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