Page 155 - DCOM208_BANKING_THEORY_AND_PRACTICE

Banking Theory and Practice

Notes

Case Study Revision in Cash Management System at Indian Oil

Corporation Limited

his case study details the revision in the Cash Management System at Indian Oil
Corporation Limited (IOCL), one of India’s leading oil companies. As of FY 2010-
T2011, IOCL had 540 locations around India which served as an outlet for its finished
products. The historical analysis draws on the process of receiving collections and payment
methods on a day-to-day basis from each of these locations. This study also helps in
understanding the Cash Management Product (CMP) and Cash Management Services
(CMS) facilities provided by State Bank of India (SBI) and HDFC Bank respectively. It
describes the centralized collection system and the decentralized payment system of IOCL.
The introduction of Electronic Collections (e-Collections) e.g. RTGS, CORE TO CORE,
NEFT, ECS, INTERNET BANKING etc. facility with a view to generating the credit receipt
to the customer account in SAP at the earliest provides valuable insights into the advantages
of the new system . IOCL registered around 82% of various collections through the e-
collection modes. The case study also looks at budgeting of cash flows, i.e. inflows and
outflows, and the analysis of variance from the actual. It involves understanding and
evaluating various sources of short-term borrowings by IOCL to meet daily cash
requirements and other payments which are necessary along with the daily collections.
This case can be used with MBA/ MS students as a part of their Financial Management
curriculum.
Indian Oil Corporation Ltd. (IOCL) was India’s largest company by sales with a turnover
of ` 12710.740 billion and profit of ` 102.210 billion for the year 2009-10. Considered an
important pillar of the Indian Economy, IOCL was India’s largest commercial enterprise
and flagship national oil company and downstream petroleum major. It operated the
largest and widest network of fuel stations in the country. In 2010, IOCL had a market
share of 41% in refining, 54% in product pipelines, and 46% in the petroleum products
market. By financial year 2010-11, IOCL had 14 products, besides delivering excellent
quality services and loyalty programs such as “extra care”, extra rewards”, and “extra
premium easy fuel cards”. It was a major supplier to core sectors such as the Army, the
Railways, State Road Transport Corporations, the Air Force, the Navy, Power, and Aviation.
IOCL revised its Cash Management System or Treasury Management System in the year
2006-07.
Management of cash is extremely crucial for any organization as mismanagement can
lead to financial distress. Cash management helps in short-term stability and long-term
survival. In order to handle business effectively and grow in terms of quantum sales and
profits, it is essential for a company to establish an adequate and positive cash flow order.

IOCL started with centralizing the whole collection system and slowly moved toward
centralization of the complete payment system. This was a sign of further flexibility in
treasury functions.
Oil Industry Background in India
The Indian oil industry is categorized into three segments based on their operations: the
Upstream, the Downstream, and the other industrial bodies.
Contd...

150 LOVELY PROFESSIONAL UNIVERSITY