Cash & Liquidity Management

Harnessing liquidity

Abstract image of liquid on glass

Making the best use of liquidity is an important goal for treasurers – but Asia’s complex landscape can present some significant challenges. From choosing suitable structures to leveraging the latest technology developments, how can treasurers optimise liquidity management across the region?

Liquidity management is a core activity for any treasurer: the more control treasurers have over their cash balances, the better use they can make of available funds – whether that means having a full and accurate view over the company’s balances at a regional level, or sweeping cash to a header account to reduce borrowing costs.

For treasurers in Asia, managing liquidity effectively can be particularly challenging. The complexity of the region’s disparate markets, currencies and regulators mean that gaining clear visibility over the company’s cash – and using that cash to minimise funding costs or optimise interest yield – tends to be less than straightforward.

That said, there is much that treasurers can do to optimise liquidity management, from putting the right structure in place to taking advantage of developments in technology.

Liquidity management goals

Making the best use of liquidity is an important goal for the region’s treasurers. “Liquidity management continues to be a key area of focus for corporate treasures in Asia with considerations ranging from the regulatory, legal and tax landscape to clearing system limitations and time zone difference vis-à-vis other regions,” says Venkat ES, head of Asia Treasury Product, Global Transaction Services, Bank of America Merrill Lynch (BofAML).

According to Venkat, the three key priorities for treasurers in Asia are:

  • Visibility – ie the ability to view a consolidated balance position across accounts and deposits held in multiple banks, currencies and jurisdictions.

  • Control and access – ie automated consolidation of funds (either physical or notional) across currencies and jurisdictions into designated regional pool headers.

  • Returns – ie yield optimisation through enhancing returns on credit balances and reducing cost on debit balances.

Kee Joo Wong, Regional Head of Global Liquidity and Cash Management at HSBC Asia Pacific, notes that the centralisation of funds and visibility of cash can help treasurers forecast what is coming and plan for the future effectively. “There are some quick wins and economical ways of getting visibility, and it all comes down to how information is relayed to treasurers,” he says.

However, Adesh Sarup, Head of Transaction Banking, North Asia at ANZ Institutional, says that the existence of multiple countries and currencies – and differing yields across those currencies – makes it critical for treasurers to ensure they manage their liquidity risk and return appropriately.

To achieve this, Sarup says that “centralisation is the key” – especially when multiple legal entities and countries are involved – to streamlining systems across legal entities and banks. But he also points out that different companies will approach this differently: “While there is a bias towards centralisation, treasurers often stage their liquidity management goals based on the business model of their organisation,” he says. “For example, a highly federated organisation with localised receivables and payables would plan their liquidity management models differently from an organisation that has adopted a regional re-invoicing model.”

Restrictions and challenges

Having clear goals is one thing – but it’s no secret that APAC presents a number of obstacles when it comes to effective liquidity management.

Venkat notes that the disparate jurisdictional landscape in Asia imposes a number of legal, regulatory and tax restrictions with respect to cross-entity, cross-border and cross-currency consolidation of funds. He explains: “These restrictions range from complete trapped cash in jurisdictions like India (where only physical domestic sweeps between same entity accounts in local currency are freely permitted) to less regulated markets like Singapore, Hong Kong and Australia where most liquidity structures can be automated.”

Some countries in the region are more challenging than others. Vijay Shankar, Head of Transaction Banking, ASEAN, India and Regional Sales at ANZ Institutional, says that the greatest challenges can be found in the countries where business opportunities are high, but cross-border capital flow restrictions are in place. “One would count China, India, Indonesia and Vietnam on this list, primarily because liquidity tends to build up in these countries without the ability to seamlessly use this liquidity outside these countries – in other words, ‘trapped cash’,” he says.

Of course, regulation is not the only challenge. “The most obvious obstacles are differing regulations, restrictions and currencies,” says Shankar. “However, we’ve noticed that over the years the more significant obstacles are the softer issues, such as ensuring that teams across countries collaborate to adhere to a higher degree of centralisation without losing flexibility.”

Evolution and liberalisation

The region’s disparate regulatory climate may prove challenging, but it is also something of a moving target – with changes in regulation presenting both challenges and opportunities. Venkat cites the example of the People’s Bank of China allowing limited cross-border sweeps in CNY and USD in some cases. But he also notes that “the pace of evolution has been slow,” meaning that restrictions are likely to continue in the foreseeable future.

ANZ’s Sarup says that little has changed in terms of lifting the caps and controls on cross-border flows, which he notes is the main deterrent to the optimal use of liquidity. “However, we have seen some tactical evolution – for example just recently, China’s SAFE introduced new guidance and regulation with respect to cross-border cash management programmes,” he says.

And market liberalisation is not limited to China, as HSBC’s Wong points out. “Thailand continues to promote itself as one of the biggest international centres in Asia by hosting international businesses and allowing fund flow currencies to move in and out of Thailand (excluding Thai baht),” he says, adding that “Hong Kong and Singapore are engaged in healthy competition for the spot of top regional treasury centre in Asia.”

Interest rate challenges

Interest rates are another significant factor when it comes to effective liquidity management. Wong says that while rates have increased over the last two years, “now we are likely to see them plateau.”

He also notes that some countries are beginning to ease up interest rates based on inflation, with New Zealand, Malaysia and the Philippines all recently cutting rates by 25 basis points. “For treasurers, this means that the focus will shift from yield to efficiency, with the focus on making the collective cash more efficient,” he says. “This is thus an opportune time to start looking at business expansion while cash deposits are at a high level.”

ANZ’s Sarup argues that changes in interest rates “are a good test and proof point of the strength of a liquidity management model.” He adds that the journey of a treasury model from decentralised to centralised to in-house bank “should ideally sustain interest rate change – whether these occur in local or benchmark rates.”

Choosing the right structure

Against this backdrop, choosing the right liquidity management structure can be challenging – and the complexity of the region means that different companies will need different approaches.

As BofAML’s Venkat says, “It is important for treasurers to look for solutions that provide them with the flexibility to automate a wide variety of structures.” He says that these may include physical sweeps in single currency, multi-bank and multi-currency cross-border sweeps, and “more complex multi-currency notional pooling and pricing enhancement programmes across multiple legal entities.”

And of course, the approaches favoured by corporate treasurers may vary in line with evolving market conditions. HSBC’s Wong says the bank has partaken in many discussions on yield enhancement over the last 12 months, “with average return a key performance indicator.” Meanwhile, clients are asking whether it is worth staggering their deposits and looking at their forecasts more closely. Wong observes, “The only way treasurers can get a better yield and optimisation of interest positions is to have clarity of when spend and receivables are coming in and how they can strategically deploy cash.”

Shankar, meanwhile, says that there is no one-size-fits-all approach – and that organisations need a combination of solutions to address areas such as visibility, sweeping, notional pooling and interest optimisation in order to reduce borrowing costs and enhance yield. “We are seeing an increasing number of corporates preferring TMS platforms to have full visibility of cash flow forecasting rather than liquidity only,” he says.

He also notes that with the rise of retail marketplace and tech businesses, there is a greater need for integrated cash management and FX settlement platforms that can link the entire ecosystem of suppliers, platform owners and end consumers.

Harnessing technology

The latest developments in technology have much to offer across the full range of treasury activities – and liquidity management is no exception.

As Wong explains, “Technology has played a large role in giving information to treasurers, and showing how we can make data into information that can provide valuable insights.” He adds that HSBC offers a variety of products that can help treasurers achieve optimal efficiency in cash, “including Liquidity Investment Solutions which enable our clients to maintain daily liquidity for transactional purposes, while automatically investing their surplus cash on a daily, weekly or monthly basis.”

Determining future liquidity positions

Shankar says there is “increasing demand from treasurers for tools that provide the ability to determine their cash flow and liquidity position at any given point in time” – a task that Shankar says can be done by identifying key data points that help anticipate incoming and outgoing deposits from supply chain systems and working with technology providers to obtain meaningful results. “You look at the sales pipeline and how long it takes to generate a receivable – and, eventually, for that receivable on balance to turn into cash,” he explains. “By using historical data to establish behaviours, you can start to predict your liquidity position.”

That’s not to say achieving this is straightforward. Mark Evans, Managing Director, Transaction Banking, ANZ Institutional, says that with data often held in legacy systems, it can be difficult for treasurers to extract the data or draw insights that can determine cash flow and the company’s future liquidity position. And the challenge can be even greater when cash is held across multiple countries and banks.

However, technology can help. “Today, technology allows you to aggregate and analyse the available data into meaningful insights by looking at existing and historic trends,” says Evans. He notes that treasurers need to start considering technology that can enable mapping of these data points and support them in making better-informed decisions “using dashboards and predictive analytics.”

Leveraging AI

Finally, where cutting edge technology is concerned, BofAML’s Venkat says that treasurers “can look to their banking partners to leverage innovative technology solutions such as AI and robotics to forecast future customer flows based on past trends.” He also notes that multi-currency virtual account solutions can enable treasurers to “significantly rationalise the number of physical accounts that they need to maintain globally.”

As Venkat explains, treasurers can leverage these technology innovations to derive operational efficiencies and achieve “a truly global liquidity management structure which can be automated and customised to their unique requirements, and meet their key priorities of visibility, control and returns.”

Q&A

Amit Baraskar

VP & Head of Treasury, Thomas Cook (India) Limited

Could you give us an overview of your liquidity management strategy?

Our long-standing approach towards conserving cash, minimising dependence on external borrowings, and creating enough liquidity backups has paid off well.

We have chosen to stay away from borrowings as far as possible by focusing on efficiencies. Over the last five or six years, we have been going aggressive on maximising financial efficiency within the entire system, in line with our parent company Fairfax’s philosophy of Free Cash Flow (FCF) – one of the key criteria that Fairfax uses to measure performance of its group companies.

Our strategy includes the following:

  • Efficiency improvement and free cash maximisation has enabled Thomas Cook (India) Limited to go almost debt free in 2018. We dip into the credit lines only occasionally due to temporary cash flow mismatches. Barring these exceptions, we continue to have a decent amount of surplus cash on the balance sheet, which fetches us some good returns.

  • From a liquidity risk management perspective, we have been working on creating liquidity backups, not only in the form of cash reservoirs (invested in liquid schemes or bank deposits) but also in the form of undrawn bank lines.

  • For the group companies, the strong position of the parent – ie Thomas Cook (India) Limited – acts as a backup support system. We have also been able to get credit lines at a group level, which are available to many of our group companies, as well as setting up unsecured credit lines for group companies across multiple geographies.

We are also working on cash pooling alternatives in various parts of the globe to improve financial efficiency, and we have initiated work with a few overseas subsidiaries on tracking currency movements, tracking exposures (if any), and providing hedging support.

What are your main goals where liquidity management is concerned?

Our key goals include creating liquidity backup for all debts at a group level, keeping external borrowings to a bare minimum, and having internal funding mechanisms in place as an alternative to external borrowings – both through structured and unstructured mechanisms.

Other goals include efficiency improvements which have a favourable impact on the working capital cycle, and giving visibility to management on our overall liquidity position using dashboards.

How do you see technology and innovation supporting liquidity management?

We are going aggressive on getting technological support. This includes:

  • Expediting the realisation of monies/collections and tracking the same. This is done by using payment gateways to accept monies via multiple modes of payment, and using the Unified Payment Interface (UPI) mode of collections, including both ‘push’ and ‘pull’ mechanisms. We have virtual accounts for B2B collections and are working on operationalising the less widely used virtual accounts for B2C businesses. We also have Amex Business Travel Account (BTA) and Mastercard/Visa Central Travel Account (CTA) mechanisms in place, through which monies are collected and directly paid to airlines.

  • We are using initiatives for payments like plastic (as well as virtual) credit cards, and an automated platform for the financing of domestic supplier payments to get financial efficiencies in place.

  • We also have nostro accounts in place akin to those used by banks. For overseas payments through our nostro accounts, we have a multi-currency tool provided by Bank of America which enables us to make cross-currency payments in more than 100 currencies. We were highly commended in the Best SWIFT Solution category in Treasury Today Asia’s 2017 Adam Smith Awards Asia for this.

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