India has more than 10,000 independent clearing zones, which process, collectively about 755.2 million cheques a year. Real time gross settlement (RTGS) doesn't exist and electronic banking is only available on a restrictive basis as there are strict government controls on the cross-border movement of funds.
As cheques are the primary form of payment, banks have been putting much thought into speeding up the process. Cheap labour means that there is less incentive for companies to automate their payments processing, thereby slowing down the bank's own processing as well.
Further, a company will typically draw banker's checks to make payments and manually reconcile these manually with their own accounts. Therefore, according to Kaushik Shaparia, head of cash management at Deutsche Bank in India, companies are reluctant to outsource their accounts payable due to the float that the bank will receive from the company. However, innovative solutions introduced by banks are turning around this problem.
Integration of the bank's system with the company's accounts payable means that a file containing instructions and information on payments is sent to the bank which then prints out the cheques in the company's name for payments. Shaparia says that the company's float at the bank is thereby reduced and keeping track of the payments is automated and therefore easier.
This product, pioneered at Deutsche Bank's India branches, was subsequently introduced to the bank's other Asian operations, where paper based-payments were still the dominant method of payment, such Sri Lanka and Bangladesh.
"India is so complex that the products we have developed to suit us turn out to be best practice and that can be exported to other developing countries," says Sanjeev Uppal, head of payments and cash management at HSBC in India.
Best practice in correspondent bank relationships is one example, says Uppal, that has been transported from India. Like most foreign banks, HSBC has developed correspondent bank agreements with most local banks. For up country collections, HSBC agents pick up cheques at company offices and drop them off at correspondent banks for clearing.
The banks then send via email or courier the information to HSBC banks for crediting to recipient accounts. An agreement ensures that payments hit recipient bank accounts within seven days. "This has made an impossible task into an orderly one," says Uppal. This system is currently in development for other countries with a similar geography and with a similar need to process large volumes of small value transactions.
Uppal also cites a highly educated pool of talent, especially in the technology sector, and low labour costs as the main factors that have enabled India to pioneer many cash management products.