INTERNATIONAL BANKING

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INTERNATIONAL BANKING MODULE A

• Prof. B.B. Bhattacharyya
• Welingkar Institute of Management Development
  Research, Mumbai

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What is an exchange rate ?

• Factors determining exchange rates

DEMAND
SUPPLY
S
VALUE OF
1.75
1.75
1.65
VALUE OF
1.65
1.60
1.60
D
x
X 1
X-1
X-1
X
X 1
QUANTITY OF
QUANTITY OF
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What is an exchange rate ?

• Factors determining exchange rates

S
1.75
VALUE OF
1.65
1.60
D
X-1
X
X-1
QUANTITY OF
4
Why do Exchange Rates change?
INFLATION
S1
S
VALUE OF
1.70
1.67
1.65
1.60
D1
D
QUANTITY OF
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• 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

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• 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

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• Cash /TOM/ SPOT date on which the exchange of
  currencies actually take place.
• Forward Transaction Beyond Spot date
• Value date

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Derivatives

• Forwards, Futures, Options, Swaps
• 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.

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• Forward to buy a specified asset on a specified
  date at a specified price.
• Both right and obligation.
• Future Contract similar to forward contract.
• 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
• Difference Contracts standardized, price
  negotiated.

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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

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Option

• Gives the buyers right but no obligation to buy
  or sell the underlying at the agreed rate on or
  before an agreed date,
• Premium
• Call Option
• Put Option
• Seller (Writer)
• American style options on or before the
  expiration date
• European Style options only on the expiration
  date

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Swaps

• Contractual agreements between two parties to
  exchange flows -very common and popular product
  in derivative markets.
• IRS No exchange of principal but periodic
  exchange of streams of interest payments in terms
  of predetermined terms on a notional agreed
  principal.
• Currency Swap two parties agree to exchange
  specific amounts of two different currencies in
  the beginning and make periodic payments over
  time in accordance with predetermined terms.

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IRS Plain Vanilla
FIXED FLOATING
COMPANY A 6 LIBOR 25 bps
COMPANY B 6.75 LIBOR 50 bps
DIFFERENTIAL 0.75 25 bps or 0.25
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LIBOR
COMPANY A
COMPANY B
6.15
FLOATING RATE FUNDING LIBOR 50 bps
FIXED RATE FUNDING 6
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PAYS RECIEVES NET
COMPANY 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
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Documentary L/C

• LC is an arrangement whereby a bank acting at the
  request of the customer undertakes to pay a third
  party by a given date acording 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.

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Factoring

• An arrangement for financing a companys Business
  against the unpaid invoices drawn in favour of
  the 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

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Factoring can be defined as

• A continuing legal relationship between a
  financial institution (the Factor ) and a
  business concern (the client ) selling goods or
  providing services to trade customers (the
  Customer ) on open account basis whereby the
  Factor purchases the clients book debts
  (receivables) either with or without recourse to
  the client and in relation thereto controls the
  credit extended to customers and administers the
  sales ledgers.

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Forfaiting

• 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
• - upto 100 percent of the contract value
• Simply put, forfaiting is the non-recourse
  discounting of export receivables. The exporter
  surrenders, without recourse to him, his rights
  to claim for payment on goods delivered to an
  importer, in return for immediate cash payment
  from a forfaiter. As a result, an exporter in
  India can convert a credit sale in to a cash
  sale, with no recourse to him / his banker

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

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Flow- 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 latters bank. Bank returns
  avalised and accepted bills of exchange to
  exporter.
• Exporter informs the importers 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 value
• Exporters bank credit exporter
• On maturity of BOE, the FA presents the
  instruments to the Aval for payment

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• Correspondent Bank The interbank market is a
  network of correspondent banking relationships
  with large commercial banks maintaining demand
  deposits account with one another, called
  correspondent banking accounts. The correspondent
  bank account network allows for the efficient
  functioniong of the foreign exchange market

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• 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 interbank
  settlement of U S dollar payments between
  international banks. A net payment settlement
  system

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• FED WIRE Communication network of the Federal
  Reserve Bank- An automated computer based message
  system which follows 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

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• NRE and FCNR Accounts

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Reserve 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.

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Reserve Bank Of India

• 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.

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Reserve Bank Of India

• The guidelines and directions by RBI, so issued
  relate to foreign exchange transactions relating
  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.

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FEMA, 1999

• All transactions in Foreign exchange are governed
  by FEMA 1999.
• FEMA replaced FERA,1976.
• Important Provisions of FEMA related to exports,
  imports, exchange rates, currency of payments,
  NRIs, etc
• Provisions for Foreign Travel.
• Other Remittances.
• Foreign Currency A/C in India
• Exchange Earners Foreign Currency (EEFC) A/Cs
• Resident Foreign Currency (RFC) Accounts
• Resident Foreign Currency (Domestic

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EXPORT-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.

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Objectives 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
• 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.

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EXIM 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

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EXIM Bank
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Export Credit Guarantee Corporation of 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
  drive in India by providing a range of credit
  risk insurance covers to exporters against loss
  in export of goods and service also by offering
  guarantee covers to banks and financial
  institutions to enable exporters to obtain better
  facilities from them.

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Export Credit Guarantee Corporation of 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.

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• 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 deffered
  payment exports, and
• In respect of services rendered and construction
  projects undertaken abroad.

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FEDAI

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

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Role of FEDAI

• 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.

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Role of FEDAI

• Functions
• 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.

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Thank You