Asian corporates are seeking ever-more sophisticated treasury services to support their expansion without the need for a complex international banking network in a bid to boost cost and operational efficiencies.
This boost to Asian working-capital management, in some cases, is diminishing demand for bank financing and forcing financial institutions to redouble their advisory capacities.
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There are still issues around regulation to navigate Swati Mitra |
Corporates in the manufactured goods, property development and commodities sectors, in particular, are seeing the benefits of expansion as their output is in demand among the growing middle classes of the emerging markets (EMs). This expansion comes with its own treasury-specific challenges.
Swati Mitra, managing director, global sales leader, EM corporate clients at Citi, says: “There is considerable focus on driving down costs and working-capital management, as many of the globalizing Asian corporates are in highly competitive sectors facing margin pressure and risk-management/reporting considerations.”
As Asian companies push into new markets, effective usage of existing working capital is proving to be an attractive way to fund growth. Suman Chaki, managing director, regional head of working capital advisory for Asia, Deutsche Bank, says working-capital efficiency has emerged as a priority for treasurers.
He explains that companies are looking to employ an “optimal amount of working capital for the level of sales that [a given company] generates [to ensure] working-capital efficiency and return on capital is maximized. A company with a better managed working capital will require lesser investment to grow to the same levels of sales than one that is not as well managed.”
Expanded operations
Take India’s telecoms provider Bharti Airtel, which has seen rapid growth after the acquisition of fellow provider Zain’s African business in 2010. Of the 20 countries the company operates in, 17 are in Africa. To manage this international push, the company restructured its treasury operations, including overhauling its working capital operations.
To effectively manage these expanded operations, the company moved its global treasury to its New Delhi headquarters to cover its global footprint. The centralization of the treasury has enabled cash forecasting and funding planning for its 20 country units.
Cash pooling has allowed for the channelling of funds to make up internal deficits, while helping to finance strategic acquisitions. The company also carries out benchmarking against similar corporates to highlight areas of improvement.
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Victor Penna, at |
Asia’s banks have been quick to respond to the changing needs of its corporate treasurers, creating systems to allow their clients to efficiently use their funding. Singapore’s DBS Bank, for example, launched a working-capital advisory programme in 2014 to assist local corporates looking to expand beyond the home markets. Participants have seen up to a 30% rise in their cash flow.
Victor Penna, head of treasury solutions, transaction banking at Standard Chartered, adds that in credit-constrained markets corporates are becoming self-sufficient, reducing their reliance on bank funding.
Cash pooling is offering one effective method, and exploring different forms of working capital funding. These include helping the given company to extend payment terms of their suppliers through a payables financing programme, or a receivables programme where insurance is used to provide additional credit.
Deutsche’s Chaki says EM corporates are looking to find ways to bolster the efficiencies of their treasury practices. The freed-up cash can then be ploughed back into the business, perhaps even diminishing the need for bank financing.
Commodities trader Olam International long centralized its functions to its Asian base to improve efficiency. The company was originally founded in Nigeria in 1989 and moved its headquarters to Singapore in 1995. The company has a S$20.8 billion turnover and operates in 65 countries globally.
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Jayant Parande, at |
"Central treasury is based at our corporate headquarters in Singapore, from where we manage the global treasury portfolio, which includes trade finance, FX management, bank borrowings, as well as debt capital markets," says Jayant Parande, president and global head of treasury and IR, group treasurer at Olam International.
"We also have localized treasury operations in key operating countries to oversee local banking relationships, as well as cash/FX management."
He adds: "We have a shared service centre in Chennai, India, that provides operational support to the treasury team, including accounts payable and receivable management, bank reconciliations [and] transaction processing. This combination allows us to better manage local requirements of the business and improve response time to changing markets, while still leveraging the scale benefits of a centralized treasury function."
As corporates find ways of internally funding their operations with greater efficiencies, banks are looking for other ways to add value and provide relevant services, in particular through in their advisory capacity.
Parande says: "For a company like Olam that operates across such wide geographies and commodity platforms, it’s important that we understand the opportunities, challenges and risks that we face.”
Chaki adds: "Banks play an important part in the development of their clients' growth strategy. Companies need to understand the phases they go through as they expand. They need to understand the risks in the new markets, whether it is country risk, counterparty credit risk or FX risk.”
Citi's Mitra says: “There are still issues around regulation to navigate, which requires the assistance of a knowledgeable banking partner. Regulatory restrictions in emerging markets present significant challenges that can only be addressed through implementation of in-country best-in-class solutions, and centralization of activities such as accounts payable, where permitted.
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Suman Chaki, at Deutsche |
"Centralizing activities via shared service centres and payment factories allows for consolidation of day-to-day payments and collections, forecasting, systems, reporting and bank channels in a single location."
She adds that Citi is offering commercial cards that are supported by data analytics to provide insight on costs and usage. The bank also operates a treasury advisory services group to provide advice on the best treasury operating model to implement, and benchmarking tools.
Chaki says: “Banks providing advisory services can help companies by undertaking various kinds of activities like financial analysis, modelling and benchmarking to help companies identify how well they are faring in their working-capital efficiency vis-a-vis their peer group in the industry as well as against their own performance in the past.”