Notional Pooling - Meaning, Advantages and Disadvantages
Commercial banks provide various types of services to their customers. One such area of service is that of liquidity management. Commercial banks offer several liquidity management arrangements to their clients. Notional pooling is one such arrangement that is very popular amongst corporations that have many subsidiaries. In this article, we will have a closer look at the concept of notional pooling as well as its advantages and disadvantages.
What is Notional Pooling?
Cash pooling is a cash concentration system that is followed by companies that have several subsidiaries. Normally, banks monitor the cash balance at an account level. This means that if the balance in an individual account is positive, the bank pays interest on the same. However, if the balance in the same account is negative, the bank charges interest.
In a notional pooling system, the balances are not calculated for every account. Instead, the balances of all the accounts of a particular company are considered to be the same and an aggregate balance is calculated at the company level. Once again, if the balance is positive, the bank pays interest to the corporation. However, if the balance is negative, the bank charges interest to the corporation.
It is important to note that the money is not physically moved between accounts. Hence, all subsidiaries have complete legal control over the money in their accounts. However, for the purpose of interest calculation, the amounts from various accounts are notionally pooled together. Hence, the practice is called notional pooling

Most commercial banks offer their customers a choice when it comes to the allocation of interest income. On the one hand, it is possible for the banks to allocate the interest income directly to the parent corporation. However, banks can also offer to distribute the interest payments back to the constituent accounts based on the amounts which they contributed.
Advantages of Notional Pooling
Corporations receive several distinct advantages as a result of notional pooling. Some of these disadvantages have been mentioned below:
Disadvantages of Notional Pooling
From the above points, it may seem like notional pooling is an ideal solution. However, that may not be the case. There are certain disadvantages of notional pooling as well. Some of the prominent disadvantages have been mentioned below:
The fact of the matter is that notional pooling is an important service provided by commercial banks to their corporate clients. Corporations all over the world are increasingly using this service in order to streamline their liquidity management.

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