1. International Division
General Bank Management (CAIIB) International Banking (Module A) – PART-I Foreign Exchange
R N Hirve
Chief Manager
International Division
Mumbai
29th November 2008

2. Contents of Module A RBI and exchange control in India
ICC, FEDAI, ECGC, EXIM Bank#
Exchange rates
Risk management and basics of derivatives#
Documentary letters of credit
Facilities for exporters and importers#
Correspondent Banking

3. EXCHANGE CONTROL IN INDIA
FEMA W.E.F. 1ST JUNE 2000
ORIGIN IN DEFENSE OF INDIA RULES (DIR) 1935
CONTROL TO CONSERVE FEX DUE TO SEVERE CONSTRAINTS ON FOREX RESERVES DUE TO II ND WORLD WAR
23 MAR 1947 THESE RULES BECAME FERA 1947
MODIFIED/AMENDED-FERA 1973 W.E.F
FURTHER RALAXATIONS SINCE 1994.
FCRA [permission from Min.Of Home Affairs to receive FC – HC/DC Judge, Newspaper Editor, Publisher, Columnist, Printer, Political party leader, Office Bearer, Candidate for election, Charitable Trust]

4. FEMA V/S FERA FEMA (49 Sections)
Plays a role of facilitator which regulates & manages of FE transactions
Civil Act.- prosecution to prove guilt
NRI status
Penalty
Regulation, Discretion & Permission
FERA (81 sections)
Acted as controller for Conservation of FE
Criminal Act- accused to prove innocence
NRI status not compatible with IT Act
Penalty & prosecution
Only regulation

5. FOREX TRANSACTIONS
4 D – TRADE CONTROL, EXCHANGE CONTROL, BANK’S INTERNAL GUIDELINES, KYC
IMPORTANT SOURCE OF OTHER INCOME FOR BANKS – INTEREST/COMMISSION/EXCHANGE
IMPORTS
EXPORTS
INWARD/OUTWARD REMITTANCES
FC A/CS: EEFC/RFC/ESCROW/FCNR-B
FCLS
FOREX DEALING/TRADING OPERATIONS
Receipt/Payment/Borrowing/Lending in FX

6. FEMA 1999
How to receive FX :
Exports + IRS + Borrowings + Inbound Investments
How to remit FX:
Imports + ORS + Lending + Outbound Investments

7. Capital Account Residents Creation of Assets/Liab. Outside INDIA
Non Residents
Creation of Assets/Liab. In INDIA

8. Inflow -- Equity Debt &Assistance
Capital A/C ( Contd.)
Inflow -- Equity Debt &Assistance
ECB/ADR/GDR/FDI/FII/NR INV.EXT..assistance to INDIA
Out flow
Repayment of loans,Repatriation of capital,Foreign investments by Residents./EXT. Assistance by INDIA

9. Current A/C ( Full convertible since 19/08/1994- Trade a/c flows, Misc payments, annual accruals- intt, dividend & profit)
Inflow
Export of goods & services – travel, insurance, investment , transport income, compensation to employees etc
Outflow
Import of goods & services travel, insurance, investment , transport income, compensation to employees etc

10. CURRENT A/C TRANSACTIONS
SCHDULE I- Prohibited
Eg. Remittance of lottery winnings, Racing, purchase of lottery tickets etc.
SCHDULE II- Permitted by Ministry/Deptt .Eg. Cultural tours-HRD-Dept of Education & Culture, Remittance of freight of vessel chartered by a PSU- Min of Surface Transport etc
SCHDULE III - Permitted by RBI
Eg. Gift /Donation exceeding USD 5000, release of exchange in excess of USD 10,000 or eq. in one financial year( April-March) [i/o one calendar year] for one or more visits to any country except Nepal & Bhutan, etc.

11. BOT & BOP BOT Current a/c inflows – outflows BOP
Current a/c + Capital a/c

12. BALANCE OF TRADE $ in BN (Yr/March) 08 07 06 05 04 03 EXPORTS 155.51
126.41
100.61
79.24
61.84
52.74
IMPORTS
235.91
185.74
140.23
107.06
75.21
60.19
Trade deficit
-80.40
-59.33
-39.62
-27.82
-13.37
- 7.45
TD as % of EXP
51.7 47 39 35 22 14

13. Growing Foreign Exchange Reserves
Foreign Exchange Reserves (US$ billion)
Exchange Rate (Rs/US$)
Our foreign exchange reserves have been growing steadily and we now have comfortable reserve balance of around US $ 35 billion. Similarly, the Rupee has also remained fairly stable, especially when compared with the steep devaluation in most of the Asian currencies. This is because we have been able to largely avoid the Asian crisis.

14. RBI - IECD/FED/DBOD FEMA 99 Inflow & Outflow of F/C
Maintenance of FC reserves
Issue of license to A.D.
Inspection & Supervision
Monitoring – R returns, XOS,BEF etc
Master Circulars
AP (DIR) Circulars
Intt. Rates on Export Credit

15. Guidelines & Rules for FX Business (FEDAI Rule book)
Training of Bk personnel in areas of FX Business
Accreditation of Forex Brokers
Code of Ethics & Conduct for Forex Dealers & Brokers
Advising/assisting member banks in settling issues/matters in their dealings
Code on Bank’s Commitment to Customers (CBCC)- Intt for delay in payment of Inward remittance beyond 10 2% over Savings rate ( USD 5000/USD 5000 and above)
Represent member banks on Govt/RBI/other bodies
Accounting standards/Closing Rates/ Revaluation of Mirror a/cs & outstanding cont

16. Inflow and outflow of goods & Services (DGFT- FT Policy)
CONCERNED MINISTRIES
Ministry of Commerce
Inflow and outflow of goods & Services
(DGFT- FT Policy)
Ministry of Finance
Inflow and outflow of F/C
(Customs/Excise/ED/RBI/Exim Bank/ECGC/Banks/0FIs)
Ministry of I.T.
Accreditation of software units
Promotion of software exports/STP/HTP

17. 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.

18. ECGC Credit Guarantee cover WTPCG- in f/o banks WTPSG- in f/o banks
POLICIES- in f/o exporters
Status Report on overseas buyers

19. Other market players Insurance companies Transporters
Chamber of commerce
Exporters/Importers

20. Interest Rates PCFC:LIBOR + 100 BP PC:BPLR- 2.5% Upto 270 days
ECB: 3 to 5 yrs: LIBOR bps more than 5 yrs+500bps
FCNR interest ceiling : LIBOR/SWAP rates prevailing on the last working day of the previous month plus 100 basis points** w.e.f. 15th Nov 2008
FCNR now in 6 currencies- USD/GBP/EUR/JPY/AUD/CAD*
Max 5 years* (* Ref DBOD cir 26/07/2005)
NRE interest rate ceiling: LIBOR/SWAP RATES FOR USD of corresponding maturities prevailing on the last working day of the previous month plus 175 bps w.e.f 15th Nov 2008 –** FEDAI would quote/display these rates fm FEB 2006 –Ref DBOD circular dtd 8 Feb 2006
NRE SAVINGS: At the rate applicable to domestic deposit rates w.e.f. 17 Nov 2005

21. Correspondent Banking
Relationship to be established by approval of the Board or delegated by Board headed by Chairman/CEO.
To be placed before the Board in next Board meeting for post facto approval
To understand details about Bank’s management, Major Business Activity, level of AML compliance, purpose of opening account, regulatory/supervisory frame work in the country of correspondent bank etc.

22. USA PATRIOT ACT & Correspondent Banking Guidelines
United and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism
Prohibition on Correspondent Accounts for Foreign Shell Accounts , for Foreign Shell Banks - Section 313
Requirements
– Terminate relationship no later than ten days
after receipt of notice that the foreign bank has
􀁺 Failed to comply with a summons or subpoena
􀁺 Initiate proceedings in a US court to contest the summons or subpoena

23. USA PATRIOT ACT & Correspondent Banking Guidelines
120 hour rule
– Not later than 120 hours after receiving a
request
􀁺 Related to anti-money laundering compliance at a covered institution or,
􀁺 Regarding a customer at a covered institution
- Covered institution shall provide
information and documentation for account opened, maintained, administered, or managed in the US

24. PECULARITIES OF FOREX MARKETS
An Over The Counter Market
Only market open 24 hour a day
SYD/TOK/TAIPEI-S’PORE-HK/INDIA/EUR/LON/NY
1.30PM/12.30PM/11.30AM/9.00AM/5.30AM//4.30AM/11.30PM-PREVIOUSDAY
No single location – no barriers
Exchange rates fluctuate almost every four second
Other markets- money, capital, & debt – also affect forex market
Controls/policies of respective governments also affect forex markets
Settlement of forex transactions normally do not take place simultaneously.

25. Factors Influencing Currency Value
Economic Factors
1. Balance of Payment
2. Interest Rates
3. Inflation
4. Monetary and Fiscal Policy
5. International Competitiveness
6. Monetary Reserves
7. Government Controls and Incentives
8. Importance of Currency in World
Political Factors
9. Political Party and Leader Philosophies
10. Proximity of Elections or Change in Leadership
Expectation Factors
11. Expectations
12. Forward Exchange Market Prices

26. FX Rates What is Exchange Rate ?
Exchange Rate is a rate at which one currency can be exchanged into another currency.
Foreign Exchange Deal
Involves the sale of one currency and the purchase of another at an agreed exchange rate

27. How Banks quote spot rates to customers?
Ascertain the ongoing market rate
Load a margin
Quote
Cover
One of the party to the transaction must be a bank i.e. AD

28. SPREAD
THE DIFFERENCE BETWEEN THE BUYING AND SELLING RATE (BID AND OFFER RATES) IS KNOWN AS SPREAD

29. Calculating Cross Rates
India is a market maker for Indian Rupee
Dollar/ Rupee trading ( the first quotes) start in the Mumbai Market
BUT WHAT ABOUT OTHER CURRENCIES ?
WHERE DO RATES FOR CHF, GBP, EUR ETC COME FROM? HOW ARE THEY CALCULATED?
A CHF/RUPEE RATE IS A CROSS OF DOLLAR/RUPEE & DOLLAR / CHF.
DOLLAR / RUPEE = 45.35/36
DOLLAR / CHF = / 45
CHF / RUPEE = / 75
In other words, / = AND
/ = 33.73

30. Calculating Cross Rates … 2
FOR GBP ( EUR , AUD ) / RUPEE RATE
CROSS RATE IS ARRIVED AT BY MULTIPLICATION
DOLLAR / RUPEE = / 45.36
x x
GBP / USD = /
GBP/ RUPEE = / 81.49

32. Forward Rates
What is a Forward Rate ?
Rate agreed for settlement on an agreed date in the future
All rates are derived from Spot rates
Forward rate is the spot rate adjusted for the premium / discount
Forward Rate = Spot Rate + / - premium or discount
Forward calculation ( examples )
Is the forward rate, the market’s expectation of future spot rates ?

33. FOREX FORWARDS
CONTRACT BETWEEN TWO PARTIES TO EXCHANGE CURRENCIES AT AN AGREED RATE ON AN AGREED DATE
FOR EXAMPLE :
Bank A agrees to buy from RIL USD 1 mio at INR per $ ON 29th SEP 2005

34. Determining Forward Rates
Forward rates are determined by adding/subtracting the premium/discount from the spot rates
E.g The Dollar is at a PREMIUM to the Rupee
Hence, the Dollar is more expensive to buy at a future date
If the Spot USD =
ADD 3 months fwd Premium =
USD/INR 3 MTH FWD =
The USD is at a DISOCUNT to the JPY
Hence, the Dollar is cheaper to buy at a forward date
If the Spot USD/JPY =
DEDUCT 3 months fwd discount =
USD/JPY 3 month forward =

35. FOREX FORWARDS
As per FEMA 1999 one of the parties has to be an AD
The contract could then be between an AD & its customer
OR between two ADs
The former is the RETAIL segment while the later is the WHOLESALE segment

36. VALUE DATE
IN FOREIGN EXCHANGE MARKET IT TAKES SOME TIME TO PROCESS THE TRANSACTION AND SEND INSTRUCTION TO THE CORRESPONDENT BANK/BRANCH ABROAD.
THEREFORE IT IS CUSTOMARY TO QUOTE A RATE TO DO THE DEAL EVEN THOUGH EXCHANGE OF THE CURRENCIES DOES NOT TAKE PLACE ON THE SAME DAY.

37. VALUE DATE IS THE DATE ON WHICH THE EXCHANGE OF CURRENCIES ACTUALLY TAKES PLACE. THIS IS IRRESPECTIVE OF THE DATE OF DEAL.

38. Basic Terms used Nostro a/c Vostro a/c
Mirror a/c- reflection of Nostro a/c – maintained in FC and eq. rupees of the same- reconciliation of nostro a/c
Card Rates/ Notional Rate/ Indicative Rate
Opening/ Closing/High/Low Rates
Interbank Rate/ Screen Rate
Revaluation Rate/ Closing Rate ( FEDAI )
LIBOR
Pipeline Transactions
Overdue contracts
Nostro/Vostro Reconcilaition

39. Basic Terms Used
Exchange Position: The difference between the amount of a currency bought and the amount of the same currency sold is known as “position” in that currency.
Overbought Position: If the amount of FC bought by a bank is more than the amount sold, the difference between the two is “Overbought/Long/Plus” position
Oversold Position: If the amount of FC sold by a bank is more than the amount bought, the difference between the two is “Oversold/Short/Minus” position.
Square Position: If the amount of FC bought by a bank equals the amount sold, then the bank is said to have “square” position. If there is a small difference, it is known as “Near Square position”
Open Position: Exchange position at given point of time
O/N Position : Open Exchange position at the end of the day

40. ORGANISATION OF DEALING ROOM
FX dealing – a highly specialised function
Need to have well trained personnel for front office to deal with branches, customers & other banks
Back office responsible for the follow-up of the deals made by the dealers
Effective control over the dealing operations is of great importance as possibilities exists for manipulation of exchange rates, dealing positions, mismatches etc.

41. RBI’S ICG – FX BUSINESS SEGREGATION OF DUTIES
Front Office- Dealing Room
Mid- Office- Risk Management, Accounting Policies & MIS
Back Office- Settlement, Reconciliation, Accounting

42. Exchange traded currency futures
U S $ - INR currency futures contract
Contract to be quoted in rupee terms. Outstanding position in dollar terms
Minimum contract size $1000
Maximum maturity of 12 months
Available contracts maturities from 1 to 12 months
Settlement in cash in Indian rupee at Reserve Bank reference rate
Settlement date: last working day (excluding Saturdays) of the month
Trading time 9 to 5 p.m.
Convenient lot size and standardized contracts

43. Currency futures segment – in a recognized exchange
Eligible Net worth Rs.100 crore for exchange.
At least 50 members for currency derivatives segment
Operations, structure and capability
A distinct company as independent clearing corporation
Nationwide trading terminal
Online screen based trading system with disaster recovery site
Separate trading and order driven platform from other segments
Separate governing council
Trading membership
Net worth Rs. 1 crore for trading member,
Rs. 10 crore for clearing member
Trading members and sales persons to be accredited by certification
FIIs and NRIs would not be permitted to trade
Three exchanges in the initial stage
NSE, MCX,BSE.

44. INTERNATIONAL TRADE SETTLEMENT AND PAYMENT SYSTEM
Advance Payment
Open Account / On Account
Sales – Consignment Basis
Collection Method
- Documentary Collection
* Demand Bills
* Usance Bills
- Clean collection
Documentary Credit / Letters of Credit 44

45. Factoring V/s Forfaiting
On going arrangement Single transaction based
Open account sale LC or bank acceptance required
Provides other than financing Primarily a financing service
services
Used for offering short term credit For medium / long term transaction
to regular buyers (up to 180 days) which could be “one-off” (90 days to 7years)
Both with and without recourse Is without recourse
For domestic and export receivables Usually for export receivables
No minimum size Transaction should be minimum USD ,000

46. DOCUMENTARY CREDITS
An arrangement at the request and on instructions of a customer
To make payment / authorise other bank to pay or negotiate
Against stipulated documents
Provided terms and conditions are complied with 46

47. ART 4: TRIANGULAR CONTRACTUAL ARRANGEMENT
SALE
CONTRACT
DEFINING
TERMS
IMPORTER
EXPORTER
L/C
APPLICATION
ADVICE OF
OPENING
LETTER OF
CREDIT
ISSUING
BANK
ADVISING
BANK
ISSUANCE OF
THE LETTER OF
CREDIT 47

48. PARTIES TO DOCUMENTARY CREDIT
Applicant (Opener / Importer)
Issuing Bank
Beneficiary (Exporter)
Advising Bank
Confirming Bank
Negotiating Bank
Reimbursing Bank 48

49. TYPES OF CREDIT Revocable / Irrevocable Confirmed
Restricted / Unrestricted
Transferable
Back-to-back
Revolving
Deferred
Red Clause / Green Clause
Standby 49

50. INTERNATIONAL TRADE – ICC’S PUBLICATIONS
International Standard Banking Practice (ISBP) – for the examination of documents under Documentary Credits – Publication No.681
International Standby Practices (ISP 98) – Publication No.590 50

51. INTERNATIONAL TRADE – ICC’S PUBLICATIONS
Uniform Customs and Practice for Documentary Credits – UCP 600
and
Supplement to UCP 600 for electronic presentation (eUCP 1.1 version)
Uniform Rules for Bank-to-Bank Reimbursement (URR 525/725) 51

52. INTERNATIONAL TRADE – ICC’S PUBLICATIONS
Uniform Rules for Collection (URC 522)
INCOTERMS 2000
Uniform Rules for Demand Guarantees (URDG) – Publication No.458 52

53. THE STRUCTURE OF INCOTERMS 2000
4 Groups of terms
Group E : Departure
EXW EX Works (….named place)
Group F : Main Carriage Unpaid
FCA Free Carrier (…named place)
FAS Free Alongside Ship (…named place)
FOB Free On Board (…named port of shipment)
Group C : Main Carriage Paid
CFR Cost and Freight (…named port of destination)
CIF Cost Insurance and Freight (…named port of destination)
CPT Carriage Paid To (…named place of destination)
CIP Carriage Insurance Paid To (…named place of destination)
Group D :
DAF Delivered at Frontier (…named place)
DES Delivered Ex Ship (…named port of destination)
DEQ Delivered Ex Quay (…named port of destination)
DDU Delivered Duty Unpaid (…named place of destination)
DDP (Delivered Duty Paid (…named place of destination) 53

54. UCPDC – UNIFORM CUSTOMS AND PRACTICE FOR DOCUMENTARY CREDITS
Universally recognised set of guidelines governing Letters of Credit
Brochure framed by ICC, HQ at Paris.
ICC – World Business Organisation of non-govt. nature working towards Trade Liberalisation, Free & Fair competition
1933 – revised in 1951, 1962, 1974, 1983,1993
Latest Publication No.600, 2007 revision adopted w.e.f. 01/07/2007
L/C being one of the safe methods of settlements is commonly used in trade, hence UCPDC has become indispensable. Constructive delivery of goods since matching physical delivery with payment is not possible.
By handing over documents or transferring title or to control over the goods is possible under L/C mechanism.
UCPDC balances the interests of all parties to L/C and gives maximum possible guidance and assistance. 54

55. The UCP 600 Revision Some Highlights:
Fewer articles. UCP600 contains 39 articles. The UCP 500 has 49.
A replacement of the term "reasonable time" with a definite number of days (5) for examining and determining compliance of documents;
A new provision concerning addresses of the beneficiary and the applicant;
An expanded discussion of "original documents"; and
Re-drafted transport articles aimed at resolving confusion over the identification of carriers and agents

56. Some Highlights (continued):
The UCP 600 Revision
Some Highlights (continued):
A new section of "definitions", containing terms such as "honour" and "negotiation“.
Honor means, i) to pay at sight if the credit is available by sight payment, ii) to incur a deferred payment undertaking and pay at maturity if the credit is available by deferred payment, (iii) to accept a bill of exchange (“draft”) drawn by the beneficiary and pay at maturity if the credit is available by acceptance.
Negotiation means the purchase by the nominated bank of drafts (drawn on a bank other than the nominated bank) and/or documents under a complying presentation, by advancing or agreeing to advance funds to the beneficiary on or before the banking day on which reimbursement is due to the nominated bank.

57. Summary of Changes
The phrase "reasonable time" for acceptance or refusal of documents has been replaced by a firm period of five banking days.
The number of articles reduced to 39.
New provisions allow for the discounting of deferred payment credits.
Banks can now accept an insurance document that contains reference to any exclusion clause.
New sections on "definitions" and "interpretations" have been added to clarify the meaning of ambiguous terms.
Credit must state if reimbursement is subject to the ICC rules for bank to bank reimbursements.

58. THANK YOU