Банкеръ Weekly



Mr. Manchev, the Cash Services Company is among the few companies in which the Bulgarian National Bank is a shareholder along with commercial banks. What is the company's strategic task?
- The company was established in order to help for creating a cash market in Bulgaria. Although we have had a central bank for 130 years, a market of this kind did not exist in the past. At the same time, it is quite intensive in Europe. This is why at the Bulgarian National Bank (BNB) we decided that we have to gradually develop such a market so that we would not be pressed to do it in short terms when the time comes to replace the lev by the euro. In other words, we want this to happen easily so we adopted a strategy that included development of the cash market. Of course, we began to apply this strategy in partnership with the commercial banks. And since each of them has specifics of its own when working with cash, we have logically addressed those with the biggest network of branches and the most numerous clients and which use the greatest number of banknotes and coins. However, the BNB declared from the very beginning that it would not impede the establishment of other private partnerships willing to offer services related to the cash market. And that is exactly what practically happened - just as the Cash Services Company was established between BNB and the three top commercial banks, all holding equal stakes, other companies of the kind began to emerge, created by other commercial banks and firms specialized in cash delivery. This is very good since it is a clear sign that conditions are being formed for a competitive market.
Will this cash market obey to certain rules?
- Yes, it will. The BNB prepared a set of rules and criteria that all participants in this market should obey. The rules will also be valid for the company in which the central bank participates. I would like to underline that it will be operating on an equal footing with the other companies of its kind.
In fact, what kind of market is that?
- It is a market for banknotes retail buying and selling. The BNB will maintain its monopoly on the wholesale services, as required by the European Central Bank (ECB). In other words, being an issuing institution we'll now provide all commercial banks with wholesale lev delivery services and later, as a unit of the ECB, we'll offer the same services for the euro.
Will the Cash Services Company provide cash-in transit services or will its functions only be related to inspecting the quality of banknotes?
- Initially, it will only occupy with handling banknotes and coins and putting them back in circulation. For the time being we are not going to transport them. However, if we decide that it is profitable to offer transportation services in the future, we'll start doing it, too.
Is it true that one reason for the establishment of the company is the need of a sizable investment in money counting machines and equipment for checking banknotes and coins?
- You know that all banknotes and coins that pass through the banks and return into circulation must meet the fitness standards published by BNB in 2006. These standards were applied in the past, too, since they existed as internal rules of the central bank. But we made them public so that they could serve as a base on which the available banknotes and coins market is created. And once this system of rules is accessible for everyone, banks can choose whether or not to create their own model for checking the money fitness, use the services of the company created by BNB, establish a competing company with other institutions, or use the services of the already existing specialized companies. There is another possibility as well - the bank may decide it is profitable for it to rely on wholesale delivery of banknotes from BNB. Each of these alternatives has advantages and disadvantages and a price, and each credit institution must decide which one is the most suitable for it. To us, being the central bank, it was important to have unified rules, fixed in Regulation No18 and the two accompanying standards - on the fitness and the identification of the banknotes. This is how we put all potential interested parties in this newly emerging market on an equal footing.
Why hasn't a market of such services existed so far?
- Because until 2006 there has been no publicly accessible standard that would let those willing to participate in the market be aware of the rules they need to obey. Everyone was aware that BNB has its own rules, everyone was convinced it was applying them and turned to it for delivery of banknotes without asking for the standards. Respectively, all costs for the application of these standards were calculated in BNB's annual budget. But later it turned out that the money circulation was growing in volume very quickly and BNB's costs were increasing, too. That was one of the reasons for the central bank to begin negotiations with the credit institutions for establishment of the free cash market. Banks themselves faced a problem because turning only to BNB as a cash supplier, they have to comply with the limited number of services that we offer them. And this does not meet the requirements of the banks' customers. In fact, this was the main driving force for the establishment of the cash market - to increase the range of services and reduce the costs. The second reason was that once we joined the European Union, we became obliged to obey the common standard for handling banknotes for their further use, imposed by the ECB. It distinguishes the roles that the central bank and the cash-in transit companies must play and we are obliged to introduce them, too.
You mean that the currently applied standards, those BNB introduced in 2006, are the standards of the EU and ECB. Is that right?
- Yes, we use them to gradually prepare the local market for the European requirements. And we are doing it now rather than acting urgently in the last minute.
And what are these cash-in transit companies?
- They provide handling, delivery and transportation services for both the national currency and the world's leading currencies. That is why the Cash Services Company will operate with levs, US dollars, euros, Swiss francs, and British pounds. It will handle and put back in circulation the banknotes of these currencies. That is why the Cash Services Company is much more flexible and able to provide much more services than BNB.
Do you mean to say that this company will have the capacity to judge whether or not the levs, euros, etc. that it receives and handles are fit for use and are not counterfeit?
- It will be able to judge whether all banknotes and coins that go to it are forged on the basis of information provided by the respective issuer. As to the separation of unfit Bulgarian banknotes and coins, the standards of BNB will be applied for them.
Speaking about the cash market, let's say what is the amount of the turnover?
- This is a very difficult question, because BNB has been the only one providing this type of services so far. And we published figures showing the cash turnovers depending on how many banks used our services. But today we can only speak about how many banknotes the company is expected to handle on the average per one year. On the average, the central bank handles about 600 million banknotes a year and we expect a larger number to pass through the company. But I repeat that these are just expectations that depend on many conventions.
Do you think cash-in transit and banknote handling companies, currently operating on the Bulgarian market, have the necessary equipment and skilled personnel to guarantee good-quality services?
- Ordinance No 18 includes minimum requirements to all that offer such services. They were published in 2006 because we obliged all banks using the services of cash-in transit and banknote handling companies to explicitly write in the contracts with them that the firms in question undertake to observe the standards stipulated in the ordinance. BNB on its part has established an organization allowing it to check if the banknote handling equipment meets the standards. All the machines have been declared and registered at the central bank. If anyone decides to buy such a device he should know it is necessary to pass tests at the BNB first of all. A list of the machines which have successfully passed the central bank's tests has been published on BNB's INTERNET website and they may handle Bulgarian lev banknotes.
In your words one of the reasons for BNB to create conditions for the banknote market's development is the willingness to optimize the expenses. What do you mean?
- First of all I'd like to point out that the statutes of the Cash Services Company explicitly state it will offer services at market prices. Its shareholders won't enjoy any preferences.
Does that mean that if any of the shareholder banks gets a more advantageous offer from a competitor company it may use its services?
- Exactly. And this guarantees all participants' equal access to that emerging market...
Is it to say that the price of services offered by the company in which the BNB participates as well will be one and the same for its shareholders and external clients?
- That's right. And it cannot be otherwise because each preference will be interpreted according to EU rules as unauthorized State assistance because the BNB participates in it. And the central bank is a legally established institution with monopolistic functions.
Let's go back to expenses for the cash circulation. How much will they be optimized?
- With the establishment of the company expenses for secondary supply with banknotes are expected to gradually go down and some 30% economizing will be achieved. Of course, there are several conventions here. The first one is how quickly the cash-in transit service will be optimized. As I've already said, initially the company won't offer transit of the banknotes ordered from it.
The second convention is how quickly the cash market will grow and that depends on the growth of the economy, the pace at which prices change, and people's willingness to use cash for payment. Don't forget that the market of payments by credit and debit cards is developing very quickly. We made our forecasts for the business prospects to the Cash Services Company assuming that demand for cash will be decreasing in the medium term because the share of cash compared to Bulgaria's gross domestic product (GDP) is very high. It is 12-13% in our country while in the EU the average is some 6-7 per cent. Anyway, the cash business in Bulgaria is a multi-billion industry. The annual costs for money handling in our country are approximately BGN60MN, at that BNB's expenses are not included in this amount.
BNB is working on another project as well - for setting up a cash centre. How does it reconcile with the Cash Services Company?
- The two projects supplement each other. As I've already said, BNB issues the lev and will be the institution which will circulate the euro on behalf of the ECB from the moment when it is adopted as a single national currency in our country. In other words, we are and we'll remain the only institution offering cash in large quantities on the domestic market. And as such the BNB should comply with certain standards which the ECB has set for its divisions. For that reason we have set up that modern cash centre where the banks will be able to order the levs and the euro banknotes in the standard packing in which BNB offers them.
What is this standard packing?
- It is described in the ordinance and meets ECB's requirements. It is the packing in which BNB accepts and supplies the banknotes. It contains 10,000 banknotes of a single denomination. What is the current practice? When a bank wants to be supplied with banknotes it places an order at BNB for a standard packing of banknotes of BGN2, BGN5, BGN10, BGN50 and BGN100 denomination. The commercial bank should decide itself if it would be able to market all these banknotes and what expenses it will make for safe-keeping the rest of them. And here comes the advantage of the Cash Services Company. It can afford to order at the BNB on behalf of the banks big quantities of banknotes which it will market in smaller quantities to many clients. And each of the banks will have the right to order instead of a standard packing of 10,000 banknotes say ten wads of the respective denomination which it knows could be distributed in a day or two and avoid in that way the big expenses for safe-keeping the money. The expenses are really significant - for counting, and repacking... and at the same time the banknotes do not yield any proceeds. The reduction of these expenses will ultimately result in economies for banks.

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