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Submitted by Name PUJA AGARWAL Enrolment No 10BSP0924 Mobile No 09867503987 Email Id agarwalpuja087@gmail.com

I declare that the project entitled Forex And International Trade conducted at Axis bank is a record of independent research work carried out by me during the academic year 2011 12, under the guidance of my company guide, Mrs. Kavitha Jayesh, Manager(forex), Axis bank and my faculty guide, Prof. Davindar Suri, IBS Mumbai

I also declare that this project is the result of my effort and has not been submitted to any other university for the award of any degree or personal favor what so ever. All the details and analysis provided in this report hold true to the best of my knowledge.

Place : Mumbai Date : --------------------------------Signature Name Class : Puja Agarwal : PGPM

Enrolment No: 10BSP0924

Before I get into the details of my project, I would like to show my sincere gratitude by adding few heart full words for the people who were part of this project report in numerous ways and who gave unending support right from the stage the project was conceived. I would like to give special thanks to Mr. Bhooshan Rege (AVP & Branch Head) and Mrs. Kavitha Jayesh (Manager- Forex) for guiding me throughout the project. I am indebted to them for the active involvement & support, which have taken place over the past month despite their busy schedules. They have been an invaluable source of thoughtful comments and conceptual insights and I would like to thank them for the intellectual input and help in conceptualizing the project. I would also like to thank Mrs. Dhanashree Kumar & Ms. Megha Jadhav (Forex Dept.) for the cooperation and intellectual counsel they gave me throughout the work on this project. They were the people whose guidance helped me in the successful completion of the project. I would like to give special thanks to my faculty guide Prof. Davindar Suri for his valuable inputs and guidance throughout the project and last but not the least my family and friends who have contributed in some or the other way to the completion of the project.

Sincerely, Puja Agarwal

Table Of Contents
Page No. CHAPTER 1 : 1.1 CHAPTER 2 : 2.1 Introduction 6-9 Executive Summary 5

: 2.1.1 Introduction to the Foreign Exchange Industry : 2.1.2 Introduction to the Subject Foreign exchange & the market in India : 2.1.3 Introduction to the Company Axis Bank Ltd. : 2.1.4 Introduction to the Project




: 2.2 : 2.3 : 2.4 CHAPTER 3 : 3.1 CHAPTER 4 : 4.1 BIBLIOGRAPHY

Objectives Methodology Limitations of the Report

30 30 30



Analysis & Conclusion


Chapter 1 1.1 Executive Summary

Over the last 60 years, India's foreign trade has undergone a complete change in terms of composition and direction. Foreign trade of India suffered from strict bureaucratic and discretionary controls during 1950-1990. Foreign exchange transactions were tightly controlled by the government and the RBI. During this period, India, with some exceptions, always faced deficit in its balance of payments. Beginning mid-1991, the government of India introduced a series of reforms to liberalize the economy. Since then, there has been enormous expansion of world trade and growth in foreign exchange dealings. The past two decades have seen foreign exchange trading develop into one of the largest global markets. Restrictions on capital flows have been lifted world over, giving impetus to world trade and transactions. Cross border dealings accelerated with globalization across America, Europe, Asia and Oceania. Some developed economies like USA, United Kingdom & Japan have better current market positions i.e. stronger currency valuation as against other countries. Over the years, various systems evolved to determine exchange rates of various currencies. Eventually, market forces were left to adjust foreign exchange rates, with the central banks and governments only playing the role of regulators in case of any extremities. These markets are extremely volatile and rates are impacted by various factors such as rate of interest, exchange regulations, demand and supply of a currency etc. Economies today are interlinked and interdependent on each other. Hence, any event has a direct or indirect impact on all countries economies, trade and foreign exchange reserves. It is hence necessary to study the markets and understand various concepts of international trade. We will try and understand the basics of the foreign exchange market including international trade, the exchange rate and interest rate mechanisms, RBI regulations and Role of banks besides analyzing the performance of Axis Bank Ltd. in terms of Foreign Exchange business.

Chapter 2 2.1

Foreign exchange was originally associated to currency exchange required by

people travelling abroad and for other personal purposes. However, today foreign exchange market has evolved into an industry, encompassing a number of players, business activities including trade, online trading & dealings and investment opportunities. Originally considered to be the playground of governmental institutions operating under the agency of central banks, the Forex industry expanded its horizons in recent years to include corporations, hedge funds, and speculators and most recently with the dot com boom and the expansion of the world wide web, now the private investors have been afforded the lucrative opportunity to be a part of the action

Foreign Exchange, Banking and International Trade Banking Sector in India is segregated in different groups depending on whether they belong to the Private or Public Sector , are of Indian origin or are foreign players and the target market they are meant to serve ( rural , urban or both ) . Although the RBI has also given licenses to new private sector banks as part of the liberalization process almost 80% of the business is still controlled by Public Sector Banks (PSBs). In the last decade however, Private Sector Institutions played an important role. They grew rapidly in commercial banking and asset management business. The range of product & services offered diversified and extended. The sources of income, profit margins, assets as well as NPAs have increased. Competition among the players has compelled banks to reach out to opportunities and develop them. One such sector is foreign exchange. The role of the banks will be consequently covered in the forthcoming chapters while studying the forex operations at Axis Bank Ltd Similarly, another industry that is facing a robust growth is the trade industry. Indias imports and exports have had an upward trend since the LPG policy, 1991. A glimpse of this can be

seen in Figure 1 (Imports & Exports data over past three years) and Figure 2 (for growth percentage of Imports & Exports). Every country has its own currency and conducting trade with each of them, not only involves different set of rules and regulations but the conversions of various currencies on a common platform. Thus, comes into the picture foreign currency transactions and trading. The inflows and outflows through trade i.e. imports and exports form a major component of foreign exchange dealings. These dealings are not done in cash but using various instruments like Letter of Credit, Bills of collection and services like buyers & suppliers credit, since the value and volume is large. This is facilitated through banks, which act as intermediaries in transactions between parties in different countries.

India-Export & Import

300000 251562 250000 200000 163132 150000 100000 50000 0 143393 185694 2008 2009 2010 220871 262836



Figure 1;

Source: Based on Indian Economic Review data

60 50 40 30 20 imports 10 0 2007 -10 -20 -30 growth % Source: www.rbi.org.in 2008 2009 2010 exports

Figure 2;

Thus, we can conclude that foreign exchange, banking and international trade are interlinked.

Currency dealings Another aspect of foreign exchange is the online trading and exchange platform. Over three trillion dollars worth of dealings take place each day in the currency market and online currency trading is now available to everybody. It is similar to the stock market except that it is a 24 hour day market since the principal dealers in this market and banks, are open at all time in the world. The currency market functions on a very high margin-trading basis. That is, one can organize and benefit from the price movement of a million dollars worth of USD / EURO etc. for a little sum of money. It can lead to a big gain as well as a huge loss. Even though we will not be covering currency trading in this project, there are certain advantages and features common to both, online trading and the forex market in general. They are as follows:

1. The Forex market has immense trade sum Forex dealing volume of more than 1.75 billion is over 3 times superior to the equities market and 5 times larger than futures. It gives online Forex traders a limitless liquidity and flexibleness. 8

2. Forex works around the clock in all nations You can carry out Forex trading through online 24/7. Moreover, currency markets are open round the clock and this creates Forex trading online an attractive constituent that will fit into dealer preferred trading times regardless of where you are on the earth.

3. There will be no bulls or bears Since Forex trading online requires the buying of one currency even as simultaneously marketing some other, you have an equal chance for gain no matter which way the currency is directed. One more benefit is that there are only approximately 14 pairs of currencies to deal, as opposed to many thousands of stocks, choices and futures.

4. Forex prices are conventional Currency value though unpredictable, tends to create and follow trends, permitting the precisely trained Forex trader to spot and take benefit of many entry and exit points.

5. Payment free online trading Forex trade commission requires no charges, no exchange fees or any other concealed charges. They no longer have to calculate commissions and fees when performing a deal.

6. Forex trading online is instant The FX market is quick. Moreover, orders will be carried out, fulfilled and sustained normally within 1-2 seconds as it is done electronically. As a final point, you have to investigate and realize the risks of trading currencies by conversing with a good Forex dealer.



Overview: After independence, till the early years of the 90s, India was a closed economy import quotas for virtually every commodity loomed large, and wherever there werent, average tariffs were more than 200% with stringent restrictions on foreign investment. Due to dwindling forex reserves in 1991 and the imminent threat the situation posed for the country consequently, the country had to follow a liberalized Regime on the foreign sector front since 1991. The level of foreign exchange reserves increased from US$ 5.8 billion as at end-March 1991 to US $ 254,685 million as at March 2010 (Figure 3) High foreign exchange reserves are often seen as an indicator of a strong currency. A strong currency, subsequently, means stronger confidence in the target nation for global investors. The composition of foreign exchange reserves show that the accumulation has been mainly on three fronts Foreign investment (directly as FDIs/ indirectly as portfolio investments or FIIs) External commercial borrowings Banking capital

Figure 3;

Source: Official RBI site (www.rbi.org)

The term foreign exchange market is used in an abstract sense and in India it is patterned after markets in the US & UK. The deals are done through communication devices


and screen based trading which operate round the clock. The markets consist of banks (Authorized dealers), exchange brokers & RBI. The dealings of authorized dealers may be Merchant dealings : between banks and its customers Interbank dealings : Between banks Between banks & RBI Domestic Banks & International markets.

Accordingly, the main players of the market can be classified into: Customers: customers engaged in trade i.e. imports & exports, or other persons who need to purchase or sell foreign currency to fulfill their obligation. Commercial Banks: These are authorized to deal and are the ones who facilitate transactions of trade & other exchange, by converting one currency into another. They are the most active players in the market Central Bank: They maintain the external value of the currency. They fulfill this responsibility by intervening in the forex market and balance the forces of demand and supply. Exchange Brokers.

Current Scenario
An improving domestic scenario & a deteriorating global situation is what can be described as the current Indian story. It began with Greece continuing to show no signs of relief in the month of April 2010, threatening to have a spillover effect on Spain & Portugal. As a result, the Euro faced a one-year low towards the end of the month. Consequently, investors flocked to safe dollar assets. Meanwhile, in the domestic markets, the impact of the global crisis is said to have a short term & long term effect. A fall in FIIs can be classified as the short term effect while an influx of capital is expected in the medium & long term. As the WPI shot up to 9.9% in the month of March, the RBI took measures to increase the interest rates & exit from the expansionary monetary policy. Some of the steps adopted by the RBI are; increasing repo rate to 5.25%, reverse repo rate to 3.75 % & Cash Reserve Ratio to 6%. This lead to a rise in the Indian Rupee. 11

There are two sides to every story. While on one hand the Indian Rupee shows a positive & upward trend, on the other hand due to such rising uncertainties on the global front the rupee might still track the USD movement for direction. (Since, the Greek crisis leads to a sudden demand for USD, devaluating the Euro).

The Indian Rupee, in the month of April, appreciated against the US Dollar due to increased demand for Dollars, as already stated. The opening rate on 5-April-10 was Rs. 44.73 & closed on 30-April-10 at Rs. 44.44. It recorded a high of Rs. 44.33 (as on 26-April-10) & a low of Rs. 44.73 (as on 5-April-10) against USD.

Inflows & outflows facts & figures

In 2004-05, companies raised about 55,000 crores via corporate bonds. In 2009-10 they have raised Rs 1.8 lakhs crore. Through commercial paper, they have raised 91,000 crore in the just ended year. Five years ago the number was just 10 thousand crore. Again in 2005, banks raised 12, 800 crores via CDs. In FY10 they raised a whopping Rs 4.3 lakhs crore. Trading Volumes too have picked up exponentially in several markets. Spot forex trading over the counter used to average USD 11 billion a day in 2004-05; now they average nearly USD 30 billion. Currency futures, a market that didnt exist until August 2008, has already grown into a USD 4 billion a day market per exchange. Government bonds used to generate trading volumes of Rs 33,000 crore in 2004-05, now it is often Rs one lakhs crore of trades a day. The overnight index swap market was still fledgling in 2004-05. Now these markets are deep and trade over 1.5 lakhs crore a day, according to CCIL data.

Besides these, banks write a whole range of derivative products. The total outstanding value of derivatives in India were about Rs 2.6 lakhs crore in 2005. They rose to Rs 8.6 lakhs crore in 2009 considering foreign trade, Indias merchandise exports during February 2010 stood at US$ 16.1 billion at a growth of 34.8 % as compared with a decline of 21.0 % registered in 12

February 2009. After a continuous decline during October 2008 to September 2009, exports recorded an increase of 0.8 % with a continued positive growth in exports thereafter. This indicates stability in improved performance of trade especially in exports. Indias merchandise imports during February 2010 was at US$ 25.1 billion showed a high growth at 66.4% as against a decline of 27.6% recorded in February 2009 . This increase was mainly due to growth in petroleum, oil & lubricants (POL) and non- POL imports.

Exchange Rates
Foreign exchange rate is the rate at which one currency is exchanged for another. It is the value of another countrys currency compared to your own. Thus, this rate or value is known as the Exchange Rate. There are various terms and concepts related to rates of exchange. Before we elaborate on the terms related to international business, let us understand the mechanisms that determine the exchange rates of a country.

Fixed Exchange Rate: This is the rate which is set & maintained by the government (Central Bank i.e. RBI) as the official exchange rate. A set price is determined against a major world currency (usually USD, but today a basket of currencies are used too e.g. Euro, GBP, Yen etc.) or another measure of value, such as gold. In order to maintain the local exchange rate the RBI buys and sells its own currency on the forex market.

Floating Exchange Rate: This rate is determined by the market through supply & demand. This is often referred to as the self correcting rate as any differences in supply & demand will automatically be corrected in the market. A floating rate is constantly changing.

Managed Float Exchange Rate: Currency rates & values are determined by the market but in cases of extreme appreciation or depreciation, the central bank intervenes and stabilizes the currency. It fixes a ceiling and floor within which the currency can fluctuate based on market forces.


International business & exchange rates

Interbank rates

Merchant Rates

Buying Rates

Selling Rates

TT buying Rate

Bills buying Rate

TT selling Rate

Bills selling Rate

Merchant Rates & Interbank Rates: The rates at which retail foreign exchange transactions take place are known as merchant rates. The base of merchant rates are the interbank rates. The interbank rates are applicable to dealings between banks which are determined by the market and any bank can buy or sell at the rates quoted. When a bank purchases currency from a customer (at the merchant rate) it sells that currency in the interbank market (at the interbank rate) and vice versa. The interbank rates form the base rate to which a margin is loaded to earn profits from forex transactions. The margin is deducted from the interbank rate while buying currency & added when selling currency and is prescribed by the Foreign Exchange Dealers Association of India (FEDAI). Interbank rates are quoted up to four decimals in multiples of 0.0025, where as the merchant rates up to two decimals.

TT Buying Rate: The Telegraphic Transfer Buying rate is for all purchase transactions where the Nostro Account (Domestic banks account with a foreign bank in the foreign currency) are credited. The margin is deducted from the interbank buying rate .The purpose of exchange margin is to recover the costs involved and provide a profit margin to the bank . These rates are applicable in case of: Clean Inward remittance, Cancellation of outward remittance / forward sale contract. 14

Bill Buying Rate: All foreign bills are purchased at the bill buying rate. Since bills involve a time lag & this period would increase in case of Usance bills, such rates are costlier than TT buying rates. Bill buying rates are applicable for the purchase, discounting & negotiations of export bills.

TT Selling Rate: Outward remittance in forex, cancellation of purchase transactions & forward contracts and direct import transactions i.e. all transactions involving a clean remittance (no documents) are carried out by applying TT selling rates. The bank adds the prescribed margin to the interbank selling rate to calculate the TT selling rate.

Bill Selling Rate: The rate is applied to all transactions involving documentation .E.g. Import bills. When an importer requests the bank to make a payment to a foreign supplier against a bill drawn on the importer, the banker has to handle documents related to the transaction. The rate is thus calculated by adding a margin over & above the TT selling rate.

Thus, foreign exchange transactions involve buying & selling of a currency against the home currency at various rates .This means that foreign exchange has to be delivered and various transactions are classified depending on when the delivery of foreign exchange takes place.

Cash Transaction: Transaction of buying & selling takes place on the same day Tom Transaction: Delivery of foreign exchange is on the next day Tomorrow Spot Transaction: When there is a time lag i.e. a gap of 2 days between agreement and actual delivery of foreign exchange. It meets the need of customers to make temporary payment. It helps regulate & diversify the customers forex investment. It is also an important instrument for foreign exchange speculation. Forward Transaction: When the delivery of foreign exchange takes place at a specific future date. Rates of exchange are subject to fluctuation and instability. Thus, traders need to protect themselves from these risks of fluctuation and forward exchange contracts are booked with banks. (Tool for hedging risk)


A contract under which the delivery date is specified is a fixed forward contract, while a contract with which a customer can buy or sell from the bank foreign exchange on any date during a given specified period at a predetermined rate is called an options forward contract. The difference between the spot rate & forward rate can be at a premium or discount, i.e Forward rate > spot rate = premium Forward rate < spot rate = discount This difference is referred to as margin or swap points.

The Two Way Quote: In any forex market, a currency will be purchased as well as sold. In other words, there is a bid rate (rate at which a dealer buys) and an offer rate (rate at which dealer sells), which is referred to as Pair rates.

A typical quotation would look something like this US $ 1 Rs. 47.8525 / 9775

One month

50 / 100

Two months

200 / 300

Analysis: The 1st statement is the spot rate for USD (base currency) with the banks buying rate being Rs.47.8525 & selling rate being Rs. 47.9775. (INR is counter currency) The difference between these two rates is called the spread which is the profit that the bank makes on dealing in foreign exchange. The second & third statement are forward margin points for one & two months respectively. A point is 0.0001 of the currency. Therefore, the first month forward margin is 50 points (0.0050) or buying & 150 points for selling (0.0150); 200 & 300 points respectively for two months.


Exchange rates are an important consideration when making international investment decisions. The value of the currency is impacted by the fluctuations, which in turn affects international trade

Stronger INR implies

1. India can buy foreign goods more cheaply 2. Foreigners find Indian goods more expensive and demand falls

Cost of purchasing foreign goods falls Does not help firms that produce for exports

Weaker INR implies

1. Foreigners buy more Indian goods 2. Foreign goods become more expensive

Helps firms that rely on exports

Demand for imports falls

When an investor decides to "cash out," or bring his money home, any gains could be magnified or wiped out depending on the change in the exchange rates in the interim. Thus, changes in exchange rates can have many repercussions on an economy:

Affects the prices of imported goods Affects the overall level of price and wage inflation Influences tourism patterns May influence consumers buying decisions and investors long-term commitments

. Cross Rates: A rate of exchange between a foreign currency and Indian Rupee through the medium of some other currency is called a cross rate. Such rates come into the scene when certain currencies are not actively traded in the forex market or for which quotes are not generally available. The Chain Rule Method is used in calculation of cross rates. 17

Let us elaborate with an example; A customer wants to remit Thailand Bahts 100000. The interbank market rate of USD is at Rs. 46.4500/ 46. 4670 and the rate in New York for Thailand Bahts is US$ 1 = 32.1315 / 33.0125 Therefore, the Bank in India will buy US$ 1 @ Rs. 46.4670 and with this US$ 1 will buy THB 32.1315. Thus, the cross rate will be US $ 1 = Rs. 46.4670 & US $ 1 = THB 32.1315, then 1 THB = 46.4670 divided by 32.1315 = Rs. 1.4461

In international markets, all rates are quoted in terms of USD (Direct Quotation). Cross currency rates as on 1st May, 2011
Currency Cross Rates


7.7729 0.9259 0.9599 0.8811 0.6123 80.7680 0.6958 -

11.1706 1.3307 1.3796 1.2662 0.8799 116.0733 1.4371

0.0962 0.0115 0.0119 0.0109 0.0076 0.0086 0.0124

12.6948 1.5122 1.5678 1.4390 131.9111 1.1364 1.6332

8.8219 1.0509 1.0895 0.6949 91.6683 0.7897 1.1350

8.0972 0.9646 0.9178 0.6378 84.1377 0.7249 1.0417

8.3947 1.0367 0.9516 0.6613 87.2294 0.7515 1.0800

0.1191 0.1235 0.1134 0.0788 10.3910 0.0895 0.1287

Source: Bloomberg (www.bloomberg.com)


Interest Rates
One of the major functions of interest rates is influencing the demand & supply of a countrys currency and hence the value of the currency. The other functions cum benefits include reconciling the banks concern for interest risk and borrowers preference for longterm guaranteed funding at fixed margins. When central banks change interest rates, they cause the forex market to experience movement and volatility. The central banks of every country play an important role in curbing inflationary pressure while maintaining steady growth within the economy. In any market, the interest rates are determined by a number of factors such as, the volume of world trade in that currency, the domestic interest rates, the monetary policy, the reserve requirements, government policy and relative strength of the currency in the foreign exchange market. There are eight major central banks within the world economy today: 1. US Federal Reserve Bank (USD) 2. European Central Bank (EUR) 3. Bank of England (GBP) 4. Bank of Japan (JPY) 5. Swiss National Bank (CHF) 6. Bank of Canada (CAD) 7. Reserve Bank of Australia (AUD) 8. Reserve Bank of New Zealand (NZD) And the Reserve Bank of India is our central bank governing all monetary operations. Interest Rate mechanism An increase in interest rates encourages traders to invest within that market and causes the demand for the currency to rise. As demand rises, the currency becomes scarcer and consequently more valuable. Investors are drawn to the currency, causing it to appreciate because they will gain a higher yield on their investments. In order to purchase assets, an investor will have to convert the domestic currency to the targets currency, again increasing demand.


Conversely, a fall in interest rates dissuades investors from purchasing assets in that economy, as the return on their investment is now smaller. Hence, the economys currency will depreciate as a result of the weaker demand. Rate of Interest Demand R1 R2



Value of currency

Thus, we can see that interest rates & demand for a currency have a direct relation. Countries use interest rates as a mechanism to achieve a stable economic state.

Types of Interest Rates :

In Domestic transactions the interest rates are determined by BPLR (Benchmark Prime Lending Rate) where as in majority of the international transactions LIBOR is used as the benchmark rate.

LIBOR: Stands for London Inter Bank Offered Rate and represents the rate at which banks in London will lend a currency to other banks for a specified time / maturity. The LIBOR is derived from a filtered average of the world's most creditworthy banks' interbank deposit rates for larger loans with maturities between overnight and one full year. It is the rate upon which rates for less preferred borrowers are based. For example, a multinational corporation with a very good credit rating may be able to borrow money for one year at LIBOR plus four or five points. LIBOR, in other words is used as a benchmark by banks across the world for setting short term interest rates


BPLR & BASE RATE: Benchmark Prime Lending Rate is the interest rate that commercial banks charge. As per RBI rules , banks are free to fix the BPLR for credit limits over Rs.2 lakhs , but which have to be declared and made uniformly applicable to all branches of the bank. For example, till recently the BPLR for Axis Bank was 14.75 %. Depending on the credit worthiness of the customers, Axis Bank reduces a certain percentage (say 3%) from the BPLR and makes it the lending rate- sub BPLR rates (thus, 11.75 %). BPLR is mostly applicable to pre and post shipment finance with respect to Foreign exchange. According to the BPLR system ,each bank sets its own base rate on the basis of cost of deposits & other adjustments in respect of the RBIs mandatory cash requirements, profit margins etc . (Which lacks transparency). This rate varies from bank to bank. An important point in relation to interest is the interest subvention of 2% on pre and post shipment credit that the RBI provided to certain export sectors like Handicrafts, Carpets, and Handlooms & SMEs at the time of the Recession 2008.

RBI regulation The amount of subvention would be reimbursed on the basis of claim submitted at the end of respective quarters. The amount of subvention will be calculated on the amount of export credit from the date of disbursement A. up to the date of repayment; or B. up to the date beyond which the outstanding export credit becomes overdue; or C. for pre shipment credit up to 270 days and post shipment credit up to 180 days, whichever is earlier. However with effect from 1st July, 2010 the RBI will replace the BLPR system with the BASE RATE SYSTEM. Due to lengthy debates on the adequacy of the BPLR to respond to market conditions & the tendency of the banks to lend at sub BPLR rates on a large scale, BPLR has been replaced with a new benchmark. Thus, under the base rate system, the actual lending rates charged to borrowers would be the Base rate plus borrower specific charges, which will include product specific operating costs, credit risk premium and tenor premium. The illustrative base rate works out to be 8.55 percent. With the proposed system, there will be no need for banks to lend below base rate as the Base rate represents the bare minimum rate below which it is not viable for banks to lend. The Base rate system will definitely induce competition while being more flexible 21

A drawback of this new system is that banks with higher costs may not be able to compete effectively because they might end up pricing their base rate higher than their low cost rival. Higher cost may put a pressure on margins of banks.


2.1. 3
Vision 2015 To be the preferred financial solution provider, excelling in customer delivery, through insight, empowered employees and smart use of technology

Core values Customer centricity Ethics Transparency Teamwork Ownership

Introduction Axis Bank Ltd. Formally UTI bank is a financial services firm that had begun operations in 1994, after the Government of India allowed new private banks to be established. The Bank was promoted jointly by the Administrator of the Specified Undertaking of the Unit Trust of India (UTI), Life Insurance Corporation of India (LIC), General Insurance Corporation Ltd. (GIC) and other four PSU insurance companies i.e. National Insurance Company Ltd. The New India Assurance Company Ltd. The Oriental Insurance Company Ltd and United Insurance Company Ltd. Besides today, FII also forms a considerable portion of the shareholding.

Products and services Large & Mid Corporate Credit Treasury Agri & SME Banking Business Banking Capital Markets Retail Banking


Shareholding Pattern (as on March 2010)

10.27% 24% LIC FIIs 33.13% Others UTI


Figure 4

Source: Axis Bank Ltd. Press Release

Axis bank branches + extension centres

1600 1400 1200 1000 800 600 400 200 0 2006 2007 2008 2009 2010 2011 561 450 783 671 1035 1390

Figure 5

Source: Axis Bank Ltd. Press Release

With over 1000 branches and Extension Counters, 6270 ATMs, the bank has a very wide network in the country.



Consistent Net Profit Growth

1020 890


800 660 600 562 403 400 330 532

765 706 656 582 501 FY2009 FY2010 FY2011


0 Quarter1 Quarter2 Quarter3 Quarter4 Quarterly net profit amount in crores-rupees

Figure 6

Source: Axis Bank Ltd. Press Release

There has been an all-round improvement on various financial parameters and ratios during the years. We can see that over the past three financial years there has been a consistent increase in the Net profit. This can be attributed sustained growth in core revenues, net interest & fee incomes and controlled & declining cost of funds.

FY 2009 Performance Basic earnings per share has increased by 57.42% to Rs. 50.61 per share from Rs. 32.15 per share in the previous year FY 2008. Diluted earnings per share (EPS) was Rs. 50.27 per share, up 60.56% from Rs. 31.31 per share in FY 2008 Return on Equity (ROE) has improved to 19.93% from 16.09% in the previous year. Book Value per share has improved by 16.06% to Rs. 284.50 from Rs. 245.14 in FY 2008 Return on Average Assets improved to 1.44% from 1.24% in the previous year


Q4 FY 10 Performance Growth in the Banks core businesses Total Net Advances grew 28% YOY to Rs. 1, 04,343 crores Total Investments grew 21% YOY to Rs. 55,975 crores Total Assets registered a 22% YOY growth, rising to Rs. 1, 80,648 crores Fees grew by 17% YOY, rising to Rs. 780 crores Share of demand deposits in total deposits stood at 43% on daily average basis

Retail Advances grew by 30% YOY to Rs. 20,826 Crores; constituted 20% of total advances, as compared to 20% at the end of Q4FY09. Net NPAs at 0.36%, as compared to 0.35% at the end of Q4FY09. At the end of March 2010, book value per share was Rs. 395.99, as compared to Rs. 284.50 at the end of March 2009 Capital Adequacy stood at 15.80% with Tier-I capital at 11.18%

FY11 Performance Net Profit during Q4 FY11 rose to `1,020 crores from `765 crores in Q4 FY10, registering a growth of 33% YOY. Net Profit for FY11 stood at `3,388 crores, up by 35% YOY from `2,515 crores for FY10. Demand Deposits on a daily average basis grew by 33% YOY to `59,551 crores for FY11 from `44,839 crores during FY10, with Savings Bank deposits growing by 36% YOY. The year on year growth in Net Interest Income and Fee Income during FY11 was 31% and 30% respectively. Net Interest Margin during FY11 was 3.65% compared to 3.75% in FY10. Gross and Net NPAs witnessed a year on year reduction by 12bps and 10bps respectively to reach 1.01% & 0.26% for the year ended March 31, 2011. The Bank is well-capitalized with a Capital Adequacy Ratio of 12.65% as at the end of FY11 compared to 15.80% as at the end of FY10. Tier-I capital was 9.41% as at the end of FY11, as against 11.18% as at the end of FY10








Remittances (Non Import / Non Export)

Import Direct/ LC Import Financing

Export Collection

Bank Guarantee

Export Financing Financial Performanc e

Buyers Credit

Sellers Credit

Pre Shipment

Post Shipment



Current A/C
Professional fees Consultancy fees Technical fees All non capital transactions

Capital A/C
Foreign Direct Investment External Commercial Borrowing

Current A/C
Professional fees Consultancy fees Technical fees All non capital transactions

Capital A/C
ODI Whole Subsidiary Joint Venture


The chart on the preceding page shows us the foreign exchange and international business operations undertaken at Axis Bank Ltd.

This study has been useful in understanding the functions undertaken by Axis Bank Ltd., different types of instruments available for trade & remittances, the growth in markets along with the increasing role of Authorized dealers in various transactions, the regulations and limits associated with each of the activities of the banks, that eventually help a customer to choose the right service to finance his business, etc. The study along with analysis, if taken in the right perspective, may be helpful in understanding the position of the bank in as well as the fee income composition and the contribution of treasury and foreign exchange to the same. This will facilitate in getting an insight into the position of Axis Bank Ltd. against its competitors , the importance of the forex department in the organization and the if necessary , undertake measures to improve the performance & efficiency .

It has also helped in understanding certain features and possibilities of the forex market. They are as under


Forex trading has become more mainstream:

Most people think of forex only in the context of buying hard currency when they go for a trip abroad. As the forex industry continues to evolve, it has become more mainstream, getting more attention in the media, and becoming an investment channel that the banks offer.


BRIC currencies to become more popular:

The nations of Brazil, Russia, India and China arent very popular with forex traders. It is mainly dominated by the US, European Union, Japan and United Kingdom. Even though Chinas economy is third in the world, and will soon become second, the currency doesnt float. The other countries arent popular as yet. However, there is speculation about popularity of Brazilian Real rising: more brokers will offer them, people: in forums will talk about them, and their trade volume will rise.



Consolidation of forex brokers:

Currently there are lots of forex brokers. Some are market-makers, and others are ECN/STP. Most traders dont know the differences. In the future, many of the smaller brokers, and especially market-makers, will disappear or merge into bigger brokers. Consolidation happens in any maturing industry, and it will eventually happen in forex.


Commodities will grow with forex:

Oil and gold are already quite popular. As the world recovers, more commodities will be in the limelight. Silver has gained traction due its rise, and a food crisis will probably make wheat very popular. Commodities wouldnt have to compete with forex: more brokers will probably offer both together.


2.2 Objectives
To know the whole transaction process of forex, the necessary documents required, the competitors, strategies & ways by which business are brought in & the problems faced in dealing the day to day business. The linkage between forex & international trade. RBI regulation, rules related to each transaction. Forex contribution to Axis banks profit.

Research based on data provided by the bank and the practical knowledge obtained by studying the transaction procedures of forex and then finally data extraction and preparation of report.

The study has been conducted based on the data furnished by the bank and other official reports. The collection of data through primary sources was subject to restrictions on the disclosure of information & financial data of Axis Bank Ltd. The time period that was granted to understand the Foreign Exchange market and its dealings was very less and could not cover the minutiae of it. It was although beneficial in understanding the basic concepts.


Chapter 3 3.1 Analysis & Findings

OUTWARD REMITTANCES Current A/C :For release of foreign exchange by persons resident in India for various current account transactions, Authorized Dealer banks are to be guided by the Rules made by the Govt. of India under Section 5 of the Foreign Exchange Management Act, 1999 In order to provide adequate foreign exchange facilities and efficient customer service, the Reserve Bank has decided to grant licenses to certain entities by authorizing them as Authorized Dealer Category II to undertake a range of non-trade current account transactions. Accordingly, Authorized Dealer Category II are authorized to release / remit foreign exchange for the following non-trade current account transactions:

(a) Private visits, (b) Remittance by tour operators / travel agents to overseas agents / principals / hotels, (c) Business travel, (d) Fee for participation in global conferences and specialized training, (e) Remittance for participation in international events / competitions (towards training, sponsorship and prize money), (f) Film shooting, (g) Medical treatment abroad, (h) Disbursement of crew wages, (i) Overseas education, (j) Remittance under educational tie up arrangements with universities abroad, (k) Remittance towards fees for examinations held in India and abroad and additional score sheets for GRE, TOEFL, etc., (l) Employment and processing, assessment fees for overseas job applications, (m) Emigration and emigration consultancy fees, (n) Skills / credential assessment fees for intending migrants, 31

(o) Visa fees, (p) Processing fees for registration of documents as required by the Portuguese / other Governments, registration / subscription /membership fees to International Organizations. The Form A2 relating to sale of foreign exchange should be retained for a period of one year by the Authorized Dealers, together with the related documents, for the purpose of verification by their Internal Auditors. However, in respect of remittance applications for miscellaneous non-trade current account transactions of amount not exceeding USD 5,000, Authorized Dealers may obtain simplified Application-cum-Declaration form i.e. Form A2 along with Annexure III & XI . In case the issuing party is a company / institution along with the above documents, it does needs to attach Form 15CA (to be filled by the company) and Form 15CB (which is filled by the Chartered Accountant of the company) Authorized Dealers may accept payment in cash up to Rs. 50,000 (Rupees fifty thousand only) against sale of foreign exchange for travel abroad (for private visit or for any other purpose).Wherever the sale of foreign exchange exceeds the amount equivalent to Rs.50000, the payment must be received only by 1. a crossed cheque drawn on the applicants bank account, or 2. crossed cheque drawn on the bank account of the firm/company sponsoring the visit of the applicant, or 3. Bankers Cheque / Pay Order / Demand Draft or 4. Debit / credit / prepaid cards provided

Retail Foreign Exchange at a glance (on the following page)


Purpose Basic Travel Quota (BTQ) For Holidays, Personal visits etc Business Travel

Limit USD $10,000.00 per financial year USD $25,000.00 per Trip

Documentation Application Form, Form A2 and Self Declaration

Application Form with authorization from the Company, Form A2, Letter from the Company stating that the employee is going abroad on business with details of places of stay

Immigration - For people who settle abroad in countries like Canada, New Zealand etc. Employment Abroad - For a person who is going to work abroad Medical Treatment - For people who are travelling abroad for treatment Studies Abroad - For students pursuing studies abroad

USD $100,000.00 per year

Application Form, Form A2 and Self Declaration

USD $100,000.00 per year USD $100,000.00 per year USD $100,000.00 per academic year

Application Form, Form A2 and Self Declaration

Application Form, Form A2 and Self Declaration

Application Form, Form A2 and Self Declaration

Maintenance of close relatives abroad

USD $100,000.00 per year

Application Form, Form A2 and Self Declaration

Investments overseas in shares, property, Gifts & Donations etc (under liberalized remittance scheme only)

USD 200,000/per financial year

Application form, Declaration for purchase of foreign exchange under the liberalized remittance scheme of USD 200,000 and Form A2 (Only for Individual residents)


Capital A/C:Outward remittances under capital a/c are direct investments outside India. It means investment by way of contribution to the capital or subscription to the Memorandum of Association of a foreign entity, signifying a long term interest (setting up a Joint Venture (JV) or a Wholly Owned Subsidiary (WOS) in an overseas entity. Valuation: An eligible entity is free to acquire either a partial stake (JV) or the entire equity (WOS) in an already existing company, provided the valuation is as per the laid down norms. Where the investment is more than USD five million, the valuation has to be done by a Category I Merchant Banker registered with Securities and Exchange Board of India (SEBI) or an Investment Banker/Merchant Banker outside India registered with the appropriate regulatory authority in the host country and in all other cases by a Chartered Accountant/Certified Public Accountant. However, in the case of investment by acquisition of shares where the consideration is to be paid fully or partly by issue of the Indian Partys shares (swap), in all cases, the valuation will have to be done by a Category I Merchant Banker registered with Securities and Exchange Board of India (SEBI) or an Investment Banker/Merchant Banker outside India registered with the appropriate regulatory authority in the host country. Resident corporate entities and partnership firms registered under the Indian Partnership Act, 1932 (Indian Party) are eligible to make direct investment abroad in JVs/ WOSs in any bonafide activity (except those that are specifically prohibited - Real estate). For example, only an Indian Company engaged in financial sector activities can make investment in the financial services sector provided it fulfills the following additional norms: i. has earned net profit during the preceding three financial years from the financial services activities; ii. is registered with the appropriate regulatory authority in India for conducting financial services activities; iii. has obtained approval for undertaking such activities from the concerned regulatory authorities both in India and abroad before venturing into such activity; iv. Has fulfilled the prudential norms relating to capital adequacy as prescribed by the concerned regulatory authority in India. 34

The two prohibited sectors are Real estate & Banking. There are two ways to undertake a direct investment Automatic Route Normal Route

Automatic Route Under the Automatic Route, an Indian Party does not require any prior approval from the Reserve Bank for setting up a JV/WOS abroad. The criteria for direct investment under the Automatic Route are as under: i. the total amount of direct investment outside India by way of contribution to equity and loans of the Indian Party in JVs/WOSs in any country other than Nepal, Bhutan and Pakistan is up to 100% of its net worth and the investment is in a lawful activity permitted by the host country; ii. the Indian Party is not on the Reserve Banks exporters caution list / list of defaulters to the banking system published/ circulated by the Credit Information Bureau of India Ltd. (CIBIL)/RBI or under investigation by the Enforcement Directorate or any investigative agency or regulatory authority; iii. The Indian Party routes all the transactions relating to the investment in a JV/WOS through only one branch of an authorized dealer to be designated by it.


Documentation : The eligible Indian Party intending to make a direct investment under the automatic route is required to fill in the form ODA supported by documents listed therein, i.e., certified copy of the Board Resolution, Statutory Auditors certificate, Valuation report as per the valuation norms and approach an Authorized Dealer (designated Authorized Dealer) for making the investment/remittance. No prior registration with the Reserve Bank is necessary for direct investments under the automatic route. After the report of remittance/investment in form ODR is received by the Reserve Bank, from the designated Authorized Dealer, an identification number for that particular JV/WOS will be issued for the purpose of taking on record the overseas direct investment with the objective of maintaining a database for monitoring the outflows/inflows in respect of the overseas entities. Subsequent investments in the same project can be made only after allotment of the identification number.

Normal Route : Proposals not covered by the conditions under the automatic route require the prior clearance of the Reserve Bank for which a specific application in form ODI with the documents prescribed therein is required to be made to the Reserve Bank of India. Requests under the normal route are considered by taking into account inter alia the prima facie viability of the proposal, business track record of the promoters, experience and expertise of the promoters, benefits to the country, etc. Investment in the financial sector, however, prior approval is required from the concerned regulatory authority both in India and abroad


Outward Remittances (current & capital a/c) of India for the past three years

India - Remittances Outflow

$4,500.00 $4,000.00 $3,500.00 $3,000.00 $2,500.00 $2,000.00 $1,500.00 $1,000.00 $500.00 $0.00 Year 2006 Year 2007 Year 2008

Remittances (US $ Millions )

India $1,561.87 $2,059.34 $3,815.30

Figure 7; Source: World Bank staff estimates based on the International Monetary Fund's Balance of
Payments Statistics Yearbook 2008.

In the above figure, we can see that the outflow of remittances have shown an upward trend over the past three years. The remittances entail both current and capital account outflows in million US Dollars.



Current A/c: The functions of current account inward remittances are the same as outward remittances. The only difference is the inflow of foreign exchange for various non-trade transactions against the outflow of foreign exchange under outward remittances. These basically are related to NRI accounts where foreign currency is sent to India in the form of TTs, MTs, Pay orders etc. And need to be converted into rupees.

Capital A/C : Inward remittances under capital a/c which consists of flow of capital into the country in terms of capital transfers & transactions in assets & liabilities. This basically can be bifurcated into

Foreign Direct Investment

External Commercial Borrowings

FOREIGN DIRECT INVESTMENT Foreign investment in India is governed by sub-section (3) of Section 6 of the Foreign Exchange Management Act, 1999 but has been amended from time to time. Foreign Direct Investment is freely permitted in almost all sectors. Under the Foreign Direct Investments (FDI) Scheme, investments can be made by non-residents in the shares / convertible debentures / preference shares of an Indian company, through two routes; Automatic Route and Approval Route

Automatic Route Under the Automatic Route, the foreign investor or the Indian company does not require any approval from the Reserve Bank or Government of India for the investment. India has among the most liberal & transparent policies on FDI among emerging economies. FDI up to 100% is allowed under the automatic route in all activities/sectors except the following which require prior approval of the Government:


i) Manufacture of Cigar & Tobacco products ii) Manufacture of aerospace & defense equipments of any kind

ii) where more than 24% foreign equity is proposed to be inducted for manufacture of items reserved for the Small Scale sector.

Approval Route Under the Government Route, prior approval of the Government of India, Ministry of Finance, Foreign Investment Promotion Board (FIPB) is required. FDI activities not under the automatic route stated above require Government approval.

Reporting of Inflow FDI in sectors/activities to the extent permitted under Automatic Route does not require any prior approval either by the Government or the Reserve Bank of India. It is however mandatory to report the Regional Office concerned of the Reserve Bank of India within 30 days of receipt of inward remittances & 180 days of issuance of shares / debentures / preference shares along with a copy/ies of the FIRC/s evidencing the receipt of the remittance along with the KYC report on the non-resident investor from the overseas bank remitting the amount. A Unique Identification Number is allotted and any further reports & transactions are carried out in reference to this number. The equity instruments should be issued within 180 days from the date of receipt of the inward remittance or by debit to the NRE/FCNR account of the non-resident investor. In case, the equity instruments are not issued within 180 days from the date of receipt of the inward remittance or date of debit to the NRE/FCNR (B) account, the amount of consideration so received should be refunded immediately to the non-resident investor by outward remittance through normal banking channels or by credit to the NRE/FCNR (B)


account, as the case may be. Non-compliance with the above provision would be reckoned as a contravention under FEMA and could attract penal provisions. In exceptional cases, refund of the amount of consideration outstanding beyond a period of 180 days from the date of receipt may be considered by the Reserve Bank, on the merits of the case. After issue of shares (including bonus and shares issued on rights basis) and shares issued under ESOP /fully and mandatorily convertible debentures / fully and mandatorily convertible preference shares, the Indian company has to file Form FC-GPR , a certificate from the Company Secretary of the company & a certificate from Statutory Auditor or Chartered Accountant indicating the manner of arriving at the price of the shares issued to the persons resident outside India not later than 30 days from the date of issue of shares However investment in the form of FDI is prohibited in certain sectors such as (a) Retail Trading (except single brand product retailing) (b) Atomic Energy (c) Lottery Business (d) Gambling and Betting (e) Business of chit fund (f) Nidhi company (g) Trading in Transferable Development Rights(TDRs) (h) Activities / sectors not opened to private sector investment (i) Agriculture (excluding Floriculture, Horticulture, Development of seeds, Animal Husbandry, Pisciculture and cultivation of vegetables, mushrooms, etc. under controlled conditions and services related to agro and allied sectors) and Plantations (other than Tea Plantation .



External Commercial Borrowings (ECB) refer to commercial loans in the form of bank loans, buyers credit, suppliers credit, securitized instruments availed of from non-resident lenders with minimum average maturity of 3 years.

Two essential forms of ECB are Foreign Currency Convertible Bonds (FCCB) & Foreign Currency Exchangeable Bond (FCEB)

Foreign Currency Convertible Bonds (FCCBs) mean a bond issued by an Indian company expressed in foreign currency, and the principal and interest in respect of which is payable in foreign currency . It is a Euro Bond which can be converted into shares at the option of the investor. They are unsecured securities and only borrowers of high financial standing are able to issue them. These bonds are issued in several markets simultaneously. FCCBs are denominated in US dollars in the denominations usually of US $ 10000. The average maturity is from 5 to 7 years.

Foreign Currency Exchangeable Bond (FCEB) means a bond expressed in foreign currency, the principal and interest in respect of which is payable in foreign currency, issued by an Issuing Company and subscribed to by a person who is a resident outside India, in foreign currency and exchangeable into equity share of another company, to be called the Offered Company, in any manner, either wholly, or partly or on the basis of any equity related warrants attached to debt instruments.

The issuing company means a company registered under the Companies Act, 1956 and eligible to issue FCEB while the Offered company means a company registered under Companies Act, 1956 and whose equity shares are offered in exchange of the FCEB . The FCEB may be denominated in any freely convertible foreign currency. Minimum maturity of FCEB shall be five years.


However, an Indian company, which is not eligible to raise funds from the Indian securities market, including a company which has been restrained from accessing the securities market by the SEBI shall not be eligible to issue FCEB.

ECB can be accessed under two routes, viz, Automatic Route Approval Route

Automatic Route

Eligible borrowers can raise ECB from internationally recognized sources such as (i) international banks, (ii) international capital markets, (iii) multilateral financial institutions (such as IFC, ADB, CDC, etc.,), (iv) export credit agencies, (v) suppliers of equipment, (vi) foreign collaborators, and (vii) foreign equity holders (other than erstwhile Overseas Corporate Bodies).

The automatic route is undertaken when ECB is USD 5 million for NGO engaged in micro finance upto 500 million USD in a financial year.

ECB can be raised under the automatic route for following activities (a) only for investment , new projects, modernization/expansion of existing production units in the real sector - industrial sector including small and medium enterprises (SME), infrastructure sector and specific service sectors, namely hotel, hospital and software - in India. Infrastructure sector for the purpose of ECB is defined as (i) power, (ii) telecommunication, (iii) railways, (iv) road including bridges, (v) Sea port and airport, (VI) industrial parks, (vii) urban infrastructure (water supply, sanitation and sewage projects) and (viii) mining, refining and exploration (b) Payment for obtaining license/permit for 3G Spectrum (c) For lending to self-help groups or for micro-credit or for bonafide micro finance activity including capacity building by NGOs engaged in micro finance activities. (d) Premature buyback of FCCBs with the exceptions being 42

(a)For on-lending or investment in capital market or acquiring a company (or a part thereof) in India by a corporate. (b) In real estate sector. (c) For working capital, general corporate purpose and repayment of existing Rupee loans

Approval Route The following require prior approval of the authorities to raise ECB (a) Financial institutions dealing exclusively with infrastructure or export finance

(b) ECB with minimum average maturity of 5 years by Non-Banking Financial Companies (NBFCs) to finance import of infrastructure equipment for leasing to infrastructure projects.

(c) Special Purpose Vehicles, or any other entity notified by the Reserve Bank, set up to finance infrastructure companies / projects exclusively, will be treated as Financial Institutions and ECB by such entities will be considered under the Approval Route. (d) Foreign Currency Convertible Bonds (FCCBs) by housing finance companies satisfying the following minimum criteria: (i) the minimum net worth of the financial intermediary during the previous three years shall not be less than Rs. 500 crore, (ii) a listing on the BSE or NSE, (iii) minimum size of FCCB is USD 100 million.

(e) Multi-State Co-operative Societies engaged in manufacturing activity Corporates can avail of ECB of an additional amount of USD 250 million with average maturity of more than 10 years under the approval route, over and above the existing limit of USD 500 million under the automatic route, during a financial year. Borrowers are permitted to either keep ECB proceeds abroad or to remit these funds to India. ECB proceeds parked overseas can be invested in the following liquid assets (a) deposits or Certificate of Deposit or other products offered by banks rated not less than AA (-) by Standard and Poor/Fitch IBCA or Aa3 by Moodys, (b) Treasury bills and other monetary instruments of one year maturity having minimum rating as indicated above, and (c) deposits with overseas branches / subsidiaries of Indian banks abroad. The funds should be invested in such a way that the investments can be liquidated as and when funds are required by the borrower in India.


ECB funds may also be remitted to India for credit to the borrowers Rupee accounts with AD Category - I banks in India


GLOBAL DEPOSITORY RECEIPTS (GDR) One of the most popular ways of raising money is GDRs. Foreign investors may invest in Indian companies through the purchase of Global Depository Receipts. These are basically negotiable instruments denominated in U.S. Dollars or any other currency representing a publicly traded issuers local currency equity shares. The shares of the issuing company is issued in local currency in the name of an international bank called the depository, which is located in another country. Based on the shares issued to it, the depository issues GDRs in US Dollars or any other currency. Each depository receipt can represent one or more of the issuing companys shares. Indian Companies have used this method to raise foreign capital over the years.

This can be seen in Figure 8.

GDR ( US $ mn )
GDR ( US $ mn ) 6645

3776 2552 832





2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08

Figure 8

Source: www.nseindia.org


India - Remittance Inflows

$60,000.00 $50,000.00 Remittances ( US $ Millions ) $40,000.00 $30,000.00 $20,000.00 $10,000.00 $0.00 Year 2006 Year 2007 Year 2008 India $28,333.64 $37,216.73 $49,940.82

Figure 9; Source: World Bank staff estimates based on the International Monetary
Fund's Balance of Payments Statistics Yearbook 2008

It can be clearly seen that over the years there has been an increasing amount of inflows in to the country. However, a slight drop can be noticed in the FY 2009, which can be attributed to the after effects of the recession. Despite that fact, the proportion of decrease is extremely low as compared to the increases over the years. This data includes both capital and current account transactions.


Methods of settling International Trade Debts

Direct Imports

Advance against Imports

Bill for collection

Letter of Credit

Of the above, Bill for collection & Letter of credit are done through an Authorized Dealer (usually a Bank)

1. Direct imports This is when the only orders are dispatched first and then the payment for the goods is made. In such a scenario, the overseas directly sends the documents to the importer who then approaches an authorized dealer for sending the remittance to the exporter.

2. Advance against imports A situation where the overseas exporter may require the importer to make payment in full in advance for the goods being exported. Thus, the authorized dealer may allow advance remittance for import of services. However, where the amount exceeds USD 500,000 or its equivalent, a guarantee from a bank of International repute situated outside India or a guarantee from an Authorized Dealer in India, if such a guarantee is issued against the counter-guarantee of a bank of International repute situated outside India, should be obtained from the overseas beneficiary. The Authorized Dealer should also follow up to ensure that the beneficiary of the advance remittance has fulfilled his obligations under the contract or agreement with the remitter in India.

3. Bill of collection In this case, goods are dispatched to the importers country and the relative documents are forwarded by the exporter/ exporters bank to an Authorized Dealer in the importers country, who acts as an agent to collect the proceeds of the transaction and remit it to the overseas exporter.

The exporter draws a bill of exchange on the importer, and the documents of the title of goods (bill of lading, air consignment note, etc.) are released only after the payment is received. However, in such cases the exporter faces the risk of non payment.


A bill of exchange can be of 2 types

Sight Bill

Usance Bill

After date

After sight

A Sight Bill (Documents against payment) which is also known as a Demand Bill means the drawee has to make the payment on the presentation of the bill. The necessary documents and debit authority is collected from the importer and remittance is paid to the exporters bank and only then the documents of the goods are handed over to the importer.

A usance bill (Documents against acceptance) on the other hand is when a drawee makes the payment after a period specified in the bill of exchange has expired. In simple words, an acceptance letter is taken from the importer and documents are handed over. On the due date, remittance is made to the exporters bank by debiting the importers account.

This can be further divided into After date or After sight bill. In case of an After date bill, the drawee will make the payment after a certain period specified in the bill calculated from the date of the bill of exchange. An After sight bill, the due date is calculated from the date the bill is sighted i.e presented and accepted by the drawee.


4. Letter of credit The letter of credit (L/C) is a document which is issued by the importers bank who guarantees payment to the exporter provided the conditions are fulfilled. This gives a sort of assurance to the exporter and releases the importer from the financial burden of making full payments & advance payments. In simple words, a L/C can be defined as a guarantee given on behalf of its customer, to make payment to the beneficiary upon presentation of the specified documents. This arrangement involves various parties in different roles. 1. Importer 2. L/C Opening Bank 3. Advising Bank 4. Exporter 5. Negotiating Bank 6. Reimbursing Bank 7. Confirming Bank

Let us consider an example, to understand these terms better: ABC Ltd. wants to import (buy) goods worth $40000 from XYZ Ltd. XYZ agrees

to sell the merchandise and gives a credit period of 60 days, provided ABC provides a letter of credit for the full amount.
XYZ Ltd. banks with Money Bank Ltd., New York & ABC Ltd. banks with Capital Bank Ltd., Mumbai. However, these two banks have no relation with each other. Money Bank Ltd. prefers to do business in Mumbai with Reliable Bank Ltd. Hence, after formalities, Capital Bank issues the L/C where Reliable Bank backs the Letter of credit.

In this scenario, ABC ltd. is the importer & XYZ Ltd. is the exporter Capital Bank Ltd. Is the opening bank bank issuing the L/C at the buyers request. It is the buyers bank Money Bank Ltd. is the advising bank bank that accepts the L/C, verifies and forwards it to the beneficiary (exporter) Reliable Bank Ltd. Is the confirming bank situated in the sellers country, providing additional guarantee to the seller. However, this party may not always be mandatory. A negotiating bank the bank in the sellers country which is authorized to purchase the bills drawn by the seller, validate documents and forward proceeds to the Advising Bank or beneficiary. A reimbursing bank bank which is designated by the L/C opening bank to effect reimbursement to the negotiating bank. 49

Import Financing (Trade Credit)

Trade Credits (TC) refer to credits extended for imports directly by the overseas suppliers bank and financial institution for maturity of less than three years. Depending on the source of finance, such trade credits include suppliers credit or buyers credit. Suppliers credit relates to credit for imports into India extended by the overseas supplier, while buyers credit refers to loans for payment of imports in to India arranged by the importer from a bank or financial institution outside India for maturity of less than three years. It may be noted that buyers credit and suppliers credit for three years and above come under the category of External Commercial Borrowings (ECB) which are governed by ECB guidelines.

Amount and Maturity AD banks are permitted to approve trade credits for imports into India up to USD 20 million per import transaction for imports permissible under the current Foreign Trade Policy with a maturity period up to one year from the date of shipment. For import of capital goods as classified by DGFT, AD banks may approve trade credits up to USD 20 million per import transaction with a maturity period of more than one year and less than three years from the date of shipment. No rollover/extension will be permitted beyond the permissible period. Thus, AD banks shall not approve trade credit exceeding USD 20 million per import transaction.


All-in-cost Ceilings

The current all-in-cost ceilings are as under: Maturity period All-in-cost ceilings over 6 months LIBOR* Up to three years 200 basis points

* for the respective currency of credit or applicable benchmark This implies that all expenses including arranger fee, upfront fee, management fee, handling/ processing charges, out of pocket and legal expenses, if any, over & above the interest fixed by the banks should not exceed 200 LBS.


AD banks are permitted to issue Letters of Credit/guarantees/Letter of Undertaking (LoU) /Letter of Comfort (LoC) in favor of overseas supplier, bank and financial institution, up to USD 20 million per transaction for a period up to one year for import of all non-capital goods permissible under Foreign Trade Policy (except gold, palladium, etc.) and up to three years for import of capital goods, subject to prudential guidelines issued by the Reserve Bank from time to time. The period of such Letters of credit / guarantees / LoU / LoC has to be co-terminus with the period of credit, reckoned from the date of shipment. Letter of Comfort means: A letter issued to a lending institution by a parent company acknowledging the approval of a subsidiary company's attempt for financing. The LOC in no way guarantees the loans approval for the subsidiary company. It merely gives reassurance to the lending institution that the parent company is aware and approves of the situation.


Suppliers Credit Sellers credit or suppliers credit is the normal procedure where the supplier uses his own funds and allows the importer to pay at a later date. The transaction is financed by the supplier and is hence known as sellers credit. The seller bears the risk of non-payment by the importer known as credit risk. The exporter also faces the risk of fluctuation of exchange rates as the actual borrowing and contract might be in different currencies. Buyers Credit To explain the procedure of buyers credit in simple words let us take an example; Indian Importer ABC Gems Ltd. has imported goods from an overseas exporter XYZ Ltd. & is due to pay the amount after a period of 60 days. However, ABC Gems Ltd. Wishes to extend the period. One of the ways he can do so is by obtaining buyers credit i.e. he approaches a domestic bank, say Axis Bank Ltd. to make arrangements. Axis Bank Ltd. approaches an overseas bank who pays the amount due on the 60th day to the exporter and extends the credit period to 180 days. This is thus, a form of a loan extended by the overseas bank to the domestic bank (Axis Bank Ltd.), on behalf of the domestic importer Gems Ltd.). It also has the characteristic of Principle + Interest that is fixed in advance. On the 180th day, the overseas bank is paid by Axis Bank Ltd. by debiting the amount from the ABC Gemss account. In case, the importer fails to make the funds available, the bank liquidates the Fixed Deposit created for the amount of the transaction as a safety margin (in case of any default) since the risk of non-payment is transferred and borne by the bank. It is hence necessary to extend such credit to financially stable & trusted companies. The domestic bank charges commission: Bill Commission + Commission in lieu of exchange + Guarantee Commission; in addition to Swift Charges. (ABC

Reporting Arrangements : AD banks are required to furnish details in a consolidated statement, during the month, in form TC (format in Form IV) & are also required to furnish data on issuance of LCs / guarantees / LoU / LoC by all its branches, in a consolidated statement, at quarterly intervals (format in Form V). Each trade credit may be given a unique identification number by the AD


Exports form a very significant part of any countrys foreign exchange reserves. This is the reason why 10% of transactions are to accounted against exports. Exports can be carried out by way of Bill of exchange - Collection of export bill of exchange Letter of Credit

Collection of export bill of exchange Collection of export bill of exchange refers to a type of transaction where the bank pays credit amount after collecting the bill of exchange and shipping documents, which the exporter has issued after completing shipping according to L/C, D/P, D/A, or export contract document. In Documentary Collections, banks provide intermediary services to facilitate trade settlement on terms agreed between the exporter (seller) and the importer (buyer). The exporter initiates the collection by submitting commercial documents and collection instructions to his bank (the remitting bank) after shipping the goods to the importer. These documents commonly include invoices, shipping documents (such as bills of lading) accompanied with a bill of exchange that the exporter draws on the importer. The remitting bank in turn forwards them to the importer's bank (the collecting bank) with instructions on delivery of documents, collection and remittance of payment. Based on these instructions, the collecting bank liaises with the importer for payment of the bill (or its acceptance, if applicable) and for the release of documents. With these documents, the importer proceeds to take charge of the goods. Documentary collections are of two types depending on the terms that have been arranged between the importer and the exporter:

Documents against Payment (D/P Basis): documents are released to the importer only upon his payment of the bill. Sight: The collection bank presents at sight documentary bill and the shipping documents to a importer, and exchanges importer's cash to shipping documents. Usance: If an importer wants to concord payment period with goods obtain period, there is usually "D/P, x days after B/L date" indication. At this point, the collection bank only


notifies the importer of the shipping documents arrival and keeps the documents to itself. When the due date arrives, the bank reimburses the documents and collects the cash.

Documents against Acceptance (D/A Basis): documents are released to the importer on his acceptance of the exporter's bill of exchange for deferred payment, and payment will be collected on maturity date. (Usance bill).

The Bank will pay you the proceeds of these bills when payment is received by the Bank. Documentation Under export collections, you would provide the Bank with bills along with other relevant documents to be sent to the overseas buyers' banks for payment.

Application for negotiation (collection) of shipping documents Shipping documents (such as bills of lading, Airway bill etc.) Original copy of L/C or export contract document / Bill of exchange A certificate of export declaration ( GR/ SF/ PP/ Softex ) Documents required in L/C or export contract document

Declaration of Exports: Every exporter of goods or software must give a declaration in one of the forms set out below to the specified authority. Declaration in form GR / SF - for goods through air or sea the specified authority is the Commissioner of Customs Declaration in form PP for goods through postal channels the specified authority is the postal authority through whom the goods are dispatched. Declaration in form Softex for software exported the specified authority is designated official of the Department of Electronics of Govt. Of India at the software technology park of free trade zone.


Exceptions: Trade samples and publicity materials supplied free of payment Goods or software accompanied by a declaration by the exporter that they are not more than twenty five thousand in value. Gift Not exceeding one lakh rupees Re-export in case of defects & replacements; goods imported on loan basis; surplus stock that was initially imported free of cost. Personal effects of travelers. These will be subsequently elaborated under GR Waiver. Regulatory Norms Invoicing of Software Exports

(i) For long duration contracts involving series of transmissions, the exporters should bill their overseas clients periodically, i.e., at least once a month or on reaching the milestone as provided in the contract entered into with the overseas client and the last invoice / bill should be raised not later than 15 days from the date of completion of the contract. It would be in order for the exporters to submit a combined SOFTEX form for all the invoices raised on a particular overseas client, including advance remittances received in a month. (ii) Contracts involving only one-shot operation, the invoice/bill should be raised within 15 days from the date of transmission.

(iii) The exporter should submit declaration in Form SOFTEX in triplicate in respect of export of computer software and audio / video / television software to the designated official concerned of the Government of India at STPI / EPZ /FTZ /SEZ for valuation / certification not later than 30 days from the date of invoice / the date of last invoice raised in a month, as indicated above. The designated officials may also certify the SOFTEX Forms of EOUs, which are registered with them.


(iv) The invoices raised on overseas clients as at (i) and (ii) above will be subject to valuation of export declared on SOFTEX form by the designated official concerned of the Government of India and consequent amendment made in the invoice value, if necessary. GR waiver (i) AD Category I banks may consider requests for grant of GR waiver from exporters for export of goods free of cost, for export promotion up to 2 per cent of the average annual exports of the applicant during the preceding three financial years subject to a ceiling of Rs.5 lakhs. For status

holder exporters, the limit as per the present Foreign Trade Policy is Rs.10 lakhs or 2 per cent of the average annual export realization during the preceding three licensing years (AprilMarch), whichever is higher. GR approval for Export of Goods for re-imports (i) AD Category I banks may consider request from exporters for granting GR approval in cases where goods are being exported for re-import after repairs / maintenance / testing / calibration etc. subject to the condition that the exporter shall produce relative Bill of Entry within one month of reimport of the exported item from India. (ii) Where the goods being exported for testing are destroyed during testing, AD Category I banks may obtain a certificate issued by the testing agency that the goods have been destroyed during testing, in lieu of Bill of Entry for import.


Extension of Time (i) Reserve Bank of India has permitted the AD Category I banks to extend the period of realization of export proceeds beyond 12 months from the date of export, up to a period of six months, at a time, irrespective of the invoice value of the export subject to the following conditions. a. The export transactions covered by the invoices are not under investigation by Directorate of Enforcement / Central Bureau of Investigation or other investigating agencies, b. The AD Category I bank is satisfied that the exporter has not been able to realize export proceeds for reasons beyond his control, c. The exporter submits a declaration that the export proceeds will be realized during the extended period, d. While considering extension beyond one year from the date of export, the total outstanding of the exporter does not exceed USD one million or 10 per cent of the average export realizations during the preceding three financial years, whichever is higher. e. All the export bills outstanding beyond six months from the date of export may be reported in XOS statement. However, where extension of time has been granted by the AD Category I banks, the date up to which extension has been granted may be indicated in the 'Remarks' column. f. In cases where the exporter has filed suits abroad against the buyer, extension may be granted irrespective of the amount involved / outstanding. (ii) In cases where an exporter has not been able to realize proceeds of a shipment made within the extended period for reasons beyond his control, but expects to be able to realize proceeds if further extension of the period is allowed to him, as well as in respect of cases not covered under Para (i) above necessary application (in duplicate) should be made to the Regional Office concerned of Reserve Bank in form ETX through his AD Category I bank with appropriate documentary evidence.


Write off by AD Category I banks (i) An exporter who has not been able to realize the outstanding export dues despite best efforts, may approach the AD Category I banks, who had handled the relevant shipping documents, with appropriate supporting documentary evidence with a request for write off of the unrealized portion. AD Category I banks may accede to such requests subject to the under noted conditions:

1. The relevant amount has remained outstanding for one year or more; 2. The aggregate amount of write off allowed by the AD Category I banks during a financial year does not exceed 10 per cent of the total export proceeds realized by the concerned exporter through the concerned AD Category I banks during the previous financial year; 3. Satisfactory documentary evidence is furnished in support of the exporter having made all efforts to realize the dues; 4. The case falls under any of the undernoted categories: a. The overseas buyer has been declared insolvent and a certificate from the official liquidator indicating that there is no possibility of recovery of export proceeds produced. b. The overseas buyer is not traceable over a reasonably long period of time. c. The goods exported have been auctioned or destroyed by the Port/Customs/Health authorities in the importing country. d. The unrealized amount represents the balance due in a case settled through the intervention of the Indian Embassy, Foreign Chamber of Commerce or similar Organization. e. The unrealized amount represents the undrawn balance of an export bill (not exceeding 10 per cent of the invoice value) remained outstanding and turned out to be unrealizable despite all efforts made by the exporter. f. The cost of resorting to legal action would be disproportionate to the unrealized amount of the export bill or where the exporter even after winning the Court case against the overseas buyer could not execute the Court decree due to reasons beyond his control. 58

g. Bills were drawn for the difference between the letter of credit value and actual export value or between the provisional and the actual freight charges but the amount have remained unrealized consequent on dishonor of the bills by the overseas buyer and there are no prospects of realization. 5. The case is not the subject matter of any pending civil or criminal suit. 6. The exporter has not come to the adverse notice of the Directorate of Enforcement or the Central Bureau of Investigation or any such other law enforcement agency. 7. The exporter has surrendered proportionate export incentives, if any, availed of in respect of the relative shipments. The AD Category I banks should obtain documents evidencing surrender of export incentives availed of before permitting the relevant bills to be written off. Where there is no further amount to be realized against the GR/SDF/PP form covered by the write off, AD Category I banks should certify this in the duplicate form.

Letter of Credit: The method of carrying out exports through Letter of Credit is the same as under imports, which has already been covered. The only exception is the reversal of roles of the banks acting as the advising and opening banks.


Export Financing / Export Credit Refinancing (ECR)

Commercial banks play an important role in financing exports. All financial requirements of the exporter from the time one enters into a sale contract with the overseas buyer, till he receives the final payment are met by commercial banks. The facility available from banks can be classified into Pre Shipment Post Shipment finance.

These are known as Fund Based Facilities.

Pre Shipment Finance This is also known as packing credit. The advance is given to the exporter to procure raw materials, carry out manufacturing process, provide a secure warehouse for goods & raw materials, pack the goods & ship the goods to the buyer. This facility extended by banks till the goods are shipped for exports.

Pre shipment finance is extended in Home currency i.e. Indian Rupee Foreign currency Packing credit in Foreign Currency ( PCFC )

Hence, the interest charged will depend on: PLR in case on home currency & LIBOR in case of foreign currency.

In case of Home currency : Up to 270 days: BPLR minus 25 percentage points In case of foreign currency: Up to 180 days: not exceeding 350 Basis points over LIBOR 180 to 360 days: 200 Basis points plus prevalent rate for Initial 180 days

The quantum of finance is granted to an exporter against the LC or an expected order & is based on the stance of monetary & credit policy of RBI & eligibility limit is 15 % of the outstanding rupee export credit eligible for refinance.


Banks determine the percentage of margin depending on: The nature of the order The nature of the commodity The capability of the exporter to bring in the requisite contribution

Before making any allowance for Credit facilities banks need to check the different aspects like product profile, political & economic details about the country etc. It extends credit after ensuring that the exporter is a regular customer , a bona fide exporter and has a good standing in the market ; the exporter has the necessary license and quota permit or not ; whether the country with which the exporter wants to deal is under the list of Restricted Cover Countries ( RCC ) or not . Once the proper sanctioning & execution of the documents is done, the advance is disbursed. The payments are made directly to the supplier by drafts/ bankers cheques. The bank decides the duration of credit depending upon the time required by the exporter for processing the goods. The maximum duration of packing credit period is In case of Home currency: 180 days + 90 days In case of Foreign currency: 360 days

In order to secure the advance, the bank uses the stock statement as a guarantee. All the goods that are purchased are either pledged or hypothecated to the bank. Besides, the bank also undertakes periodic inspection of the godown, stock verification etc. Packing credit is usually disbursed in the form of Loan Account: a separate account is maintained for each export order. Proceeds of bills against orders which are executed are adjusted for packing credit advance given. The request from the party has to be supported by lodging the L/C or export order Running facility : operates like a cash credit account and bank waives off the prior condition of lodging documents , provided the exporter has a good track record .

Once the goods are shipped, the packing credit needs to be liquidated out of the export proceeds of the relevant shipment, thereby converting pre shipment credit into post shipment credit.


To summarize pre shipment finance covers Packing credits covered by Export Credit Guarantee Corporation of India( ECGC ) Shipping loans Advance against duty drawbacks Advance against cash incentives Packing credit in foreign currency

Post Shipment Finance

These are credit facilities extended to the exporter from the time goods are shipped and till the export proceeds are realized. It is provided against evidence of shipment of goods or supplies made to the importer.

Post shipment can be secured or unsecured. Since the finance is extended against evidence of export shipment and documents of title of goods, it is usually secured. However, if it involves advance against undrawn balance, it becomes unsecured in nature. Quantum of finance: Post shipment finance can be extended up to 100% of the invoice of goods. In special cases, where the domestic value of goods increases the value of the exporter order, finance for a price difference is covered by the government. This type of finance is not extended in case of pre shipment stage.

Similar to pre shipment, post shipment is also extended in Home currency & foreign currency. Thus, interest in case of post shipment advances is In case of home currency : up to 180 days: BPLR minus 2.5 percentage points In case of foreign currency: for on demand bills & usance bills: not exceeding 350 Basis points over LIBOR

Post shipment finance can be for long term or short term, depending on the payment terms offered by the exporter to the overseas importer. Usually the maximum period 62

In case of Home currency : 365 days (including Normal Transit Period + grace period) In case of Foreign currency: 180 days (including Normal Transit Period + grace period)

Post shipment finance may be extended in the following ways:

EBR ($ financing)

Rupee Advance


EBRP - Sight Bill

EBRDUsance Bill

ACBUUsance Bill

ACBS - Sight Bill FSB N

LC Backed






Export bills Negotiated: The risk of non payment is less under LC, as the issuing bank makes sure of the payment. Hence, banks readily extend finance against bills under LC. Accordingly there are; Finance Sight Bill Negotiated (FSBN) & Finance Usance Bill Negotiated (FUBN)

Export Bills Purchased / Discounted: Export Bills (Non LC bills) is used in terms of sale contract/ order may be discounted or purchased by banks. It is used in international trade transactions & the proper limit has to be sanctioned to the exporter for purchase of export bill. Accordingly, there are Finance Usance Bill Discounted (FUBD) & Finance Usance Bill Purchased (FUBP)


This facility covers Foreign bills negotiated - D/P , D/A, L/C Foreign bills purchased Advance against duty drawback Post shipment finance in foreign currency Advance against cash incentives Advance against undrawn balances Foreign clean bills purchased (DD, TC, International money orders, etc.)

Submission of export documents The documents pertaining to export shall, within 21 days from the date of export as, as the case may be, from the date of certification of SOFTEX form, be submitted to the authorized dealer mentioned in the relevant declaration form : Provided that, subject to the directions issued by the Reserve Bank from time to time, the authorized dealer may accept the documents pertaining to export submitted after the expiry of the specified period of 21 days, for reasons beyond the control of the exporter . Important Documents Bill of Lading: Shipping forms a very important part of international mode of transport. The bill of lading is a documentary evidence of carriage of goods by sea. It is issued by the shipping company acknowledging the receipt of goods, which should be in the same condition as they were dispatched & received at the port. A Bill of Lading is an evidence of contract of carriage, receipt of goods by the carrier & title to goods. Airway Bill: It is a document of carriage of goods by air. This mode of transportation is usually used when the goods are required expeditiously & safely. It is made in three originals given to three parties viz. carrier, consignee & consignor. The purpose of an airway bill is similar to the bill of lading, only that it also serves as a certificate of insurance but is not a document of title to goods. Some other documents include: postal receipts. Courier receipts, insurance documents, etc.


A bank guarantee is a written contract given by the bank on behalf of the customer. The bank takes responsibility for payment of a sum of money in case, if it is not paid by the customer on whose behalf the guarantee has been issued. In return a bank gets commission for issuing the guarantee. Benefits: For Governments: Increases the rate of private financing for key sectors such as infrastructure. Provides access to capital markets as well as commercial banks. Reduces government risk exposure by passing commercial risk to private sector.

For private sector: Reduces risk of private transactions in emerging countries. Mitigates risks that the private sector does not control Improves project sustainability

The guarantees are structured according to the terms of agreement viz. security, maturity and purpose. With the introduction of risk weights for both on-Balance sheet and off-Balance sheet exposures , banks have become risk sensitive , resulting in structuring of their business exposures in a more prudent manner .

Bank guarantees are either Direct Bank Guarantee: Issued by the applicants bank (issuing bank ) directly to the guarantees beneficiary without concerning a correspondent bank . This type of guarantee is less expensive and also subject to the law of the country in which the guarantee is issued unless mentioned otherwise. Indirect Bank Guarantee: A second bank is involved which is basically the representative of the issuing bank in the country to which beneficiary belongs. This involvement is on demand of the beneficiary. It is time consuming and expensive too. Confirmed Guarantee: It is a cross of the direct & indirect guarantee, which is issued by the bank directly and then sent to a foreign bank for confirmations. The foreign bank confirms the original documents and thereby assumes responsibility.


There are various types of guarantees, viz. Bid bond guarantee : In cases of construction / turnkey projects involving huge amounts, usually calls for global tenders. To participate in this tender the contractors are required to furnish bank guarantees usually for five percent of the value of the contract. The bank undertakes to pay the guarantee amount if the contract is awarded to the contractor but due to any reason, fails to take it up. Thus, the bank has to ensure & give guarantees to only those contractors with reasonable means and capacity to execute the work. The duration of such guarantees is for a short term, say three to six months and is terminated on the contractor taking up the contract or on expiry of the period. Authorized banks require prior approval of RBI to issue bid bond guarantees and must satisfy themselves with the bona fides of the applicant and his capacity to perform; also that the value of the bid/guarantee as a percentage of the total value of the project is reasonable and in compliance with the normal practice of international trade & Foreign Exchange Management regulations. Performance guarantee : After the contract is awarded to the contractor, he is required to furnish a guarantee whereby the execution of the contract as per terms and conditions is guaranteed. In case of failure to perform as per the contract, the guarantee is invoked whereby the bank is compelled to pay the amount of the guarantee. This guarantee is issued for ten percent of the contracted amount. Such guarantees are issued for a longer period. Advance payment guarantee This is also known as the repayment guarantee. Almost all turnkey projects and construction contracts provide payment of an advance under the contract. This calls for a guarantee by the bank to provide for the repayment of the advance paid if the contractor does not fulfill the contract. Retention money guarantee Many of the turnkey / construction contracts provide that a part of the contract amount be retained by the importer for a certain period of time during which he verifies the proper functioning of the work executed by the contractor .This amount is usually five percent of the contract value and the retention period could be 12 months .In case the work executed is found to be defective the importer can invoke the guarantee and the bank will pay the amount. 66

Chapter 4 4.1 Analysis & Conclusion

ANALYSIS 1: Contribution of Forex to Treasury earnings & Contribution of Treasury earnings to Fee Income over three financial years, at Axis Bank Ltd.

2925 3000 2500 1495 2000 1500 1000 211 500 33 0 FY 2007-08 FY 2008-09 86 108.3 347 466 Forex Earnings Treasury Earnings Fee income Rupees (Crores) 2447

FY 2009-10

Figure 10; Source: Based on Axis Bank Press Release reports-Y.E.2010, 2009, 2008

Interpretation The above graph shows the growth and composition of one of Axis Banks performance parameters i.e. Fee Income. Fee income encompasses Treasury under which we have Foreign Exchange Earnings. The Bank has an integrated Treasury, covering both domestic and global markets, which manages the Bank's funds across geographies.

Highlights: Consistent Growth in Fee income over the three financial years : FY 2007-08 , FY 2008-09 & FY 2009-10.


Increase of 64 % YoY from 2007-08 to 2008-09 & Increase of 20 % YoY from 2008-09 to 2009-10 Besides the fact that all businesses under Fee Income did extremely well in 2008-09, one of the reasons why there was a sudden increase of 64 % was the inclusion of Forex Earnings in Fee Income instead of Trading Profits, in accordance with common practices among other banks.

Prior to this the Fee Income was as follows : 2006-07 Rs. 890 Cr. 2005-06 Rs. 558 Cr. 2004-05 Rs. 366 Cr. Which is comparatively lower to the fee income post 2007-08.

Under Fee Income there are various heads such as Large & Mid Corporate Credit, Agri & SME Banking, Business Banking, Capital Markets, Retail Business and Treasury are included. Out of these, over the three financial years Retail Banking always had the highest income followed by Large & Mid Corporate Credit. Treasury takes third position.

Highlights: Treasury roughly constitutes 14 % each year of the total Fee Income in terms of earnings. Axis Bank recorded an increase of 65 % YoY from 2007-08 to 2008-09 & an increase of 34 % YoY from 2008-09 to 2009-10. Even though the growth rate of treasury may be higher than that of Retail Business ( 39 % YoY from 2007-08 & 16 % from 2008-09 to 2009-10 ) it is less in terms of actual turnover ( Rs.553 Cr. in 2007-08 , Rs.771 Cr. in 2008-09 and Rs. 897 Cr. in 2009-2010 )

Treasury covers Forex trading, SLR & Money market trading and Derivatives Trading. From the above graph, it can be clearly seen that there has been an upward trend in terms of forex trading i.e. Foreign Exchange currency with the bank. It is a subset of forex turnover. The contribution & performance of the Forex Business at Axis Bank has steadily risen over the three years.


Highlights As a percentage of Treasury the contribution of Forex was approximately 15 % in 2007-08 which increased to 23 % in 2009-10. This is significant as even though the difference in terms of percentage is not major, the increase in terms of value is. In the year 2007-2008 with earnings of Rs.33 crores, there has been an approximate increase of 160 % YoY to Rs. 86 crores in 2008-2009. Similarly, an increase of 27 % YoY is seen from 2008-2009 to Rs. 108.3 Cr in 2009-10. This is in sync with the steady rise in the total forex turnover

Forex Trading comes second to SLR & Money market trading which has had phenomenal growth each year , especially with an increase of 483 % in the year 2008-09 (from Rs. 39 Cr. to Rs. 225 Cr)

ANALYSIS 2: Forex business turnover of Axis Bank Ltd.

450000 400000 350000 300000 250000 200000 150000 100000 50000 0 127970 159165 295776


FY 2006-07 FY 2007-08 FY 2008-09 FY 2009-10


Figure 12; Source: Based on Axis Bank Press Release reports-Y.E.2010, 2009, 2008, 2007

Interpretation: In the above graph, we can observe the growth in the Foreign Exchange Business of Axis Bank Ltd. This involves the whole turnover and not just the profit earned or Forex currencies with the bank.


Highlights Increase of 24 % YoY from 2006-07 to 2007-08 Increase of 86 % YoY from 2007-08 to 2008-09 Increase of 36 % YoY from 2008-09 to 2009 -10

A 24 % rise in turnover during 2007-08 can be credited to Significant emphasis developing the customer business in foreign exchange, Centralization of its foreign trade processing operations, which led to significant gains in the form of savings in costs as well improvement in the standards of service & compliance. In 2008-09 The Bank continued its emphasis on developing the customer business in foreign exchange Proprietary trading in foreign exchange was also very profitable The Bank sustained the growth in customer driven forex business by strengthening existing relationships, acquiring new clients and providing value-added services to clients.

During the year 2009-10 The Bank posted a vigorous growth in both customer-based and proprietary Treasury business. In foreign exchange business, the Bank increased its presence in the inter-bank markets and despite the competitive environment, grew the customer forex (merchant) business.


ANALYSIS 3: Forex business turnover of Axis Bank Ltd. Of Powai branch

180000 160000 140000 120000 100000 80000 60000 40000 20000 0 turnover in lakhs 108288.79 FY 2009-10 FY 2010-11

The Powai branch did a very good business in forex. The Bank continued its emphasis on developing the customer business in foreign exchange and saw a rise of turnover of about 55%. This rise can be credited to Significant emphasis on developing the customer business in foreign exchange. Increase in customers doing business in diamonds. Dedicated and hard working team of forex in the branch.


ANALYSIS 4: Forex business exchange of Axis Bank Ltd. Of Powai branch



150 100 50 FY 2009-10 0 EXCHANGE IN LAKHS FY 2010-11

FY 2009-10 FY 2010-11

The branch has achieved an exchange income of 169rs (lakhs) as against the budget of 149 lakhs.


ANALYSIS 5: Forex business commission earned of axis bank ltd of Powai branch

35 31.25 30 25 20 15 10 5 0 COMMISSION IN LAKHS 18.56 FY 2009-10 FY 2010-11

The branch has achieved 31.25 lakhs of commission income against a target of 23 lakhs.


ANALYSIS 6: Number of new acquisition in the branch.

25 20 15 10 5 0 NEW ACQUISITIONS 12


FY 2009-10 FY 2010-11


Observation & Conclusion

Fundamental change that has taken place in recent years is the importance of capital flows in determining exchange rate movements as against trade deficits and economic growth, which were important in the earlier days. The latter do matter, but only over a period of time. Capital flows, on the other hand, have become the primary determinants of exchange rate movements on a day-to-day basis. Secondly, unlike trade flows, capital flows in "gross" terms which affect exchange rate can be several times higher than "net" flows on any day. The composition of foreign exchange reserves show that the accumulation has Been mainly on three fronts Foreign investment ( directly as FDIs/ indirectly as portfolio investments or FIIs) External commercial borrowings Banking capital

Which has been brought about mainly by a substantial increase in foreign investments. Apart from the well known IT, BPO and KPO sectors, unexplored service sectors like medical care are potential sectors for foreign investment. Investing in the secondary sector/manufacturing sector is a brick and mortar investment. It makes provision for employment to semi skilled and skilled labor. (Infrastructure). Indias burgeoning tertiary sector requires fewer but highly skilled workers. Hence, more investments in both the areas are needed, be it in the form of FDI or FII. Without private investment, including foreign players, India cannot meet its targeted growth rate. Since, foreign investments play such an important role, reviewing and adjusting according the scenario in the international market is equally important. In the current circumstances, the world sees the Dollar as a safe haven as demonstrated by its recent strength against the Euro & Yen. While the European Union is struggling to bail out Greece, the Yen fell against all 16 of its most traded counterparts some weeks ago as Japanese consumer prices dropped, indicating that the countrys central bank will lag behind its peers in raising interest rates. As far as the Indian Rupee is concerned, there are separate views on the issue. On one hand it is believed that the declining value of Euro may not affect Indian forex reserves to a great extent as it forms only a small component of the reserves. It may also lead to an increase in inward remittances as India is considered to be a safe haven too during any global economic turmoil. On the other hand, the finance ministry states that if the Euro zone crisis persists, it could have an adverse impact on capital flows and pose a threat in the medium term. This especially becomes a cause of concern since the government is emphasizing a lot on infrastructure development through FDI / FII. Various opportunities lie with a change in investment 75

climate of India in roads, telecommunication, port development, aviation, education, healthcare & hospitality. Of these roads and ports play a vital role in trade. Studies have shown that the oldfashioned, inefficient facilities are those (the port of Kolkata, for example) ports where the private sector remains excluded results in Indias exports and imports being burdened with higher costs. Each ship at Jawaharlal Nehru Port (Mumbai) on a given day can carry a maximum of only 2,500 TEUs (twenty equivalent units) of containers, as against at least 12,000 for the largest ships at Chinese ports. The vessels serving Indian ports not only have higher costs but also are too small to make intercontinental voyages. So containers bound for Europe/North America must be transshipped at ports such as Colombo or Salalah (Oman) all at extra cost. Doesnt all of this provide a perfect setting for spending a few billion dollars from foreign reserves to import turbines, railway coaches, port equipment and air-traffic control systems? We can always push reserves to play in the global market instead of holding them at low returns. The central bank is continuously buying dollars to stem the pace of appreciation in the rupee. However, it isn't making much dough on the assets it's acquiring with those dollars. In the year ended June 2006, the Reserve Bank earned 3.9 percent on its reserves. Infrastructure promises significantly higher returns. NTPC sold a 10-year dollar-denominated bond last year, paying a coupon rate of about 5.9 percent. The performance of the services sector is enviable to most countries of the world. And that performance is only half of the story that India is capable of. China is likely to rule in manufacturing sector; India must take advantage of the service industry.



Axis Bank Ltd. Press release reports & Annual Reports Official RBI site ( www.rbi.org.in ) The Economic Times ( www.economictimes.com ) World Bank site ( www.worldbank.org) EXIM Bank site (www.eximbankindia.com) Official website of Foreign Exchange Dealers Association of India (www.fedai.org.in) www.indianforex.net www.bloomberg.com www.nse.com