Caiib-Intl (1) BKG

INTERNATIONAL BANKING
G .R. Rao
Faculty, IIB&F
09/16/15
International Banking
Topics
Exchange rates
Risk management and basics of
derivatives
Documentary letters of credit
Facilities for exporters and importers
Correspondent banking and NRI accounts
RBI and exchange control
ECGC and EXIM bank
09/16/15
FACTORS INFLUENCING FOREX RATES

Interest rate
Investment in foreign securities demand and supply of
currencies - exchange rates.
Relative income levels

Government controls
Expectations
Strength of the economy
Political factors
Central bank interventions
Technical factors
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Type of quotes
Direct quote Foreign currency
constant, home currency varies. eg.
USD 1 = Rs. 39.50
Indirect quote Home currency
constant, foreign currency varies.
Eg. Rs. 100 = USD 2.53.
Two-way quotes inter bank quotes
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Different rates
Cash /TOM/ SPOT date on which
the exchange of currencies actually
take place.
Forward Transaction Beyond Spot
date
Value date
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Risks in international banking

In addition to risks in dealing room
following risks are possible in intl. bkg.
Buyer risk
Seller risk
Shipping risk
Country risk
Settlement risk
Exchange risk
Legal risk
09/16/15
Derivatives
Financial contract whose value is
derived from or depends on the price
of some underlying asset
Value of derivative changes when
there is a change in the price of the
underlying related asset
Forwards, Futures, Options, Swaps
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Derivatives Contd..
Forward to buy a specified asset on a
specified date at a specified price
Both right and obligation
Future Contract similar to forward
contract
Difference Contracts standardized,
price negotiated, fixed settlement date
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Differences contd.
Exchange traded no default risk clearing
house becomes the opposite party to both
buyer and seller
Most contracts are eventually offset
Only a small portion results in actual delivery
Profits/ Losses on forward contracts are
realized only on the delivery day, the change
in the value of a futures contract results in
cash flow every day- hence less default risk
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Derivatives Contd
A Currency futures contract is an
agreement to buy or sell at futures
exchange a standard quantity of a foreign
currency at a future date at the price
agreed to between the parties to the
contract
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10
Option
Gives the holder a right but no obligation to
fulfill his part of the contract
Premium
Call Option ; Put Option
Seller (Writer) ; Buyer
American style options on or before the
expiration date
European Style options only on the
expiration date
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11
Swaps
Contractual agreements between two parties
to exchange flows.
IRS No exchange of principal but periodic
exchange of streams of interest payments in
terms of pre-determined terms on a notional
agreed principal.
Currency Swap two parties agree to
exchange specific amounts of two different
currencies over time in accordance with
predetermined terms.
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12
IRS Plain Vanilla

FIXED
FLOATING
BANK A
6%
LIBOR + 25 bps
COMPANY
B
6.75%
LIBOR + 50 bps
DIFFEREN
TIAL
0.75%
25 bps or 0.25 %
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13
LIBOR
COMPANY B
BANK A
6.15%
FIXED RATE
FUNDING
6%
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FLOATING RATE
FUNDING
LIBOR + 50 bps
14
PAYS
RECIEVES NET
BANK -6%
A
-LIBOR
+ 6.15%
6.15% (6% + LIBOR)

=-(LIBOR0.15%)
COMP -6.15%
ANY -(LIBOR +
B
50bps)
+LIBOR
-6.15% - LIBOR
09/16/15
-50BPS + LIBOR
=-(6.15 +0.50)
=-6.65%
15
Documentary L/C
LC is an arrangement whereby a bank
acting at the request of a customer
undertakes to pay a third party by a given
date according to agreed stipulations and
against presentation of documents the
counter-value of goods and services
supplied
Banks deal only in documents and not in
goods.
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16
LC continued
Types
Irrevocable
Confirmed
Anticipatory
Transferable
Parties
Opener, beneficiary,
issuing, advising, confirming, negotiating,
reimbursing banks
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Recent amendments to UCPDC

Time for checking only 5 working
days
No possibility of negotiating under
reserve
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18
Documents under LC bill
Bill of exchange
Invoice
Bill of lading
Insurance policy and certificate of origin
Crystallisation of export bills
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19
Facilities to exporters
Rupee credit
Foreign currency credit
Pre shipment credit
Post shipment credit
Negotiation , purchase and advance
against collection, un-drawn balances
Advance against receivables
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20
Factoring
An arrangement for financing a
companys Business against unpaid
invoices drawn in favour of their
customers and in which the factor
becomes responsible for all credit
control, sales ledger administration and
debt collection activities.
Debt Administration
Credit Protection
Factor Financing
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21
Factoring can be defined as

Covers sales on an open account basis
Factor purchases them fully or some of them
Seller gets the proceeds subject to a margin
generally 20%
Seller is completely out of the transaction in an
without recourse factoring and only for non
payment in case of with recourse factoring.
Follow up with the eventual purchaser is done by
the factor
Pays the balance amount on realisation net of his
charges
More suitable to SME customers
09/16/15
22
Forfaiting
Forfaiting is the non-recourse discounting of
export receivables.
The exporter surrenders his claim on sale in
return for immediate cash payment
All exports of goods made on medium to long
term credit are eligible to be financed through
forfaiting
As a result, an exporter in India can convert a
credit sale in to a cash sale, with no recourse to
him / his banker
09/16/15
23
Forfaiting Contd..
A mechanism of financing exports by
- discounting export receivables
- evidenced by bills of exchange or
promissory notes
- without recourse to the seller
- carrying medium to long term maturities
- on a fixed rate basis
- up to 100 percent of the contract value
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24
Flow- Chart
Exporter finalizes contract with overseas
buyer and opens LC through his bank.
Exporter ships the goods as per schedule
agreed with buyer
Exporter draws series of bills of exchange
and sends them along with the shipping
documents, to his banker for presentation
to importer for acceptance through latters
bank. Bank returns avalised and accepted
bills of exchange to exporter.
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25
Exporter informs the importers bank about

assignment of proceeds of transaction to the
Forfaiting bank
Exporter endorses avalised Bill of Exchange
(BOE) with the words Without Recourse and
forwards them to the Forfaiting Agency (FA)
through his bank.
The FA effects payment of discounted value
Exporters bank credit exporter
On maturity of BOE, the FA presents the
instruments to the Aval for payment
09/16/15
26
Correspondent Bank
The inter-bank market is a network of
correspondent banking relationships
Large commercial banks maintain
demand deposits account with one
another
The correspondent bank account
network allows for the efficient
functioning of the foreign exchange
market
09/16/15
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Payment systems
SWIFT a private non-profit message
transfer system. Provides an exclusive
telecommunication network throughout
the world for transmission of financial
messages among banks and financial
institutions
CHIPS provides a clearinghouse for the
inter-bank settlement of U S dollar
payments between international banks. A
net payment settlement system
09/16/15
28
Payment systems Contd..

FED WIRE Communication network of the Federal
Reserve Bank- An automated computer based message
system
Gross settlement as compared to Net payment system in
CHIPS.
Mainly used for Interbank fund transfers, sale and
purchase of certain securities among banks, settlement
of large value commercial transactions, payments
received from other countries in favour of U.S. Banks
CHAPS In London, similar to CHIPS in New York
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Bank facilities to NRIs

NRE and FCNR Accounts
Repatriable
Non repatriable
Rupee accounts
Foreign currency accounts
Investments
Loan facilities
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30
Reserve Bank Of India

It is empowered under the statute to
control and regulate
foreign exchange reserves and policies
related to international trade,
Inflow/outflow of foreign exchange,
It also has supervisory powers over

the persons authorized to deal in
foreign exchange.
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An essential function of a central bank is to
maintain the stability of the external value of
the domestic currency corresponding to the
economic strength of the country and the
monetary and fiscal policies of the authorities
concerned.
The guidelines and directions by RBI, relate
to exports, imports, remittances, travel and
tourism, investments in India, repatriation of
funds, non-resident Indian segment, as also
overseas investment by Indian residents.
09/16/15
32

One important function of RBI is
compiling data related to exportimport trade, forex markets, nonresident deposits, as also
international assets and liabilities
Disseminating them among all
users and general public
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FEMA, 1999
All transactions in Foreign exchange
are governed by FEMA 1999.
Important Provisions of FEMA relate
to exports, imports, exchange rates,
currency of payments, NRIs, etc
Provisions for Foreign Travel.
Other Remittances.
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Fema 1999
Foreign Currency A/C in India
Exchange Earners Foreign Currency
(EEFC) A/Cs
Resident Foreign Currency (RFC)
Accounts
Resident Foreign Currency (Domestic
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35
EXPORT-IMPORT BANK OF INDIA
Established by an Act of Parliament in 1981

Bank commenced operations on March 1, 1982
Exim Bank's mission is to facilitate globalization
of Indian business.
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Objectives of EXIM Bank

To translate national foreign trade policies
into concrete action points
To provide alternate financing solutions to the
Indian exporter, aiding him in his efforts to be
internationally competitive
To develop mutually beneficial relationships
with the international financial community
To initiate and participate in debates on
issues central to India's international trade
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Objectives of EXIM Bank Contd.

To forge close working relationships with other
export development and financing agencies,
multilateral funding agencies and national trade
and investment promotion agencies.
To anticipate and absorb new developments in
banking, export financing and information
technology.
To be responsive to export problems of Indian
exporters and pursue policy resolutions.
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EXIM Bank
Financing Programmes
For Exporters and Importers
For Commercial Banks
For Foreign Governments, Foreign Importers
and other Financial Institutions.
Deferred Payment Exports/Project exports.

Assistance for Project Exports/Turnkey
Projects/Construction Projects.
Other Services and Programmes
09/16/15
39
Export Credit Guarantee Corporation of

India Ltd. (ECGC)
It was set up for the promotion of exports in the

year 1957.
To protect the exporters from any financial loss.
Primary goal of ECGC :
To support & strengthen the export promotion
by
1. Providing a range of credit risk insurance
covers to exporters and
2. Offering guarantee covers to banks and
financial institutions
09/16/15
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Export Credit Guarantee Corporation of

India Ltd. (ECGC)
ECGC issues various types of guarantees
to banks, financing exporters, which
protect banks in case of loss from their
advances to exporters.
Guarantees to Banks
At pre-shipment stage
At post-shipment stage
ECGC is a backbone of Indian Project

Exports.
09/16/15
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ECGC
ECGC provides cover to various types
of risks, namely,
Risk of not receiving payment from
foreign buyers,
Trading on short term credit,
Of not receiving payments in respect of
deferred payment exports, and
In respect of services rendered and
construction projects undertaken abroad.
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FEDAI
Foreign Exchange Dealer's Association of
India (FEDAI) was set up in 1958.
It's major activities include framing of rules governing the conduct of
inter-bank foreign exchange business among
banks vis--vis public, and
liaison with RBI for reforms and development
of forex market.
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Role of FEDAI
Functions:
Set guidelines and rules for forex business.

Training the bank Personnel
Accreditation of Forex Brokers
Advising/ assisting member banks in
settling issues/ matters in their dealings.
Represent members on govt. / RBI/ other
bodies.
Monitor developments
Identify problems/ difficulties
Ensure proper adherence.
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Thank You
wish you all success in your exams.
for any assistance regarding the subject
contact 09867826719 or grrao@iibf.org.in
09/16/15
45

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INTERNATIONAL BANKING

FACTORS INFLUENCING FOREX RATES

Relative income levels

Risks in international banking

IRS Plain Vanilla

6.15% (6% + LIBOR)

Recent amendments to UCPDC

Documents under LC bill

Factoring can be defined as

Exporter informs the importers bank about

Payment systems Contd..

Bank facilities to NRIs

Reserve Bank Of India

It also has supervisory powers over

Reserve Bank Of India

Reserve Bank Of India

EXPORT-IMPORT BANK OF INDIA

Established by an Act of Parliament in 1981

Objectives of EXIM Bank

Objectives of EXIM Bank Contd.

Deferred Payment Exports/Project exports.

Export Credit Guarantee Corporation of

It was set up for the promotion of exports in the

Export Credit Guarantee Corporation of

ECGC is a backbone of Indian Project

Set guidelines and rules for forex business.

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