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A

PROJECT REPORT
ON
BENEFITS OF FOREIGN OPERATIONS OF INDIAN
BANKS
SUB TOPIC

STRATEGIES AND METHODOLOGIES FOR LEVERAGING AND


EXPANDING FOREIGN EXCHANGE BUSINESS IN AHMEDABAD
Undertaken at

ASHRAM ROAD BRANCH


AHMEDABAD

In partIal fulfIllment of Summer traInIng (1st year MBA)


Submitted to

AES PG Institute of Business Management


Gujarat University
Ahmedabad
Submitted by

YASHRAJSINGH CHAUHAN [7]


HETALI RAJKAR [44]
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PREFACE
In every field of education imparted to the student, working on project plays an
immense role in bringing out and exhibiting the qualities which are helpful in implementing
students knowledge in the practical life.
When it comes to the practical knowledge in Financial field, there are number of
areas to be specialized in. one can go for core finance like working capital management,
Investment decisions, capital structure decisions, credit policies etc, and one can look
forward to equity and forex markets as well. Both are important part of the Finance. But
amongst all these fields tremendous opportunities are residing in the Foreign Exchange field.
As in India, the FOREX system is main fundamental thing for any kind of International
business.
What is the lure of the foreign exchange market? How did it grow to be the most
powerful and important market in the world? And how can you benefit from it?
The foreign exchange market directly impacts every bond, equity, private property,
manufacturing asset and any investments accessible to foreign investors. Foreign exchange
rates play a major role in financing government deficits, equity ownership in companies and
real-estate holdings. Foreign exchange trading helps determine who hires and fires
employees, and who owns the banks at which you maintain your corporate and personal
accounts. The currency in your pocket is literally stock in your country, and like a share, its
value fluctuates on the international market providing knowledgeable traders with substantial
opportunities for profit or loss.
Getting the deep and practical knowledge of this field can be of great help to the
students who are interested in finance. This kind of training and projects can help the
students to use their theoretical knowledge on the practical aspects of the field.

July 16, 2007


Ahmedabad

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ACKNOWLEDGEMENT
Study of management is all about gaining knowledge from the experience one gets
from the corporate world. When students get into the corporate world to gain the knowledge,
they are novice. They need and opportunity and of-course help of their seniors to explore the
aspects of business management.

We were given this opportunity by one of the best bank in the banking industries,
especially in forex business. We are obliged to BANK OF BARODA for providing us an
opportunity to undergo training in their esteemed organization.

We wish to express our heartfelt gratitude to

Mr. E. F. TUCKER
AGM
FOREX-BOB
ASHRAM ROAD BRANCH,

Mr. R. M. KUMARAN
CHIEF MANAGER
FOREX-BOB
ASHRAM ROAD BRANCH
And
Mr. R. K. PARIKH
MANAGER
FOREX-BOB
ASHRAM ROAD BRANCH
For their immense help in making our training and project fruitful. We would also like to
thank all the employees of Ashram Road Branch for their needed help.

We also thank Dr. Mayank Joshipura for his kind help in the subject and we are thankful to all
other faculty members at AES PGIBM for their kind support.

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Finally, not to miss anyone, we thank all the people who have directly or indirectly
helped us a lot throughout the training period and in completion of our project successfully.

YASHRAJSINGH CHAUHAN
______________________

HETALI RAJKAR
______________________

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EXECUTIVE SUMMARY
The important aspects of our project were to study various Forex
operations of Indian Banks and to suggest various strategies and
methodologies for leveraging and expanding forex business in
Ahmedabad.
Chapter 1 contains basic history of the Foreign Exchange. I.e. the emergence of foreign
exchange market.

Chapter 2 contains some basic information on the Foreign Exchange. i.e. what exactly Foreign
Exchange and what does it include as well as provide.

Chapter 3 gives a broad idea the FOREX Market rates. Initiated with the top 6 most traded
currencies and factors affecting currency trading, and the later part of the chapter contains
various types of exchange rates and factors affecting exchange rates.

Chapter 4 contains the information about foreign exchange market and its size and scope both
from the perspective of the Indian and global economy. It also gives the broad idea about
various instruments of forex.

FOREX market is not a market where anyone who has money can come and participate; it has
its own guidelines. In chapter 5 these guidelines which are necessary for FOREX market and
which has been given by RBI are covered. Also the guidelines given by FEDAI are included.

Chapter 6 defines the role of different players of forex market. The major participants are
corporate customers, central banks, banks, investment firms, brokers etc.

Chapter 7 focuses on banks which was our focus of study continued with brief introduction and
overview of Bank of Baroda.

Chapter 8 gives the idea about various foreign operations of Bank of Baroda, like Export
Finance, Import Finance, LCs, ECBs, RTGS, EEFC accounts, Correspondent banking and the
benefits of these operations to Bank of Baroda.

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Chapter 9 highlights the various benefits of foreign operations of Indian Banks particularly of
Bank of Baroda.

After studying the various operations and benefits of these operations


Chapter 10 deals with the strategies and methodologies arising out of our study for Bank of
Baroda in general.

Chapter 11 focuses on strategies and methodologies that is essential for expanding and
leveraging forex business specially in Ahmedabad and whole Gujarat region at some level.

Chapter 12 At the end depicts the action points that we have encountered during our summer
study at BOB, which can be useful for enhancing forex business of the bank.

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RESEARCH METHODOLOGY
Main objective

To learn the Forex operations of Indian Banks

Sub objectives

Studying different aspects of foreign operations

Studying the benefits of foreign operations of Indian banks

Developing various strategies and methodologies for leveraging foreign business


in Ahmedabad

Action points for leveraging business in future for BOB

Scope
The project looks into the actual workings of BANK OF BARODA. In its Forex System
study we tried to cover every objective of the project, mentioned above and various
aspects of the Forex business. Scope of our project study is restricted only to foreign
exchange branch of BANK OF BARODA.

Limitations

Time constraints

Lack of proper guidance

Resource constraints

Confidentiality of business operations

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TABLE OF CONTENTS
1.

2.

3.

HISTORY

10

1.1

11

FOREIGN EXCHANGE

13

2.1
2.2
2.3

14
15
15
16

3.1
3.2

TOP 6 MOST TRADED CURRENCIES


FACTORS AFFECTING CURRENCY TRADING

17
18

3.2.1 ECONOMIC FACTORS


3.2.2 POLITICAL CONDITIONS
3.2.3 MARKET PSYCHOLOGY

18
19
19

EXCHANGE RATES

21

3.3.1 DEFINITION
3.3.2 DIRECT QUOTE
3.3.3. INDIRECT QUOTE

21
21
21

FACTORS AFFECTING EXCHANGE RATES

23

3.4

FOREIGN EXCHANGE MARKET

28

4.1
4.2
4.3

FOREX-SIZE AND SCOPE


ROLE OF FOREX IN GLOBAL ECONOMY
INSTUMENTS

30
31
32

4.3.1
4.3.2.
4.3.3
4.3.4
4.3.5

SPOTS
FORWARDS
FUTURES
OPTIONS
SWAPS

32
32
32
32
33

INDIAN FOREX MARKET

36

4.4

5.

WHAT IS FOREIGN EXCHANGE


WHAT DOES FOREX INVOLVE
WHAT DOES FOREX PROVIDE

CURRENCY AND EXCHANGE RATE ARITHMATIC

3.3

4.

BASIC HISTORY OF FOREX

GUIDELINES

37

5.1
5.2

38
40

RBI
FEDAI

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6.

7.

MARKET PARTICIPANTS

41

6.1
6.2
6.3
6.4
6.5
6.6
6.7

43
43
44
44
44
45
45

BANKS

46

7.1
7.2
7.3

ROLE OF BANKING INDUSTRIES


INTRODUCTION TO BANK OF BARODA
GLOBAL PRESENCE OF BANK OF BARODA

47
48
51

7.3.1 WIDE GLOBAL NETWORK


7.3.2 INDIAN NETWORK

52
53

PRODUCTS AND SERVICES

53

7.4
8.

CORPORATE CUSTOMERS
CENTRAL BANKS
INVESTMENT MANAGEMENT FIRMS
RETAIL EXCHANGE BROKERS
OVERSEAS FOREX MARKETS
SPACULATORS
BANKS

FOREX OPERATIONS

55

8.1
8.2
8.3
8.4
8.5
8.6
8.7
8.8
8.9

57
58
62
64
70
75
77
79
80

FCNR
EXPORT FINANCE
IMPORT FINANCE
LCs
ECBs
EEFC
RTGS
CORRESPONDENT BANKING
INTERNATIONAL TREASURY

9.

BENEFITS OF FOREIGN OPERATIONS

81

10.

STRATEGIES FOR BANK IN GENERAL

84

11.

STRATEGIES AND METHODOLOGIES FOR DEVELOPING


AND LEVERAGING FOREX BUSINESS IN AHMEDABAD

89

ACTION POINTS

93

12.

BIBLIOGRAPHY

96

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BASIC HISTORY OF FOREX


Initially, the value of goods was expressed in terms of other goods, i.e. an economy
based on barter between individual market participants. The obvious limitations of such a
system encouraged establishing more generally accepted means of exchange at a fairly
early stage in history, to set a common benchmark of value. In different economies,
everything from teeth to feathers to pretty stones has served this purpose, but soon metals,
in particular gold and silver, established themselves as an accepted means of payment as
well as a reliable storage of value.

Originally, coins were simply minted from the preferred metal, but in stable political
regimes the introduction of a paper form of governmental IOUs (I owe you) gained
acceptance during the middle Ages. Such IOUs, often introduced more successfully through
force than persuasion were the basis of modern currencies.

Before the First World War, most central banks supported their currencies with
convertibility to gold. Although paper money could always be exchanged for gold, in reality
this did not occur often, fostering the sometimes disastrous notion that there was not
necessarily a need for full cover in the central reserves of the government.

At times, the ballooning supply of paper money without gold cover led to devastating
inflation and resulting political instability. To protect local national interests, foreign exchange
controls were increasingly introduced to prevent market forces from punishing monetary
irresponsibility.

In the latter stages of the Second World War, the Bretton Woods agreement was
reached on the initiative of the USA in July 1944. The Bretton Woods Conference rejected
John Maynard Keynes suggestion for a new world reserve currency in favor of a system built
on the US dollar. Other international institutions such as the IMF, the World Bank and GATT
(General Agreement on Tariffs and Trade) were created in the same period as the emerging
victors of WW2 searched for a way to avoid the destabilizing monetary crises which led to the
war. The Bretton Woods agreement resulted in a system of fixed exchange rates that partly
reinstated the gold standard, fixing the US dollar at USD35/oz and fixing the other main
currencies to the dollar - and was intended to be permanent.

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The Bretton Woods system came under increasing pressure as national economies
moved in different directions during the sixties. A number of realignments kept the system
alive for a long time, but eventually Bretton Woods collapsed in the early seventies following
president Nixon's suspension of the gold convertibility in August 1971. The dollar was no
longer suitable as the sole international currency at a time when it was under severe
pressure from increasing US budget and trade deficits.

The following decades have seen foreign exchange trading develop into the largest
global market by far. Restrictions on capital flows have been removed in most countries,
leaving the market forces free to adjust foreign exchange rates according to their perceived
values.

But the idea of fixed exchange rates has by no means died. The EEC (European
Economic Community) introduced a new system of fixed exchange rates in 1979, the
European Monetary System. This attempt to fix exchange rates met with near extinction in
1992-93, when pent-up economic pressures forced devaluations of a number of weak
European currencies. Nevertheless, the quest for currency stability has continued in Europe
with the renewed attempt to not only fix currencies but actually replace many of them with the
Euro in 2001.

The lack of sustainability in fixed foreign exchange rates gained new relevance with
the events in South East Asia in the latter part of 1997, where currency after currency was
devalued against the US dollar, leaving other fixed exchange rates, in particular in South
America, looking very vulnerable.
But while commercial companies have had to face a much more volatile currency
environment in recent years, investors and financial institutions have found a new
playground. The size of foreign exchange markets now dwarfs any other investment market
by a large factor. It is estimated that more than USD1,200 billion is traded every day, far
more than the world's stock and bond markets combined

Today, the values of the major world currencies are independent of each other, with
intervention available to the states only through the central banking system.

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What is Foreign Exchange?

Countries of the world have been exchanging goods & services amongst themselves
from time immemorial. The world has come a long way from the days of barter trade. With
the inventions of money, the rigors & problems of barter trade have disappeared. Barter trade
has made way to exchange of goods & services for money instead of exchange for other
goods & services.

As every sovereign nation has a distinct national currency, international trade has
involved exchange of currencies. It is said that although the business of changing money is
as old as money itself, the foreign exchange markets where currencies of different countries
are exchanged, started taking shape only in late nineteenth century. The exchange of
currencies has brought about the concept of exchange rates.

Like any other commodity, the price of one unit of foreign currency can be stated in
terms of domestic currency; in fact a unit of one currency can be stated in terms of any other
currency. Rate of exchange means the price of one currency in terms of other currency. To
state differently, the exchange rate is said to be the rate at which a number of units of one
currency can be exchanged for a number of units of another currency. Simply defined,
exchange rate is nothing but value of one currency expressed in terms of another currency.
For example, the price of US Dollar (USD) of Japanese Yen (JPY) or Pound Sterling (GBP)
can be expressed in terms of Indian Rupees (INR). Thus, if we say USD 1 = INR 47.00. It
means the exchange of US Dollar & Indian Rupees is 1:47.00. Similarly, GBP 1= INR 77
meaning that the exchange rate of Sterling Pounds & Indian Rupee is 1:77.

Different countries have adopted different exchange rate system at different times.

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What Does FX Involve?


A foreign exchange deal involves:

Exchange of two currencies

As an agreed exchange rate

For a specified settlement date

Settlement instructions for receipt and payment, and

Confidence that the terms of the trade will be adhered to i.e. limits

What Does FX provide?


Foreign exchange provides us:

The method or mechanism to conduct and settle the proceeds of international


trade

The means to obtain / provide technology, expertise and the sharing of information

The means to minimize the risks of currency fluctuations primarily through the
use of various tools and financial instruments, and

Trading opportunities to generate incremental income.

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Top 6 Most Traded Currencies


Rank

Currency

ISO 4217
Code

Symbol

United States dollar

USD

Eurozone euro

EUR

Japanese yen

JPY

British pound sterling

GBP

5-6

Swiss franc

CHF

5-6

Australian dollar

AUD

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Factors affecting currency trading


Supply and demand for any given currency, and thus its value, are not influenced by
any single element, but rather by several. These elements generally fall into three categories:
economic factors, political conditions and market psychology.

Economic factors
These include economic policy, disseminated by government agencies and central
banks, economic conditions, generally revealed through economic reports, and other
economic indicators.

Economic policy comprises government fiscal policy (budget/spending practices) and


monetary policy (the means by which a government's central bank influences the supply and
"cost" of money, which is reflected by the level of interest rates).

Economic Factors include


Government budget deficits or surpluses
The market usually reacts negatively to widening government budget deficits, and
positively to narrowing budget deficits. The impact is reflected in the value of a country's
currency.

Balance of trade levels and trends:


The trade flow between countries illustrates the demand for goods and services, which
in turn indicates demand for a country's currency to conduct trade. Surpluses and deficits in
trade of goods and services reflect the competitiveness of a nation's economy. For example,
trade deficits may have a negative impact on a nation's currency.

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Inflation levels and trends: Typically, a currency will lose value if there is a high level of
inflation in the country or if inflation levels are perceived to be rising. This is because inflation
erodes purchasing power, thus demand, for that particular currency.

Economic growth and health: Reports such as gross domestic product (GDP), employment
levels, retail sales, capacity utilization and others, detail the levels of a country's economic
growth and health. Generally, the more healthy and robust a country's economy, the better
its currency will perform, and the more demand for it there will be.

Political conditions
Internal, regional, and international political conditions and events can have a
profound effect on currency markets.

For instance, political upheaval and instability can have a negative impact on a
nation's economy. The rise of a political faction that is perceived to be fiscally responsible
can have the opposite effect. Also, events in one country in a region may spur positive or
negative interest in a neighboring country and, in the process, affect its currency.

Market psychology
Market psychology and trader perceptions influence the foreign exchange market in a
variety of ways:

Flights to quality:
Unsettling international events can lead to a "flight to quality" -with investors seeking a
"safe haven". There will be a greater demand, thus a higher price, for currencies perceived
as stronger over their relatively weaker counterparts.

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Long-term trends:
Very often, currency markets move in long, pronounced trends. Although currencies
do not have an annual growing season like physical commodities, business cycles do make
themselves felt. Cycle analysis looks at longer-term price trends that may rise from economic
or political trends.

"Buy the rumor, sell the fact:" This market truism can apply to many currency
situations. It is the tendency for the price of a currency to reflect the impact of a particular
action before it occurs and, when the anticipated event comes to pass, react in exactly the
opposite direction. This may also be referred to as a market being "oversold" or
"overbought".[5] To buy the rumor or sell the fact can also be an example of the cognitive bias
known as anchoring, when investors focus too much on the relevance of outside events to
currency prices.

Economic numbers:
While economic numbers can certainly reflect economic policy, some reports and
numbers take on a talisman-like effect - the number itself becomes important to market
psychology and may have an immediate impact on short-term market moves. "What to
watch" can change over time. In recent years, for example, money supply, employment,
trade balance figures and inflation numbers have all taken turns in the spotlight.

Technical trading considerations:


As in other markets, the accumulated price movements in a currency pair such as
EUR/USD can form patterns that may be recognized and utilized by traders for the purpose
of entering and exiting the market, leading to short-term fluctuations in price. Many traders
study price charts in order to identify such patterns. [6]

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Exchange rates
Although exchange rates are affected by many factors, in the end, currency prices are a
result of supply and demand forces. The world's currency markets can be viewed as a huge
melting pot: in a large and ever-changing mix of current events, supply and demand factors
are constantly shifting, and the price of one currency in relation to another shifts accordingly.
No other market encompasses (and distills) as much of what is going on in the world at any
given time as foreign exchange.

Definition

Rate of Exchange
A rate of exchange is the price of a unit of one Currency expressed in terms of another
currency. Such rates may be quoted as Direct rates or as Indirect rates. Reserve Bank of
India does not deal directly with the customers i.e. importers, exporters, remitters,
beneficiaries of remittances etc. Popularly called "Merchants" and therefore, has authorised
some of the banks for this purpose. Reserve Bank of India, under Foreign Exchange
Management Act, 1999, Section 10) has granted Authorised Dealer's licence to various
banks to deal in Foreign Exchange. FEDAI frames rules for the same. The exchange rates
quoted to these "Merchants" are known as "Merchant Rates".

Direct quotations
Under a system of Direct Quotations, the exchange rates are quoted where the unit(s) of
foreign currency remains constant, whereas the home currency units fluctuate:
I.e.
US $ 1 = Rs. 44.60
US $ 1 = Rs. 44.80 etc.

Indirect Quotations
Under a system of Indirect Quotations, the exchange rates are quoted where the unit(s) of
home currency remains constant against variable units of foreign currency.
I.e. Rs. 100/- = US $ 2.2421
Rs. 100/ = US $ 2. 2415

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In India we follow the direct method of quoting exchange rates. In this system of rate
quotation, the principle applied is "Buy Low, Sell High". We quote so many Rupees and
Paise for 1 unit of foreign currency or 100 units of foreign currency. All exchange rates in
Indian Rupees are quoted for 1 unit of foreign currency, except the following currencies for
which the exchange rates are quoted against 100 units of foreign currencies:

Indonesian Rupiah

Japanese Yen

Kenyan Shillings

Bangladesh Taka

Myanmar Kyat

Iranian Rial

Pakistani Rupees

Sri Lankan Rupees

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FACTORS AFFECTING EXCHANGE RATES


The Bretton Woods conference in July 1944 resulted into a new monetary order. The
main objectives of this were to establish an international monetary system with stable
exchange rates, to eliminate exchange controls, and to bring about convertibility of all
currencies. This required the central banks of various countries to declare their parity to gold
or to the US Dollar. In turn, USA agreed to exchange US Dollar for gold at 35 dollars per
ounce. The Central banks were expected to keep the rate fluctuations within 1%. However,
due to chronic US balance of payments deficits there was a general loss of confidence in the
US Dollar. This culminated in the demise of the Bretton Woods System in 1971. At the
monetary conference held on December 17 and 18, 1971, a new arrangement, popularly
known as Smithsonian Agreement was at. Under the system intervention points range was
widened to 2.25%.
However, as the USA had done away with the convertibility of Dollars into Gold, the
arrangement under Smithsonian Agreement could not continue for long and ultimately in
1973 many countries started floating their currencies. This development gave rise to
fluctuating exchange rates. Although in a free market it is the demand and supply of the
currency which should determine the exchange rates there are many more factors
responsible for these fluctuations. The volatility of exchange rates cannot be traced to a
single reason and consequently it becomes difficult to precisely define the factors that affect
the exchange rates. However, the important among them are:

(I) Balance of payments


Balance of payments position of a country is a definite indicator of the demand and
supply of foreign exchange. If a country has a favorable balance of payments position it
implies that there is more supply of foreign exchange and therefore foreign currencies will
tend to be cheaper vis--vis domestic currency. However, if balance of payments position is
unfavorable, it indicates that there is more demand for foreign exchange and this will result in
the price of foreign exchange vis--vis domestic currency firming up.

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(II) Strength of the economy


The relative strength of the economy also has an effect on the demand and supply of
foreign currencies. If an economy is growing at a faster rate it is generally, in the long-run,
expected to have a better performance on balance of trade. However, in the short run
increasing economic activity in the country may necessitate higher imports and exports may
take sometime to increase. The economic growth is indicated by various parameters like
relative rate of growth in industrial production and capacity utilization, rate of increase in
Gross National Product and fall in employment rate, etc.

(III) Fiscal policy


The fiscal policy followed by government has an impact on the economy of the country
which in turn affects the exchange rates. If the government follows an expansionary policy by
having low interest rates, it will fuel the engine of economic growth and will lead to better
trade performance. However, a word of caution is necessary here. If the government is
following an expansionary policy by resorting to high budget deficit and monetizing the deficit,
this will lead to high inflation in the economy. This will prove to be counter productive as far
as growth in exports is concerned.

(IV) Interest rate


High interest rates make the speculative capital move between countries and this
affects the exchange rates. The capital is attracted, provided there are no controls towards
currencies yielding high interest rates. If interest rates of domestic currency are raised this
will result in more demand for domestic currency and more supply of the foreign currency,
thus making the latter cheaper vis--vis the former.

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(V) Monetary policy


The central banks of various countries have a control on the monetary policy to be
pursued although it is generally in consonance with the fiscal policies of the government.
Monetary policy is a very effective tool for controlling money supply, and is used particularly
for keeping a tab on the inflationary pressures in the economy. The main objective of the
monetary policy of any economy is to maintain the money supply in the economy at a level
which will ensure price stability, full employment and growth in the economy. Pursued by the
central bank, it also gives a hint about the future interest rates. If the money supply in an
economy is more it will lead to inflation and the central bank will raise interest rates, sell
government securities through open market operations, raise cash reserve requirement thus
giving a signal for tight money supply policy. On the other hand, to spur the growth in the
economy the central bank may lower interest rates, buy government securities in the market,
and lower the cash reserve requirements thus heralding an era of easy monetary policy. This
will be a sign for low interest rates in future. It will be clear from the above that monetary
policy influences interest rates, inflation, employment, etc. and consequently, affects the
exchange rates.

(VI) Political factors


If a change is expected in the government on account of elections or if there is change
in the incumbency in the government, the exchange rates may be affected. Market thrives on
stability and any perception of political instability is sufficient to move exchange rates
significantly. However, whether the currency of the country concerned will become stronger
or weaker will depend upon expected policies to be pursued by the new government which is
likely to take over. But there are some currencies, like the US Dollar, Swiss Franc etc. in
which people have confidence and at times of any international crisis foreign funds move into
these currencies. These are known as safe havencurrencies. War also affects the exchange
rates of the currencies of the country involved. Sometimes it affects the currencies of other
countries too.

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(VII) Exchange control


Exchange control is generally aimed at disallowing free movement of capital flows and
it therefore affects exchange rates. Sometimes countries exercise control through exchange
rate mechanism by keeping the price of their currency at an artificial level. If a country wants
to give a boost to exports, it will keep the value of its currency low vis--vis the foreign
currency. This will help exporters in realizing more units of the local currency for the same
units of foreign currency received by them as export earnings. However, reverse would be
the case if the government decides to follow a liberal import policy.

(VIII) Central Bank intervention


Buying or selling of foreign exchange in the market by the central bank with a view to
increase the supply or demand, thereby affecting the exchange rates is known as
intervention. If a central bank is of the opinion that local currency is becoming stronger
thereby affecting the exports, it will buy foreign currency and sell local currency. It will
increase the demand for foreign currency and the rates of foreign currency vis--vis local
currency will go up. However, if the rate of exchange is kept artificially at low levels, it tends
to accelerate inflation. Therefore, the central bank has to take into consideration many
factors before intervening in the market.

(IX) Speculation
In FOREX markets, a dealer taking speculative positions is common. If a few big
speculative operators are buying/selling a particular currency in a big way, others may follow
suit and that currency may strengthen/weaken in the short run. This is popularly known as
the bandwagon effect and this can affect exchange rates significantly, particularly in the
near term.

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(X) Technical factors


Technical factors particularly in the short run can influence exchange rates. If, for
example, regulations by the central bank make it necessary to limit the size of open position
and if banks have a big short position, they may, in order to cover such a position, buy
foreign exchange. This will result in higher short-term demand which is not genuine.
Similarly, reserve requirement of the central bank may also create a technical position thus
influencing the exchange rates.

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For any currency the main foreign exchange market is the country's financial centre viz. for genuine, trade related corporate business. This is the centre where the country's
central bankers and monetary authorities determine and implement their monetary policies,
its investment strategies and above all its intervention polices to ensure stability in its
currency markets. This is the centre where the country's business leaders transact their trade
related financial deals and where the rest of the world comes to as a last resort to cover its
requirements.

However, for major world currencies, the world is a 24 hour market that stretches from
Wellington to Los Angeles. In this global marketplace there are certain major trading centers
called "money centers" and these are Tokyo, Hong Kong, Singapore, Bahrain, London,
Frankfurt, Zurich, New York and Los Angeles.

The FX Market is a facilitating mechanism through which currencies are exchanged. It


comprises FX traders connected across the world through an advanced telecommunication
network

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Foreign Exchange Markets size and scope


The foreign exchange market dwarfs the combined operations of the New York,
London, and Tokyo futures and stock exchanges. Daily turnover on the spot market is
approximately US$1.5 trillion per day.

Spot transactions and forward outright FX trading takes place in the inter-bank market.
51% of the market is in spot FX transactions, followed by 32% in currency swap transactions.
Forward outright FX transactions represent another 5% of this daily turnover. Options on
inter-bank FX transactions making up another 8%. Therefore the inter-bank market accounts
for 96% of the global foreign exchange market, with the remaining 4% being divided among
all the global futures exchanges.

The foreign exchange (currency or forex or FX) market exists wherever one
currency is traded for another. It is by far the largest financial market in the world, and
includes trading between large banks, central banks, currency speculators, multinational
corporations, governments, and other financial markets and institutions. The average daily
trade in the global forex markets currently exceeds US$1.9 trillion. Retail traders (individuals)
are a small fraction of this market and may only participate indirectly through brokers or
banks.

Market size and liquidity


The foreign exchange market is unique because of:

its trading volume,

the extreme liquidity of the market,

the large number of, and variety of, traders in the market,

its geographical dispersion,

its long trading hours - 24 hours a day (except on weekends).

the variety of factors that affect exchange rates,

- 30 -

The role of Forex in the Global Economy


Over time, the foreign exchange market has been an invisible hand that guides the
sale of goods, services and raw materials on every corner of the globe. The forex market was
created by necessity. Traders, bankers, investors, importers and exporters recognized the
benefits of hedging risk, or speculating for profit. The fascination with this market comes from
its sheer size, complexity and almost limitless reach of influence.

The market has its own momentum, follows its own imperatives, and arrives at its own
conclusions. These conclusions impact the value of all assets -it is crucial for every individual
or institutional investor to have an understanding of the foreign exchange markets and the
forces behind this ultimate free-market system.
Inter-bank currency contracts and options, unlike futures contracts, are not traded on
exchanges and are not standardized. Banks and dealers act as principles in these markets,
negotiating each transaction on an individual basis. Forward "cash" or "spot" trading in
currencies is substantially unregulated - there are no limitations on daily price movements or
speculative positions

- 31 -

Instruments of foreign exchange market


There are several types of financial instruments commonly used.

Spots
A spot transaction is a two-day delivery transaction, as opposed to the futures
contracts, which are usually three months. This trade represents a direct exchange
between two currencies, has the shortest time frame, involves cash rather than a contract;
and interest is not included in the agreed-upon transaction. The data for this study come from
the spot market. Spot has the largest share by volume in FX transactions among all
instruments.

Forwards
One way to deal with the Forex risk is to engage in a forward transaction. In this
transaction, money does not actually change hands until some agreed upon future date. A
buyer and seller agree on an exchange rate for any date in the future, and the transaction
occurs on that date, regardless of what the market rates are then. The duration of the trade
can be a few days, months or years.

Futures
Foreign currency futures are forward transactions with standard contract sizes and
maturity dates for example, 500,000 British pounds for next November at an agreed rate.
Futures are standardized and are usually traded on an exchange created for this purpose.
The average contract length is roughly 3 months. Futures contracts are usually inclusive of
any interest amounts.

Options
A foreign exchange option (commonly shortened to just FX option) is a derivative
where the owner has the right but not the obligation to exchange money denominated in one
currency into another currency at a pre-agreed exchange rate on a specified date. The FX
options market is the deepest, largest and most liquid market for options of any kind in the
world.

- 32 -

Swap
The most common type of forward transaction is the currency swap. In a swap, two
parties exchange currencies for a certain length of time and agree to reverse the transaction
at a later date. These are not contracts and are not traded through an exchange.

Forex swap
Forex swap is an over the counter short term interest rate derivative instrument. A
Forex swap consists of a spot foreign exchange transaction entered into at exactly the same
time and for the same quantity as a forward foreign exchange transaction. The forward
portion is the reverse of the spot transaction, where the spot purchase is offset by a forward
selling. In this reason, surplus funds in one currency are for a while swapped into another
currency for better use of liquidity. Protects against adverse movements in the forex rate, but
favourable moves are renounced.

The fixed rate in this transaction is the forward rate that is locked in by the forward
contract. The floating rate will be the overnight rate that is realized on a daily basis by the
spot transaction. Typically, the floating side of these trades are indexed to the Overnight
Index Swap (OIS) rate. This rate is an average of the rates that are paid based on a survey.

It should not be confused with a currency swap, which is a much rarer, long term
transaction, governed by a slightly different set of rules.
In emerging money markets, Forex swaps are usually the first derivative instrument to be
traded, ahead of Forward rate agreements.

- 33 -

Currency swap
A currency swap is a foreign exchange agreement between two parties to exchange a
given amount of one currency for another and, after a specified period of time, to give back
the original amounts swapped.

Currency swaps can be negotiated for a variety of maturities up to at least 10 years. Unlike a
back-to-back loan, a currency swap is not considered to be a loan by United States
accounting laws and thus it is not reflected on a company's balance sheet. A swap is
considered to be a foreign exchange transaction (short leg) plus an obligation to close the
swap (far leg) being a forward contract.

Currency swaps are often combined with interest rate swaps. For example, one company
would seek to swap a cash flow for their fixed rate debt denominated in US dollars for a
floating-rate debt denominated in Euro. This is especially common in Europe where
companies "shop" for the cheapest debt regardless of its denomination and then seek to
exchange it for the debt in desired currency.

Interest rate swap


In the field of derivatives, a popular form of swap is the interest rate swap, in which
one party exchanges a stream of interest for another party's stream. These were originally
created to allow multi-national companies to evade exchange controls. Interest rate swaps
are normally 'fixed against floating', but can also be 'floating against floating' rate. A singlecurrency 'fixed against fixed' rate swap would be theoretically possible, but since the entire
cash-flow stream can be predicted at the outset there would be no reason to maintain a swap
contract as the two parties could just settle for the difference between the present values of
the two fixed streams. Because one party would be definitely at a disadvantage in such an
exchange, that party would decide not to enter into the deal. Hence, there are no singlecurrency 'fixed versus fixed' swaps in existence. If there is an exchange of interest rate
obligation, then it is termed a liability swap. If there is an exchange of interest income, then it
is an asset swap.

- 34 -

Interest rate swaps are often used by companies to alter their exposure to interest-rate
fluctuations, by swapping fixed-rate obligations for floating rate obligations, or vice versa. By
swapping interest rates, a company is able to alter their interest rate exposures and bring
them in line with management's appetite for interest rate risk.

Example
Consider the following illustration in which Party A agrees to pay Party B periodic
interest rate payments of LIBOR + 50 bps (0.50 %) in exchange for periodic interest rate
payments of 3.00 %. Note that there is no exchange of the principal amounts and that the
interest rates are on a "notional" (i.e. imaginary) principal amount. Also note that the interest
payments are settled in net (e.g. if LIBOR + 50 bps is 1.20 % then Party A receives 1.80 %
and Party B pays 1.80 %). The fixed rate (3.00 % in this example) is referred to as the swap
rate.
Trading An interest-rate swap is one of the more common forms of over-the-counter
derivatives. It is the most widely used derivative in terms of its outstanding notional amount,
but it's not standardized enough and doesn't have the properties to easily change hands in a
way that will let it be traded through a futures exchange like an option or a futures contract.

- 35 -

INDIAN FOREX MARKETS


Foreign Exchange business in India is regulated closely by the RBI. With Exchange
Control Regulations, the RBI ensures that involvement in the Foreign Exchange business is
restricted to certain sections of the business community only.
The main market participants here are:

Corporate: Importers, Exporters and Customers for genuine trades or merchant


transactions.

Banks: One authorized dealer dealing with another to generate profit or cover its
open exposure.

Overseas Traders: Banks in India are permitted to buy and sell currencies abroad
in cover of customer requirements. They have very recently been permitted to
initiate positions abroad too. Overseas banks call banks in India to cover their
Indian Rupee requirements.

Authorized Dealers v/s RBI: This occurs only when the RBI intervenes in the
market and not in the normal course.

The Indian FX Market has seen a remarkable growth in the last few years. The reasons for
are:

Relaxation of controls by RBI and permitting banks to deal freely in the Inter-bank
market - this essentially is the process of economic reforms.

Better communication and availability of information - Reuters, Telerate, Knight


Ridder, RTA, Dealing System, Swift etc.

A virtual explosion in volumes in global FX market and Indian markets follows suit.

General improvement in competence, freehand to trade and generate incremental


income and

The likelihood of full convertibility of rupee in the near future.

- 36 -

- 37 -

RBI
(RESERVE BANK of INDIA)
Guidelines
1. Category

Exporter

Importer

Foreign Currency Borrower

2. Currency Blanket Permission. The currency which has no blanket permission has to
go through RBI reference or say RBI reference is necessary for those currencies for
doing any kind of trading. The currencies with blanket permission are USD, EUR,
GBP, CHF, JPY, AUD and CAD. These currencies are used for payment of Imports;
accept of Exports and for borrowing.

3. Trade Amount (expect for borrower)

4. Duration

On the date or above the starting period and before the end date.

5. Speculation

No speculation is allowed as per RBI

6. Trading

Exporter he has receivables so if foreign currency goes up he has profit


and if FC goes down than it is risk for him. An exporters risk starts on
receipt of an export order or an Export L/C. Risk ends when payment is due;
On shipment (DP Basis) or end of credit period (DA Basis)

- 38 -

Importer he has payment to make so if foreign currency goes down he has


profit and if FC goes up than it is risk for him. An importers risk starts on
placing an import order or opening of Import L/C and it ends when payment
is due, either on receipt of documents (DP Basis) or end of credit period (DA
Basis)

RBI permits importers and exporters to hedge their exposures (partial or full)
at any time from the commencement to the termination of the FX risk

Banks are authorized to provide cover against confirmed orders or L/C.


They may also quote rates against past performance

RBI also permits exporters/importers to hedge their exposures against cross


currencies. Trading in cross currencies requires a thorough understanding
of currency markets and a pro-active participation in the market

- 39 -

FEDAI
FOREIGN EXCHANGE DEALERS ASSOCIATION OF INDIA

Foreign Exchange business in India was confined to few foreign banks only till the
period 1959. The said group banks were known as Exchange Banks. They had formed an
Association, which was known as the "Exchange Banks' Association". It was mainly
covering the areas of activities within Bombay (now Mumbai), Calcutta (now Kolkata),
Madras (now Chennai), Delhi and Amristsar. On introduction of the exchange control in
India during 1939, the said Association was functioning within rules framed by RBI. The
rules and regulations - introduced and practiced were also covered by RBI approval. On
account of expansion in the foreign trade, and business, RBI allowed schedule commercial
banks also to undertake foreign exchange transactions. Those banks which were allowed
and permitted by RBI to deal in foreign exchange transactions were known as AD Authorized Dealers. The FEDAI - Foreign Exchange Dealers' Association of India was
formed with approval of RBI during August 1958. It was under ECM-RBI directives under
reference ECS/198/86-58-Gen dated 16th August, 1958, authorized the banks to handle
foreign exchange business.
All Public sector banks, foreign banks, private sector and co-operative banks and
certain Financial institutions are the members of FEDAI. FEDAI is a non-profit making
Association and relative expenses are shared by all its member banks. FEDAI acts as a
facilitating body and in consultation with Reserve Bank of India, frames rules / regulations
for AD in India for conduct of the foreign exchange business related transactions.
FEDAI is the Association of the member Banks. Naturally, the guidelines and rules
prepared were of interest of the member Banks. However, on account of liberalization and
reforms introduced during 1991 to boost the foreign trade to and fro India, it becomes
imperative by FEDAI to review Rules and Guidelines. FEDAI has also taken due care of the
interest of both Importers and Exporters while revising rules and guidelines

- 40 -

- 41 -

Unlike a stock market, where all participants have access to the same prices, the
Forex market is divided into levels of access. At the top is the inter-bank market, which is
made up of the largest investment banking firms. Within the inter-bank market, spreads,
which are the difference between the bid and ask prices, are razor sharp and usually
unavailable, and not known to players outside the inner circle. As you descend the levels of
access, the difference between the bid and ask prices widens. This is due to volume. If a
trader can guarantee large numbers of transactions for large amounts, they can demand a
smaller difference between the bid and ask price, which is referred to as a better spread. The
levels of access that make up the forex market are determined by the size of the line (the
amount of money with which they are trading). The top-tier inter-bank market accounts for
53% of all transactions. After that there are usually smaller investment banks, followed by
large multi-national corporations (which need to hedge risk and pay employees in different
countries), large hedge funds, and even some of the retail forex market makers. According to
Galati and Melvin, Pension funds, insurance companies, mutual funds, and other
institutional investors have played an increasingly important role in financial markets in
general, and in FX markets in particular, since the early 2000s. (2004) In addition, he notes,
Hedge funds have grown markedly over the 2001-2004 period in terms of both number and
overall size Central banks also participate in the forex market to align currencies to their
economic needs.

- 42 -

Corporate Customers
Institutional and Individual Customers, Exporters, Importers, Foreign Currency
Borrowers and Lenders, Investors and Fund Managers all form corporate customers. These
players can be major participants in markets where there are exchange controls and
restricted currency trading. An important part of this market comes from the financial
activities of companies seeking foreign exchange to pay for goods or services. Commercial
companies often trade fairly small amounts compared to those of banks or speculators, and
their trades often have little short term impact on market rates. Nevertheless, trade flows are
an important factor in the long-term direction of a currency's exchange rate. Some
multinational companies can have an unpredictable impact when very large positions are
covered due to exposures that are not widely known by other market participants.

Central Banks
National central banks play an important role in the foreign exchange markets. They
try to control the money supply, inflation, and/or interest rates and often have official or
unofficial target rates for their currencies. They can use their often substantial foreign
exchange reserves to stabilize the market. Milton Friedman argued that the best stabilization
strategy would be for central banks to buy when the exchange rate is too low, and to sell
when the rate is too high that is, to trade for a profit based on their more precise
information. Nevertheless, the effectiveness of central bank "stabilizing speculation" is
doubtful because central banks do not go bankrupt if they make large losses, like other
traders would, and there is no convincing evidence that they do make a profit trading.
The mere expectation or rumor of central bank intervention might be enough to stabilize a
currency, but aggressive intervention might be used several times each year in countries with
a dirty float currency regime. Central banks do not always achieve their objectives, however.
The combined resources of the market can easily overwhelm any central bank. Several
scenarios of this nature were seen in the 1992-93 ERM collapse, and in more recent times in
Southeast Asia.

- 43 -

Investment management firms


Investment management firms (who typically manage large accounts on behalf of
customers such as pension funds and endowments) use the foreign exchange market to
facilitate transactions in foreign securities. For example, an investment manager with an
international equity portfolio will need to buy and sell foreign currencies in the spot market in
order to pay for purchases of foreign equities. Since the forex transactions are secondary to
the actual investment decision, they are not seen as speculative or aimed at profitmaximization.
Some investment management firms also have more speculative specialist currency
overlay operations, which manage clients' currency exposures with the aim of generating
profits as well as limiting risk. Whilst the number of this type of specialist firms is quite small,
many have a large value of assets under management (AUM), and hence can generate large
trades.

Retail Exchange Brokers


Exchange brokers provide an important service to FX markets all over.

They

are instrumental in bringing buyers and sellers together by providing rates, market
information and their network across various centers. Forex brokers generally deal with
banks. In India, they are not allowed to deal on their own account.

Overseas FX Markets
FX markets world-wide have an astronomical turnover which is estimated to run into
hundreds of billions of dollars. Of the total volume of FX trade, genuine corporate demand is
estimated to constitute only around 5% of the total volume. The FX market is largely
supported by a very advanced communication network which not only provides uninterrupted
information on world currencies, economies, politics and the like, it also is characterized by a
very large number of participants. This is what gives the market the depth and the clout it
has. Some of the most popular communication systems available in the market today are
Reuters Information Service, Telerate, Reuters Technical Analysis, Reuters TV, Knight
Ridder, Reuters Dealing System etc.

- 44 -

Speculators
Speculators are in the market mainly to generate trading income. The growth in
volumes, better communications, pressures to constantly generate profits and a general
improvement in competence have all contributed to see the emergence of the speculators as
a force to reckon with. Banks and corporate, at different times, can be speculators as well.

Banks
Banks are the most active market participants. They essentially perform the task of
market makers. With their ability to take on foreign exchange positions, they can quote
prices for their own account. They have the communication network, branches, support
from exchange brokers, access to overseas markets and limits with overseas banks which
enable them to be market makers. In India, RBI license to engage in FX transactions is
required and those that are granted this license are called Authorized Dealers. The
authorized dealers collectively constitute the Interbank Foreign Exchange (FOREX) market
in India.
The interbank market caters for both the majority of commercial turnover and large
amounts of speculative trading every day. A large bank may trade billions of dollars daily.
Some of this trading is undertaken on behalf of customers, but much is conducted by
proprietary desks, trading for the bank's own account.

- 45 -

- 46 -

Role of banking Industry:

For India to become an economic powerhouse, it would not suffice if one sector
alone performs. The engine of growth has to fire on all cylinders to have broad based
shift in income levels. Though the predominance on agriculture has come down, still
it provides the biggest pool of jobs. Manufacturing has its own pride of place though
its share has been taken partly by the service sectors envious growth levels. Banks
are in a position to contribute for the growth of all the three sectors. This would help
in rising income levels, generate savings, augment capital formation and thus be a
catalyst for all round growth.

- 47 -

BANK OF BARODA
BIRTH
Bank of Baroda was founded by Maharaja Sayajirao Gaekwad of Baroda on July 20,
1908 with a paid up capital of Rs 10 lakhs. Since then the bank has traversed an eventful
and successful journey of almost 100 years. Today, Bank of Baroda has a network of 2737
branches including 42 overseas branches spread over 21 countries.

In mid-eighties, the Bank of Baroda diversified into areas of merchant banking,


housing finance, credit cards and mutual funds. In 1995 Bank raised Rs 300 crores through a
Bond issue. In 1996 the Bank tapped the capital market with an IPO of Rs850 crores. Bank
of Baroda took the lead in shifting from manual operating systems to a computerized work
environment. Today, the Bank has 1918 computerized branches, covering 70% of its network
and 91.64% of its business.

Bank of Baroda gives high priority to quality service. In its quest for quality, the Bank
has secured the ISO 9001:2000 certifications for 15 branches.

- 48 -

A saga of vision and enterprise


It has been a long and eventful journey of almost a century across 21 countries.
Starting in 1908 from a small building in Baroda to its new hi-rise and hi-tech Baroda
Corporate Centre in Mumbai is a saga of vision, enterprise, financial prudence and
corporate

governance.

It is a story scripted in corporate wisdom and social pride. It is a story crafted in


private capital, princely patronage and state ownership. It is a story of ordinary bankers
and their extraordinary contribution in the ascent of Bank of Baroda to the formidable
heights of corporate glory. It is a story that needs to be shared with all those millions of
people - customers, stakeholders, employees & the public at large - who in ample
measure, have contributed to the making of an institution

- 49 -

Mission Statement
To be a top ranking National Bank of International
Standards committed to augmenting stake holders' value
through concern, care and competence.

LOGO
BOBs new logo is a unique representation of a universal symbol. It comprises dual B
letterforms that hold the rays of the rising sun. They call this the Baroda Sun.
The sun is an excellent representation of what the bank stands for. It is the single
most powerful source of light and energy its far reaching rays dispel darkness to illuminate
everything they touch. At Bank of Baroda, they seek to be the source that will help all their
stakeholders realize their goals.
To BOBs customers, they seek to be a one-stop, reliable partner who will help them
address different financial needs. To their employees, they offer rewarding careers and to
their investors and business partners, maximum return on their investment. The singlecolour, compelling vermillion palette has been carefully chosen, for its distinctiveness as it
stands for hope and energy. They also recognize that their bank is characterized by diversity.
Their network of branches spans geographical and cultural boundaries and rural-urban
divides.
Their customers come from a wide spectrum of industries and backgrounds. The
Baroda Sun is a fitting face for their brand because it is a universal symbol of dynamism and
optimism it is meaningful for their many audiences and easily decoded by all. Their new
corporate brand identity is much more than a cosmetic change. It is a signal that they
recognize and are prepared for new business paradigms in a globalized world. At the same
time, they will always stay in touch with their heritage and enduring relationships on which
their bank is founded. By adopting a symbol as simple and powerful as the Baroda Sun, they
hope to communicate both.

- 50 -

Global presence of BOB

- 51 -

Wide global network


Bank of Baroda started its overseas journey by opening its first branch way back in
1953 in Mombassa, Kenya. Since then the Bank has come a long way in expanding its
international network to serve NRIs/PIOs and locals. Today it has transformed into Indias
International Bank.
It has significant international presence with a network of 61 offices in 21 countries
including 42 branches of the Bank, 16 branches of its six Subsidiaries and three
Representative Offices in Malaysia, China & Thailand. The Bank also has one Joint Venture
in Zambia with 9 branches.
The Bank has presence in worlds major financial centers i.e. New York, London, Dubai,
Hong Kong, Brussels and Singapore.
The "round the clock around the globe", Bank of Baroda is further in the process of
identifying/opening more overseas centers for increasing its global presence to serve its 29
million global customers in still better way.
The Bank has recently upgraded its operations in Hong Kong on 2nd April 2007 and
now offers full banking service through its two branches at Central and Tsim Sha Tsui. It
would also be upgrading its operations to full banking service in China and through JV in
Malaysia shortly.
The Bank has plans to open new offices in Trinidad & Tobago, Australia and Ghana for
which permissions / in principle approvals from host country regulators have been received. It
is also in process of establishing offices in Canada, New Zealand, Isle of Man, Sri Lanka,
Qatar, Bahrain, Saudi Arabia, Mozambique, Russia etc. Besides this, it has plans to extend
its reach in existing countries of operations in UK, UAE, South Africa, Tanzania, and
Botswana.
Heres a brief look at how international banking with Bank of Baroda is both dependable
and efficient.

Correspondent Links
BOBs International Banking network is further augmented by correspondent links with
more than 500 leading Banks in every country around the world over.

- 52 -

Indian Network
The international network is supported by a large Indian network through
International Business Branches, Non Resident Indian Branches, 115 Authorized
Forex Branches and more than 2600 other branches.
Being the one of largest banks of the country with the maximum number of branches
overseas, Bank of Baroda is well positioned to offer a variety of services, products and
financial solutions to a cross section of clients. Our products suit our clients' banking
requirements by virtue of being one of the best banking relationship networks both in terms of
strength and spread among the Indian financial entities.

Products & Services


By Branches in India
The banking services at the International Business Branches (IBB), Non Resident
Indian Branches, 115 Authorized Branches as well as more than 2600 other branches are
provided for the benefit of Indian customers, corporations, NRI's, Overseas Corporate
Bodies, Foreign Companies/ Individuals as well as Foreign Banks etc.

Services that target these groups include:


NRI Services
Foreign Currency Loans in India (FCNR Loans)
Export Finance / Services
Import Finance / services
Letter of Credit
ECB
EEFC accounts
RTGS
Correspondence Banking Services in India
All General Banking Services
Treasury Services
- 53 -

By Branches outside India


The international banking services of Bank of Baroda at its overseas branches are
provided for the benefit of its Indian customers, local customers, NRI's, subsidiaries and
joint ventures of Indian corporations operating out of India, foreign entities, multinational
corporations, banks as well as customers around the globe.
Services that target these groups include:
1.
2.
3.
4.

All general Banking Services including Corporate/ Retail lending


NRI Services
Foreign currency credits to the Indian corporations
Arranging/ participating in the Syndicated loans of Indian corporations as well as rated
multinational corporations.
5. Correspondent Banking services to the Indian Banks/ corporations
6. Trade Finance (Bills Discounting)
7. International Treasury Services

The cross border foreign currency lending to Indian corporate, trade finance and treasury
services are provided at the money center branches as well as the subsidiary in Hong Kong.
General banking services are provided at all the branches/ subsidiaries/ joint ventures.

- 54 -

- 55 -

Bank of Baroda, one of the major public sector banks in India having a strong global
presence with a wide network of 61 overseas offices, including those of subsidiaries, spread
over 16 countries, is considered as a market leader in foreign exchange operations in India.
At present the Bank is having branches / offices in countries like USA, UK, Belgium, South
Africa, Hong Kong, UAE, Oman, Fiji Islands, Mauritius, Seychelles, Bahamas, Guyana,
Kenya, Uganda and Zambia.
The Bank has completed fifty years of operations in overseas territories and is poised
to expand its reach to countries like Tanzania and China, apart from consolidating its
overseas operations in those countries where the bank has already made its presence felt.
The modern state-of-the-art dealing room at its Specialized Integrated Treasury
Branch (SITB) at Mumbai provides the necessary wherewithal to its 115 designated
branches across the length and breadth of the country authorized to handle foreign
exchange business of its clientele. The bank has retained its primacy as a leading market
maker both in spot and forward markets, along with foreign exchange swap markets.
The forex dealing desk at the SITB is provided with all modern communication
facilities and is in the process of linking all its authorized branches via Reuters Automated
Dealing System, to provide on-line quotes for foreign exchange transactions.
Through its large network of authorized branches, the bank caters to the foreign
exchange needs of its clientele engaged in export and import trade and the SITB provides
rates for conversion of all major world currencies like U S Dollar, Sterling Pounds, Euro,
Swiss Francs, Japanese Yen and other exotic currencies. The services to the customers of
the Bank include hedging of foreign currency risks by providing forward covers and various
derivatives product

- 56 -

FCNR
FCNR Loans
Corporates can loans from the Banks who are authorised dealers. Bank of Baroda
grants FCNR (B) Loans through its Position Maintaining Offices at Mumbai, New Delhi,
Kolkata, Chennai and Ahmedabad.
The Indian corporates/ firms are allowed to raise the funds through foreign currency
loans at the selected Indian branches within the prevailing policy guidelines of the Bank/ RBI.

Key Benefits
FCNR loans are beneficial to the corporates on account of following:

At times, it may entail lesser interest cost vis--vis Rupee borrowings.


The borrower is not required to go to the International market for raising the funds as
foreign currency funds are made available in India reducing the cost of raising such
funds.

Broad purpose of loans


Corporates are allowed to obtain foreign currency denominated loans in
India under the above scheme for the following purposes:

1.
2.
3.
4.
5.
6.
7.

For meeting working capital requirements in Indian Rupees.


By way of pre-shipment advances/ post shipment advances to the exporters.
Import of raw materials.
Import of capital goods.
Purchase of indigenous machinery.
Repayment of the existing Rupee Term Loan.
Repayment of any existing ECB's with the permission from RBI, Govt. of India.

- 57 -

EXPORT FINANCE
PACKING CREDIT
By way of pre-shipment advance for purchase, processing, manufacture, and packing
goods meant for export, against lodgement of firm export orders and /or irrevocable letter of
credit. The facility is normally secured by hypothecation/pledge of goods wherever possible
and against ECGC whole turn over packing credit guarantee.
The advance which is available at a concession rate of interest must be liquidated only
out of submission of export bills for negotiation/purchase etc. The period for which advances
are given is to be determined according to the nature of the business/process involved
subject to such maximum period as laid down by reserve bank of India.

LOANS AGAINST RECEIVABLES


These loans are made against exporters entitlements which are to be received from
govt. authorities such as duly drawback claims etc. Such advances are granted normally for
a period not exceeding 90 days to the extent of the actual amount receivables against ECGC
guarantees at a concessional rate of interest.
Customer must execute a power of attorney favor of our bank to enable the bank to
collect the amounts direct from the govt.by cheque in its name. Such type of finance is
granted at pre shipment or post shipment stages. Appropriate ECGC guarantee cover is to
taken in such cases.

ADVANCES AGAINST BILLS FOR COLLECTION


Overdrafts against export documents forwarded on collection basis(UFBCs). With
ECGC cover, are granted to exporters at a concessional rate of interest which must be
liquidated out of the proceeds of the relative UFBCs o realization within the stipulated period.

PURCHASED /DISCOUNT OF EXPORT BILLS (FBP/UFBP)


Finance is made available at the post shipment stage against approved bills on
approved bills on approved parties abroad on whom satisfactory credit report is available with
the branch with ECGC cover. Bills may be drawn on DA/DP terms in accordance with
sanctioned terms and for a period, not exceeding maximum period laid down by the reserve
bank of India/FEDAI.

- 58 -

INLAND LETTER OF CREDIT


Banks opens inland, back to back letter of credit on the strength of letters of credit received
by exports from abroad .these back to back letter of credit are opened in favour of
upcountry or local suppliers/manufactures of inputs and/or goods for export.

GUARANTEES
Bank issues guarantees for waiver of excise duty, due performance of contract, bid
bonds, in lieu of cash security deposit, advance payment etc. Such a facility can be covered
under the guarantee cover of ECGC.

POST SHIPMENT TERM FINANCE


Covers exports on deferred payment terms. Advance granted at the pre shipment
stage ,if any , must be liquidated by means of post shipment term loans which in turn are
liquidated in installments, by deferred payment letters of credit/guarantee of foreign banks
favoring exporters.
Such advances are often participation advances with exim bank and other financial
institution.

Financing of Exports
The following are main tasks performed by the export section of a foreign exchange dept.
a.
b.
c.
d.
e.
f.
g.

Advising export letters of credit.


Negotiating documents /under letter of credit.
Extending pre shipment packing credit advances.
Post shipment loans, against export bills sent on collection basis.(PSDL)
Deferred payment exports
Purchasing /discounting of export bills(FBP/UFBP)
Handling export bills on collection basis (FBC).

- 59 -

EXCHANGE CONTROL REGULATIONS REQUIRE THAT

Every person/firm/company engaged in export business in India should hold


importer-exporter code number allotted by the office of director general of
foreign trade (DGFT).and reserve bank of India.

Documents covering export from India should be routed through banks


authorized to deal in foreign exchange.

In case of cash exports ,the full proceeds of the bill should be received in India,
in an approved manner on the due date of payment or within six months from
the date of shipment whichever is earlier.

In respect of consignment exports made to Indian owned warehouses abroad


established with the permission of the reserve bank of India, a maximum period
of 15 months is allowed for realization of export proceeds.

Any extension in this time limit requires the prior approval of the reserve bank
of India.

Post-shipment Finance

The bank finance disbursed to an exporter after the date of shipment is termed as post
shipment finance. The post shipment finance may be in the form of
1. Negotiation of export documents under the letters of credit, opened by the
overseas bank of repute(negotiating bank)
2. Purchase /discount of the export bills under the export contracts
3. Advance against receivables from government of India
4. Advance against consignment exports / undrawn / balances / Retention money.
5. Advance against export bills sent for collection.

The bank in India have adopted the following::


1. Uniform custom and practice for documentary credits, ICC publication NO 500
2. Uniform rules for collection international chamber of commerce publication NO
522
3. Uniform rules for bank to bank reimbursements. ICC NO 525
4. INCOTERMS [ICC PBLICATION NO-460,1990]

- 60 -

Generally, the following documents are required to be submitted to the bank for
negotiation/purchase. The documents should be complete, correct, in full set and as
required in terms of the LC contract. The bank is expected to scrutinise them properly
to ensure the settlement of its claim by the reimburse/ issuing/ importer abroad:
1.
2.
3.
4.
5.
6.
7.
8.

Original letter of credit with amendments if any


Bills of exchange
Invoice and Packing list
Transport documents in full set(bill of lading,airway bill etc)
Original insurance policy in negotiable form, certificate of insurance
Certificate of origin
Consular invoice/ customs invoice
Other documents if any

- 61 -

IMPORT FINANCE
Bank of Baroda provides various types of funding/ services to the importers for facilitating
the imports in the country. All the facilities are subject to the prevalent rules of the Bank/ RBI
guidelines. The various facilities provided are:

Collection of import bill.

Opening of Import L/Cs (Sight/ DA)

Financing of import by way of Foreign Currency Loans

Issuing Guarantees etc. on behalf of importers.

COLLECTION OF IMPORT BILLS


The import bills are collected through the 116 authorised branches at very competitive rates.
The Bank has correspondent relationship with reputed International Banks throughout the
world and can provide the services to importers who may be importing from any part of the
globe.

LETTER OF CREDIT
Bank of Baroda offers L/C facility for the purchase of goods in the international market. Being
a well-known international Bank of repute, the L/Cs of the Bank of Baroda are well accepted
in the International market. With the Letter of Credit of Bank of Baroda, importers can build
up better trust/ confidence in their suppliers and develop other business relationship at a
much faster pace. The vast network of Bank's overseas branches/ subsidiaries and
Correspondent Banks world-wide facilitate prompt & efficient services to the importers. The
L/C facility can be granted to the importers after assessing their requirement/ credit
worthiness/ financial strength and other parameters being to the satisfaction of the Bank.

- 62 -

BANK GUARANTEES

Bank of Baroda on behalf of importers/ other customers issues guarantees in favour of


beneficiaries abroad. The guarantees can be both Performance and Financial.

- 63 -

LETTER OF CREDIT
Sales of goods are contracted privately between buyer and seller and a contract of
sale comes into being, which, among other things indicates the description, quantity, price of
the goods, terms of delivery and the method of payment desired. The buyer will ask his bank
to open for his account a commercial documentary letter of credit in favour of the seller if this
is a requirement of the contract. Therefore, while a contract of sale is between a buyer and a
seller, a letter of credit is an arrangement between the buyer and his bank i.e. an
arrangement of payment. The bank in issuing a letter of credit will in turn be entering into
another form of contract, because the letter of credit is itself a contractual obligation of the
bank to the beneficiary, who is the seller.
LETTERS OF CREDIT ARE SEPARATE TRANSACTIONS FROM THE SALES AND
OTHER CONTRACTS ON WHICH THEY MAY BE BASED AND BANKS ARE IN NO WAY
CONCERNED WITH OR BOUND BY SUCH CONTRACTS.

DEFINITION OF LETTER OF CREDIT


In opening the credit, the bank substitutes its own superior standing for that of the
buyer. The seller will rely on the opening Bank's standing and look to the bank for payment in
accordance with the letter of credit terms. He need no longer be concerned with whether the
buyer pays to the credit opening bank or not.
A letter of credit is an accepted and popular instrument used in the finance of trade
both foreign and local, because it facilitates trade payment by making :
i. Finance available to the seller (Beneficiary)
ii. Credit available to the buyer (Opener)
iii. Ensures security to both.

- 64 -

Article 2 of Uniform Customs and Practice for Documentary Credits (1993 Revision)
states that the expressions "Documentary Credit(s)", mean any arrangement, however
named or described, whereby a bank (the "Issuing Bank") acting at the request and on the
instructions of a customer (the "Applicant") or on its own behalf,
(i) is to make a payment to or to the order of a third party (the "Beneficiary") or is to accept
and pay bills of exchange. (Draft/s) drawn by the beneficiary
OR
(ii) Authorizes another bank to effect such payment or to accept and pay such bills of
exchange (Draft/s)
(iii) Authorizes another bank to negotiate
Therefore, essentially, a letter of credit is a written but a conditional undertaking given
by the issuing bank on behalf of its customer, to the beneficiary that it will pay him the
amount stated in the credit PROVIDED documents specified in the letter of credit are drawn
and presented in STRICT CONFORMITY with the terms and conditions of the credit. The
advantages of such an arrangement are obvious. The beneficiary gets payment as soon as
he presents the documents immediately after shipment of goods. The opener is able to
ensure that payment will be made by bank to the beneficiary only if the documents which he
has stipulated are correctly made out, and presented in time. In documentary credit
operations, all parties concerned deal with documents and not with goods, services and/or
other performances to which the documents may relate.

- 65 -

IMPORTANT CONDITIONS
The bank issuing a letter of credit (issuing bank) is making credit available to the opener.
Therefore, his credit- worthiness must be ascertained.
When the amount of the letter of credit is expressed in the beneficiary's currency, the opener
and his bank run an exchange risk and vice-versa.
Though banks deal with documents and not with goods in letter of credit operations, the
bank's security for its advance is the documents of title to the goods. If the opener fails to
honour the bill, the bank's advance will be in danger if the goods supplied are defective or
sub-standard. Therefore, the business integrity and financial standing of the beneficiary
should also be ascertained. It is the responsibility of the issuing bank to ensure that trade and
exchange regulations (EXIM Policy guidelines and FEMA 1999 Regulations) are not violated.

PARTIES TO LETTER OF CREDIT


Basically there are four parties to a letter of credit :
(i) the opener i.e. the applicant or buyer
(ii) the issuing bank
(iii)the beneficiary (the seller) and
(iv) the advising and/or negotiating bank.
There may be a confirming bank also, or the advising bank may play the roles of advising
bank, confirming bank as well as of negotiating bank.

- 66 -

TYPES OF LETTERS OF CREDIT

1. Revocable letters of credit


are very rarely used in trade today. Such credits contain no undertaking of the issuing bank,
or any legal obligations to give notice of cancellation or amendment. However, if any
documents had been negotiated prior to receipt of the notice of amendment/ or cancellation,
the negotiating bank
must be reimbursed. Refer to Article 8 of Uniform Customs (1993 Revision). A written
undertaking should be obtained from the customer that all such bills will be honoured by him.

2. Irrevocable letters of credit


are commonly used in foreign as well as local trade. They represent a definite legal
undertaking of the issuing bank to the beneficiary. Such credits cannot be cancelled or
amended without the written consent of all parties to credit. If the beneficiary rejects any
amendment, then the terms of the credit existing prior to the issuance of the amendment
continue to remain in force.
Article 6 of Uniform Customs (1993 Revision) requires that a letter of credit should clearly
indicate whether it is irrevocable or revocable. In the absence of such indication it is to be
treated as irrevocable letter of credit.

3. Confirmed and unconfirmed


An irrevocable letter of credit carries an undertaking of the issuing bank to honour drawings
there under. If the opening bank authorizes/ requests the advising bank also to give the
beneficiary a similar undertaking and the advising bank adds its confirmation to the letter of
credit, it is called a confirmed irrevocable letters of credit, thus bearing an undertaking of both
the issuing and advising banks. Refer Article 9 of Uniform Customs (1993 Revision). On the
other hand if the advising bank is not required to add its confirmation, the letter of credit is
called an irrevocable but unconfirmed letter of credit, thus bearing an undertaking only of the
issuing bank.

- 67 -

4. Transferable credit
When the beneficiary of credit is not the actual supplier or manufacturer, he requires such
credits to be opened, giving him the right to instruct the advising bank to make the Credit
available to third parties. The extent of transferability is now governed by Article 48 of
Uniform Customs (1993 Revision), which interalia provides that :
(a) it can be transferred only once unless otherwise stated in the Credit.
(b) only on the terms and conditions specified in the original Credit except for amount/ unit
price/ and validity which may be reduced/ curtailed.

5. Revolving credit
Such Credits, generally used in local trade. The Credit is opened for a stated amount which
becomes available again after the previous drawing has been honored by the buyer. The
Credits indicate the total permitted drawings thereunder during the period of validity. The final
validity and total drawing clauses are very important clauses in such credits. Opening of
import revolving LCs should as far as possible be avoided. However, in exceptional cases
they may be opened with adequate safeguards/ conditions (subject to strict compliance of all
Import Trade and Exchange provisions and guidelines) particularly with reference to
aggregate drawings under such LC and shipment dates etc., after seeking approval from
Regional/ Zonal Authorities.

6. Back to Back Credit


a. When a middle man enters into a contract to supply goods to be obtained from
suppliers but is unwilling to disclose their identity and the buyer is also unwilling to
open a transferable letter of credit, such Credits come into use. The irrevocable letter
of credit opened by the buyer is used by the beneficiary as security with his bank
against which it agrees to open letters of credit in favour of the actual supplier/
manufacturer. The terms of the back to back letters of credits will be almost identical
to the letters of credit received from the buyer except to the extent of amount, price
and delivery dates. The beneficiary will substitute his own invoices for negotiation
under the original letters of credit.

- 68 -

b. With effect from 1st April 2002, International Chamber of Commerce, Paris has issued
the eUCP as the supplement to UCP 500 (Verson 1.0). For details, reference may be
made to eUCP publication.

INTERNATIONAL STANDARD PRACTICES


a. Letter of credit appears to be a safe instrument for trade settlements but in certain
cases it fails to produce the desired results.

b. ICC Banking Commission appointed a task force to compile ISBP for examination of
documents drawn under a letter of credit. The task force came out with a report which
was approved by ICC Banking Commission in October 2002 and came out with the
publication titled as International Standard Banking Practice for the Examination
of documents under Documentary Credit

c. It should be noted that this publication (ISBP) is not an amendment to UCP ICC 500. It
discreetly addresses the issues that commonly arise but not expressly treated in UCP.

- 69 -

ECB
1. The commercial borrowings raised from the International Market outside India by any
Indian legal entity registered under Companies Act, Co-operative Societies Act,
including Proprietorship/ Partnership concerns, are called external Commercial
Borrowings (ECBs.). The legal entities do not include the individuals, non-profit
organizations and Trusts.
2. It is clarified that only those cooperative societies which are commercial in nature and
whose accounts are up to date and have complied with the statutory guidelines
without any qualification would be eligible to raise ECBs.
3. No financial intermediary viz. Bank, NBFC will be allowed access to ECBs under any
route.
4. ECB availed by financial intermediaries need to be distinguished from those availed by
corporates. Further more, banks have the facility.
A. to borrow from its head office or branch or correspondents outside India up to
25 per cent of its unimpaired Tier-I Capital or US$ 10 million, whichever is
higher,
B. to borrow from its head office or branch or correspondents outside India
without limit for the purpose of replenishing Rupee resources (not for
investment in call money or other markets) and
C. to avail lines of credit from a bank / financial institution outside India without
any limit for the purpose of granting pre-shipment / post-shipment credit to its
constituents.

ECB can be accessed under two routes


(i) Automatic Route and
(ii) Approval Route

AUTOMATIC ROUTE
ECB for investment in real sector -industrial sector, especially infrastructure sector in
India, will be under Automatic Route, i.e. will not require RBI/Government approval.
Eligible borrowers
Corporates registered under the Companies Act except financial intermediaries (such
as banks, financial institutions (FIs), housing finance companies and NBFCs) are eligible.

- 70 -

End-use
ECB can be raised only for investment (such as import of capital goods, new projects,
modernization/ expansion of existing production units) in real sector - industrial sector
including small and medium enterprises (SME) and infrastructure sector - in India.
Infrastructure sector is defined as
1.
2.
3.
4.
5.
6.
7.

Power,
Telecommunication,
Railways,
Road including bridges,
Ports,
Industrial parks and
Urban infrastructure

Utilization of ECB proceeds is permitted in the first stage acquisition of shares in the
disinvestment process and also in the mandatory second stage offer to the public
under the Governments disinvestment programme of PSU shares.

Utilization of ECB proceeds is not permitted for on-lending or investment in capital


market by corporates.

Utilization of ECB proceeds is not permitted in real estate. The term real estate
excludes development of integrated township as defined by Ministry of Commerce and
Industry.

Parking of ECB proceeds overseas


ECB proceeds should be parked overseas until actual requirement in India.

Prepayment
Prepayment of ECB up to USD 100 million is permitted without prior approval of RBI,
subject to compliance with the stipulated minimum average maturity period as applicable for
the loan.

Debt Servicing
The designated Authorized Dealer (AD) has the general permission to make remittances of
installments of principal, interest and other charges in conformity with ECB guidelines issued
by Government / RBI from time to time.

- 71 -

APPROVAL ROUTE
Eligible borrowers

Financial institutions dealing exclusively with infrastructure or export finance such as


IDFC, ILFS, Power Finance Corporation, Power Trading Corporation, IRCON and
EXIM Bank will be considered on a case-by-case basis.

RBI based on prudential norms as approved by the Government will also permit Banks
and financial institutions, which had participated in the textile or steel sectorrestructuring package, to the extent of their investment in the package and
assessment. Any ECB availed for this purpose so far will be deducted from their
entitlement.

Cases falling outside the purview of the automatic route limits and maturity period.

Recognized Lenders, All-in-cost ceilings, End-use, Guarantees, Security, Parking of


ECB proceeds overseas, Prepayment, Refinance of existing ECB, Debt Servicing,
Procedure are same as Automatic route.

Documents to be submitted to Authorized Dealers/ RBI/ Govt. of India for


raising ECBs:

An offer letter from the lender giving detailed terms and conditions.

If applicable, copy of the project appraisal report from a recognized financial


institution.

The copies of relevant documents (wherever applicable) like approvals from Foreign
Investment Promotion Board / Cabinet Committee on Economic Affairs (CCEA) /
Clearance Environmental Clearance/Techno Economic Clearance from Central
Electricity Authority.

Approvals are valid for initial period of 6- months, for telecom project9- months and
for Power projects 1- year. The approvals granted by the Govt. of India/ RBI can be
extended for a further period of -3-month. At the expiry of the validity of the approval,
fresh applications are required to be made.

The executed copies of the Loan Agreement are to be submitted to ECB Division of RBI
for clearance, before the loan can be allowed to be withdrawn.

- 72 -

Benefits of ECBs

ECBs from international market will be an additional source for the Indian economy
like development of infrastructure sector etc.

The cost of funds from the international market is expected to be cheaper than the
domestic market and therefore will make available the funds to the Indian Corporates
at International rates so as to make them competitive.

The raising of resources on long-term basis also adds to the forex reserves of the
country.

Inflow of the foreign currency in the country.

Sources of ECB
The ECBs can be raised only from internationally acceptable and/or recognized lender
such as:

Export Credit Agencies


Suppliers of Equipments
Foreign Collaborators
Foreign Equity holders
International Debt Capital Market
Banks and Financial Institution
Commercial Borrowings from IFC/ ADB etc.

ECBs from unrecognized sources such as individuals, Sole Proprietorship/Partnership


firms etc are not allowed

Foreign Currency Term Loan (FCTL)


The most common way of raising the ECB is through loans. Depending on the
corporate and quantum of the loan the ECB through loans can be raised in the following
ways:
Bilateral Loans
Club Deal Loans
Syndicated Loans

Bilateral Loans
The single bank to the borrowers i.e. there is only two parties involved bank and
borrower, hence the name bilateral given to these loans. These type of loans are normally
granted to banks existing customers and are for a smaller amounts to the extend that
bank is comfortable to take exposure singly on that borrower. The amount of the loan
depends on the individual corporate, their size, standing, performance, and financial
position, etc.
- 73 -

Club Deal Loans


Club deal loans are the loans where normally a small group of banks(three to eight
depending on the size of the loan) take the exposure on the borrower. There is no
arranger in the club deal and the status of all the participating banks is equal.

Syndicated Loans
A syndicated loan is one in which minimum four to five banks Participants, each
funding a certain portion of the loan. A syndicate of banks may be formed either before or
after the loan agreement is signed and identities of the participants may changed during
the life time of the loan subject to transfer assignment and participation provisions in the
loan agreement.

- 74 -

EEFC ACCOUNTS
Indian exports have surged over the last decade owing to an unprecedented boom in
sectors like software, biotechnology, gems, jewellery, textiles etc. As a result of this, the
volume of inward remittances has also increased significantly. To shield the firms engaged in
regular export and import from the exchange rate fluctuations RBI has allowed parking of
foreign currency by exporters in an account designated as Exchange Earners Foreign
Currency Account (EEFC). EEFC accounts are Current Accounts held in foreign currency
with authorized dealers of foreign exchange in the country.

Exchange Earners' Foreign Currency Account (EEFC) is an account maintained in foreign


currency with an Authorised Dealer, i.e a bank dealing in foreign exchange.
the account is a Non-interest bearing current account.
A person resident in India may open the account.
Yes, one can credit 100 percent of his foreign exchange earnings into this account subject to
permissible credits and debits.

Permissible Credits
i) Inward remittance through normal banking channel, other than remittances received on
account of foreign currency loan or investment received from abroad or received for meeting
specific obligations by the account holder.

ii )Payments received in foreign exchange by a 100 per cent Export Oriented Unit or a unit in
(a) Export Processing Zone or (b) Software Technology Park or (c) Electronic Hardware
Technology Park for supply of goods to similar such unit or to a unit in Domestic Tariff Area.

iii) Payments received in foreign exchange by a unit in Domestic tariff Area for supply of
goods to a unit in Special Economic Zone (SEZ);

- 75 -

iv) Payment received by an exporter from an account maintained with an authorised dealer
for the purpose of counter trade. (Counter trade is an arrangement involving adjustment of
value of goods imported into India against value of goods exported from India in terms of
Reserve Bank guidelines);

v) Advance remittance received by an exporter towards export of goods or services;


vi) Payment received for export of goods and services from India, out of funds representing
repayment of State Credit in U.S. dollar held in the account of Bank for Foreign Economic
Affairs, Moscow, with an authorized dealer in India,

vii) Professional earnings including directors fees, consultancy fees, lecture fees, honorarium
and similar other earnings received by a professional by rendering services in his individual
capacity.

viii) Interest earned, if any, on the funds held in the account;

ix) Re-credit of unutilised foreign currency earlier withdrawn from the account

- 76 -

REAL TIME GROSS


SETTLEMENT RTGS
The continuous settlement of payments on an individual order basis without netting
debits with credits across the books of a central bank.
Basically, this is a system for large-value interbank funds transfers. This system
lessens settlement risk because interbank settlement happens throughout the day, rather
than just at the end of the day.

Real Time Gross Settlement (RTGS) is an online system for settling transactions of
financial institutions, especially banks. RTGS systems are "push payment" systems with transactions
initiated by the paying bank.

We can explain this with the help of an example:


If Bank A or one of its customers needs to pay $1000 to Bank B or one of its
customers, Bank A initiates the transaction and Bank B is immediately paid $1000
"electronically" by Bank A. Examples of RTGS systems include CHAPS in the UK and Fed
wire in the United States.
Each country has its own RTGS system. As mentioned above, CHAPS is used in the UK
and Fed wire in the United States. Below is a listing of countries and their RTGS systems:

United States - Fed wire


Canada - LVTS (Large Value Transfer System)
Australia - RGTS
UK - CHAPS

This "electronic" payment system is normally maintained or controlled by the Central


Bank of a country. There is no physical exchange of money; the Central Bank makes
adjustments in the electronic accounts of Bank A and Bank B, reducing the amount in Bank
A's account by $1000 and increasing the amount of Bank B's account by the same. The
RTGS system is suited for low-volume, high-value transactions. It lowers settlement risk,
besides giving an accurate picture of an institution's account at any point of time. Such
systems are an alternative to systems of settling transactions at the end of the day, also
known as the net settlement system such as BACS. In the net settlement system, all the
inter-institution transactions during the day are accumulated. At the end of the day, the
accounts of the institutions are adjusted. Extending the example above, say another person
deposits a check drawn on Bank B in Bank A for $500. At the end of the day, Bank A will
have to "electronically" pay Bank B only $500 ($1000 - $500).
- 77 -

The implementation of RTGS systems by Central Banks throughout the world is driven
by the goal to minimize risk in high-value electronic payment settlement systems. In an
RTGS system, transactions are settled across accounts held at a Central Bank on a
continuous gross basis. Settlement is immediate, final and irrevocable. Credit risks due to
settlement lags are eliminated.
RTGS requires Core Banking to be implemented across participating banks. Any
RTGS would employ two sets of queues: one for testing funds availability, and the other for
processing debit/credit requests received from the Integrated Accounting System. All
transactions would be queued and submitted for funds availability testing on a FIFO+Priority
basis.
In India, this is initiated by RBI (Central Bank of India) and is available on weekdays
only from 10:00am to 13:30pm. Fees for RTGS vary from bank to bank, but as mentioned
earlier, both participating banks must have Core Banking in place to enter into such
transactions. Core Banking enabled banks and branches have assigned RTGS 11-character
alphanumeric codes, which are required for transactions along with recipient's account
number.

Benefits of RTGS
a. Processing / settlement of fund transfer request / TT reimbursement on the same day will
result in avoidance of interest claims by other Banks.
b. Transfer of surplus funds from current accounts with other banks through RTGS system
will lead to better management of funds by our Bank and will result in more profitability for our
bank.
c. Use of RTGS by RTGS enabled branch will reduce reconciliation entries under HOTT /
IBTA. Reconciliation of entries under Baroda RTGS is transactions based without origination
/ movement of any transaction advices and are reconciled by IBO on T+1 basis.

- 78 -

CORRESPONDENT
BANKING
The extensive worldwide network of branches of Bank of Baroda offers
Correspondent Banking services to the Indian Banks as well as banks from other countries.
BOBs branches are capable of providing the services that an international
correspondent Bank can offer. All the branches of the Bank are well equipped to handle the
business of Correspondent Banking.
The New York, Brussels and London Branches of the Bank are equipped with latest
technology and are having trained and experienced staff for handling the maintenance of
Nostro accounts in US$, Euro and GBP respectively.
The overseas presence of the Bank is further supported by a large number of
correspondent Banks (more than 500) which gives Bank of Baroda access to every corner of
the Globe.

The main services provided are

1. Collection of bills both Documentary and Clean.


2. Advising / confirming of L/Cs opened by Indian Banks.
3. Discounting of Bills drawn under L/Cs as well as outside L/Cs.
4. Maintenance of foreign currency accounts (Nostro in US$, Euro, GBP at New York,
Brussels and London respectively) for settlement of transactions (Link).
5. Making foreign currency payments/ remittance on behalf of customers of Indian
Banks.

- 79 -

INTERNATIONAL
TREASURY
Bank of Baroda has a strong presence in the Treasury Market in India as well as abroad.
The overseas Money Centre Branches undertake the Forex treasury operations on behalf of
the customers. All the Forex treasuries at the overseas money center branches are equipped
with state of art technology, highly experienced and motivated staff with professional skills.
These branches deal in all the major international currencies i.e. US$, GBP, Euro, Yen as
well as other currencies. These branches undertake the following treasury related activities:

Forex Inter Bank Placements/ Borrowings

Sale & Purchase of currency on behalf of customers

Forward Cover Bookings

Cross Currency Swaps

Interest Rate Swaps (IRS)

Forward Rate Arrangements (FRA's)

Forex Money Market Operations

- 80 -

- 81 -

The various benefits of foreign operations of Indian banks particularly of bank of


Baroda are as follows:
1. Exchange reserve increase/balance of payment

2. increase in the overall profit of the Bank of Baroda :

GLOBAL BUSINESS
31.3.2007
(RS)/cr

31.3.2006
(RS)/cr

ABSOLUTE
CHANGE
(RS)/cr

% change

DEPOSITS

1,24,915

93,662

31,253

33.37%

ADVANCES

83,621

59,912

23,709

39.57%

TOTAL
BUSINESS

2,08,536

1,53,574

54,962

35.79%

GROSS
NPA

2.47%

3.90%

NET NPA

0.60%

0.87%

NET
PROFIT

1026

827

199

24.12%

- 82 -

3. Significant increase in overseas business

OVERSEAS BUSINESS
31-3-2007
(RS)/cr

31-3-2006
(RS)/cr

ABSOLUTE
CHANGE
(RS)/cr

%
CHANGE

DEPOSITS

25,190

14,613

10,577

72.38%

ADVANCES

16,358

9540

6818

71.46%

TOTAL
BUSINESS

41,548

24,153

17,935

72.02%

GROSS
NPA

0.73%

1.31%

-----

-----

NET NPA

ZERO

ZERO

-----

-----

4. Many nationalised banks do not provide the facility of RTGS, bank of Baroda is
one of the few banks which provides the facility of RTGS.

5. Through facilities like EEFC accounts exporters and importers can take the benefit
of fluctuations in the exchange rates and exchange rate risks.

6. The extensive worldwide network of branches of Bank of Baroda offers


Correspondent Banking services to the Indian Banks as well as banks from other
countries.

7. ECBs from international market will be an additional source for the Indian economy
like development of infrastructure sector etc.

8. The cost of funds from the international market is expected to be cheaper than the
domestic market and therefore will make available the funds to the Indian
Corporates at International rates so as to make them competitive.
9. Long term presence in market skilled and experienced staff is a key for the rapid
growth of BOBs Forex operations.
10. Huge network of overseas branches and vast network of correspondent banks has
given the BOB a strong grass root fundamental strengths.

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International trade in banking services is growing rapidly despite many barriers to


trade. Consumer services are being established world wide and increasingly banking
services are becoming globalized in much the same way that manufacturing is outsourcing
overseas.

The manager of a banking organization can no longer ignore international competition


in banking services, especially the globalization of back-room operations. Todays Bank
managers need a framework in which to develop a global service strategy. Addresses two
questions which managers face when developing a global bank service strategy:

What are the factors that we can use to classify bank services in terms of their
potential for moving globally; and
How do these factors translate into strategies for the globalization of specific banking
services?
The most common dimensions for classifying Banks Forex operations include
consumer involvement and customization, complexity of inputs and outputs, and labour
intensity.

PRODUCT INNOVATION AND PROCESS RE-ENGINEERING


With increased competition in the banking Industry, the net interest margin of banks
has come down over the last one decade so for BOB also. Liberalization with Globalization
will see the spreads narrowing further to 1-1.5% as in the case of banks operating in
developed countries. Banks will look for fee-based income to fill the gap in interest income.
Product innovations and process re-engineering will be the order of the day. The changes will
be motivated by the desire to meet the customer requirements and to reduce the cost and
improve the efficiency of service. All banks will therefore go for rejuvenating their costing and
pricing to segregate profitable and non-profitable business. Service charges will be decided
taking into account the costing and what the traffic can bear.
Similarly, Banks will look analytically into various processes and practices as these
exist today and may make appropriate changes therein to cut costs and delays.
TECHNOLOGY IN BANKING
Technology can bring fundamental shift in the functioning of banks. It would not only help
them bring improvements in their internal functioning but also enable them to provide better
customer service.
Technology will break all boundaries and encourage cross border banking business.
Banks would have to undertake extensive Business Process Re-Engineering and tackle
issues like

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How best to deliver products and services to customers

Designing an appropriate organizational model to fully capture the benefits of


technology and business process changes brought about.

How to exploit technology for deriving economies of scale and how to create cost
efficiencies, and

How to create a customer - centric operation model.

Technology solutions would make flow of information much faster, more accurate and
enable quicker analysis of data received. This would make the decision making process
faster and more efficient. For the Bank, this would also enable development of appraisal and
monitoring tools which would make credit management much more effective. The result
would be a definite reduction in transaction costs, the benefits of which would be shared
between banks and customers.
Payment and Settlement system is the backbone of banking.
The present Payment and Settlement systems such as,
a) Structured Financial Messaging System (SFMS)
b) Centralized Funds Management System (CFMS)
c) Centralized Funds Transfer System (CFTS) and
d) Real Time Gross Settlement System (RTGS)
Will undergo further fine-tuning to meet
international standards. Needless to add, necessary security checks and controls will have
to be in place.
RISK MANAGEMENT AS A KEY FACTOR FOR BOB
Risk is inherent this rule. Rising global competition, increasing deregulation,
introduction of innovative products and delivery channels have pushed risk management to
the forefront of todays financial landscape. Ability to gauge the risks and take appropriate
position will be the key to success. It can be said that risk takers will survive, effective risk
managers will prosper and risk averse are likely to perish.
In the regulated banking
environment, banks had to primarily deal with credit or default risk. As we move into a
perfect market economy, we have to deal with a whole range of market related risks like
exchange risks, interest rate risk, etc.
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Operational risk, which had always existed in the system, would become more
pronounced in the coming days as we have technology as a new factor in todays banking
even BOB is not an exception in that. Traditional risk management techniques become
obsolete with the growth of derivatives and off-balance sheet operations, coupled with
diversifications.
Building up a proper risk management structure would be crucial for the BOB in the
future. Bank would find the need to develop technology based risk management tools. The
complex mathematical models programmed into risk engines would provide the foundation of
limit management, risk analysis, computation of risk-adjusted return on capital and active
management of banks risk portfolio. Measurement of risk exposure is essential for
implementing hedging strategies.
Risk management is an area the bank can gain by cooperation and sharing of
experience among themselves. Common facilities could be considered for development of
risk measurement and mitigation tools and also for training of staff at various levels.
Needless to add, with the establishment of best risk management systems and
implementation of prudential norms of accounting and asset classification, the quality of
assets in commercial bank will improve on the one hand and at the same time, there will be
adequate cover through provisioning for impaired loans. As a result, the NPA level of BOB is
expected to come down significantly.

Mission SMEs - a key growth driver


This sector is at last getting the attention it deserves after a long time. The contribution
of this sector has often been under-estimated as they have been unsung heroes. Actually the
sector contributes 40% of then industrial output and over one third of exports. It provides the
largest employment after agriculture and covers 8000 products. It can be termed as the
birthplace of the enterprise.
In the past few years, SME sector in Ahmedabad has emerged more competitive and
efficient and knowledge-based industries are likely to acquire greater prominence. SMEs are
dominating in industry segments such as Pharmaceuticals, Information Technology and
Biotechnology. With SME sector emerging as a vibrant sector of the Indian economy, flow of
credit to this sector has gone up significantly.
BOB will have to sharpen their skills for meeting the financial needs of this segment.
Some of the Banks may emerge as niche players in handling SME finance. Flow of credit to
this Sector will be guided purely by commercial considerations as Banks will find SMEs as an
attractive business proposition.

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Strategies
Multi-country expansion
Importing customers
Following your customers
Service unbundling
Beating the clock
Market penetration: On the basis of long term relationship
Branch network to support clients at any location
Use integrated solution for international and domestic
operations.
Procedural delays and bottlenecks can be removed using
IT infrastructure.

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1. Marketing of strong network of overseas branches


Bank of Baroda has a strong global presence in the overseas market with 61 branches
in 21 countries; it can be an extraordinary advantage for BOB. It can market this strength
of reaching and supporting its clients at any location of the world in a way, so it can
capture more clients for export and import business in Ahmedabad region.

2. Canvassing of Deposits from NRIs through overseas network of


branches.
Bank of Baroda is pioneer in providing NRI services in the financial and banking
sector. In yet another customer centric initiative, Bank has launched a deposit scheme for
investors with interest rates at 25-30 bps over the interest rate swap (IRS) rates for 3, 4
and 5 years period of term deposits. It can attract the huge numbers of NRIs of
Ahmedabad region.
The deposit scheme has been designed keeping in view the needs of NRI customers
and understanding their requirements for deployment of funds with higher return.
The Baroda Term Deposit is offered at Banks major overseas centres excluding
USA. The rate of interest on this deposit is better than rate currently offered in the market.
Bank can encourage the customers through above mentioned advantages by making
them unlock the hidden potential of their fixed deposits with BOB with this plan developed
specifically for providing loans/overdraft against their security of Foreign Currency
denominated fixed deposits placed with BOB.

3. ECB Loans through overseas branches at globally competitive rates.


BOB is very active and is a leading player in granting and arranging various forms of
foreign currency facilities through ECB route for the Indian Corporates. BOB focuses on
all type of foreign currency credit requirements of Indian corporates in arranging the
Foreign Currency Loans.
As there are so many small and medium corporates operating in Ahmedabad region,
BOB has a good opportunity for being helpful to them in raising money through its vast
overseas network at Globally Competitive Rate rates.
BOB has a few decades of experience in arranging foreign currency loans. This long
experience and wide presence across the globe brings leverage to BOB to understand
the ECB market better thus offer best terms to the clientele of Ahmedabad region.
International Merchant Banking Cell (IMBC) has been set up at BCC; Mumbai to pay
focused attention to the international merchant banking needs of Indian corporates with
special emphasis on Externational Commercial Borrowing can be very helpful in
expanding forex business in Ahmedabad and whole Gujarat region.

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4. Tapping the mergers and acquisitions


Mergers and acquisitions are a common feature of the global business. There has
been a marked increase in merger activity since 1990s.the main drivers of such deals are
the changing market conditions, which requires business to group their activities and
deregulation which lead to consolidation.
BOB can target these mergers and acquisitions market by providing finance as per
RBI guidelines to fund these takeovers and acquisitions.

5. FCNR deposits by which bank can offer FCNR denominated loans at


LIBOR + SPREAD rates.
Facilities for loans/overdraft can be advanced against FCNR Fixed deposits in USD,
GBP, EUR or YEN etc. It can enhance the business of BOB as there are so many
opportunities waiting in Ahmedabad region.

6. Providing PCFC to small exporters of Ahmedabad region


Bank of Baroda provides PCFC in foreign currency to the exporters enabling them to
fund their procurement, manufacturing/ processing and packing requirements. These
loans are available at very competitive international interest rates covering the cost of
both domestic as well as import content of the exports.

7. Loans to EOUs
There are many Export Oriented Units such as Textiles, Pharmaceuticals, Chemicals,
Engineering goods, Metal Industries, Consumer goods and Agro based industries
operating in Ahmedabad region as well as in Gujarat.
So BOB can target these EOUs by providing all integrated financial services,
understanding their financial needs and requirements.

8. Seminars and Workshops in Ahmedabad


The bank should organize seminars and workshops for educating the small and
medium scale exporters for leveraging its foreign business. BOB can arrange seminars
highlighting its various services for export-import to attract new customers as well as to
educate its existing customers for better performance.
It should also provide them with regular publications and literatures to make them
aware of new services and creating a facilitating environment for promoting trade and
investment.

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9. Participation in Overseas Trade Fairs to promote new exporters going


global.
BOB can utilize its overseas branch network efficiently with a view to promote
international trade and strengthen economic linkages; BOB can participate and showcase
its products and services in the overseas trade fairs and through this it can help the small
and medium entrepreneurs of Ahmedabad.

10. Financing R&D and new product development for Pharmaceuticals


and Automobile Industries in Ahmedabad region
As there are so many small pharmaceutical companies and Automobile industries
involved in international business in Ahmedabad region, BOB can easily target these
small companies and provide them special financial services to promote import and
exports of their products.

11. BOB can provide Export Marketing Services (EMS) to SMEs of


Ahmedabad region
BOB can use its widespread overseas branch network to help local exporters who are
unable to launch their product in totally new foreign market due to lack of proper
information of overseas market.
BOB can provide them assistance in establishing their product in overseas markets
through this EMS, starting from identification of prospective business partners to
facilitating placement of final orders.

12. BOB should also provide services like Factoring and Forfeiting to its
customers doing imports and exports, to enhance its forex operations
in Ahmedabad region.
13. Utilization of large overseas network for tie ups with international
payment gateways like VISA, MASTERCARD for payments to foreign
nationals.

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FUTURE ACTION POINTS ARISING OUT OF OUR STUDY

1.

Bank will have to adopt global standards in capital adequacy, income recognition
and provisioning norms.

2.

Risk management setup in Banks will need to be strengthened.

Benchmark

standards could be evolved.

3.

Payment and settlement system will have to be strengthened to ensure transfer of


funds on real time basis eliminating risks associated with transactions and
settlement process.

4.

Regulatory set-up will have to be strengthened, in line with the requirements of a


market-led integrated financial system

5.

Bank will have to adopt best global practices, systems and procedures.

6.

Bank may have to evaluate on an ongoing basis, internally, the need to effect
structural changes in the organization. This will include capital restructuring through
mergers / acquisitions and other measures in the best business interests. IBA and
NABARD may have to play a suitable role in this regard.

7.

There should be constant and continual up gradation of technology in the Banks,


benefiting both the customer and the bank.

Banks may enter into partnership

among themselves for reaping maximum benefits, through consultations and


coordination with reputed IT companies.

8.

The skills of bank staff should be upgraded continuously through training. In this
regard, the banks may have to relook at the existing training modules and effect
necessary changes, wherever required. Seminars and conferences on all relevant
and emerging issues should be encouraged.

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9.

Bank will have to set up Research and Market Intelligence units within the
organization, so as to remain innovative, to ensure customer satisfaction and to
keep abreast of market developments. Bank will have to interact constantly with
the industry bodies, trade associations, farming community, academic / research
institutions and initiate studies, pilot projects, etc. for evolving better financial
models.

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BIBLIOGRAPHY
Books
VOLUME-1O OF BOB, 2003
SHAKUN EXIM CORPRATION
FEDAI GUIDELINES
FEMA 2000

Magazines & News Papers


Indian Economic review, January 2006, Forex
The Economic times
Business Standard
Business Line

Websites
www.rbi.org.in
www.fedai.com
www.forexstreet.com
www.bankofbaroda.com
www.fema.com

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