Background
I was given an assignment to optimize the cash holdings of a local bank in Pakistan that demands specific attention to cash holdings at branches and a complete revamp of Cash Centers and its processes. The management’s concern for the “excess” cash holdings at bank level was due to one simple reason that any true banker understand it by default. “Excess” Cash Holding = Idle Cash = Non Earning Asset.
The Cost Breakdown “Base of the problem”
“Excess” Cash Holding carries a number of cost factors and related terminologies that need to be elaborated.
“Excess” by default means anything that is over and above the optimum requirement and that what it exactly means here. Be it a branch or an ATM machine, for each location there will be a different optimum requirement for cash holdings that changes on day to day basis.
Based on historical cash transactions for each location, you cannot precisely calculate an ideal “Optimum Cash Holding” without using complex algorithms. This level of expertise lacks in this industry and so there was a simple “questionable” formula that was in place that also need to be reviewed. It was x% of deposit. That’s it!!
Reducing “Excess” Cash Holding to an “Optimum Level” requires a branch to surrender their excess cash to its respective cash center. These cash centers maintains an account with the Central Bank or in its agent’s bank where this excess cash is deposited and a main account maintained at central bank is given credit. A group of branches are tagged to a certain cash center and so there were 65 of them across the country for this purpose. Head office (or more precisely treasury) operate this main account and may use this “documented cash” for investment, lending, etc. “Physical Cash” deposited into a bank account makes it “documented cash”. Bank “A” lends money to Bank “B” using this “documented cash” and does not send bags full of cash for this purpose.
If all of this money that falls into these accounts belongs to say one particular branch, then technically all the profits that head office earns belongs to that branch. Unfortunately branches are not that lucky and they share a very small pie of the profits.
For head office, it is difficult to keep track whose money is now being invested and how much share of profit need to be credited to each branch. But doing the inverse of this tracking is simple. How about if a branch is not given profit but charged a cost for it’s cash holding? Head office knows exactly how much cash is parked in each branch’s cash account and so the higher the cash
holding the lesser the share of profit. This cost is refered as “float cost”.
Irrespective of head office invests their money or not, an agreed rate of cost is charged to the branches for their cash holdings. This, therefore, forces a branch to convert their “physical cash” into the “documented cash” as soon as possible. Frequent cash movements incur transportation cost and therefore there exist an inverse relationship between the “transport cost” and the “float cost”.
Unfortunately branches weren’t lucky enough either to ship out excess cash at their own will because of certain limitations at cash centers. The receiving end of this excess cash.
“The Management’s Concern”
The management’s concern was to manage this float cost and transport cost in a way to maintain its cash holding at optimum level with minimal float charge out to branches and reasonable transport cost.
Across the bank level, the branches were carrying Rs. 9 billion (USD 105 Million) in “Excess” cash holding. The float cost affecting profitability of branch network was at Rs. 2.7 million per day (@ 11% p.a.) and to add up to this burden was an increasing trend of “Transportation Cost”.
Problem Identification – An End to End Process Review
The very first step of the process is when a customer walks-in and deposit cash over the teller counter. As per the instructions of “Central Bank” this cash cannot be placed in circulation until it is “sorted” into the following two main categories as “Re-Issuable” and “Soiled / Defective” notes. Incase any
branch is found violating this instructions is heavily penalized (in monetary terms) and the teller may be issued a charge sheet that can even enforce service termination. Yes, it was that serious!!! By default all cash receipts are immediately classified as “Unsorted” or “Unusable”.
As 2nd step, the “Excess” cash that need to be shipped out to cash centers also need to be properly categorized into “Re-Issue” and “Soiled / Defective Category”. Therefore a branch, that need to save float cost have to put in efforts to arrange sorting and then surrender excess cash. Most of the branches
choose to surrender cash or in other words put in this efforts only when head office pushes them to do that. This effort had risks of its own and there was just no reward in doing that. A branch chose to pile-up excess unsorted cash instead.
As 3rd step, the cash center lacks facility, infrastructure, equipments and manpower to accept “unsorted” cash from the branches and therefore emphasized only on to surrender “sorted” cash. For Cash Centers, there were no standard operating guidelines, no job description, no responsibilities was assigned to anyone and so I saw it as a biggest challenges to organize this pigeon hole into a proper “Cash Handling Facility”.
Central bank and its agent accepts cash only when it is properly categorised into “Re-issue” and “Soiled / Defective” category and incase of any discrepancy, the cash center were charged heavy penalties. So basically these cash centers were in the middle of the problem.
Recommendations and The Implementation Steps
Looking at the process, I devised the follwing action plan to address this problem.
1. I developed an excel model that helped the management to review the difference in cost terms between the current “questionable” formula and the cash holding based on “Last 6 Days of cash payment average and then taking its x multiples”. The difference was clearly visible. Have a look at these graphs.
x% of deposit was clearly beaten by the “x multiple of payment average formula” and anything over above the 1.5 multiple was again getting expensive. So it was to decide between the 1 and 1.3 multiple. In terms of cost, 1 multiple was the most feasible but in terms of cash movement it was pretty aggressive 583 branches vs. 531 branches. So the management agreed on the 1.3 multiple. I
am convinced that this might not be an ideal formula but to start with it was better than the x% of deposit.
2. The next step step was to revamp cash centers and provide clearly marked spaces to have the following additional space for (a) Consignment Area – where all bag exchanges will take place and (b) Cash Handling Area – where I planned to develop Cash Sorting Cell. This cash sorting cell will eliminate the need for branches to surrender sorted cash and therefore will do the dirty job in a more
mechanized and organized manner. This step I called as “Civil Works” and took special approval to incur this expense, since it was never planned to happen and so there wasn’t any budget for this type of work. I arranged private lockers for each staff where they can keep their personal belongings. I also recommended to wear dangri in these cash centers but there was quite a lot of resistance to
that. Well I can imagine, I don’t want to say good bye to my loving wife wearing a dangri or don’t want anyone to see I am wearing one and that to in a “bank”.
3. As third step, I requested the procurement division to invite vendors for demonstrations of right machines at each step so as to reduce human labor. The procurement process took a long time than I expected, precisely 2 months. Fortunately at the end of this step, I installed the following type of machine at each processing stage in cash center.
(a) Piece Counting – to count notes in each packet without breaking the seal.
(b) Cash Sorting Machine – that sorts out notes in defined categories.
(c) Packet Binding Machine – to make packets out of loose notes.
(d) Bundle Banding Machine – to make bundle of sealed packets.
(e) Cash Center Specific Time Stamp – to identify the cash center, time and date stamp.
These machines were placed at precise location so the operator follows a pre-defined process and completes his job of “Cash Sorting Process” without any hassle. The cash sorting machine was a bit complicated for our people to understand so I outsourced its operations to the vendor company. This machine did wonders for this bank indeed. From 5 bundles (50 packets) per day of manual
sorting, I was looking at a sorting capacity of 150 bundles per day.
4. The next step was to look for someone who will perform the monitoring of cash holding at regional levels (branches were tagged into districts, districts into regions and regions into cluster.) Luckily, this bank had a good structure in place known as branch monitoring team. They took over the responsibility to monitor regional optimal limits vs. the current cash holdings and keeps an active follow-up on regional heads.
An active follow-up of monitoring team along with this cash centers efficiency in place did exactly what management was looking for.
5. With all the facilities in place, I now needed the right people in place so I involved Human Resource to design a detailed job description for each step and identify relevant resources within the bank. Very soon, within 2 weeks time, I had the job descriptions in place, internal jobs posted, interviews conducted and so filled the gap with right employees.
The job description explained the responsibility for the following tasks.
(a) Cash Center Manager
(b) Officer – Consignment Area
(C) Supervisor – Cash Handling Area
(d) Vault and Books Management.
6. As last step, I designed the standard operating procedure that also explained a clear role of each of the above 4 positions, arranged a bank level communication for the new optimum limit formula and a step by step instructions for branch network on how to calculate optimum limit and dispose off excess cash holding.
Branch network took this communication as a relief and immediately responded to it by off loading their excess “Unsorted” Cash pile to their respective cash centers. Cash Centers that were now working at 30 times cash processing handled it pretty well. Disposal to central bank and to its agent was also at the same pace as the sorting of cash was done at these centers.
The Result
It took 3 months for the bank’s 5 major cash centers (holding 56% of excess cash) to reduce “excess” cash holding from Rs. 9 Billion of excess cash holding to Rs. 5 billion.
The Unfinished Business
The rollout is in place in all centers across nationwide but I believe the rate of sucess will soon drop as the cabinets of central bank are going short of space with this new unexpected inflows from this bank.
I see this deadlock as success indicator!Now that is a place where I do not want to poke my nose in… I can only hope when central bank identifies their ways to handle this new inflow and allow us to complete this unfinished business.
