The Role of Commercial Banks In Liquidity Management

Due to increasing globalization in the world economy, a lot of multinational corporations today have their businesses spread out across several geographies. This creates several management problems for multinational companies. Not only do they have to struggle with the complexity of managing personnel and operations in many countries but they also have to ensure proper liquidity management for their business.

In this article, we will try to understand what liquidity management is and what roles commercial banks have to play when it comes to the management of liquidity.

What is Liquidity Management?

Liquidity can be defined as having enough cash on hand required to pay the company’s liabilities on time. Any excess cash needs to be locked up in investments that provide the highest yield possible while simultaneously being available to meet any contingency expenses.

Now, multinational corporations face a lot of difficulty in managing today’s complex and reshaped liquidity landscape. This is the reason why liquidity management is not just an administrative function but has acquired strategic importance.

• Since corporate operations are scattered across the globe, companies find it very difficult to truly understand their cash position. Corporations are in dire need of systems that can help them gain visibility over their cash positions on a real-time basis. Also, these systems can be further utilized in order to optimize the cash flow of the firm.

• Corporate companies have their operations in several countries. However, they need a system that can enable them to effectively deploy all their excess cash in the best manner possible.

• Over the years, corporations have realized that liquidity management is not just another necessary evil. Instead, it can be a strategic factor that can help the company to lower its costs as compared to competitors. These costs can then be used to capture more market share or to increase profitability.

What Do Corporations Expect from Commercial Banks?

Just like multinational corporations, multinational banks also have their operations spread out across several geographies. This is the reason that corporations all across the world expect such banks to act like strategic partners when it comes to liquidity management. The common expectations which corporations have from commercial banks are as follows:

• Multinational corporations are generally struggling with managing their cash across a wide variety of geographies. Managing this cash leads to several transactions in the back end. Keeping a track of these transactions and then clearing and settling the same can be quite complicated and can lead to significant efforts.

  Corporations want to partner with a bank that has cutting-edge systems in place. These systems should facilitate easy and accurate reconciliation of records on the bank end.

• Multinational corporations also want to partner with a bank that can help them answer the question about how much cash they have. Many large organizations struggle with their cash visibility. As a result, they are not able to optimally deploy their cash. Corporations want to partner with a bank that can help them understand their cash position on a dashboard. They also want the bank to enable faster transfers and access to cash between the various subsidiaries of the same company.

• Multinational companies want to have access to quick and cost-effective sources of funding if they fall short of funds while managing their liquidity. Hence, a lot of companies expect their commercial banking partners to enable such funding.

  Commercial banks may play a mediator between two companies of the same group by facilitating intra-company loans. On the other hand, some commercial banks can themselves provide overdrafts and other credit products to their partners.

• Lastly, commercial banks can help corporations generate maximum returns based on the amount of cash which is held by them. Commercial banks must enable the transfer of funds to the bank account where they can be invested for the maximum gain. The objective is to achieve maximum returns from trapped liquidity.

How Banks Can Provide Better Liquidity Management Services to Corporations?

Corporations manage liquidity for their own business. However, when it comes to commercial banks, they manage the liquidity for many other corporations as well. Hence, they have more advanced capabilities related to liquidity management which makes them the expert in this regard.

• For example, commercial banks are able to use their advanced systems to not just cater to the present needs of the corporate client. Instead, commercial banks should be able to predict what the future needs of the clients will be and how their cash positions should ideally be managed in the future date.

  By using predictive analytics, commercial banks should enable their customers to remove the element of surprise. Once the element of surprise is removed, the planning can take place much more effectively.

• The systems being developed by commercial banks need to be more integrated with their customer. This is because of fact that the free flow of information between the corporate and its banking partner is crucial when it comes to managing the operations and growing the business.

The fact of the matter is that commercial banks are an integral part of the liquidity management strategy of any corporation. However, larger corporations are more careful when it comes to managing their liquidity and hence they are the ones who generally partner more deeply with commercial banks.

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The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.