transaction banking news

7/31/2019 Transaction Banking News

1/4

Anjali Mohanty, Deutsche Bank - Frank Wu, Deutsche Bank - 25 May 2012

These are challenging times for the world economy including Asia, but India and China continue tosee economic growth. India's gross domestic product (GDP) is expected to grow at about 7% in 2012,and it has been in the 6.5% to 8.5% range since 2008. However, inflation continues to be a problem inIndia and interest rates are high. China's projected GDP for 2012 is below 8% for the first time in twodecades, but that doesn't mean China faces any real threat of recession. After a prolonged period ofrapid growth, the slower rate of development, together with more focus on domestic consumption,should be more sustainable.

While both nations have a strong economic prognosis, they certainly are not immune to the eurozonecrisis. Furthermore, both nations have their own challenges in terms of tightly regulated markets, afragmented clearing infrastructure, non-automated payment systems and corporate governance rules

that make cash management and repatriation of cash, a rather complex proposition for many foreigncorporates. So what is the transaction banking environment like in India and China, and what are thechallenges and opportunities?

Three of the main features of transaction banking in China are:

1. In the past 10 years there has been a rapid evolution of regulation and technology.

2. Regulation is driving the evolution of transaction banking products.

3. The local and foreign banks in China view transaction banking quite differently. Foreignbanks see transactions as an important standalone product, while most Chinese banks stillbase their corporate banking business on lending, deposits, trade finance and payments.

There are some underlying reasons for the features and priorities of Chinese transaction banking.Local banks place importance on deposits because China's banking authority, the China BankingRegulatory Commission (CBRC), monitors their loan/deposit ratios. Another factor is that the interestrate is regulated, so the margins are more or less guaranteed. This drives business for local Chinesebanks more than the transaction banking fees.

The defining features of transaction banking in India are not that different when compared with China.The primary objectives for companies are automation, outsourcing and risk management, whileconsolidating their transaction banking relationships to derive maximum efficiency and liquidity.Companies in India are increasingly looking at treasury consolidation in order to have better visibilityof their liquidity, as well as the ability to move their money faster and more efficiently. They want tomanage risk, and particularly counterparty risk, so having a consolidated view helps them managetheir exposures across the entity.

In the transaction banking space in India, there has been a huge growth in volumes and increasedpenetration by corporates, with multinational corporations (MNCs) increasingly expanding into thesecond and third tier cities1.

While there are opportunities in both India and China, there are also challenges. Deregulation is aslow process and there are still regulatory constraints in both countries. One of the commonchallenges is that the regional regulatory bodies often have differing interpretations of the law,complicating compliance for corporates.


2/4

China is pushing for an upgraded national payment system, with China's National Advanced PaymentSystem (CNAPS) soon to migrate to CNAPS 2. The enhanced system will have a wider functionalityand also allow large amounts of yuan to be cleared across regional borders. However, China'snetwork of fragmented local clearing systems remains in place.

India has more than 1,000 clearing zones, as well as 78,000 local and foreign bank branches. Thishas been a challenge for companies hoping to achieve efficient cash management and consolidation

of accounts. However, the emergence of electronic payments (e-payments) has made transactionbanking more efficient. E-payments have become dominant, with 90% of payments by value nowprocessed electronically and 45% of payments by volume electronically. The challenge is that 55% ofpayments are processed manually, and even though they are very small value payments, it is still atreasury nightmare.

Transactions in India are on a scale rarely seen outside the sub-continent: with vendors sellingproducts in the smallest shops in remote villages at one end of the value chain whereas at the otherend, many of the MNCs have to handle huge transaction volumes and managing these as efficientlyas possible is a major part of their cash management cycle. However, global banks have developedsolutions to mitigate these challenges for clients through the use of a local partner bankingarrangement that has an extensive coverage which enable efficient cash management andconsolidation of accounts.

Likewise, the regulators stipulate that certain local taxes are to be collected by local bank branches

only. This often poses further difficulty for corporates wanting to maintain streamlined accounts.However, over the last few years, banks in India have developed solutions around the localinfrastructure and regulations to enable clients to process such payments with its global banks.Despite the challenges, and often because of these, it translates into opportunities for banks andcompanies operating in these countries.

In China, for example, there are three broad areas of opportunity for transaction banking:

1. New products and services quickly come on the market when deregulation occurs.

2. China is becoming a market rather than a production base for many MNCs.

3. It is generally anticipated that by 2020 the renminbi (RMB) will become an internationalconvertible currency. This will generate opportunities around the RMB clearing system andany trade finance or cash management products involving RMB.

The Asian economies will have to look closer at the impact of the eurozone crisis as Europe is animportant economic partner to the East. Both China and India are not spared.

As China's largest trade partner, the eurozone's slowdown of consumption is affecting China's exportmomentum. In the first quarter of 2012, Chinas exports slowed down as compared to 2011, mainlydue to reduced demand from the EU. Year-on-year, export growth to the US was 14%, but to the EU itdecreased by 3.1%.

Although the financial sector in China can feel the change in business volume as a result of theslowdown in exports and trading business with Europe, the local banks on the other hand, are notover-exposed to the sovereign debts in the eurozone. The crisis is impacting the pace at whichChinese banks are expanding their business in Europe as regulators in the eurozone have slowed the

approval process for entry for foreign banks.

Similarly, India can no longer say it is completely unaffected by the eurozone crisis. India has a largelydomestic-led economy and, unlike China, it does not depend heavily on exports to the West. India'slargest trading partners are China and the Middle East. India exports natural resources such asminerals and agricultural products like cotton to China and buys capital goods like machinery, powerplant and telecommunications equipment from China. Nonetheless, India is seeing a drop in demandand companies with clients in Europe are affected by this. They are under pressure to reign in theirliquidity and adjust their counterparty risk exposures.


3/4

Another indirect effect of the European crisis is that companies want working capital efficiency andbetter liquidity management. This is partly an effect of the European crisis, but it's also a result ofIndia's high interest rates, which is hitting the mid-sized and smaller corporates. As a result of this,solutions such as supplier finance programmes are seeing more demand in India and the banksability to offer customised technology-enabled financial supply chain management solutions isbringing significant value to the clients.

The internationalisation of the RMB is significant in China and globally. In Q411, the People's Bank ofChina (PBOC) expanded the scope of RMB cross-border payments, so the currency can now be usedfor cross-border direct investment, either outbound or inbound, as well as for cross-bordershareholder loans into China.

The CBRC is also preparing for the new capital regulations for banks in China as part of Basel III.Chinese banks are already raising capital and this will put them on an equal footing with Europeanbanks.

The Reserve Bank of India (RBI) is also working on Basel III, although some of the requirementscould be a strain on local banks. This hasn't affected the market yet, but when Basel III adoptionbegins next year, there could be further tightening of credit and liquidity.

Regulations in India prohibit cross-border cash pooling, leading to trapped cash for MNCs. Currentaccount convertibility is possible, but capital account convertibility is not. Dividend payments by localsubsidiaries to their parents are subject to withholding tax and often can become a challenge forMNCs. Import trade in India is regulated and requires underlying documentation to be submitted tothe bank before making the foreign currency payments. Because of these challenges, clients arelooking at outsourcing solutions for import documentation management and automated solutions forFX payments and rate booking. Only a banking provider with a sophisticated and advanced array oftransaction banking product suite are able to meet these requirements of these clientscomprehensively.

The rupee has seen 20% depreciation in the past five years and the RBI introduced guidelines toregulate this, mainly to prevent speculative hedging. However, regulation has also made genuinehedging contracts more complex.

Shanghai and Beijing have launched schemes for MNCs to establish regional treasury centres (RTCs)in China. They offer preferential policy treatment and streamlined approval processes. This has led tosome MNCs looking to establish RTCs for Asia in these locations, for example Shanghai or Beijing.

Working capital management is very important for corporates in both China and India because theycannot afford to keep excess cash in some entities while paying for funding in other entities, due tothe gap between the lending rate and the deposit rate.

Repatriation of cash accumulated in China has always been a challenge, but this was made easierwith the introduction of cross-border entrustment loans subject to regulatory rules. However, directinter-company lending is still not allowed and companies are looking forward to more policydevelopments to allow them to repatriate cash out of China. There are also still some regulatoryconstraints on foreign exchange (FX) payments. For instance, supporting documents are required for

inward FX conversion and outward FX payment, as well as the adherence to additional StateAdministration of Foreign Exchange (SAFE) procedures if the payment is to be executed outside ofthe city where the company is located.

In India, one of the biggest challenges for corporates is cash pooling, which is highly regulated andnot available for all corporate structures. Inter-company lending is similarly regulated and dependenton company structure. Companies need to understand how they can move their cash more efficiently,while addressing the countrys local requirements.


4/4

The economic changes in China mean that companies may have to adapt their business models.Exporters to Europe tend to export through distributors, so they have to deal with a limited number ofcounterparties. They are also protected by trade finance instruments like letters of credit (L/Cs).

Selling to the domestic market requires a domestic distribution network, which is a completelydifferent business model and has different banking requirements. Despite the differences, changingtheir business model from export-only to selling into the domestic market is now an alternative option

some exporters are considering. On the whole, MNCs are increasingly focusing on China as a marketrather than a production base, and they are expanding their physical presence in smaller cities.

Many companies in India are also taking a closer look at their business model and their transactionbanking services as theyre looking at consolidation. Companies need to ensure that their banksstrategies and growth models are aligned with their own.

Technology has always been a driving force for transaction banking. Consumer uptake of newtechnology and communication in China and India is advanced, so continual investment is needed tostay ahead of developments in mobile technology, such as interfaces with tablet PCs or smartphones.These consumer-led developments are shaping the corporate world and these countries are alreadyseeing corporate treasurers using their mobile devices to authorise cash management transactions.

Advances in technology are driving upgrades in the infrastructure of China's clearing system. With theupgrade to CNAPS 2, it is also developing its connectivity to the SWIFT global payment system. Onceimplemented, cross-border RMB payments will become easier.

China is also seeing connectivity between the RMB clearing system and other capital marketssystems, such as the stock exchange or the central clearing system for bonds. CNAPS is now beingconnected with the bond clearing system in Hong Kong. Customers can buy and sell bonds and thenget the proceeds in RMB via an automated cross-border payment.

There is good potential for cashless collection in China, particularly in certain sectors like business-to-consumer (B2C). Third party payment platforms also provide an interesting payment solution for B2Cand e-commerce businesses.

In India, the RBI has set up the National Payments Corporation of India (NPCI) as an independententity to build state-of-the-art, consumer-friendly electronic retail payments systems that would beavailable around the clock. Some of the key initiatives taken by NPCI, such as mobile payments (m-payments) through the Interbank Mobile Payment Service (IMPS), would have a significant impact interms of improved efficiencies for corporates in India for their domestic collections and payments.

Overall, the three main factors that are of concern to corporate treasurers in both India and China areefficiency, liquidity management and risk management. Technology, innovation and optimisation willall play a key role in how corporates grow and are supported by their transaction banks.

transaction banking news

Documents