Page 156 - DCOM208_BANKING_THEORY_AND_PRACTICE

Unit 9: Cash Management System

Upstream Notes
Upstream operations are confined to production and exploration of energy resources.
India has 26 sedimentary basins spanning 3.14 million sq. km of which 1.35 million sq. km
are under deep water. A substantial part remains unexplored or poorly explored. Domestic
production grew by 5.6 per cent in 2006-07 to 33.98 million ton (mt) from 32.19 mt in 2005-
06; it had increased to 34.11 mt during 2007-08.
However, India still has a long way to go in exploration and production (E&P), being one
of the least explored countries in the world.
Downstream
Downstream operations include refining and marketing of petroleum products. Refining
is an industrial process where crude oil is processed and refined into more useful petroleum
products, such as gasoline, diesel fuel, asphalt base, heating oil, kerosene, and liquefied
petroleum gas. The refinery capacity in the country was 178 MMTPA (million metric
tonnes per annum) at the end of 2008-09. As of 2011, there were 17 refineries in India of
which seven were owned by Indian Oil Corporation Ltd. (IOCL). Only one refinery,
Reliance Petroleum’s plant at Jamnagar, was wholly owned by a private company. The
Jamnagar facility was Reliance Petroleum’s only refinery, but it was India’s largest, with
a capacity of 660,000 barrels per day.

India had the global opportunity of emerging as a leading refinery centre in the world.
Since 2006, the worldwide demand for petroleum products had grown by around 2.5
percent, while the rate of refining capacity addition had been only around 0.7 percent. No
new refineries had been set up in the US and Europe in the last 20 years due to strict
environmental norms. The high refining margins had led to a rush by Indian companies
to meet the deficit for petroleum products. Also India’s favourable geographical presence
alongside major sea routes gave it an edge in the areas of refining and exporting crude oil.
Company Structure
All the branches of IOCL worked under the Corporate Office located at New Delhi, India.
It followed a hierarchical structure where the decision flowed from the top to the bottom
and information flowed from the bottom to the top. Under the corporate office there were
four divisions - Pipelines, Refineries, Research and Development, and Marketing.
Earlier Cash Management System
An organization’s cash operating cycle is the complete process of utilizing its resources
and converting them into income through trading activities. Prior to the establishment of
the Cash Management Product (CMP) module in IOCL in 2006-07, the transactions took
place through the conventional method using the Regional Cash Credit (RCC) module.
Current Cash Management System
As for IOCL, as a marketing organization, the cash management process involved a number
of depots, terminals, bottling plants, etc. and every unit was responsible for purchasing
and selling products all over India. There was a need to have close control over the
collection mechanism so as to meet daily payment requirements. After a transaction, the
banking department of IOCL started its function only when the money got deposited in
the respective bank branches and the bank generated an MIS. Generation of MIS from a
bank branch was a very important part from IOCL’s point of view as real work on the
transaction took place.
Contd...

LOVELY PROFESSIONAL UNIVERSITY 151