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Liquidity and cash management in a failing economy. How banks and corporates can build a symbiotic relationship

Posted by Vishwanath Thanalapatti (View Profile | View All Posts) at 4:55 AM

Each morning as I read my financial newspaper I see the world economy sinking deeper into a black hole. The learned economists say it's the proverbial second dip. The US economy is not likely to grow till 2013; the policy rates will be kept "exceptionally low". Europe is staggering to stay steady. Germany reported growth of 0.1% from April to June. The 17 member euro zone grew by 0.2% in the same period. Inflation is rising in Asia. So where will the corporates get money from? The banks of course, silly!  Do the banks have money? Yes. They do. The stress tests are teaching the banks fundamental lessons that liquidity is more valuable in difficult times than potential numbers from investments or for that matter risk based lending. The banks will not loosen the purse strings, they are very circumspect. The corporates will have to fend for themselves for liquidity and to be in business with little reliance on banks. This blog looks at the key focus areas where corporates on their own or in conjunction with banks can survive the eco tsunami.  
Cash is cash and nothing is more liquid. The smart corporates will look beyond lines of credit from banks as a source for liquidity. The cash component in the balance sheet will be substantial enough for a corporate to cover the working capital life cycle plus pay off the interest on debt demanded on periodic basis. This means addition to reserves, less dividend to shareholders. Thus the dependency on banks will be much lesser; so also reduced investment in areas such as Information technology. A safe corpus, unencumbered and free is what strong corporates will show in their balance sheet.  
Cash pooling
The cash assets (cash and bank balance) will be in currencies that are easily convertible and for companies that are global, ability to repatriate profits to the parent country will be the mantra. Here cash and liquidity management will play a key role for pooling funds. Banks that are global and have products that truly demonstrate the value to a corporate will benefit by attracting top tier corporates. This will enlarge the portfolio of fee based income. The pan global movement of liquidity from surplus areas to deficit areas without reliance on lines of credit from banks will be the order of the day.   
Liquidity management
The dependence on payment hubs will increase. In trade related transactions the real time settlement of funds with near real time pooling will enhance a corporates capability in optimising the intraday liquidity balancing the cash flows.  The corporates that maintain a near zero open position will reduce operational costs. It will make economic sense to have relationship with one global bank. The cash outflows and inflows will be netted of in a geography optimising the source and use of funds. The payment hub will seamlessly move funds within a bank and between banks. The banks with strong payment hubs will be in demand.
Trade finance services
Corporates will look to receive funds when due on the first day and pay out on the last day due; encourage prompt payments with discounts and receive cash incentives for early payments. The trade finance services will see more volumes. This will reduce risk for a corporate and add to fee based business to a bank. Banks that offer cross border consultancy will see business grow. Service innovation that creates a global market place for corporate customers will grow even faster. E-invoicing, financial supply chain management, business partner market place, will gain currency.   
Regulatory compliance
Regulatory compliance will be an obsession and will haunt both the corporates and banks. Investments will be made to comply with regulations. Better compliance will translate to increased business opportunities for corporates and credibility for banks.
Corporate treasury
Corporate treasury will see growth. With corporate specific risk management practices built into the system, counter party risk (banks and business partners) tools that have robust data visualisation and analytics will be in demand. A CFO and a CTO will collaborate and see eye to eye (at last) and investments in information technology will be a business decision.  
In conclusion
The corporates will be looking for 'fine' cash management by improving operational efficiencies in managing cross border liquidity with little dependence on lines of credit. The banks will scale up to the industry demands by offering products (payment hubs, cross border real-time pooling) and consultancy services (Trade advisory services, Business partner services) that will generate low risk, fee based income. Lending, if any will be collateral based. To a corporate it will be competitive with low interest rates and to a bank highly secure low risk asset. This sets a level playing field, with no losers in difficult times.

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