Forex Draft

8/6/2019 Forex Draft

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Forex

Union Bank of India, one of the major public sector banks in India having a correspondent

relationship with 345 leading international banks at all major international centers. The bank

has entered into Rupee Drawing Arrangements (RDA) with 23 International Banks and 13

Exchange Houses in Middle East. The Bank has also introduced a Internet-based Union e-Remit Product for NRIs in U.K. and U.S.A. as well as for Exchange Houses in Middle East.

The modern state-of-the-art dealing room at its Integrated Treasury Branch at Mumbai

handles exchange business of its clientele. The bank has retained its primacy as a leading

market maker both in spot and forward markets, along with foreign exchange swap markets.

The forex dealing desk at the Treasury is provided with all modern communication facilities

and is in the process of linking all its authorized branches via Reuters Automated Dealing(RETAD) System, to provide on-line quotes for foreign exchange transactions.

Through its large network of authorized branches, the bank caters to the foreign exchange

needs of its clientele engaged in export and import trade and the Treasury provides rates for

conversion of all major world currencies like U S Dollar, Sterling Pounds, Euro, Swiss Francs,

Japanese Yen and other exotic currencies. The services to the customers of the Bank include

hedging of foreign currency risks by providing forward covers and various derivative

products.

The Bank is in a position to deliver its products promptly and efficiently to its NRI customers

through select pool of Customers Relationship Managers (CRMs) posted at strategic locations

The range of products includes remittance facilities and acceptance of deposits in Indian

Rupees (NRE / NRO) as well as in designated foreign currencies (FCNR). Resident as well as

Returning Indians can avail of benefits like Resident Foreign Currency Accounts (RFC).

Union Bank of India also offers derivative products like Interest Rate Swaps (IRS), Forward

Rate Agreements (FRA) for hedging interest rate risks and for currency risks, Currency

Swaps and Options

Foriegn Exchange department in a bank has following functions:


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EXPORTS

Pre-shipment Advances

Post-shipment Advances

Export Guarantees

Advising/Confirming Letter of Credit

Facilitating project exports

Bills for collection

IMPORTS

Opening letters of credit

Advance bills

Import loans and guarantees.

EXCHANGE DEALINGS

Rate computation

Nostro/Vostro Accounts

Forward contracts

Derivatives

Exchange position and cover operations

REMITTANCES

Issue of DD, MT, TT etc.

Encashment of cheques, DD, MT, TT etc. Issue and encashment of travelers' cheques

Sale and encashment of foreign currency notes

Non-resident deposits

STATISTICS

Submission of returns

Collection of credit information


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Letters of Credit

Letters of Credit (LC) are an integral part of international business. A LC is a bank's promise

to pay a seller on behalf of a buyer, providing the seller meets the terms and conditions

stated in the credit. Banks act as intermediaries and have no actual contact with the goods

bought and sold.

A Letter of Credit is a document issued by a financial institution which usually provides an

irrevocable payment undertaking, used primarily in trade finance. Letters of credit are used

primarily in international trade transactions of significant value, for deals between a supplier

in one country and a customer in another. The parties to a letter of credit are usually a

beneficiary who is to receive the money, the issuing bank of whom the applicant is a client

and the advising bank of whom the beneficiary is a client. Almost all letters of credit are

irrevocable, i.e., cannot be amended or canceled without prior agreement of the beneficiarythe issuing bank and the confirming bank, if any.

Participants in LC Process

Buyer

Issuing Bank

Advising Bank

Seller (Beneficiary)

The LC serves as a guarantee that the buyer will receive the merchandise specified and that

the seller will be paid in a timely manner. Each LC transaction generally involves four parties:

the two parties to the transaction (buyer and seller) and the bank for each of these parties

The LC transaction occurs between two parties at a time: buyer and seller, buyer and issuing

bank (which issues the LC on behalf of the buyer), issuing bank and advising bank (which

authenticates the credit and manages the LC process on behalf of the seller), advising bank

and seller.

All LCs contain details of the payment undertaking given by the bank (issuing bank) on behalf

of the buyer to pay a seller a given amount of money within a specific timeframe and at a

specified place. The LC also outlines the terms and conditions of the transaction.
http://en.wikipedia.org/wiki/International_tradehttp://en.wikipedia.org/wiki/Advising_bankhttp://en.wikipedia.org/wiki/International_tradehttp://en.wikipedia.org/wiki/Advising_bank


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Steps in the Letter of Credit Process

I. Buyer and seller agree to terms including means of transport, period of credit offered (if

any), and latest date of shipment acceptable.

II. Buyer applies to bank for issue of letter of credit. Bank will evaluate buyer's credit

standing, and may require cash cover and/or reduction of other lending limits.

III. Issuing bank issues LC, sending it to the Advising bank by airmail or electronic means

such as telex or SWIFT.

IV. Advising bank establishes authenticity of the letter of credit using signature books or

test codes, then informs seller (beneficiary).

V. Seller should now check that LC matches commercial agreement and that all its terms and

conditions can be satisfied.

VI. Seller ships the goods, then assembles the documents called for in the LC (invoice

transport document, etc.).


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VII. The Advising bank checks the documents against the LC. If the documents are compliant

the bank pays the seller and forwards the documents to the Issuing bank.

VIII. The Issuing bank now checks the documents itself. If they are in order, it reimburses

the seller's bank immediately.

IX. The Issuing bank debits the buyer and releases the documents (including transport

document), so the buyer can claim the goods from the carrier.

Methods of payment:

Letter of credit is one the most convenient methods of selling payments in Internationa

Trade. It provides complete financial security to the seller of goods. Seller may not know the

credit worthiness of the buyer and the prevailing regulations in the country of the buyer. But

once the letter of credit is established by the buyer`s bank on behalf of the buyer in favor

of the seller and the seller submits then set of required documents to the opening bank or to

the nominated bank, the seller is assured of payment. Buyer also gets the advantage of his

banker`s assistance closely scrutinizing the documents and only after receiving the relevant

documentary evidence from the seller by the banker nominated in the credit, the nominated

banker releases payment.

Method of

payment

Timing of

payment

Goods

Availability

Sellers risk Buyers risk

Advance Before

shipment

At

destination

arrival

None 100% reliance

on seller

Sight L/C Presentation

of documents

after

shipment

When L/C is

paid

Minimal:

Issuing

confirming

banks

obligation to

pay if

documents

confirm to

L/C

Assurance of

shipment, but

depends on

seller to

supply goods

ordered

Usance L/C Maturity date

or at discount

At

acceptance of

Minimal:

Issuing

Regardless of

product


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of the draft the draft

drawn under

the L/C

confirming

banks

obligation to

pay if

documents

confirm to

L/C

quality,

payment due

at maturity

Open

Account

Buyers

discretion

Upon arrival 100% reliance

on buyer

Zero

List of documents used in the LC process:

1. Bill of exchange (B/E)

A B/E is also referred to as Draft or Hundi. In many countries a B/E is recognized as a

legal document. In India section 5 of the Negotiable Instruments Act, 1881 defines the B/E.

A B/E performs the 5 basic functions which are

Collecting payment: B/E shows that there is a commercial of trade transaction underlying

the B/E drawn and it is an instrument for collecting payment arising out of such a transaction

Demanding Payment: When a B/E is drawn and presented to the drawee (buyer) for

payment, it amounts to having made a demand on the drawee to pay the payment.

Extending Credit: When a B/E is drawn for a particular tenure it means that the drawer

(seller) is allowing the drawee to make payment at a future date i.e. the seller is extending

his buyer a credit.

Promise of Payment: Certain B/E`s are drawn on acceptance basis, i.e. the drawee will be

given the documents upon his acceptance to pay the bill at a specified tenure. Such an

accepted bill of exchange is sufficient evidence of promise of payment by the drawee.

Receipt of Payment: When the amount shown on a B/E is paid by the drawee, the payee

endorses the B/E is received payment. Thus a discharged B/E acts as a receipt for having

paid the amount.


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It is a certificate that indicates the quality, technical composition and intricate nature of

goods, described in the invoice. The certificate may be given by the exporter himself or an

institution which is competent or nominated to give such a certificate.

6. Certificate of inspection

It is a document certifying that the goods have been inspected. This document is generally

desired by the importer, so that he can be sure that the right type of goods ordered is being

sent by the exporter.

7. Bill of lading

It is a transport document representing movement of goods by water. A bill of lading is a

formal receipt given by the ship owners or their authorized agents that the goods mentioned

there in (quantity, quality, description, etc) are shipped to a specified date and vessel and are

deliverable to a person mentioned therein or to his order after payment of all dues of the

shipping company.

Generally bills of lading are issued in a set of two or three and presentation of any one of

them will entitle the holder to claim the goods and render the other negotiable copies void.

8. Airway Bill

It is an acknowledgement issued by an airline company or their authorized agents stating

that they have received the goods detailed therein for dispatch by air to the named

consignee at the address stated therein.

9. Multimodal transport documents

This document is issued when the movement of goods involves more than one mode of

transport.

10. Insurance policy

It is a contract of insurance. In international trade marine insurance is the most common

document obtained either by exporter or importer for safety of goods. The policies

basically cover the perils of sea.


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Scrutiny of Documents under Credit:

Scrutiny of documents drawn under credit is one of the most important functions of

Union Bank of India, which is an AD-I category bank.

In case of import letter of credit, the issuing bank has the authority either to accept or

refuse the documents. Issuing bank has to scrutinize the documents and if they choose

to refuse the document they should inform their refusal within 5 banking days excluding

the date of receipt of documents, listing down the discrepancy.

In case of documents drawn under export letter of credit, discrepant documents will not

form a valid security for the negotiating bank. Securing an indemnity letter from the

beneficiary, for negotiating discrepant documents will no way help in obtaining payment

from the issuing bank.

Forex Draft

Documents

Transcript of Forex Draft