Post on 08-Aug-2015
NAGINDAS KHANDWALA COLLEGE
CLASS - TYBBI
GROUP NO. - 5
SUBJECT - INTERNATIONAL BANKING AND FINANCE
TOPIC - FUNCTIONAL OVERVIEW OF INTERNATIONAL
BANKING
SUBMITTED TO - PROF. NIKESH SHETH
GROUP MEMBERS
NAME ROLL NO.
URVI DHULLA 511
NIKITA GAJENDRAGADKAR
512
PALAK MISTRY 528
PRITI PARMAR 532
SEJAL PATEL 535
KUNAL SAKPAL 538
ACKNOWLEDGEMENT
The satisfaction and euphoria that accompany the successful completion of any task would be incomplete without mentioning the name of the people whose constant guidance and encouragement has crowned all our effort with success.
Firstly we would like to thank Prof. NIKESH SHETH for giving us his precious time and guidance that helped us a lot in completing this project.
Last but not the least we would like to thank all those people for their immense co-operation who helped us in any way and without help of these people this project would never have been completed successfully.
THE FOREIGN EXCHANGE MARKET
Market generally indicates a geographical location preferred for trading which facilitates trade
by providing means of settlement and resolution of disputes. Since evolution of electronic
transaction media, requirement of market is used in abstract sense only. It may be defined as
meetings or systematic communication by telephone, telex or other electronic means between
foreign exchange dealers, brokers and banks for the purpose of transacting foreign exchanges
i.e. foreign currencies.
STRUCTURE OF FOREIGN EXCHANGE MARKET
The foreign exchange market may be broadly classified into two parts or layers ,ie Wholesale
market and Retail market.
WHOLESALE MARKET
It may be classified into two sub-layers:
1. Giant transactions layer
Very large giant commercial banks of the world deal in foreign exchange for their
customers as well as for themselves .they buy and sell different currencies and also stock
these currencies with an expectation to sell it at a future date to make profits. Thus
commercial banks may be said to carry inventories of the currencies. These giant banks
usually transact directly with each other i.e. they generally would not use any broker. To
buy or sell currency with a motive to make a profit at a future date through reverse
transaction is called as taking position in the currency. The risk of making loss is not
covered. Hence, to maximize profits, they continuously track prices of various currencies,
try to project them and make transactions accordingly. Also whenever any customer
approaches them, they are ready to buy or sell any currency. Depending upon their total
exposures to a particular currency, banks quote different rates to buy or sell the currency.
Hence these commercial banks are called as ‘market makers’.
2. Other transaction layers
Slightly smaller commercial banks transact in a similar fashion as giant commercial but
the extent (amount) of exposure is slightly lesser. These banks are also market makers.
As majority of deals in wholesale market is between the banks, it is called as Interbank
Market.
RETAIL MARKET
Retail market is the market in which the travellers and tourists exchange one currency for
another in the form of currency notes or travellers cheques. Total turnover and transactions size
is very small.
ROLE OF CENTRAL BANKS IN FOREIGN EXCHANGE MARKET:
Central banks of various countries (such as RBI in India) intervene in the market from time to
time to attempt to move exchange rates in a particular direction. In case of limited flexibility
systems like EMS, these interventions are obligatory when intervention limits are reached. In
other areas though there is no commitment to defend any particular rate, a central market may
still intervene to influence market sentiment.
THE STRUCTURE OF FOREIGN EXCHANGE MARKET IN INDIA
The foreign exchange market in India may be broadly said to have three layers or segments.
First layer consists of the Central bank i.e. RBI and the Authorised Dealers (ADs). ADs are
mostly commercial banks and Financial Institutions such as IDBI, ICICI and the travel agent
Thomas Cook.
Second layer is the inter-bank segment in which ADs deal with each other.
Third layer is in which ADs deal with their corporate customers. In retail market in addition to
ADs there are money changes who are allowed to deal in foreign currencies. Full-fledged
money changers are allowed to buy and sell foreign currency and restricted moneychangers are
allowed only to buy.
Indian markets also have accredited brokers who match buyers and sellers. FEDAI i.e. Foreign
exchange Dealers Association of India has made it mandatory to route deals between two ADs
through brokers.
FUNCTIONAL OVERVIEW OF INTERNATIONAL BANKING :
Banks have a department which may be titled as any of the following: foreign Department (FD), international banking Department/Group (IB or IBD or IBG), Foreign Exchange Department (FED) or Overseas Business Division (OBD). All banks which have foreign business do have this department.
Banks transact with forex customers, with other banks, with regulatory authorities, within internal sub-entities (departments/branches) and with transaction facilitators. Accordingly international Banking has functions sub-grouped as follows.
Customer related functions Compliance related (regulatory) functions Inter-bank functions Internal Function
Each of them is described in detail in the following paragraphs:
1) Customer Related functions:(a) Trade Finance
i. Export Avenue Pre-Shipment Export Credit (packing Credit) Pre-Shipment Export Credit in Foreign Currency (PCFC) Post-Shipment Export Credit Export Bill Rediscounting Letter of Credit Value Added (Gold Card, etc)
ii. Import Avenue
Foreign Currency Import Credit Supplier’s credit Banks Guarantees
(b) International Merchant banking (Forex) International loan syndication: Arranging External Commercial
Borrowing (ECB) in from of Commercial Loans, loans backed by Export Credit Agencies, Lines of Credit from Foreign Banks and Financial Institutions, Import Finance for Indian corporate.
(c) Finance of Project export
(i) Non Fund Based Facilities Letter of credit facilities Guarantees
a. Bid Bond Guaranteeb. Advance Payment Guaranteec. Performance Guaranteed. Retention Money Guaranteee. Maintenance Guaranteef. Overseas Borrowing Guarantee
(ii) Fund Based Pre-shipment credit Rupee/Foreign currency supplier’s credit Buyer’s credit
(d)Derivatives Offering(e) Remittances
(2) Compliance related (regulatory) functions:
Bank has to continuously monitor all the transactions to ensure adherence to regulatory provisions (eg. FEMA in India) act and also
relevant central bank circulars (RBI circulars).
(3) Inter-bank functions:
banks maintain correspondent banking relation with many banks in many countries. The accounts such as Nostro, Vostro and Loro and also mirror accounts to be financed and monitored. We will understand these accounts in detail in subsequent chapters.
(4) Internal Functions:
These include branch management and communication, accounting, risk management n forex markets, settlement within various offices, money markets investments of the bank, etc. Apart from this it also includes one important function ‘treasury Function.’
LETTER OF CREDIT
Meaning:-
A letter of credit is a document that a financial institution or similar party issues to a seller of
goods or services which provides that the issuer will pay the seller for goods or services the
seller delivers to a third-party buyer. The issuer then seeks reimbursement from the buyer or
from the buyer's bank. The document serves essentially as a guarantee to the seller that it will be
paid by the issuer of the letter of credit regardless of whether the buyer ultimately fails to pay.
In this way, the risk that the buyer will fail to pay is transferred from the seller to the letter of
credit's issuer.
Letters of credit are used primarily in international trade for large transactions between a
supplier in one country and a customer in another.
Definition:-
It is a promise of payment in the event that certain requirements are met. A letter of credit
essentially substitutes the credit of a third party (usually a large bank) for that of a borrower. In
the case of municipal bonds, an LOC generally permits a trustee to draw six months' interest
and sufficient funds to retire outstanding bonds at par in the event of default.
PARTIES AND BASIC COMPONENTS:-
1) Applicant :- It is the importer who has bought the goods and wants to pay for those
goods by opening letter of the credit through bank.
2) The issuing bank :- It is the bank which opens the letter of credit on the request of the
importer.
3) Beneficiary :- It is the exporter who has sold the goods and in whose favor letter of
credit is opened.
4) Amount :- The sum of money usually expressed as a maximum amount of the credit
defined in a specific currency.
5) Term :- The requirements, including documents that must be met for the collection of the
credit.
6) Expiry:- The final date for the beneficiary to present against the credit.
HOW DOES A LETTER OF CREDIT WORK?
Once the exporter and importer have concluded a transaction that calls for payment under some
form of L/C, the importer makes an application for the credit to the bank that will issue the
credit, either locally or in another country.
The importer/ applicant will give the issuing bank instruction that cover such items as:
a) The full correct name, address and contact information of the beneficiary, usually the
exporter.
b) A brief description of the item supplied, including the quantity, quality and unit price.
c) The method, place and form of shipment, the location of the final destination and other
shipping issues including trans-shipment, partial shipment and latest shipping date.
d) The full, correct description of the document required, including the period of the time after
the document are issued within which they must be present for payment.
e) Details of the L/C itself, including the amount, the expiry date, how the credit will be made
available and the transferability of the credit.
f) The type of credit the recoverable credit, the irrecoverable credit or the conformed
irrecoverable L/C.
The advising is often done by the bank other than the issuing bank, and this second bank may
also confirm the credit. Once the importer and exporter are satisfied that the credit is operable,
the exporter ship against the original trade contract and presents the required documents and
draft to the conforming correspondent or the issuing bank.
CUSTOMER RELATED FUNCTIONS
1) Pre-shipment export credit
Banks offers pre-shipment credit (packing credit) to the exporters for financing purchase,
processing, manufacturing or packing of goods prior to shipment. This is also known as
packing credit. Credit facilities are sanctioned to exporters who satisfy credit norms of the
bank. Exporters having firm export orders or confirmed L/C form bank are eligible to avail
export credit facilities. Packing credit is granted for the period depending upon the
circumstances of the individual case, such as the time required for procuring, manufacturing
or processing (where necessary) and shipping the relative goods. Packing credit is released
in one lump sum or in stages, as per the requirement for executing the orders of L/C.
Generally rupee export credit is available for a period of 180 days from the date of first
disbursement. In deserving cases extensions may be permitted within the guidelines of RBI.
Pre-shipment export credit in foreign currency PCFC:
Banks offer PCFC in the foreign currency to the exporters enabling them to fund their
procurement, manufacturing / processing and packaging requirements. These loans are available
at competitive international interest rate covering the cost of both domestic as well as import
content of the exports.
The corporate / exporters with the good track record can avail a running account facility with the
bank for PCFC. PCFC in foreign currency is normally available for a period of 180 days from the
date of first disbursement similar to the case of rupee facility.
In PCFC drawls permitted in a foreign currency other than the currency of export, an exporter
bears the risk in currency other fluctuation. The foreign currency drawls are restricted to major
currencies at present. In case, the export order is in currency fluctuation. The foreign currency
drawls are restricted to major currencies at present. In case, the export order is in a non-
designated currency, PCFC is given in US$. For orders in euro, pound sterling and JPY, PCFC
can be availed in the respective currencies or US$ at the choice of exporter.
Multi-currency drawls against the same orders are usually not permitted .PCFC is to be repaid
with the proceeds of the export bill submitted after shipment. In case of cancellation of export
order, the PCFC can be closed by selling equivalent amount of foreign exchange at the rate
prevalent on the date of liquidation.
2) Post shipment credit
Post-shipment credit is offered to an exporter to finance export sales receivables after the
date of shipment of goods till the date of realisation of export proceeds. It includes any
loans/advances granted by the banks. It is extended to the actual exporter who has exported
the goods or to an exporter in whose name the export documents are transferred. It is
extended against evidence of shipment of export goods. In the case of routine exports, the
maximum period allowed for realisation of exports proceeds is 6 months from the date of
shipment. Banks can extend post shipment finance at a lower interest rate up to the normal
transit period or the notional due dates (this is calculated as the sum of the normal transit
period + Usance period, subject to a maximum of 180 days). Beyond that period, banks
lends at non-concessive rates or the normal commercial rates.
3) Export bill rediscounting EBR
Banks provides financing of export by way of discounting of export bills, as post shipment
finance to the exporter at competitive international rate of interest. The export bills (both
sight and Usance) drawn can be purchased / discounted. Exporters can avail this facility to
cover the bills drawn under L/C as well as other export bills. It is comparatively easier to
have a facility against bills portfolio (covering all eligible bills) than to have rediscounting
facility abroad on bill by bill basis. There is, however, be no bar if rediscounting facility on
bill to bill basis is arranged by a bank in case of any particular exporter, especially for large
value transactions. Banks may arrange a “banker acceptance facility” (BAF) for
rediscounting the export bill without any margin and duly covered by collateralized
documents.
4) Gold card schemes approved by RBI
As per guideline of RBI, most Indian banks have launched Gold card for creditworthy
exporters. It is simplified access to export credit on very good terms.
Eligible exporter get better terms of credit including rate of interest than those extended to
other exporters. Processing of application for credit is faster. ‘In-principle’ limits are
sanctioned for a period of 3 years with a provision for automatic renewal, subject to
fulfilment of the terms and condition of sanction. They get Preferences for grant of PEFC,
subject to availability for foreign currency funds. Lower charges schedule and fee-structure
than those provided to other exporters is applicable. The scheme has relaxations in the norms
in respect security and collaterals, wherever feasible.
5) Foreign currency import credit
Banks offer credit to foreign suppliers of Indian importers by purchasing the import bill for
its full value through one of the bank’s overseas offices. The tenor of this form of supplier’s
credit does not exceed 180 days. The supplier gets 100 per cent of invoice value immediately
making his deal practically a cash sale.
Importers get credit for maximum period of 180 days, enabling them to manage their
liquidity better. Further there interest payables could be lower since international interest
rates are currently lower than domestic rate. These facilities are useful for import by seller in
domestic market as well as export related import.
6) Suppliers’ Credit
Suppliers’ credit essentially represents credit sales effected by the supplier on the basis of
accepted bills or promissory notes with or without a collateral security. Any credit facility
arranged with recourse to the supplier for financing upto 180 days import into India which is
not backed up in the form of any letter/document/guarantee/agreement, etc. issued by the LC
opening banks or in any other manner except normal routine commercial transactions like an
LC, can be treated as a suppliers’ credit. The underlying commercial contract between the
exporter and Indian importer should provide for drawing of Usance drafts with an upper cap
of 180 days on the Usance period. The credit is being extended for a period of less than 3
years.
7) Bank Guarantees for Imports (Trade Finance, Import Avenue)
Banks on behalf of importer constituents or other customers, issue guarantees in favour of
beneficiaries abroad. The guarantees may be both Performance and Financial.
8) LC for Project Exports
Letter of Credit facility on behalf of project exporting enterprise enabling it to import raw
material required for manufacturing goods for project export is provided by the banks.
9) Guarantees for Project Exports
An accessory guarantee is issued on behalf of project contractor (project exporter) by the
bank. Types of such guarantee are as follows-
a) Bid Bond Guarantee
Governments/MNCs invite competitive bids for construction and turn key projects. This
is called as NIT (Notice Inviting Tender). Bid Bond Guarantee supports the
principle/applicant’s obligation to execute a contract if he is awarded a bid.
b) Advance Payment Guarantee
This supports an obligation to account for an advance payment made by the Beneficiary
to the principle/applicant. Banks recommend that this guarantee contains a clause that the
guarantee is inoperative until the advance payment has been received by the
principle/applicant, as well as a clause allowing for reductions of the guarantee amount.
c) Performance Guarantee
This guarantee supports an obligation to pay for losses which may arise as a consequence
of the principal/applicant failing to fulfil his obligations under the contract.
d) Retention Guarantee
This supports an obligation to account for retention money paid by the beneficiary to the
principal/applicant. Bank advises that the retention guarantee explicitly stipulates i.e.
does not come into effect until the retention money has been received by the
principal/applicant.
e) Overseas Borrowing Guarantee
This supports the repayment of a credit or credit facility including amortisation and
interest. It applies from the date the loan is made until it has been repaid.
f) Maintenance Guarantee
This supports remedies and any defects which become apparent after delivery of the
goods or after completion of a plant.
10) Fund Based Facilities for Project Exports
It is available in the following ways
a) Pre shipment credit in Indian Rupees and foreign currency to extend financial
assistance for procuring/manufacturing/processing/packing/shipping goods meant for
export.
b) Rupee/foreign currency supplier credit
When a project export is on deferred credit terms, bankers cater to meet the financial
requirement of the exporter in Indian rupees or foreign currency.
c) Buyer’s Credit
Banks also participate in grant of credit to foreign buyers under the buyers credit
scheme of EXIM Bank.
11) Remittances
Banks through their worldwide network of branches or correspondents, Indian and
overseas branches offer inward and outward foreign remittance facilities.
12) Derivatives Offering
Banks also structure and facilitate execution of derivatives including long term Rupee –
foreign currency swaps, Rupee – foreign currency Interest rate swaps and cross currency
swaps. (Part of treasury functions)
TREASURY FUNCTIONS
This function is key function not only in banks but also in corporate, insurance companies,
government bodies, for all. Treasury function is monitoring of balance sheet. Assets
investments are to be managed, valued, and hedged against risk. Liabilities are also monitored
and funded. Asset-Liability match to broad function.
Foreign exchange denominated assets and liabilities (including contingent liability such as
banks guarantees) are a specialized area of treasury function. It may be termed as ‘forex
Treasury ‘. Treasury is an internal function. However, by virtue of its expertise in managing
derivative products, risks management, treasury department offers some products to the
customer too. Forex treasury has following functions:
Monitoring of forex operation of our foreign offices done with the objectives of
optimizing of returns while managing the attendant risks.
Structuring, marketing, facilitating execution of foreign currency derivatives including
currency option, long terms rupee – foreign currency swaps and forward rate agreements.
Maintenance of reciprocal lines, Nostro, Vostro, and Mirror accounts with international
banks.
Custodian and portfolio management services.
Treasury related other customer activities:-
Forex interbank placements/ borrowings
Sale & purchase of currency on behalf of customers
Forward cover bookings
Forex money market operations
STRUCTURE OF INTERNATIONAL BANKING DEPARTMENT
There is no uniform structure of the department across the department across the banks. Some
bankers have centrally located global treasury in one global head quarters. Some have reginal
treasuries with coordination. In some banks, branches reports to regional offices to country head
office, including for forex transactions. Some banks have parallel line of order for forex
transition, directly separate from other functions.
Even treasury function for domestic money market may be separate in some cases, and in other
it may be clubbed with forex treasury function.
These variations are because of historical setup of the bank, process of expansion, viewpoint of
the senior. Some important aspects of these setups are as follows:
1) Dealing room
Commercial banks conduct their treasury and money market operations from a secured
and well equipped room of an office called as the ‘dealing room’. It houses the exchange
dealers, money market dealer and security dealer, depending on the department. Number
of dealers depending upon size of operations of the banks. It varies 2/3 dealer to even
over one hundred! Dealer / dealer-group specialized in specific currencies, specific type
of securities, type of transactions, derivatives, etc.
2) Dealing room environment
It is a highly computerized environment with all dealers equipped with sophisticated
machines and net connectivity. Telephone, facsimile machines, and all such equipment is
available. They are hooked on continuously to web-based information portals and service
for up-to-date knowledge of happenings in the market.
3) Profile of a dealer
The job of a dealer is highly specialized. Though education is important for the dealer,
more important is mathematical ability speed, presence of mind, ability of assimilate,
analyze and upon every bit of new information. It is believed to be one of most stressful
jobs of the planet.
4) Responsibilities of a dealer
Dealer buys and sells currencies on behalf of the bank and its customers. They keep track
of banks’ stock and position in each currency. They manage risk for the bank in terms of
currencies and their derivatives. They provide quotes to the branches for offering to the
customer and also act upon the transaction information gathered from the branches. It
may be noted that Forex rates changes almost every minute. So dealers have to take
decision almost instantaneously. They have free hand to commit their banks to dollars,
Euros or whatever. Only that they get broad policy guidance from their seniors and they
have to remain within regulatory provisions of the country they are operating in.
5) Interbank and merchant transaction
Dealers deal in interbank market. They take buy-sell positions. They are linked to
merchant transaction through ‘merchant desk’. Their role in merchant transaction is to
provide indicate rates to the branches and when branches report the concluded
transactions, they have to ‘square off’ the deal interbank market or take appropriate
decision otherwise squaring off means ‘buy’ in merchant market is to be paralleled with
‘sell’ deal in interbank merchant or vice-versa.
6) Working hours of interbank market:
Worldwide, all interbank markets are closed on Saturdays and Sundays. Trader are
allowed to trade, generally in official working hours of the bank. however, global market
are open somewhere always because of time zone gap in different countries. So, if a bank
wishes to close or open a particular currency position, it would find ‘open working
market’ somewhere in the world as per time zone difference. Dealer need to be aware of
holidays of major financial centres.
BIBLIOGRAPHY:
INTERNATIONAL BANKING AND FINANCE
-BY DIPAK ABHYANKAR.
WEBLIOGRAPHY:
WWW.GOOGLE.COM
WWW.RBI.ORG.IN