Bank charges and FX margins
Corporations often regard their treasury as a non-core function. They look upon it in the same way as their human resources, IT and Finance functions – a function that they need to have but which does not impact on their core business. The modern treasury function however faces continuous change on a daily basis. Markets globalize, the internet provides new ways of doing things and makes others obsolete, the banking sector consolidates, regulation increases; thereby making economic scenario extremely complex and challenging. Most organizations understand their liquidity and funding risk and have a firm policy on interest rate risk. Not all are observing & analyzing the different types of foreign exchange risk to which they are prone to and their potential exposure to the same. For most of our clients, the multi-national nature of their business and structure requires them to deal in foreign currencies. The contracts they enter into exposes them to future cash flows in terms of payments & remittances. Due to this they may want to protect their business against this fluctuation and the related charges (payable to bank for carrying out these various types of transactions). IFA Global helps clients in managing their Foreign Exchange Rates and the related costs:
- Educate the client about Inter-bank FX rates with the help of IFA Market Tracker -- Better Margins
- Help in negotiating with the bank in case of wide deviations found -- Stricter Banking Management
- Analyze & Recommend Transaction Costs related to Banking w.r.t Industry & Banking standards -- Saving on Bank Charges
- Detect & save unwanted/debatable charges levied by banks -- Savings on Vague charges
- Regular Checks for ensuring consistency maintained by banks in implementing the revised charges -- Proper systems in place
We take this opportunity to share a real time case study which encompasses the kind of savings we could affect for one of our clients on FX margins & Transaction Costs related to Treasury Function:
Client: XYZ (Name not disclosed as per confidentiality clause) is one of the leading Agro Commodity Company into the export business of Rice with a portfolio of $ 250 million.
Banking Profile: XYZ had multiple banking relationships with a Public sector bank and a Private sector bank to fulfill its Financing, Treasury, and Cash Management & Investing needs.
Expectations: Since XYZ had a long relationship with its bank so they felt that the bank would never levy high charges or even if they do it will be minimal. XYZ engaged IFA mostly out of curiosity and had little or no expectations of any material savings.
But inherent in these challenges was an immense opportunity for the company which was made possible by IFA’s Yield 360⁰
The Result? -- Immediate and sustainable gains that amounted to considerable savings for perpetuity
IFA’s Treasury Experts performed a detailed historical & current check of Transaction cost levied and FX margins charged by the bank to the company (By each of its bank)…….state of art software. This was juxtaposed to Industry & banking standards. This gave us a platform to build the matter for negotiation
Next we analyzed the findings and compared it to our Banking Standard Charge (BSC) Sheet for assessing the deviation. This helped us in gauging the efficiency of their banks versus the rates of comparable banks operating in a similar industry
Then the negotiation process was initiated for betterment of Inter-bank FX rates & Transaction charges. Various live checks, style of Booking, Daily Transaction cost related to treasury function & elimination of vague charges were carried out.
Upon completion of the above process the realization of the Banking effectiveness could be felt. The process added 5% to the bottom-line of XYZ which would be observed till perpetuity. The company conducted this check periodically to ensure accuracy & consistency
Outcome: The Company largely benefitted from this check. By saving on these costs the Bank charges could be reduced and more of FX profits could be generated because of better FX margins. This entire practice helped in setting upa very efficient banking system