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FINAL REPORT

On

Financing Of Foreign Trade

And

Foreign exchange accounting

……………………………….

Submitted By

Bikash Bajaj

07BS0938

2007-2009

Faculty Guide Project Guide

Prof. Debarati Bhattacharya Mr. Arun Chakraborty

ICFAI Business School Senior Manager


KOLKATA Syndicate bank
…………………………………………………

A REPORT

On

Financing Of Foreign Trade

And

Foreign exchange accounting

At Syndicate bank

Submitted By

Bikash Bajaj

07BS0938

A report submitted for fulfillment of the requirements of


MBA Program of ICFAI Business School
Table of content:

Cover page…………..1

Acknowledgement……..4

About syndicate bank…….6

Abstract……………………..8

Executive summary……………11

Introduction……………………….13

Foreign exchange market…………….13

Exchange control……………………….15

Role of banks in foreign trade……………..17

Foreign exchange business in syndicate bank…17

Exchange rate system……………………………..19

Factors determining exchange rates………………….20

Purchasing power parity and interest rate parity……….22

Different type of rates……………………………………23

Types of foreign exchange trading…………………………24

Export finance………………………………………………..25

Letter of credit…………………………………………………30

Import finance……………………………………………………37

Commission and charges……………………………………………40

Case study…………………………………………………………….45

Foreign exchange accounting…………………………………………..47

SWIFT mechanism………………………………………………………..48

List of current account transaction………………………………………….51


Recommendation……………………………………………………………..54

References………………………………………………………………………55

ACKNOWLEDGEMENT

Behind every success there is so much of effort, pain, continuous encouragement required. This
is also true in my case, to prepare this report I had to understand the rules regulation framed by
R.B.I and govt. of India to carry on foreign trade as well as practical knowledge how things
actually work. I express my gratitude to Mr. Arun Chakraborty (senior manager of FXPC dept.
of Syndicate bank) and Prof. Debarati Bhattacharya (faculty at ICFAI business school, Kolkata)
for showing me correct way to proceed for this project, also timely guidance and encouragement
to learn and understand every aspect of this project.

I would like to thank specially Mr. Arun kr. Chakraborty for giving me opportunity to work in
practical environment and learn things from practical documents.

Also I can’t ignore the contribution of other staff member of FXPC department, especially Mr.
Pulak Roy and Deben Modak for giving me simple yet useful information. I am sure that
knowledge gain through this project will help me in long run for enriching my career.

Beside the above I would also like to thank the other faculty member of IBS, Kolkata for being
giving me important input for the project and library member for being so helpful to me.
Mission of syndicate bank
Priority Sector Credit: To have accelerated & qualitative growth in priority sector lending to
reach a level of Rs.23800 crore, Rs.10800 crore under agriculture, Rs.3514 crore under Small &
Micro Enterprises through various customer friendly credit products of the Bank and to take
maximum advantage of Financial Inclusion to expand the clientele base of the Bank, leverage
training facilities in SIRDs and RUDSETIs and provide financial assistance to all eligible
candidates.

Information Technology: To harness the state-of-the-art technology, network all branches,


create an Enterprise-wide Data Warehouse for the Bank, so as to make available reliable MIS for
Decision Support System and deploy best practices in Information Security to manage the
business effectively and profitably

Management of Assets: To make the year 2007-08 truly a "Year of NPA Resolution" by
striving for getting "A" rating under asset quality by upgrading NPAs, bringing down Gross
NPA & Net NPA level both in absolute & percentage terms below March 2007 figure and
accomplishing NPA recovery target as per commitment.

Forex and Treasury: To profitably manage the forex and investment assets of the Bank to
achieve an export and import turnover of Rs.15000 crore and Rs.12750 crore respectively. To
achieve treasury income of Rs.2345 crore with investments of Rs.35000 crore

Profitability: To make every branch a profit centers and ensures best possible returns to the
stakeholders.

Risk Management: To continuously upgrade the Risk Management systems & processes,
imbibe risk management in business activities and implement Base II requirements for the
benefit of all stakeholders

Human Resources & Organization structure: To mould and strengthen the organizational
structure to meet the future business requirements and challenges. To redefine and redevelop
people’s management techniques so as to unleash human potential, drive growth and nurture
leadership of high quality corporate governance
BRIEF HISTORY

Syndicate Bank was established in 1925 in Udupi, the abode of Lord Krishna in coastal
Karnataka with a capital of Rs.8000/- by three visionaries - Sri Upendra Ananth Pai, a
businessman, Sri Vaman Kudva, an engineer and Dr.T M A Pai, a physician - who shared a
strong commitment to social welfare. Their objective was primarily to extend financial
assistance to the local weavers who were crippled by a crisis in the handloom industry through
mobilizing small savings from the community. The bank collected as low as 2 annas daily at the
doorsteps of the depositors through its Agents under its Pigmy Deposit Scheme started in 1928.
This scheme is the Bank's brand equity today and the Bank collects around Rs. 2 crore per day
under the scheme.

The progress of Syndicate Bank has been synonymous with the phase of progressive banking in
India. Spanning over 80 years of pioneering expertise, the Bank has created for itself a solid
customer base comprising customers of two or three generations. Being firmly rooted in rural
India and understanding the grassroots realities, the Bank's perception had vision of future India.
It has been propagating innovations in Banking and also has been receptive to new ideas, without
however getting uprooted from its distinctive socio-economic and cultural ethos. Its philosophy
of growth by mutual sustenance of both the Bank and the people has paid rich dividends. The
Bank has been operating as a catalyst of development across the country with particular
reference to the common man at the individual level and in rural/semi urban centers at the area
level.

The Bank is well equipped to meet the challenges of the 21st century in the areas of information
technology, knowledge and competition. A comprehensive IT plan is being put in place and the
skills and knowledge of the Bank's personnel are being upgraded through a variety of training
programmers to promote customer delight in every sphere of its activity. The Bank has launched
an ambitious technology plan called Centralized Banking Solution (CBS) whereby 500 of our
strategic branches with their ATMs are being networked nationwide over a 4 year period.
ABSTRACT

The project is mainly to understand the foreign exchange mechanism, understand the different
rates have given by syndicate bank to its customer, how bank meet the financial needs of its
customers who are indulging in import and export trade.

The FXPC (Foreign Exchange Processing Centre) department of Syndicate bank finances its
customers who are indulging in the import trade in the form of letter of credit. Opening a letter
of credit on behalf of its customer is same as giving assurance to the exporter to mature his dues
on presentation of specified documents whether the importer paid or not paid to the bank.

Generally credit support to importers are extended in the form of opening of LC, Financing
imports in the form of cash credit , loans mostly against import trust receipt, effecting payment
in foreign exchange directly to overseas sellers and also by issuing deferred payment guarantees
favoring overseas sellers on behalf of importer who is importing capital goods on long – term
credit.

Also bank finance its customer who are involve in export trade in the form of pre- shipment and
post- shipment finance.

Pre-shipment Finance or Packing Credit is the advance granted to the exporter to procure
process, manufacture, and pack and prepare the goods for export. In other words, it is the facility
extended to the exporter before and until the goods are shipped for export.

Post-shipment Finance refers to the credit facilities extended to the exporter from time to time
goods are shipped and till the export proceeds are realized. Post-shipment finance may take any
of the following forms:

Negotiation of a bill drawn under a letter of credit


Purchase of a bill not drawn under a letter of credit
Advance against bill sent for collection

Amount of finance:
EXPORT:

Amount of loan will not normally exceed FOB value of goods or domestic market value of
goods whichever is lower. However, packing credit may be granted up to the domestic cost of
goods even if it is higher than FOB value, provided the goods are covered by export incentives
of the Government of India and availability of Export Production Finance Guarantee offered by
ECGC.

Post – shipment finance can be extended up to 100 % of the invoice value of the goods.
However, banks are free to stipulate margin requirements as per their lending norms.

Imports:

Bank lending activities under import financing are mainly concentrated on activities like:

Import of consumables inputs and channelized items


Import of plant and machinery
Import made under short – term credit facility extended by overseas seller

To understand the total functioning of foreign trade one need to learn and understand the rules
and regulation framed by Govt. of India and RBI. Also to understand the whole procedure from
opening a letter of credit to payment for the same, one has to follow the rules so it is
indispensible that everything is worked out by following the rules of FEMA, UCPDC 500 or 600
and FEDAI guidelines. Also the documents required, which is the most important element of
letter of credit.

Also it is important to know the exchange rate and how it’s being quoted (which rate should be
given to customers). Sometimes it’s happen that a customer want to buy a currency but for that
no ready seller available in the market to sell the same currency in exchange of another currency.
So the buyer has to take another way to buy the required currency. He needs to buy another
currency and then exchange that with the required currency. This is called cross rate system.
The whole thing will be clear with a simple example. Suppose a customer want to buy dollar in
exchange of rupee but dollar does not available in exchange of rupee but available in exchange
of pound. Again dollar is available in exchange of pound. So the customer needs to buy pound
first in exchange of rupee then again exchange the pound in exchange of dollar.
Forward exchange rate is another important rate which is often using to do forward trade. Means
when currency is required in future date. So customer buy the currency at forward rate in present
(detail calculation of forward rate is shown in report).

Taking about accounting part the all transactions are recorded in the books of account by
following the law of double entry system like other business. But what different in FXPC
department of Syndicate bank is that they maintain mirror image accounting, which is same with
the accounts which are maintained by head office of forex department. So with the help of this
mirror image accounting the FXPC department is able to calculate its profit, loss and expenses
by itself and work according to the situation. Also they are advised to recover all their expenses
in form of commission, charges and through margin money. Also bank maintain different type of
accounts (like Vostro, Nostro and Loro) to facilitate its customer.

SWIFT (Society for Worldwide Interbank Financial Telecommunication) mechanism facilitates


the import and export trade. It is worldwide interbank software through which important
documents are sent via internet. As for example suppose Mr. X of India export goods to Mr. Y of
London. Now Mr. Y request an issuing bank (say HSBC London) to draw a letter of credit in
favor of Mr. X, henceforth HSBC London advises the advising bank (say Syndicate bank,
Kolkata) to pay Mr. X after checking the required document which are essential to check before
making the payment. Document like letter of credit and all advising messages are sent through
this secured software SWIFT.
Executive Summary

Forex market is an over the counter market in which currencies are bought and sold against each
other. The market is basically characterized by – no physical presence, huge size, dominated by
financial flows, deep, highly liquid and efficient, sleek being screen- based , highly volatile 24
hours a day market and yet a profit centre with simultaneous potential for losses. The banks
extend financial assistance to the exporters at pre-shipment and post – shipment stages. Financial
assistance extended to the exporter prior to the shipment of the goods from India falls within the
scope of pre – shipment finance while that extended after shipment of goods falls under post –
shipment finance. In India, investors can raise substantial portion of project costs through debt
and equity instruments. Applications for long-term loans can be made to State Financial
Corporations when the project is small-generally less than 50 million. Institutions expect
concrete project and market reports, with reasonably firm cost and implementation plan .Other
long-term financing options include leasing, hire purchase, deferred payment guarantee etc.
Short-term finances for working capital requirements are available from commercial banks and
through instruments such as fixed deposits, intercourse deposits and commercial papers.

The main players in the foreign exchange market are large commercial Banks, forex brokers,
large corporations and the Central Banks.

Type of finance:

Packing credit is normally a funded advance. It takes the form of an unsecured/clean loan in the
initial stages of disbursement of funds .It is called extended packing credit. When the exporter
gets a title to the goods it becomes a secured advance.

At times pre-shipment finance will be extended in a non-fund form, like issuing LCs favoring the
supplier of raw materials, opening guarantees for credit purchases, etc.

Quantum of finance:

export

Quantum of loan will not normally exceed FOB value of goods or domestic market value of
goods whichever is lower. However, packing credit may be granted up to the domestic cost of
goods even if it is higher than FOB value, provided the goods are covered by export incentives of
the Government of India and availability of Export Production Finance Guarantee offered by
ECGC.

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Post – shipment finance can be extended up to 100 % of the invoice value of the goods.
However, banks are free to stipulate margin requirements as per their lending norms.

Imports

Bank lending activities under import financing are mainly concentrated on activities like:

• Import of consumables inputs and channelized items.


• Import of plant and machinery.
• Import made under short – term credit facility extended by overseas seller.

Credit support to imports are extended in the form of opening of LC, Financing imports in the
form of cash credit , loans mostly against import trust receipt, effecting payment in foreign
exchange directly to overseas sellers and also by issuing deferred payment guarantees favoring
overseas sellers on behalf of importer who is importing capital goods on long – term credit.

Introduction

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Foreign exchange market is the largest financial market in the world, with an estimated daily
average turnover well in excess of US$1 trillion. A foreign exchange rate is the relationship
between two currencies, which means the amount of one currency that would be required to buy
(or sell) one unit of another currency. Currencies are quoted in pairs, e.g. Euro/US$ =
EUR/USD, US$/Japanese Yen = USD/JPY, etc. Forex trading involves a foreign exchange
transaction, defined as the simultaneous buying of one currency and selling of another currency.

Forex trading is said to be a 24-hour, 5 day a week market, starting each day in Wellington, NZ
and then moving around the globe as the business day commences in the next financial center.
This rotation includes Tokyo, London, and New York. This allows foreign exchange market
participants to react to news, whether it is economic political or social, 24 hours per day. Unlike
other markets, such as stocks or futures, forex trading does not involve a central exchange and is
considered to be an over the counter market known as the interbank market. Most forex
transactions are conducted between two counterparties via the telephone or over an electronic
network, such as the internet.

Forex trading, once the province of commercial, investment and central banks has evolved over
the years as other players took on a greater role in foreign exchange. This has seen forex trading
evolve as multi-national companies, hedge funds, fund managers; individual speculators and
private investors took on a greater influence. The evolution of the internet has further opened
forex trading to the independent currency trader who can follow the market on a 24-hour basis
and trade foreign exchange online.

Factors that have attracted the retail currency traders to forex trading include the ability to trade
24 hours, 5 days per week, and a high level of foreign exchange market liquidity, the ability to
benefit in both bull and bear markets, narrow bid-offered spreads by historical standards, low
margin requirements and general market volatility.

FOREIGN EXCHANGE MARKET

The foreign exchange (currency or forex or FX) market exists wherever one currency is traded
for another. It is by far the largest market in the world, in terms of cash value traded, and
includes trading between large banks, central banks, currency speculators, multinational
corporations, governments, and other financial markets and institutions. Retail traders (small
speculators) are a small part of this market. Large commercial banks are the major traders in this
market
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The Forex market itself consists of a worldwide network of primarily interbank traders
connected by telephone lines and computers. FX traders constantly negotiate prices between one
another and the resulting market bid/ask price for a particular currency is then fed into computers
and displayed on official quote screens. It offers huge returns like twenty to thirty percent every
month, yes unbelievable but truth, however that is only in some cases and you need a lot of
experience to be able to extract that amount of interest.

The benefits of online forex trading are listed below:

- Currency market never sleeps: online forex trading allows you to keep track and deal from
anywhere at any time.

- Mini accounts: some websites offer mini accounts that allow you to get started with as less as
$200.
- No Commission: Online forex trading is commission free, there’s no exchange or hidden fee
either. The brokers only earns from the spreads.
- Instant: it is instant unlike offline trade, which may involve paperwork.

NEED FOR FOREIGN EXCHANGE:

Currency exchange is necessary in numerous circumstances.

• Consumers typically come into contact with currency exchange when they travel. They
go to a bank or currency exchange bureau to convert one currency into another so that
they can pay for the goods and services in the foreign country.
• Businesses typically have to convert currencies when they conduct business outside their
home country
• Investors and speculators require currency exchange whenever they trade in any foreign
investment, be that equities, bonds, bank deposits, or real estate.
• Commercial and Investment Banks trade currencies as a service for their commercial
banking, deposit and lending customers. These institutions also generally participate in
the currency market for hedging and proprietary trading purposes.
• Governments and central banks trade currencies to improve trading conditions or to
intervene in an attempt to adjust economic or financial imbalances. Although they do not
trade for speculative reasons -- they are a non-profit organization -- they often tend to be
profitable, since they generally trade on a long-term basis.

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Market participants:
The market participants can be split into five groups:

 End users of foreign exchange: firms, individual’s governments who need foreign
currency in order to acquire goods and services from abroad or to move capital as part of
their regular economic activities

 Market makers: large international banks who hold stocks of currencies to allow the
market to operate continuously and who make their profits through the spread between
buying and selling rates of exchange

 Speculators: banks, firms and individuals who attempt to profit from outguessing the
market

 Arbitrageurs: banks that make profits from buying in one market at the same time as
selling in another, taking advantage of small inconsistencies which develop between
markets.

 Central banks: on behalf of their government enter the market to attempt to influence to
influence the international value of their currency- perhaps to protect a fixed rate of
exchange, or to manage to varying degrees an allegedly market-determined rate.

EXCHANGE CONTROL:
Exchange control refers to the control, by the government or a centralized agency, of transactions
involving foreign exchange.

OBJECTIVES OF EXCHANGE CONTROL:

The purposes for which exchange control is imposed are many but important among them are
enumerated below:

a) Stability of exchange rates: A constantly changing exchange rate may not be conducive to the
economy and the government may therefore adopt exchange control methods to stabilize the
exchange rate of the currency.

b) Overvaluation of currency: The exchange control may aim at keeping currency overvalued.
When the currency is overvalued imports become cheaper, it is encouraging imports of essential
commodities into the country.

c) Undervaluation of currency: At times the exchange control may function to undervalue a


currency in order to maintain the balance of payments of the country. When the currency is

16
undervalued, exports become cheaper, thus increasing exports to regain the balance of payments
of the country.

d) Reserve foreign exchange for essentials: Exchange control may be imposed to acquire foreign
exchange to be utilized for importing certain essential commodities from abroad.

e) Economic planning: For proper execution of the economic plans, exchange control helps to a
great extent by controlling the foreign exchange market.

f) Encourage local industries: The government may desire to protect the local industries from
competition from abroad. Imports mat be restricted so that the local industries are allowed to
grow.

METHODS OF EXCHANGE CONTROL:

Exchange control may take any of the following forms:

a) Exchange intervention Location: Exchange intervention or official intervention refers to the


buying and selling of foreign exchange in the market by the government or its agency (central
bank) with the view to influencing the exchange rate.

b) Indirect methods:

(i) Import restrictions and tariffs

(ii) Export subsidy

(iii) Interest rate changes

EXCHANGE CONTROL IN INDIA:

• FEMA guidelines
• FEDAI guidelines
Some of the exchange control can be listed as under:
• Importer-Exporter code number – every exporter is required to follow the export trade
regulations framed by director general of foreign trade. One such regulation is that every

17
exporter should have an importer-exporter code number allotted by the regional import
trade control authorities.
• Export declaration forms – all exports from India should be declared in any of the
following export declaration forms as is appropriate:
1. Form GR – exports otherwise than by post, including export of software in physical form,
i.e., magnetic tapes and paper media.
2. Form SDF – exports through custom offices with EDI system.
3. Form PP – exports by post.
4. Form SOFTEX – export of software otherwise than in physical form.

ROLE OF BANKS IN FOREIGN TRADE:


Commercial banks have a vital role in the foreign trade of a country. They provide the finance
needed to execute the transactions. Foreign exchange is a highly specialized business and is
therefore concentrated in selected branches of the bank. The foreign exchange department, also
called the international banking division, is headed by a senior executive of the bank who is
vested with enough powers to take decisions in the dealings of the bank. While policy decisions
are taken and foreign exchange resources are managed at the corporate level, the actual dealings
with the customer’s takes place at the selected branches of the bank authorized to deal in foreign
exchange.

The functions of the foreign exchange department can be listed as follows:

a) Financing exports

b) Financing imports

c) Remittance facilities

d) Dealings in foreign exchange

e) Furnishing credit information

Foreign exchange business in syndicate bank:


Syndicate bank provides the finance needed to execute the foreign trade transactions. Foreign
exchange is a highly specialized business and is therefore concentrated in selected branches of
the bank. The foreign exchange department, also called the international banking division, is
headed by a senior executive of the bank who is vested with enough powers to take decisions in
the dealings of the bank. While policy decisions are taken and foreign exchange resources are
18
managed at the corporate level, the actual dealings with the customer’s takes place at the selected
branches of the bank authorized to deal in foreign exchange.

The functions of the foreign exchange department can be listed as follows:

a) Financing exports

b) Financing imports

c) Remittance facilities

d) Dealings in foreign exchange

e) Furnishing credit information

Services offered to Exporters in Syndicate Bank:

• Pre-shipment finance in foreign currency and Indian rupees


• Post-shipment finance in foreign currency and Indian rupees
• Handling export bills on collection basis
• Outward remittances for purposes as permitted under Exchange Control
guidelines
• Inward remittances including advance payments
• Quoting of competitive rates for transactions
• Maintenance of Exchange Earners Foreign Currency (EEFC) accounts
• Assistance in obtaining credit reports on overseas parties
• Forfeiting for medium term export receivables

Services offered to importers in Syndicate Bank:

• Establishment of Import Letters of Credit covering import into India and


handling of bills under Letter of Credit
• Handling of import bills on collection basis
• Remittance of advance payment against imports
• Offering utilization of PCFC ( pre-shipment credit in foreign currency) for
imports
• Credit reports on overseas suppliers

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Exchange rate system:

The rate of exchange is the rate at which one currency is converted into another. For example, an
US dollar is not usable in India unless and until it is converted into Indian rupee. The dollar can
be converted into Indian rupees either by an authorized banker or by a money changer. Let say
that one need to pay 40 rupee for exchange of a dollar. Then us$ 1= Rs. 50 would be termed as
exchange rate.

Countries round the world have been exchanging goods and services from ancient time. Initially
it was barter system in which one good exchanged against another. But with the invention of
currency gradually barter trade disappeared. Also trade between countries flourished as no
country was self sufficient to meet all his requirement.

There have to be scientific way of relating the value of one currency with another. This is what
the exchange rate system does. It helps in fixing the rate of exchange of currency with another.
In another words exchange rate is nothing but value of one currency expressed in terms of
another.

Different countries adopted different exchange rate system at different times. During last one and
a half centuries the world has experimented with many exchange rate systems and moved on
from that system when it failed to provide solutions in increasing growth in international trade
and liquidity. The exchange rate systems used so far are:

• The gold standard

• Gold specie standard

• Gold bullion standard

• Purchasing power parity

• Breton woods exchange rate system

• Fixed exchange rate and floating exchange rate

Exchange rate determination:

As in the case of any other commodity, it is the market demand and supply of currencies that
fixes the rate of exchange. The importer of goods and services, need to pay different currencies
since they have to make the payment to overseas suppliers of goods and services. The supply is
20
provided by exporters, remittances by overseas Indians, etc., who have the concerned currency at
a future date. There are other factors also other than demand and supply which affects exchange
rate.

Factors determining foreign exchange rates:

Demand for Supply of a


a currency currency

RATES OF EXCHANGE

OTHER FACTORS

BALANCE OF PAYMENTS

INFLATION

INTEREST RATES

MONEY SUPPLY

POLITICAL FACTORS

MARKET SENTIMENTS

TECHNICAL FACTORS

Balance of payments: it is a value of the record of transactions between residents of a country


with outsiders. In other words it represents the demand for and supply of foreign exchange which
will determine the value of the exchange rate. Exports both visible and invisible represent the
supply side; imports visible and invisible create demand for the currency.

21
Inflation: This means rise in the prices of domestic commodities. With increase in price the
exports may be affected, as it will cease to be competitive. To give an example, If both India and
US experience seven percent inflation, the rate of exchange will not change. On the other hand
India has 15 percent inflation and US has five percent inflation, then the Indian rupee will
depreciate by 10 percent.

Interest rates: Interest rates have a great influence on short term movement of capital. When the
interest rates in a one centre rise it attracts funds from other centers. The result would be demand
for those currency increases, hence it appreciates.

Money supply: an increase in money supply in the economy increases the supply of the currency
in the foreign exchange market and its value declines.

Political factors: political stability induces confidence in the investors and encourages capital
inflows into the country. This would strengthen the currency and it would appreciate. In likewise
situation where the political situation is volatile there will be a flight of capital and the currency’s
value would decline and depreciate.

Market sentiments: in the short term the exchange rate is affected mostly by the views of the
market participants. If they are buoyant about the market the currency will appreciate. For
example, let us presume the market expects that the balance of payment of India would be a
deficit of RUPEES 100000 crore. But when the figures are released the deficit is larger. This
would immediately depress the rate of exchange of the rupee temporarily.

Technical factors; isolated large transactions can upset the market’s ability to balance supply
with demand for the currency. The immediate effect is distortion of exchange rate. The
immediate effect is distortion of exchange rate . for example , whenever the big oil companies
enter the forex market for purchase of us dollars for imports of oils into India, it depress the
value of Indian rupee by appreciating the value of us dollars. Hence in order not to upset the
market, us dollar is purchased right through the month. Sometimes some of the currencies are
subject to regular monthly or weekly cycles due to impact of large regular payments.

Purchasing power parity:

Purchasing power parity is an economic technique used when attempting to determine the
relative values of two currencies. It is useful because often the amount of goods a currency can

22
purchase within two nations varies drastically; based on availability of goods, demand for the
goods, and a number of other, difficult to determine factors.

Purchasing power parity solves this problem by taking some international measure and
determining the cost for that measure in each of the two currencies, then comparing that amount.

One of the primary uses of purchasing power parity is in lessening the misleading effects of
shifts in a national currency. This is particularly an issue when calculating a nation's Gross
Domestic Product. For example, if the riel falls in value to 80% of its value on the dollar, the
GDP as expressed in US dollars will also drop to 80%. This does not accurately reflect the
standard of living in that country (a common use of GDP). Purchasing power parity is of course
an imperfect device for determining things such as GDP, as the exchange rate will vary based on
the basket item used for the index. This effect is lessened by looking at a large sample of
commodities, rather than one or two, but this simply minimizes the problem, it does not
eliminate it entirely.

Interest rate parity:

Interest rate parity the difference between the interest rates paid on two currencies should be
equal to the differences between the spot and forward rates.

If interest rate parity is violated, then an arbitrage opportunity exists. The simplest example of
this is what would happen if the forward rate was the same as the spot rate but the interest rates
were different, and then investors would:

1. borrow in the currency with the lower rate


2. convert the cash at spot rates
3. enter into a forward contract to convert the cash plus the expected interest at the same
rate
4. invest the money at the higher rate
5. convert back through the forward contract
6. Repay the principal and the interest, knowing the latter will be less than the interest
received.

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Different types of rates:

TT buying rate : this rate is applied for all purchase transactions where the Nostro account of the
bank is credited . This rate is calculated by deducting the exchange margin from the interbank
buying rate of the currency. The base rate is the interbank rate

Bill buying rate: this rate is applied for foreign bills purchased. Exporters draw bills of exchange
on their foreign customers. They can sell these bills to an AD for immediate payment. The AD
buys bills and collects payment from the importer. Since there is a delay between the AD paying
the exporter and itself getting paid, various margins have to be subtracted from the TT buying
rate to compute the bill buying rate.

Bills are of two kinds. Sight or demand bills require payment by the drawer on presentation. The
delay involved in such a bill is only the transit period. Usance bills give time to the importer to
settle the payment. In such cases the delay involved is transit period plus the usance period

TT selling rate: the base rate here is the interbank spot selling rate. As usual the exchange margin
is subject to a ceiling specified by FEDAI.

24
Bills selling rate: when an importer requests the make to make a payment to a foreign supplier
against a bill drawn on the importer, the bank has to handle documents related to the transaction.
For this, the bank loads another margin over the TT selling rate to arrive at bills selling rate.

Exchange rate sheet is prepared daily after taking the market rate in the dealing room of
Syndicate bank which is situated in Mumbai. FXPC department of Syndicate bank received daily
rate sheet from dealing room.

In the rate sheet TT sell and BIL sell is two columns which rates are quoted to the importer. For
opening an L/C, BIL sell rate are given to the importer. Also the other columns BIL buy indicate
the rate which is quoted to the exporter. CPC and TC buy are the rates which are given for
cheque and traveler’s cheque. Generally traveler’s got worst rate.

WAR is the weekly average rate which is used for accounting purpose. Currency rates are spot
rates which is being quoted if customer want to buy or sell currency in spot market. Usance rates
are the forward rates which are quoted for forward transaction.

TYPES OF FOREIGN EXCHANGE TRADING:

Depending upon the time elapsed between the transaction date and the settlement date the
foreign exchange transactions can be categorized into:

• Cash transactions – having same transaction and settlement date


• Tom transactions – settlement date is one day after transaction date
• Spot transactions – settlement date is two days after transaction date
• Forward transactions – settlement date is beyond two days after transaction date
• Swap transactions – it is a combination of spot and forward transactions. They are again
of following types:
a) cash/tom swaps
b) cash/spot swaps
c) spot/forward swaps
d) forward/forward swaps

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Export finance:
Exports play a very important role and are given utmost priority in the foreign trade policy of
any country particularly in developing countries. Indian economy being one such, is attaching
great importance to promote exports. Finance is the backbone of any trade, whether domestic or
international and export being a part of international trade is no exception. Export finance,
therefore plays a very crucial role in development of international trade and serves the process of
economic development, which is a national objective. Banks, being the main source of finance,
are encouraged in several ways to extend export finance, to achieve the objective of foreign trade
policy.

An exporter may need financial assistance for execution of an order from the date of receipt of
an export order till the date of realization of export proceeds at any stage. Export finance is short-
term working capital finance allowed to an exporter. Export finance can be broadly classified
into two categories, depending upon at what stage of export activity the finance is extended viz.

• Pre-shipment credit

• Post-shipment credit

Pre-shipment Credit means any loan or advance or any other credit provided by a bank to an
exporter for financing the purchase, processing, manufacturing or packing of goods prior to
shipment. On the other hand Post- shipment Credit means any loan or advance granted or any
other credit provided by a bank to an exporter of goods from India after the shipment of goods to
the realization of the export proceeds. Thus the dividing line between the two types of export
credits is the date of shipment. Generally, the pre-shipment credit is extinguished by the
submission of export bills and connected documents. Thereafter, it is called post-shipment credit,

Pre-shipment credit:
As noted above, the pre-shipment credit meets the working capital needs of an exporter at the
pre-shipment stage. When an exporter receives an export order, the goods to be exported may not
be readily available with him for shipment. He has to purchase the raw materials/semi-finished
goods, process/manufacture the same, or may procure the goods from their suppliers, pack them
and dispatch them to the port. The funds required for all these purposes are called pre-shipment
credit.

Banks provide pre-shipment credit after taking into consideration all factors relevant for granting
credit. But the basis of granting such credit is:

• Pre-shipment credit is to be granted for the period which is sufficient to meet the needs of
the exporter. But if the period of credit exceeds 180 days, no refinance will be granted by
the Reserve Bank of India. If the pre-shipment advance is not adjusted by submission of
26
export documents within 360 days, the advance will not remain eligible for concessional
rate of interest.

• Packing credit may be released in one lump sum or in installments as required by the
exporter. Banks must monitor the end-use of the funds and ensure their utilization for
genuine requirement of exports.

• Pre-shipment credit must be liquidated out of the proceeds of the export bill on its
purchase, discount etc by the banker. Thus the pre-shipment credit must be converted into
post-shipment credit.

• In case of agro-based products, the non-exportable products are to be sold within the
country. Banks must charge interest at commercial rate, as applicable to domestic
advance, on packing credit covering non-exportable portion.

• In some cases, exporters need packing credit in anticipation of receipt of letters of


credit/firm export order from importers. This happens when the raw materials are
seasonal in nature or when the manufacturing time is greater than the delivery schedule.
In such cases, banks may extend Pre-Shipment Credit Running Account facility and
grant credit taking into account the exporter's needs and without insisting on firm export
order or letter of credit.

Post-shipment credit:
Need for post-shipment credit arises after the exporter has shipped the goods and has secured the
shipping documents, such as bill of lading, etc. Now, the concern of the exporter is to realize his
dues from the foreign importer. This is invariably done by drawing a bill of exchange on the
importer. The bill may be drawn either on Documents against Acceptance (D/A) basis or on
Documents against Payment (D/P) basis. In the former case, the importer takes delivery of the
documents by giving his acceptance on the bill, sent to him through the exporter's banker.
Thereafter he takes delivery of the goods from the shipping company and makes payment of the
accepted bill on its due date. In case the bill is drawn on DIP basis the documents are released to
the importer at the time he makes payment of the bill to the exporter's bank, on its presentation.

Exporter's bank provides post-shipment advance to the exporter in either of the two ways:

• By purchasing, discounting or negotiating the export bills

• By granting advance against bills for collections

27
Thus, post-shipment credit is liquidated by the proceeds of the export bills when received from
the importer by the exporter's bank.

Banks also grant advances to the exporters against duty drawback which he has to receive from
the government. Such advance is liquidated when the amount of duty drawback is received by
the exporter.

Post-shipment finance is the finance provided against shipping documents. It is also provided
against duty drawback claims. It is provided in the following forms:

Purchase of Export Documents drawn under Export Order:

Purchase or discount facilities in respect of export bills drawn under confirmed export order are
generally granted to the customers who are enjoying Bill Purchase/Discounting limits from the
Bank. As in case of purchase or discounting of export documents drawn under export order, the
security offered under L/C by way of substitution of credit-worthiness of the buyer by the issuing
bank is not available, the bank financing is totally dependent upon the credit worthiness of the
buyer, i.e. the importer, as well as that of the exporter or the beneficiary. The documents dawn
on DP basis are parted with through foreign correspondent only when payment is received while
in case of DA bills documents (including that of title to the goods) are passed on to the overseas
importer against the acceptance of the draft to make payment on maturity. DA bills are thus
unsecured. The bank financing against export bills is open to the risk of non-payment. Banks, in
order to enhance security, generally opt for ECGC policies and guarantees which are issued in
favor of the exporter/banks to protect their interest on percentage basis in case of non-payment or
delayed payment which is not on account of mischief, mistake or negligence on the part of
exporter. Within the total limit of policy issued to the customer, drawee-wise limits are generally
fixed for individual customers. At the time of purchasing the bill bank has to ascertain that this
drawee limit is not exceeded so as to make the bank ineligible for claim in case of non-payment.

Advances against Export Bills Sent on Collection:

It may sometimes be possible to avail advance against export bills sent on collection. In such
cases the export bills are sent by the bank on collection basis as against their
purchase/discounting by the bank. Advance against such bills is granted by way of a 'separate
loan' usually termed as 'post-shipment loan'. This facility is, in fact, another form of post-
shipment advance and is sanctioned by the bank on the same terms and conditions as applicable
to the facility of Negotiation/Purchase/Discount of export bills. A margin of 10 to 25% is,
however, stipulated in such cases. The rates of interest etc., chargeable on this facility are also
governed by the same rules. This type of facility is, however, not very popular and most of the
advances against export bills are made by the bank by way of negotiation/purchase/discount.

Advance against Goods Sent on Consignment Basis:

When the goods are exported on consignment basis at the risk of the exporter for sale and
eventual remittance of sale proceeds to him by the agent/consignee, bank may finance against
such transaction subject to the customer enjoying specific limit to that effect. However, the bank
should ensure while forwarding shipping documents to its overseas branch/correspondent to
instruct the latter to deliver the document only against Trust Receipt/Undertaking to deliver the
sale proceeds by specified date, which should be within the prescribed date even if according to
the practice in certain trades a bill for part of the estimated value is drawn in advance against the
exports.
28
Advance against Undrawn Balance:

In certain lines of export it is the trade practice that bills are not to be drawn for the full invoice
value of the goods but to leave small part undrawn for payment after adjustment due to
difference in rates, weight, quality etc. to be ascertained after approval and inspection of the
goods. Banks do finance against the undrawn balance if undrawn balance is in conformity with
the normal level of balance left undrawn in the particular line of export subject to a maximum of
10% of the value of export and an undertaking is obtained from the exporter that he will, within
6 months from due date of payment or the date of shipment of the goods, whichever is earlier
surrender balance proceeds of the shipment. Against the specific prior approval from Reserve
Bank of India the percentage of undrawn balance can be enhanced by the exporter and the
finance can be made available accordingly at higher rate. Since the actual amount to be realized
out of the undrawn balance, may be less than the undrawn balance, it is necessary to keep a
margin on such advance.

Advance against Retention Money:

Banks also grant advances against retention money, which is payable within one year from the
date of shipment, at a concessional rate of interest up to 90 days. If such advances extend beyond
one year, they are treated as deferred payment advances which are also eligible for concessional
rate of interest.

Advances against Claims of Duty Drawback:

Duty Drawback is permitted against exports of different categories of goods under the 'Customs
and Central Excise Duty Drawback Rules, 1995'. Drawback in relation to goods manufactured in
India and exported means a rebate of duties chargeable on any imported materials or excisable
materials used in manufacture of such goods in India or rebate on excise duty chargeable under
Central Excises Act, 1944 on certain specified goods. The Duty Drawback Scheme is
administered by Directorate of Duty Drawback in the Ministry of Finance. The claims of duty
drawback are settled by Custom House at the rates determined and notified by the Directorate.
As per the present procedure, no separate claim of duty drawback is to be filed by the exporter. A
copy of the shipping bill presented by the exporter at the time of making shipment of goods
serves the purpose of claim of duty drawback as well. This claim is provisionally accepted by the
customs at the time of shipment and the shipping bill is duly verified. The claim is settled by
customs office later. As a further incentive to exporters, Customs Houses at Delhi, Mumbai,
Calcutta, Chennai, Chandigarh, and Hyderabad have evolved a simplified procedure under which
claims of duty drawback are settled immediately after shipment and no funds of exporter are
blocked.

Period of Credit:
Export bills are of two types, Demand Bills, which are payable on demand or on presentation
before the importer. In case of demand bills, the banker grants an advance to the exporter, but the
period of advance should not exceed the normal transit period i.e. the average period normally
involved from the date of purchase/ discount of the bill till the receipt of the proceeds of the bill
by the bank. Such advance is thus automatically liquidated with the realization of the export
bills.

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Usance Bills which mature after a period of time. In case of usance bills banks grant credit for a
maximum period of 180 days from the date of shipment inclusive of normal transit period and
the grace period. Such bills are presented for acceptance.

Decisions before the importer and thereafter it are retained by the bank concerned. On its due
date it is presented again before the acceptor for its payment.

There are two methods of dealing with such bills-(a) purchase or discounting of the bills and (b)
collection of the bills.

Purchase/ Discounting of Bills:

In case of purchase of documentary bills by the exporter’s banker, it is usual for the latter to give
immediate credit for the bills. An amount by way of discount, fee, interest, etc, is charged by the
banker from the amount of the bill and the remaining amount is immediately made available to
the exporter (drawer of the bill). This facility is generally granted in case where the standing of
the exporter is good and he is considered credit-worthy for the amount of the bill, because in case
the drawee of the bill refuses to honour the bill, the banker shall be entitled to recover its amount
from the drawer exporter.

If the banker is unable to recover the amount of the bill from the exporter also his ultimate
remedy would be to realize it by disposing off the goods exported. Therefore while
purchasing/discounting the export bills, the banker takes into consideration the nature of the
goods covered by the bills, the nature of its demand and the possibilities of variations in its
price. Moreover, the exporter is required to take a suitable guarantee issued by the Export Credit
Guarantee Corporation.

In addition to the above, the banker also takes into account the foreign exchange regulations in
the importer's country and purchases the export bill if the importer’s country has not imposed
any restrictions on making such payments. The banker also examines the documents enclosed
with the bill and ensures that they are genuine and are in order.

Collection of Bills:

The banker collects the foreign bills on behalf of the customer in the same way as in the case of
home trade. In case the exporter sends to his banker export bills for collection, the latter proceeds
according to the instructions given by the exporter drawer and makes its payment to him as and
when the proceeds of the bill are realized from the importer. Obviously, in case of collection of
bills, the banker does not grant any advance to the exporter immediately on receipt of the bills
for collection. Such practice is usually adopted when the exporter does not enjoy reputation
which is required in case the bill is purchased/discounted by the banker.

Negotiation of Bills under Letters of Credit:

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The above mentioned methods of realizing the export bills is prevalent in cases where the
foreign buyer is well known to the exporter and the latter feels no risk or hesitation in sending
the documents on D/A or DIP basis. But in circumstances where the exporter has no previous
experience of dealing with the importer or has no reliable information on the financial standing
and credit-worthiness of the importer, he might not like to adopt the above procedure for
realizing his dues. This risk of uncertainty about receiving payment is largely mitigated by
securing a letter of undertaking from the banker of the importer. Such letter is called, Letter of
Credit (L/C) which plays a very important role in financing the foreign trade.

Letter of credit:

A letter of credit is an abstract and irrevocable undertaking of a bank to effect payment against
presentation of prescribed documents within the stipulated period provided the documents so
submitted are in accordance with the term of the credit established by parties.

So we can say that a letter of Credit is “ An arrangement by means of which a bank ( issuing
bank) acting at the request of a customer (applicant) ,undertakes to pay a third party (beneficiary)
a predetermined amount by a given date according to agreed stipulations and against
presentation of stipulated documents”. By opening letter of credit, the bank undertakes to make
payment in his behalf to the extent of the amount of the credit. The bank should appraise the
creditworthiness of the customer before sanctioning him this facility.

Parties to letter of credit:


• Applicant: The person who import goods from abroad and requests the issuing bank to
open an L/C

• Beneficiary: The party in whose favor the L/C is opened and who receives payments.

• Issuing bank: The bank issuing L/C at the buyer’s request. This is usually the buyer’s
bank.

• Advising bank: Through which bank L/C is advised. The L/C is sent to the beneficiary
through the agents or correspondents of the opening bank in the country where the seller
situated.

Depending upon the country of import, currency of the transaction, country of the supplier of
goods etc, there will be few more parties connected to the letter of credit other than those
stated above.

• The confirming banker: The role of the confirming bank, which is situated in the country
of seller provides additional guarantee to the seller. Though confirmation of L/C is not
mandatory.

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• The reimbursing banker: The bank which is designated by the L/C opening bank to effect
reimbursement to the negotiating bank.

• The negotiating banker: The bank in the seller’s country which is authorized to purchase
the bills drawn by the seller.

Types of letter of credit:


According to the various need of import-export business different type of letter of credit is
required to open to facilitate easy repayment of the proceeds.

Documentary Letter of Credit and Clean Letter of Credit:

When the L/C contains a clause that documents of title to goods, such as bill of lading, insurance
policy, invoice, certificate of origin, etc, must be attached with the bill of exchange drawn under
L/C, it is called a documentary L/C. In the absence of such a clause, it is called a clean letter of
credit.

Fixed Credit and Revolving Credit:

In case of fixed credit, the L/C specifies the amount up to which one or more bills may be drawn
by the beneficiary within the specified period of time. But in case of revolving credit, the L/C
specifies the total amount up to which bills drawn may remain outstanding at a time. As soon as
a bill is paid by the importer, another bill may be drawn by the exporter on the importer under
the same L/C.

Revocable and Irrevocable Letter of Credit:

When the opening banker reserves to itself the right to cancel or modify the credit at any time
without prior notice to the beneficiary, it is called revocable L/C. When a L/C cannot be revoked
or cancelled as above it is an irrevocable L/C and provides unconditional undertaking to the
exporter.

Confirmed and Unconfirmed L/C:

When the issuing banker requests the advising bank (i.e. the banker in exporter’s country), to add
its own confirmation, also to an irrevocable credit and the latter does so, it is called irrevocable
and Confirmed L/C. After confirmation the advising banker is called confirming banker and
takes upon itself the task of negotiating the export bills without recourse to the drawer.

With and without Recourse Credits:

In case of `With Recourse' bills the banker, as the holder of the bill, can recover obligation. The
negotiating banker should, therefore, take the following precautions the amount of the bill from
its drawer, in case the drawee of the bill fails to honour it. On the other hand, in case of Without

32
Recourse credit the issuing banker will have recourse to the drawee only. If he fails to pay,
banker can realize by disposing off the goods.

Negotiation:
When a bill of exchange is drawn under a letter of credit, it may be negotiated with any banker in
the exporter's country. But if the L/C mentions the name of any particular bank for the purpose
of negotiation, it must be negotiated only with that banker.

By negotiation we mean that the negotiating banker (i.e. the banker through whom the. export
bills are sent to the importer), pays to the drawer the value of the bill on the basis of the
undertaking given by the opening banker. But it is very important that the terms and conditions
specified in the L/C are duly complied with, because if any condition is not complied with, the
opening banker shall not remain liable to meet its Decisions obligation .The negotiating banker
should , therefore , take the following precautions at the time of negotiating the export bills.

The last date within which the bill must be negotiated has not expired because L/C becomes
ineffective after the expiry of such date.

The documents required to be attached with the bill must be in order. If the banker finds any
irregularity or deficiency therein, he must get it rectified; otherwise refuse to negotiate the bill.

The following documents are usually enclosed with the bill of


exchange:

Invoice: An itemized list of goods shipped to a buyer, stating quantities, prices, shipping
charges, etc.

Bill of lading: In international trade shipping occupies an important place as a mode of


transport. The document evidencing the carriage of goods by sea is the bill of lading. A bill of
lading is a document issued by the shipping company or its agent, acknowledging the receipt of
goods for carriage which are deliverable to the consignee in the same condition as they were
received.

Marine Insurance Policy: Broadly, insurance covering loss or damage of goods at sea. Marine
insurance typically compensates the owner of merchandise for losses sustained from fire,
shipwreck, etc., but excludes losses that can be recovered from the carrier.

Certificate of Origin: A certified document showing the origin of goods; used in international
commerce.

The invoice and other documents must have the same description of the goods as is given in the
letter of credit

33
Export credit in foreign currencies:

Reserve Bank of India has permitted the authorized dealers in foreign exchange to extend export
credit, both pre-shipment and post-shipment, in foreign currencies viz U.S dollars, pound
sterling, Japanese Yen, Euro, etc.

Pre-shipment Export Credit in Foreign Currencies:

Pre-shipment Credit in foreign currency is granted to exporters for purchasing domestic and
imported inputs for goods to be exported. Rate of interest is related to LIBOR/EURO. It is
applicable to only cash exports.

Banks are permitted to extend pre-shipment credit in one convertible currency in respect of an
export order while invoice is prepared in another convertible currency. The risk and cost of
cross-currency transaction will be borne by the exporter.

Sources of Funds for Banks: Banks may grant pre-shipment credit in foreign currency from the
funds raised from the following sources:

Foreign Currency balances available with the banks in different types of accounts, viz. Exchange
Earners Foreign Currency Accounts, Resident Foreign Currency Accounts, Foreign Currency
(Non-Resident) Accounts, and Exporters Foreign Currency Accounts.

Foreign Currency lines of Credit: Banks may arrange lines of credit with overseas banks for this
purpose, provided the rate of interest on such borrowings does not exceed 0.75% over six months
LIBOR/EURO. If it exceeds this limit, approval from Reserve Bank of India is required.

Banks may also arrange lines of credit from other banks in India, if they are not able to raise
loans abroad.

Pre-shipment credit in Foreign Currency is initially granted for a maximum period of 180 days
which may be extended further but an additional interest of 2% is charged.

Such credit is required to be liquidated out of the proceeds of export bills, when they are
submitted for discounting/re-discounting. Export bills are not to be accepted by banks for
collection.

Banks are permitted to extend Running Account facility under PCFC Scheme also, just as is
provided in case of Rupee credit. Such facility should be provided to exporters with good track
record, who should produce L/C or firm orders within a reasonable period of time.

Reserve Bank of India does not provide any refinance against export credit under PCFC scheme.

Post-shipment Export Credit in Foreign Currency:

Exporters are permitted to avail of pre-shipment credit and post-shipment credit either in rupees
or in foreign currency. But if they have taken pre-shipment credit in foreign currency, the post-

34
shipment credit has to be necessarily in foreign currency because foreign currency pre-shipment
credit has to be liquidated in foreign currency.

Banks, having discounted the export bills drawn in foreign currencies, are allowed to re-discount
such bills abroad at rates linked to international interest rates at post- shipment stage. For this
purpose, they may arrange a Bankers Acceptance Facility (BAF) for rediscounting the export
bills without any margin and duly covered by collateralized documents.

Each bank can have its own BAF limit fixed with an overseas bank or a re- discounting agency.

The exporters can also arrange themselves a line of credit with an overseas bank or any other
agency for discounting their export bills directly. Bills are to be rediscounted through the bank
from whom pre-shipment credit facility has been availed of.

The above scheme covers mainly export bills with usance period up to 180 days from the date of
shipment including normal transit period and grace period. Demand bills may also be included if
overseas institution has no objection. Reserve Bank's prior approval is required for bills having
usance of more than 180 days.

Sources of funds for post-shipment export credit are the same as are in case of pre- shipment
export credit in foreign currency. Banks should re-discount export bills with recourse terms. If
they can arrange such facility on competitive terms on without recourse basis, they are permitted
to do so. Reserve Bank of India does not grant refinance facilities against export bills
discounted/rediscounted under the scheme.

Refinance from reserve bank of India:


In order to promote exports from the country and to increase the competitiveness of Indian
exporters, Reserve Bank of India provides refinance to the commercial banks at concessional
rates, in respect of the export credit provided by them. Section 17 (3A) of the Reserve Bank of
India Act, 1934 empowers the Reserve Bank of India to make advances to any scheduled bank
against its promissory notes repayable on demand or on the expiry of fixed periods not
exceeding 180 days, provided a declaration in writing is furnished by the scheduled bank that :

• It holds eligible export bills of a value not less than the amount of such loan and
advance, such bills should have usance not exceeding 180 days; or

• It has granted a pre-shipment loan or advance to an exporter in India to enable him to


export from India. The amount of such pre-shipment loan drawn and outstanding at any
time should not be less than the advance obtained by the borrowing bank from the
Reserve Bank. The period of pre-shipment credit should not exceed 180 days, which may
be extended, for reasons beyond the control of the exporter.

35
Thus Reserve Bank of India provides refinance both in respect of pre-shipment credit and post-
shipment credit. The essential pre-requisite is the submission of a promissory note, supported by
a declaration about having granted export credit.

Extent of Refinance:
Reserve Bank of India provides refinance which is linked with the export credit extended by a
bank. With effect from May 5, 2001, scheduled commercial banks are provided export credit
refinance to the extent of 15% of the outstanding export credit eligible for refinance as at the end
of the second preceding fortnight. Thus with the increase in the value of export credit extended
by a bank, the refinance facility also correspondingly increases.

Gold Card Scheme for Exporters:


Reserve Bank of India has formulated a Gold Card Scheme for creditworthy exporters with good
track record for easy availability of export credit on best terms. Salient features of the scheme
are as follows:

• All creditworthy exporters including those in small and medium sectors with good track
record would be eligible as per the criteria laid down by the banks.

• Banks would clearly specify the benefits they would be offering to gold card holders.

• Request from card holders would be processed quickly within a prescribed time frame.

• `In-principle' limits would be set for a period of 3 years with a provision for stand-by
limit of 20% to meet urgent credit needs

• Card holders would be given preference in the matter of granting packing credit in
foreign currency.

• Banks would consider waiver of collateral and exemption from ECGC guarantee schemes
on the basis of card-holders credit-worthiness and track record.

Interest Rates on Export Credit:


In order to reduce the cost of export credit to the exporters, so as to increase their
competitiveness in the international markets, Reserve Bank of India has prescribed ceiling rates
for different categories of export credit. Banks are free to charge any rate below the ceiling rates.
Present rates, effective from May 1, 2004, are as follows:

Types of Advances:

Pre-shipment Credit:

Up to 180 days not exceeding BPLR minus 2.5 percentage points

36
Beyond 180 days and up to 270 days banks are free to determine rates of interest subject to
BPLR and spread.

Post - Shipment Credit:

On demand bills for transit period not exceeding BPLR minus 2.5 percentage points

Usance bills (for total period) not exceeding BPLR minus 2.5 percentage points

Up to 90 days (maybe extended up to 365 days for eligible exporters) not exceeding BPLR
minus 2.5 percentage points.

Beyond 90 days and up to 6 months from the date of shipment, banks are free to determine
interest rates subject to BPLR and spread guidelines:

• Against incentives from Govt not exceeding BPLR minus 2.5%

• Against undrawn balance (up to 90 days) not exceeding BPLR minus 2.5%

• Against retention money payable within one year from the date of shipment not
exceeding BPLR minus 2.5%

Deferred Credit:

For period beyond 180 days banks are free to determine rate of interest subject to BPLR and
spread guidelines.

When a bank deals in export finance it is bound by the following


guidelines and regulations:

FEMA – 1999 rules and acts

FEMA – notification

A.P. directives issued by R.B.I

Foreign trade (development and regulation act) EXIM policy

Rules of FEDAI

International commercial rules

Incoterms

Export credit guarantee corporation (ECGC)

Bank’s own guidelines and circulars

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Import finance:

Import finance is being extended in the following manner.

• Establishing letters of credit


• Trust receipt loans
• Import goods loans
• Term loans
• Machinery loans
• Hypothecation loans

Assessment of import finance:

Payment for imports are made against bills drawn under letters of credit or against bills received
on collection basis or against advance payment for future imports. Importer’s bank will be asked
to open letter of credit, which may involve financing by the banks. Hence letter of credit must be
opened selectively and only for customers of good financial standing. Proper investigation into
the antecedents and respectability of the importer is essential to safeguard any eventuality, which
may arise later on while undertaking import business on behalf of them. Care must be taken by
banks to see that the goods to be imported are easily marketable. In the event of default there
should be no difficulty in disposing off the goods if the imported goods are easily marketable.

The assessment of economic viability of the import is a guide in assessing whether the
underlying transaction is profitable. In case the importer fails to pay for the bills, it would
become necessary for the bank to release the goods by resorting to sale of imported goods. The
imported goods cannot be sold in all the cases without reference to the licensing authority.
Though the consignment can be cleared by the banker in the event of the import bill remaining
unpaid; sale of such goods is subject to the approval of the licensing authority, which can be a
long drawn out process. While assessing the liability of import, it would be necessary to
ascertain and calculate the duty, sales tax, port trust dues etc, on sale of the goods to the third

38
party. Banks should satisfy that if facilities are granted, import client would be in a position to
retire the documents when received in case port import facility is not granted.

Procedure for opening letter of credit:

After selecting the client as stated in the earlier paragraph, obtaining the required sanction limit
from the appropriate authorities, a running serial number is allotted to the application and it is
entered in a register specified for this purpose. The serial number given to the letter of credit will
be in accordance with the bank’s procedures.

The letter of credit number, date of opening, name of the correspondent bank, name of the
reimbursing bank, percentage of custom duty, other charges letter of credit amount in foreign
currency and its rupee equivalent, earlier liabilities overdue liabilities under all heads, if any,
date of expiry of limit etc. should be written in manager’s approval from and his approval to be
obtained before establishing the letter of credit since the directive of Reserve Bank is that the
payment for import bill has to be given by the head of the branch.

Bank should maintain a register for recording movement of license similar to that of joint
custodian key register.

If the margin money is collected for the letter of credit by debit to customer’s account or third
party’s margin, money accepted as security details of the same should be noted in the register.
Third party’s margin money should be only in the form of “cash” through the proper banking
channels and should not be fixed deposit of any other bank. The margin money should be
collected before establishing the letter of credit.

Refund of the margin money may be made, if no document is received under the letter of credit,
or on obtaining confirmation from the advising bank that the letter of credit is cancelled and
retained at their end duly unutilized.

In the below the documentary credit procedure shown with the help of diagram:

39
Scrutiny of letter of credit application form:

Once the limits are sanctioned after observing all the formalities, the prospective importer will
tender the application form for establishing the letter of credit. Opening of letter of credit is a
definite commitment given to the beneficiary that the payment for such imports would be made
on submitting the shipping documents in confirmatory to the terms of the credit established by
the bank (article 7 of UCPDC-600). Hence before opening the letter of credit bank should
ensure:

Whether import of goods for which letter of credit is being opened is allowed as per the EXIM
policy. If so, the relevant provisions or import license details to be mentioned.

Whether credit report of the overseas seller held

Whether the letter of credit application form is signed by the appropriate official of the importer
and stamped as prescribed in the Stamp Act of the concerned State in which the branch of the
bank is located. Application form must be completed in all respects.

The application should state whether credit is irrevocable, if it so, whether to be confirmed where
the beneficiary is located, or whether it is to be made transferable, divisible etc. the application
must also state whether the credit must be advised by airmail or by swift etc. if the credit is to be
advised by airmail, whether the brief details of credit has to be sent by swift/ telex. The
application should contain full name and address of the beneficiary who must be an overseas
supplier, manufacturer or supplier of the goods.

It is advisable to obtain satisfactory status report on the overseas seller or at least overseas seller
must be a well known name in international business before establishing the letter of credit. For
letter of credit above US $ 1, 00,000 or its equivalent it is advisable to call for the credit report of
the supplier/ manufacturer before establishing the credit if they are not internationally known
parties. This information may be obtained from the bank’s correspondent or from internationally
reputed agency.

Letter of credit should be opened on the basis of underlying contracts. However, in the absence
of contracts/ orders, following documents can be accepted as substitute for sale contracts;

• Purchase order duly confirmed


• Proforma invoice duly signed by seller and accepted by buyer
• Indent or offer from overseas buyer or his authorised agents, either in India or abroad

Sale contracts or Proforma invoice or indent from etc. should contain the following essential
details:

• Name and address of the seller


• Name and address of the buyer
• Description of the goods
• Quantity and specification
• Unit price and value
• Terms of payment
• Approximate date of shipment
• Country/ port of shipment

40
• Port of discharge of goods

It is advisable to obtain original sale contract and make endorsement for having established the
letter of credit with details. If the original sale contract is required by the importer for any reason,
banks may handover the same after retaining the copy for their records. However beneficiary can
in no case avail himself of the contractual relationship existing between the banks or between the
applicant and the issuing bank.

Besides calling for standard documents as stated earlier, banks may call for additional documents
such as certificate of quality, certificate of analysis, inspection certificate etc. depending upon the
commodity being imported to ensure that the goods supplied are good quality one. Over and
above the required copies, banks should call for extra copies of invoices, transport documents for
their records.

Application calling for the bill of lading or airway bill will specify whether freight is to be paid
or is payable at destination depending upon the terms of the contract/ order etc. the letter of
credit application should also to state the dates for shipment and negotiation. Last date for
shipment should preferably 7 to 21 days before the date of negotiation. Depending upon the type
of shipment, port of shipment, the time gap between the period of shipment and negotiation has
to be ideally stipulated to ensure that such period would take care of the time required for the
beneficiary to submit the documents for negotiation and for the opener to receive the documents
before the arrival of the carrying vessel.

Letter of credit should normally stipulate that the bill of lading or air way bill indicates name and
address of the importer as the notify party and of the bank. The goods are to be consigned in the
name of the bank a/c opener.

Insurance risks that are to be covered have to be expressly stated. Vague terms such as “usual
risks”, “customary risks”, “all risks” etc must not be used. Minimum risk to be covered for the
purpose of insurance are- Institute cargo clause (all risk), strikes, riots, civil commotions,
Institute war clause and theft pilferage non delivery clause. Specific cover may also be included
depending upon the nature of goods.

If the insurance is covered by the opener, bank should ask the opener to submit “open policy” or
“provisional cover note” which should be taken out in the name of bank a/c opener. Where goods
are subject to transshipment, the insurance cover should provide cover for the transshipment risk.

Commission and charges:

Commission, commitment charges, out of pocket expenses, stamp charges etc. for establishing
the letter of credit should be collected upfront only, as per FEDAI rules, as per bank scale of
charges. These charges once collected normally cannot be refunded without the prior approval of
the competent authority of the bank. Calculations of commission, charges etc should be recorded
in the appropriate register for easy verification by the inspecting officials.

Scrutiny of bills received under letter of credit:

• When bills are received under the letter of credit established by the bank, the same should
be stamped with, date and time. Recording time is very important to establish whether the
documents are received during the business hours or later. The issuing bank shall have a
reasonable time not exceeding seven banking days following the date of receipt of the
41
documents to examine the documents and determine whether to take up or refuse the
documents accordingly. It also states that the banks are under no obligation to accept
presentation of documents outside their banking hours.
• Documents should be scrutinized for its correctness as per the office copy of the letter of
credit held by them. Following points are to be examined to determine the correct
submission under the letter of credit.
• Verify the covering/ forwarding letter to ensure:
• Whether the documents were negotiated by the correct paying banker, if letter of credit is
restricted to any particular banker only, that bank is expected to forward the documents.
Otherwise it is considered as discrepant documents.
• Ensure that the document was negotiated within the period of negotiation.
• Verify the listed documents to ensure that all the documents required under the credit has
been listed with required number of sets.
• Check whether the documents dispatched as per letter of credit terms
• Ensure the amount of bill stated in the covering letter is full L/C amount or partial
negotiation. If letter of credit prohibits partial negotiations and the covering letter
indicates partial negotiation, it is considered as discrepancy and such documents are to be
rejected by credit opener.
• Confirm whether negotiating bank has claimed the reimbursements as per terms of the
letter of credit established. If credit stipulated the negotiating bank to claim
reimbursement directly from their end on negotiation of documents and if negotiating
bank request to cover payments, they should be asked to claim reimbursement from their
end only if the presented documents are in accordance with the credit terms. Otherwise
such instructions are to be given only on acceptance of the documents by the applicant
provided the credit has validity to clam reimbursement by the negotiating bank. This type
of precaution is taken to avoid double payment under the credit.

Invoice:

• Whether the invoice is drawn by the beneficiary, if the credit is transferable one then the
invoice can be drawn by the original beneficiary and it is so in the case of acceptability of
third party documents.
• Check the description of goods and ensure that there are no deviations from that of credit
terms. Small spelling mistakes need not be taken as discrepancy unless they do not give
altogether different meaning.
• The quantity of goods, unit price is to be in terms of the letter of credit, besides whether
the terms such as CIF, C&F, FOB etc.
• Whether the details of import license have been quoted on or not, if applicable otherwise
the provision of import policy under which the captioned import is allowed to be stated.
• Total amount of invoice should be within the letter of credit amount. However a tolerance
of 5% more or 5% less will be permissible if credit does not specify that the drawing
should not exceed the credit amount.

Examine the bill of lading to ensure:

Port of loading of goods on to the steamer and discharge of cargo at the destinations are same as
that of letter of credit.

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Whether the shipment date is within the date stated in the letter of credit

Description of goods is not inconsistent to that described in the invoice as well as the quantity of
goods loaded.

Ensure that the bill of lading is signed by the appropriate authority

Check whether bill of lading indicated whether the goods have been loaded on board or shipped
on a named vessel.

Check for all the original bills of lading are listed and received with the documents

Check whether goods have been consigned as per letter of credit clause and if goods are
consigned to the order of shipper whether the shipper has endorsed the bill of lading or not.

Airway Bill:

• If a credit calls for an air transport documents ensure that:


• It appears on its face to indicate the name of the carrier and to have been signed or
otherwise authenticated by the carrier or a named agent for or on behalf of the carrier.
• Airway bill should indicate that the goods have been accepted for carriage.
• Where credit calls for an actual date of dispatch, indicates on specific notation of such
date, the date of dispatch so indicated on the air transport document will be deemed to be
the date of shipment. In all other cases, the date of issuance of the air transport document
will be deemed to be the date of shipment
• Whether freight prepaid or to be paid depending on the terms of the credit

Insurance:

• Documents should be issued and signed by insurance companies or underwriter or their


agents
• Whether all the originals have been listed and received
• Date of the issuance of policy is not later than the date of loading on board or dispatch or
taking charge as indicated in such transport documents.
• Insurance documents expressed in the currency of letter of credit

Other documents:

If credit calls for an attestation of certification of weight in the case of transport other than by
sea, banks will accept a weight stamp or declaration of weight which appears to have been
superimposed on the transport document by the carrier or his agent unless the credit specifically
stipulates that the attestation or certification of weight must be by means of a separate document.

Rejection of documents:
43
After examination of the documents received under the credit if found that they are not in
conformity of the credit terms, has to be rejected and rejection to be communicated to the sender/
negotiating bank without delay not later than close of seven banking days listing all the
irregularity / discrepancies and seeking their further disposal instruction.

If negotiating bank had already claimed the reimbursement in terms of credit arrange to claim the
refund from the negotiating banker, if no reply received within 60 days, such document shall be
returned to the sender, and pursue for the refund.

Refusal of documents under letter of credit:

Once the documents are refused by the opener, they should inform the forwarding banker about
the refusal furnishing the details of irregularity observed by them in the documents at the first
instance itself and should hold the documents at the risk of the sender seeking their further
instruction about the disposals.

Acceptance of discrepant documents:

When documents received under credit are not in conformity of the credit, opener on informing
the negotiating bank in terms of UCPDC 500/ 600, will normally inform the applicant also in
writing and also seek their advice. If opener is willing to waive the discrepancies and willing to
retire the bills or to accept the bill for future payment, then the banker should claim such
willingness in writing provided discrepancies are not violating EXIM policy / Reserve Bank of
India directives. An intimation of acceptance should be communicated to the forwarding banker
and release the documents on obtaining their approval.

Receipt of bills after arrival of the vessel or goods:

There may be occasions that the import consignment arrives before related documents are
received. Taking this accept into account banks should take reasonable period between the date
of shipment and date of negotiation. Under such a circumstances bank may issue delivery order
to the importer to enable him to clear the consignment provided.

Undertaking is obtained to retire the documents or to accept the usance draft on its arrival at the
counters of the opener irrespective of any discrepancies.

Full margin money is provided in case of sight bill to meet the obligation under the credit when
document is received. In case of usance bills under credit, delivery order can be issued against
“trust receipt” to make the payment within the usance period from the date of release order
issued or from the date of execution of trust letter or within the specified period of bill of lading
depending upon the terms of credit.

Whenever the release order issued prior to receipt of documents banker should take additional
care to trace the documents by contacting the letter of credit advising banker. Release order for
taking delivery of goods shall be noted in the letter of credit registered in red ink to draw the
attention of the section officer to recover the dues without waiting for the authorisation from the
opener.

44
However scrutiny of the document, non receipt of listed documents, forwarding
acknowledgement to the negotiating bank etc. to be carried out by the opener except for the
rejection of documents.

Trust receipt loan:

When goods are imported under usance basis under banks letter of credit, it is an obligation on
the part of bank to deliver the documents to the importer to enable him to clear the goods from
the customs pending payments. He will be as per terms of stamped letter of credit agreement
under the obligation to make the payment on expiry of the usance period.

Usance period is normally granted by the overseas supplier to the buyer of the goods to facilitate
him to cover the voyage period, clearance time, and arrangement of the inspection, certification,
and transportation time for taking goods to his factory / godown which is normally located away
from arrival point of goods. Such delayed payment to the supplier of goods is known under trade
terminology as usance period, for which normally there will be charges on the importer which is
called usance interest. The payment of interest for such delayed payment is permitted under the
commercial trade and has approval of the Reserve Bank of India provided the interest amount is
restricted to Libor + 50 basis period up to one year and Libor +125 basis point for period
exceeding one year but within 3 years.

Import loan:

Whenever customers have been granted post import facilities, such as import/ goods loan under
domestic limits, the import bills may be retired and transferred to import loan immediately on
receipt of documents following normal procedures. In such cases, customer should arrange for
customs duty and any other charges to the customs authorities directly out of their own funds
through the bank who entrusted the clearing work of the goods through their approved clearing
agent.

Under the import loan system the imported goods are held under the custody of the bank at the
landed cost of goods less stipulated margin. Landed cost means, CIF value of goods converted at
the appropriate bill selling rate on the day of crystallizing the bill+ custom duty+ taxes+ harbor
dues+ clearing agent charges etc. The goods held at the banks custody shall be insured for proper
risk at importers cost, goods to be released to the importer as and when funds made available for
the release. Proper books shall be maintained at the branch end as well as at the place where
goods are held to enable the inspecting officials to verify the existing stocks at any time. Bank
should closely monitor the repayment of loan since disposing the goods to other than the
importer is long drawn process.

Term loan/ machinery loan:

Banks may consider sanction of term loan or machinery loan to those importers who imports
machinery from abroad. Value of machinery including customs duty, port dues etc. comes to
large amount and importer needs bank finance to ensure that the existing working capital is not
affected their usual business.

Amount of loan is substantial one and normally will be repaid over a period of three years to five
years, either on a quarterly or on half yearly basis out of their internal accruals. Hence it is prime
important to study the viability of the proposal before opening the letter of credit covering import
of plant and machinery.

45
After receipt of the documents under the letter of credit the bank will follow the procedure as
stated in the paragraph import loan.

Hypothecation loan:

On importation of goods from abroad same will be released t the importer by granting
hypothecation loan. Under this loan system the imported goods are always available to importer
for their production purposes. It is normally ongoing facility or running account facility. As and
when sales are made the proceeds of the sales shall be made in to the account. The net
outstanding liability should always be backed up by sufficient stock. Hence it is the
responsibility of the bank to ensure that the stock statements are made available periodically to
ensure that the sufficient stocks are available to cover the advance.

Case study:
XYZ Company applies for a Letter of Credit from Syndicate Bank in favor of PQ Company for
Import of goods from Korea. In respect of this it goes through the application procedure of
Syndicate Bank. The documents and forms it submits to Syndicate Bank are as follows:

1. A forwarding letter to the manager consisting of Beneficiary’s name, stating amount,


applicant’s account no. maintained with Syndicate Bank and details of documents
submitted for application.

2. Declaration cum Undertaking (appendix 1) : In this letter it requests for the release of
foreign exchange for payments to beneficiary for Import of goods its particulars which
are:

Beneficiary (name), Address, Amount, Purpose

It declares that it had submitted the following documents

• Forwarding Letter

• Application to open Documentary credit (appendix 2)

• Non Judicial stamp paper of Rs. 10 (appendix 3)

• Filled up Form a1 (appendix 4)

• Copy of Quotation (appendix 5)

• Copy of Purchase order (appendix 6)

• Copy of Sales order acknowledgement

3. Application to open Documentary Credit:


46
Applicant’s Name Beneficiary’s name

XYZ PQ

Advising Bank Expiry Date

Citi Bank, Korea for Shipment 24/06/08

For Negotiation 03/06/08

Amount Not Exceeding (Place in country of Beneficiary

In Figures:

In Words:

Applicant’s name and address, Beneficiary’s name and address, name of the Advising
Bank who will be advising the credit to the beneficiary, amount and date of expiry for
letter of Credit. Application Form contains all the requirements and the documents
required by applicant to effect funds.

4. Non Judicial Stamp paper of Rs. 10: It say’s on behalf of applicant part and parcel of our
application for letter of Credit made with Syndicate Bank FXPC Kolkata.

5. Copy of Quotation: It consists of the rate charged by seller on the requested goods just
stating the invoice will be of this type. It consists of all the details of goods and its rate
that will be charged.

6. Copy of Purchase order: It contains the description of goods, rates charged, Incoterms
that will be used.

7. Copy of sales order acknowledgement: It states that goods required by applicant from
seller are being acknowledged by seller.

Documents Verification done by Syndicate bank is as follows:

1. Goods as stated are under present EXIM policy 2003-2008.

2. Import Licenses or OGL submitted to bank are in accordance with import and the amount
as per the HS code mentioned in advice for verification.

3. Countries of Origin of goods are as under FEMA 1999. That the goods can be obtained
from Korea and is not under restricted list.

4. Goods required by applicant are as stipulated in sales order acknowledgement copy.


47
5. Confirmation from manager order slip that the applicant is having sufficient funds/margin
for financing the trade.

6. The documents required by applicant from Beneficiary are in accordance with UCP 600

Documents required for application of funds:

1. Signed Commercial Invoice (appendix 7) in Quadruplicate Form for a value not


exceeding L/C amount quoting IC code and certifying goods are as per order

2. Certificate of Republic of Korea origin issued by Chamber of Commerce. (appendix 8)

3. Airway bill/Shipment bill in the name of Syndicate bank. (appendix 9)

4. Test Certificate issued by manufacturer. (appendix 10)

5. Packing List (appendix 11)

Presentation Stage:

On presentation of documents syndicate bank Checks the following items to remit the amount to
Beneficiary:

Commercial Invoice: As per the L/C Shipper, Consignee, Invoice No. , L/C no. , Departure Date
are in accordance with and Goods Description, Quantity, Unit price, Amount matches with it.

Airway Bill: As per the L/C Shipper’s ,Consignee’s and carrier’s name and address Nature and
Quantity of goods are in accordance and checks Inco terms, Date of Shipment, L/C no. , Airport
of Departure & destination & Signature of carrier.

Packing List: As per the L/C Shipper, Consignee, Departure date, Flight (From to) Invoice no.,
L/C no., Buyer Description of Goods with weight and Size.

Certificate of Origin: Issued by chamber of commerce & industry of Export country, Country of
origin, Transport details, Description of goods, Certification that goods are produced in this
country.

Bills of Exchange: The amount of bill drawn on Syndicate bank is mentioned.

After Satisfying from the documents i.e. accepting the documents banks follows these steps:

Step1

Debit the bill of Exchange value from Applicant’s Account.

Step2

Debit commission, SWIFT charges from Applicant’s account.

Step3

48
Debit if any Discrepancy charges from Beneficiary’s amount.

Step4

Remit the Net amount to Beneficiary.

Applicant need to submit the Exchange control copy to Syndicate Bank for Import evidence. The
particulars which bank checks in Exchange control copy are:

• Stating bill of entry for Home consumption

• Importer details

• MAWB No./HAWB No

• Invoice Value

• Certification from Custom Dept.

Foreign exchange accounting:

Foreign exchange business of banks required a sound accounting system. The accounting system
maintained in branches includes the following:

Nostro Account: ‘Nostro’ means ‘our account with you’. For example if Syndicate bank
maintains an account with Citi bank, America (which must be in $) to facilitate its transaction in
America than this type of account is termed as Nostro account.

Vostro account: The account maintained by foreign banks in Indian Rs. With an Indian bank
would be referred in all the correspondences by the Indian bank as Vostro account means your
account with us. For example if Deutsche bank, Frankfurt maintains an account with syndicate
bank, India than Syndicate bank in all its correspondence with Deutsche bank would refer to this
account as Vostro account.

Loro account: Loro account means their account with you. For example if State bank of India has
an account with Bank of America (in $) and if Syndicate bank wants to refer this account to
Bank of America, to facilitate any transaction than this account will be termed as Loro account.

The foreign exchange accounting generally maintained with the help of simple double entry
system. While maintaining the accounts rules and regulations formed by RBI and Govt. of India
(FEMA 1999, UCPDC 600) should be kept in mind.

49
SWIFT mechanism:

SWIFT (Society for Worldwide Interbank Financial Telecommunication) mechanism facilitates


the import and export trade. It is worldwide interbank software through which important
documents are sent via internet. As for example suppose Mr. X of India export goods to Mr. Y of
London. Now Mr. Y request an issuing bank (say HSBC London) to draw a letter of credit in
favor of Mr. X, henceforth HSBC London advises the advising bank (say Syndicate bank,
Kolkata) to pay Mr. X after checking the required document which are essential to check before
making the payment. Document like letter of credit and all advising messages are sent through
this secured software SWIFT.

When letter of credit is sent through via SWIFT message, a particular format is used which is
shown below depending on different case basis:

Max.
MT MT name Purpose Authen length Mug
issue of a indicates the term and
documentary conditions of a
700 credit documentary credit Y 10000 N
issue of a continuation of an MT
documentary 700 for fields 45a, 46a,
701 credit and 47a Y 10000 N
provides brief advice of
pre- advice of a a documentary credit for
documentary which full details will
705 credit follow Y 2000 N
informs the receiver of
amendment to a amendments to the
documentary terms and conditions of
707 credit a documentary credit Y 2000 N
advice of a third
bank's advises the receiver of
documentary the term and conditions
710 credit of a documentary credit Y 10000 N
advice of a third
bank's continuation of an MT
documentary 710 for fields 45a, 46a,
711 credit and 47a Y 10000 N

Max.
Authe lengt
MT MT name Purpose n h Mug
advises the transfer of a
transfer of a documentary credit, or past
documentary thereof, to the bank advising the 1000
720 credit second beneficiary Y 0 N

50
transfer of a
documentary continuation of an MT 720 for fields 1000
721 credit 45a, 46a, and 47a Y 0 N
Acknowledgements the receipt of a
documentary credit manages and
may indicate that the message has
been forwarded according to
instruction. It may also be used to
account for bank charges or to
advise of acceptance or rejection
acknowledgem of an amendment of a 1000
730 ent documentary credit Y 0 N
advises that documents received
advise of with discrepancies have been
732 discharge taken up Y 2000 N
advises the refusal of documents
that are not in accordance with the
advise of terms and conditions of a
734 refusal documentary credit Y 2000 N
requests the receiver to honour
claim for reimbursement of
authorisation to payment or negotiations under a
740 reimburse documentary credit Y 2000 N
informs the reimbursing bank of
amendment to amendments to the terms and
an conditions of a documentary
authorisation to credit, relative to the authorisation
747 reimburse to reimburse Y 2000 N
advises of discrepancies and
request authorisation to honour
documents presented that are not
in accordance with the terms and
advise of conditions of the documentary
750 discrepancy credit Y 2000 N
advises a bank which has
requested authorisation to pay,
accept, negotiate or incur a
deffered payment undertaking that
the presentation of the documents
authorisation to may be honoured, notwithstanding
pay, accept or the discrepancies, provided they
752 negotiate are otherwise in order Y 2000 N
Advises that documents have been
presented in accordance with the
advise of terms of a documentary credit and
payment/ are being forwarded as instructed.
acceptance/ This message type also handles
754 negotiation the payment/ negotiation Y 2000 N
advises of the reimbursement or
payment for a drawing under a
advise of documentary credit in which no
reimbursement specific reimbursement instruction
756 or payment or payment provisions were given Y 2000 N

51
No. Tag Field name Status
1 27 Sequence of total M
2 40A form of documentary credit M
3 20 documentary credit number M
4 23 reference of pre- advice O
5 31C date of issue O
6 31D date & place of expiry M
7 51A applicant bank O
8 50 applicant bank M
9 59 beneficiary M
10 32B currency code, amount M
11 39A percentage credit amount tolerance O
12 39B maximum credit amount O
13 39C additional amounts covered O
14 41A available with…….by M
15 42C draft at O
16 42A drawee O
17 42M mixed payment details O
18 42P deferred payment details O
19 43P partial shipments O
20 43T transshipments O
21 44A loading on board/dispatch/ taking in charge at/ from O
22 44B for transportation to O
23 44C latest date for shipment O
24 44D shipment period O
25 45A description of goods or services O
26 46A documents required O
27 47A additional conditions O
28 71B charges O
29 48 period for presentation O
30 49 confirmations instruction M
31 53A reimbursing bank O
32 78 instruction to the paying/ accepting/ negotiating bank O
33 57A advise through bank O
34 72 sender to receiver information O

52
List of current account transactions:

SCHEDULE – I

List of current account transactions for which withdrawal of foreign exchange is not
permitted:

1. Remittance out of lottery winnings.

2. Remittance of income from racing/riding, etc., or any other hobby.

3. Remittance for purchase of lottery tickets, banned/prescribed magazines, football pools,


sweepstakes, etc.

4. Payment of commission on exports made towards equity investment in Joint Ventures/Wholly


Owned Subsidiaries abroad of Indian companies.

5. Remittance of dividend by any company to which the requirement of dividend balancing is


applicable (The condition of dividend balancing not applicable presently).

6. Payment of commission on exports under Rupee State Credit Route, except commission up to
10% of invoice value of exports of tea and coffee.

7. Payment related to "Call Back Services" of telephones.

8. Remittance of interest income on funds held in Non-resident Special Rupee Scheme A/c.

SCHEDULE-II:

List of current account transactions for which prior approval of the government is
required:

(No permission required if payment is made out of RFC or RFC (Domestic Account for all types
of payments listed in item nos. 1 to 10, whereas for payments out of EEFC Account, no
permission is required for transactions listed in item nos. 1 to 9)

Purpose of Ministry/Department of Govt. of India


Remittance whose approval is required

1. Cultural Tours Ministry of Human Resources


Development (Department of
Education and Culture)
2. Advertisement in foreign print media Ministry of Finance (Department

53
abroad by any PSU/State and Central of Economic Affairs)
Government Department other than
promotion of tourism, foreign investments
and international bidding (exceeding US$
10,000)
3. Remittance of freight of vessel Charted by Ministry of Shipping (Chartering
a PSU Wing)
4. Payment of import by a Govt. Department Ministry of Shipping (Chartering
or a PSU in c.i.f. basis (i.e. other than f.o.b. Wing)
and f.a.s. basis)
5. Multi-modal transport operators making Registration Certificate from the
remittance of their agents abroad Director General of Shipping
6. Remittance of hiring charges of Ministry of Information &
transponders by Broadcasting

- TV Channels Ministry of Communication &


Information Technology
- Internet Service Providers
7 Remittance of container detention charges Ministry of Shipping
exceeding the rate prescribed by Director
General of Shipping (Director General of Shipping)
8 Remittances under technical collaboration Ministry of Industry And
agreements where payment of royalty Commerce
exceeds 5% on local sales and 8% on
exports and lump-sum payment exceeds
US $ 2 million
9 Remittance of prize money/ sponsorship of Ministry of Human Resource
sports activity abroad by a person other Development (Department of
than International/National/State level Youth Affairs and Sports)
sports bodies, if the amount involved
exceeds US$ 100,000
10 Remittance for membership of P&I Club Ministry of Finance (Insurance
(remittances from other than RFC account) Division)

SCHEDULE-III:

List of current accounts transactions for which prior approval of R.B.I is required

(No permission required if payment is made out of RFC or RFC (Domestic) Account)

1. Release of exchange exceeding US $ 10,000 or its equivalent in one financial year (April to
March), for one or more private visits to any country (except Nepal and Bhutan).

2. Liberalized remittance exceeding US $ 2, 00,000 per remitter/donor per annum.

54
3. Donation exceeding US $ 50,000 per remitter/donor per annum.

4. Exchange facilities exceeding US $ 1, 00,000 per persons going abroad for employment.

5. Exchange facilities for emigration exceeding US $ 1, 00,000 or amount prescribed by country


of emigration.

6. (a) Remittance for maintenance of close relatives abroad exceeding net salary (after deduction
of taxes, contribution to provident fund and other deductions) of a person who is resident but not
permanently resident in India and is a citizen of a foreign state other than Pakistan or is a citizen
of India, who is on deputation to the office or branch or subsidiary or joint venture in India of
such foreign company.

(b) Exceeding USD 100,000 per year, per recipient, in all other cases.

Explanation: For the purpose of this term, a person resident in India on account of his
employment or deputation of a specified duration (irrespective of length thereof) or for a specific
job or assignment; the duration of which does not exceed three years, is a resident but not
permanently resident.

7. Release of foreign exchange, exceeding US $ 25,000 to a person, irrespective of period of


stay, for business travel, or attending a conference or specialized training or for maintenance
expenses of a patient going abroad for medical treatment or check-up abroad, or for
accompanying as attendant to a patient going abroad for medical treatment/check-up.

8. Release of exchange for meeting expenses for medical treatment abroad exceeding the
estimate from the doctor in India.

9. Release of exchange for studies abroad exceeding the estimates from the institution abroad or
US $ 1,00,000 per academic year, whichever is higher.

10. Release of exchange for commission to agents abroad for sale of residential flats/ commercial
plots in India, exceeding 5% of the inward remittance per transaction or USD 25,000 whichever
is higher.

11. Remittances exceeding US $ 1,000,000 per project for consultancy services procured from
abroad subject to the applicant submitting documents to the satisfaction of the authorised dealer.

12. Remittance exceeding US $ 1, 00,000 for reimbursement of incorporation expenses.

13. Remittance exceeding US $ 5,000 or its equivalent for small value remittances.

Note: The above restrictions shall not apply on the use of International Credit Card for making
payment by a person towards meeting expenses while such person is on a visit outside India.

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Recommendation:
Syndicate bank can start consultancy services to facilitate the customer as the general people
knowledge even they are involved in foreign trade is very limited.

Bank should charge a specific percent of commission on the letter of credit amount or some
specific amount for the consultancy. This will not only lead to extra revenue generation for the
bank but also help to improve the image of the bank.

Bank should approach new customer to extent its current volume of transaction.

Bank can think about starting international state of art forex department which will ultimately
influence all customer and help to increase the volume of trade.

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REFERNCES

Bibliography:

• Author P.G.Apte - International Trade and Finance.


• R. R. Beedu – Documentary letter of credit
• B.K.Chaudhuri & O.P. Agarwal – Foreign trade and
foreign Exchange.
• Other news paper and guidelines issued by R.B.I
• www.rbi.org.
• Wikipedia.org

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