Cash & Liquidity Management

Navigating the liquidity conundrum: MMF, ESG and real-time visibility

Published: Oct 2021

The pandemic has left some companies with too much liquidity and others with too little. BNP Paribas’ Krishna Sampath, Head of Corporate Deposits Line, Asia Pacific argues real time service solutions are key. Elsewhere he suggests corporates wanting to park excess liquidity use MMFs, and those needing more align borrowing with ESG goals.

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Portrait of Krishna Sampath, Head of Corporate Deposits Line, BNP Paribas

Krishna Sampath

Head of Corporate Deposits Line, Asia Pacific

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With the COVID-19 pandemic showing no signs of abating, and newer virus variants challenging the efficacy of vaccines, there are more questions than answers as to what comes next. The cautious optimism of early 2021 about a potential V-shaped economic recovery is turning into despondency as the delta strain forces more countries into varying degrees of lockdowns.

For corporates, the lingering uncertainty not only prolongs the need to do more with stretched resources as staff continue to work from home, but also undermines treasurers’ cash flow forecasts predicated on assumptions of a post-pandemic recovery. Moreover, the pandemic has affected industries in different ways and forced companies to continue to maintain large liquidity reserves, albeit for various reasons, which also poses new challenges for banks supporting them.

Liquidity: too little or too much

In Asia Pacific, sectors such as aviation, retail and hospitality continue to endure the worst of the crisis and struggle to stay afloat as travel remains largely restricted. On the other hand, corporates in technology, logistics and luxury sectors are flush with record cash flows thanks to the e-commerce boom. Though the dividend payouts this year have been robust, the excess liquidity presents these corporates and banks with a conundrum: How to deploy this mountain of cash?

“Ordinarily, surplus cash would have been channelled into organic or inorganic expansions through capex or M&A; activity, with some liquidity being parked with banks and in yield-bearing deposits. However, corporates are putting many of these large and long-term investment decisions on hold because of the uncertain outlook for the pandemic and growing geopolitical tensions,” says Krishna Sampath, Head of Corporate Deposits Line, Asia Pacific.

For example, increasingly volatile relations between the world’s two largest economies—China and the US – has forced several technology, media, and telecoms (TMT) companies across Asia, especially in China, to list IPOs in China and Hong Kong instead of the US. These corporates are also employing a wait and watch approach before deploying the raised capital in large investments, which has also led to an increase in short-term bank deposits.

However, this presents a new challenge for treasurers as they discover that depositing large volumes of cash with banks isn’t as easy as it used to be and can come at a cost, especially for negative yielding currencies such as the Euro, Yen and Swiss franc. This adversely impacts treasurers’ P&L; statements.

Banks, which in the pre-pandemic days comfortably accepted and offered competitive returns on deposits, are starting to impose limits on deposit volumes for large corporates and charge interest on negative-yielding currencies. It has become harder for banks to deploy such large liquidity volumes for onward lending as the pandemic leads to a deterioration in counterparty credit ratings of borrowers. In the absence of a corresponding increase in assets, the balance sheet cost of excess liquidity is increasing for banks, forcing them to re-price corporate clients’ deposits.

Creating win-win solutions

“Corporates have started seeking alternative ways to overcome challenges arising from either too much or not enough liquidity, and we are actively engaging treasurers to find mutually beneficial solutions to resolve the liquidity conundrum,” Krishna adds.

Cash-surplus corporates are turning to money market funds as an alternative to park liquidity. Such off-balance sheet solutions by way of third-party investment options are a win-win for corporates as well as banks. Corporates potentially earn a better yield than what banks can offer in the current environment, and at the same time banks save on costs associated with holding on to excess liquidity and create more headroom to nurture long-term strategic relationships.

Those needing to shore up liquidity are finding banks willing to finance corporates that have established clear Environmental, Social, and Governance (ESG) goals through ESG-linked offerings. The pandemic has provided a major impetus for companies to embrace ESG goals to fulfil expectations of customers, investors, and other stakeholders of a targeted approach to sustainability. ESG and sustainability are now a key corporate treasury priority.

Corporates are also discovering that sustainability-linked loans offer the most straightforward route for them to dip their toes into ESG debt financing. Banks, too, are keen to provide such financing to corporates with clear sustainability goals to build a pool of green and sustainable assets on their books—a win-win for borrowers and lenders.

Enabling treasurers to do more with less

Working from home is still the default for many corporates in Asia Pacific, hence their limited treasury resources remain stretched. Amid the pandemic, the treasurer’s role has evolved into that of a strategic partner to the business. Treasury departments have increasingly embraced automation to reduce the need to engage in mundane tasks and have started to focus their scarce resources on gathering and analysing data to add value to the business.

In this challenging environment, treasurers have started to demand that banks provide them with real-time visibility and control over their companies’ cash positions. With this information on hand, they can make timely decisions to manage their working capital, for example, make deposit placements, fund intercompany loans and make FX conversions. Furthermore, they are also looking to their banking partners to enable these transactions via digital, paperless and automated solutions that will help them transform their operational processes, and alleviate the workload of the increasingly strategic treasury team. BNP Paribas has used this feedback to expand the self-service options for its liquidity management clients through its Connexis Cash online platform.

The liquidity module in Connexis Cash offers a fully automated solution for managing cash pool balances and intercompany loans, including a variety of self-administration options. This allows treasurers to view and manage intercompany lending and borrowing balances and interest between parent entity and affiliates in real time, as well as extract detailed intercompany interest statements for current or past interest periods.

Furthermore, through Connexis Cash, corporate treasurers can also invest excess cash online in short tenor term deposits in a range of currencies to maximise interest yields in today’s low-rate environment. Instead of having to pick up the phone to call their relationship bank, treasurers can simply go online and place deposits in a more efficient and seamless fashion. “Both of these solutions effectively eliminates the exchange of paper documentation between our clients and us, a key target outcome of these solutions, and allows corporate treasury teams to make most of the resources at hand,” Krishna explains.

More than 18 months into the pandemic, even as the proverbial light at the end of the tunnel remains elusive and the tunnel appears to get longer, corporates continue to invest in digitalising treasury management and embrace real-time solutions for managing liquidity and payments. BNP Paribas will continue to be a key partner for our clients in this journey and is committed to deepen our engagement to help treasurers overcome existing and new pain points.

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