INTRODUCTION
Indian Oil Corporation is an important pillar in Indian Economy. It is India's largest commercial enterprise and flagship national oil company and downstream petroleum major. In 2010, IOC had a market share of 41% in refining, 54% in product pipelines and 46% in petroleum products market. By 2010 and even now in 2011 it has 14 products, beside delivers excellent quality services and loyalty programmes such as "extra care", extra rewards", "extra premium easy fuel cards" etc. It is a major supplier to core sector i.e. army, railways, state road transport, air force, navy, power and aviation. Indian Oil Corporation Ltd. is India's largest company by sales with a turnover of Rs. 271,074 crore and profit of Rs. 10,221 crore for the year 2009-10 (refer to Exhibit 1).
INDIAN OIL INDUSTRY
COMPANY STRUCTURE
The whole of Indian Oil Corporation (IOC) works under Corporate Office located at New Delhi. It follows hierarchical structure where the decision flows from top to bottom and the data flows from bottom to top. Under the corporate office there are four divisions namely Pipelines, Refineries, R&D & Marketing. The Marketing division located at Mumbai co-ordinates with the regional offices i.e. North, South, East, West and Assam oil division Regional offices. The Regional offices co-ordinates with respective state office that in turn co ordinates with respective location offices. It follows a hierarchical structure where decision making flows from the top to bottom and data flows from the bottom to top (refer to Exhibit 2).
EARLIER CASH MANAGEMENT SYSTEM
An organisations cash operating cycle is the complete process of utilizing its resources and converting them into income through trading activities. Prior to the establishment of cash management product (CMP) [1] module in Indian oil corporation limited (IOCL), the transactions took place through the conventional methods of regional cash credit module. In the RCC module, the SBI branches of various states dispersed over various locations would send the information of remittances of funds to the regional office and they in turn would then forward that information to the SBI head office.
However, under this facility, the lead-time on an average was 4-10 days depending on the accessibility of the location. The delay included 2-7 days for the transfer between the location and state office SBI branch to the Regional Office SBI branch, and another 2-3 days from the Regional Office to the Head Office SBI branch. Therefore, though a collection may be made on the 10th day of any month, the credit of such a collection may reflect only on the 14th - 20th of that month.
It is clearly evident that from such a long lead time in the transfer of funds, the cash requirements of IOCL and the interest figure in the income statement are affected directly by the length of the cycle.
High value transactions i.e. above Rs. 5 crores was being informed prior to their collections so that it can considered in their daily budgeting process and can get prepared for working capital needs. Anything below Rs. 5 crores was treated as low value transaction and prior information to it were not necessary.
Hence to tackle this problem, Indian oil's primary banker, SBI, introduced the Cash Management Product (CMP) facility which helped IOCL to determine the fund position (Receipts & Applications) of all the locations in all the five regions on the very same day, thus making it easier to project cash flow requirements or investments more accurately. And later due to the introduction of electronic collection system, it became very easy for IOCL to automate the whole treasury functions by integrating information technology with it.
CURRENT CASH MANAGEMENT SYSTEM
Mainly a marketing organisation where process involves number of depots, terminals, bottling plants etc. which are responsible for purchasing and selling products all over India and money is paid and collected at all these places. Selling takes place at these places and only after the transaction and when money is deposited to the bank then the banking department of IOCL starts. It is a very important part as real work on transaction takes place from IOCL's point of view.
Being a huge organisation all transaction of Indian Oil takes place through e-collections and a lesser amount through instruments i.e. cheques, demand draft, LOC etc. and a very few in cash with negligible amount involved in it. SBI is the major banker of IOCL which provides completely customised SBIFAST (CMP) facility to IOCL. In a view to decrease dependency and reduce risk it has also made similar arrangements with HDFC as a secondary banker.
Centralization of collection and decentralisation of payments is the unique feature of IOC and its strength, where money is collected from over 500 locations per day and gets it transferred at HO, Mumbai on same day. But as now-a-days e-collection exist all over the country and is the main system of collection in IOCL, so getting information prior of sales is not at all possible. Few tools are being used to predict the collection in daily as well as monthly basis.
BANKING ARRANGEMENTS
With Internet banking becoming a necessity in today's business world, Indian Oil along with the help of its bankers has been able to introduce the concept of E-collections within its working environment so as to reap all the benefits coming out of it.
Indian Oil Corporation has a centralized collection system whereas their payment mechanism is totally decentralised. That means funds flow through all the regional offices or state offices to the head office (HO). There are advantages as well as disadvantages to it. Payment system is decentralised and is region specific. Budgets are made according to their expenses and appropriate limit allocated to the respective accounts from where the payment released. The overview also explains the various requirements necessary for opening account at various locations at the end they have a lasting effect on the credit availability of the organization. Hence while opening a location various reasons and how they affect the cash flow has been given. There are two types of collection modes in Indian Oil: non e-collection modes and e-collection modes.
NON E-COLLECTION MODES:
The customer can make use of any kind of instrument, i.e. cheque/pay order/DD for making the payment. These are categorised into same bank instruments, other bank instruments, and other bank instruments-outstation. Local instruments- All local instruments tendered by the Corporation within clearing hours are to be included in the day's clearing (if tendered after the clearing house, to be taken in following day's clearing) and credit should be released on the day the bank is funded for clearing. Outstation instruments are received only from Government / Semi government customers.
Facilities provided under SBI CMP:
The different types of bank account facilities provided by State Bank of India (SBI) are:
Collection account: This account is opened at all the branches/ locations/depots etc. or at any place from where IOC collects its money from customers or other parties.
Special current (withdrawal) account: This account is opened at all Regions and State Offices for the purpose of withdrawal. The locations having monthly payments of more than Rs. 50 lakhs have the facility of this account, for this purpose locations are to assess their fund requirements and put up the proposal for opening it as this will result in avoidance of blockage of funds.
Current (Imprest) account: This account is generally opened at all locations of IOC. Main purpose of the account is to meet day-to-day expenses of respective locations. Its transactions are not transferred to the main account of Mumbai via CMP.
Letter of Authority: At every location of IOC some special type of payments are made, e.g. Customs and Excise authorities or payment to Port trust authorities or payments to other refineries for cost of product etc.
Railway credit note: This is a special facility provided by SBI in which IOC's all locations can make payments for Railway freight. All locations, under this facility are authorised to make payments of Railway freight, shunting charges etc.
Regional cash credit account: Each regional office of the marketing and other divisions of the corporation individually operates a regional cash credit (RCC) account. In this account, pooling of debits and credits from various accounts other than the current account operated by the locations is affected.
Cash credit account: Cash credit Account is the principle Account operated by the HO Marketing Division. All above accounts except current account is pooled into one account i.e. cash credit (CC) account. Loans availed for Working Capital purpose and other major receipts handled by HO are mostly credited to Cash Credit Account directly.
NORTHERN REGION
COLLECTION POOLING A/C (90)
WITHDRAWAL POOLING A/C (71)
MASTER POOLING A/C-MD
[COLLECTION POOLING A/C (5)
WITHDRAWL POOLING A/C (5)
LA POOLING A/C (3)
RCN POOLING A/C (2)
REFINERY CURRENCY PURCHASE A/C FOR SBI (1)]
EASTERN REGION
COLLECTION POOLING A/C (86)
WITHDRAWL POOLING A/C (32)
WESTERN REGION
COLLECTION POOLING A/C (89)
WITHDRAWL POOLING A/C (43)
SOTHERN REGION
COLLECTION POOLING A/C (98)
WITHDRAWL POOLING A/C (66)
BALANCE TRANSFERRED TO CASH CREDIT A/C
ASSAM OIL DIVISION
COLLECTION POOLING A/C (3)
WITHDRAWL POOLING A/C (4)
Figure 1: Pooling Mechanism for CMP Accounts at SBI CAG Branch, Mumbai
CENTRALISED E-COLLECTION MODES:
There are various modes of e-collection mechanism in Indian Oil Corporation Limited. They are:
Real time gross settlement (RTGS): RTGS system is a funds transfer mechanism where transfer of money takes place from one bank to another on a 'real time' and on 'gross' basis. This is the fastest possible money transfer system through the banking channel. In RTGS minimum amount to be remitted is Rs. 2 lakhs. The whole transaction process in RTGS takes around 2hrs to get completed.
National electronic fund transfer (NEFT): Presently, NEFT operates in hourly batches - there are eleven settlements from 9 am to 7 pm on week days and five settlements from 9 am to 1 pm on Saturdays.
Corporate Internet banking: Customer avails "Corporate Internet Banking" facility from his SBI Branch and carry out the registration procedure for mapping "IOCL" as a supplier. Customer remits the funds online by accessing SBI webpage.
Core to core: It involves online transfer of funds. Bank branches are interconnected by networking. Customer's banker will transfer the funds from customer a/c to IOC A/c using "Screen no. 51073 - Cheque by Deposit" option. This happens in different branches of same bank.
Instruction card: The instruction card facility was introduced in 2004, in vogue with ICICI and HDFC bank. But presently the facility is phased out from ICICI. An instruction card like a debit card and is used by around 250 Indian Oil dealers at 68 supply locations. Whenever a customer makes some transaction, 2 days time period is taken to credit money at IOCL account. Approval code is the unique number in instruction card that is generated at the time of transaction.
CASH FLOW FORECASTING
A key element of treasury management involves projections of inflows and outflows of cash by the corporation. It also requires its constant updating on day to day basis for ensuring effective fund management. Projections are done on two stages:
Monthly: by 7th of every month
Rolling: by 22nd of every month for the next month
For effective forecasting, managers at Indian oil require credible information from multiple sources. The process of cash flow forecasting on a daily/monthly basis employs forecasting by three months moving average, forecasting by OCC seasonal index [2] and forecasting by five years trend analysis which are done for every month. Budgeting for the entire financial year takes place in a board of directors meeting, considering not just the market factors but also Indian Oil's plan for expansionary projects and others. Monthly cash flows are forecasted based on an average of the values obtained by several forecasting methods, which are again finalized at a monthly treasury meet.
Average of the above mentioned methods are taken as monthly budgeted figure (refer to Exhibit 3). Similarly daily cash flow budgeting is done based on same mentioned methods. The daily break down figures adds up to the monthly budgeted figure for each month. When the actual collection is realised then it is compared with the budgeted or expected. If there is a difference between budgeted and actual then reasons behind these variations are figured out. These reasons are verified by the corporate office, Delhi.
There are even impacts due to holidays at certain state or regional offices, the estimated collections are not realised if regional holidays were not taken into account. When the corporation have to make certain payments that is more than that days collections, then they go for short term loans. Short term loans by Indian Oil includes collateralised borrowing and lending obligations (CBLO) [3] , special cash credit facility [4] , commercial papers [5] and short term loans from other banks depending upon prevailing market's rate of interest.
Even on the day when surplus amount is realised then it is invested. The investment decisions are taken by the corporate office at Delhi.
LOOKING AHEAD
Although Indian Oil Corporation uses a centralised collection but they have a decentralised payment system. In early 2011 they started centralised payment system but restricted to employee payments only but Indian Oil is hoping foreword to make the whole payment system centralised. The rationale for such a move is to have complete control of the cash and to provide greater investment opportunities with larger sums of money available as surplus. Centralized collection and payment system helps in easy monitoring of cash and so as to plan out payments accordingly.
Exhibit 1
Indian Oil Corporation: Leader in Downstream industry
Source: PETROLEUM PLANNING & ANALYSIS CELL, IOCL
Exhibit 2
Indian Oil Corporation: Organisational structure
Corporate Office
New Delhi
Refineries Division
New Delhi
R&D
Division
Pipelines Division
Marketing Division
Mumbai
(TERMINAL/DEPOTS/LPG PLANTS/DIVISIONAL OFFICES/AREA OFFICES)
TNSO
KNSO
KASO
APSO
GSO
MHSO
MPSO
WBSO
ORSO
BHSO
NEISO
DSO
PBSO
RSO
UPSO-1
UPSO-2
Assam Oil Division
SR
Chennai
Chennai
WR
Mumbai
(Prabhadevi)
ER
Kolkata
Kolkata
NR
New Delhi
New Delhi
Source: Indian Oil Corporation banking department, HO
ADDITIONAL READINGS & REFERENCES:
http://www.iocl.com/
http://www.iocl.com/AboutUs/Vision.aspx
http://www.iocl.com/Aboutus/FinancialPerformance.aspx
http://www.iocl.com/downloads/PresentationtobankersApril302010.pdf
http://www.rbi.org.in
https://www.sbicmp.co.in/sbicmp/docs/AboutUs.html
