In the cash management world, new cash pooling technology has the potential to drive significant efficiencies for both banks and multinational corporations. We all know that cash pooling is a valuable tool for treasurers to manage their liquidity position.
The key for this lies in investing in the right technology with the right solutions.
Cash pooling 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. Physical
cash pooling is managed with separate sub accounts and automatic transfers to and from the header or concentration account. This way, idle funds can be swept and made more productive and optimize interest/reduce interest payout.
In the case of notional pooling, the same effect is achieved through virtual accounts without any changes to the bank accounts. The debit and credit balances of the participating accounts within a pool are offset on a “virtual basis”. The bank managing the
notional pool provides details of the interest as a result of this pooling. Notional pooling can be a realistic approach for mitigating the costs of periodic fluctuations between positive and negative positions in short-term cash
However, liquidity management can still be a challenge when you take into consideration the various regulatory requirements and the multi-currency environments that corporates operate in. Some of the aspects of cash pooling for both physical as well as notional
pooling are interest compensation, tax efficiencies, regulatory requirements like limit on inter - corporate borrowing and capital controls to be adhered to and the currency scenarios.
For example, physical pooling is not possible on a cross border basis if the foreign exchange regulations do not permit cross-border funds movement – which is the situation in countries such as Brazil and India. In Mexico, there are tax issues pertaining
to inter-corporate loans and therefore while cross border physical pooling is permitted, it is not practical. Notional pooling is not allowed in India.
In order to address and mitigate some of these issues, companies negotiate with the banks to enter into an interest optimization solution that will go beyond physical and notional pooling and still remain well within the regulatory frameworks of the countries
that they operate in.
The solution takes into account the corporate’s excess cash position across various currencies and countries with a bank. The end-of-day account balances in various countries are collected and notionally converted into a base currency. This way the cash
funds available in those countries where restrictions exist are also taken into consideration to decide on the interest slab to be paid on the notionally poolable funds as no regulations are breached. The interest compensation is provided in slabs that include
balances in all locations and is provided on the eligible notionally pooled funds in the country where the regulations permit such compensation. This hybrid arrangement that some banks offer can help companies leverage their global operations to make their
money in the bank do much more.
The technology solution should provide all the features like, sweeps, cash concentration, target balancing, notional pooling across legal entities participating in the pool, across countries and time zones. The solution should also facilitate recording inter-corporate
loans created by sweeping and allow the corporate to set interest rates for its subsidiaries.