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DD Report (My apologize in advance but the Information is a lot)

CASH MANAGEMENT IN INDIA

Against the backdrop of a rapidly growing economy, cash management methods in India are evolving to provide banks and corporates with greater efficiencies.

India is expected to be a leading world economy (along with China) in the 21st century. India's share of the world's gross domestic product (GDP) is expected to rise from 6% in 2005 to 11% by 2025, making it the third largest economy in the world behind the US and China.

Economic reforms initiated in 1991 have paid rich dividends for India. Not only have they led to a strong growth in the GDP but they also created a business environment that is creating world-class companies. The initial thrust was provided by the IT and IT-enabled services sectors but India is increasingly being recognised for its strength in the automobile (including auto components), biotechnology, pharmaceutical and textile industries. Foreign investment is flowing into both the services and manufacturing sectors.

According to the forecasted figures for 2004-05, the economy has been predicted to grow by 6.9%, compared to 8.2% in 2003-04. This is primarily due to lower growth in the agriculture sector, which fell sharply from its 2003-04 level of 9.1% to 1.1% in 2004-05 on account of a poor monsoon. Though the 2004-05 growth rate is lower than that of 2003-04, it is still among the highest growth rates seen in India since independence. The growth was also accompanied by stable inflation. The Indian economy has posted an excellent average GDP growth of 6.8% since 1994 (the period when India's external crisis was brought under control), and is expected to grow at around 7% in the fiscal year of 2005-06.

Financial System
India has had organised financial markets for over a century. Today, markets of varying maturity exist in equity, debt, commodities and foreign exchange.

The Securities & Exchange Board of India (SEBI) is the regulatory authority governing the securities market in India. Its primary objectives are the promotion and development of the securities market and protection of investors' interests. The national stock exchange (NSE) and the Bombay stock exchange (BSE) are the primary stock exchanges in India, with the bulk of securities trading being conducted on these exchanges.

The equity markets have performed strongly in both 2004 and 2005, and on 8 September 2005, the benchmark BSE Sensex index closed around the 8,000 mark for the first time in its 130-year plus history. The Indian capital market was one of the top performing markets in the world in 2004-05. The primary market has also been very active since 2004 with a large number of corporates and public sector institutions undertaking large initial public offerings to fund their expansion requirements.

The Indian capital market was opened to foreign institutional investors (FIIs) in 1992 and today they play a dominant role in it.

Political Environment
India is the world's largest democracy with a population of over one billion. India is a union of 28 states and seven centrally administered union territories. The current central government came to power in the general elections in May 2004 and is a coalition of parties called the United Progressive Alliance led by the Congress Party. Coalition governments have become the norm in India, with no single political party being able to win a majority of the seats in the lower house of parliament. This is due to the growing influence of regional political parties in the country, with no single party enjoying mass support.

The current government has been able to carry forward economic reforms despite resistance from the communist parties. Over the years, there has been a general consensus built on the continuity of economic reforms, though the pace and nature of the reforms vary depending on the government in power.

Banking System
The Indian banking sector can be broadly categorised into nationalised banks, private-sector banks, foreign banks, co-operative banks and specialised banking institutions. The Reserve Bank of India (RBI) is the central monetary authority, regulating the banking and financial systems and governing the exchange control and monetary policies in the country.

Banks in India have finally woken up to the competitive dynamics of the 'new' Indian market and are addressing the relevant issues to take on the challenges of globalisation. Banks that employ IT solutions are perceived to be proactive players capable of meeting the varied requirements of a large customer base. Private and foreign banks have re-oriented their strategies using the Internet as a medium to reduce costs and improve customer service.

The transformation of the banking industry has been largely brought about by the major dose of liberalisation and economic reforms that allow banks to explore new business opportunities rather than generating revenues from conventional streams (i.e. borrowing and lending). Indian nationalised banks continue to be the major lenders in the economy, due to their sheer size and penetrative networks that assure them high deposit mobilisation. However, the share of public sector banks in the aggregate assets of the banking sector fell from 90% in 1991 to 75% in 2004.

The RBI has been liberalising regulations on the establishment of new private banks and the entry of foreign banks. Foreign direct investment (FDI) in private sector banks has also been increased up to 74%. As of June 2005, there were 31 private sector banks and 31 foreign banks operating in India.

The RBI has also been liberalising exchange control regulations over a period of time. The Indian rupee (INR) is fully convertible in current account transactions. Through government policies to promote FDI and FII inflows into the country, India has a comfortable foreign exchange reserve position of around US$138bn as of June 2005.

Cash Management in India
India has traditionally had a paper-based clearing system. In 2005, India had about 1,056 clearing houses and more than 65,000 bank branches. The total value of checks processed through these centres surpassed INR130,000bn in 2003-04.

The paper-based clearing system, however, poses inherent problems such as the high cost of processing, the fragility of the system and security risks. For these reasons, the RBI has been emphasising the need to upgrade the technological infrastructure and has launched important initiatives such as electronic payments, image-enabled check collections and interbank settlement.

Recent Regulatory Changes
Businesses and consumers are increasingly using computers to create, transmit and store information in electronic formats instead of traditional paper documents. Since e-commerce eliminates paper-based transactions, the need for legal changes became a necessity.

On 9 June 2000, the parliament gave its assent to the Information Technology Act, which defines commonly used computer terminology and gives legal recognition to electronic records and digital signatures. The act further defines when digital signatures or electronic records can be termed secure for transmission over the Internet. In 2001, the government passed the Information Technology (Certifying Authority) Regulations. This primarily controls the activities of certifying authorities that are licensed to issue digital signatures. India now has four certifying authorities: Safescrypt, the National Information Centre, the Institute for Development and Research in Banking Technology, and Tata Consultancy Services.

In order to increase the scope of existing legislation, the RBI has proposed a new payment and settlement systems bill with a view to establishing the legal definition of 'netting' and 'settlement finality', and also to create a regulatory framework for the payment and settlement systems. Also, in a move that underscores the importance attached by the RBI to this sector, the bank has set up a separate department dealing with payments and settlement systems, with an independent board that has industry representation.

Electronic Banking
The Information Technology Act, coupled with recent technological advancements, has resulted in a great increase in the implementation of Internet and electronic banking. Both the private sector and foreign banks in India are at the forefront in offering online banking services on the Internet. This service is in addition to existing offsite delivery channels such as automated teller machines, electronic banking and mobile banking. Payment execution, account viewing and management information reports delivery (primarily for collections products) are now routinely being offered on the Internet.

The utilisation of electronic banking is expected to further increase as technological advances and other initiatives of the RBI, such as real-time gross settlement (RTGS) and check truncation, become more popular.

Check Truncation
The physical movement of instruments is a major impediment to shorter clearing cycles and efficient processing. Initiatives such as Check 21 in the US enable banks to overcome this problem by presenting scanned images of checks deposited with them instead of sending physical checks to the clearing house. Check-imaging reduces clearing cycles, enables faster returns-processing, better customer service and availability of images for audit trails.

The Negotiable Instruments Act was amended in 2002 to extend the definition of a check to include electronic checks and electronic images of truncated checks. The act now also defines material alteration of electronic images of truncated checks. With the legal issues resolved, the RBI launched a pilot scheme for check truncation in the New Delhi region in Q3 2005.

The availability of adequate technical infrastructure at clearing houses and banks is essential for expanding the payments and settlement network and exploiting the full benefits of check truncation. Considering the significant investments required, it is envisaged that check truncation will cover seven major cities in India by 2007.

RTGS
RTGS eliminates settlement risk by settling payments in real-time. The RBI has implemented a national RTGS system that allows all banks in India to make secure interbank payments across the country. More than 6,500 branches are now on the RTGS network and the system has fully replaced the paper-based interbank settlement system. The RBI and leading cash management banks are making efforts to increase customer awareness to make maximum use of this channel.

To ensure the success of the RTGS initiative, the RBI has invested in two other infrastructure improvement programmes - a payment messaging solution and enhanced support for all member banks to settle their positions with the central bank.

The Structured Financial Messaging Solution The Structured Financial Messaging Solution (SFMS) is the communication protocol introduced by the RBI for intra-bank and interbank messages within India. It incorporates templates and fixed-message formats for affecting straight-through processing (STP) among member banks. SFMS message formats are broadly similar to SWIFT messages. These messages are used for RTGS and other interbank communication. SFMS protocols will facilitate STP in the Indian banking industry for domestic payments and transactions, reducing transaction costs for customers.

The Centralised Funds Management Service The Centralised Funds Management Service (CFMS) enables commercial banks to obtain the funds position of their accounts with the RBI's deposit accounts department (DAD) at 17 locations in India. Phase I (enquiry mode) of the CFMS has now been implemented. Once the services are fully implemented, banks will also be able to transfer funds across their DAD accounts in different cities. The CFMS allows banks to reduce the cost of funds by better management of fund flows, which is a prerequisite given the large fund transfer using RTGS and other electronic channels.

Electronic Funds Transfer
The RBI introduced the Electronic Funds Transfer (EFT) system in 2001 and an enhanced version, the Special Electronic Funds Transfer (SEFT) system in 2003. The SEFT system covers 216 cities, 34 banks, and 4,127 bank branches across India. The coverage of SEFT is much larger than that offered by EFT, and banks are given the option to select the branches where they can offer SEFT. All branches that participate in SEFT need to be networked with the service branch in Mumbai, which will act as the one point of contact with the RBI for the service. As all of the banks' branches participating in SEFT are networked, funds are available to beneficiaries promptly (unlike for EFT, where there is a possibility of delayed credit if the beneficiary's bank is not networked).

The RBI has planned a substantial improvement in the security of EFT and SEFT messages by converting them into the SFMS model and using the infrastructure established for RTGS. This initiative is covered under the new National Electronic Funds Transfer (NEFT) scheme, which is generally seen as a replacement to SEFT. In the future, it is expected that RTGS and NEFT will be the two main electronic payment channels in India.

Cash Management Trends
In India, cash management has predominantly been associated with collections products. Subsequently, cash management providers have diversified their product portfolio to include payments, account services and delivery management. This has enabled corporate treasurers to concentrate on their core functions and outsource non-core activities to banks.

In view of the geographic diversity of India, key cash management providers have strengthened their correspondent banking relationships to reduce transaction costs, enhance location coverage and improve service quality. The new payment systems pose significant challenges for cash management service providers and will require banks to make a shift in terms of earnings (from float to fees) as well as service offerings.

The overall cash management scenario is changing with technological advances and evolving customer needs. STP, facilitated by the integration of banks' cash management solutions with corporates' enterprise resource planning systems, is gaining importance. Electronic banking access on the Internet with account-viewing and transaction-initiation capabilities is critical for technology-savvy customers. The emerging technologies and the payment systems will significantly impact corporate treasurers' agendas. New strategies for effective cash management will soon emerge in the Indian market.

Going Forward
The changes in the cash management industry in India are far reaching and the next few years will be crucial, since a transition from the traditional paper-based processing to electronic transactions will occur. Banks will have to evolve new strategies, products and market development strategies in this context.