TREASURY MANAGEMENT AND INVESTMENT PORTFOLIO MANAGEMENT TWO DIVISIONS DOMESTIC TREASURY AND FOREX TREASURY Liquidity Management

Management - Investment Management and trading in securities reserve management in Indian rupees Forex treasury Liquidity Management and Trading in Forex No permission to invest abroad except for short term investments Both divisions operate separately. However, both are inter-connected Borrowing decision [Raising funds] depends on the interest rates prevailing in domestic markets and international markets. The important objectives of treasury are:Profit maximisation Managing risks associated with funding, investments and trading activities. Money Market= Money market is the market for dealing in monetary assets of short term nature. Short term being referred to tenor of remaining maturity of less than one year. Money market instruments include call money, term money, certificates of deposit, commercial paper and money market mutual funds. A market comprising institutions such as discount houses, merchant banks, and sometimes even the government's central bank, which deal in very short-term loans, such as treasury bills, bills of exchange, commercial paper, certificates of deposits, etc. DOMESTIC TREASURY Banking is highly transaction oriented business Branches are spread at different places within the country and abroad Transactions take place at all these branches Every transaction results into inflow or outflow of money [Funds] It is rarely that the inflow and outflow matches. Bank survival is dependent on their ability to meet all payment commitments Enough money to meet all payments at all times LIQUIDITY MANAGEMENT It is the function of domestic treasury to continuously monitor the funds position for the bank as a whole Liquidity management Excess funds do not earn interest Short supply affects image of bank and may have to borrow at heavy prices [High interest costs] Minimise borrowings Liquidity is to be managed at all centres at all times where the bank branches function There has to be a sufficient liquidity at all centres at all times Branch cash holding limits Currency Chest Reserve Bank of India facility for funds transfer Managing maturity mismatches Deposit mismatches Advances mismatches If expected outflow is more than expected inflow it is Negative Mismatch Reverse is Positive Mismatch It will reveal GAPS in liquidity in various time frames [BUCKETS] Treasury assesses maturity gaps every week and plan to keep gaps to manageable levels RBI has prescribed acceptable limits for gaps in various buckets The lending and borrowing policies of bank are adjusted to manage the gaps ALCO = Asset Liability Committee Adjusting rates of interest for deposits for various maturities and advances INVESTMENT MANAGEMENT DEPLOYMENT OF FUNDS Securities such as bonds and debentures, government and corporate securities Tradability of securities makes investment an attractive option Ratings assigned to securities by risk rating agencies CRISIL and ICRA [Indian Credit Rating Agencies]
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Moodys and Standard and Poor [International Rating Agencies] Risk and Return High Risk High Return Tradability Interest earning [Return on investments] Trading Book Intention to sell within 90 days. Fluctuation in interest rates and Arbitrage operations. Fluctuation in prices due to variation in interest rates. Traders guess the fluctuations and make good money. Disciplined approach to trading can help minimising losses. Have to be Marked to Market every quarter. Available for sale [AFS] bought with an intention to sell but not necessarily within 90 days. Part of trading portfolio but time frame is different. Have to be Marked to Market every quarter. Hold To Maturity [HTM]- To earn steady interest income. Need not be Marked to Market. Banks cannot freely shift securities from Trading and AFS to HTM. Amortising loss over the maturity of security Conservatism in accounting. Profit can be booked only when received but the loss is to be amortised over the life of security. Reserve Management CRR = Cash Reserve Ratio SLR = Statutory Liquidity Ratio Duel purposes Liquidity, Reserve and Monitory Policy Tool Monitoring on weekly basis FOREX TRASURY What is Foreign Exchange? Internationalism of Trade and Nationalism of Currencies is the root cause of Foreign Exchange Different Time Zones Ocean of Forex Market is roaring 24 Hours in different time zones Current Account Transactions Capital Account Transactions Nostro, Vostro, Loro Accounts Correspondent Banks Correspondent Relations FOREIGN TRADE AND FOREIGN EXCHANGE: Foreign Trade means movement of goods and services across the national boundaries. Foreign Exchange means the exchange of currency of one country for that of another. EXCHANGE CONTROL AND TRADE CONTROL: Exchange Control means government imposed limitations on the dealings in exchange or of free transfer of funds into other currencies. Exchange Control is supplemented by Trade Control. The Trade Control regulates the physical movement of goods i.e., import and export of goods. The Exchange Control was introduced in India on 03.09.39 as a war time measure in terms of Emergency Powers for Administration of Exchange Control. It has been put on a regular footing by Foreign Exchange Regulation Act, 1947 (FERA). The Act has been repealed by FERA 1973 w.e.f. 01.01.1974. The FERA 1973 is replaced by FEMA 1999 w.e.f. 01.06.2000. The Exchange Control in India is administered by Reserve Bank of India, through its Exchange Control Department and Foreign Exchange Dealers Association of India (FEDAI), under overall supervision of Ministry of Finance. The Trade Control in India is administered by Ministry of Commerce, through Director General of Foreign Trade (DGFT) New Delhi. Short Forms:o Mio = Million
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o o o o o o o o o o o

Yours = I sell to you Mine = I buy from you Points = Pips = Quarter = Quarter Million Dollars Half Dollar = Half Million Dollars Cable = One Pound is equal to how many Dollars Tom = Next Day settlement Mom = Moment Cash = Same day settlement Spot = Second working day settlement

STRUCTURE OF FOREX TREASURY FRONT OFFICE= The Front Office is the center, where the main Exchange Dealing activity is carried on. It is well equipped with the most modern communication equipments (modern gadgets of the information technology), like Router screens, telephone lines with STD / ISD facilities, intercoms, hot lines with brokers and important centers, telex / fax, voice recorders, in house computers, etc. It is also well connected with the Mid Office and also the important dealing centers of the Bank. The job role of the exchange dealer is:1) to fix the daily card rates, for the small value transactions at the branches, 2) to take a position, 3) to receive the transactions reporting from the branches from time to time, 4) advise the branches the appropriate exchange rates for the different foreign exchange transactions reported , 5) to cover the position, (Over Sold, Over Bought, Square Position.) 6) to manage the Nostro / Vostro balances, (Fund Position and Exchange Position.) 7) to book and monitor the forward contracts and other Derivative products, etc. MIDDLE OFFICE (MID OFFICE)= Looking to the size of the bank, there may be number of dealers. However, there is a Chief Dealer, responsible for the activities taking place from time to time in the Dealing Room. His job role is to monitor, direct, control, regulate, the Dealing Room activities and reports to the controlling authorities. The deals are struck by the exchange dealer and the deal slips are passed on to the Back-Up Section for the accounting purpose through the Chief Dealer. The dealer shall neither have the control or the access to the Back-Up Section. According to the RBI and FEDAI Guide Lines, the physical separation of the dealing room from the Back-Up Section is a must and the same is coordinated by the Middle Office. The role of the Middle Office is to coordinate the activities between the Front Office and the Back-Up Section. BACK OFFICE - BACK UP SECTION= The backup section is the accounts department for the dealing room. 1. It receives the deal slips from the exchange dealers, checks the rate applications, calculations, etc. 2. it posts the transaction in the Gold Book and other books. 3. Sends / receives confirmations to / from different banks and the exchange brokers. 4. It makes / receives the payments to / from different banks on due dates. 5. It ensures the payments on the due dates and arranges for the receipt / payment of the late payment interest claims.
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It compiles the data, prepares various statements and returns including the MIS data and forwards the same to different nominated authorities. 7. Assists the concurrent / statutory and other audits and inspections, etc. (As the dealing Section is full of risks, it is always under continuous supervision and audit / inspections.) 8. It obtains the banks statements for the various Nostro accounts and feeds the updated information to the dealers, like: Nostro balances / over drafts, Contracts and payments falling due on the day, Deliveries due, Receipt of the pipe line transactions from the branches, etc. Gaps in the position. Rate Fluctuation Risk Volatility in the exchange rates Transaction limit Intra-day limits Sun Shine Limits Over-night limits Stop loss limits Gap Management - Gap Limits - AGL, IGL, etc. Limits - Over Ride Limit: The total amount of money measured in terms of the institution's domestic currency which it is willing to commit to all foreign exchange net positions. The limit helps to overcome the risk of over trading (volume risk) and speculation. There is a heavy temptation and better atmosphere speculation in the forex market. Depending upon the factors like size of the bank, volatility of the different currencies, the seniority, exposure and capacity of the dealer the bank fixes the dealing limits for the each exchange dealer. Each dealer is expected to remain within the limits prescribed and in the event of his exceeding the limit; he is expected to seek the confirmation from the authority prescribed. Limit Order = An order away from the market price which is held until it can be executed at the desired price

TAKING A POSITION= At the start of the day, the dealer takes the view of the market. He predicts the market movements during the day and takes the position. He may buy / sale the foreign currency from the market with an expectation that during the day, the currency shall move to his advantage. For that, the dealer constantly, keeps the watch on the market and no sooner the market touches his expected level, he off loads the amount in the market, by way of a reverse transaction and book the profit for the bank. It is not always, that the market moves according to the expectations of the exchange dealer. In case, the market moves against the expectations of the dealer, there are chances of losses also. If the market moves in an opposite direction, there may be a loss to the bank. However, the dealer expects that the market shall improve and the same shall again turn into profit on the position he has taken. The dealer waits and waits in the expectation of the market to improve. But he is proved and there is a large value loss to the bank. To save the bank from such a situation, there is a provision of the CUT LOSS LIMIT. The dealer is expected to For the purpose, the dealer is expected to reverse the position he has taken and book the loss, no sooner the market rate touches a point, which is a stop loss limit for the dealer. CURRENCY/ FUND POSITION=Currency / Fund position is the difference between total inflow and total out flow in any particular currency. It is nothing but the balances in the Nostro account. They are to be monitored by the dealer on an ongoing basis. Nostro over
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drawings shall attract the interest and also in some countries, it is not permitted by the local Exchange Control. The excess balances in the account may not fetch any interest but shall be a drain on the interest earnings of the bank. EXCHANGE POSITION= The Exchange Position of the bank is the summary of the transactions of the sale and purchase - spot and forward - merchants and inter-bank and the transactions undertaken with the overseas markets. The position book gives details of the assets and the liabilities of the bank in a particular currency. When the bank purchases foreign currency, it is said to be creating an asset in that currency. Conversely, when the bank is selling a currency, it is creating, it is said to have created a liability in that currency. OPEN POSITION= The net amount of foreign currency payable or receivable is an open position. In case of a net payable, it is a short position a net receivable is a long position. Difference between total purchases (spot + forward) assets and sales (spot + forward) liabilities in a particular currency, on which exchange risk is open. LONG POSITION (OVER BOUGHT): The foreign currency is the commodity, and the price of this commodity, the foreign currency is subject to frequent fluctuations. When the bank buys the foreign currency, it acquires the asset a command over the asset, which the bank is not going to utilize the same for its own purpose, but he shall be required to sell to somebody else, who is in the demand of the same. Excess of purchases over sales is said to be the Over Bought / Long Position. It is risky for the banker to acquire the Over Bought position, as in case the price of the foreign currency acquired changes to the disadvantage of the bank, the bank shall cultivate a loss. OVER SOLD / SHORT POSITION= In the case, where the bank sells the foreign currency in excess of the amount of the same foreign currency at its command, the position is said to be the Over sold / Short position. The bank shall be required to acquire to enable it to give the delivery of the same to whom the amount is sold. In case, the price of the currency sold is changed to the disadvantage of the banker, the banker shall enter into a loss. Excess of sales over purchases in a particular currency is said to be the Over sold / Short Position.. An overbought position in depreciating currency and an oversold position in appreciating currency represent exchange loss. SQUARE= Looking to above, the bank always tries to cover up the over sold / overbought position as fast as possible. Aggregate purchases equal aggregate sales in a particular currency. The overbought position is squared when the bank off loads / sales the same amount of foreign currency in the market. The oversold Position may be squared by purchasing the same amount of foreign currency from the market. The bank is free from the exchange rate risk, no sooner it acquires the Square Position. Pip: The most junior digit in a currency quotation. In most currencies, it denotes the fifth decimal place. EXCHANGE RATE= The exchange rate is the price of one currency in terms of another. It is the price at which a currency can be bought or sold in terms of another currency. The price may be the result of supply and demand for the currency in the open market, or at the other extreme, firmly fixed by the Government or its monetary authority, usually the central bank. However, most of the time the value of the currency is decided by the interaction of the free market forces playing their role, allowed by the intervention of the monetary authorities, to ensure their currencies do not depreciate or appreciate excessively. The latter form of fixing currency exchange rates is sometimes called a DIRTY FLOAT.
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MERCHANT TRANSACTIONS = The purchase from and sale of foreign exchange to the customers of the bank are called the MERCHANT TRANSACTIONS. To the merchants, the rates are quoted upto two decimal points. These transactions are backed by the genuine trade transactions. All the merchant transactions are usually off loaded either in the local market, INTERBANK MARKET / to Reserve Bank of India or in the foreign market - OVERSEAS MARKET by way of opposite deal, i.e., cover operations. MERCHANT QUOTATIONS= The exchange rate shall be quoted in direct terms, i.e. so many Rupees and Paise for 1 unit of foreign currency or 100 units of foreign currencies. The Merchant (as well as inter-bank) rates shall be quoted upto four decimals, the last two digits being in multiples of 25 (for example US $1 = Rs. 43.8525, 1 Pound Sterling = Rs. 70.5550). The card rates shall be quoted in two decimals. (For example US $1 = Rs. 43.85 or US $1 = Rs. 43.8500). (Rules of the Foreign Exchange Dealers' Association of India (Third Edition) effective from 1st October, 1999) Spot (Exchange) Rate = Price at which foreign exchange can be sold or bought for immediate (within two business days) delivery. For the delivery of currency on the same day (for merchant transactions), (Tom and on second working day for Inter Bank / Overseas transactions) the exchange rates quoted by the bank are called the spot rates. The exchange rates quoted for the delivery of foreign currency on any future fixed date (or during future option period) is called the forward rates. In an interbank market, the exchange rate is finalized today, but the currencies are to be exchanged on the second working day. Saturdays and Sundays are not working days in foreign exchange. The delivery date must be such, where there is no holiday at both the centers. Delivery of foreign exchange / currencies is to be made on the day next to the date of transaction. The spot rate for the currency is the price quoted for the nearest standard settlement day for the purchase or sale of that currency against another one. The spot rate, whether floating freely or fixed by the authorities, reflects the external value of the currency at the time of dealing. TOM= To Morrow / Next working day i.e., exchange rate is finalized to day, but the currencies are to be exchanged on the next working day. Delivery of foreign exchange currencies would take place on the second working day from the date of contract Two Way Quotes= CARD RATES= At the start of the day, the dealing room of the bank quotes the exchange rates for the different currencies, at which rate the small value transactions (as decided by the bank) may be carried out by the reporting branches. These rates are called the Card Rates. However, the branches shall have to contact the position maintaining branch for obtaining the exchange rates for large value transactions and for the finer rates for the valued customers. CROSS RATE= Where the exchange rate of a particular currency is not quoted against another currency, the parity may be arrived at by a Chain Rule Method, by the use of intermediary currency. The exchange rate so obtained is termed as cross rate. The exchange rate between two currencies derived from the rates relating to common currency.
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For instance, the EURO / Yen cross rate can be calculated from the EURO / US dollar and Yen / US dollar rates. Cross rate is a rate of exchange between currencies of two centers, both not the currencies of the dealing country in the international market. An exchange rate is called the cross rate, when the national currency is not a party to the transaction. A London bank buying or selling Euro against US $ is using a cross rate. This may prove to be a cost saving device and helps the bank to avoid exposure risk and synchronise two exchange operations with two different parties. A cross currency rate is an exchange rate between two currencies, neither of which is the USD. For e.g. EUR/JPY, GBP/ CHF. In the Indian forex market, the cross rate is loosely referred to the rate for any currency pair which excludes the Indian rupee. For e.g. USD/JPY DIRECT RATES (HOME CURRENCY QUOTATIONS)= A given number of units of local currency per unit of foreign currency e.g. $ 1 = Rs. 46.30. With effect from 2.8.93, India has adopted a direct method of rate quotations. As per FEDAI guidelines the currencies shall be quoted against one unit of foreign currency. However, the Belgium Franc, Indonesian Rupiah, Italian Lira, Japanese Yen, Kenya Shilling and Spanish Peseta shall be quoted against 100 units i.e. Japanese Yen 100 = Rs 29.60. Now the Belgium Franc, Italian Lira and Spanish Peseta have been converted into EURO. The ACU currencies shall also be quoted against 100 units of foreign currency. Foreign currency is fixed and the home currency fluctuates. An exchange rate quote in which one unit of foreign currency is quoted in terms of x units of home currency. In India the USD/INR is a direct quote. $1 = Rs. 46.73 Direct Rate. W.E.F.02.08.93 Foreign currency is fixed and home currency fluctuates. Home currency quote Buy low) Sell high. India has adopted direct rate quotation system w.e.f.02.08.93. US $ 1 = Rs.43.60 US $ 1 = Rs.43.50 Quoted against one unit of foreign currency. ACU Currencies and Bel. Franc, Jap. Yen, It. Lira, Indonesian Rupiah, Kenya Shillings and Spanish Pesetas are quoted in terms of 100 units of foreign currency. Spot Rate + Lower Premium = Forward Option Buying Rate. - Maximum Discount= " + Premium = Forward Option Selling Rate. - Lowest Discount= " Under Direct Rate Quotations: The Premium is added and The Discount is deducted. Where the interest rates for both the trading currencies are same, there is no difference between spot and forward rates. The currencies are said to be at par. Premium Ascending Add. $ 1 = Rs 36.05 / 06 1M= 03 / 05 Discount Descending Deduct. $ 1 = Rs 36.33 / 37 1M = 5/ 3 Currency with lower interest rate will be at premium. INDIRECT RATES (FOREIGN CURRENCY QUOTE) = A given number of units of foreign currency per unit of local currency e.g. Rs. 100 = $ 2.7850. Home currency remains fixed and foreign currency fluctuates. In India, before 1-8-1993 the exchange rates were quoted as indirect quotation except for currency notes. From 2-8-1993 exchange rates are quoted as direct quotation of rupees. The indirect quotation is used in London foreign exchange
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market in the form of 1 Pound = USD 1,6500 $. In New York and other foreign exchange market, including India, the direct quotation is mostly used. Home currency is fixed and foreign currency fluctuates. Rs. 100 = US $ 2.3360 Rs. 100 = US $ 2.3350 FIXED RATE AND FLOATING RATE: In a fixed rate regime, the exchange rate of the nations currency is pegged to a stronger currency, or basket of currencies. With the movement such a base currency/currencies, the nations currency moves. However, there is a fixed band between the nations currency and the base curr ency to which the same is pegged. Any change in the band is termed to be the devaluation/revaluation of the nations currency. In a floating exchange rate system, the exchange rate of the nations currency is determined by the market forces like demand and supply. FORWARD RATE= While booking the forward contract, the rate is fixed to-day, but the delivery of currencies shall take place at the future agreed date (in case of fixed date forward), or during the agreed period (in case of option forward contract). The forward contract may result into Early Delivery, Extension / Roll - over or Cancellation. The early delivery, extension, roll over or cancellation may result into recovery / payment of swap charges and / or interest on outlay of funds. Forward contract may be - Option forward or Fixed Date forward. Option available for the utilisation of the forward contract may be- full month, first half (1 to 15), second half (16 to last date), rest of month (21st to last date.) or it may be any week. Options = An option contract is the right to buy or sell a specific quantity of a given asset at a specified price at or before a specified date in the future. As such it has certain important characteristics a. An option confers upon the buyer a right, not an obligation. Since it can be abandoned without future penalty, the maximum loss that the buyer faces is the original cost of the option (premium). b. By contrast, if the buyer chooses to exercise his right to buy or sell the asset, the seller has an obligation to deliver or take delivery of the underlying asset. His potential loss is therefore, unlimited. A contract giving the owner the right, but not the obligation, to buy or sale a given quantity of an asset at a specified price at some date in the future Options may be in the currency, interest, or financial instruments, which is a matter of right and obligations. The writer (seller) of a pure option has an obligation to deliver or take delivery if the buyer exercises his right. The shorter the period, the cheaper it will be. There are the straight options as written on the stock exchange or the Over The Counter options sold by commercial and investment banks. An option cans either a CALL OPTION or the PUT OPTION. In principle, a buyer of a call option has a right to demand the delivery of the underlying instrument or a currency, or a cash settlement or profit. It is doubtful, whether, the buyer of an option would agree to take loss on settlement. A put option, of course, is exactly the opposite, where the buyer has a right to give delivery or take the cash settlement. Libid stands for London Inter Bank Bid-Rate. It refers to the interest rate at which banks in London are prepared to accept each others short-term deposits. LIBOR

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Libor or Libo stands for London Inter-Bank Offered Rate: It is the interest rate at which the prime banks offer to lend foreign currency to other prime banks in London as on a given date. This rate is fixed at 11 a.m. every day. The Libor or Libo is often used as the basis for pricing Euro-dollar and other Euro-currency loans. The lender and the borrower agree to a makeup over the LIBOR and the total of LIBOR plus the mark up makes the effective interest rate for the loan. For example, Eurodollar loan may be fixed at % p.a. over LIBOR. The loan may be for a period of 5 years. The interest rate does not remain constant during the entire period of the loan. The interest rate on the loan is linked to LIBOR interest rate which is revised every six months by reference to the LIBOR then prevailing. A typical Euro-Credit LIBOR clause defines LIBOR as the arithmetic mean of the respective rates notified to the agent by the reference bank as the rate at which deposits of the relevant amount for a period equal to the relevant interest period and in the relevant currency were offered to prime banks by the reference banks in the London Inter-Bank Euro-currency Market (at 11-00 a.m. London time) two business days prior to the date of draw-down or renewal for value on such date. Limean= Stands for London Inter-Bank Mean Rate. It refers to an arithmetical mean of bid and asked rates (LIBID and LIBOR) on the London market for inter-bank rates. Loonie= A commonly used market term for the Canadian Dollar. London Inter Bank Offered Rate [LIBOR]= The interbank interest rate at which a bank will offer Eurocurrency deposits to another bank in London. LIBOR is often used as the basis for setting the Eurocurrency loan rates. The loan rate is determined by adding a risk premium to LIBOR. LORO ACCOUNT : Entries passed to the account of a third bank are said to be for "Loro" account, e.g., a remittance made by one bank to another for account of a third bank may be sent by the remitter "for credit of a Loro a/c (bank)" , meaning "their account with you". Commodity Trading Banks are freely allowed to trade freely in forex securities. RBI has not allowed banks to trade in commodities except in gold Out- of-the-money: An option whose strike price is unfavorable in comparison to the current price. E.g. a Yen put option at 110 strike when the current price is 108.00 or a Euro put option at 0.8200 strike when the current price is 0.8500 NEER (Nominal effective exchange rate): NEER is the weighted average of bilateral nominal exchange rates. It measures the appreciation/depreciation of a currency against the weighted basket of currencies whose countries are the main trading partners or competitors of the country of the currency under study. Nominal exchange rate is the actual exchange rate quote in the market at a given time. REER (Real effective exchange rate): REER is the nominal effective exchange rate (NEER) adjusted for inflation. In other words, the REER is calculated by dividing the home countrys nominal effective exchange rate by an index of the ratio of average foreign prices to home prices. REER may change even without any change in the exchange rate. Real exchange rate is the nominal exchange rate adjusted for relative prices between the countries under consideration. Effective exchange rate is a measure of whether or not the

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currency is appreciating or depreciating against the weighted basket of currencies with whom the country trades. During the last decade, banking worldwide underwent a sea change. Competition is hotting up. Banks can no longer be all things to all people. They have to choose their areas of core competence and build a business model accordingly. The banking system in India faces threat from several fronts. Liberalization, since 1991, is leading to a restructuring of Indian Industry, and banks need to manage the restructuring to ensure that their asset quality does not deteriorate any further. Technological change in the shape of the Internet threatens to move the banks best customers to those banks who will be the first to get on the net. The low entry barriers to internet banking will increase the competition. Banking will be undermined by the movement of blue chip corporates away from the banking system to the direct sourcing of funds. The attraction of other financial products such as mutual funds will steadily increase. Financial Institutions, banks, insurers, credit card companies and consumer finance companies will increasingly tread on each others toes. For all these reasons, banks in India need to manage change before they are overwhelmed by it. Some activity has already started in this direction. NEER is the Nominal Effective Exchange Rate, and REER is the Real Effective Exchange Rate. Unlike nominal and real exchange rates, NEER and REER are not determined for each foreign currency separately. Rather, each is a single number (usually expressed as an index) that expresses what is happening to the value of the domestic currency against a whole basket of currencies. These other currencies are picked on the basis of that countrys trade with the domestic economy. India trades with a large number of countries such as the US, EU, Japan and countries of the Middle East. With each individual currency, the rupee has a different nominal exchange value. To calculate the NEER we weight the nominal exchange rate of the rupee against the currencies of these four trading partners by their share in Indias trade. Then, by summing the weighted exchange rates, we get the NEER. By setting the NEER for some year at 100, we can track changes in the rupees value as percentage changes over the base year. Similar to NEER, the REER is the weighted average of real exchange rates, weighted by the relative importance of each country in trade with the domestic economy. In other words, like the NEER, the REER is an index of a countrys real exchange rate, a single number which gives some reference or benchmark about how the currency is performing in relation to the rest of the world as a whole, rather than just individual countries. Both these measures are useful as benchmarks that give an idea of the general movement of the domestic currency against the rest of the world. Theory tells us that if the domestic currency becomes more expensive in terms of other currencies, then exports will become less valuable in terms of the domestic currency and imports will become cheaper. The converse is true if the domestic currency weakens (in nominal and real terms). Nominal exchange rate The nominal exchange rate is simply the price of one currency in terms of the number of units of some other currency. This is determined by fiat in a fixed rate regime and by demand and supply for the two currencies in the foreign exchange rate market in a floating rate regime. It is nominal because it measures only the numerical exchange value and does not say anything about other aspects such as the purchasing power of that currency. In a floating rate regime, an increase in the value of the domestic currency against other currencies is called an appreciation, while a decrease in value is called depreciation. In contrast, an increase in the exchange rate in a fixed rate regime is called a revaluation (for

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an increase) and a decrease in the exchange value of the domestic currency is referred to as devaluation. Real exchange rate = To incorporate the purchasing power and competitiveness aspect and, therefore, make the measure more meaningful, real exchange rates are used. The real exchange rates are nothing but the nominal exchange rates multiplied by the price indices of the two countries. This means the market price level of goods and services given by indices of inflation. So if the price level in the US is higher than the price level in India, then the real exchange rate of the rupee versus the dollar will be greater than the nominal exchange rate. Suppose the nominal exchange rate is Rs.50 and US prices are greater than Indian prices, a dollar will buy more in India than what Rs.50 will buy in the US. So the real rupee-dollar exchange rate is greater than the nominal rate. If the real exchange rate is calculated using the price levels of common traded goods, then it gives a measure of export competitiveness. For example, if both the US and India manufacture the same (or highly comparable) pharmaceutical drug, and Indian drug prices are lower than US prices, then the exchange rate in terms of drugs is favourable to India. This can be generalized to all the goods manufactured by all the goods manufactured by the two economies that compete in the export market. If the real rupee-dollar exchange rate based on export-competing goods depreciates, then Indian exports enjoy an enhanced pricing advantage over US goods. The converse is true for a real appreciation. Real Exchange Rate = Measures the degree of deviation from PPP over a period of time, assuming PPP held at the beginning of the period Spot and Forward Rates. TYPE OF TRANSACTION DT.OF TRANSACTION VALUE DATE. CASH 05.05.2000 [FRIDAY] 05.05.2000 TOM [NEXT WORKING DAY] " 08.05.2000 SPOT " 09.05.2000 FORWARD " 10.05.2000 and onwards CASH= Same Day. (Ready) TOM = To Morrow/ Next Working Day. SPOT= Second Working Day. (Following Day of Transaction) Saturday/ Sunday closed. No holiday at Both Centers. Forward = Rate is fixed to) day. The delivery of currencies shall take place at the future agreed date (in case of fixed date forward) or during the agreed period (in case of option forward contract). Forward Premium / Discount = The amount over (under) the spot exchange rate for a forward rate that is often expressed as an annualized percent deviation from the spot rate FINANCIAL SERVICES IRDA = Insurance Regulatory and Development Authority. MF = Mutual Fund SIP = Systematic Investment Plan Banks started as safe keepers in Egypt Safe keeping of grains Funds transfer facility Credit facility Financial intermediaries
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Safe keeping is not a banking activity as per modern definition of banking Transformation of economy and financial markets during last decade Banks have turned into providers of financial services Traditional banking Deposits Credit Funds Transfer More fee based services in comparison to interest based services Fund based services [Interest Income] Fee based services [Commission Income] Increased competition Thinning of margins Search for new avenues of income More the number of services more are the customers CUSTOMER LOYALITY Distribution and sale of: Mutual Funds Insurance Products Govt. Bonds Stamp Papers Gold Coins Mobile Recharge Managing Public Issue (Merchant Banking) Collection of: Taxes Utility Bills Demat of shares Safe Keeping: Safe Custody Safe deposit Vault Advisory: Investment Advice MUTUAL FUNDS Growth of capital markets Investment in shares and bonds Unpredictable fluctuations in the prices of shares Lack of time and expertise to assess the financial strength of companies and tracking performance Help of Mutual Funds for a small fee Management Fee Collection of small savings from large number of small savers and investment in companies on their behalf Division in units of 10 MF employ experienced Funds Managers Invest in large number of shares to avoid concentration risk Putting all eggs in one basket Company is called the Asset Management Company [AMC] Accounts of each fund are kept separately Each fund shall have dedicated Fund Manager Even a smallest investor can get started in mutual funds There are many MFs with different objectives and levels of growth potential providing investors to diversify investment. NAV = Net Asset Value of a fund AV = Market value of funds investment + Receivables + Accrued Income

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 Liabilities Accrued Expenses Number of Outstanding Units SEBI Regulations NAV of the scheme is to be declared at least once a week. Some declare on a daily basis At least in two daily news papers NAV of closed ended scheme target at a specific segment or any monthly income scheme (which are not mandatorily required to be listed on a stock exchange) may be declared in a monthly / quarterly basis. OPEN ENDED SCHEMES No fixed maturity period No CAP on amount invested Any time entry Any time exit Units Sold / purchased at NAV at NAV related prices CLOSE ENDED SCHEMES Fixed maturity period Few months to few years No units can be bought after offer period May be sold / purchased if listed on stock exchange Market price may vary from NAV depending upon demand and supply MANAGEMENT FEE Fund deducts management fee every year [0.5 to 2.5 %] ENTRY / EXIT LOAD PURCHASE PRICE REDUMPTION PRICE Price received on sell of units of open ended scheme SWITCH From one scheme to another Q. what are the benefits of Mutual Fund? BENEFITS 1. Professional investment management 2. Diversification 3. Small investment and low cost 4. Liquidity 5. Transparency SEBI 6. Variety TYPES OF MUTUAL FUNDS Equity Fund Large Cap Funds Investment in Shares of large companies Mid Cap Funds Investment in Shares of Medium sized companies Flexi Cap Funds Investment in Shares of Both type of companies Micro Funds - Investment in Shares of small companies Fixed Income Funds Invest in Government / Corporate Bonds Debt instruments that offer fixed rate of interest Balanced Funds Investment in Bonds and Shares Gold Funds Investment in Gold and Gold Derivatives Funds are classified according to their objectives:Growth Funds Equity Look for growth of capital secondary emphases on dividend. Invest in shares having potential for growth and capital appreciation. Invest in well established companies. Low current income. Take higher risks than income funds. Some funds concentrate on one or more industry sectors or invest in broad range of industries. Tax Saving Funds Equity Lock in period of three years. Can be invested at any time. Each investment can be redeemed after three years. Investment may be deducted from total annual income.

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Speciality / Sector Funds Equity Investment in securities of specific industry or sector Health Care Technology Leisure Utilities Precious metals. Index Funds Equity The fund buy shares composing BSE Sensex or NSE Nifty. Nifty is calculated on the basis of price of the shares 50 large companies. The fund would invest in the shares of these 50 companies in proportion of the weightage allotted in the index. Return will be in the line with the movement of the index. As it is a passive fund, the management fee is low. No research work or active trade is required. Exchange traded Fund [ETF] Some Index funds are listed on stock exchanges and so are very liquid as units can be traded just like equity shares. The brokerage will be lower than the entry / exit loads on the mutual funds. Growth and Income Funds Equity and Debt Seek long term growth of capital and current income. The investment strategies vary from fund to fund. Some invest in duel portfolio consisting of growth stocks and income stocks or a combination of growth stocks, stocks paying high dividends, preferred stocks, convertible securities or fixed income securities such as corporate bonds and money market instruments. Others may invest in growth stocks and earn current income by selling covered call options on their portfolio stocks. Growth and income funds have low to moderate stability of principal and moderate potential for current income and growth. They are suitable for current income and growth. They are suitable for investors who can assume some risk to achieve growth of capital but who want to maintain moderate level of current income. Balanced Equity and Debt Aims at providing growth and income. Fund invest in shares and fixed income securities in proportion of the offer documents. Ideal for investors who are looking for combination of income and moderate growth. Fixed Income Funds Debt Aimed at providing fixed income and preservation of capital. Invest in corporate bonds or government backed mortgage securities that have a fixed rate of return. Suitable for the investors who seek to have steady income and do not want to assume capital risk. Money Market Funds / Liquid Funds Debt Investment is in highly liquid, virtually risk free, short term debt securities of Indian Government, banks and large corporations. Attractive alternative to bank deposits. Yields are generally higher than the bank deposits. Offer several advantages Money can be withdrawn without penalty risk free investment as it is highly liquid and a short term investment. Gold Funds Gold Gold is entrusted to warehousing companies for safe keeping. Fund manager trade in gold or gold derivatives. Return accrues with price escalation of gold. Cost of gold storage, insurance and administrative expenses are the costs involved. Units are listed on the stock exchanges and are traded on the line with the shares. Brokerage is required to be paid on the sale and purchase of the units. Liquid investment. Convenient investment to invest in gold, without bothering about problems of storage. Plans offered by Mutual Funds

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Growth Plan Return is reinvested. Unit numbers shall remain the same but the value shall increase. Dividend Plan Income is distributed from time to time. Ideal for investors requiring regular income. Dividend Reinvestment Plan dividend declared are reinvested , increasing number of units. Automatic [AIP] or Systematic Investment Plan [SIP] Investor is given option to invest periodically as specified monthly, quarterly, etc. Facilitates the investor to plan investment. It is similar to recurring deposit plans offered by the banks Automatic [AWP] or Systematic Withdrawal Plan [SWP] Permits investor to withdraw amount in a pre determined sum in a pre determined intervals. Risk vs. Reward No guarantee of adding more money to sum assured Probability of loss is always there. There is also an opportunity to earn profits. Greater the risk there is a greater chance to earn higher reward. Higher the risk higher the profit Fluctuation in price, interest rates, inflation. RISKS Market Risk Price fluctuation Inflation Risk Interest rates fluctuate Exchange Risk Some companies earn in foreign currency Investment Risk Performance of companies Change in Government Policies Loss of key professionals and inability to adapt business to rapid technological change 7. Choosing a fund 8. Past performance 9. Know the fund manager 10. Does it suit to the investors risk profile? Willingness and capacity of the investor to share loss. Safety Liquidity 11. Read the prospectus 12. Costs Entry / Exit Loads and Management Fee Tax aspects of Mutual Funds Equity Schemes Dividend is tax free for the fund and also in the hands of investors Other Schemes Tax is payable by the Fund - Dividend is tax free in the hands of investors Tax on Capital Gains Difference between selling price and cost of acquisition is called the Capital Gain Short Term Capital Gain [Less than / Equal to 12 Months] and Long Term Capital Gain Indexation Indexation means that the purchase price is marked up by an inflation index resulting in lower capital gains and hence lower tax. Inflation index = Inflation index for the year of transfer Inflation index for the year of acquisition 1. 2. 3. 4. 5. 6. Banks Role - Acts as agents to sell units. Generally, do not give advice. Bank is not responsible for the performance of fund. Choice of fund is left to customer. Bank collects

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application and cheques. For further clarification and service the investor has to approach MF directly. Bank gets upfront and trail commission. INSURANCE Risk of loss. Natural events. Unnatural reasons. Probability of loss is small. Prudent ones protect themselves against unforeseen losses by joining together to share the risks. Insurance is based on a principle All for One and One for All. Sharing of risks. Insurance is spending little money to protect against the risk of having to spend a lot of money. Insurance business is classified into LIFE and GENERAL Insurance. Insurance = Providing cover for the event that might happen. Assurance = Provision of cover for an event that is certain to happen. Life Insurance The policy offers assurance on death. Insurance sector is regulated by Insurance Regulatory and Development Authority. PRINCIPLES OF INSURANCE 1. Utmost good faith [Caveat Emptor] 2. Insurable interest 3. Indemnity 4. Contribution Multiple insurances 5. Subrogation Transfer of rights and remedies 6. Proximate cause Causa Proxima LIFE INSURANCE Insurer Proposer Insured Nominee Underwriting Evaluation of risks, decision to accept / reject proposal and deciding premium 6. Hazards a. Physical Hazards Age, Gender, Build, Physical condition, Physical impairments, Personal History, Family History b. Occupational Hazards i. Nature of job and place ii. Environmental contact Chemical factory iii. Operational Risks Height, Speed Machines c. Moral Hazards i. Undue advantage ii. Less income High Premium iii. Large insurance for non earning member d. Premium Consideration for contract. Payable in advance Mortality, Investments, Contingency, Expenses. e. Mortality Ratio of numbers of persons dying during a year to the number living at the beginning of the year. Risk premium f. Investments Investment income Net / Pure premium g. Contingencies Unexpected calamities earthquake, volcano eruption, flash of floods h. Expenses Office premium i. Age [Next / Last / Nearer Birthday], Mode, Sum Assured, Financial and medical condition of the insured 7. Level Premium [Same rate] and Premium on Renewal [Age Related premium change every year] Basis. 8. Minimum Sum Assured Single Premium Policy 1.25 % of single premium 1. 2. 3. 4. 5.
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Regular Premium Term X Annual Premium X 0.5 Annual Premium X 5 [Whichever is higher] 9. Bonus Life Fund Actuaries 10. Paid-up Value = Number of premiums paid X Sum Assured Total numbers of premiums payable Premium needs to be paid for at-least 3 complete years 11. Surrender Value = Sum Payable in the event of lapse of policy. 12. Premium needs to be paid for at-least 3 complete years Factor of premiums paid other than 1st premium and supplementary premiums paid 13. Nomination 14. Assignment 15. Loan against policy 16. Revivals 17. Married Women Property Act 18. Life Insurance products a. Term Assurance [Pure Risk] Whole Life Policy. Unspecified period. Payable on death / 100 years. Premium payment till claim arises / shorter period b. Pure Savings [Endowment Plans] [Risk Cover + Savings] Combination of risk cover with financial savings. c. Anticipated Endowment Policy [Money Back Policy] d. Market Linked Plans [ULIP Unit Linked Insurance Plans] 19. Annuity Insurer agrees to pay stipulated sum periodically for certain period 5 to 10 years 20. Pension GENERAL INSURANCE Insurance of property against loss / damage Cover note Contains essential details. PRODUCTS 1. Whole sale / Corporate products 2. Retail products 3. Rural and Agriculture specific products MOTOR INSURANCE MANDETARY INSURANCE Theft, Damage, death of driver and passengers, damage to third party and property [Third Party Liability - TPL] Two wheelers, Four wheelers, Tractors, Construction equipments, Commercial vehicles. Insured First Party Insurance Company Second Party All others Third Party Coverage Liability Only Policy Third Party Liability only [TPL] Package [Comprehensive] Policy EXCLUSIONS 1. Mechanical breakdown 2. Consequential loss 3. Depreciation 4. Deliberate accidental loss 5. Intoxicated driving 6. Any contractual liability PREMIUM PAYABLE 1. Type of vehicle 2. Age of vehicle 3. Period of coverage
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4. TPL OD NCB PTD PPD TPA IRDA

Discounts / Loadings No claim bonus = Third Party Liability = Own Damage = No Claim Bonus = Permanent Total Disablement = Permanent Partial Disablement = Third Party Administrator [TPA] = Insurance Regulatory Authority

HEALTH INSURANCE Rising medical costs increase in lifestyle related deceases Health insurance may be classified into three covers:Hospitalization cover Critical illness cover Personal Accident Cover HOSPITALIZATION COVER Provides reimbursement of hospitalization expenses including room tariff, medicines, diagnostics, doctors and surgeons fees. Cashless facility / Reimbursement scheme CRITICAL ILLNESS COVER Lump-sum benefit on diagnosis of critical illness / major medical illness Payment of flat sum, irrespective of consequent hospitalization charges PERSONAL ACCIDENT COVER Covers against accidental death or Permanent Total Disablement (PTD) on account of accident with an option to cover Permanent Partial Disablement (PPD) Exclusions Premium payable Age, Amount of cover Number of family members covered, other additional benefits, family history, income / earning Benefits and discounts Income Tax Benefit under Section 80 D Discount for claim free year Number of net work hospitals offering cashless treatment Claim procedure Third Party Administrator [TPA] Insurance Regulatory Authority [IRDA] TRAVEL INSURANCE Coverage:1. Death due to accident 2. Medical expenses 3. Repatriation of remains 4. Loss / delay of checked baggage 5. Passport loss 6. Third party liability 7. Hijack distress allowance 8. Financial emergency assistance 9. Home building and contents Exclusions:1. Medical expenses arising out of pre-existing conditions 2. Addiction to alcohol 3. Drugs 4. Mental disorder 5. Sporting activities 6. Loss of passport in public places and other exclusions 7. War and warlike consequences Premium payable:NIRMA 18

Age, duration of trip, country of visit, benefits included in the plan Benefits and discounts:Family discounts, coverage upto 70 years of age without medical tests Two way compassionate visit for student travel plan Claim procedure:Help line numbers In case of financial emergency, giving the details enumerating incident of loss, cause, circumstances and place of loss along with police report and passport number Hijacking to be confirmed by the police report Claim amount [Excluding financial emergency] shall be paid in India in Indian Rupees Payment shall be at the exchange rate declared by Reserve Bank of India Immigrants shall be paid abroad For house fire / burglary the TPA shall appoint surveyor to access the loss HOME INSURANCE Coverage:1. Fire 2. Riot, Strike, Malicious damage 3. Explosion and implosion [__________] 4. Earthquake 5. Lightning 6. Storm, cyclone, tempest [Violent Storm], tornado, hurricane, flood, inundation [Over flow to flood] 7. Impact of vehicle 8. Missile testing 9. Subsidence [Sinking], landslides and rock slides 10. Leakage from automatic sprinkler installations 11. Aircraft damage 12. Bursting and / or over flowing of water tanks, apparatus and pipes Burglary cover Optional covers Additional expenses of rent for alternative accommodation Exclusions Premium payable Benefits and discounts Claim procedure BANK EMPLOYEES ROLE As per IRDA regulations, only the persons who have passed their Agents Examination and conformed as Agent by them can sell insurance. GOVERNMENT BONDS Borrowing program of Government is managed by Reserve Bank of India Reserve Bank of India has appointed the banks as their selling agents for selling selected issues. Banks receive applications, identity proof, address proof and cheque [payment]. Applications with supporting documents are sent to nodal branch Payments are collected by the bank and remitted to RBI Nagpur. RBI Nagpur is the controlling office for all the bond issues Nodal branch / processing centre shall process the applications and shall issue the bonds Send details of applicants and bonds issued to RBI Nagpur Banks shall pay interest / repayment when due and shall claim reimbursement from RBI Nagpur Banks should not insist the investors to present bonds for payment but the banks should make payment on due date as per the mandate given by the investor in the application The procedures like transfer, change in address, etc are done by the issuing bank
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Bank receives commission on amounts collected and annual maintenance charge per bond account SALE OF GOVERNMENT BOND PAPER As a result of Telgi Scam Selling of stamp paper / franking stamps as an agent of State Government Done by select branches of the bank Some banks have installed even vending machines Purchase / loading of franking machines at the office of the Registrar of Stamps SALE FO GOLD COINS Traditional business of banks to deal in gold Gold is equal to currency GOLD STANDARD Gold is the only metal in which the banks in India can deal in ICICI Bank is pioneer in the year 2000 Gold coins sold by banks are with 99.9 % purity and HALLMARKED Gold available in market is with 99.5 % purity Banks add reasonable profit on sale Movement of coins Safe keeping Stock reconciliation MOBILE RECHARGING MANAGING PUBLIC ISSUES [MERCHANT BANKING BUSINESS] IPO = Initial Public Offer FPO = Follow-on Public Offer Managers to the issue Registration with SEBI to act as collecting banker to the public issues Till about 2000 Issues were at fixed price Thereafter practice of Book Building developed [Price Band] Public issues are required to be kept open for a minimum of 4 days NSE / BSE shall automatically tabulate bids and display total bids received at various prices on their websites Advantages of Book Building Greater transparency Better price discovery Speedy closure Allocations Certain portions are required to be reserved for different categories of investors as per SEBI Guidelines Public Issues are underwritten by banks Parties in public issue:1. Issuing company 2. BRLMs = Book Running Lead Managers who are merchant banking companies who manage and underwrite the public issue 3. CBRLMs = Book Running Lead Managers who are small merchant banking companies supporting to BRLMs 4. Syndicate Members who are brokers 5. Bankers to issue COLLECTION TAXES CBDT Central Board of Direct Taxes Income Tax, Wealth Tax CBCE - Central Board of Customs and Excise Customs Duty, Excise Duty and service Tax VAT = Value Added Tax State Government Property Tax Municipal Organizations UTILITY BILLS
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DEMAT SHARE ACCOUNTS Physical shares upto 1996 Growth of economy Increase in companies issuing shares Increase in the share capitals Increase in the number of shares Increase in number of traders in share certificates Long settlement cycle Risk of counter-fit shares In August 1996 setup of National Security Depository Ltd [NSDL] Dematerialization = A process of converting physical share certificates into book entries Demat Account - Contains record of shares bought and sold and balance available DEPOSITORIES AND DEPOSITORY PARTICIPANTS Two depositories to maintain Demat accounts of investors NSDL promoted by National Stock Exchange and CDSL Central Depository Services Ltd Promoted by Bombay Stock Exchange Banks act as agents of depositories to interact with the investors who will be customers of banks. Banks are called the Depository Participants [DPs]. Finance Companies and Share Brokers also have been appointed as DPs. Demat accounts of investors are maintained by DPs.only banks are authorized to maintain demat accounts of brokers. Demat accounts of investors are called Beneficiary Accounts. Demat accounts of brokers are called Clearing Members Accounts. Dematerialization Each of the company is allotted a unique identification number ISIN [International Security Identification Number]. DRF = Demat Request Form [Page-221] RTA = Registrar and Transfer Agents [Page-221] TIFD = Transfer Instruction for Delivery [Page-222] NSCCL = National security Clearing Corporation Ltd On line trading Transfer of shares Pledging of shares Nomination Death of Demat Account Holder Freezing of demat account SAFE KEEPING SAFE CUSTODY SAFE DEPOSIT VAULT [SDV] ADVISORY SERVICE INVESTMENT ADVICE NOTIONAL TRANSIT PERIOD [NTP] AND NOTIONAL DUE DATE [NDD]= When export documents are purchased / discounted / negotiated by the bank, it takes some time (Postal delay) to reach the overseas centre, for presenting to the drawee for acceptance/ payment and credit of the proceeds to banks nostro account abroad. The banks, while purchasing / discounting / negotiating an export bill, recovers from the exporter customer the interest at the concessional rate for such postal delay i.e., Notional Transit Period as prescribed by FEDAI plus usance period, upto the Notional Due Date so arrived. If the bill is paid subsequent to such due date, the bank will charge overdue interest from the Notional Due Date till the credit of the amount to the banks Nostro Account. For the conversion of the foreign currency amount into Indian Rupees, the purchasing / discounting / negotiating bank takes into consideration the Notional Transit period and also the Notional Due Date. The bank expects the bill to realiaze on an expiry of the Notional Transit Period and covers the transaction on the Notional Due Date. The bank

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loads the premiums and discounts upto Notional Due Date while arriving the exchange rate for the bill. Premium and Discount= Currency is said to be at a premium or at a discount or at par in terms of another currency. Premium is synonymous with "dearer" and discount is with "cheaper". The premium/ discount is an interest rate differential between the two currencies. The base currency may be at discount or premium as compared to another currency. The interest rate differential between the currency bought/ sold is loaded in the exchange rate, upto a period of delivery from the date of fixing of exchange rate. Higher interest rate currency is at discount in the forward market. Discount currency is cheaper and attractive currency for forward delivery. Buyer will get more units of foreign currency at future. When a currency is costlier in forward market, it is said to be at premium. Lower interest rate currency is at premium in forward market. Premium currency is costlier and unattractive currency for forward delivery. Buyer will get less units of foreign currency at future. Premium currency is dearer (costlier) in future market. It can be purchased at higher price. More units of local currency are required or less units of foreign currency can be had with same units of local currency. Under indirect quotes, the premium is deducted and discount is added to buying / selling exchange rates. Under direct quotes, the premium is added and discount is deducted from buying / selling rates. Where the interest rates for both the trading currencies are same, there is no difference between spot and forward rate. The currency is said to be at par. Premium - Ascending - Add. $ 1 = Rs. 46.05 46.06. I.M.- 3P / 5 P. Discount Descending - Deduct. $.1 = Rs. 46.33 46.37 1.M - 5P / 4 P. Holgate's Rule (In case of Direct Rates) Discount Deduct Maximum Discount Latest Period Minimum Discount Earliest Period Premium Add Minimum Premium Earliest Period Maximum Premium Latest Period

Forward Purchase Forward Sale

Pre-Shipment Finance: Advances granted at the pre-shipment stage for the purpose of purchasing / procuring / manufacturing / processing / packing and shipping of the goods is called the pre shipment finance. It may be in the form of Indian rupees or in foreign currency. It is a short term working capital finance granted on a need basis, for a period not exceeding 180 days. PRINCIPLES FOR THE EXCHANGE RATES1. Commodity Principle. 2. Market Maker Principle. 3. Banker Principle. (I do not have $ , I do not keep $.) 4. Go logical. (Market Behaviour.) In the normal course of business, the banks in India, the Authorised Dealer in Foreign Exchange (AD.), purchases as well as sells the foreign currencies against the Indian Rupees or one foreign currency against another foreign currency. To enable to understand the
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working of the Exchange Dealings Department, it shall be easy, if some basic principles are properly understood. They may be summarized in brief, as under: COMMODITY PRINCIPLE= When the bank (usually) purchases the foreign currency, it purchases against Indian Rupees (parts the Indian Rupees) and when the bank sells the foreign currency, it acquires the Indian Rupees. Thus, in most of the cases, the sale / purchase of foreign currency is against Indian Rupees. Accordingly, one may consider the Indian Rupees to be the currency and all the foreign currencies to be the commodities. As the trader purchases and sales the commodities, in what he is dealing in, against Indian Rupees (Home currency), the banker sales / purchases the commodities he is dealing in (foreign Currencies), against Indian Rupees. For the banker, the Indian Rupees is the currency, where as all the foreign Currencies are the commodities or the goods in what he is treading. In purchase transaction ;the bank acquires foreign currency and parts with home currency and in a sales transaction it parts with foreign currency and acquires home currency. MARKET MAKER PRINCIPLE / QUOTING BANK PRINCIPLE= When the banker sales the foreign currency to its customer (Merchant Transaction), it is the sale transaction for the banker, but the same shall be the buying transaction for the customer. Conversely, when the banker buys the foreign currency from the customer, it is a buying transaction for the bank and a sale transaction for the customer. In the Indian Banking parlance, the transaction is to be considered to be a BUYING TRANSACTION, if the bank is buying the foreign currency from the customer and shall be considered to be the SALE TRANSACTION, where the bank is selling the foreign currency to the customer, against Indian Rupees. The transaction is always talked from banks point of view the party who quotes the rate of exchange. In the Inter Bank and Overseas Market, there are two banks Calling Bank and Quoting Bank. The bank, which inquires the exchange rate is the Calling Bank and the Bank which is quoting the exchange rate is the Quoting Bank. In the Inter Bank and Overseas Transaction the Quoting Bank is the Market Maker and the transaction shall be considered to be the Buying Transaction, if it is buying transaction for the Quoting Bank and the same shall be considered to be the Selling Transaction, if it is a Sale Transaction for the Quoting Bank. QUOTING BANK ASKING BANK / HEATING BANK / MARKET USER / CALLING PARTY. BANKER PRINCIPLE= The bank puts the transaction for the customer. The banker purchases from / sales the foreign exchange to the customer. He acts a s the middle man in carrying out the foreign exchange transaction. The foreign exchange purchased by the bank from the customer if sold in the Inter Bank / Reserve Bank / Overseas Market and conversely, when the banker sales the foreign exchange to the customer, he acquires the amount from the market and delivers the same to the customer. The Banker Principle tells that I do not have foreign currency I do not keep foreign currency. The banker always tries to keep the SQUATRE POSITION. GO LOGICAL (MARKET BEHAVIOUR)= The foreign exchange market behaves like any other market. If somebody tries to sale a commodity to the market, against the fixed amount of money, the market shall prefer to take as many units of the commodity as possible, but if you try to purchase some commodity from the market against fixed amount of money, in all probable cases, the market shall try to give as less units of the commodity as possible. Similarly, the foreign markets also takes as much foreign currency as possible against the given amount of the local currency and delivers as less the foreign currency as possible, against the given amount of local currency. So, when the exchange rates are quoted in the market, the rate which quotes the less amount of the foreign currency against the given amount of local
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currency, it shall be the selling rate and the rate which quotes the higher amount of the foreign currency against the given amount of local currency, it shall be the buying rate. Post-Shipment Finance : Advances granted after the shipment like purchase / discount / negotiation of export bill, advances against export bill, undrawn balances / incentive claims will be in the form of post shipment finance. Purchasing Power Parity (PPP) = A theory stating that the exchange rate between currencies of two countries should be equal to the ratio of the countries price level of the commodity basket Put = An option to sell an underlying asset at a pre specified price. An option in which one investor acquires the right but not the obligation to sell an underlying asset for a specified price during a specified period of time Indexed-based Futures= A new mode of stock market investment in which, instead of buying individual shares one buys some units of a recognized index, such as the BSE Sensitive Index. Example: If the BSE Sensex stands at 300 points, and the price of an index point is Rs, 1000, an investment on 100 units would cost Rs. 30,00,000, and the profit and loss depends on the rise or fall of the index respectively. Put Protection= This is obtained by the right, inherent in options, to sell shares at an agreed option price, when the conditions of the options turn unfavorable to him. Short Dollar Position= A market position where a trader has sold dollars that he does not previously own. A short position is normally expressed in terms of the base currency (the currency of the home market in which a trader or investor is buying or selling). BID RATES (BUYING), OFFER RATES (SELLING)= The exchange rate at which the bank is prepared to sell the foreign currency to the customer is called the offer (selling) rate. The exchange rate at which the bank is prepared to buy the foreign currency from the customer is said to be the biding (Buying) rate. Bill Buying Rate= This rate is to be applied when a foreign bill is purchased by the bank, the proceeds of which are to be realized after the (at sight) bill is presented to the drawee at the overseas centre. In the case of a usance bill, the proceeds will be realized on the due date of the bill which includes the transit period and the usance period of the bill. Forward margin, for the currency, may be at a premium or discount. Premium is to be added to the spot rate and discount should be deducted from it. While making calculations, the bank will see that the period for which forward margin is loaded is in tune with the ongoing market and in the favour of the bank. The bill buying rate is arrived at by deducting the exchange margin and also adding / deducting premium / discount for the currency for the period of Transit / Usance etc. on the BASE RATE. The maxim here is "Better the Bill, Better the Rate". (on direct quotations). The Bill Buying Rate is applied for the transactions like For foreign inward remittances where amount is not credited to the banks Nostro account. Purchase / Discount of foreign currency clean instruments like traveller cheques, drafts, payment orders, cheques / export bills. Base Rate (Market Buying Rate) - Exchange Margin. +/- Forward Margins = Bill Buying Rate. BILL SELLING RATES= Applied for: Foreign outward remittances for imports.
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 TT Selling Rate + Additional Exchange Margin = Bill Selling Rate. TT Buying Rates = These rates are applicable for the transactions like: payment of inward remittances where cover has already been credited to bank's Nostro account. cancellation of forward sale contract. cancellation of foreign outward MT / TT / DD etc. Base Rate (Market Buying Rate) - Exchange Margin = TT Buying Rate. TT SELLING RATES = For foreign outward remittances ( clean.) The TT Selling rate is applied for: Clean outward remittances. cancellation of Forward buying contracts. cancellation of Foreign inward remittance. transferring the Bill Purchased earlier, to collection A/c. Base Rate (Market Selling Rate) + Exchange Margin = TT Selling Rate. INTERNATIONAL BANKING SWIFT = The society for Worldwide Inter-bank Financial Transactions FEDWIRE = USA RTGS = Real Time Gross Settlement system CHIPS = Clearing House Inter Bank Payment System Independent of FRB FR = Federal Reserve Ban ok USA CHAPS = Clearing House Automated Payment System UK INCOTERMS The revision, the first in a decade, reflects the profound changes that have taken place in global trade since 2000. These include the increased importance of cargo security, the resulting new obligations on traders, developments in container transport, and the 2004 revision of the United States Uniform Commercial Code, which resulted in a deletion of the former US shipment and delivery terms.

Incoterms 2010 by the International Chamber of Commerce (ICC) ICC Publication No. 715, 2010 Edition Implementation date: 1 January 2011. Incoterms rules define the responsibilities of buyers and sellers for the delivery of goods under sales contracts. Incoterms 2010 takes into account the latest developments in commercial practice, and updates and consolidates some of the former rules. A new classification system divides the 11 Incoterms rules into two distinct groups:
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Rules for any mode of transport: EXW FCA CPT CIP DAT DAP DDP Rules for waterway transport: FAS FOB CFR CIF In addition to the 11 rules, Incoterms2010 includes: Extensive guidance notes and illustrative graphics to help users efficiently choose the right rule for each transaction; New classification to help choosing the most suitable rule in relation to the mode of transport; Advice for the use of electronic procedures; Information on security-related clearances for shipments; Advice for the use of Incoterms 2010 in domestic trade. Incoterms 2010 reflects changes and evolutions in international business and commercial practice. Since 1936, ICCs Incoterms help traders avoid misunderstandings by clarifying costs, risks, and the allocation of certain responsibilities of buyers and sellers in sales contracts. ICC has been writing and publishing Incoterms rules for more than 70 years, providing importers, exporters, lawyers, freight forwarders, insurers and students in the international arena with rules and guidance reflecting the latest developments in the trading environment. - Paper version ISBN 978-92-842-0080-1 Size 13 x 24 130 pages. 55,00 - Paper version ISBN 978-92-842-0089-4 Size 13 x 24 250 pages. 60,00 E Term: The seller makes the goods available to the buyer at the seller's own premises. EXW - EX WORKS (...named place) Ship, Air, Rail & Truck OK. "Ex Works" (EXW) means the seller fulfills the obligation to deliver when he or she has made the goods available at his premises or another named place (i.e., works, factory, warehouse, etc.) to the buyer. In particular, the seller is not responsible for loading the goods in the vehicle provided by the buyer or for clearing the goods for export. This term thus represents the minimum obligation for the seller, and the buyer has to bear all costs and risks involved in taking the goods from the seller's premises. If the parties wish the seller to be responsible for the loading of the goods on departure and its risks and costs, this should be made clear by adding explicit wording to this effect in the contract of sale. This term should not be used when the buyer cannot carry out the export formalities directly or indirectly. In such circumstances, the FCA term should be used, provided the seller agrees that he will load at his cost and risk. F Terms: The seller is called upon to deliver the goods to a carrier appointed by the buyer. FCA - FREE CARRIER (...named place) Ship, Air, Rail & Truck OK. "Free Carrier" (FCA). This term has been designed to meet the requirements of modern transport, particularly such "multi-modal" transport as container or "roll on - roll off" traffic trailers and ferries. It is based on the same main principle as FOB except that the seller fulfills his obligations when he delivers the goods into the custody of the carrier at the named point. If no precise point can be mentioned at the time of the contract of sale, the parties should refer to the place or range where the carrier should take the goods into his charge. The risk of loss or damage to the goods is transferred from seller to buyer at that time and not at the ship's rail. A "Received for Shipment" Bill of Lading is acceptable in lieu of an "On Board" Bill of Lading. This allows exporters to receive shipping documents more quickly and to get paid in a more timely manner. "Carrier" means any person by whom or
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in whose name a contract of carriage by road, rail, air, sea or a combination of modes has been made. When the seller has to furnish a bill of lading, waybill or carrier's receipt, he duly fulfills this obligation by presenting such a document issued by a person so defined. FAS - FREE ALONGSIDE SHIP (...named port of shipment) Ship Only. "Free Alongside Ship" (FAS). This means that the seller fulfills his obligation to deliver when the goods have been placed alongside the vessel at the named port of shipment. The buyer has to bear all costs and risks of loss or damage to the goods from that moment. The FAS term requires the seller to clear the goods for export. FOB - FREE ON BOARD (...named port of shipment) Ship Only. "Free On Board" (FOB). This means that the seller fulfills his obligation when the goods are placed on board a ship by the seller at a port of shipment named in the sales contract. The risk of loss of or damage to the goods is transferred from the seller to the buyer when the goods pass the ship's rail. All costs from that point forward, including freight and insurance, are for the buyer's account. This term requires the seller to arrange export clearance. This term can be used only for sea or inland waterway transport. If the parties do not intend to deliver the goods across the ship's rail, the FCA term should be used. C Terms: The seller must contract for carriage, but without assuming the risk of loss or damage to the goods. CFR - COST AND FREIGHT (...named port of destination) Ship Only. "Cost And Freight" (CFR). The seller must pay the costs and freight necessary to bring the goods t the named destination, but the risk of loss or damage to the goods, as well as any additional costs due to events occurring after the time of delivery, are transferred from the seller to the buyer when the goods pass the ship's rail in the port of shipment. The CFR term requires the seller to clear the goods for export. This term should only be used for sea and inland waterway transportation. If the parties do not intend to deliver the goods across the ship's rail, the CPT term should be used. CIF - COST, INSURANCE AND FREIGHT (...named port of destination) Ship Only. "Cost, Insurance and Freight" (CIF). This means that the seller delivers when the goods pass the ship's rail in the port of shipment. The seller must pay the costs and freight necessary to bring the goods to the named port of destination but the risk of loss or damage, as well as additional costs due to events occurring after the time of delivery are transferred from the seller to the buyer. In CIF the seller also has to procure marine insurance against the buyer's risk of loss or damage to the goods during the carriage. Consequently, the seller contracts for insurance and pays the premium. The buyer should note that under the CIF term the seller is required to obtain insurance only on minimum cover. The CIF term requires the seller to clear the good for export. This term should be used only for sea and inland waterway transport. If the parties do not intend to deliver the merchandise across the ship's rail, the CIP term should be used. CPT - CARRIAGE PAID TO (...named place of destination) Ship, Air, Rail & Truck OK. "Carriage Paid To" (CPT). This term means that the seller delivers the goods to the carrier nominated by him, but the seller must also pay the cost of carriage to bring the goods to the named destination. Like CFR, "Freight or Carriage Paid To ...", the buyer bears all risks and any other costs occurring after the goods have been so delivered. "Carrier" is defined as any person who, in a contract of carriage, undertakes to perform or to procure the performance of transport, by rail, road, air, sea, inland waterway or by a combination of
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methods. If subsequent carriers are used for the carriage to the agreed destination, the risk passes when the goods have been delivered to the first carrier. This CPT term requires the seller to clear the goods for export. CIP - CARRIAGE AND INSURANCE PAID TO (...named place of destination) Ship, Air, Rail & Truck OK. "Carriage and Insurance Paid to" (CIP). This term is the same as "Carriage Paid To..." but with the addition that the seller has to procure insurance against the risk of loss of or damage to the goods during the carriage. The seller contracts with the insurer and pays the insurance premium. CIF is used for goods carried by sea, while CIP is used irrespective of the mode of transport. This term allows the exporter the greatest control over all aspects of shipment. D Terms: The seller has to bear all costs and risks needed to bring the goods to the country of destination. DAF - DELIVERED AT FRONTIER (...named place) Rail & Truck OK. "Delivered At Frontier" (DAF). This term is used typically when goods are being moved overland, and delivery of the goods will take place at the frontier of an adjoining country. It means that the seller delivers when the goods are placed at the disposal of the buyer on the arriving means of transport not unloaded, cleared for export, but not cleared for import at the named point and place at the frontier, but before the customs border of the adjoining country. The frontier must be clearly named. For example, goods being shipped from the U.S. to Mexico might have Laredo, Texas, named as the frontier. The shipper has the responsibility of delivering the goods to Laredo, while the buyer has the responsibility to bring the goods across the border into Mexico and clear Mexican customs. This term may be used irrespective of the mode of transport when goods are t be delivered at a land frontier. When delivery is to take place in the port of destination, on board a vessel or on the wharf, the DES or DEQ terms should be used. DES - DELIVERED EX SHIP (...named port of destination) Ship Only. "Delivered Ex Ship" (DES). This term means that the seller delivers when the goods are placed at the disposal of the buyer on board the ship, not cleared for import at the named port of destination. The seller must bear all the costs and risks involved in bringing the goods to the named port destination before discharging. If the parties wish the seller to bear the costs and risks of discharging the goods, then the DEQ terms should be used. This term can be used only when the goods are to be delivered by sea or inland waterway or multimodal transport on a vessel in the port of destination. DEQ - DELIVERED EX QUAY (DUTY PAID) (...named port of destination) Ship Only. "Delivered Ex Quay" (DEQ). This term means that the seller delivers when the goods are placed at the disposal of the buyer not cleared for import on the quay at the named port of destination. The seller bears costs and risks involved in bringing the goods to the named port of destination and discharging the goods on the quay. The DEQ term requires the buyer to clear the goods for import and to pay for all formalities, duties, taxes and other charges upon import. This term can be used only when the goods are to be delivered by sea or inland waterway or multimodal transport on discharging from a vessel onto the quay at the port of destination. If the parties wish to include in the seller's obligations the risks and costs of the handling of the goods from the quay to another place (warehouse, terminal, transport station) in or outside the port, the DDU or DDP terms should be used.

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DDU - DELIVERED DUTY UNPAID (...named placeof destination) Ship, Air, Rail & Truck OK. "Delivered Duty Unpaid" (DDU). This term means that the seller delivers the goods to the buyer, not cleared for import, and not unloaded from any arriving means of transport at the named place of destination. The seller has to bear the full cost and risk involved in bringing the goods thereto other than, where applicable, any "duty" (which includes the responsibility for the risks of the carrying out of customs formalities, and payment of formalities, customs duties, taxes and other charges) for import in the country of destination. Such "duty" has to be borne by the buyer as well as any costs and risks caused by his failure to clear the goods for import in time. This term may be used irrespective of the mode of transportation, but when delivery is to take place in the port of destination on board the vessel or on the quay, the DES or DEQ terms should be used. DDP - DELIVERED DUTY PAID (...named place of destination)

Ship, Air, Rail & Truck OK. "Delivered Duty Paid" (DDP). This term means that the seller delivers the goods to the buyer, cleared for import, and not unloaded from any arriving means of transport at the named place of destination. The seller must bear all costs and risks involved in bringing the goods thereto including, where applicable, any "duty" (which includes the responsibility for and the risk of carrying out of customs formalities, customs duties, taxes and other charges) for import in the country of destination. While the term "EXW" signifies the seller's minimum obligation, the "DDP" term represents the maximum obligation. If the parties wish the buyer to bear all risks and costs of the import, the DDU term must be used. The DDP term may be used irrespective of the mode of transport but when delivery is to take place in the port of destination on board the vessel or on the quay, the DES or DEQ terms should be used.

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Commodity Trading Banks are freely allowed to trade freely in forex securities. RBI has not allowed banks to trade in commodities except in gold Out- of-the-money: NEER (Nominal effective exchange rate): NEER is the weighted average of bilateral nominal exchange rates. It measures the appreciation/depreciation of a currency against the weighted basket of currencies whose countries are the main trading partners or competitors of the country of the currency under study. Nominal exchange rate is the actual exchange rate quote in the market at a given time. REER (Real effective exchange rate): REER is the nominal effective exchange rate (NEER) adjusted for inflation. In other words, the REER is calculated by dividing the home countrys nominal effective exchange rate by an index of the ratio of average foreign prices to home prices. REER may change even without any change in the exchange rate. Spot and Forward Rates. Forward Premium / Discount UCPDC / UCP and ISBP FEMA -1999 FEDAI Rules REMITTANCE SERVICES Inward Remittance FCRA Foreign Contribution Regulation Act FIRC = Foreign Inward Remittance Certificate COLLECTION OF CHEQUES Cash Letter Services FOREIGN CURRENCY NOTES AND COINS CDF OUTWARD REMITTANCES Schedule I Schedule II Schedule III Form A1 / A2 COLLECTION OF DOCUMENTARY BILLS Bill of Exchange Invoice Bill of Lading / Airway Bill Transport Documents Types of Bill of Lading Received for shipment Bill of Lading Short Form Bill of Lading Multimodal Transport Document Insurance Policy / Certificate Other Documents I.E. Code Number Collection of Export Bill URC GR / PP / SOFTEX Form Procedure SDF Electronic Data Interchange XOS Statement Extension of time for Realization Process of collection of Outward (Export) bills DA / DP / At Sight / Usance Noting and Protesting Advance against Exports Remittances against exports Agency Commission, Legal Expenses, Testing Charges, Claims form the buyers Collection of Import Bills Bill of Entry FEMA Declaration Regulation of Imports Advance Remittance against Imports LETTER OF CREDIT PARTIES TO L/C Adding Confirmation Negotiating Bank Endorsing the L/C Reimbursement Export L/Cs Import L/Cs - Procedure Funded / Non Funded Limits Application Import Licence Copy of Contract Crystallization TYPES OF LC Scrutiny of Documents under LC UCP 600 ISBP ICC PUBLICATIONS 1. Rules of Arbitration - in force as from 1 January 1998 2. ICC DOCDEX RULES - ICC Rules for Documentary Instruments Dispute Resolution Expertise - First revision - In effect from 15 March 2002

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3. International Standard Banking Practice for the Examination of Documents under Documentary Credits Subject to UCP 600 (ISBP) Published by ICC, Paris Publication No. 681, 2007 Edition 4. Comments to Commentary on UCP 600 - a critical review - By Kim Christensen 5. STANDARDIZED RULES ON THE ENCASHMENT - They entered the force with 1 January 1996 - PUBLICATION OF THE INTERNATIONAL CHAMBER OF COMMERCE OF 522 6. UCP 600 - (Deals with the transactions under Letters of credit) 7. eUCP 8. ISP 98 01/11/98 Standby letters of credit (including performance, financial, and direct pay standby letters of credit). 9. Uniform Rules for Demand Guarantees - URDG ICC Pub. No. 458 10. URR725 - UNIFORM RULES FOR BANK-TO-BANK REIMBURSEMENTS - APPROVED ON 15-16.04.2008. IN FORCE SINCE 01/10/2008 USD-50.00 11. INCOTERMS 2000 12. Arbitration and Conciliation - Dispute resolution systems for the transactions outside Letters of Credit TRADE FINANCE Pre-shipment Finance Post-shipment Finance PCFC FCBP Period of Credit Rates of Interest Procedure for Disbursement Repayment Duty Drawback Deemed Exports Purchase / Discount / Negotiation Advance against bill sent for collection Factoring Book Debts Forfeiting Buyers / Suppliers Credit Guarantees ECGC 1. Policies / Guarantees 2. Packing Credit Guarantee / WTPCG 3. Export Production Finance Guarantee 4. Post Shipment Export Credit Guarantee 5. Export Finance Guarantee 6. Export Performance Guarantee 7. Export Finance (Overseas Lending) Guarantee DEPOSIT SERVICES NRIs NRO NRE FCNR RFC RFC (D) EEFC EEFC Account Scheme was introduced in 1992, which enables exporters and other exchange earners to retain their receipts in foreign exchange with an authorised dealer in India. A person resident in India (which includes individuals, firms, companies, etc.) may open, hold and maintain with an authorised dealer in India, a Foreign Currency Account to be known as Exchange Earner's Foreign Currency (EEFC) Account. The EEFC Account shall be opened, held and maintained in the form of non interest bearing current account only. A person resident in India may open, hold and maintain with an authorised dealer in India a Foreign Currency Account, to be known as a Resident Foreign Currency (RFC) Account, out of foreign exchange a. received as pension or any other superannuation or other monetary benefits from his employer outside India; or b. realized on conversion of the assets referred to in subsection (4) of section 6 of the Act, and repatriated to India; or c. received or acquired as gift or inheritance from a person referred to in sub section (4) of section 6 of the Act; or
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d. referred to in clause (c) of section 9 of the Act, or acquired as gift or inheritance there from. The funds in a Resident Foreign Currency Account opened or held or maintained in terms of sub-regulation (1) of the Act shall be free from all restrictions regarding utilisation of foreign currency balances including any restriction on investment in any form, by whatever name called, outside India. The accounts may be maintained in the form of Current Account, Savings Account or Term Deposit Resident Foreign Currency (Domestic) Account. [RFC (D) Account] A person resident in India may open, hold and maintain with an Authorised Dealer in India a foreign currency account, to be known as Resident Foreign Currency (Domestic) Account. The resident Indians are allowed to retain upto USD 2000/-or its equivalent in aggregate, provided that such foreign exchange is in the form of currency notes bank notes and travellers cheques and the same has been acquired:a. while on a visit to any place outside India by way of payment for services not arising from any business in or anything done in India; or b. from any person not resident in India and who is on a visit to India, as honorarium or gift or for services rendered or in settlement of any lawful obligation; or c. by way of honorarium or gift while on a visit to any place outside India; or d. represents the unspent amount of foreign exchange acquired by him from an authorised person for travel abroad. e. gift received from close relatives (as defined in the Companies Act) and repatriated to India through normal banking channel by resident individuals. f. out of the earnings through export of goods and/or services, royalty, honorarium etc. With the introduction of the facility, the residents can either deposit the foreign exchange so acquired in the Resident Foreign Currency (Domestic) Account designated in any foreign currency or at their discretion, deposit in a Rupee Account after conversion. The facility for opening RFC(D) Account is in addition to the existing facility of retaining USD 2000/- or its equivalent in the form of currency notes and/or foreign currency travellers cheques. Debits to the account shall be for payments towards a current account transaction in accordance with the provisions of the Foreign Exchange Management (Current Account Transactions) Rules, 2000 and towards a capital account transaction permissible under the Foreign Exchange Management (Permissible Capital Account Transactions) Regulations, 2000. Cheque book facility may be provided. There shall be no ceiling on the balances in the account." EXPORT FINANCE a. General Guidelines to Banks for export financing b. Maximum permissible bank finance Tandon Committee Recommendations Method I /II. Not compulsory to observe c. Pre-shipment Finance DEFINATION - 'Pre-shipment credit' means any loan or advance granted or any other credit provided by a bank to an exporter for financing the purchase, processing, manufacturing or packing of goods prior to shipment, on the basis of letter of credit opened in his favor or in favor of some other person, by an overseas buyer or a confirmed and irrevocable order for the export of goods from India or any other evidence of an order for export from India having been placed on the exporter or some other person, unless lodgment of export orders or letter of credit with the bank has been waived. Financial assistance extended to the exporters prior to shipment falls within the scope of pre-shipment finance.
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Bank finance at pre-shipment stage is available in the form of:a. Packing credit in Indian rupees (PC) b. Packing Credit to Sub Supplier c. Running Account facility d. Pre shipment Credit in Foreign Currency (PCFC) e. Packing Credit Facilities to deemed Exports f. Packing Credit facilities for Consulting Services g. Advance against Cheques/Draft etc. representing Advance Payments. h. Packing credit in foreign currency (PCFC) i. Advances against incentives and duty draw-back claims etc. j. Advances against Cash Incentives. k. Advance against Duty Drawback. Criteria for granting packing credit Security Quantum of finance Margin requirements Period of finance Rate of interest Running Account Facility Application for disbursement to contain Documentation ECGC Formalities Disbursement:Special care has to be taken:1. Where, packing credit is a sub-limit of cash credit limit. 2. Interchangeability between pre and post shipment limits is permitted. 3. Shipments proposed to are to countries with externalization problems. 4. Letters of credit are restricted for negotiation to other banks. 5. Exporter is under Specific Approval List (SAL) of ECGC. 6. Exporter is caution listed by Reserve Bank of India. 7. Letter of credit opening bank is not a prime bank. 8. Commodities requiring quota/export license etc. 9. Marketability of commodity/security etc 10. Granting packing credit for LC in a currency where the bank has no nostro account Packing credit disbursements may be made in installments as per utilization schedule of the exporter. The letters of credit lodged for packing credit advance should bear required Revenue Stamp. At present Rs 2/-. The original export contracts/ letters of credit lodged under packing credit advance should be studied in detail to ensure the conversion of are-shipment finance into post-shipment finance at a later date. Such original contracts / letters of credit should be properly endorsed for the Amount disbursed, under bank stamp and signature and held on bank's records. The same may be parted to the borrower in deserving cases only, against proper written request, retaining certified copy on record. Even under 'running account facility, lodgment of contract/ letter of credit is a must. However, the same may be done within a reasonable period after the disbursement date not exceeding one month. Usually, the packing credit disbursement is made directly to suppliers

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Though the packing credit sanction may have a stipulation of hypothecation/ pledge, initially the disbursements are made against lodgment of contract/ letter of credit. The Packing Credit advance is clean and unsecured till material is acquired and charge is created. There is always a danger of double financing. However, the resultant stocks are required to be given for hypothecation/ pledge within a reasonable time thereafter. Packing credit advance is disbursed on demand loan basis and not as a cash credit advance. Each disbursement is a separate demand loan. Interest charged to packing credit account must be simultaneously recovered (on the same day-to debit of local account, to avoid financing of interest Amount on concessional rate of interest. ECGC guarantee does not cover claims on interest Amount. Prior permission of ECGC to be obtained for exports to restricted cover countries Disbursement of Packing Credit a. Ordinarily, each packing credit sanctioned should be maintained as separate account for the purpose of monitoring period of sanction and end-use of funds. b. Banks may release the packing credit in one lump-sum or in stages as per the requirement for executing the orders/LC. c. Banks may also maintain different accounts at various stages of processing, manufacturing, etc. depending on the types of goods to be exported, e.g. hypothecation, pledge, etc., accounts and may ensure that the outstanding balance in accounts are adjusted by transfer from one account to the other and finally by proceeds of relative export documents on purchase, discount, etc. d. Banks should continue to keep a close watch on the end-use of the funds and ensure that credit at lower rates of interest is used for genuine requirements of exports. Banks should also monitor the progress made by the exporters in timely fulfillment of export orders. Liquidation of Packing Credit (i) General The packing credit/pre-shipment credit granted to an exporter must be liquidated out of proceeds of bill drawn for the exported commodities on its purchase, discount, etc. thereby converting pre-shipment credit into post-shipment credit. If not so liquidated, banks should charge the rate of interest for ECNOS -Pre-shipment as indicated in paragraph 5.2.1 (4) from the date of advance. (ii) Packing credit in excess of export value (a) Where byproduct can be exported Where the exporter is unable to tender export bills of equivalent value for liquidating the packing credit due to the shortfall on account of wastage involved in the processing of agro products like raw cashew nuts, etc., banks may allow exporters, inter alia, to extinguish the excess packing credit by export bills drawn in respect of byproduct like cashew shell oil, etc. (b) Where partial domestic sale is involved However, in respect of export of agro-based products like tobacco, pepper, cardamom, cashew nuts, etc., the exporter has necessarily to purchase a somewhat larger quantity of the raw agricultural produce and grade it into exportable and non-exportable varieties and only the former is exported. The non-exportable balance is necessarily sold domestically. For the packing credit covering such non-exportable portion, banks are required to charge commercial rate of interest applicable to the domestic advance from the date of advance of packing credit and that portion of the packing credit would not be eligible for any refinance from RBI. (c) Export of de-oiled / defatted cakes
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Banks are permitted to grant packing credit advance to exporters of HPS ground nut and de-oiled / defatted cakes to the extent of the value of raw materials required even though the value thereof exceeds the value of the export order. The advance in excess of the export order is required to be adjusted either in cash or by sale of residual byproduct oil within a period not exceeding 30 days from the date of advance to be eligible for concessional rate of interest. (iii) Operational Flexibility. Banks have, however, operational flexibility to extend the following relaxation to their exporter clients who have a good track record: (a) Repayment/liquidation of packing credit with proceeds of export documents will continue; however, this could be with export documents relating to any other order covering the same or any other commodity exported by the exporter. While allowing substitution of contract in this way, banks should ensure that it is commercially necessary and unavoidable. Banks should also satisfy about the valid reasons as to why packing credit extended for shipment of a particular commodity cannot be liquidated in the normal method. As far as possible, the substitution of contract should be allowed if the exporter maintains account with the same bank or it has the approval of the members of the consortium, if any. (b) The existing packing credit may also be marked-off with proceeds of export documents against which no packing credit has been drawn by the exporter. However, it is possible that the exporter might avail of EPC with one bank and submit the documents to another bank. In view of this possibility, banks may extend such facility after ensuring that the exporter has not availed of packing credit from another bank against the documents submitted. (c) These relaxations should not be extended to transactions of sister / associate/ group concerns. Packing Credit to Exporter - Packing credit may be disbursed to exporter on making a formal application for release the packing credit with an undertaking to the effect that the exporter shall ship the goods within stipulated due date and submit the relevant shipping documents to the banks within prescribed time limit, as per the Sanction terms. The application should be supported by:i. The original, firm export order / irrevocable LC / original telecommunication correspondence exchanged between the exporter and the buyer. This document should be in conformity with the Sanction stipulations. ii. Licence issued by the office of the DGFT if the goods to be exported fall under the restricted category. If the item falls under quota system, proper quota allotment proof needs to be submitted. If the item falls under the canalized list the no objection / release order from the respective canalizing agency is required. Export order may contain minimum following details. I. Name of the exporter and the overseas buyer. II. Particulars / details of the goods to be exported. III. Quantity, unit price, name of the currency and value of the export order. IV. Last Date/s of shipment /dispatch. V. Terms of sales and payments VI. Any other terms to be complied with It is expected of the bank to guide to customer and particularly explain the difference between letter of credit and firm order as a security for finance. Packing credit to suppliers may be made available against no objection /non- availing of Packing Credit from the relative exporter. This will help the financing bank to avoid double finance. Usually, the packing credit amount disbursed should not exceed the aggregate of

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FOB value. The packing credit to the supplier may also be granted against Back to back LC / inland LC or quarterly audited certificate of export bills. Packing Credit to immediate sub-supplier [w.e.f.10.11.94] may be granted to cover export order/ letter of credit received in favor of export houses/ trading houses/ star trading houses etc., or manufacturing exporters only. Presently there is no provision for sub-sub supplier. Packing Credit can only be shared between the Export Order Holder (EOH) and the supplier of the goods on the basis of disclaimer. Disclaimer is required to be issued by the EOH in order to indicate that he is not availing any credit facility against the portion of the order transferred in the name of the manufacturer. Inland LC favoring sub supplier is a must. Disbursement is to be made on order to order basis. No running account facility. No PCFC facility. Facility is available on the basis of good track record of exporters. The EOH(Export Order Holder- will be responsible for exporting the goods as per export order or overseas LC and any delay in the process will subject him to the penal provisions issued from time to time. once the sub-supplier makes available the goods as per inland LC terms to the EOH, his obligation of performance under the scheme will be treated as complied with the penal provisions will not be applicable to him for delay by EOH, if any. It attracts interest tax provisions. (i) Packing credit can be shared between an Export Order Holder (EOH) and subsupplier of raw materials, components, etc. of the exported goods as in the case of EOH and manufacturer suppliers, subject to the following: (a) Running Account facility is not contemplated under the scheme. The scheme will cover the L/C or export order received in favour of Export Houses/Trading Houses/Star Trading Houses, etc. or manufacturer exporters only. The scheme should be made available to the exporters with good track record. (b) Bankers to an EOH will open an inland L/C specifying the goods to be supplied by the sub-supplier to the EOH against the export order or L/C received by him as a part of the export transaction. On the basis of such a L/C, the sub-supplier's banker will grant EPC as working capital to enable the sub-supplier to manufacture the components required for the goods to be exported. On supplying the goods, the L/C opening bank will pay to the subsupplier's banker against the inland documents received on the basis of inland L/C. Such payments will thereafter become the EPC of the EOH. (c) It is upto the EOH to open any number of L/Cs for the various components required with the approval of his banker/leader of consortium of banks within the overall value limit of the order or L/C received by him. Taking into account the operational convenience, it is for the L/C opening bank to fix the minimum amount for opening such L/Cs. The total period of packing credit availed by the sub - supplier(s), individually or severally and the EOH should be within normal cycle of production required for the exported goods. Normally, the total period will be computed from the date of first drawl of packing credit by any one of the sub-suppliers to the date of submission of export documents by EOH. (d) The EOH will be responsible for exporting the goods as per export order or overseas L/C and any delay in the process will subject him to the penal provisions issued from time to time. Once the sub-supplier makes available the goods as per inland L/C terms to the EOH, his obligation of performance under the scheme will be treated as complied with and the penal provisions will not be applicable to him for delay by EOH, if any. (e) The scheme is an additional window besides the existing system of sharing of packing credit between EOH and manufacturer in respect of exported goods as detailed in paragraph 1.2.1 above. The scheme will cover only the first stage of production cycle. For example, a manufacturer exporter will be allowed to open domestic L/C in favour of his immediate suppliers of components etc. that are required for manufacture of exportable goods. The scheme will not be extended to cover suppliers of raw materials/components, etc. to such immediate suppliers. In case the EOH is merely a trading house, the facility will be
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available commencing from the manufacturer to whom the order has been passed on by the Trading House. (f) EOUs / EPZ / SEZ units supplying goods to another EOU / EPZ / SEZ unit for export purposes are also eligible for rupee pre-shipment export credit under this scheme. However, the supplier EOU / EPZ / SEZ unit will not be eligible for any post-shipment facility as the scheme does not cover sale of goods on credit terms. (g) The scheme does not envisage any change in the total quantum of advance or period. Accordingly, the credit extended under the system will be treated as export credit from the date of advance to the sub-supplier to the date of liquidation by EOH under the inland export L/C system and upto the date of liquidation of packing credit by shipment of goods by EOH and will be eligible for refinance from RBI by the respective banks for the appropriate periods. It has to be ensured that no double financing of the same leg of the transaction is involved. (h) Banks may approach the ECGC for availing suitable cover in respect of such advances. (i) The scheme does not envisage extending credit by a sub-supplier to the EOH / manufacturer and thus, the payment to sub-suppliers has to be made against submission of documents by L/C opening bank treating the payment as EPC of the EOH. Packing credit for exhibition and sale - may be extended in the first instance as a normal domestic credit, and after the sale is completed they can be allowed the benefit of concessive rate of interest up to the stipulated/ eligible period by way of rebate. Running Account facility Pre-shipment credit to exporters is normally provided on lodgment of L/Cs or firm export orders. It is observed that the availability of raw materials is seasonal in some cases. In some other cases, the time taken for manufacture and shipment of goods is more than the delivery schedule as per export contracts. In many cases, the exporters have to procure raw material, manufacture the export product and keep the same ready for shipment, in anticipation of receipt of letters of credit/firm export orders from the overseas buyers. Having regard to difficulties being faced by the exporters in availing of adequate preshipment credit in such cases, banks have been authorized to extend Pre-shipment Credit Running Account facility in respect of any commodity, without insisting on prior lodgment of letters of credit/firm export orders, depending on the banks judgment regarding the need to extend such a facility and subject to the following conditions: Banks may extend the Running Account facility only to those exporters whose track record has been good as also Export Oriented Units (EOUs) / Units in Free Trade Zones/ Export Processing Zones (EPZs) and Special Economic Zones (SEZs). In all cases where Pre-shipment Credit Running Account facility has been extended, letters of credit/firm orders should be produced within a reasonable period of time to be decided by the banks. Banks should mark off individual export bills, as and when they are received for negotiation / collection, against the earliest outstanding pre-shipment credit on 'First In First Out' (FIFO) basis. Needless to add that, while marking off the pre-shipment credit in the manner indicated above, banks should ensure that concessive credit available in respect of individual pre-shipment credit does not go beyond the period of sanction or 360 days from the date of advance, whichever is earlier. Packing credit can also be marked-off with proceeds of export documents against which no packing credit has been drawn by the exporter. If it is noticed that the exporter is found to be abusing the facility, the facility should be withdrawn forthwith. In cases where exporters have not complied with the terms and conditions, the advance will attract commercial lending rate ab initio. In such cases, banks will be required to pay higher rate of interest on the portion of refinance availed of by them from the RBI in
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respect of the relative pre-shipment credit. All such cases should be reported to the Monetary Policy Department, Reserve Bank of India, Central Office, Mumbai 400 001 which will decide the rate of interest to be charged on the refinance amount. Running account facility should not be granted to sub-suppliers. There appears to be a misconception for the meaning of the term RUNNING ACCOUNT facility under Packing Credit. The "RUNNING ACCOUNT facility for the packing credit as per the Reserve Bank of India guide lines, means that a borrower with a good track record may be disbursed a packing credit without prior lodgment of a supporting letter of credit / confirmed order at the time of disbursement. The same may be submitted within a subsequent time thereafter, not exceeding 30 days from the date of disbursement. Running account facility may be extended to the borrower where the need has been established to the satisfaction of the bank, the exporter's track record has been good. The LC / contract to be lodged within a reasonable time, which may not exceed 30 days for the commodity under selective credit control. Packing credit advance shall have to be disbursed as per sanction stipulations, usually, only against lodgment of letter of credit / export order etc. However, RBI has permitted the banks to disburse the loans even where the exporter is not able to lodge the letter of credit / export order while availing the advance. The relative letter of credit / export order may be lodged subsequently, within a reasonable time, i.e. on running account basis. The facility is to be permitted very carefully, only to the good customers, having proven track record and of course, after making proper stipulations / amendments in sanction. Under a Running Account Facility, banks may grant pre-shipment advances for exports of any commodity, without insisting on prior lodgment of letter of credit / firm export orders, subject to the following conditions: The export credit refinance from RBI is available only upto a period not exceeding -180days. The 'Running Account' facility does not envisage any relaxation in regard to the stipulated period for which pre-shipment credit at lower rate of interest is made available. ADVANCE AGAINST RECEIVABLE / INCENTIVES: Ordinarily, advances against Cash Incentive - Duty Drawback are considered at the postshipment level. However, for some commodities where the domestic price is higher than the export price, it is normally compensated by the Government by cash incentive as per the policy in force. In such cases, the banks may have to finance in excess of the contract value taking into consideration the cash incentive available. Such advances can be extended to a maximum period of 90 days only at the concessional rate of interest. (At present, the cash incentive scheme is withdrawn by Government of India and hence there will not be any advance against cash incentives.) In case of export products which contain import contents for which import duty is paid, it is refunded by the Government by way of Duty Drawback. Advance can be given at the preshipment stage against Duty Drawback and should be adjusted by the receivable from the Government. Advance against incentive / receivable released at the pre-shipment stage may be covered under "Export Production Finance Guarantee" of the E.C.G.C. The cover and premium is as applicable to WTPCG if the bank has opted for the WTPC Guarantee. (At present, the facilities like Cash Incentives and financing under international price reimbursement scheme, etc., are not available.)
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Packing Credit facilities for Consulting Services In the cases of consultancy service exports, there is no physical movement of goods. The working capital required by the consultants / firms for providing the consultancy services to the foreign constituents may also be covered under the pre shipment finance and all the benefits of the packing credit advance may be permitted for such an advance. i. Some of the Indian consultancy firms have taken up export of consultancy services in connection with the setting up of industrial and other projects in foreign countries. Where such consultancy services form part of turnkey projects or joint ventures set up abroad, banks are considering suitable credit facilities at the pre-shipment and post-shipment stages. The exporters may need financial assistance from banks even in cases where consultancy services alone are exported, particularly, if no advance payments are received. ii. Banks may consider granting suitable pre-shipment credit facilities against consultancy agreements to consultancy firms for meeting the expenses of the technical and other staff employed for the project and purchase of any materials required for the purpose as well as for export of computer software, both standard and custom built software programs, subject to the usual conditions of packing credit scheme. iii. While deciding the pre-shipment facilities, advance payments received against the contract must be taken into account. iv. Banks may consider issuing suitable guarantees to exporters of consultancy services of high value with large advance payment, taking into account the competence of the firm to undertake the assignment in question and other related aspects. Advance against Cheque/Drafts received as advance payment Where exporters receive direct payments from abroad by means of cheques/ drafts etc. the bank may grant export credit at concessional rate to the exporters of goods track record, till the time of realization of the proceeds of the cheques or draft etc. The Banks however, must satisfy themselves that the proceeds are against an export order. (i) Where exporters receive direct remittances from abroad by means of cheques, drafts, etc. in payment for exports, banks may grant export credit at concessive interest rate to exporters of good track record till the realization of proceeds of the cheque, draft etc. received from abroad, after satisfying themselves that it is against an export order, is as per trade practices in respect of the goods in question and is an approved method of realization of export proceeds as per extant rules. (ii) If, pending compliance with the above conditions, an exporter has been granted accommodation at normal commercial interest rate, banks may give effect to concessive export credit rate retrospectively once the aforesaid conditions have been complied with and refund the difference to the exporter. Rupee Pre-shipment Credit to Specific Sectors/Segments Rupee Export Packing Credit to Manufacturer Suppliers for Exports Routed through STC / MMTC / Other Export Houses, Agencies, etc. (a) Banks may grant export packing credit to manufacturer suppliers who do not have export orders/letters of credit in their own name, and goods are exported through the State Trading Corporation/Minerals and Metal Trading Corporation or other export houses, agencies, etc. (iii) Such advances will be eligible for refinance, provided the following requirements are complied with apart from the usual stipulations: (a) Banks should obtain from the export house a letter setting out the details of the export order and the portion thereof to be executed by the supplier and also certifying that
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the export house has not obtained and will not ask for packing credit in respect of such portion of the order as is to be executed by the supplier. (b) Banks should, after mutual consultations and taking into account the export requirements of the two parties, apportion between the two i.e. the Export House and the Supplier, the period of packing credit for which the concessionary rate of interest is to be charged. The concessionary rates of interest on the pre-shipment credit will be available upto the stipulated periods in respect of the export house/agency and the supplier put together. (c) The export house should open inland L/Cs in favour of the supplier giving relevant particulars of the export L/Cs or orders and the out standings in the packing credit account should be extinguished by negotiation of bills under such inland L/Cs. If it is inconvenient for the export house to open such inland L/Cs in favour of the supplier, the latter should draw bills on the export house in respect of the goods supplied for export and adjust packing credit advances from the proceeds of such bills. In case the bills drawn under such arrangement are not accompanied by bills of lading or other export documents, the bank should obtain through the supplier a certificate from the export house at the end of every quarter that the goods supplied under this arrangement have in fact been exported. The certificate should give particulars of the relative bills such as date, amount and the name of the bank through which the bills have been negotiated. (d) Banks should obtain an undertaking from the supplier that the advance payment, if any, received from the export house against the export order would be credited to the packing credit account. Rupee Pre-shipment Credit to Construction Contractors i. The packing credit advances to the construction contractors to meet their initial working capital requirements for execution of contracts abroad may be made on the basis of a firm contract secured from abroad, in a separate account, on an undertaking obtained from them that the finance is required by them for incurring preliminary expenses in connection with the execution of the contract e.g., for transporting the necessary technical staff and purchase of consumable articles for the purpose of executing the contract abroad, etc.. ii. The advances should be adjusted within 180 days of the date of advance by negotiation of bills relating to the contract or by remittances received from abroad in respect of the contract executed abroad. To the extent the outstanding in the account are not adjusted in the stipulated manner, banks may charge normal rate of interest on such advance. iii. The exporters undertaking project export contracts including export of services may comply with the guidelines/instructions issued by Reserve Bank of India, Exchange Control Department, Central Office, Mumbai from time to time. Pre-shipment Credit to Floriculture, Grapes and Other Agro-based Products a. In the case of floriculture, pre-shipment credit is allowed to be extended by banks for purchase of cut-flowers, etc. and all post-harvest expenses incurred for making shipment. b. However, with a view to promoting exports of floriculture, grapes and other agrobased products, banks are allowed to extend concessional credit for working capital purposes in respect of export-related activities of all agro-based products including purchase of fertilisers, pesticides and other inputs for growing of flowers, grapes, etc., provided banks are in a position to clearly identify such activities as export-related and satisfy themselves of the export potential thereof, and the activities are not covered by direct/indirect finance schemes of NABARD or any other agency, subject to the normal terms & conditions relating to packing credit such as period, quantum, liquidation, etc.

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Export credit should not be extended for investments, such as, import of foreign technology, equipment, land development, etc. or any other item which cannot be regarded as working capital. Export Credit to Processors / Exporters - Agri-Export Zones i. Government of India have set up Agri Export Zones in the country to promote agri exports and proposed that Agri Export Oriented Units (processing) would be set up in Agri Export Zones and to promote such units, production and processing have to be integrated. The producer has to enter into contract farming with the farmers around the unit and has to ensure supply of quality seeds, pesticides, micro-nutrients and other material to the group of farmers from whom the exporter would be purchasing their products as raw-material for production of the final products for export. The Government, therefore, suggested that such export processing units may be provided packing credit under the extant guidelines for the purpose of procuring and supplying inputs to the farmers so that quality inputs are available to them which in turn will ensure that only good quality crops are raised. The exporters will be able to purchase/import such inputs in bulk which will have the advantages of economies of scale. ii. Banks may treat the inputs supplied to farmers by exporters as raw material for export and consider sanctioning the lines of credit/export credit to processors/ exporters to cover the cost of such inputs required by farmers to cultivate such crops to promote export of agri products. The processor units would be able to effect bulk purchases of the inputs and supply the same to the farmers as per a pre-determined arrangement. iii. Banks have to ensure that the exporters have made the required arrangements with the farmers and overseas buyers in respect of crops to be purchased and products to be exported respectively. The financing banks will also appraise the projects in agri export zones and ensure that the tie-up arrangements are feasible and projects would take off within a reasonable period of time. iv. They have also to monitor the end-use of funds, viz. distribution of the inputs by the exporters to the farmers for raising the crops as per arrangements made by the exporter/main processor units. v. They have to further ensure that the final products are exported by the processors / exporters as per the terms and conditions of the sanction in order to liquidate the pre-shipment credit as per extant instructions. Quantum of Finance The packing credit is need based working capital finance. The nature of goods to be exported, the quantum of bank finance required to fulfill the order, the stake of the borrower, etc., play an important role in deciding the quantum of bank finance. The advance value for packing credit disbursements should be arrived at as per sanction terms (FOB/ CFR/ CIF value, margin, etc). Necessary provisions for freight and insurance may be made. Usually for sea freight a provision of 10 % (air 20%) and for insurance provision of 1 to 2% is made from the advance value. Margin requirements - The disbursement is made for market value of goods less margin. Banks are to decide margin requirements, considering the exporter's stake in business, to make the borrower more business conscious, to avoid erosion in value of goods, not to finance profits, etc. The exception may be made for commodities like, extractions HPS groundnuts, de-oiled cakes, de-fatted cakes, oil portion (by- product oil- to be liquidated within 30 days.)

c.

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Post disbursement follow up - must be done properly and advance should be liquidated within stipulated period by submission of export documents. Stocks under packing credit should be segregated from import cash- credit/ domestic cash credit etc. Separate stock statement, stock register and insurance may be insisted upon. Interest is to be charged on quarterly basis and on liquidation of loan. For advance under PCFC and FCBP scheme, 360 days makes a year and not 365 days as under rupee advance. Time Limit of Packing credit Advance - Banks may grant packing credits up to 270 days ab-initio, in the case of commodities which would need longer period of production. For period beyond 270 days and up to 360 days from date of drawl, the rate applicable will be "export credit not otherwise specified" is synchronized with the normal lending rate as applicable to domestic credit and advances of Rs.2 lakhs and above. The finance is granted for a period not exceeding 360 days. If the advance is outstanding for more than 360 days, banks are to charge commercial rate of interest from day one 180 +90 +90 days. Concessive interest rate on packing credit only up to "reasonable time- 360 days In case disbursements are in installments, 360 days period will be reckoned, from the date of first disbursal. Extension in time limit to be permitted judiciously in the cases of genuine hardships for factors beyond borrower's control like, transport bottlenecks, power shortage, non availability of shipping space. Bank considers all such requests on case to case basis taking into consideration the past experience, track record of borrower, etc. PERIOD OF CREDIT: The pre-shipment finance is to be adjusted out of the export proceeds, irrespective of the commodity. Finance at pre-shipment stage may be granted for a period not exceeding 180 days, from the date of the disbursement. However, the bank has to ensure that the advance is provided considering the manufacturing / shipment schedule, etc., and the facility is not misused by the borrower. For example, if the last date of shipment is within a period of 30 days from the date of advance, the advance may be adjusted maximum within a period of 30 to 40 days by negotiation / purchase of export bill/s. Thus the pre-shipment credit is a short term working capital finance, available at concessional rate of interest upto a period prescribed by Reserve Bank of India. However, the bank is expected to keep the period, as short as possible taking into consideration the manufacturing / purchasing cycle, packing and shipment, but not exceeding (at present) 180 days, from the date of disbursement. If an exporter is not able to ship / dispatch the goods within the stipulated 180 days due to the reason/s beyond his control, the bank has discretion to allow an extension of 90 days. The same may further be extended by 90 days (Not exceeding total 360 days in all). But this discretion should be used judiciously and under the authority of the bank's respective controlling authorities. At present, the pre-shipment finance may be disbursed in Indian Rupees (rupee packing credit) or in foreign currency, i.e. packing credit in foreign currency (PCFC) as per the needs of the borrower. The packing credit in Indian Rupees may be liquidated by purchase / negotiation / discount of export bills (FBP / UFBP). The packing credit in foreign currency may be liquidated by purchase / negotiation / discount of export bills (FCBP / FCBD). a. The period for which a packing credit advance may be given by a bank will depend upon the circumstances of the individual case, such as the time required for procuring, manufacturing or processing (where necessary) and shipping the
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relative goods. It is primarily for the banks to decide the period for which a packing credit advance may be given having regard to the various relevant factors so that the period is sufficient to enable the exporter to ship the goods. b. (ii) If pre-shipment advances are not adjusted by submission of export documents within 360 days from the date of advance, the advances will cease to qualify for concessive rate of interest to the exporter ab-initio. c. RBI would provide refinance only for a period not exceeding 180 days. Pre-Shipment finance is released in the form packing credit in Indian Rupees / Foreign currency, advances against duty-drawback etc. Packing Credit Advance needs be liquidated out of as the export proceeds by converting pre-shipment credit into post-shipment credit. Accordingly, wherever the bank has sanctioned the pre-shipment finance limit, it is essential that the bank also sanctions the post-shipment finance limits. Liquidation may be allowed by the payment receivable from the incentives payments received from the Government of India like duty drawback, payment from the Market Development Fund (MDF) of the Central Government etc. In case if the export does not take place, the advance is to be recovered from the local source at a commercial rate of interest. The pre-shipment finance may also be recovered through the debit of the EEFC account. Reserve Bank of India has no objection to a bank permitting packing credit with following facilities: a. Running account facility b. Liquidation on FIFO / LIFO basis. c. Substitution of contract is permitted w.e.f.14.12.94 d. Liquidation by export documents for which no packing credit was availed is permitted w.e.f.14.12.94 but not from sister/ associate / group concerns e. Extension of packing credit beyond sanctioned period up to 180 days. It may further be extended upto90 days. However, the bank is to ensure that it is commercially necessary and unavoidable and supported by valid reasons. Overdue Packing Credit The packing credit advance not liquidated on the due date is considered to be overdue. FOLLOW-UP / INSPECTION/ CONTROL/ CHECK POINTS: Exporter needs to submit stock statement giving all the necessary information about the stocks. It is then used by the banks as a guarantee for securing the packing credit in advance. Bank also decides the date of submission of these stocks. Apart from this, authorized dealers (banks) also physically inspect the stock at regular intervals. Even though, initially, the packing credit advance is clean in nature, as the borrower procures the material from the amount disbursed only, the branch should carefully study the sanction and follow up actions after disbursements should be scrupulously taken care of. The security should be created within a reasonable time, from the date of disbursement. Once the raw material / goods procured out of the pre-shipment finance reach the godown, it must be taken as pledge/ hypothecation with proper insurance as per the sanction terms. The finished goods for shipment may be released under trust with Bank's approved clearing agents. A lien letter should be obtained from the clearing agent and the goods inspected at regular intervals by the nearest branch at the port centre or by the branch staff themselves.

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At every stage, the follow-up and inspection is necessary to protect the interest of the bank and also ECGC will absolve its liability if the terms and conditions of the sanction are not complied with. Due date of the advance approved in advance. to be closely monitored and extension if any is duly

Default is informed to ECGC within 30 days of recalling the advance. The claim, if any is submitted to ECGC within time. The packing credit is adjusted immediately on submission of the export bills to the bank by the exporter. The advance may be guaranteed under the security like Pledge / Hypothecation of goods, personal guarantee of the exporter, other securities etc. These precautions / securities are over and above the normal precautions / securities like viability of venture, integrity and the capacity of the borrower, capacity to export, obtaining export quota / license if any, normal margin requirements, marketability of goods (securities), past performance, fulfillment of Exchange Control / Trade Control requirements, conditions stipulated in Letter of Credit / Export Contract etc. PRE SHIPMENT FINANCEIN FOREIGN CURRENCY - PCFC W.E.F.8.11.93 Under the busy season policy guidelines and the half yearly credit policy for the second half of 1993-94 announced by RBI, the scheme of pre-shipment credit in foreign currency (PCFC) has been formulated. The advance under PCFC may be granted by the authorized dealers at LIBOR related interest rates, to the exporter to meet the cost of the imported as well as domestic inputs for the goods meant for export. Pre shipment finance in foreign currency [PCFC] is permitted in all convertible currencies, against export order/ LC. It is working capital finance, an additional window. Running account facility for PCFC [IECD.No.30/04.02.02/94 data 14.12.94] PCFC may cover both domestic/imported inputs, for executing export order, cash/ consignment exports. ECGC cover shall be in Indian rupees only. EEFC facility may be availed under the scheme but the credit to EEFC account shall be after liquidation of export credit. Banks may charge commitment charges for early delivery, with a tolerance of one month. There may also be the operational charge on each bill. The exchange rate risk is covered under the scheme and accordingly there is no reason for booking of forward contracts. No Reserve Bank of India refinance against PCFC advance and for documents discounted abroad. Bank are to source funds from EEFC a/cs, RFC a/cs, FCNR (B) a/cs, Escrow a/cs, Lines of credit abroad. PCFC and EBR are also available for ACU transactions w.e.f.01.01.96. PCFC in one currency and invoicing in another currency is permitted w.e.f.01.01.99. Running a/c facility is available for all commodities w.e.f.14.03.92. [IECD No 56/EFD/819.aol.ecr/ 91.92 data 14.03.92] The scheme is permitted to supplier in one EOU/EPZ to another EOU/ EPZ since Nov/Dec.1994. Early/late liquidation of PCFC/ FCBP will attract a charge and also crystallization provisions. PCFC is an additional window for providing pre-shipment credit at internationally competitive interest rates in addition to the pre-shipment credit in Indian rupees. The PCFC shall be disbursed as short term finance out of the deposits canvassed under Foreign Currency Account (EEFC), ESCROW accounts, Resident Foreign Currency accounts, etc. Interest on Pre-shipment Credit Banks should charge interest on pre-shipment credit upto 180 days, and for the period beyond 180 days, but upto 270 days, at the rates to be decided by the bank within the

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ceiling rate arrived at on the basis of PLR relevant for the entire tenor of the export credit under the category. The period of credit is to be reckoned from the date of advance. If pre-shipment advances are not liquidated from proceeds of bills on purchase, discount, etc. on submission of export documents within 360 days from the date of advance, the advances will cease to qualify for concessive rate of interest ab initio. In cases where packing credit is not extended beyond the original period of sanction and exports take place after the expiry of sanctioned period but within a period of 360 days from the date of advance, exporter would be eligible for concessional credit only upto the sanctioned period. For the balance period, interest rate prescribed for ECNOS at preshipment stage will apply. Further, the reasons for non-extension of the period need to be advised by banks to the exporter. In cases where exports do not take place within 360 days from the date of pre-shipment advance, such credits will be termed as Export Credit Not Otherwise Specified (ECNOS) and banks may charge interest rate prescribed for ECN OS - pre-shipment from the very first day of the advance. If exports do not materialize at all, banks should charge on relative packing credit domestic lending rate plus penal rate of interest, if any, to be decided by the banks on the basis of a transparent policy approved by their Board Every disbursement at the pre-shipment stage is a separate loan and the interest is to be charged (at present) at the quarterly rest. Also, the interest in full is required to be recovered simultaneously, on liquidation of each loan, from the local source of the exporter, without waiting for the quarter to end. The rate of interest to be charged is periodically advised by the bank, remaining within the stipulations prescribed by Reserve Bank of India. If, ultimately, the advance is not adjusted by means of export proceeds, the bank has to charge a penal interest from the original date of advance. Such recurring cases should also be informed to ECGC, since the exporter is defaulting from his commitment. The interest on PCFC is based on LIBOR / EURO / EURIBOR. ECGC GUARANTEE: Export Credit Guarantee Corporation of India Ltd., (ECGC) is operating the Whole Turnover Packing Credit Guarantee Scheme (WTPCG). Many banks have subscribed to the scheme. ECGC gives the WTPCG on annual basis based on the consolidated statement of limits in force submitted by the bank as on 31st March every year. Whenever new limits are sanctioned or existing limits enhanced, reduced or cancelled, it should be reported to the Corporation immediately. As per the Guarantee stipulations, the Corporation gives a discretionary limit (DL). If the limit sanctioned by the bank to the exporter is in excess of such a discretionary limit, the Corporation's approval should be obtained in advance. Extension of due date of advance / overdue advances / default, etc. should be promptly reported to the Corporation. Timely submission of monthly declarations by the bank with premium due thereon is one of the prime conditions to be complied with for the Guarantee. Failure to comply with this requirements, may absolve the Corporation in settling the claim. REFINANCE FROM RESERVE BANK: Reserve Bank of India announces the policy regarding refinance facility on Export Credit, under the Credit Policy. To summarize, the Packing Credit has the advantage of refinance, risks are covered by EGCG, and the bank earns exchange profit. In view of all these factors, bank may liberally extend the pre-shipment finance to the exporters. Reserve Bank of India (RBI) said the standing liquidity facilities provided to banks (export credit refinance) and primary dealers (PDs) under the collateralized liquidity support would be at the revised repo rate, i.e. 5.0 per cent with effect from 20 March 2010.

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The RBI had, in its monetary policy announcement on 19 March, had increased the fixed repo rate under the Liquidity Adjustment Facility (LAF) by 25 basis points from 4.75 per cent to 5.0 per cent with immediate effect. DISTENCTION BETWEEN PACKING CREDIT and CASH CREDIT 1. Both the facilities are short term, working capital finance. 2. The packing credit is a demand loan account. i.e. each disbursement is to be treated to be a separate advance. Whereas the cash credit is a running account type facility 3. Generally the cash credit disbursements are allowed up to an advance value arrived as per the stock statement. Whereas packing credit disbursement is initially allowed on the bases of an export order / letter of credit (Export commitment). The borrower approaches the market with the subject Amount disbursed procures the material and submits the stock statement within a reasonable time thereafter. 4. Thus, the cash credit disbursement is secured by the stocks right from the date of disbursement, where as packing credit disbursements are initially the clean advance till the relative stocks are procured and lodged as hypothecation / pledge as the case may be. Packing Credit - Check List Ensure:1. that if the borrower is a direct exporter, he holds Importer Exporter Code Number, allotted by the Office of DGFT (Original verified and certified copy retained for records). 2. that the packing credit amount is disbursed against specific demand of the borrower. 3. that the letter of disbursement of the packing credit is signed by the authorized signatory/ies of the borrower. 4. that the original export contract/ order/ letter of credit is enclosed with the application. 5. that the genuineness of export contract/ order/ letter of credit is established, where warranted. 6. that the terms and conditions stipulated in the export contract/ order/ letter of credit are carefully studied and it creates no ground of doubt to convert the pre shipment finance into post shipment finance, at a later stage. 7. that the letter of credit bears proper stamp duty (at present revenue stamp of Rs.2/-). 8. that the stamps (Stamp Duty) are properly pasted and cancelled to avoid their reuse. 9. that the terms of sanction are observed. 10. that the advance value is arrived at, converting the foreign currency into Indian Rupees by applying an ongoing exchange rate. 11. that to arrive at FOB value, from CIF value, the freight at the rate of 10% (20% in case of air dispatches) and insurance at the rate of 1 to 2% is deducted. 12. that the provision for margin money is taken care of. 13. that the export contract/ order/ letter of credit is endorsed for the amount disbursed, under the stamp and signature of the Bank. 14. that the amount disbursed is credited to the borrower's export current account/ current/ cash credit account as per the sanction terms.

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15.

that within a reasonable period, from the disbursement date, the stocks are lodged under hypothecation/ pledge and relative stock statement is submitted as the pre shipment finance may be a hypothecation/ pledge/ clean limit. 16. that the stocks under hypothecation/ pledge is properly insured and inspection is carried out at stipulated intervals. 17. that the stocks under packing credit are kept separate from other stocks and separate insurance, stock statements, etc., are provided. 18. that disbursements on Running Account Basis is provided to the borrowers, who have been sanctioned packing credit limit with "Running Account Facility". 19. that the facility of liquidation of advance on FIFO/ LIFO system, substitution of contract, substitution of commodity, liquidation of advance by a bill against which no packing credit finance is availed is permitted at the discretion of the bank. 20. that the documents presented under export contract/ order/ letter of credit against which the bank has disbursed packing credit finance, are purchased/ discounted or negotiated under letter of credit (as the case may be) and are not be processed on collection basis, to continue the ECGC cover. 21. that while sanctioning the packing credit limit, the manufacturing cycle/ shipment cycle is taken into consideration and proper period/ time limit not exceeding 180 days from disbursement date is prescribed for liquidation of advance. 22. Extension in time limit for liquidation may be considered by the Bank, subject to certain conditions and against the specific request of the borrower. 23. The advance remaining outstanding beyond the period prescribed above, is to be considered overdue and overdue interest is to be charged. 24. The packing credit interest is to be recovered at regular intervals as prescribed by the bank and on the liquidation of advance to the debit of local account of the borrower. 25. that the interest due is immediately recovered from the local account of the borrower as ECGC Guarantee does not cover the interest amount. 26. that the proper and continuous monitoring Packing Credit is taken care of as the packing credit advance is at the concessional rate of interest. 27. that the concessional rate of interest is allowed only if the advance is liquidated by the export proceeds. 28. that the advance liquidated out of local credits are charged commercial rate of interest. 29. that the ECGC formalities are complied with and premium is paid in time. 30. that each packing credit disbursement is treated as separate demand loan, which is liquidated within the period permitted. 31. that the transactions are monitored within the limit. For the deviation if any, confirmation is obtained and the ECGC is kept advised. 32. that the packing credit in foreign currency is serviced and also repaid in foreign currency only. Generally, 1. the export contracts/ orders/ letters of credit stipulating FOB/ CFR shipment terms are not considered for packing credits, unless it is ensured that the buyer has obtained the insurance and the same contains "Seller's Interest Clause". 2. the letters of credit restricted to another bank for negotiation are not considered for packing credit disbursements. 3. pre shipment finance is disbursed only where post shipment credit limit is available, unless all disbursements are under letters of credit and all documents are to be negotiated under letters of credit. Following letters of credit may not be considered good for negotiation: 1. Restricted to another bank for negotiation. 2. Not opened by a prime bank.
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3. 4. 5. 6. 7. 8. 9.

Shipments/ dispatches on FOB/ CFR terms, unless it is ensured that the opener has obtained the insurance policy with "Seller's Interest Clause". Payable at the counters of opening bank (not providing "Direct Reimbursement Clause"). Opened by the bank in the country having externalization difficulties. Full set of documents, title to the goods are not available to the negotiating bank. (Few original title to goods are dispatched to the opener / opening bank, as per the stipulations in the letter of credit.) For compliance of conditions of the Credit, the beneficiary is dependent on opener. (Onerous Clauses.) Providing for payment on an expiry of usance period. Not governed by current Brochure of UCP.

B. POST-SHIPMENT FINANCE: 'Post-shipment Credit' means any loan or advance granted or any other credit provided by an institution to an exporter of goods from India from the date of extending credit after shipment of goods to the date of realization of export proceeds. The pre-shipment stage comes to an end no sooner the shipment is effected and the relative export documents are delivered to the financing bank. The pre-shipment finance is a self liquidating advance and the same is required to be liquidated by the export finance. As the export finance is available at concessional rate of interest, if the same is liquidated by the local funds, the concessional rate of interest is not available. Accordingly, where the pre shipment finance is granted, it is advisable to grant post-shipment finance limit. No sooner the documents are presented to the bank, the same are financed under the postshipment limit and the funds so advanced shall be utilized to liquidate the pre-shipment finance. It is also essential to convert the pre-shipment finance into post-shipment finance to continue the ECGC cover. Bank finance at post-shipment stage is available in the form of:a. Purchase/ discount/ negotiation of export documents. Physical exports i.e. the finance to the exporter or the party in whose the export documents are transferred. b. In Indian rupees (FBP/ UFBP) c. In foreign currency (FCBP/ FCBD) (W.E.F.08.11.93) d. Advance against Cash Incentives e. Advance against Duty Drawback. f. Advance against undrawn balances g. Negotiation of Export documents under Export LCs opened by prime banks. h. Purchase of export documents drawn under confirmed export contracts/ orders. i. Advances against Bills sent on collection basis. (PSDL) j. Advances against goods sent on consignment basis. (PSDL) k. Advances against undrawn balances. l. Advances against Duty Drawback (i.e. 01.02.76) m. Financing exports against deferred payment arrangement n. Turnkey contracts, service contracts, civil construction contracts etc. o. Deemed export: Finance to the supplier of the goods which are supplied to the designated agencies in India. p. Capital goods and project exports: Finance to the parties who have taken up capital projects abroad or who are the suppliers to such projects. Quantum of Finance - Post-shipment finance can be extended up to 100% of the bill value.

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Period of Finance The period of Post-shipment finance may vary depending upon the payment terms offered by the exporter to the overseas importer. In case of at sight bills, the maximum period allowed for realization of exports proceeds is six months from the date of shipment. Concessional rate of interest is permitted for a maximum period of 180 days, from the date of presentation of shipping documents to a bank. Export Bills Purchased/ Discounted.(DP & DA Bills) Export bills drawn under the contract between the exporter and importer and not under the LC may be purchased or discounted by the banks, considering the financial limits sanctioned to the exporter. In the event of the Ad-hoc Purchase of the export bill it is advisable to obtain the Foreign Bills Purchase Undertaking. The At Sight bills are purchased and the Usance bills are discounted. For the export bill financed (purchased or discounted) the financing bank insists that the title to goods should be collected in fullest and made out in the name of the bank, containing the provision to transfer the title by endorsement and delivery. a. Quasi negotiable documents like Bill of lading, Railway Receipts (RRs), Motor Lorry Receipts (MTRs), etc., where the title to the goods / cargo may be transferred from one hand to another, by endorsement and delivery. The transport company shall not deliver the goods, till the original transport document, duly discharged in its favor, is not provided to the transport company. Accordingly, it is essential that the title to the goods is made out / endorsed in the name of the financing bank or its overseas correspondent bank. b. The non - negotiable transport documents are other than Bill of Lading, Railway Receipt and Motor Transport Receipt. They may be Air Way Bill, Post Parcel Receipt, Courier Receipt, Non Negotiable Sea Way Bill, etc., - where the transport company shall deliver the goods / cargo / parcel to the addressee, on identification of the addressee. The title from one hand to another may be passed on by issue of the Delivery Order. Thus, it is essential that such a title to the goods is always made out in the name of the financing bank or its overseas correspondent bank. c. in full set. Usually, in an international trade, the transport documents available in the negotiable form are issued in sets. i.e. in more than one original. The delivery of the cargo / goods may be obtained by submitting any one of such original and thereafter, all the rest originals shall be treated to be non negotiable. All such original title to the goods issued, shall contain a number denoting how many original are issued. Accordingly, while financing against such transport documents, the bank takes care to see that all the negotiable copies of such an original transport document are delivered to them in full set. By obtaining the transport document in full set, the financing bank obtains full, constructive possession of the goods. Accordingly, the letters of credit, demanding one original bill of lading along with the copy of the invoice to be dispatched directly to the overseas buyer may not be favored by the financing banks. Export Bills Negotiated (Bill under LC) Negotiation of export bills is done generally:a. Against the prime bank LC -Standing of credit opening bank. The prime bank criteria may differ from bank to bank. In case of the doubt about the credit worthiness of the LC opening bank, the beneficiary insists for the confirmation of LC by European bank / a bank in a developed country with relatively stable currency for a country with externalization problem Like Ghana, Nigeria, Sudan, Uganda, Kenya, (African countries) b. Where the direct reimbursement is available and c. The credit opening country does not have the externalization problems.
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The banks generally, insist for the shipments / dispatches on CIF terms. The shipment where the insurance is covered by the buyer abroad, it is advisable to ensure that the insurance policy has the Seller's Interest Clause. Financing the export bill under LC under Reserve/Indemnity/guarantee shall be outside the protection under LC, considering the creditworthiness of the drawer [the exporter]. Advance against Export Bills Sent on Collection Basis Bills can only be sent on collection basis, if the bills drawn under LC have some discrepancies. Sometimes exporter requests the bill to be sent on the collection basis, anticipating the strengthening of foreign currency. Banks may allow advance against these collection bills to an exporter with a concessional rates of interest depending upon the transit period in case of DP Bills and transit period plus usance period in case of usance bill. The transit period is from the date of acceptance of the export documents at the banks branch for collection and not from the date of advance. Advance against Export on Consignments Basis Bank may choose to finance when the goods are exported on consignment basis at the risk of the exporter for sale and eventual payment of sale proceeds to him by the consignee. However, in this case bank instructs the overseas bank to deliver the document only against trust receipt /undertaking to deliver the sale proceeds by specified date, which should be within the prescribed date even if according to the practice in certain trades a bill for part of the estimated value is drawn in advance against the exports. In case of export through approved Indian owned warehouses abroad the times limit for realization is 15 months. Advance against Un-drawn Balance It is a very common practice in export to leave small part Un-drawn for payment after adjustment due to difference in rates, weight, quality etc. Banks do finance against the Undrawn balance, if Un-drawn balance is in conformity with the normal level of balance left Un-drawn in the particular line of export, subject to a maximum of 10 percent of the export value. An undertaking is also obtained from the exporter that he will, within 6 months from due date of payment or the date of shipment of the goods, whichever is earlier surrender balance proceeds of the shipment. Advance against Claims of Duty Drawback Duty Drawback is a type of discount given to the exporter in his own country. This discount is given only, if the in house cost of production is higher in relation to international price. This type of financial support helps the exporter to fight successfully in the international markets. In such a situation, banks grants advances to exporters at lower rate of interest for a maximum period of 90 days. These are granted only if other types of export finance are also extended to the exporter by the same bank. After the shipment, the exporters lodge their claims, supported by the relevant documents to the relevant government authorities. These claims are processed and eligible amount is disbursed after making sure that the bank is authorized to receive the claim amount directly from the concerned government authorities. Crystallization of Overdue Export Bills In the event where the export bills are financed by the banks (Purchased / Discounted / Negotiated) the foreign currency is converted into Indian Rupees at the ongoing exchange rate or the forward contract, as the case may be. It is a condition with the exporter that the bill will be realized on an expiry of Notional Transit Period (NTP) and the financing banks Nostro account shall be credited with the bill amount in the foreign currency. If the bill remains unpaid on due date, the bank waits for about a months time for realization. If the bill still remains unpaid even after expiry of such cushion period, the bank crystallizes
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the foreign currency liability by converting the bill amount into Indian Rupees and there after the exporters liability stands converted into Indian Rupees. The process is known as crystallization. It is as per the FEDAI Guidelines and in terms of the present FEDAI Guidelines, the financing bank has a freedom to prescribe the crystallization period. NOTIONAL TRANSIT PERIOD [NTP] AND NOTIONAL DUE DATE [NDD]- When export documents are purchased / discounted / negotiated by the bank, it takes some time (Postal delay) to reach the overseas centre, for presenting to the drawee for acceptance/ payment and credit of the proceeds to banks nostro account abroad. The banks, while purchasing / discounting / negotiating an export bill, recovers from the exporter customer the interest at the concessional rate for such postal delay i.e., Notional Transit Period as prescribed by FEDAI plus usance period, upto the Notional Due Date so arrived. If the bill is paid subsequent to such due date, the bank will charge overdue interest from the Notional Due Date till the credit of the amount to the banks Nostro Account. For the conversion of the foreign currency amount into Indian Rupees, the purchasing / discounting / negotiating bank takes into consideration the Notional Transit period and also the Notional Due Date. The bank expects the bill to realize on an expiry of the Notional Transit Period and covers the transaction on the Notional Due Date. The bank loads the premiums and discounts upto Notional Due Date to arrive at the exchange rate for the bill. AS PER THE EXISTING FOREIGN EXCHANGE REGULATIONS:i. All the parties who are involved in the export - import trade, must obtain an Importer- Exporter Code Number from the office of the Director General of Foreign Trade. ii. Export documents should be submitted to the bank within 21 days from date of shipment/ Dispatch, along with relative GR/PP/ SOFTEX Form iii. Export proceeds are to be realization within a Notional Transit Period (NTP)/12 months from the date of shipment / dispatch. (15 months for Indian- owned warehouse abroad) iv. In case, the export proceeds have not been realized within the Notional Transit period, the extension in time limit may be sought by the exporter by submitting to a bank an application in form EXT v. The Authorized Dealer has to submit the details of all export bills which have not been realized within a period of six months from the date of shipment in XOS statement, to be submitted to Reserve Bank of India, on a half yearly basis. vi. Export proceeds are to be realized as per the Permitted Methods of Receipts. For further details reference may be made to the Notification No. ______ dated _________ Declaration of Commission/ trade discount on GR form Submission of ENC statement FOLLOW UP AND MONITORING: Diarize the due dates of shipment Diarize due dates of liquidation of advance. Verify the rationale for deviation Export crystallization may be delayed for few days where the exporter states the bill having been paid. Bank may permit by obtaining specific instructions in writing (express consent) Instructions to crystallize by date... + swap charges Ensure the credit report on overseas buyer/seller Ensure correct application of interest (Loss of income) Refund the interest where over charged No overdue if extension given by bank. Liquidation after 360 days commercial rate of interest Liquidation by local funds commercial + 2%
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Foreign Bills Purchased liquidation by local funds commercial rate Post shipment - no penal provisions Foreign Bills Purchased recovered but paid within 180 days from date of shipment. Recall / Calculate and give benefit to exporter. Recovery of early realization charges in respect of usance export bills. Conflict Diamonds Kimberly Process Certificate

IMPOLRTANT FOR THE FINANCING BANK Swap cost must be recovered in all cases of early realization of usance export bill. Interest refund to the customer and swap cost recovery should be simultaneous. The financing bank has to be careful in the cases of:a. Financing a bill where title to goods dispatched direct. [Full title to the goods is not submitted to bank.] b. Airway bill is made out favoring drawee. c. In issuing the bank certificate of exports. d. Recovery of quarterly interest. e. Recovery of interest PCFC, FCBP, FBP, etc. f. Delay in dispatch of documents. g. Delay in claiming of reimbursement. h. Crystallization i. Preparing the sanction memo. j. Restricted letters of credit. k. Courier service. l. Adding confirmation - recovery of charges. As per the foreign exchange regulations, the bank purchasing/ negotiating/ accepting documents on collection basis, is watching and monitoring the realization of export proceeds in time and in an approved manner. All export bills processed by the bank must be properly recorded in the bank's books, followed up and reported under foreign exchange regulations as per prescribed procedure. Export documents lodged for collection, against which the exporter is likely to ask for post shipment demand loan (PSDL- at a later date, must be scrutinized whether the same are eligible for purchase/ discount, before dispatch and relative noting to be made on office record under authentication, for facilitating disbursement of PSDL at a later date. Proper, recent credit report on overseas buyer must be obtained and studied before purchasing/ discounting export bills on such buyers. Regular and individual follow up of all export bills, whether financed or not is a must and an important feature of export section. For overdue bills, applications for extension in time limit in form ETX to be made and also the reporting in half yearly statement XOS is to be made. Care should be taken while:a. Financing against the bills where part of the documents (title of goods- are dispatched directly to importer/ opener of the credit.) b. Financing against the documents where title to goods i.e. bill of lading, air way bill, post parcel/ courier receipts are made in favor of importers/ openers of credit. c. Insurance has been covered by the importer abroad. d. Documents covering shipments to:I. Countries in restricted cover (ECGC guidelines) II. Countries with externalization problems.

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e. f. g. h. i. j. k.

l. m. n. o.

Exporters under Specific Approval List of ECGC/ caution listed exporters as per reserve bank of India. Documents are drawn on "DA" terms. The letter of credit opening bank is not a prime bank. The documents presented are "stale". Documents under letter of credit may be negotiated only if all LC terms are complied with, without any exception. "Doctrine of strict compliance." No compliance no LC. By processing export documents on collection basis, where pre-shipment finance has been disbursed, the bank does not get ECGC cover for the outstanding preshipment finance, as pre-shipment cover extinguishes on submission of export documents. Shipment comprehensive risk policy of ECGC may be insisted upon in the deserving cases. All columns to be checked very carefully and cautiously, with the original documents stated therein before signing export realization certificate. All corrections/ additions/ deletions by hand should be authenticated under proper Stamp and signature by the bank. No extra copies of the certificate should be issued.

CONCESSIONAL RATE OF INTEREST Export credit, both at pre and post shipment levels, is available at concessional rate of interest, subject to following conditions:a- Concessional interest at are-shipment stage is available if:i. Advance is liquidated by export proceeds, ii. Within time limit not exceeding 180 days from the date of disbursement as prescribed by the bank. The period may further be extended for 90 days in deserving cases. b- concessional interest at post-shipment stage is available if the export proceeds are realized within 360 days from the date of shipment, up to notional due date, which may include the usance period, transit period and days of grace, where available.

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