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INTERNATIONAL BANKING

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INTERNATIONAL BANKING MODULE A. Prof. B.B. Bhattacharyya ... On maturity of BOE, the FA presents the instruments to the Aval for payment. 8/27/09 ... – PowerPoint PPT presentation

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Title: INTERNATIONAL BANKING


1
INTERNATIONAL BANKING MODULE A
  • Prof. B.B. Bhattacharyya
  • Welingkar Institute of Management Development
    Research, Mumbai

2
What is an exchange rate ?
  • Factors determining exchange rates

DEMAND
SUPPLY
S
VALUE OF
1.75
1.75
1.65
VALUE OF
1.65
1.60
1.60
D
x
X 1
X-1
X-1
X
X 1
QUANTITY OF
QUANTITY OF
3
What is an exchange rate ?
  • Factors determining exchange rates

S
1.75
VALUE OF
1.65
1.60
D
X-1
X
X-1
QUANTITY OF
4
Why do Exchange Rates change?
INFLATION
S1
S
VALUE OF
1.70
1.67
1.65
1.60
D1
D
QUANTITY OF
5
  • 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

6
  • 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

7
  • Cash /TOM/ SPOT date on which the exchange of
    currencies actually take place.
  • Forward Transaction Beyond Spot date
  • Value date

8
Derivatives
  • Forwards, Futures, Options, Swaps
  • 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.

9
  • Forward to buy a specified asset on a specified
    date at a specified price.
  • Both right and obligation.
  • Future Contract similar to forward contract.
  • 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
  • Difference Contracts standardized, price
    negotiated.

10
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

11
Option
  • Gives the buyers right but no obligation to buy
    or sell the underlying at the agreed rate on or
    before an agreed date,
  • Premium
  • Call Option
  • Put Option
  • Seller (Writer)
  • American style options on or before the
    expiration date
  • European Style options only on the expiration
    date

12
Swaps
  • Contractual agreements between two parties to
    exchange flows -very common and popular product
    in derivative markets.
  • IRS No exchange of principal but periodic
    exchange of streams of interest payments in terms
    of predetermined terms on a notional agreed
    principal.
  • Currency Swap two parties agree to exchange
    specific amounts of two different currencies in
    the beginning and make periodic payments over
    time in accordance with predetermined terms.

13
IRS Plain Vanilla
FIXED FLOATING
COMPANY A 6 LIBOR 25 bps
COMPANY B 6.75 LIBOR 50 bps
DIFFERENTIAL 0.75 25 bps or 0.25
14
LIBOR
COMPANY A
COMPANY B
6.15
FLOATING RATE FUNDING LIBOR 50 bps
FIXED RATE FUNDING 6
15
PAYS RECIEVES NET
COMPANY A -6 LIBOR 6.15 6.15 - (6 LIBOR) -(LIBOR-0.15)
COMPANY B -6.15 -(LIBOR 50bps) LIBOR -6.15 - LIBOR -50BPS LIBOR -(6.15 0.50) -6.65
16
Documentary L/C
  • LC is an arrangement whereby a bank acting at the
    request of the customer undertakes to pay a third
    party by a given date acording 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.

17
(No Transcript)
18
Factoring
  • An arrangement for financing a companys Business
    against the unpaid invoices drawn in favour of
    the 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

19
Factoring can be defined as
  • A continuing legal relationship between a
    financial institution (the Factor ) and a
    business concern (the client ) selling goods or
    providing services to trade customers (the
    Customer ) on open account basis whereby the
    Factor purchases the clients book debts
    (receivables) either with or without recourse to
    the client and in relation thereto controls the
    credit extended to customers and administers the
    sales ledgers.

20
Forfaiting
  • 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
  • - upto 100 percent of the contract value
  • Simply put, forfaiting is the non-recourse
    discounting of export receivables. The exporter
    surrenders, without recourse to him, his rights
    to claim for payment on goods delivered to an
    importer, in return for immediate cash payment
    from a forfaiter. As a result, an exporter in
    India can convert a credit sale in to a cash
    sale, with no recourse to him / his banker

21
  • All exports of capital goods and other goods made
    on medium to long term credit are eligible to be
    financed through forfaiting

22
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.
  • 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

23
  • Correspondent Bank The interbank market is a
    network of correspondent banking relationships
    with large commercial banks maintaining demand
    deposits account with one another, called
    correspondent banking accounts. The correspondent
    bank account network allows for the efficient
    functioniong of the foreign exchange market

24
  • 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 interbank
    settlement of U S dollar payments between
    international banks. A net payment settlement
    system

25
  • FED WIRE Communication network of the Federal
    Reserve Bank- An automated computer based message
    system which follows 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

26
  • NRE and FCNR Accounts

27
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.

28
Reserve Bank Of India
  • 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.

29
Reserve Bank Of India
  • The guidelines and directions by RBI, so issued
    relate to foreign exchange transactions relating
    to exports, imports, remittances, travel and
    tourism, investments in India, repatriation of
    funds, non-resident Indian segment, as also
    overseas investment by Indian residents.
  • One important function of RBI is compiling data
    related to export-import trade, forex markets,
    non-resident deposits, as also international
    assets and liabilities.

30
FEMA, 1999
  • All transactions in Foreign exchange are governed
    by FEMA 1999.
  • FEMA replaced FERA,1976.
  • Important Provisions of FEMA related to exports,
    imports, exchange rates, currency of payments,
    NRIs, etc
  • Provisions for Foreign Travel.
  • Other Remittances.
  • Foreign Currency A/C in India
  • Exchange Earners Foreign Currency (EEFC) A/Cs
  • Resident Foreign Currency (RFC) Accounts
  • Resident Foreign Currency (Domestic

31
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.

32
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
  • 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.

33
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

34
EXIM Bank
35
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
    drive in India by providing a range of credit
    risk insurance covers to exporters against loss
    in export of goods and service also by offering
    guarantee covers to banks and financial
    institutions to enable exporters to obtain better
    facilities from them.

36
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.

37
  • 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 deffered
    payment exports, and
  • In respect of services rendered and construction
    projects undertaken abroad.

38
FEDAI
  • Foreign Exchange Dealer's Association of India
    (FEDAI) was set up in 1958.

39
Role of FEDAI
  • It's major activities include -
  • framing of rules governing the conduct of
    inter-bank foreign exchange business among banks
    vis-à-vis public, and
  • liaison with RBI for reforms and development of
    forex market.

40
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.

41
Thank You
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