CHAPTER-1

INTRODUCTION

INTRODUCTION
The securities scandal of 1991-92 and of 2001 emanating from the financial
services has thrown light on the vulnerability of the banking sector to any lapses on the
part of the non bank financial sector. The portfolio management services, mutual fund
and merchant banking services of banks and their subsidiaries have all become vulnerable
to any developments in the non-banking sector. Similarly the non-bank and non-financial
sector, the capital and money markets have all become equally susceptible to any
weaknesses and malpractices of other sectors including the banking sector. The equity
boom and the new issue buoyancy in 1992 and the subsequent burst and the prolonged
bearishness in these markets have confirmed the increasing vulnerability of these sectors
inter se. The operations of mutual funds, investment banks and FFIs etc., have led to
greater volatility of stock markets and emphasized the destabilizing linkages between the
money market and securities market operations and the stock markets. The stock brokers
have played a role in these operations and this again under lines the need for forging
better relations and healthy traditions and enforcing a code of conduct on bankers and
brokers alike. It is this fact, that has led to the emerging importance of overseeing such
non-banking financial operations of banking subsidiaries and those of private sector.
In recent years, non-banking finance companies (NBFCs), variously called as
Finance Corporation, Loan Company, Finance Company, etc., have mushroomed
all over the country and have been making rapid progress. These finance companies or
corporations with very little capital of their own, --less than Rs. 1 lakhhave been
raising deposits from the public by offering attractive rate of interest and other incentives.
They advance loans to wholesale and retain traders, small-scale industries and selfemployed persons. Bulk of their loans are given to parties which do not either approach
commercial banks or which are denied credit facilities by the latter. The finance
companies give loans which are generally range between 24 or 36 per annum. Besides
giving advances, the fianc companies run chit funds, purchase and discount hundis, and
have also taken up merchant banking, mutual funds, hire-purchase, leasing etc.

Essentially, these finance companies are banks, since they perform the basic twin
functions of attracting deposits from the public and making loans. However, they are not
regarded as banking companies. Hence, they did not come under the control of RBI; and
there is no minimum liquidity ratio or cash ratio as in the case of banking companies, and
so specific ratio between their owned funds and deposits.
That the depositors of these companies are subject to extreme insecurity is clear from the
fact that:
(a)

Bulk of their loans are unsecured and are given to very risky enterprises and
hence their charging high rates of interest;

(b)

The loans, though given for short periods, can be and are renewed frequently and
thus become long-term loans;

(c)

As there is no exchange of communication between different companies, it is

possible for a person or party to borrow from more than one finance company; and

(d)

The deposits of the public with the finance companies are not protected by the
Deposit Insurance Corporation.

NEED & IMPORTANCE OF THE STUDY

1.

Collection of sales proceeds from their customers as quickly as possible and

conversion into available funds so as to take advantage of any investment
opportunities or reduce the borrowing cost of making payments to the vendors. In short,
the corporate treasure wants to optimize the working capital management.

2.

Reduce the float days or transit time involved in collections, especially for
cheques drawn in remote or outstation areas.

3.

Provide funds availability confirmation so as to improve cash flows predictability

and credit control.

1.

Reduce collection cost, especially labour cost associated with cheques processing
and clearing.

2.

Reduce the administrative bundle of account receivable matching via accurate and
timely information and consolidated accounting entries.

SCOPE OF THE STUDY

The study is confined to cash management only. The study doesn't examine other
aspects of financial management. Period of study: The period of study is for three years i.e.
from financial year 2010-2011 to 2012-2013

OBJECTIVES OF THE STUDY

To make a detailed study about the various Cash Management

Practices and Services provided by HDFC Bank to its customers.

To compare the services provided by HDFC Bank with some of the other
banks providing the same CASH MANAGEMENT SERVICES.

To identify and understand the advantages to corporate sector from the

various Cash Management Services provided by the Bank.

To suggest some more pertinent steps to the bank through which it can
improve the services being provided and gain more customer confidence and
loyalty. These steps would also help the bank to be unique and have an edge over
other competitors in the market.

RESEARCH METHODOLOGY OF THE STUDY

The study is based on the following Methodology.

A .Primary Source: The basic procedure and standards of different aspects of

Cash Management Services are collected by interacting with Employees and
Officials of HDFC Bank.
B. Secondary Source: The Secondary sources of data include the statements of the
bank and related documents of the bank. The other data is from books,
journals & the articles published by the bank.
Period of study: The above study is carried for the last year.

LIMITATIONS OF THE STUDY

a) Though the study refers to cash management study in CFL is restricted to
analysis of the revenue account, cash flows, balance sheet, cashbook only,
therefore the conclusions may be generalized to the extent of the limitation.
b) Most of the data is generalized from secondary sources therefore the
accuracy and authenticity of the data depends on the reliability of source.
c) The figures have been approximated.
d) Comment on company's cash positions cannot be exactly made because the
study is for three years only.

CHAPTER- 2
PROFILE OF BANKING INDUSTRY

The Reserve Bank of India

The Reserve Bank of India (RBI) is the central banking system of India and
controls the monetary policy of the rupee as well as US$3000.21 billion (2010) of
currency reserves. The institution was

established on 1st April 1935 during the British

Raj in accordance with the provisions of the Reserve Bank of India Act, 1934 and plays
an important strategy of the government. It is a member of Asian Clearing Union.

History;
1935-1950
The central bank was founded in 1935 to respond to economic troubles after the
first world war. The Reserve Bank of India was set up on the recommendation of the
Hilton Young Commission. The commission submitted is report in the year 1926, though
the bank was not set up for another nine years. The preamble of the Reserve Bank of
India describes the basic functions of Reserve Bank as to regulate the issue of bank notes,
to keep reserve with a view to securing monetary stability in India and generally to
operate the currency and credit system in the best interests of the country. The Central
Office of the reserve Bank was initially established in Kolkata, Bengal, but was
permanently moved to Mumbai in 1937.The Reserve Bank continued to act as the central
bank for Myanmar till Japanese occupation of Burma and later up to April 1947, though
Burma seceded from the Indian Union in 1937. After partition, the Reserve Bank served
as the central bank for Pakistan until June 1948 when the State bank of Pakistan
commenced operations. Though originally set up as a shareholders bank, the RBI has
been fully owned by the government of India since its nationalization in 1949.
1950-1960:
Between 1950 and 1960, the Indian government developed a centrally planned
economic policy and focused on the agricultural sector. The administration nationalized
commercial banks and established, based on the Banking Companies Act, 1949 (later
called Banking Regulation Act) a central bank regulation as part of the RBI. Furthermore,
the central bank was ordered to support the economic plan with loans.
10

1960-1969:
As a result of bank crashes, the reserve bank was requested to establish and
monitor a deposit insurance system. It should restore the trust in the national bank system
and was initialized on 7 December 1961. The Indian government founded funds to
promote the economy and used the slogan Developing Banking. The Gandhi
administration and their successors restructured the national bank market and
nationalized a lot of institute. As a result, the RBI had to play the central part of control
and support of this public banking sector.
1969-1985:
Between 1969 and 1980, the Indian government nationalized 20 banks. The
regulation of the economy and especially the financial sector was reinforced by the
Gandhi administration and their successors in the 1970s and 1980s. The central bank
became the central player and increased its policies for a lot of tasks like interests, reserve
ratio and visible deposits. The measures aimed at better economic development and had a
huge effect on the company policy of the institutes. The banks lent money in selected
sector, like agri-business and small trade companies.
The branch was forced to establish two new offices in the country for every newly
established office in a town. The oil crises in 1973 resulted in increasing inflation, and the
RBI restricted monetary policy to reduce the effects.
1985-1991:
A lot of committees analysed the Indian economy between1985 and 1991. Their
results had an effect on RBI. The board for Industrial and Financial Reconstruction, the
Indira Gandhi Institute of Development Research and the Security & Exchange Board of
India investigated the national economy as a whole, and the security and exchange board
proposed better methods for more effective markets and the protection of investor
interests. The Indian financial market was a leading example for so-called financial
repression (Mackinnon and Shaw). The Discount and Finance House of India began its
operations on the monetary market in April 1988; the National Housing Bank, founded in

11

July 1988, was forced to invest in the property market and a new financial law improved
the versatility of direct deposit by more security measures and liberalization.
1991-2000:
The national economy came down in July 1991 and the Indian rupee was
devalued. The currency lost 18% relative to the US dollar, and the Narsimahmam
Committee advised restructuring the financial sector by a temporal reduced reserve ratio
as well as the statutory liquidity ratio. New guidelines were published in 1993 to establish
a private banking sector. This turning point should reinforce the market and was often
called neo-liberal The central bank deregulated bank interest and some sectors of the
financial market like the trust and property markets. This first phase was a success and
the central government forced a diversity liberalization to diversify owner structures in
1988.
The National Stock Exchange of India took the trade on June 1994 and the RBI
allowed nationalized banks in July to interact with the capital market to reinforce their
capital base. The central bank founded a subsidiary company the Bharatiya Reserve Bank
Note Mudram Limited-in February 1995 to produce banknotes.

Since2000:
The Foreign Exchange Management Act from 1999 came into force in June 2000.
It should improve the foreign exchange market, international investment in India and
transactions. The RBI promoted the development of the financial market in last years,
allowed online banking in 2001 and established a new payment system in 2004-2005
(National Electronic Fund Transfer). The Security printing & Minting Corporation of
India Ltd., a merger of nine institutions, was founded in 2006 and produces banknotes
and coins.The national economy s growth rate came down to 5.8% in the last quarter of
2008 2009 and the central bank promotes the economic development.

STRUCTURE:

Central Board of Directors:

12

The Central Board of Directors is the main committee of the central bank and has
not more than 20 members. The government of the republic appoints the directors for a
four year term.

Central Board of Directors Name Position:

Duvvuri Subbarao Governor
Shyamala Gopinath Deputy Governor
K.C.Chakrabarty Deputy Governor.
Subir Gokram Deput Governer.
Y.H.Malgam Regional of the west.
Suresh D.Tendulkar Regional of the east.
U.R.Rao Regional of the north.
Laksmi Chand Regional of the south.
H.P.Ranian Lawyer Supreme Court of India.
Ashok S.Ganguly Chairman Firstsource Solution Limited.
Azim Premji Chairman WIPRO Limited.
Kumar Mangalam Birla Chairman Aditya Birla Group of Companies.
Shashi Rajagopalan Advisor.
Suresh Neotia former Chairman Ambuja Cement co..
A.Vaidyanathan Economist, professor Madras Inst.
Man Mohan Sharma Chemist, Professor Mumbai University.
D.Jayavarthanavelu Chairman Lakshmi Machine Works Limited.
Sanjay Labroo CEO Asahi India Glass Ltd.
Sunanda Padmanabham Government representative.
Ashok Chawla Government representative.

Governor:
The central bank had 22 governors since 04.01.1935. The regular term of office is
a four-year period, appointed by the national administration.

Supportive bodies:
The reserve bank of India has four regional representations: North in New Delhi,
south in Chennai, East in Kolkata, and west in Mumbai. The representations are formed
13

by five members, appointed for four years by central government and serve beside the
advice of central Board of Directors as a forum for regional banks and to deal with
delegated tasks from the central board. The institution has 22 regional offices.
The board of Financial Supervision (BFS), formed in November 1994, serves as a CCBD
committee to control the financial institutions. It has four members, appointed for two
years, and takes measures to strength the role of statutory auditors in the financial sector,
external monitoring and internal controlling systems.
The Tarapore committee was setup by the Reserve Bank of India under the chairmanship
of former RBI deputy governor S S Tarapore to lay the road map to capital account
convertibility. The five-member committee recommended a three-year time frame for
complete convertibility by 1999-2000.
On July 1st 2006, in an attempt to enhance the quality of customer service and strengthen
the grievance redressal mechanism, the Reserve Bank of India constituted a new
department customer service Department (CSD).

Offices and branches:

The Reserve bank of India has branch offices at most state capitals and at a few
major cities in India [total of 18 places] viz, Ahmedabad, Bangalore, Bhopal,
Bhubaneswar, Chennai, Delhi, Guwahati, Hyderabad, Jaipur, Jammu, Kanpur, Kolkata,
Lucknow, Mumbai, Nagpur, Patna, and Thiruvananthapuram. Besides it has sub-offices at
Dehradun, Gangtok, Kochi, Panaji, Raipur, Ranchi, Shimla, and Srinagar.
The bank has also two training colleges for its officers, viz Reserve bank Staff
College at Chennai and College of Agricultural Banking at pune. There are also four
Zonal Training Centres at Belapur, Chennai, Kolkata and New Delhi.

Main functions:
Reserve Bank of India regional office, Delhi entrance with the Yakshini sculpture
depicting Prosperity through agriculture
The RBI Regional Office in Delhi
The RBI Regional Office in Kolkata Monetary authority The RBI is the main
monetary authority of the country and beside that the central banks acts as the bank of the
14

national and state government. It formulates implements and monitors the monitory
policy as well as it has to ensure an adequate flow of credit to productive sectors. The
national economy depends on the public sector and the central bank promotes an
expansive monetary policy to push the private sector since the finance market reforms of
the 1990s.
The institution is also the regulator and supervisor of the financial system and
prescribes broad parameters of banking operations within which the country banking and
financial system protect depositor interest and provide cost-effective banking services to
the public. The Banking Ombudsman Scheme has been formulated by RBI for effective
addressing of complaints by bank customers. The RBI controls the monitory supply,
monitors economic indicators like the gross domestic product and has to decide the
design of the rupee banknotes as well as coins.

Manager of exchange control:

The central bank manages to reach the goals of the Foreign Exchange
Management Act, 1999. Objective: to facilitate external trade and payment and promote
orderly development and maintenance of foreign exchange market in India.

Issuer of currency:
The bank issues and exchange or destroys currency and coins not fit for
circulation. The objectives are giving the public adequate supply of currency of good
quality and to provide loans to commercial banks to maintain or improve the GDP. The
basic objectives of RBI are to issue bank notes, to maintain the currency and credit
system of the country to utilize it in its best advantage, and to maintain the economic
structure of the country so that it can achieve the objective of price stability as well as
economic development, because both objectives are diverse in themselves.

Developmental role:
The central bank has to perform a wide range of promotional functions to support
national objectives and industries.The RBI faces a lot of inter- sector and local inflationrelated problems. Some of these problems are results of the dominant part of public
sector.
15

Related functions:
The RBI is also a banker to the government and performs merchant banking
function for the central and the state governments. It also acts as their banker. The
National Housing Bank (NHB) was established in 1988 to promote private real estate
acquisition the institution maintains banking accounts of all scheduled banks, too.
There is now an international consensus about the need to focus the tasks of a
central bank upon central banking. RBI is far out of touch with such a principle, owing to
the sprawling mandate described above. The recent financial turmoil world over, has
however, vindicated the reserve Bank s role in maintaining financial stability in India.

RBI has various tools to control which are listed below:

(a) Bank Rate: RBI lends to the commercial banks through its discount window to help
the banks meet depositers demands and reserve requirements. The interest rate the RBI
charges the bank for this purpose is called bank rate.if the RBI wants to increase the
liquidity and money supply in the market,it will decrease the bank rate and if it wants to
reduce the liquidity and money supply in the system, it will increase the bank rate.
(b) Cash Reserve Requirement (CRR): Every commercial bank has to keep certain
minimum cash reserves with RBI. RBI can vary this rate between 3% and 15%. RBI uses
this tool to increase or decrease the reserve requirement depending on whether it wants to
affect a decrease or an increase in the money supply. An increase in CRR will make it
mandatory on the part of the banks to hold a large proportion of their deposits in the form
of deposits with RBI. This will reduce the size of their deposits and they will lend less.
This will in turn decrease the money supply.
(C) Statutory Liquidity Requirements (SLR): Apart from the CRR, banks are required to
maintain liquid asset in form of gold, cash and approved securities. RBI has stepped up
liquidity requirements for two reasons:- Higher liquidity ratio forces commercial banks
to maintain a larger proportion of their resources in liquid form and thus reduces their
16

capacity to grant loans and advances thus it in an anti- inflationary impact. A higher
liquidity ratio diverts the bank funds from loans and advances to investment in
government and approved securities.
In well developed economies, central banks use open market operations buying and
selling of eligible securities by central bank in money market- to influence the volume of
cash reserves with commercial banks and thus influence the volume of loans and
advances they can make to the commercial and industrial sectors. In the open money
market government securities are traded at market related rates of interest. The RBI is
resorting more to open market operations in the more recent years.

Generally RBI uses three kinds of selective credit control:

a)

Minimum margins for lending against specific securities.

b)

Ceiling on the amounts of credit for certain purpose.

c)

Discriminatory rate of interest charged on certain types of advances.

Direct credit controls in India are of three types:

(a) Part of the interest rate structure i.e on small savings and provident funds, are administratively
set.
(b) Banks are mandatorily required to keep 25% of their deposits in form of government securities.
(c) Banks are required to lend to priority sectors to the extent of 40% of their advances.

BANKING IN INDIA
Banking in India originated in the last decades of the 18th century. The first banks were
the general bank of India which started in 1786, and the bank of Hindustan both of which
are now defunct. The oldest bank in existence in India is the state bank of India which
originated in the bank of Calcutta in June 1806,which almost immediately became the
bank of Bengal. This was one of the three presidency banks, the other two being the bank
of Bombay and the bank of Madras, all three of which were established under charters
17

from the British East India Company. For many years the presidency banks acted as quasi
central banks, as did their successors. The three banks merged in 1921 to form the
Imperial Bank of India, which, upon Indias independence became the state bank of India.
The Indian Banking industry, which is governed by the Banking Regulation Act
of India, 1949 can be broadly classified into two major categories, non-scheduled banks
and Scheduled banks comprise commercial bank and the co-operative banks. In terms
of ownership, commercial bank can be further grouped into nationalized banks, the
state bank of India and its group banks, regional rural banks and private sector
banks(the old/ new domestic and foreign) These banks have over 67,000 branches
spread across the country.
The first phase of financial reforms resulted in the nationalization of 14 major
banks in 1969 and resulted in a shift from class banking to Mass banking
.This

in turn resulted in a significant growth in the geographical coverage of

banks. Every bank had to earmark a minimum percentage of their loan portfolio to
sectors identified as priority sectors The manufacturing sector also grew during
the 1970s in protected environs and the banking sector was a critical source. The
next wave of reforms saw nationalization of 6 more commercial banks in 1980.
since then the number of scheduled commercial banks increased fourfold and the
number of bank branches increased eight-fold.
After the second phase of financial sector and liberalization of the sector in the
early nineties, the public sector Banks(PAS) s found it extremely difficult to
compete with the new private sector banks and the foreign banks. The new private
sector bank first made their appearance after the guidelines permitting them were
issued in January 1993,eight new private sector banks are presently in operation.
These banks due to their late start have access to state-the-art and provide better
services.
During the year 2000, the state Bank of India(SBI) and its 7 associate accounted
for a 25 percent share in deposits

and 28.1 percent share in credit. The 20

nationalized banks accounted for 53.2 percent of the deposits and 47.5 percent of
credit during the same Period. The share of foreign banks (numbering 42) regional
rural banks and other scheduled commercial bank accounted for 5.7 percent 3.9
18

percent and 12.2 percent respectively in deposits and 8.41 percent 3.14 percent and
12.85 percent respectively in credit during the year 2000.

HISTORY:
Indian merchant in Calcutta established the Union Bank in 1839, but it failed in 1848 as a
consequence of the economic crisis of 1848-49. The Allahabad Bank, established in 1865
and still functioning today, is the oldest joint stock bank in India. (Joint stock Bank: A
company that issues stock and requires shareholders to be held liable for the company
debts) It was not the first though. That honor belongs to the Bank of upper India, which
survived until 1913, when it failed, with some of its assets and liabilities being transferred
to the Alliance Bank of Simla.
When the American Civil War stopped the supply of cotton to Lancashire from the
confederate states, promoters opened banks to finance trading in Indian cotton. With large
exposure to speculative ventures, most of the banks opened in India during that period
failed. The depositors lost money and lost interest in keeping deposits with banks,
subsequently banking in India remained the exclusive domain of European for next
several decades until the beginning of the 20th century.
Foreign banks too started to arrive, particularly in Calcutta, in the 1860s. The Comptoire
dEscompte de pairs opened a branch in Calcutta in 1860 and another in Bombay in
1862; branches in Madras and Panudcherry, then a French colony, followed. HSBC
established itself in Bengal in 1869. Calcutta was the most active trading port in India,
mainly due to the trade of the British Empire, and so became a banking centre.
The first entirely Indian joint stock bank was the Oudh Commercial Bank, established in
1881 in Faizabad. It failed in 1958. The next was the Punjab National Bank, established
in Lahore in1895, which has survived to the present and is now one of the largest banks
in India.
Around the turn of 20th century, the Indian economy was passing through a relative
period of stability. Around five decades had elapsed since the Indian Mutiny, and the
social, industrial and other infrastructure had improved. Indians had established small
banks most of which served particular ethnic and religious communities.

19

The presidency banks dominated banking in India but there were also some exchange
banks and a number of Indian joint stock banks. All these banks operated in different
segments of the economy. The exchange banks, mostly owned by Europeans,
concentrated on financing foreign trade. Indian joint stock banks were generally
undercapitalized and lacked the experience and maturity to compete with the presidency
and exchange banks. This segmentation let Lord Curzon to observe, "In respect of
banking it seems we are behind the times. We are like some old fashioned sailing ship,
divided by solid wooden bulkheads into separate and cumbersome compartments."
The period in between 1906 and 1911, saw the establishment of banks inspired by the
Swadeshi movement. The Swadeshi movement inspired local businessmen and political
figures to found banks of and for the Indian community. A number of banks established
then survived to the present such as Bank of India, Corporation Bank, Indian Bank, Bank
of Baroda, Canara Bank and Central Bank of India.
The fervour of Swadeshi movement lead to establishing of many private banks in
Dakshina Kannada and Udupi district which were unified earlier and known by the name
South Canara (South Canara) district. Four nationalized banks started in this district and
also a leading private sector bank. Hence undivided Dakshina Kannada district is known
as "Cradle of Indian Bank".
During the first World War (1914-1918) through the end of the Second World War (19391945), and two years thereafter until the independence of India were challenging for
Indian banking. The years of the First World War were turbulent, and it took its
toll with banks simply collapsing despite the Indian economy gaining indirect boost due
to war-related economic activities. At least 94 banks in India failed between 1913 and
1918 as indicated in following table;

20

Years

No of banks

Authorized

Paid up

That failed

Capital(RS. Lakha)

Capital(RS.Lakha)

1913

12

274

35

1914

42

710

109

1915

11

56

05

1916

13

231

04

1917

09

76

25

1918

07

209

01

Post-independence:
The partition of India in 1947 adversely impacted the economies of Punjab and West
Bengal, paralyzing banking activities for months. Indias independence marked the end of
a regime of the Laissez-faire for the Indian banking. The government of India initiated
measures to play an active role in the economic life of the nation, and the industrial
policy resolution adopted by the government in 1948envisaged a mixed economy. This
resulted in to greater involvement of the state in different segments of the economy
including banking and finance. The major steps to regulate banking included:
The reserve bank of India, Indias central banking authority, was nationalized on January
1st 1949 under the terms of the Reserve Bank of India (transfer to public Ownership ) Act,
1948 (RBI, 2005b)
In 1949, the banking regulation act was enacted which empowered the Reserve Bank of
India (RBI) to regulate, control and inspect the banks in India.
The banking regulation act also provided that no new bank or branch of an existing bank
could be opened without a license from the RBI, and no two banks could have common
directors.

Nationalization:
Banks nationalization in India: Newspaper Clipping, Times of India, July 20,
1969Despite the provisions, control and regulations of Reserve bank of India, banks in
India expect the State Bank if India or SBI, continued to be owned and operated by
private persons. By the 1960s, The Indian banking industry had become an important tool
21

to facilitate the development of the Indian economy. At the same time, it had emerged as
a large employer, and a debate had ensued about the nationalization of the banking
industry. Indira Gandhi, the prime Minister of India, expressed the intention of the
government

of

India

in

the

annual

conference

of

the

All

India

Congress meeting in a paper entitled stray thoughts on banking nationalization. The

meeting received the paper with enthusiasm.
Thereafter, her move was swift and sudden. The Government of India issued an
ordinance and nationalized the 14 largest commercial banks with effect from the midnight
of July 19, 1969. Jayaprkash Narayan, a national leader of India, described the step as a
masterstroke of political sagacity. Within two weeks of the issue of the ordinance, the
parliament passed the Banking Companies Bill, and it received the presidential approval
on 9 August 1969.
A second dose of nationalization of 6 more commercial banks followed in 1980. The
stated reason for the nationalization was to give the government more control of credit
delivery. With the second dose of nationalization, the government of India controlled
around 91% of the banking business of India. Later on, in the 1993, the government
merged New Bank of India with Punjab National Bank. It was the only merger between
nationalized banks and resulted in the reduction of the number of nationalized banks from
20 to 19. After this, until the 1990s, the nationalized banks grew at a pace of around 4%,
closer to the average growth rate of Indian economy.

Liberalization:
In the early 1990s, the then Narsimha Rao government embarked on a policy of
liberalization, licensing a small number of private banks. These came to be known as
New Generation tech-savvy banks, and included Global Trust Bank (the first of such new
generation banks to be set up), which later amalgamated with Oriental Bank of
Commerce, Axis Bank (earlier as the UTI Bank), ICICI Bank and HDFC Bank. This
move, along with the rapid growth in the economy of India, revitalized the banking sector
in India, which has seen rapid growth with strong contribution from all the three sectors
of banks, namely, government banks, private banks, foreign banks.

22

The next stage for the Indian banking has been set up with the proposed relaxation in the
norms for Foreign Direct Investment, where all Foreign Investors in banks may be given
voting rights which could exceed the present cap of 10%, at present it has gone up to 74%
with some restrictions.
The new policy shook the Banking sector in India completely. Bankers, till this time, were
used to the 4-6-4 method (Borrow at 4%; Lend at 6%; Go to home at 4%) of functioning.
The new wave ushered in a modern outlook and tech-savvy methods of working for
traditional banks. All this led to the retail boom in India. People not just demanded more
from their banks but also received more.
Currently (2007), banking in India is generally fairly mature in terms of supply, product
range and reach-even though reach in rural India still remains a challenge for the private
sector and foreign banks. In terms of quality of assets and capital adequacy, Indian banks
are considered to have clean strong and transparent balance sheets relative to other banks
in comparable economies in its region. The reserve Bank of India is an autonomous body,
with minimal pressure from the government. The stated policy of Bank on the Indian
Rupee is to manage volatility but without any fixed exchange rate-and this has mostly
been true.
With the growth in the Indian economy expected to be strong for quite some timeespecially in its services sector-the demand for banking services, especially retail
banking, mortgages and investment services are expected to be strong. One may also
expect M&As, takeovers, and asset sales.
In March 2006, the Reserve Bank of India allowed Wardurg Pincus to increase its stake in
Kotak Mahindra Bank (a private sector bank) to 10%. This is the first time an investor
has been allowed to hold more than 5% in a private sector bank since the RBI announced
norms in 2005 that any stake exceeding 5% in the private sector banks would need to be
vetted by them.
In recent years critics have charged that the non-government owned banks are too
aggressive in their loan recovery efforts in connection with housing, vehicle and personal

23

loans. There are press reports that the banks loan recovery efforts have driven defaulting
borrowers to suicide.

24

BANKS IN INDIA:
Allahabad Bank.

Indian Bank's Association (IBA).

Andhra Bank.

Indian Overseas bank.

Bank of Baroda.

IndusInd Bank Ltd.

Bank of India.

Industrial Development Bank of India.

Bank of Madura.

Industrial Investment Bank of India Ltd.

Bank of Maharashtra.

Institute for Development and Research in

Bank of Punjab.

Banking Technology (IDRBT).

Banque Nationale De Paris.

Jammu & Kashmir Bank.

Canara Bank.

Jammu and Kashmir Bank Ltd.

Central Bank of India.

Kalyan Bank.

Centurion Bank Limited.

Kapol Co-operative Bank Ltd.

Centurion Bank.

Lakshmi Vilas Bank.

Cipher Securities (India) Pvt. Ltd.

Citibank.
Corporation Bank.
Cosmos Bank.
Dena Bank.
Development Credit Bank.
EXIM Bank of India.
Export Import Bank of India.
Federal Bank Limited.
Global Trust Bank.
HDFC Bank Ltd.
Haryana State Cooperative Apex Bank.
Limited (HARCOBANK).
ICICI Bank.
IDBI Bank.
Indian Bank.

25

North Eastern Development Finance

Small Industries Development Bank of

Corporation (NEDFI).

India.

Mandvi Co-operative Bank Ltd.

State Bank of Hyderabad.

National Bank for Agriculture & Rural

State Bank of India.

Development.

State Bank of Indore.

National Housing Bank.

State Bank of Mysore.

Oriental Bank of Commerce.

State Bank of Saurashtra.

Punjab National Bank.

State Bank of Travancore.

Punjab and Maharashtra Co-operative Bank

Syndicate Bank.

Pvt. Ltd.

UCO Bank.

Punjab and Sind Bank.

Union Bank of India.

Ratnakar Bank Ltd.

Unit Trust of India.

Reserve Bank of India.

United Bank Of India (UBI).

Saraswat Co-operative Bank Ltd.

Vijaya Bank.

Saraswat Co-operative Bank Ltd.

SBI Capital Markets Limited.
.

CHAPTER-3
PROFILE OF HDFC BANK

27

The Housing Development Finance Corporation Limited (HDFC) was amongst the
first to receive an 'in principle' approval from the Reserve Bank of India (RBI) to set
up a bank in the private sector, as part of the RBI's liberalisation of the Indian
Banking Industry in 1994. The bank was incorporated in August 1994 in the name of
'HDFC Bank Limited', with its registered office in Mumbai, India. HDFC Bank
commenced operations as a Scheduled Commercial Bank in January 1995
HDFC is India's premier housing finance company and enjoys an impeccable track
record in India as well as in international markets. Since its inception in 1977, the
Corporation has maintained a consistent and healthy growth in its operations to
remain the market leader in mortgages. Its outstanding loan portfolio covers well over
a million dwelling units. HDFC has developed significant expertise in retail mortgage
loans to different market segments and also has a large corporate client base for its
housing related credit facilities. With its experience in the financial markets, a strong
market reputation, large shareholder base and unique consumer franchise, HDFC was
ideally positioned to promote a bank in the Indian environment.
HDFC Bank's mission is to be a World-Class Indian Bank. The objective is to build
sound customer franchises across distinct businesses so as to be the preferred provider
of banking services for target retail and wholesale customer segments, and to achieve
healthy growth in profitability, consistent with the bank's risk appetite. The bank is
committed to maintain the highest level of ethical standards, professional integrity,
corporate governance and regulatory compliance. HDFC Bank's business philosophy
is based on four core values - Operational Excellence, Customer Focus, Product
Leadership and People.
Mr. C.M. Vasudev has been appointed as the Chairman of the Bank with effect from
6th July 2010. Mr. Vasudev has been a Director of the Bank since October 2006. A
retired IAS officer, Mr. Vasudev has had an illustrious career in the civil services and
has held several key positions in India and overseas, including Finance Secretary,
Government of India, Executive Director, World Bank and Government nominee on
the Boards of many companies in the financial sector.
The Managing Director, Mr. Aditya Puri, has been a professional banker for over 25
years, and before joining HDFC Bank in 1994 was heading Citibank's operations in
Malaysia.
The Bank's Board of Directors is composed of eminent individuals with a wealth of
28

experience in public policy, administration, industry and commercial banking. Senior

executives representing HDFC are also on the Board.
Senior banking professionals with substantial experience in India and abroad head
various businesses and functions and report to the Managing Director. Given the
professional expertise of the management team and the overall focus on recruiting and
retaining the best talent in the industry, the bank believes that its people are a
significant competitive strength.

Management service to a corporate we undertook cost benefit analysis

for a client of HDFC bank. In order to understand the significance of cash
management for the company we analyzed the costs borne by the company two
scenarios one in which the company doesn't make use of cash management
service & second when the company uses the bank's services. The net savings in
cost is the benefit for the company.
(A) THE MAIN OBJECTS TO TBE PURSUED BY THE COMPANY ON ITS
INCORPORATION ARE:
1. To carry on the business of Trading as sub:broker,in agricultural producrs,metals
including precious metals, precious stones, diamonds,petroleum and energy products
and all other commodities and securities, in spot markets and in futures and all kinds
of derivatives of all the above commodities and securities.
2. To carry on business as sub-brokers, market makers,arbitrators,and / or hedgers in
agricultural products, metals including precious metals, precious stones, diamonds
petroleum and energy products and all other commodities and securities, in spot
markets and in futures and all of derivatives of all the above commodities and
securities permitted under the laws of India.
3. To become member of commodity Exchanges set up India.
(B) THE OBJECTS INCIDENTAL OR ANCILLARY TO THE ATTAINMENT OF
MAIN OBJECTS ARE :
1. To buy, deal,prefer,treat,manipulate,exchange,hire,import,dispose or deal in any or all
kinds of articles and things which may be required for the purpose of business which

29

the company expressly or by implication authorized by this memorandum of

association of the company to carry on.
2. To establish and maintain any agencies in India or any part of the world for the
conduct of the business of the Company or for the sale of any materials or things for
there time being at the disposal of the company for sale.
3.

To establish and maintain transport services for the purpose of carrying on business
of the company.

4. To lease, let out in hire,mortgage,pledge,sell or otherwise dispose of the whole or any

part of the undertaking of the company, or any lands business,properly,rights or
assets of any kind of the Company, or any share of interest thereon respectively. In
such manner and for such consideration as the company may think fit and in particular
for shares, debentures or securities of any other corporation having object altogether
or in part,similar those of the Company.
5. To adopt such means of making the products of the company known as may seem
expedient and particularly by advertising in the press,circulars,purchase and
exhibition of works of art or intrest by publication of books and periodicals and by
establishing centres and celebrations,fairs,market places of other activities of general
intrest by granting prizes,rewards and donations.
6. To pay all or any costs, charges and expenses preliminary and incidental to the
promotion, formation registration and establishment of the company.
7. To purchase or otherwise acquire and undertake all or any part of the business
property and liabilities of any business or organization carrying on any business
which the company is authorized to carry on or p prossessed of properly suitable for
the purpose the company.
8. To take or otherwise acquire and hold shares in other company having objects
altogether or in part,similar to those of this company or carrying or carrying on any
business capable of being conducted so as directly to benfit the company.
9. To enter partnership or in to any agreement for sharing profits .union of interest
cooperation joint venture ,reciprocal concession or otherwise with any person
corporation association, local government or company carrying on or engaged in any
business or transtaction capable of being conducted so as directly to

benefits this

company and to take or otherwise acquire and hold shares or stock in any such
company.
30

10. To maintain any shops or stores or residential quarters for the benefit of the company
or its servants ,workmen others ,employed by the company.
11. Subject to the banking regulation act of 1949 to draw , make accept ,endorse ,discount
and issue cheques and other promissory notes ,bills of exchange ,bills of lading,
warrants ,debenture and other negotiable or transferable instruments and securities.
12. To invest the monies of the company ,not immediately required ,upon such securities
properties 12.To invest the monies of the company ,not immediately required ,upon
such securities properties /installments as may be determined from time to time.
13. Subject the provisions of the companies act,1956 and rules framed there under to
receive money as deposits on such terms and conditions as may be determined from
time but so as not to banking business within the meaning of banking regulation act of
banking regulation act of 1949.
14. To establish and control agencies and branches of the company and for that purpose to
employ agents branch managers ,secretaries ,treasures and other officer of clerks or
servants and brokers or commission agents and to pay or provide for them such
salaries, brokerage and remuneration ,as may be found necessary ,expedient or
desirable.
15. To barrow or rise ,or secure payment of money ,in such manner as the company may
think fit and in particular by the issue of debentures charges upon or all any of the
companies properly both present and future including its un called capital and to
purchase or pay off any such securities.
16. Subject to the provisions of the companies act ,1956 to support or subscribe or donate
to any charitable or other institutions ,clubs ,societies, funds or projects either
indirectly conductive to any of the companys objects.
17. To distribute the companys property among the members in specie upon winding up.
18. To appoint legal,technical,engineering and financial advisers and to appoint banker or
bankers for the company and to pay the necessary charges for the same.
19. To build and establish new showroms,workshops,offices and laboratories suitable for
the purpose of the company.
20. To amalgamate merge with any other company or companies having objects,
altogether or in part, similar to those of the company.

31

21. To undertake and execute any trusts or undertaking where of may seem desirable,
either gratuitously or otherwise.
22. To create any depreciation fund, reserve fund, sinking fund,insurance,or any special
or other fund, whether for depreciation or for reparing,improving,extending or
maintaining any of the property of the company or for redemption of debentures,
redeemable preference shares or for any other purpose whatsoever conducive to the
interest of the company.
23. To conduct studies of technologies developments, undertake systematic market survey
and for this purpose, to prepare and get project reports, blue prints, statistical data and
other information either with or without foreign collaboration and to disseminate the
results of such studies or surveys as the company may deem expedient.
24. To open current or deposit accounts with any bank or banks, whether nationalized or
private and pay into and draw moneys and operate on such accounts.

HDFC Bank began operations in 1995 with a simple mission: to be a "World-class

Indian Bank". We realised that only a single-minded focus on product quality and
service excellence would help us get there. Today, we are proud to say that we are
well on our way towards that goal.
It is extremely gratifying that our efforts towards providing customer convenience
have been appreciated both nationally and internationally.
2011

Financial Express

- Best in Strength and Soundness

Best Bank Survey

- 2nd Best in the Private Sector

2010-11
CNBC TV18's Best - Best Bank
Bank & Financial

- Mr. Aditya Puri, Outstanding Finance Professional

Institution Awards
Dun & Bradstreet

Best Private Sector Bank - SME Financing

Banking Awards
2011

32

ISACA 2011 award Best practices in IT Governance and IT Security

for IT Governance
IBA Productivity

New Channel Adopter (Private Sector)

Excellence Awards
2011
DSCI (Data

Security in Bank

Security Council of
India) Excellence
Awards 2011
FINANCE ASIA

- BEST BANK

Country Awards

- BEST CASH MANAGEMENT BANK

2011: India

- BEST TRADE FINANCE BANK

Asian Banker

Strongest Bank in Asia Pacific

BloombergUTV's

Best Bank

Financial
Leadership Awards
2011
IBA Banking

Winner -

Technology Awards 1) Technology Bank of the Year

2010

2) Best Online Bank

3) Best Customer Initiative
4) Best Use of Business Intelligence
5) Best Risk Management System
Runners Up Best Financial Inclusion

IDC FIIA Awards

Excellence in Customer Experience

2011

2010

33

Outlook Money

Best Bank

2010 Awards
Businessworld Best Best Bank (Large)
Bank Awards 2010
Teacher's

Mr. Aditya Puri

Achievement
Awards 2010
(Business)
The Banker and

Best Private Bank in India

PWM 2010 Global

Private Banking
Awards
Economic Times

Business Leader of the Year - Mr. Aditya Puri

Awards for
Corporate
Excellence 2010
Forbes Asia

Fab 50 Companies - 5th year in a row

NDTV Business

Best Private Sector Bank

Leadership Awards
2010
The Banker

World's Top 1000 Banks

Magazine
MIS Asia IT

BEST BOTTOM-LINE I.T. Category

Excellence Award
2010
Dun & Bradstreet
Banking Awards

Overall Best Bank

2010

Best Private Sector Bank

Best Private Sector Bank in SME Financing

Institutional

HDFC Bank MD, Mr. Aditya Puri among "Asian

Investor Magazine

Captains of Finance 2010"

Poll
34

IDRBT Technology Winner - 1) IT Infrastructure 2) Use of IT within the

2009 Awards

Bank
Runners-up - IT Governance (Large Banks)

ACI Excellence

Highly Commended - Asia Pacific HDFC Bank

Awards 2010
FE-EVI Green

Best performer in the Banking category

Business
Leadership Award
Celent's 2010

Model Bank Award

Banking Innovation
Award
Avaya Global

Customer Responsiveness Award - Banking &

Connect 2010

Financial Services category

Forbes Top 2000

Our Bank at 632nd position and among 130 Global

Companies

High Performers

Financial Express Ernst & Young

Best New Private Sector Bank

Survey 2009-10

Best in Growth
Best in strength

Asian Banker
Excellence Awards

Best Retail Bank in India

2010

Excellence in Automobile Lending

Best M&A Integration
Technology Implementation

The Asset Triple A

Best Cash Management Bank in India

Awards
Euromoney Private

1) Best Local Bank in India (second year in a row) 2)

Banking and Wealth Best Private Banking Services overall (moved up from
Management Poll

No. 2 last year)

2010
Financial Insights

Innovation in Branch Operations - Server

Innovation Awards

Consolidation Project
35

2010
Global Finance

Best Trade Finance Provider in India for 2010

Award
2 Banking

1) Best Risk Management Initiative and 2) Best Use of

Technology Awards Business Intelligence.

2009
SPJIMR Marketing

2nd Prize

Impact Awards
(SMIA) 2010
Business Today

Listed in top 10 Best Employers in the country

Best Employer
Survey

We are aware that all these awards are mere milestones in the continuing, neverending journey of providing excellent service to our customers. We are confident,
however, that with your feedback and support, we will be able to maintain and
improve our services

TABLE 1
PRODUCT

BREAK UP
OF LCT
(Rs.)

AVG LCT 13279698.60

COLLECTI
ONS/
MONTH
(Rs.)
1327698.65

COLLECTIO CLEARI
NS/ DAY NG
TIME
(Rs.)

MAIL
TIME

TOTAL

INTRF
SI
RATE
(%>

TO
FLOAT
COST
(Rs)

442656.60

2.00

2.00

0.0025

181.49

52747298.64

1758243.00

10.00

5.00

15.00

0.0025

5406.59

AVG EXP

133115.20

4437.17

13.00

5.00

18.00

0.0025

16.37

AVG

270827.20

9027.57

21.00

6.00

27.00

0.0025

49.97

98654941.74

3288498.00

7.00

4.00

11.00

0.0025

7415.56

165085881.4

5502863.00

AVG
NMM

CLEAN
AVG NET
TOTAL

40264046.31

79253241.54

73.00

% AGE OF THE PRODUCTS IN LOCAL COLLECTION

36

13069.99

NON
METRO

METRO

HYD

30.32

59. 68 %

10%

1. Interest rate has been calculated from the balance sheet of the company as the
cost for working capital & other short-term loans.
Apart from the float costs the bank also has pay a flat charge for outstation
cheques deposited & bear costs of employing people in the receivables
processing departments to receive cheques & input data. Banks usually provide
information reporting as an add on for CMS clients. When they are not using
such service they have to do most of this work on their own.

37

OTHER COSTS
Flat

Bank

298793.21

Charge (Rs.)
Proceeding

200000

Costs (Rs.)

Therefore the total cost of collecting receivables for the company is

Rs.52,69,339.56

38

CHAPTER-4
THEORETICAL FRAME WORK

39

In earlier times the mode of exchange that existed was that of baiter system. Such a
system ensured that one paid for one's purchases immediately i.e. there was a
simultaneous realization of due.
The improvement in simple sort of barter led to the tendency of selecting one or two
items in preference to others so that the preferred item started to get accepted because of
their qualify of acting as a media of exchange for almost all items. This it self led to the
development of money in the form of currency notes and coins, which then became
the mode for the making payments and accounting for debts and credits.
With the development of money as well as that of society, came problems such as having
to carry huge bundles of cash with oneself wherever one went in order to undertake huge
volume of transaction & maintain reserves of cash, which was quite risky. This problem
was somewhat reduced through the introduction of cheques as a mode of payment. Now
individuals could just write a cheque in place of making the payment in cash. It
substantially reduced the transactions in physical money.
Then came the banking explosion the result of which was that, not every individual or
entity had an account with the same bank. Clearinghouses were established so that
banks could settle balances with each other. Keeping track of all receivables and
obtaining uniformity and fast availability of funds became difficult with corporates
undertaking a varied number of transactions and that too in a large number of locations.
The time and effort spent by the accounts department in processing receivables and
getting the funds cleared was too much and the cost incurred in the entire process was
increasing. Another loss was the opportunity cost of funds. There was an increasing
need of corporates to concentrate on core activities and to reduce costs on processing as
well as achieve an efficient receivables management strategy.
This led to the development of cash management service, which brought about
faster clearing of funds and better control over cash inflows and outflows. The
benefits of such were substantial to the corporate.

Cash Management Basics

Cash Management is the process of optimizing a company's working
capital cash flow cycle.

It essentially aims to regulate the time frames

between the various stages in the working capital cycle i.e. sales,
40

collection, investment, disbursement and production. Cash Management

is a crucial factor in the smooth and successful running of any
organization. It assumes even greater significance in the light of recent
change in the cost and availability of funds. A formal Cash Management
system acts as a guide to decision making, by ensuring that prompt and
reliable information is readily available at all times. Though cash doesn't
enter into the profit and loss account, profits without cash are
meaningless because in such a situation you are unable to make all your
payments, which could spoil relations with suppliers.
With the introduction of cheques as an instrument of payment coupled
with geographical distance and a multiple banking system the time taken
to realize funds has increased even more.
This point can be elaborated by the following example
PAYMENTS
GOODS

DRAWS CHEQUEA

CREDITS

________

ICICIBANK DELHI

LOCAL CLEARING HOUSE

DEPSITS

SENDS CHEQUE TO DELHI

REMITS FUNDS
HDFCBANK

HDFC BANK DELHI

41

In figure, A is manufacturer in Hyderabad while his customer B lives in Delhi A

sells goods to B who writes a cheque in favor of A drawn on his bank i.e. ICICI
bank. Once A receives the cheque he deposits it in his own bank that is HDFC
bank Hyderabad HDFC sends it to its own branch in Delhi to put the cheque in
local clearing. Once the cheque goes to RBI or any other bank assigned by RBI
for cheque clearing process and after preliminary checking and net account
clearing the cheque is physically sent to the draw bank. If B has enough funds in
his account the funds are remitted back to Hyderabad or else the cheque is
returned to A due to lack of sufficient funds. This entire process takes about
fifteen days on an average. Thus for a long time span A is not able to use the funds
though he was duly paid by B.
The time for which the funds are in the process of collection as in the previous
case is called float. For such time the depositor loses opportunity cost on the
funds i.e. the interest rate. There exist actually two types of float:

Sales term float

Disbursement float.

THE SCENARIO WHERE THE COMPANY DOESN'T USE CMS

With the help of bank personnel we collected data regarding the company's
collections, which represent the total of company's domestic sales. We
identified a pattern in the' local collections. It was found that out of the total
only 10% emanated from Hyderabad while the rest was mostly from metros &
non-metros. We therefore split this figure into collections from Hyderabad that
were put under LCT. The rest was put under NET (for metro collections) &
NMM (for non-metro collections). The reason for this is that before the client
made use of CMS it received all its cheques by post at its headquarters in
Hyderabad. Cheques received in Hyderabad but drawn outside cannot be entered
into the local clearing. They have to be sent back to the place where they
were drawn for clearing. This takes longer time than local clearing and also
since the client was not a CMS user before it could not benefit a more
favorable funds realization time on collections outside Hyderabad. For example
42

collections that have to be effected in mini metros take 10 days when a normal
cheque is deposited but once a corporate has a CMS arrangement with the bank
it could be realized in only 5 days. In the 'table 1' below we have captured the
float cost of the corporate.
We are incorporated under the Indian Companies Act, 1956, and our equity shares are
listed on the Bombay Stock Exchange Limited and the National Stock Exchange of
India Limited, which are the major stock exchanges in India. Our corporate
governance framework is in compliance with the Companies Act, the regulations and
guidelines of the Securities and Exchange Board of India ("SEBI") and the
requirements of the listing agreements entered into with the Indian stock exchanges
("Listing Agreement"). We also have American Depository Shares (ADSs) listed on
the New York Stock Exchange LLC (the "NYSE").
Companies listed on the NYSE must comply with certain standards of corporate
governance set forth in Section 303A of the NYSE's Listed Company Manual. Listed
companies that are foreign private issuers, as the term is defined in Rule 3b-4 under
the Securities Exchange Act of 1934 ("Exchange Act"), are permitted to follow home
country practices in lieu of the provisions of this Section 303A, except that foreign
private issuers are required to comply with the requirements of Sections 303A.06,
303A.11 and 303A.12(b) and (c) of the NYSE's Listed Company Manual. As per
these requirements, a foreign private issuer must:
1.

Establish an independent audit committee that has specified responsibilities

and authority. [NYSE Listed Company Manual Section 303A.06];

2.

Provide prompt written notice by its chief executive officer if any executive
officer becomes aware of any non-compliance with any applicable corporate
governance rules. [NYSE Listed Company Manual Section 303A.12(b)];

3.

Provide to the NYSE annual written affirmations with respect to its corporate
governance practices, and interim written affirmations in the event of a change to the
board or a board committee. [NYSE Listed Company Manual Section 303A.12(c)];
and

4.

Include a statement of significant differences between its corporate

governance practices and those followed by U.S. companies in the annual report of
the foreign private issuer. [NYSE Listed Company Manual Section 303A.11].

43

In a few cases, the Indian corporate governance rules under Clause 49 of the Listing
Agreement
THE SCENARIO WHERE THE COMPANY USES CMS

In this case company the company has different arrangements for collections
form different regions. For each specific product the bank charges different
rates. From 'table 2' we can see that overall the company gains about 12 days of
float on total collections. The charges of the corporate are minimal.
TABLE 2
PRODUCT

COLLECTI

COLLECT

BANK

ONS/

IONS/

CHARG

MONTH

DAY (Rs.)

ES

MAIL

ING

TIME

TOTAL

INTRE

TO

ST

FLOAT

RATE

COST

2.00

(%)
0.0025

(Rs)
1814.89

TIME

(Rs.)
AVG LCT 132796986.50
4426566.00

AVG

CLEAR

2.00

12483252.33 1758243.00

5.00

5.00

10.00

0.0025

3604.40

NMM

AVG EXP

133115.20

4437.17

499.18

12.00

5.00

17.00

0.0025

15.46

AVG

270827.20

9027.57

1760.37 17.00

6.00

23.00

0.0025

42.57

19401700.20

646723.30

4.00

9.00

0.0025 1193.21

CLEAN
AVG NET

TOTAL

The

client's

5.00

2259.55 41.00

61.00

6670.52

customer The limitations of this collection

It
is a first
its kind so
There could
befollowing:
other costs in the form
would
mailofpayments
to service
are the
There
would
Its
efficiency would
be directly
the bank
has be
to some
tie up
of conducting
a survey
to understand
initial problems in
dependents on the efficiency of the
Even if we assume that he mail time remains the same (though due to the presence
of the bank's branches in various locations this could be less) the overall float
cost to the bank is much lesser than in the first case. Since the bank provides

44

informational reporting the company can almost avoid the cost of information
processing.
2. Flat bank charges have been calculated at the basis of 2.50 Rs. Per outstation
cheque.
3.Processing cost is an assumed figure.
The total benefit or cost saving for the company is Rs. 2807483.68
Apart from just the quantitative benefits that accrue to a corporate on account of
cash management there are several qualitative benefits as well. The collection
services of banks enable corporates derive convenience in banking operations
thereby facilitating management of cash positions through a central treasury. As
the same time it could also be used for improved control over different
business segments. It streamlines the processes of the company.
1.

For a corporate it is critical to know its daily cash balances & the various

transactions that have been undertaken in its various accounts. By eliminating all
the intermediate stages of local credit, clearance and remittance, cash
management service almost totally eliminates the need for cumbersome r code.
2.

Single client window catering for multiple payment types and branch

locations. Apart from payments and collections most banks also provide
liquidity management service to their clients. This particular service ensures that
clients efficiently manage and utilize their funds. It ensures that the client's idle
balance is put to good use and he/she earns returns on them.
4.

Collection of sales proceeds form their customers as quickly as

possible and conversion into available funds so as to take advantage of

any investment opportunities or reduce the borrowing cost of making payments
to the vendors. In short, the corporate treasures wants to optimize the working
capital management.
5.

Reduce the float days or transit time involved in collections,

especially for cheques drawn in remote or outstation areas.

6.

Provide funds availability confirmation so as to improve cash flows

predictability and credit control.

45

3.

Reduce collection cost, especially labor cost associated with cheques

processing and clearing.

7.

Reduce the administrative bundle of account receivable matching via

accurate and timely information and consolidated accounting entries.

The benefits to corporate are: 1. Improves the management of liquidity.
2. Optimizes the net return on available funds through borrowing cost
reduction, investment return improvement and effective tax planning.
3. Provides comprehensive reporting for MIS.
Thus the corporate profits from a lowering of processing time &costs as well
from faster availability of funds and proper channel fixation of the same.
Risks Of Cash Management
There are three sorts of risks in cash management they are operational risks,
market risk & technology risk.
In cash management operational risks are most significant. Loss of cheques,
posting credits to the wrong accounts, not posting returns, not giving
cheques in for clearing at the right time, not sending the reports to the right
address,

employees

defrauding

the

bank, system failure, sending

remittances without first debiting the client's account are some of the events
could lead to problems for the bank as well as the clients.
Market risk could be in the form of increased competition, consolidation of
banks in which two banks could leverage on each other's strengths &
eliminate individual weaknesses to beat competition.
Technology risk is in the form of new products & techniques like Real
Time Gross Settlement (RTGS) that could change the way collections &
corporate products such as loans, treasury & trade finance. The product heads
are responsible for recommending a proposal while the credit team analyses the
company's financials and determines whether the credit should be given. In case
of a private Indian bank the relationship manager analyses the financial data,
which is then sent for approval to the credit department.
46

CHAPTER-5
DATA ANALYSIS & INTERPRETATIONS

47

DATA ANALYSIS

The purpose of this analysis is to determine relative standing on the five

banks in the CMS offering to their clients/corporates.The findings of the survey
are segregated in the following manner.

1. The major determinant of selecting a CM S banker in each revenue group.

2. The quality of services being rendered to the banks
3. Problems faced by the corporate.
4. Perception gap between banks & corporate.
5. The relative standing of the banks.
6. Future plans of banks.

(1) DETERMINANTS OF SELECTION

The corporate were asked to rate on a scale of 1-4, where 1 stands for most
important, the following parameters:

Coverage-The number of locations covers by the bank along with

the correspondent bank arrangements.

Pricing -Per unit cost for collection/payment instrument.

Technology-Includes the capacity of the bank to provide MIS, value

added services & customization

Processing speed-This refers to how banks can enable faster availability of

funds. The following are the findings

48

i) Large size companies

As can he seen from .figure the most important criterion for selection in case
of large

INTERPRETATION:
Companies arc pricing. For about 50% of the large si/.ed companies
pricing is the prime factor for selecting a CMS provider followed by
technology & processing speed. This is essentially because the volume
of collections generated by a large company is high meaning that the
corresponding fee is high (because of which there is a need for them to
negotiate on pricing). Large companies are also aware of the various
products, services & prices being offered by the other banks. It
therefore leverages its strength to negotiate structured products with
favorable pricing. The requirements of big corporate are many, they
arc aware of their worth to the bank and expect the bank to have the
best technology and processing speed in place.

49

ii) Medium sized companies

For middle level companies about 43% stated processing speed as the most
important criterion. Unlike the big companies they are unable to negotiate
too much on pricing because of the volumes.

INTERPRETATION:

As can be seen from figure another very important factor for them
is whether they already have a relationship with the bank. Their aim
is to essentially increase their overall relationship with the bank as
that makes the banks service them better i.e. bargain better & get
better services. This relationship is basically in the form of credit
relationships. Most companies in this group have the same bank for
credit as well as CMS.

50

iii) Small Sized Companies

INTERPRETATION:
This is probably due lo the fact that for the hanks to be able to service
small companies profitably they have to have the right infrastructure.
The next (actor of concern to them is coverage in small towns & cities.
This is because, of the greater possibility of them being situated in
small places.

The level of awareness in this group is low & they are

also low on funds. This makes them look for banks that have good
processing speed and good infrastructure i.e. good coverage and
technology using appropriate technology lowers the per unit cost for
the bank.

51

(2) QUALITY OF SKRVICES

The services quality was studied with respect to the following parameters
MIS-The ability of the bank to provide various types of data of the

volumes, locations, pricing etc.

Customization-Ability of the bank top structure products/services to

meet specific client requirements

Innovation-Willingness & capability of the bank to successively

improve on existing products.

Expertise-Ability of the personnel handling CMS to answer client

queries
.The corporates were asked to state the relative importance (scale 1-

4, 4 being most important) of each service and the results were as follows.
SIZE OF

MIS

Customization

Innovation

Expertise

ORGANIZATION
LARGE

CORPORATES
MEDIUM SIZED

CORPORATES
SMALL

CORPORATES

Then on a scale of 6-10 (6 being the lowest) the corporate rated the
quality of these services.
The findings are depleted belowInnovativeness
i.

Most of the respondents stated lack of flexibility & slow reply on

enquiry as their key problem with HDFC bank. Most corporate were happy
with the overall CMS provided the bank,
ii.

Citibank's low coverage has been stated as their biggest problem.

This generally delays collections from remote locations. All the aspects of
their service are well received by their clients,
52

iii.

ICICI 's inability to provide timely settlement & information was

stated as the bank's biggest problem. All other services were found to be
satisfactory.
iv.

Corporation bank's low coverage & poor MIS, which in turn is

due to its inadequate technical up gradation, have been cited as their biggest
shortcomings,
v.

Standard Chartered bank's clients find its services satisfactory and

expect the bank to provide more specialized service in future. How ever the
bank's coverage. is quite poor covering only about 50 locations.
PERCEPTION GAP BETWEEN BANKS & CORPORATES
From the analysis of the survey it appears that there exists some gap between the
bank's perception of its won services and the corporate' rating of the same. The
banks were asked to give their perception about the quality of their own services
the responses were captured on a scale of 6-10, where 10 stands for excellent & 6
for below average below average. It was found that when compared with
customer responses the bank with the greatest gap was Corporation bank
followed by ICICI bank. With respect to innovativeness both HDFC bank &Citi
bank have similar gaps. As far as customization of services is HDFC bank's gap is
lesser than that of Citi bank this is primarily because though Citi bank rates its
customization capability very high while its ability to deliver has been rated low
by the corporates.
Standard chartered being a fairly new player realizes its limitations, which is
why its perception gap has been the lowest.

RELATIVE STANDING OF BANKS

Based on the general perception of the bank by the client coupled with the
analysis of the survey we have been able to determine the leading CMS
53

bank. The calculations state that overall Citi bank is the most preferred CMS
provider since its scores the highest average score of 8.45 pis followed by
HDFC bank with an average score of 8.1 pts. Standard chartered with an
average score of 7.32pts is in close competition with TC1C1 bank whose
score stands at 7.35 pts. Corporation bank has a lot of scope for
improvement on the services front. Its average stands at 6.25 pts This trend
is noticed in all revenue groups as well.

After undertaking the project & understanding the needs of the corporates &
the limitations of banks I would like make a few proposals basing on my
findings, which in my view could be incorporated to improve the services of the
bank.

I) Till now the bank aimed at reducing the time taken by most corporates
to deposit cheques with the bank by arranging courier pickups from the client's
place of business. Depending on whether most client's customers send them
payments by mail the bank could initiate a system by which it would g et the
payments directly from the client's customers. It would work in the following
manner. The client has to first provide a preaddressed return envelope to all its
customers that could contain the invoice area. The courier expenses would be
54

reduced and recovered from the client.

II) Since the requirements of each sector varies from the other. The service &
products could be designed to cater to the needs of each specific sector & there
could be personnel to dedicated to the needs of a specific sector. The variations
in services could be in the form of information required, queries reply etc.
These customized products could be provided at a higher price than generic
product.
III) In order to better manage the co-ordinators & ensure quicker transfer of
information they could be provided with some user interface by which they
could communicate with the headquarters online.

The data regarding

deposits could be entered in a specific format and sent by email. They could
also communicate their problems if any without delay. If required they could
scan cheques & send instead of faxing them which usually takes longer.

This

would require some initial investments but could substantially improve the
efficiency of the co-ordinator network.
IV)In order to reduce the inefficiencies in clean collections the bank could take
the help of its clients. It could inform the client of some location where the bank
faces recurring problems in collecting funds on time.
put

pressure

on

The client could

the dealer/customer in such remote locations to make

payments on time. The key is to keep the client informed about the problems &
delays so they can take the necessary steps.
V) Value added services such deposit slip scanning, cheque imagine etc.
could be provided to the clients. This ensures that as soon as the cheques are
deposited the client can view the actual instruments online. This is for credits
who have employ C&F agents & get their cheques deposited by them. In case of
clean products the bank could preserve an image of the cheques on CD-ROMs
so incase cheques are lost they can still be tracked. This specific
information could be provided to the client as a specific cost.
55

VI)The bank could also try and increase their market by targeting the small
players. Most of these films are not aware of this particular service so
aggressive marketing is required. Since the volumes in this segment are
not high they could be charged a flat rate. The bank's costs wouldn't rise
that much because by increasing the volumes fixed costs in processing will be
reduced.
Forbes Global named HDFC Bank in its list of "The 300 Best Small
Companies" in the world and as one of the "20 for 2001" best small companies
in the world.
HDFC Bank's mission is to be a World Class Indian Bank. The Bank's aim is to
build a sound customer franchise across distinct business so as to be the
preferred provider of banking services in the niche segments that the bank
operates in and to achieve healthy growth in profitability, consistent with the
bank's risk appetite. The bank aims to ensure the highest level of ethical
standards, professional integrity and regulatory compliance. HDFC Bank's
business philosophy is based on four core values; Operational Excellence,
Customer Focus, Product Leadership and People. The bank signed a strategic
business collaboration agreement with Chase Manhattan Bank in February 1999.
The Bank at present has an enviable network of 325 branches spread over 126
cities all across the country. All branches are linked on an online real-time basis.
Customers in 39 locations are also serviced through Telephone Banking.

HDFC BANK - BUSINESS AREAS

Wholesale Banking Service
The Bank's target market is primarily large, blue chip manufacturing companies
in the Indian corporate sector and to a small extent, emerging mid-sized
corporates. For these corporates, the Bank provides a wide range of banking
services, including working capital finance, trade services, transactional
services, cash management, HDFC bank plus.
56

Retail Banking Service

The retail banking segment of the bank strives to create a one stop shop window
for the customers wherein the customer can make use of a variety of services and
products under one roof. The products are backed by world-class service and
delivered to the customers through various delivery channels including the
branch network, as well as alternative delivery channels like ATMs, Phone
Banking, Net Banking and Mobile Banking.
Treasury Operations
Within this business, the bank has three main product areas - Foreign Exchange
and Derivatives, Local Currency Money Market & Debt Securities, and
Equities. The services here include risk management information, advice and
product structures and fine pricing on treasury instruments.
CASH MANAGEMENT SERVICES OF HDFC BANK
HDFC Bank offers a one-stop shop for collections and disbursements products
under the Cash Management Services umbrella. They have been providing this
service only for the past seven years; they are one the premier cash management
service providers. There are seven different products provided by the bank under
collections.
COLLECTION PRODUCTS

LCT

NET

NMM

RAPID

EXPRESS

CLEAN

REACH

LCT (local clearing and transfer) this is a collection product under which the
client deposits a local cheque drawn on respective HDFC bank locations, the
same is locally cleared and credit is passed on to the client into his central
account. The pricing and day of credit differs from location to location

57

The rest of the five products are for out station cheque collections. The
difference between rapid reach and express products is the kind of
arrangement that has been entered into by the bank for getting credit.
Net (network), NMM (network mini metro) collections; the client deposits its
cheque drawn on HDFC bank locations at a central location. The same cheques
are sent for collection to the respective location and the credit the passed on the
central account. This product is differentiated on the basis of metro and nonmetro locations.
RAPID COLLECTIONS:
It's an extension of LCT product, providing more locations due to the
correspondent bank tie-ups. For rapid collections HDFC bank has contracted
services of service companies to act as coordinators in areas where the bank has
correspondent bank tie-ups. These coordinators collect cheques from HDFC
clients & also cheques that are sent from other HDFC bank locations and deposit
them with the respective correspondent bank for local clearing. They ensure that
there is not much delay in clearing & collection activities. After depositing the
cheques and getting them cleared the co-ordinators also fill in the required
information and fax the copy of the deposit slips along with any other
information to the HDFC hub in Mumbai. The co-ordinators charge a specific
fee for their operations, which is generally dependent on the volumes.
EXPRESS COLLECTIONS:
It is used for up country cheque collection facility.
CLEAN COLLECTIONS:
This is basically for locations where HDFC bank does not have either its own
branch or a correspondent bank tie up. The cheques drawn at such locations are
sent bank so that a demand draft payable at the HDFC bank is issued and
returned.
REACH COLLECTIONS:

58

This collection product offers the client a dedicated courier service to carry bigticket cheques to the drawer bank and to bring back the credit advice. This
product is fairly expensive and can be available by the client for big value
cheques. This personalized service is usually undertaken in remote, non HDFC
bank locations.
DISBURSEMENT PRODUCTS:
HDFC provides payment management through customized cheque printing
facility along with net banking which helps the client to track his payment. The
common products are at par cheques, printing of bulk demand drafts and
dividend warrants, account-to-account transfers & electronic clearing system.
VALUE ADDED SERVICES:
In this sphere HDFC bank provides flexible Management Information
System. Its comprehensive MIS includes;
1. Daily report of deposits made at various locations.
2. Location wise report
3. Credit forecast report
4. Monthly cumulative report - date wise/location wise
5. Monthly charging statement
6. Monthly cheque return statement
Customized reports as per mutual agreement with the clients are also provided
to help them in reconciling their receivables and in keeping track of their debtors.
The bank also provides value added services inform of, speedy queries
resolution, customized reports on paper and through electronic media and
support to the company for managing its cash flow across its distribution
network. It also provides regular client pick-ups from various client locations.
Another service the bank has introduced lately is E-net, which is a graphic user
interface.' It provides a single point of access to the entire modular systems
architecture of information reporting, payments, cash management, trade
finance, custody and foreign exchange services. Its features include the
following:
59

Cash Management (Collections): Through the cash management

collections module, online querying of cheques deposited at various locations

under the given arrangement can be done for cleared / unlearned information.
Also you can request various cash management reports required for planning
your fund flows.

Cash Management (Disbursement):

Through the same cash

management module, bulk disbursement through a file upload can be done

in the form of account-to-account transfers and issuance of pay orders and
demand drafts. E-Net is designed using the state-of-art "thin client" browser
technology, its platform independent architecture enables clients to access
information and bank from anywhere using digital certificates for the
authentication and triple Data Encryption Standard (DES) for point-to-point
secured transmission of data.
E-Net ensures the information transmitted across the network remains
private and inaccessible by unauthorized third party or hackers. This is done
through encrypted data transmission using Secured Socket Layer (SSL). Data
is encrypted before transmission and decrypted by the Server before
processing. Also the presence of firewall, Proxy Server and Secured Web
Server prevents the non-authenticated third parties and hackers from accessing
the information.
The selling point of CMS for HDFC bank is competitive pricing of its
products & its continuous efforts to technically upgrade its systems and bring
about new and automated techniques. In figure too it will have to adapt the
same

strategy

to

keep

up

with

60

the

ever-increasing

competition.

INTERPRETATION:As can be inferred from figure Citi bank seores

the highest when innovativeness is taken as service parameter. This is
essentially due to the fact that it was the first to set up cash management
service in India & it also has considerable exposure to various new
services & products due to its presence in market abroad. Its fixed
costs are much lower than that of other players because most other
banks are bringing in the services & products that Citi bank had
introduced long time back the fixed cost of which they haven't been able
to recover yet.

61

Customization

INTERPRETATION:
In figure we see that IIDKC bank scores the highest in customization. It
has been fast to adapt to new technology & its new services such as Enet have been designed to meet the specific needs of corporate. City bank
has been unable to provide the required amount of customization
because its system driven.

62

Management information system

INTERPRETATION:
Citibank's MIS is the rated as the best. This is because they provide
additional services

such as deposit slip scanning etc. which gives

corporates all the information required for controlling & reconciling

their receivables & payments. As can be seen from figure II ICI
bank's MIS capabilities are also rated well by the companies

63

Expertise

INTERPRETATION:
Citibank again scores the highest in expertise due to their global
experience & have contracted call centers for their telephonic enquiries.
Overall it was found that the small and medium companies were
happier with the quality of bank services than the bigger companies.
This is because big companies have many more requirements than
others and want the banks to come out with new products & services
that are different from the usual.

64

CHAPTER-5
FINDINGS
RECOMMENDATIONS
CONCLUSIONS

65

MAJOR FINDINGS
The findings in this area are as follows
S

Clearing

U
P
L

Processing

Float
Float
Float
It Disbursement Float
GO

Mail
Sales Term Float

L
I

ODS

NUMBER OF DAYS
Sales term Float starts with receiving of goods and ends with mailing of
payments. This particular phase involves checking the validity of the invoice,
checking the goods, getting required accounts payable approvals etc.
Disbursement Float includes three types of float.

The first is Mail float,

which is the time taken by the cheque to reach the supplier once it has
been dispatched by the customer. The second part includes the processing float,
which starts from the time of the receipt of the cheque till the customers gets a
ledger credit for the same. The third part is the Clearing Float this is the time
taken by the local clearinghouse to clear the cheque and the funds to be remitted
to the supplier's bank.
From the above we can understand the demand side of cash management, the
need for speedy availability of funds. But as we see it the need is not just limited
to getting funds fast but also additional services such as a proper
management information system, forecasting etc.
66

With increasing competition a large number of banks have sought to bring

about innovative new products and services in this sphere in order to better
serve their corporate client. The essentials features of cash management
service will typically provide collection and payment product.
Collections refer to products, which assist the customers to convert their
receivables to available funds rapidly as possible at optimal cost efficiency.
From the corporate perspective, the common key objectives for collection
management are as follows:
Payments refer to products, which assist the customers to manage funds
outflow and disbursement process efficiently while managing a good relationship
with their suppliers. The benefits to the corporates from this are:
3.

Streamlining and automation the payment process so as to simplify back

office operation and reduce operating costs for the accounts payables,
payroll and treasury settlements with in the organization.
4.

Provides a secured, error free and user-friendly processing environment,

which reduces the processing cycle time that reduces the overall time spent in
making payments.
5.

Provides up-to-date transaction details for reconciliation and MIS

reporting.

The banks could also undertake specific reconciliation service for certain
clients. The company could upload its receivables file through E-net and the
bank could then tally this data with actual receivables.
To improve operational efficiency in the bank the counter where cheques
are received, the processing area & the clearing room should be located next to
each other. When the cheques are taken from the counter to the processing area
they should always communicate the number of cheques that have been bought is
so that cheques are not lost on the way so that if they are they can be tracked
immediately. The personnel handling client queries should priorities & handle
them accordingly.
67

The way ahead for banks in Cash management service is that of automation.
New products & services on the lines of CMS in developed countries should be
bought in and applied in a phased manner.
After a studying the challenges faced by banks while rendering CMS services,
the following Recommendations can be put forward.

68

RECOMMENDATIONS
1. Standardization with flexibility:
The operating systems used by the banks have to be standardized to such an extent
that providing flexibility is the key part of such standardization. The MIS, which
helps in delivering proper information flow, must be flexible enough to cater to
the various needs of the clients.
2. Trained personnel:
The personnel involved in the whole process flow has to be trained to handle
situations with accuracy and expertise for any system to be successfully handled
requires competent work force this is an essential requisite of the system.
3. Automated Borrowing Systems:
Any company, which borrows for its operations, has idle funds, which can be
invested. They are needed at a later stage but there has to be liquidity in the
system to allow the immediate withdrawal of funds. ABS is the one, which
provides this system. The banks are liked to the invest bodies like mutual funds
or other money markets, when ever there is an extra surplus of money it gets
transferred into the investment accounts. The minimum amount to be
maintained is predefined. When the funds are needed for operations they get
transferred to the current account of the banks when noticed. ABS requires a
close and proper interaction between the banks and financial markets.
4. Suggested Process Flow:
The system can have to be organized from the point a purchase order is prepared
by the company to the point when in sale of the manufactured goods take place
with the deliver of profits.
If an example of a corporate is taken with its suppliers. The purchase order is
given and the invoice presentation is done based on the negotiation this can be
done with the help of EIPP, The supplier and corporate may have a single
banker or different bankers the money transfer from the accounts are done with
the help of RTGS or other real time systems. There has to be proper
information flow between the supplier, bank and corporate. The clearinghouses
and the banks have to be efficiently connected.
69

CONCLUSION
The revenue receipts have been fluctuations through out the period of the study. The
fluctuation in the revenue receipts is, due to the fluctuations in the revenueearnings.
There is steady increase in the payments. The company should maintain steadiness
of the payments. The profits of the company have come down because of the increase in
tax rate. The company should try to reduce borrowings. It has to take measures in order to
increase its revenue internally by eliminating the unnecessary expenditure. The interest
on the loans borrowed has been increasing. The company has to repay the loans as
early as possible in order to eliminate the risk of paying higher interests. In contrast it
has to consider those institutions, from where it can get loans for lower interest rates. It
is observed from the cash flow statement that the company is maintaining sufficient
cash balance in order to meet anticipated payments. The company has to maintain
some cash in order to meet speculative circumstances.

70

BIBLIOGRAPHY

Websites:
www.Phonixhecht.com.
www.HDFCbank.com
www.bcsis.com www.fxnet.com.

Books:
Cash Management
Working Capital Management by Hrishikesh Bhattacharya
Working Capital Management by Khan & Jain

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