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Anjali Mohanty, Deutsche Bank - Frank Wu, Deutsche Bank - 25 May 2012
What are the regulatory difficulties and the growth opportunities affecting transaction banking services in two of the foremost 'BRIC' countries, China and India? This article looks at how the eurozone crisis is affecting these 'emerging' nations and also reviews the cash management environment for corporates.
These are challenging times for the world economy including Asia, but India and China continue to see economic growth. India's gross domestic product (GDP) is expected to grow at about 7% in 2012, and it has been in the 6.5% to 8.5% range since 2008. However, inflation continues to be a problem in India and interest rates are high. China's projected GDP for 2012 is below 8% for the first time in two decades, but that doesn't mean China faces any real threat of recession. After a prolonged period of rapid growth, the slower rate of development, together with more focus on domestic consumption, should be more sustainable. While both nations have a strong economic prognosis, they certainly are not immune to the eurozone crisis. Furthermore, both nations have their own challenges in terms of tightly regulated markets, a fragmented clearing infrastructure, non-automated payment systems and corporate governance rules that make cash management and repatriation of cash, a rather complex proposition for many foreign corporates. So what is the transaction banking environment like in India and China, and what are the challenges and opportunities?
China is pushing for an upgraded national payment system, with China's National Advanced Payment System (CNAPS) soon to migrate to CNAPS 2. The enhanced system will have a wider functionality and also allow large amounts of yuan to be cleared across regional borders. However, China's network of fragmented local clearing systems remains in place. India has more than 1,000 clearing zones, as well as 78,000 local and foreign bank branches. This has been a challenge for companies hoping to achieve efficient cash management and consolidation of accounts. However, the emergence of electronic payments (e-payments) has made transaction banking more efficient. E-payments have become dominant, with 90% of payments by value now processed electronically and 45% of payments by volume electronically. The challenge is that 55% of payments are processed manually, and even though they are very small value payments, it is still a treasury nightmare. Transactions in India are on a scale rarely seen outside the sub-continent: with vendors selling products in the smallest shops in remote villages at one end of the value chain whereas at the other end, many of the MNCs have to handle huge transaction volumes and managing these as efficiently as possible is a major part of their cash management cycle. However, global banks have developed solutions to mitigate these challenges for clients through the use of a local partner banking arrangement that has an extensive coverage which enable efficient cash management and consolidation of accounts. Likewise, the regulators stipulate that certain local taxes are to be collected by local bank branches only. This often poses further difficulty for corporates wanting to maintain streamlined accounts. However, over the last few years, banks in India have developed solutions around the local infrastructure and regulations to enable clients to process such payments with its global banks. Despite the challenges, and often because of these, it translates into opportunities for banks and companies operating in these countries. In China, for example, there are three broad areas of opportunity for transaction banking: 1. New products and services quickly come on the market when deregulation occurs. 2. China is becoming a market rather than a production base for many MNCs. 3. It is generally anticipated that by 2020 the renminbi (RMB) will become an international convertible currency. This will generate opportunities around the RMB clearing system and any trade finance or cash management products involving RMB.
Another indirect effect of the European crisis is that companies want working capital efficiency and better liquidity management. This is partly an effect of the European crisis, but it's also a result of India's high interest rates, which is hitting the mid-sized and smaller corporates. As a result of this, solutions such as supplier finance programmes are seeing more demand in India and the banks ability to offer customised technology-enabled financial supply chain management solutions is bringing significant value to the clients.
The economic changes in China mean that companies may have to adapt their business models. Exporters to Europe tend to export through distributors, so they have to deal with a limited number of counterparties. They are also protected by trade finance instruments like letters of credit (L/Cs). Selling to the domestic market requires a domestic distribution network, which is a completely different business model and has different banking requirements. Despite the differences, changing their business model from export-only to selling into the domestic market is now an alternative option some exporters are considering. On the whole, MNCs are increasingly focusing on China as a market rather than a production base, and they are expanding their physical presence in smaller cities. Many companies in India are also taking a closer look at their business model and their transaction banking services as theyre looking at consolidation. Companies need to ensure that their banks strategies and growth models are aligned with their own.
In India, the general classifications are: Tier 1 cities are large urban towns with good clearing infrastructure; Tier 2 cities are semi urban towns with average or inconsistent clearing infrastructure; and Tier 3 cities are rural towns with poor clearing infrastructure.