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Post Corporate Banking - December 4th, 2008

EXECUTIVE SUMMARY


 The study involves different types of services offered by banks for corporate.
 The basic function of bank is accepting deposits from the public at lower interest rates and lends it at a higher rate.
 Besides from the usual services, banks now have started giving additional services right from working capital needs to investment banking.
 Working capital is the core area of banking industry.
 The facilities provided to them are cash management services, working capital finance, project finance, EXIM finance, short tem corporate finance etc.
 The banks have now adopted corporate banking strategies which are explained ahead.
 The role of banks has emerged in functioning of corporates.
 This topic is much practical when we go through the corporate banking of STATE BANK OF INDIA.
 All this was possible because of advancement in E-banking, technology and it wouldn’t have possible without our bankers.
 We can also look at the RBI’s initiatives towards this topic.
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CORPORATE BANKING

 Corporate Banking represents the wide range of banking and financial services provided to domestic and international operations of large local corporates and local operations of multinationals corporations.
 Services include access to commercial banking products, including working capital facilities such as domestic and international trade operations and funding, channel financing, and overdrafts, as well as domestic and international payments, INR term loans (including external commercial borrowings in foreign currency), letters of guarantee etc.
 Banks normally provide credit in the form of overdrafts, loans, bills discounted, or import and export finance. The process of extending any of the said forms to corporate borrowers passes through two distinctive phases; the credit decision making process (account relationship management) and the banks' internal operations.
 Corporate Banking services are an integral part of the Corporate, Investment Banking and Markets (CIBM) structure, which focuses on offering a full range of services to multinationals, large domestic corporates and institutional clients.
 The Investment Banking and Markets division brings together the advisory and financing, equity securities, asset management, treasury and capital markets, and private equity activities of the Group to complete the CIBM structure and provide a complete range of financial products to our clients. Increasingly, ECA financing is being considered by customers and we work closely with our project export finance teams, both onshore and offshore, to provide structured solutions.
 Clients are serviced by sector based client service teams that combine relationship managers, product specialists and industry specialists to develop customized financial solutions. These form the relationship team along with the Investment Banking & Advisory division. Each team supports the client's worldwide operations, ensuring a full understanding of the company's business and financial needs. Based on our client's requirement, HSBC also assigns Global Relationship Management teams to provide structured solutions.
 In today’s global Banking arena, Corporate Bankers are facing a string of unprecedented and sweeping challenges in the areas like Treasury Management, Trade Finance, Risk Management, Compliance Management, Electronic Trading and Derivatives Markets. Compounding this are the mounting complexities from ongoing regulatory changes, decreasing margins and fierce competition
 Global Relationship Management teams are tasked with understanding in depth the sectors in which our clients operate with the aim of adding value through detailed industry knowledge and structured financial solutions.
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Re: Corporate Banking - December 4th, 2008

CORPORATE BANKING OPERATIONS

 The bank mostly lend against appropriate tangible securities such as deposits, shares, debentures, property, guarantees supported by tangible securities, life policies, goods, gold or other precious metal.
 The bank may also lend against intangible securities such as unsupported guarantees or assignment of sums due to the borrower by third parties.
 It is essential that the bank follows the proper procedures in order to obtain good title when taking a security.
 There is a difference between possession and ownership.
 The various forms of documents used for obtaining different types of security are also important. Inadequate documentation may well cause losses to the is particularly true for the Trade Financing documentation and the Securities Agreement relating to goods.
 The bank must also follow proper procedures to realise securities otherwise losses may be incurred.
 The corporate operations divisions are normally responsible for maintaining securities documentation and updating the customers' mandates with fresh account documentation, account statements, financial statements and relationship reviews.
 Handling and treatment of delinquent accounts is also an important area of operations.
 Grading of bad and doubtful debts for an effective recovery process is important.
 An effective delinquency policy is essential to avoid unnecessary financial losses.
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Re: Corporate Banking - December 4th, 2008

IMPORTANCE OF FEE-BASED SERVICES SEGMENT TO BANKS

Q. Why should the banks be so excited about the subject?

 Deregulation and new technology have eroded banks’ comparative advantages and made it easier for non-bank competitors to enter into hitherto exclusive banks’ domains. In response, banks have shifted their sales mix toward non-interest income by selling ‘non-bank’ fee-based financial services by charging explicit fees for services.

 According to another study titled ‘Fee-Based Financial Services Markets: New Opportunities and Threats In the Internet Age’ by Killen Associates again, the market for retail and commercial fee-based financial services will exceed that for interest-based services by 2005, reaching nearly a staggering $500 billion by 2004 globally.

 Banks want such services to be their primary profit source for certain reasons. This revenue is more stable over time, assures a steady income and more importantly, leads to a strong relationship with the corporate client.
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Re: Corporate Banking - December 4th, 2008

CORPORATE BANKING STRATEGY

 As a result of the advent of the Internet, banks and other Financial Institutions are rethinking their corporate banking strategy. The Internet opens a new channel for delivering services to corporate clients and helps these institutions remove cumbersome and expensive paper processes. It is significantly cheaper and much more flexible.
 With the Internet, large multinational companies that always used EDI can save more money by eliminating the old system’s expensive private networks and expand reach to include more businesses on the supply chain. Small-to-medium size companies, too, can conduct business-to-business transactions. The Internet simply provides a two-way electronic linkage that never existed before.
 So, banks can now offer a trusted solution to their corporate customers via the low-cost delivery channel i.e., the Internet. And corporations will enjoy the ability to manage cash held by their strategic banking partners in real time via a secure, efficient, Web-enabled communication system.
 The expected shift in volume from paper-based transactions to electronic ones would determine the path of future technology investments in banks and orient it towards electronic payment delivery systems.
 This shift is also driven by banks’ perception that electronic transactions contribute higher margins than paper-based transactions.
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Re: Corporate Banking - December 4th, 2008

CREDIT GUIDELINES & CREDIT STANDARDS

THE ACCOUNT RELATIONSHIP MANAGEMENT:

MEANING:

 The account relationship managers are those who negotiate with
the targeted corporate customers with the terms acceptable to the banks and “Account Relationship Management Acceptance Criteria" or the so called "Credit Guidelines."
 It should be internally placed and distributed to every credit manager/officer.
 These guidelines set the minimum acceptance standards, in simple words, the guidelines are aimed to let the account relationship managers/officers know exactly what they should be selling, to whom, at what price and under which conditions (securities and other terms).

DECISION MAKING:

 Making a sound decision to extend credit to a corporate customer is a complex process.
 This is because corporate customers are normally engaged in a wide range of activities and are affected by a host of external and internal factors that have direct impact on their ability to meet financial obligations.
 The credit decision making should, therefore, be directed by an internal lending policy that takes into account such factors and aims to protect the bank's assets, preserve its reputation and optimize the
relationship profitability.
 Based on the credit guidelines, the account relationship executive will have to submit a credit proposal evaluating the whole relationship.
 The Credit Evaluation process must be done systematically and within acceptable standards to maintain a high quality credit portfolio.
 The preparation of the credit proposal must be guided by common sense and sensible judgement.
 The amount of details the proposal should contain naturally depends on several elements, namely the size and strength of the customer, the size of the bank's current and proposed exposure, the socio political environment, the economy, the industry and the bank's position in relation to other creditors.

CREDIT EVALUATION:

 The bank must place a system of credit evaluation which is based on assessment of historical, current and projected elements stated hereunder:

a. FINANCIAL ANALYSIS:

 Sales, Profitability, Performance, Funds Flow, working Capital Management, liquidity, balance sheet conditions...etc.

b. OPERATING ANALYSIS (OPERATING RISKS) :

 Owners, Management, Company, Industry, Markets.

In summary, the credit proposal (review) must highlight the Financial Risks and Operating Risks. It should state the magnitude and likelihood of such risks i.e. "What if" scenarios, and how will they be managed? Most global banks maintain their credit evaluating standards in an internal "Instruction Manual" containing the bank's management instructions regarding each and every aspect of the credit extension or review process. It sets the management standard of credit evaluation to eliminate risks and prevent the decline in profit margins on credit facilities.
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Post Re: Corporate Banking - December 4th, 2008

CORPORATE SERVICES PROVIDED BY INDIAN BANKS

1. CASH MANAGEMENT SERVICES

MEANING:

 Corporations, the world over are jettisoning antiquated cash management practices and opting to put in place sophisticated cash management structures to garner the associated economic benefits and due to reasons of expediency.
 Conversely, banks have taken note of the enormous revenue potential in the fee-based services segment to prop up their sagging bottom lines. While appreciating the initiatives taken by the Administrative Staff College of India in organizing the Workshop.
 The some of the relevant issues, which the banks need to address are as follows.

OBJECTIVE OF CASH MANAGEMENT:

 The fundamental objective of cash management is ‘optimization of liquidity through an improved flow of funds.’
 In today’s highly competitive environment, where time is considered as money, deployment of staff to render basic routine tasks does not make economic sense.
 As a sequel, cash management today is not what it used to be.
 Electronic banking, which began as a passive desktop access to bank balances, is emerging into complex processes of liquidity management through numerous techniques.
 Almost all of the corporations in advanced countries are now planning to use the services of banks to help them collect payments on monthly bills they issue to consumers and other types of cash management services.

IMPORTANCE OF CASH MANAGEMENT FOR A CORPORATE ENTITY:

Q. Why there is need to put in place a specialized cash management system by corporate?

 Good cash management is a conscious process of knowing when, where, and how a company’s cash needs will occur; knowing what the best sources for meeting additional cash needs; and being prepared to meet these needs when they occur by keeping good relationships with bankers and other creditors.
 Scientific cash management results in significant savings in time, decrease in interest costs, less paper work and greater accounting accuracy.
 Proper cash management creates more control over time and funds; provides timely access to information; enables easy employee related payments; supports electronic payments; produces faster electronic reconciliation; allows for detection of bookkeeping errors; reduces the number of cheques issued and earns interest income or reduces interest expense.
 Corporations with subsidiaries worldwide, can pool everything internationally so that the company can offset the debts with the surplus monies from various subsidiaries.
 The end result will transform treasury function as a profit-centre by optimizing cash and put it to good use.
 Creative and pro-active cash management solutions can contribute dramatically to a company’s profitability and to its competitive edge.
 The ultimate purpose of proper management of liquidity, needless to emphasize, is to improve the overall productivity of funds.

TYPES OF CASH MANAGEMENT SERVICES:

 The menu of cash management services offered by banks abroad is indeed diverse and tempting.
 The services broadly fall under collection services, Disbursement services, Information and control services, services related to Electronic data interchange (EDI), Commercial web banking services, Sweep services, Fraud detection solutions, Global trade solutions and Investment solutions.
 Collection Services accelerate receipt of payments from sales and quickly turn them into usable cash in accounts.
 Disbursement Services make efficient payments by reducing or eliminating idle balances in company’s accounts.
 Information and Control Services receive the data and provide the management capability needed to monitor company cash picture, control costs, reconcile and audit bank accounts, and reduce exposure to fraud.
 Financial Electronic Data Interchange (EDI) is a computerized exchange of payments between a company’s business and its customers and vendors.
 Commercial Web Banking Services give a wide range of services from any Internet connection, which can help streamline banking process quickly and efficiently.
 Sweep Services maintain liquidity and increase earnings without having to actively monitor accounts and move money in and out of them.
 Information reporting solutions assist companies, which need to receive account data that is timely, precise, and easy to access and interested in initiating online transactions.
 Investment solutions help to minimize excess balances and maximize return on available funds.
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Re: Corporate Banking - December 4th, 2008

CASH MANAGEMENT SERVICES - INDIAN SCENARIO:

 It is apposite to review the Indian scenario in this regard. As we are well aware, banks’ desire for funds has lost under the onslaught of the current slowdown.
 Despite the offer of very soft terms corporates are refusing to borrow, while bank deposits have been ballooning.
 Compelled to service the burgeoning liabilities, but unable to lend hastily and allow their non-performing assets (NPAs) to grow, bankers are forced to compete for the handful of safe bets among their borrowers.
 Banks chose to use the opportunity to refocus their activities, seeking clearly defined identities in terms of services and customer segments.
 Most of them concentrated on cleaning up their books by peeling down their NPAs.
 All of them attempted freezing of costs, improving operational efficiencies, and boosting productivity.
 The strategy of the banks, which performed well, is to use fee-based services to maintain earnings growth.
 With interest rates falling, non-interest income was, unsurprisingly, the fastest-growing component of the banks’ total income. Fee-based activities will complement though not substitute the core business of lending.
 It is gratifying to note that a number of banks in India are offering wide-ranging cash management services to their corporate clients.
 All the three categories of banks viz., nationalized banks, private banks, and foreign banks operating in India are active in the cash management segment.
 SBI, PNB, ICICI Bank, GTB, HDFC 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 Grindlays 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.25,000 crore per month.
 State Bank of India alone is estimated to handle over Rs.12,000 crore per month through its product called SBI-FAST.
 Indian banks are offering services like Electronic funds transfer services, provision of cash related MIS reports, cash pooling services, collection services, debit transfer services, guaranteed credit arrangements, sweep products, tax payment services, receivables and payables management.
 Foreign banks operating in India are offering regional 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.
 The cash management services offered to Indian corporates are comparable to what their counterparts are getting in advanced countries.
 Banks realised that if they do not offer the services required by corporate customers it would result in a net loss of clientele, returns and goodwill.
 Banks in India need to continuously monitor international trends in innovations taking place in providing cash management services and swiftly offer similar services to their corporate clients.
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Re: Corporate Banking - December 4th, 2008

RESERVE BANKS INITIATIVE IN CMS:

 The Reserve Bank of India has been taking a number of initiatives, which will facilitate the active involvement of commercial banks in the sophisticated cash management segment.
 One of the pre-requisites to ensure faster and reliable mobility of funds in a country is to have an efficient payment system.
 Considering the importance of a robust payment system to the economy, the RBI has taken numerous measures since mid Eighties to strengthen the payments mechanism in the country.
 Introduction of computerized settlement of clearing transactions, use of Magnetic Ink Character Recognition (MICR) technology, provision of inter-city clearing facilities and high value clearing facilities, Electronic Clearing Service Scheme (ECSS), Electronic Funds Transfer (EFT) scheme, Delivery vs. Payment (DvP) for Government securities transactions, setting up of INdian FInancial NETwork (INFINET) are some of the significant initiatives which highlight the seriousness with which the Reserve Bank has taken up the reforms in Payment systems.
 Introduction of a Centralized Funds Management System (CFMS), Securities Services System (SSS), Real Time Gross Settlement System (RTGS) and Structured Financial Messaging System (SFMS) are the top priority items on the agenda to transform the existing systems into a state-of-the-art payment infrastructure in India by the Reserve Bank.
 The current vision envisaged for the payment systems reforms is one, which contemplates linking up of at least all important bank branches with the domestic payment systems network thereby facilitates cross boarder connectivity.
 With the help of the systems already put in place in India and which are coming into being, both banks and corporates can exercise effective control over the cash management.


Q. HOW CORPORATES SELECT A BANK FOR SOURCING CASH
MANAGEMENT SERVICES?

 It is normally the client-bank relationship, which is a main consideration in choosing a bank for cash management.
 Pricing, obviously, is a very dominant factor.
 Making a choice between the local banks and the more highly priced foreign banks usually depends on how cost savings are presented by the banks.
 Multinational corporates with complex treasury operations admire their respective banks’ expertise and ability to offer creative solutions.
 Flexibility, reliability, security and stability have been cited as vital parameters for any electronic banking system.
 The systems should be tailored to provide pertinent reports and the ability to upgrade easily in future.
 The technology should allow real-time cash management with strategic banking partners.
 It should integrate easily with legal framework in place.
 It should lower operating costs and resolve disputes quickly by providing secure and legally enforceable audit trails.
 It should be capable of reducing risk of fraud in electronic funds transfers and other treasury activities.
 It should also be able to use a low-cost public network infrastructure like Internet, which eliminates the need for dedicated leased lines.



CHANGING CASH MANAGEMENT PROCESSES AND ‘ E-BANKING’:

INNOVATIONS:

 The enlightened participants in this Workshop are aware that the cash management techniques have been undergoing a metamorphosis as a result of the extensive technological advancements. Positioning finance as a valuable part of a business organization means re-engineering of business processes.
 Electronic Bill Presentment and Payment (EBPP) is now widely accepted in Western countries. It replaces the slow and costly process of preparing and mailing paper bills and receiving cheques as payment.
 Corporations look to electronic bill presentment and payment as an opportunity to expand marketing and sales efforts, enhance customer care and increase efficiency, while reducing costs.
 As technologies evolve with amazing speed, the IT choices facing treasurers are becoming more intricate simultaneously increasing their expectations too.
 Today, a multinational company has tall demands from its banker.
 When the treasurer sits at his desk, he expects that his computer has to automatically update his files with real-time information on the company’s account balances.
 Without moving, he wants to manoeuvre funds between accounts to capture more interest from pooled accounts, he demands to lag his payments to make his cash work to the fullest and he desires to get an up-to-date report on the progress of his collections.
 If relieved of numerous manual errands, his treasury can effectively plan for the future.
 As the Internet explodes into life, companies want to be among the first to use the Internet to market their products, receive orders, deal with suppliers and settle transactions.
 Corporates visualize technology as a tool to cut their costs and improve efficiency.

CORPORATE CASH MANAGEMENT TO BENEFIT FROM ELECTRONIC PAYMENTS:


 The new electronic payment products and services offer the corporate clients an improved bottom line by helping manage cash requirements.
 It helps corporate to make the best use of their funds and provides an effective means of managing their financial requirements.
 Several of the trends in cash flow forecasting favor the use of electronic payment products like RTGS, Electronic Funds Transfer (EFT) and card payments.
 Improved technology and systems integration makes it more attractive to use electronic payment products because these methods of payment can be incorporated into firm-wide computing systems.
 The new forecasting techniques also suggest use of electronic payments, because they offer disaggregated revenue and spending data that can easily be categorized and studied.
 Electronic payments and cards provide control over incoming funds, and allow companies to limit access to these funds to authorized parties. In addition, limiting corporate purchases to electronic payments makes it easier for firms to monitor cash outflows and prevent unauthorized expenditures, because these payments are easier to document and provide an audit trail.
 From the perspective of a Corporate, the electronic payment systems ensure speed and security of the transaction processing chain, from verification and authorization to clearing and settlement. Also it gives a great deal of freedom from more costly labor, materials, and accounting services that are required in paper-based processing, better management of cash flow, inventory, and financial planning due to swift bank payments.
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Post Re: Corporate Banking - December 4th, 2008

CHALLENGES TO COMPANIES IN AVAILING TECHNOLOGY-ORIENTED CASH MANAGEMENT SERVICES FROM BANKS:

a. Electronic Communication with a Bank:
 The first challenge facing a treasury is how to communicate electronically with a bank, although this is often dictated by cost limitations, security concerns and the infrastructure peculiarities of different countries. It is likely that the company itself may be lacking the necessary expertise to choose an appropriate form of communication where the company needs banker’s advice.



b. Economic Considerations:
 Costs associated with the new services do pose a challenge to small and medium companies. A host-to-host connection is a sophisticated, direct, two-way link between the bank’s and the customer’s computers, which is expensive to set-up and maintain. However, it is highly automated and allows the corporate to use more of the banks’ services. Small companies, unfortunately, may not be able to afford host-to-host connection. Concerns associated with high costs may be effectively addressed once the Internet’s security apprehensions have been resolved.

c. Decisions Regarding Sourcing of Software:
 The three sources of software applications for on-line banking and on-line cash management in particular are…
1) Built in-house:
Large banks prefer to build applications in-house owing to their belief that it provides them with competitive advantage
2) Bought from independent software vendors:
Building Web-enabled cash management solutions requires a thorough understanding of both technology as well as business issues.
3) Outsourced to a trusted third party:
Smaller banks who do not wish to make significant investment in back-office systems prefer to outsource on-line banking services.
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