers and

Automotive Retail showrooms , who place huge
orders on a periodic basis and make payments via
Cheques and Electronic Payments
First Stop has recently ventured into franchise based

Highway Service Outlets. These service outlets have
entered into contracts with First Stop to pay a fixed
amount on a monthly basis based on the request
from First Stop
49
Receivables/Collections (Contd..)
Laura explains to Tom , ABC Bank being a leader in the Cash Management services, provides
various flavors of the Collection Products for the Corporates
Domestic Collections
International Collections
Lock Box Collections
Electronic Collections
Collections/
Receivables
Paper Based
Domestic
Collections
LockBox
Collections
Electronic
International
Collections
Direct Debits
Inward
Remittances
Over the
Counter Cash
50
Lockbox Collections/ Cheque Collections

Laura advices to Tom , for collections within Singapore from the clients who prefer to write
Cheques, First Stop instead of going for a plain Domestic Collection model, where the
Customers have to deposit the individual Cheques into First Stop Account ; First Stop should
opt for a Lockbox collection model.
As part of the Lock box collection model, the First Stop Customers can deposit the Cheques to
a Lockbox /PO box and the bank will process the Cheques deposited , Collect the amount
from various banks through the domestic clearing and Credit the amount to First Stop Account
with ABC Bank.
The process is reverse of the earlier scenario in which the First Stop was the Payer
2
3
Whole Sale Dealer deposits

instruments into lockbox or
send to the First Stop
4
1
First Stop generates the invoice

and sends the same across to the
wholesale dealers
ABC Bank Credits the

First Stop s Bank
account once the
cheque is realised
ABC collects the instruments from

the drawee banks i.e. Wholesale
dealer and other clients bank
accounts via clearing or via
correspondent banking
Note: Now the local clearings are exposing BPAY as
service to reduce cheques and manual process
51
Cheque Collections (FCY) Comprehensive Process

Laura mentions that for invoice collection process, ABC Bank can play a greater roll and part to
ease the transactional volumes handled by First Stop.

Tom provides the details of a contract with Australian Automobiles (Importer) who imports
the finished goods from First Stop. The terms of payment are
AUD 100000 once the goods are received

AUD 50000 on a 90-day draft
First Auto generates

the Invoice and sends
the documents for
collection via ABC
Bank
AA is satisfied
with the
conditions and
makes an
immediate
payment of AUD
100000 and
agrees for a 90
day draft for AUD
50000
3
ABC Bank (Remitting Bank) sends
the document to the Collecting
Bank , NAB . NAB is the banker for
Australian Automobiles
NAB sends an
Acknowledgement as MT410
to ABC Bank that documents
have been received
4
NAB Passes on the documents to
Australian Automobiles
52

(Contd.)
Australian Automobile makes an immediate payment of AUD 100000 to First Stop via its bank
NAB and also agrees for the 90-day draft for the remaining amount of AUD 50000
ABC Bank credits the First Stop account for

AUD 100000 in equivalent CCY and
advices about the advice of acceptance
for the remaining payments as 90-day
draft
1
AA makes a
payment of
AUD 100000
For the remainder of AUD 50000, NAB

sends a MT 412 ( Advice of Acceptance) to
ABC Bank, SG
NAB also sends an MT400 (Advice of

Payments) to ABC Singapore
NAB remits the AUD 100000 as MT202 to AUD

correspondent of ABC Bank SG , which in turn remits
the equivalent amount to ABC Bank
53

(Contd.)
After 90-days , the MT400 (Advice of Payment) is sent by the collecting bank to the
remitting bank and actual financial transfer is initiated as MT202 by the collecting
bank via the remitting banks / collecting banks currency correspondent
Different scenarios might arise in the interim. The Importer (here AA) does not pay
its bank (the collecting bank NAB) the remaining amount either due to dispute or
lack of funds or any other reason. In such a case a MT 416 (Advice of Non-Payment/
Acceptance) is generated and sent by the collecting bank to the remitting bank
The Importer and exporter may also negotiate and agree on an amended terms
and conditions . In this case the remitting bank sends an MT430 (Amendment of
Instructions) to the collecting bank , which is acknowledged via MT410 and
accepted via MT412
If no response is received from the collecting bank a tracer , MT 420 is sent by
the remitting bank to the collecting bank, which is responded with the a MT 422
( Advice of Fate)
54
Cash Letters
A Cash Letter covers multiple documents (in a particular currency) can be sent by a bank to its
currency correspondent for collection

The Correspondent Bank credits the face value of the documents to the bank under the usual
clause subject to final payment and realisation
In case of dishonour of any cheques, the correspondent bank, reduces the banks Vostro with
2
it by the credit amount and reversal fees.
Debits its internal branch account
and credits ABC Banks Nostro at
face value and sends the MT 450
as Credit Advice
Sends the Cash Letter to

the UK Correspondent
ABC Banks UK Correspondent

In case of any dishonour , the
correspondent debits ABC Banks
Nostro for the credit amount
along with the dishonour fees
and sends an MT 456 (Advice of
Dishonour)
3
Sends the documents for
collection
55
Inward Remittances
Inward remittances are nothing but the direct incoming payment instructions hitting the First
Stops Account with ABC Bank. These inward remittances can either be a domestic payment or
a cross border payment. With the BPAY services being exposed by the local clearing houses,
such inward remittances as part of collection is getting more common
BPAY Overlay Services

Registered with BPAY and logs in all
invoice details
Wholesale dealer initiates the

BPAY with invoice details and
biller details
Payers bank verifies the

and Invoice
3 Biller
authenticity
On confirmation initiates the

credit transfer to First Stop
5
ABC either credits the
First Step CASA account
directly or pools in such
BPAY in a separate
collection account for
ABC and sweeps on a
agreed interval to First
Steps CASA Account
First Stop generates the invoice and

sends the same across to the
wholesale dealers
56
Direct Debits
A direct debit or direct withdrawal is an instruction that a bank account holder gives to his or her bank to collect an amount directly
from another account. It is also called pre-authorized debit (PAD) or pre-authorized payment (PAP).
For contracts with the High Service Franchises , Laura recommends Tom to get them signed up for direct debit mandates for the
stipulated contract period and the amount.

First Stop, post that can initiate the direct debit instructions on the designated frequencies and claim for the contract amount at the
agreed frequency
Highway Service Franchise

, provides the details of
the mandate it is giving to
First Step and gets it
acknowledged by its bank
Citibank Initiates the

payment of the amount
requested
Highway Service Franchise

, agreed mandate details
along with the
acknowledgement from its
bank
If not a Centralised Mandate, the

bank checks for mandate validity and
debits its customers
Validates the mandate if Mandate is

Centralised and passes the
instruction to the Receiver Bank
Generates a Direct
Debit Instruction
8
Credit Amount received by
the ABC Bank
Provides the mandate details to its

bank ABC . ABC Bank defines the same
as a recurring instruction for the agreed
time period and the amount
9
First Stop Account Credited

57
Cash Management Liquidity

Management
58
Liquidity Management
Liquidity management techniques broadly fall into two main groups, depending upon the method
used to consolidate balances:
Physical balance consolidation:
Cash concentration, also referred to as zero balancing, sweeping, target balancing or physical cash
pooling.
Notional balance consolidation:

Notional pooling
Interest enhancement
59
Liquidity Management Overview

The Core Principals of effective Liquidity Management is to ensure the funds for the Corporate
Working Capital needs at the Right Place, at the Right Time and at the Right Cost;
Liquidity Management Services provided by the banks are always in tandem with the Account
Services , Collections and Payments
The core value propositions provided to a corporate by the Liquidity Management Services are
as below
Visibility
Liquidity Efficiency
Control and access to Internal
Funds and reducing
dependency on external
funding
Optimal utilisation of internal
liquidity and create surplus for
Investments
Operational Efficiency
View Consolidated Cash
Positions
Administrative Tracking of
Intercompany loans
Financial Efficiency
Increase Interest Income
Investment Opportunities
Control
Optimization
60
Story Board 4
First Stop has grown into a multinational organisation propelled by both organic growth and a
series of recent takeovers in the APAC markets . Now First Stop has different branches across
Singapore, Malaysia , India , Australia and New Zealand
It also has grown into more product/service lines, which has been incorporated as subsidiaries
or group companies of First Stop
It has its Operations and Purchasing departments for all the subsidiaries centralised in SG and
partly in India , while its sales and invoicing is spread across multiple geographies
Each one of these divisions/subsidiaries maintains separate local accounts for ease of
maintenance, recon and auditing
In most of the geographies First Step has relationship with ABC Bank and in some regions some
other private banks
First Step Holding Company

(Location: Singapore)
Optimum Auto
Design ( IN)
Operations
Sales &
Invoicing
Magnus Highway
Service (MY)
Sales &
Invoicing
Premium CAB
Services (ID)
Sales &
Invoicing
First Step Auto

Parts (SG)
Sales &
Invoice
Operations
Purchasing
61
Story Board 4 (Contd..)

Tom highlights to Laura that , though the over all relationship with ABC Bank and
other Banks are always Positive from a Cash Position , still First Step is ending up
paying huge interests on its Purchases account in SG and India , as many a times,
the purchases account gets overdrawn
Laura suggests Tom to go for Sweeping Structure one of the LM Techniques , basis
which the debit in the Purchase Account will follow the below procedure or steps
Debit the Purchase Account for the available balance
If debit amount is not met against the balance available in the Purchase Account
in SG , sweep in as per the sweep structure defined for accounts
If debit amount is still not met then go for the Intra Day OD limit
If the debit amount is still not met then go for the normal Credit Limit
If debit amount is still not met , utilise the limits earmarked for in other group
accounts
If the debit amount is still not met, then reject the transaction or park it in any
manual queue for Relationship Manager to take the action
Tom asks for different LM Techniques available with ABC Banks so that he
can discuss and decide with the treasury team
62
Story Board 4 (Contd..)

Laura explains that at a high level some of the Liquidity Management Techniques
available
Domestic Sweeping
Same Currency
Multi Bank Sweeping
Domestic Sweeping
Cross Currency
Single Currency
Notional Pooling
Interest Optimisation
Cross Border
Sweeping
Multi Currency
Notional Pooling
Laura also explains that the kind of LM technique that is allowed in a market is
highly driven by the following parameters
Corporate Business
Model
Corporate Treasury
Model
Tax Impacts
Banks Capabilities
in the region
Market Practice
Pool Locations
Regulations
63
Sweeping Physical/Cash
Physical/Cash Sweeping
Header Account in
Bank A
Header
Account
Sub Acc 1
Sub Acc 2
Sub Acct. A in
Connected Branch
of Bank A
Sub Acct. B in Local

Third party bank
Sub Acct. C in Cross

border Third party
bank
Physical movement of funds

Offsetting Credit and Debit Balances
Cross Branch Sweep
Options Available are Cross Border

and Domestic Sweeping ( Same
Currency/ Cross Currency)
Same Bank or Multibank Sweeping
Options. For Multi Banks - MT101
should have been enabled.MT
940/950 balance statements should
be received
OD Facility for the Corporate Accounts
may be required
Transfer through
Local Clearing
Transfer through
SWIFT (MT 940/
MT101)
For Multi Bank Sweep Facility the , the third party bank should support
The Third Party bank should support MT940/MT942/MT950 statements (receipt
and remit) or any local clearing equivalent for balance determinations
The Third Party bank should support sending and receiving MT101 message or
equivalent local clearing messages
The Third party bank should support MT103 or equivalent Local clearing message
Cross-Guarantee required if Dynamic

Pool Payment feature is enabled
64
Sweeping Different Configurations/Capabilities
Sweep Parameters
Direction of Sweep
Limit Management
Back Valuations
Sweep Timing and

frequency
Inter Company Loan

Administration
Reports
65
Sweeping Different Configurations/Capabilities

Zero balance account is a account in which a balance of zero is maintained by
automatically transferring funds to master account to eliminate excess balances in
separate accounts and maintain greater control over disbursements.
Zero Balancing
Sweep Example
Master Account
Sub Account A
Sub Account B
Sub Account C
Available Balance
before Sweep
+ 10,000
-3000
+4000
-1000
Sweep Amount &

Direction
- NA-
+ 3000 ( From
Master Acct.)
- 4000 ( To Master
Account)
+1000 (From Master

Account)
Available Balance
After Sweep
+10,000
66
Sweeping Physical/Cash (Contd..)

In Target Balance Accounts, a minimum amount (which has been specified) is left in the
Sub-Account and the balance amount is swept to the Master Account.
The Target Balance Account builds on zero balance by allowing target cap / floor balances
to be applied to each individual account.
Target Balancing
Example
Master Account
Target Balance
Sub Account A
Sub Account B
Sub Account C
NA
2000
3000
Available Balance
before Sweep
+ 10,000
3000
+4000
-1000
Sweep Amount &

Direction
- NA-
-1000( To Master
Acct.)
- 4000 ( To Master
Account)
4000 (From Master

Account)
Available Balance
After Sweep
+11,000
2000
3000
67
Notional Pooling
Notional Pooling
Header Account
(USD 500)
Header
Account
Sub Acc 1
Sub Acc 2
Over all pool fund is USD 750
Sub Acct. A
(USD 300)
Sub Acct. B (USD

300)
Sub Acct. C (USD

250)
No Physical Movement of Funds

Offsetting of Credit and Debit
balances
Domestic Only Domestic Single
Currency Notional Pooling and
Domestic Multi Currency Notional
Pooling
Notional Pooling is the process of offsetting the Credit Balances in some of the
accounts against the overdrawn balances in some of the accounts without
physically moving the funds
Cross Guarantee/Set off Mandatory
Good for corporates who have decentralised operation model with decentralised
treasury and want to take the benefit of Sweeping without comingling the amount
available in each of the subsidiary accounts
High Regulated
Will depend on Tax Rules , Transfer
Pricing norms in the Country
Credit Approvals
Notional Pooling is most complex with cross guarantees , haircuts/ FX buffers in

case of MCNP etc to protect the bank interest
The Notional pooling also comes with the Dynamic Pool Payment Facility
68
Netting
In general, netting means to allow a positive value and a negative value to cancel each other out. In this
method of reducing credit, settlement and other risks of financial contracts by aggregating (combining)
two or more obligations to achieve a reduced net obligation.
Benefits of Netting
Netting potentially address four major risk in financial area, there are
Reduction of credit risk

Reduction of settlement risk
Reduction of liquidity risk
Reduction of systemic risk
Below are few of the types of netting in context of the credit risk
Payment Netting
o Bilateral and Multilateral Netting
69
Bilateral netting
A owes B USD 100
B
B owes A USD 200
B
B pays A USD 100
This can be best understood as:

Daily settlement or offsetting of several, due claims in the same currency
Reduction of transaction costs, settlement risk and liquidity risk.
No impact on credit risk.
70
Multilateral Netting
Bilateral Netting is between two parties.
Multilateral Netting involves netting among more than two parties, using a clearing-house or central exchange.
Before Netting
Co.A
After Netting
Co.B
Co.A
Co.B
Netting
Center
Co.C
Co.D
Co.C
Co.D
71
Cash Management Allied

Services
72
Different Cash Management Allied Services

Statements and Alerts - Example MT940/MT950 statements direct feed to
ERP
Fraud Preventions Paybase based Cheque Fraud identification, Cyber
Frauds, Risk Score for behaviour
Pricing and Billing - Consolidated Pricing and Billing based on relationship
across Cash Management services and staggered pricing models.
Configurable billing cycles and Rebates
Virtual Account Services - To support the C2B payments and help the
corporates to recon the collections seamlessly
FX Booking Support the FX deal booking - provide preferential rates
73
Thanks
74

Cash Management An Introduction

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Cash Management An Introduction

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Cash Management- An Introduction

What is cash Management?

Cash Management represents optimization of cash balances and short-term investments

Three main motives of Cash Management

Copyright 2015 TechM. All rights reserved.

Unanticipated cash requirements

To take advantage or opportunity

key indicator for a business success ;

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Importance of Cash Management

Be prepared to meet cash needs when they arise

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Principles of Cash Management

Manage cash flows Effectively

Forecast cash flows Accurately

Establish an Appropriate Investment Policy

Implement Effective Investment Management

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Copyright 2015 TechM. All rights reserved.

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Corporate Online Portal

Corporate Online Portal

Cash Management Portal

functions that the banks provide as part of their

Customised MIS Reports in

Cash Flow Forecasting

Self Service Corporate User

Authorisation matrix for

Inter company lending

Single Customer View

Services in compliance with

Cash Management - Payables

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Introduction to Payments System

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Traditional payment system

Traditional Payment System

Info Flow for Notional

Goods and Services

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Pay for Raw

Pay for Tools

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Pay for Office

Pay for Utility

Pay for Taxes

Pay for Raw

Pay for Tools

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Pay for Office

Pay for Utility

Pay for Taxes

Below is an ancillary service provided to the corporates to initiate the

Payment Initiation Services

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Domestic RTGS Payments - Singapore

Dr. ABC Bank Settlement Account with MEPS+

Dr RTGS Mirror Account maintained in Citibank Books

RTGS Clearing and Settlement

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RTGS Clearing and Settlement