CASH MANAGEMENT
Cash Management in Thailand
July 30, 2007
Jason Tan, HSBC Global Payments and Cash Management - Originally published in HSBC Guide to Treasury and Cash Management in Asia Pacific 2007

OVERVIEW:

• Thailand is in the process of implementing a new private-sector, nationwide payment system for banks, with a focus on electronic channels, including the introduction of cheque imaging.
• Most foreign banks use local banks to ensure national coverage for collections. Multinationals and government departments are demanding and promoting more extensive electronic fund transfers.
• With the slowdown of the economy, most companies want better working-capital flow and internal efficiencies, as well as immediate and quantifiable savings.
• Successful cash management strategies will be crucial for companies operating in Thailand, with consolidation of cash flow and effective liquidity management. Banks will need to create innovative solutions if they want to stand out.

Thailand's strong economic growth from 2001 to 2004 was driven by domestic consumption, low interest rates and government support of grass-roots businesses. During the past two years growth has been driven by:

• Rising export volumes (up 14% year-on-year in the first quarter of 2006).
• A 5% increase in agricultural growth after 18 months of drought-affected declines.
• A strong revival in tourism after a drop-off caused by the 2004 Indian Ocean tsunami (May 2006 year-to-date arrivals are 30% ahead of those for May 2005).

A new system for measuring economic growth projections will be introduced on 1 October 2006 (the start of the fiscal year) that will include government spending and elaboration on the quality of that spending. The fiscal 2006-2007 economic growth target of 3.5% to 4.0% is based on:

• A declining trend in external debt.
• Continued strong growth in the export of electronics, auto-industry goods, services and agriculture.
• A stable currency outlook, based on reserves of US$45bn.
• A US$45bn, five-year, government infrastructure programme, to start in 2007, involving mass transit, housing, transportation, water, health and education.

This positive trend is expected to continue despite political difficulties and insurgency in southern Thailand; a low unemployment rate; rising interest rates and oil prices; and rising inflation and negative real interest rates.

Clearing Systems

Thailand has 76 provinces and 100 clearing zones, and uses four major payment systems for paper-based and electronic payments:

• Electronic Cheque Clearing System (ECS), with settlement on a net basis the next day.
• Provincial Cheque Clearing System, for cheques drawn in other provinces, and with settlement on a net basis the next day.
• Bahtnet, operated by the Bank of Thailand (BOT), a real-time, gross settlement system for high-value transactions.
• System for Managing Automated Retail Funds Transfer (SMART), a low-value, high-volume system allowing interbank, retail-funds transfer, with instructions submitted two days before the value date.

In December 2005, in response to rapid market developments, the Bank of Thailand (BOT) approved the establishment of the private-sector Interbank Transaction Management and Exchange (ITMX) to provide a new national payment system for banks. As well as allowing for electronic payments and other business, it will act as a switching centre for business-to-business and business-to-consumer payments. ITMX is expected to take over most of the payment systems above, except Bahtnet, that are managed by BOT. Cheque-truncation, using images to clear cheques, is expected to be introduced by ITMX by 2009.

Bank Account Structures

Under normal Thai banking practice, all current accounts are non-interest bearing. However, end-of-day credit balances can be swept into interest-bearing savings accounts. Current and other deposit accounts are subject to BOT exchange control regulations, which restrict the transfer of funds from residents' accounts to non-resident or overseas accounts for which the submission of relevant obligations and supporting documents are required.

Four types of current accounts are available in Thailand, as follows:

Thai Baht (THB) accounts - Thai residents

Most Thai individuals and companies maintain local currency accounts. Although there are few restrictions on the transfer of funds between residents' accounts, an individual or company must declare the underlying purpose of any cash transaction worth THB2m or more, under money laundering legislation.

THB accounts - non-residents

Non-residents may open THB accounts with commercial banks in Thailand, but must maintain non-debit balances in any current accounts. Commercial banks are required to report the movements of non-resident THB accounts daily, and account-holders are required to declare the underlying purpose of transactions before they can take place. As well, the balance in non-resident THB accounts per individual per entity (in aggregation of all accounts maintained with all commercial banks in Thailand) must not exceed THB300m at the end of each day.

Foreign currency current accounts - Thai residents

Thai individuals and companies are allowed to maintain foreign currency accounts only under the following conditions:

• The accounts must be funded with money originating from overseas.
• The account owner must submit evidence of an obligation to pay in foreign currency to individuals or companies residing abroad within six months of the date of deposit. BOT approval is required to maintain a deposit longer than this. The deposit must not exceed the amount of the outstanding obligation.
• The total daily outstanding credit balance (in aggregation of all deposit accounts) must not exceed US$50m for a company and US$500,000 for an individual. BOT approval is required to exceed these limits.
• Debits to accounts are allowed for payments of any external obligations on submission of supporting evidence, or for conversion into THB at commercial banks.

Foreign currency accounts - non-residents

Non-residents can open and maintain foreign currency accounts with commercial banks. The accounts must be funded with money originating from abroad. Funds can be transferred without restrictions.

Cash Management Overview

A number of large local banks have introduced structured cash management services similar to those offered by foreign banks, in line with their regional and global services. The local banks have the advantage of extensive branch networks, and many also offer e-banking and e-commerce. Most foreign banks in Thailand use the services of correspondent banks to ensure national coverage for collections. Overall visibility and control of payments and collections activity are crucial for local treasurers, and there is increasing demand for integrated solutions with back-office systems.

Collections Management

The collections business in Thailand is highly competitive among foreign and local banks, as each tries to develop and enhance different features. One core feature is imaging technology, whereby the image of a cheque, invoice or credit note is captured for viewing online. As well as benefiting customers, the technology is expected to pave the way for cheque truncation in 2009, according to BOT. Imaging allows customers to view cheque status online, follow an audit trail, and reduce paper-based handling and storage costs. The technology further promotes competition in the collections business. Network Alliance is the alternative receivables system among foreign banks, providing outstation channels for customers to receive cash payments via local branch networks. ITMX is expected to significantly change the collections business by allowing:

Payments management

Electronic funds transfers, although widely used, have not yet replaced traditional cheque payments. The Media Clearing System (MCS) for bulk, low-value payments plays a key role in payments management, especially for large multinational companies that have significant bargaining power. These companies typically require suppliers to submit receipts or other documents in advance so these can be checked and validated before payments instructions are sent to the bank.

Increasingly, government departments are using information technology to promote electronic services and provide better banking services for Thais. The revenue department, for example, has introduced an e-Revenue service, which allows individuals and companies to file tax reports, pay taxes and request refunds online. It has been successful during the past three years in providing faster tax refunds.

Liquidity management

Multinational companies are increasingly emphasising proactive liquidity management. Treasurers typically use zero-balance accounts or in-country cash concentration to help them release locked liquidity from subsidiaries and to access the total net position of their group. Interested companies should seek tax and legal advice to clearly understand the implications of adopting such structures. Netting and notional pooling are not permitted in Thailand.

Trends

Thai companies are increasingly focusing on restructuring their supply chains in an attempt to ensure shorter production cycles, greater product variety and shorter order-cycle time, and to reduce the impact of fast-rising fuel costs and heightened security concerns. One crucial issue is finding a balance between centralising and decentralising the distribution network. Benefits of centralising need to be weighed against the logistic challenges of distribution overseas or up-country. Companies also need to factor in tax, customs and financial (receivables and payables) requirements to ensure that the optimum balance is obtained. Companies that excel after such restructuring typically have a good understanding of the real cost at each stage of the supply chain, and are able to implement change.

Conclusion

With the slowing of the Thai economy due to rising oil prices and interest rates, political instability and insurgency in the south, most companies want to improve their working-capital flow and internal efficiencies. And they want immediate and quantifiable savings. Successful cash management strategies will continue to play a key role for companies wanting to obtain such savings, by improving overall visibility via consolidation of cash flows and effective liquidity management. ITMX will change the cash management business and further encourage payments and settlements through electronic channels. Foreign and local banks are competing to offer better cash management services to existing and new customers using information technology and straight-through processing. There will continue to be strong competition among local and foreign banks in this area. Banks will need to create innovative solutions and services to add value to their customers' operations if they are to stand out.

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