Introduction to banking relationships
Treasurers are responsible for managing cash, risk and liquidity needs for day to day smooth functioning of the organization. To fulfill these responsibilities and ensure efficient allocation of funds, treasurers need to work with different banking partners and manage relationships with different banks for their organizations.
From corporates’ perspectives, corporates could rely on banks for transactional, funding or liquidity needs. From banks’ perspectives, they look forward to develop long-term relationships with corporate clients, but will need to manage credit risk carefully when they lend to corporates.
The Relationship between Banks and Corporates Should be Mutual (in an Ideal World)
In the ideal world, the relationship between banks and corporates should be a mutual one. But sometimes, one side could be in a stronger position in the relationship, depending on the positioning of the corporates and priorities of the banks.
For example, a big corporate with huge cash surplus might use banks just as a conduit for business, so it could have the flexibility to choose between different banking partners. On the other hand, a small corporate that is strapped for cash could prioritize its banking relationships above other responsibilities, especially if funding from the banks are absolutely necessary for it’s survival.
Thus, many different factors like size of company, nature of business, capital intensiveness, competitiveness of industry, balance sheet structure, industry growth, and cash requirements could affect how the relationship between corporates and banks would play out.
In today’s dynamic environment, it is essential that irrespective of the different banking needs of an organization, a solid relationship should be built with banks. Treasurers need to have oversight on all the banking needs and ensure that all the banking relationship of the organizations are well managed.
However, for large multinational organizations, it might be difficult for treasurers to have oversights over all banking relationships due to its presence in multiple regulatory environments and a decentralized treasury structure.
In such situations, it might not be practical for treasurers to spend time monitoring banking relations at every single working location, as there could possibly be more important priorities to tend to. Nevertheless, a general framework for banking relationship should be well defined and the banking business should be handled within the framework.
Banking Relationships – How Many Banks?
Some organizations work on a “one-bank solution”, i.e. maintaining relationship with a single banking partner. This comes with a risk of over-dependency on that single bank.
A better strategy adopted by many large corporates would be to have a prime banker for all the major needs and at the same time, maintain relationship with alternative banks for other small and specialized needs. If the prime banker is small in size and have significant exposure to the organization, disclosure norms would also become a factor to watch out for as banks have to disclose the major borrowers in their financials to adhere to the stringent disclosure norms of Basel 3.
Understanding the strengths and weaknesses of your prime banker’s offering is the key to successful relationship. For example, a bank may be very good in its cash management and current account offerings, but it may be lacking in trade services. In such cases, the treasurer needs to decide on an allocation of business to prime banker and various alternative relationship banks. This enables the organization to utilize additional lines with alternative banks, and tap on different strengths of banks for different needs (e.g. specialized services like factoring).
Another reason why it is advisable for organizations to maintain multiple relationships is that banks may change their priorities any time, based on capital decisions or requirements imposed by regulations (e.g. Basel 3). Therefore, having multiple accounts with alternative banks help to safeguard the organization from any sudden or adverse decision taken by a single banking partner.
Maintaining multiple banking relationships can also help organizations to keep up to date with developments in the financial industry, e.g. fintech. Many banks today are working closely with fintech companies in areas of payment, cash management, blockchain technology. Therefore, one benefit of having good banking relationships is that treasurers can stay updated with latest developments in the banking industry.
So, how should you manage your relationships with the banks? We have identifies 9 key rules to guide treasurers on how they can maintain good relationships with different banks.
9 Key Rules of Managing Bank Relationships
- Treat the bankers as valued business partner and esteemed supplier of money and banking services. Effectively, banks are just like other important suppliers to business which are there to supply money whenever needed and hence should be dealt accordingly.
- The business understanding should be shared with them and periodic plant visits to be conducted for interested bankers. In case no such set up is available, a small gesture like informal meetings over a cup of coffee can also do wonders.
- Create openness and promote transparency while dealing with the banks. All the designated employees dealing with banks should be on board. Treasurers need to promote information symmetry within the banking relation department in order to avoid any miscommunication and misunderstandings.
- Extend the invitation to bankers for important corporate gatherings (public) and celebrate the success with them.
- There might be instances wherein the lending bank start pushing the organization an inferior product. In such scenarios, tactical handling is required to maintain good relationship and direct rejections might impact the relations.
- It is essential to maintain the good relations with prime bankers but be ready with fall-back plan. The changing dynamics and priorities for banks are difficult to ascertain in advance and availability of alternatives always works well. The alternative line with banks should be into different expertise areas and treasurer should be aware about the major technological advancement of banking in order to drive the success digitally.
- Any kind of conflict of interest should be avoided.
- Banking is not only about technology and money but also about the people. Strong relationship should be built with the bankers. In case the relationship manager or the senior management has shifted the jobs and moved to different banks, due consideration should be given to new relationships through new banks.
- Bank’s expertise areas need to be known in advance and any new request should be evaluated independently before putting it up with the prime bankers. It becomes really easy to handle the sales pitch and offering from prime banker once treasurer has access to information and services provided by the competitors.
In summary, how corporate treasurers should maintain relationships with banks will depend on the organization’s business model and business needs. If the organization’s relationship with different banks is maintained well, the good banking relationships could be viewed as an intangible asset for the organization. Today, due to strict banking regulations and disclosure norms like Basel, banks are wary of their credit exposures to organizations. So, it is important for organizations not to heavily rely on one single bank, but instead build good relationships with multiple banks.
Next, let us look at the topic of another big topic relevant to corporate treasuries – risk management.