Liquidity management is essential to any multinational organization's financial framework. As the role of the corporate treasurer becomes increasingly strategic, they are paying more attention than ever before to available cash to help make sound financial
decisions. For corporate treasurers, there is a growing requirement to juggle cash positions across business units, and
invariably across disparate geographic locations. Different regulatory requirements, multiple currencies and divergent tax regimes make effective liquidity management all the more important—and all the more challenging.
Adding to liquidity management’s inherent complexity is the frequently used and often essential tool of cash pooling. This is a short-term solution used to offset a cash deficit in one area of an organization with a cash surplus in another. The benefits
include improved insight into an organization’s financial picture and ability to control and utilize cash. Fortunately, advances in available technology have provided a number of options to simplify cash pooling, driving significant efficiencies for organizations.
To see just how useful cash pooling technologies can be, and just how necessary they will become in the near future, we can look at what’s currently taking place in China.
Cash Pooling in China
Until recently, direct lending between different legal entities was not permitted in China. Then the Central bank – the People’s Bank of China (PBOC) allowed “entrust loans” where a bank could be an agent of entrusted funds from a depositor. The bank could
further lend the same funds to a borrower designated by the depositor. This ‘entrust loan’ mechanism formed the basis of cash pooling in China. These loans continued to evolve and, in 2004, physical cash pooling of the RMB, the People’s Republic of China’s
currency, was permitted.
In 2012, China further relaxed controls on the capital account, setting the stage for universal acceptance of the RMB as an international business currency. As the Chinese economy grows, and Chinese companies increasingly have business interests in other
countries, there is a growing demand from companies to be allowed to link their offshore accounts with the home country accounts. Taking into consideration the need for greater transparency, and with the growing push toward the internationalization of the
RMB, regulators are cautiously reviewing cash pooling requirements.
In 2012, thirteen Chinese and non-Chinese companies were part of a pilot project that allowed them to move foreign currency and lend surplus RMB to company cash pooling centers overseas. In July 2013, based on lessons learned from the pilot program, the
PBOC issued draft guidelines that will make cash pooling with RMB much easier in the near future. These guidelines indicate that the PBOC will continue down the path to promote the capital account convertibility of the RMB, facilitated by simplification of
the cross-border settlement rules. The guidelines cover various matters including:
- RMB cross settlement under the current account
- Offshore non-financial institutions can provide RMB guarantees to offshore entities
- Domestic banks can finance cross-border trade
- Onshore corporates can deposit RMB funds raised offshore (dim sum) into “RMB special accounts”.
The positive impact of this announcement is that RMB denominated trades can be settled more efficiently even though it is presently only available for clients who have a long standing relationship with the bank. The other outcome of these guidelines is that
local Chinese banks would be able to conduct more cross-border trade financing. This marks the beginning of paperless transaction banking in China. Companies operating in China will now be able to deposit their RMB funds raised overseas into an “RMB special
account”. All of this translates into an ecosystem that has a greater ability to use technology and its related tools to manage operations more effectively and efficiently.
Benefits of Cash Pooling Techniques in Developed Market
Technological improvements made in the last decade have provided some tangible benefits to companies in developed markets that are using cash pooling solutions. The biggest benefit of using cash pooling techniques is that the idle funds lying in bank accounts
can be consolidated. As a result, the cost of external borrowing is reduced and there is an increase in the return on investments. The immediate implication of using cash pooling is the reduction in interest costs. Cash surpluses available in some of a company’s
entities can be used to net off the deficits in other entities. Higher levels of automation and increased visibility into accounts across multiple locations make it easier to manage a company’s liquidity. The ability to set off surpluses against deficits also
has a positive impact on liquidity management. The consolidation of the information database helps produce better reports which are detailed and timely.
The benefits of liquidity management solutions like notional pooling and cash pooling will be apparent, provided adequate business processes and technologies are put in place by the corporate and the bank in question. The technology solutions available allow
companies to consolidate bank accounts into pooling groups so that they can manage them efficiently. A solution should have a single reference point from where all of the management information required will be generated. At that point, information from relevant
databases is consolidated and calculations for notional pooling across accounts, currencies, banks and time zones are obtained. The solution typically has a high level of automation so that better operational efficiencies are achieved
The Way Forward
Regulatory changes the world over have helped bring cash pooling to the forefront. There are a number of factors that impact cash pooling, especially when it relates to the multi-country, multi-currency accounts of a company. There are also accounting and
tax implications that companies need to consider.
Going back to the example of China, though cash pooling is presently limited, there is a major change on the horizon to the way trade flows are routed. Multinational companies that are technologically prepared to reap the benefits of cash pooling will be