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The challenge
Like many companies, Cummins Inc has felt the impact of COVID-19. However, a success story has been forged by the treasury team at its India subsidiary.
The challenges were unprecedented. When the prevailing economic downturn was made worse by the impact of the COVID-19 pandemic, Cummins’s Customers were facing mounting working capital pressure. Cummins was transacting on an open account basis with its biggest buyers. This was turning out to be an area of concern for Abhijit Sarkar, Head of Treasury for the following reasons:
- Resultant delays in payment and corresponding interest loss for Cummins.
- Its customers were close to exhausting their credit lines.
- Lower cash flow predictability.
- Increased scrutiny of the overdue receivable potentially leading to credit lock and resultant supply halt and consequent impact on the company’s revenue.
The solution
Determined to find a solution that would represent a win for both Cummins and its customers, Sarkar reached out to Cummins’s two main banking partners in India for help. Its objectives were to find a solution that would:
- Mitigate Cummins’s risk of customer payment delays and facilitate raising liquidity.
- Be acceptable to the customer currently transacting on open account and in need of an extension to its payment terms.
- Represent a non-onerous implementation and ongoing operating process for all involved.
Building on its longstanding relationship with its core bank, Bank of America, Cummins worked with them to explore and analyse different settlement mechanisms that could meet its objectives. It was decided that a product would be devised that would have bills of exchange accepted by the buyer as an underlying document – together with a post-dated cheque that would provide the right degree of risk mitigation and means of raising liquidity without being too onerous on the buyers.
Cummins proceeded to bring its biggest client on-board, with the following proposal/agreement:
- Cummins will extend the credit period of the customer from 60 to 90 days.
- Interest equivalent to 30 days to be added in the part price, which will ensure Cummins is not impacted in any way.
- Sales to be made under a traditional bill of exchange.
- Customer to accept the bill of exchange and provide a post-dated cheque in advance.
- Cummins to discount the bills of exchange on day 60 thereby safeguarding its original cash flow.
- On the 90th day, the cheque would be deposited with Bank of America to pay-off the loan created by discounting of the bill.
Best practice and innovation
Best practices and innovation are demonstrated in this unique solution forged across traditional trade and treasury products.
Traditional bills of exchange accepted by Cummins’s buyer and discounted by Bank of America, enable payment to Cummins on their original due date (60 days) and the buyer makes payment on extended terms at 90 days.
The effective interest charged to the buyer for the additional 30 days is embedded in Cummins’s invoice price.
A more attractive interest rate (based on Cummins’s credit) for the credit is achieved than it could have achieved with its own credit rating.
Best practices were also achieved across implementation and transaction execution in the work from home COVID environment.
Key benefits
- Expected addition of a second large buyer.
- Extension of customer credit period without impacting own cash flow.
- Certainty of payment.
- Limited documentation.
“Our customer was deeply appreciative that we acted like a partner and were willing to help them during the time of crisis. The programme has been operational since June 2020, and we are committed to keep it going until March 2021. The programme can be extended further on request and can also be scaled for other customers,” says Abhijit Sarkar, Treasury Head.
