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04/18/2304/18/23 International BankingInternational Banking 11

INTERNATIONAL BANKINGINTERNATIONAL BANKING

G .R. RaoG .R. Rao

Faculty, IIB&FFaculty, IIB&F


TopicsTopics

• Exchange rates• Risk management and basics of

derivatives• Documentary letters of credit• Facilities for exporters and importers• Correspondent banking and NRI accounts• RBI and exchange control• ECGC and EXIM bank


FACTORS INFLUENCING FOREX RATES

• Interest rate – Investment in foreign securities – demand and supply of

currencies - exchange rates.

• Relative income levels• Government controls• Expectations• Strength of the economy• Political factors• Central bank interventions• Technical factors


Type of quotesType of quotes

• Direct quote – Foreign currency constant, home currency varies. eg. USD 1 = Rs. 39.50

• Indirect quote – Home currency constant, foreign currency varies. Eg. Rs. 100 = USD 2.53.

• Two-way quotes –inter bank quotes


Different ratesDifferent rates

• Cash /TOM/ SPOT – date on which the exchange of currencies actually take place.

• Forward Transaction – Beyond Spot date

• Value date


Risks in international bankingRisks in international banking

• In addition to risks in dealing room following risks are possible in intl. bkg.– Buyer risk– Seller risk– Shipping risk– Country risk– Settlement risk– Exchange risk– Legal risk


DerivativesDerivatives

• Financial contract whose value is derived from or depends on the price of some underlying asset

• Value of derivative changes when there is a change in the price of the underlying related asset

• Forwards, Futures, Options, Swaps


Derivatives Contd..Derivatives Contd..

• Forward – to buy a specified asset on a specified date at a specified price

• Both right and obligation

• Future Contract – similar to forward contract

• Difference – Contracts standardized, price negotiated, fixed settlement date


Differences contd.Differences contd.• Exchange traded – no default risk –clearing

house becomes the opposite party to both buyer and seller

• Most contracts are eventually offset • Only a small portion results in actual delivery• Profits/ Losses on forward contracts are

realized only on the delivery day, the change in the value of a futures contract results in cash flow every day- hence less default risk


Derivatives Contd…Derivatives Contd…

• A Currency futures contract is an agreement to buy or sell at ‘futures exchange’ a standard quantity of a foreign currency at a future date at the price agreed to between the parties to the contract


OptionOption

• Gives the holder a right but no obligation to fulfill his part of the contract

• Premium• Call Option ; Put Option• Seller (Writer) ; Buyer• American style options – on or before the

expiration date• European Style options – only on the

expiration date


SwapsSwaps

• Contractual agreements between two parties to exchange flows.

• IRS – No exchange of principal but periodic exchange of streams of interest payments in terms of pre-determined terms on a notional agreed principal.

• Currency Swap – two parties agree to exchange specific amounts of two different currencies over time in accordance with predetermined terms.


IRS – Plain VanillaIRS – Plain Vanilla

FIXED FLOATING

BANK A 6% LIBOR + 25 bps

COMPANY B

6.75% LIBOR + 50 bps

DIFFERENTIAL

0.75% 25 bps or 0.25 %


BANK A COMPANY B

FIXED RATE FUNDING

6%

FLOATING RATEFUNDING

LIBOR + 50 bps

LIBOR

6.15%


PAYS RECIEVES NET

BANK A

-6%-LIBOR

+ 6.15% 6.15% -

(6% + LIBOR)

=-(LIBOR-0.15%)

COMPANY

B

-6.15%

-(LIBOR + 50bps)

+LIBOR -6.15% - LIBOR

-50BPS + LIBOR

=-(6.15 +0.50)

=-6.65%


Documentary L/CDocumentary L/C

• LC is an arrangement whereby a bank acting at the request of a customer undertakes to pay a third party by a given date according to agreed stipulations and against presentation of documents the counter-value of goods and services supplied

• Banks deal only in documents and not in goods.


LC continuedLC continued

Types• Irrevocable• Confirmed• Anticipatory• TransferablePartiesOpener, beneficiary,issuing, advising, confirming, negotiating,

reimbursing banks


Recent amendments to UCPDCRecent amendments to UCPDC

• Time for checking only 5 working days

• No possibility of negotiating under reserve


Documents under LC billDocuments under LC bill

• Bill of exchange

• Invoice

• Bill of lading

• Insurance policy and certificate of origin

• Crystallisation of export bills


Facilities to exportersFacilities to exporters

• Rupee credit

• Foreign currency credit

• Pre shipment credit

• Post shipment credit

• Negotiation , purchase and advance against collection, un-drawn balances

• Advance against receivables


FactoringFactoring

• An arrangement for financing a company’s Business against unpaid invoices drawn in favour of their customers and in which the factor becomes responsible for all credit control, sales ledger administration and debt collection activities.

• Debt Administration• Credit Protection• Factor Financing


Factoring can be defined asFactoring can be defined as

• Covers sales on an open account basis• Factor purchases them fully or some of them• Seller gets the proceeds subject to a margin

generally 20%• Seller is completely out of the transaction in an

‘without recourse’ factoring and only for non payment in case of ‘with recourse’ factoring.

• Follow up with the eventual purchaser is done by the factor

• Pays the balance amount on realisation net of his charges

• More suitable to SME customers


ForfaitingForfaiting

• Forfaiting is the non-recourse discounting of export receivables.

• The exporter surrenders his claim on sale in return for immediate cash payment

• All exports of goods made on medium to long term credit are eligible to be financed through forfaiting

• As a result, an exporter in India can convert a credit sale in to a cash sale, with no recourse to him / his banker


Forfaiting Contd..Forfaiting Contd..

• A mechanism of financing exports by - discounting export receivables- evidenced by bills of exchange or promissory notes- without recourse to the seller- carrying medium to long term maturities- on a fixed rate basis- up to 100 percent of the contract value


Flow- ChartFlow- Chart

• Exporter finalizes contract with overseas buyer and opens LC through his bank.

• Exporter ships the goods as per schedule agreed with buyer

• Exporter draws series of bills of exchange and sends them along with the shipping documents, to his banker for presentation to importer for acceptance through latter’s bank. Bank returns avalised and accepted bills of exchange to exporter.


• Exporter informs the importer’s bank about assignment of proceeds of transaction to the Forfaiting bank

• Exporter endorses avalised Bill of Exchange (BOE) with the words “ Without Recourse” and forwards them to the Forfaiting Agency (FA) through his bank.

• The FA effects payment of discounted valueExporter’s bank credit exporter

• On maturity of BOE, the FA presents the instruments to the Aval for payment


Correspondent BankCorrespondent Bank

• The inter-bank market is a network of correspondent banking relationships

• Large commercial banks maintain demand deposits account with one another

• The correspondent bank account network allows for the efficient functioning of the foreign exchange market


Payment systemsPayment systems

• SWIFT – a private non-profit message transfer system. Provides an exclusive telecommunication network throughout the world for transmission of financial messages among banks and financial institutions

• CHIPS provides a clearinghouse for the inter-bank settlement of U S dollar payments between international banks. A net payment settlement system


Payment systems Contd..Payment systems Contd..• FED WIRE – Communication network of the Federal

Reserve Bank- An automated computer based message system

• Gross settlement as compared to Net payment system in CHIPS.

• Mainly used for Interbank fund transfers, sale and purchase of certain securities among banks, settlement of large value commercial transactions, payments received from other countries in favour of U.S. Banks

• CHAPS – In London, similar to CHIPS in New York


Bank facilities to NRIsBank facilities to NRIs

NRE and FCNR Accounts– Repatriable – Non repatriable

Rupee accounts

Foreign currency accounts

Investments

Loan facilities


Reserve Bank Of IndiaReserve Bank Of India

• It is empowered under the statute to control and regulate – foreign exchange reserves and policies

related to international trade,– Inflow/outflow of foreign exchange,

• It also has supervisory powers over the persons authorized to deal in foreign exchange.



• An essential function of a central bank is to maintain the stability of the external value of the domestic currency corresponding to the economic strength of the country and the monetary and fiscal policies of the authorities concerned.

• The guidelines and directions by RBI, relate to exports, imports, remittances, travel and tourism, investments in India, repatriation of funds, non-resident Indian segment, as also overseas investment by Indian residents.



• One important function of RBI is compiling data related to export-import trade, forex markets, non-resident deposits, as also international assets and liabilities

• Disseminating them among all users and general public


FEMA, 1999FEMA, 1999

• All transactions in Foreign exchange are governed by FEMA 1999.

• Important Provisions of FEMA relate to exports, imports, exchange rates, currency of payments, NRIs, etc…– Provisions for Foreign Travel.– Other Remittances.


Fema 1999Fema 1999

• Foreign Currency A/C in India– Exchange Earners Foreign Currency

(EEFC) A/Cs– Resident Foreign Currency (RFC)

Accounts– Resident Foreign Currency (Domestic


EXPORT-IMPORT BANK OF INDIAEXPORT-IMPORT BANK OF INDIA

• Established by an Act of Parliament in 1981

• Bank commenced operations on March 1, 1982

• Exim Bank's mission is to facilitate globalization of Indian business.


Objectives of EXIM BankObjectives of EXIM Bank• To translate national foreign trade policies

into concrete action points

• To provide alternate financing solutions to the Indian exporter, aiding him in his efforts to be internationally competitive

• To develop mutually beneficial relationships with the international financial community

• To initiate and participate in debates on issues central to India's international trade


Objectives of EXIM Bank Contd.Objectives of EXIM Bank Contd.

• To forge close working relationships with other export development and financing agencies, multilateral funding agencies and national trade and investment promotion agencies.

• To anticipate and absorb new developments in banking, export financing and information technology.

• To be responsive to export problems of Indian exporters and pursue policy resolutions.


EXIM BankEXIM Bank• Financing Programmes

– For Exporters and Importers– For Commercial Banks– For Foreign Governments, Foreign Importers

and other Financial Institutions.

• Deferred Payment Exports/Project exports.

• Assistance for Project Exports/Turnkey Projects/Construction Projects.

• Other Services and Programmes


Export Credit Guarantee Corporation of Export Credit Guarantee Corporation of India Ltd. (ECGC)India Ltd. (ECGC)

• It was set up for the promotion of exports in the year 1957.

• To protect the exporters from any financial loss.

• Primary goal of ECGC :To support & strengthen the export promotion by

1. Providing a range of credit risk insurance covers to exporters and

2. Offering guarantee covers to banks and financial institutions


Export Credit Guarantee Corporation of Export Credit Guarantee Corporation of India Ltd. (ECGC)India Ltd. (ECGC)

• ECGC issues various types of guarantees to banks, financing exporters, which protect banks in case of loss from their advances to exporters.

• Guarantees to Banks– At pre-shipment stage– At post-shipment stage

• ECGC is a backbone of Indian Project Exports.


ECGCECGC

• ECGC provides cover to various types of risks, namely, – Risk of not receiving payment from

foreign buyers,– Trading on short term credit,– Of not receiving payments in respect of

deferred payment exports, and– In respect of services rendered and

construction projects undertaken abroad.


FEDAIFEDAI

• Foreign Exchange Dealer's Association of India (FEDAI) was set up in 1958.

• It's major activities include -– framing of rules governing the conduct of

inter-bank foreign exchange business among banks vis-à-vis public, and

– liaison with RBI for reforms and development of forex market.


Role of FEDAIRole of FEDAIFunctions:• Set guidelines and rules for forex business.• Training the bank Personnel• Accreditation of Forex Brokers• Advising/ assisting member banks in

settling issues/ matters in their dealings.• Represent members on govt. / RBI/ other

bodies.• Monitor developments• Identify problems/ difficulties• Ensure proper adherence.


Thank YouThank Youwish you all success in your exams.wish you all success in your exams.

for any assistance regarding the subject for any assistance regarding the subject contact 09867826719 or [email protected] 09867826719 or [email protected]

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