318 Corporate Finance
In the case of the depositor availing of the bank’s CMS facility, the banker makes the funds available to
the depositor on Day 1—on a clear funds basis. In case of high value clearing, the entire procedure takes place
on the same day, i.e., Day 0–Day 0 basis. The case can be narrated with an example: The Hyderabad branch
of XYZ Ltd. deposits checks (drawn on Hyderabad) in the Hyderabad branch of its CMS banker, the
Corporation Bank, on January 1. The bank then sends the check for clearing to the local clearing house.
Without waiting for the funds to be cleared, Corporation Bank credits the amount to the account of XYZ Ltd.
in Mumbai, on January 2. Thus clear funds are made available to the cash manager for effective utilization.
Out-Station Clearing A check that is not drawn on the same location where it is deposited becomes an
out-station check. In such a case, the banker of the company sends the check to the drawee bank on a col-
lection basis. The collection (realization) of these cheques generally takes 5 to 20 days. To improve the col-
lection cycle, the CMS banker arranges for a tie-up with other banks for correspondent banking.
However, the CMS banker makes available the funds to the corporate immediately without waiting for
the check to be realized, on the strength of the creditworthiness of the company. The CMS banker discounts
the check and gives credit to the client on Day 0–Day 1 basis, thus providing liquidity to the cash manager.
An Example
The Hyderabad branch of XYZ Ltd. deposits a check drawn on Ananthpur at the Hyderabad branch of its
CMS banker—Corporation Bank—on January 1. The bank discounts the check and gives credit to the central
account of the company at Mumbai on January 2. The Hyderabad branch of Corporation Bank sends the
check to its Ananthpur branch for realization through courier. The Ananthpur branch receives the check on
January 4 and presents the same in the local clearing on the same day. If the check is not returned by the
paying banker within the stipulated period, on January 6 (i.e., Day 2 considering January 4 as Day 0—the
day on which the check is deposited for local clearing) the Ananthpur branch of Corporation Bank passes
on the credit to the Hyderabad branch, which then marks the check as realized. In case the check is dishonoured,
the Ananthpur branch returns the check to the Hyderabad branch and the latter debits the account of
the company.
ISSUES CONCERNING THE CASH MANAGER
The CMS banker charges a fee to the company for the service rendered. The fee for collection of local
checks is very minimum, which could range from 5 paise to 50 paise per Rs 1,000 collected. The fee varies
from location to location—the metro and RBI clearing centers being the cheapest. In case of out-station
checks, the fee could range from Rs 2 to Rs 10 per Rs 1,000 collected. The fees are often negotiable on the
basis of volume of business provided to the CMS banker. Understanding this complexity of the clearing sys-
tem is very important to a company. A corporate with a marketing strategy of rural penetration often collects
a large volume of out-station checks. The collection of these checks is more costly and the fate of these
checks needs to be carefully monitored by the company. A company with a strong brand and with the
demand-pull strategy can dictate terms to its C & F agents or dealers, and can get payments done by way of
demand drafts (DD). Thus the company can avoid utilizing out-station checks clearing facility to reduce the
cost of collection.
A corporate can implement an effective cash management system only with effective coordination of its
marketing, finance and accounts functions/departments. Lack of coordination within the company pulls up
the cost.