Presentation on theme: "International Division"— Presentation transcript:
1International Division General Bank Management (CAIIB) International Banking (Module A) – PART-I Foreign ExchangeR N HirveChief ManagerInternational DivisionMumbai29th November 2008
2Contents of Module A RBI and exchange control in India ICC, FEDAI, ECGC, EXIM Bank#Exchange ratesRisk management and basics of derivatives#Documentary letters of creditFacilities for exporters and importers#Correspondent Banking
3EXCHANGE CONTROL IN INDIA FEMA W.E.F. 1ST JUNE 2000ORIGIN IN DEFENSE OF INDIA RULES (DIR) 1935CONTROL TO CONSERVE FEX DUE TO SEVERE CONSTRAINTS ON FOREX RESERVES DUE TO II ND WORLD WAR23 MAR 1947 THESE RULES BECAME FERA 1947MODIFIED/AMENDED-FERA 1973 W.E.FFURTHER 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]
4FEMA V/S FERA FEMA (49 Sections) Plays a role of facilitator which regulates & manages of FE transactionsCivil Act.- prosecution to prove guiltNRI statusPenaltyRegulation, Discretion & PermissionFERA (81 sections)Acted as controller for Conservation of FECriminal Act- accused to prove innocenceNRI status not compatible with IT ActPenalty & prosecutionOnly regulation
5FOREX TRANSACTIONS4 D – TRADE CONTROL, EXCHANGE CONTROL, BANK’S INTERNAL GUIDELINES, KYCIMPORTANT SOURCE OF OTHER INCOME FOR BANKS – INTEREST/COMMISSION/EXCHANGEIMPORTSEXPORTSINWARD/OUTWARD REMITTANCESFC A/CS: EEFC/RFC/ESCROW/FCNR-BFCLSFOREX DEALING/TRADING OPERATIONSReceipt/Payment/Borrowing/Lending in FX
6FEMA 1999How to receive FX :Exports + IRS + Borrowings + Inbound InvestmentsHow to remit FX:Imports + ORS + Lending + Outbound Investments
7Capital Account Residents Creation of Assets/Liab. Outside INDIA Non ResidentsCreation of Assets/Liab. In INDIA
8Inflow -- Equity Debt &Assistance Capital A/C ( Contd.)Inflow -- Equity Debt &AssistanceECB/ADR/GDR/FDI/FII/NR INV.EXT..assistance to INDIAOut flowRepayment of loans,Repatriation of capital,Foreign investments by Residents./EXT. Assistance by INDIA
9Current A/C ( Full convertible since 19/08/1994- Trade a/c flows, Misc payments, annual accruals- intt, dividend & profit)InflowExport of goods & services – travel, insurance, investment , transport income, compensation to employees etcOutflowImport of goods & services travel, insurance, investment , transport income, compensation to employees etc
10CURRENT A/C TRANSACTIONS SCHDULE I- ProhibitedEg. 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 etcSCHDULE III - Permitted by RBIEg. 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.
11BOT & BOP BOT Current a/c inflows – outflows BOP Current a/c + Capital a/c
12BALANCE OF TRADE $ in BN (Yr/March) 08 07 06 05 04 03 EXPORTS 155.51 126.41100.6179.2461.8452.74IMPORTS235.91185.74140.23107.0675.2160.19Trade deficit-80.40-59.33-39.62-27.82-13.37- 7.45TD as % of EXP51.74739352214
13Growing 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.
14RBI - IECD/FED/DBOD FEMA 99 Inflow & Outflow of F/C Maintenance of FC reservesIssue of license to A.D.Inspection & SupervisionMonitoring – R returns, XOS,BEF etcMaster CircularsAP (DIR) CircularsIntt. Rates on Export Credit
15Guidelines & Rules for FX Business (FEDAI Rule book) Training of Bk personnel in areas of FX BusinessAccreditation of Forex BrokersCode of Ethics & Conduct for Forex Dealers & BrokersAdvising/assisting member banks in settling issues/matters in their dealingsCode 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 bodiesAccounting standards/Closing Rates/ Revaluation of Mirror a/cs & outstanding cont
16Inflow and outflow of goods & Services (DGFT- FT Policy) CONCERNED MINISTRIESMinistry of CommerceInflow and outflow of goods & Services(DGFT- FT Policy)Ministry of FinanceInflow and outflow of F/C(Customs/Excise/ED/RBI/Exim Bank/ECGC/Banks/0FIs)Ministry of I.T.Accreditation of software unitsPromotion of software exports/STP/HTP
17Export 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.
18ECGC Credit Guarantee cover WTPCG- in f/o banks WTPSG- in f/o banks POLICIES- in f/o exportersStatus Report on overseas buyers
19Other market players Insurance companies Transporters Chamber of commerceExporters/Importers
20Interest Rates PCFC:LIBOR + 100 BP PC:BPLR- 2.5% Upto 270 days ECB: 3 to 5 yrs: LIBOR bps more than 5 yrs+500bpsFCNR interest ceiling : LIBOR/SWAP rates prevailing on the last working day of the previous month plus 100 basis points** w.e.f. 15th Nov 2008FCNR 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 2006NRE SAVINGS: At the rate applicable to domestic deposit rates w.e.f. 17 Nov 2005
21Correspondent 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 approvalTo 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.
22USA PATRIOT ACT & Correspondent Banking Guidelines United and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct TerrorismProhibition on Correspondent Accounts for Foreign Shell Accounts , for Foreign Shell Banks - Section 313Requirements– Terminate relationship no later than ten daysafter 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
23USA PATRIOT ACT & Correspondent Banking Guidelines 120 hour rule– Not later than 120 hours after receiving arequest Related to anti-money laundering compliance at a covered institution or, Regarding a customer at a covered institution- Covered institution shall provideinformation and documentation for account opened, maintained, administered, or managed in the US
24PECULARITIES OF FOREX MARKETS An Over The Counter MarketOnly market open 24 hour a daySYD/TOK/TAIPEI-S’PORE-HK/INDIA/EUR/LON/NY1.30PM/12.30PM/11.30AM/9.00AM/5.30AM//4.30AM/11.30PM-PREVIOUSDAYNo single location – no barriersExchange rates fluctuate almost every four secondOther markets- money, capital, & debt – also affect forex marketControls/policies of respective governments also affect forex marketsSettlement of forex transactions normally do not take place simultaneously.
25Factors Influencing Currency Value Economic Factors1. Balance of Payment2. Interest Rates3. Inflation4. Monetary and Fiscal Policy5. International Competitiveness6. Monetary Reserves7. Government Controls and Incentives8. Importance of Currency in WorldPolitical Factors9. Political Party and Leader Philosophies10. Proximity of Elections or Change in LeadershipExpectation Factors11. Expectations12. Forward Exchange Market Prices
26FX Rates What is Exchange Rate ? Exchange Rate is a rate at which one currency can be exchanged into another currency.Foreign Exchange DealInvolves the sale of one currency and the purchase of another at an agreed exchange rate
27How Banks quote spot rates to customers? Ascertain the ongoing market rateLoad a marginQuoteCoverOne of the party to the transaction must be a bank i.e. AD
28SPREADTHE DIFFERENCE BETWEEN THE BUYING AND SELLING RATE (BID AND OFFER RATES) IS KNOWN AS SPREAD
29Calculating Cross Rates India is a market maker for Indian RupeeDollar/ Rupee trading ( the first quotes) start in the Mumbai MarketBUT 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 = 45.35/36DOLLAR / CHF = / 45CHF / RUPEE = / 75In other words, / = AND/ = 33.73
30Calculating Cross Rates … 2 FOR GBP ( EUR , AUD ) / RUPEE RATECROSS RATE IS ARRIVED AT BY MULTIPLICATIONDOLLAR / RUPEE = / 45.36x xGBP / USD = /GBP/ RUPEE = / 81.49
32Forward RatesWhat is a Forward Rate ?Rate agreed for settlement on an agreed date in the futureAll rates are derived from Spot ratesForward rate is the spot rate adjusted for the premium / discountForward Rate = Spot Rate + / - premium or discountForward calculation ( examples )Is the forward rate, the market’s expectation of future spot rates ?
33FOREX FORWARDSCONTRACT BETWEEN TWO PARTIES TO EXCHANGE CURRENCIES AT AN AGREED RATE ON AN AGREED DATEFOR EXAMPLE :Bank A agrees to buy from RIL USD 1 mio at INR per $ ON 29th SEP 2005
34Determining Forward Rates Forward rates are determined by adding/subtracting the premium/discount from the spot ratesE.g The Dollar is at a PREMIUM to the RupeeHence, the Dollar is more expensive to buy at a future dateIf the Spot USD =ADD 3 months fwd Premium =USD/INR 3 MTH FWD =The USD is at a DISOCUNT to the JPYHence, the Dollar is cheaper to buy at a forward dateIf the Spot USD/JPY =DEDUCT 3 months fwd discount =USD/JPY 3 month forward =
35FOREX FORWARDSAs per FEMA 1999 one of the parties has to be an ADThe contract could then be between an AD & its customerOR between two ADsThe former is the RETAIL segment while the later is the WHOLESALE segment
36VALUE DATEIN 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.
37VALUE DATE IS THE DATE ON WHICH THE EXCHANGE OF CURRENCIES ACTUALLY TAKES PLACE. THIS IS IRRESPECTIVE OF THE DATE OF DEAL.
38Basic 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/cCard Rates/ Notional Rate/ Indicative RateOpening/ Closing/High/Low RatesInterbank Rate/ Screen RateRevaluation Rate/ Closing Rate ( FEDAI )LIBORPipeline TransactionsOverdue contractsNostro/Vostro Reconcilaition
39Basic Terms UsedExchange 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” positionOversold 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 timeO/N Position : Open Exchange position at the end of the day
40ORGANISATION OF DEALING ROOM FX dealing – a highly specialised functionNeed to have well trained personnel for front office to deal with branches, customers & other banksBack office responsible for the follow-up of the deals made by the dealersEffective control over the dealing operations is of great importance as possibilities exists for manipulation of exchange rates, dealing positions, mismatches etc.
41RBI’S ICG – FX BUSINESS SEGREGATION OF DUTIES Front Office- Dealing RoomMid- Office- Risk Management, Accounting Policies & MISBack Office- Settlement, Reconciliation, Accounting
42Exchange traded currency futures U S $ - INR currency futures contractContract to be quoted in rupee terms. Outstanding position in dollar termsMinimum contract size $1000Maximum maturity of 12 monthsAvailable contracts maturities from 1 to 12 monthsSettlement in cash in Indian rupee at Reserve Bank reference rateSettlement date: last working day (excluding Saturdays) of the monthTrading time 9 to 5 p.m.Convenient lot size and standardized contracts
43Currency futures segment – in a recognized exchange Eligible Net worth Rs.100 crore for exchange.At least 50 members for currency derivatives segmentOperations, structure and capabilityA distinct company as independent clearing corporationNationwide trading terminalOnline screen based trading system with disaster recovery siteSeparate trading and order driven platform from other segmentsSeparate governing councilTrading membershipNet worth Rs. 1 crore for trading member,Rs. 10 crore for clearing memberTrading members and sales persons to be accredited by certificationFIIs and NRIs would not be permitted to tradeThree exchanges in the initial stageNSE, MCX,BSE.
44INTERNATIONAL TRADE SETTLEMENT AND PAYMENT SYSTEM Advance PaymentOpen Account / On AccountSales – Consignment BasisCollection Method- Documentary Collection* Demand Bills* Usance Bills- Clean collectionDocumentary Credit / Letters of Credit44
45Factoring V/s Forfaiting On going arrangement Single transaction basedOpen account sale LC or bank acceptance requiredProvides other than financing Primarily a financing serviceservicesUsed for offering short term credit For medium / long term transactionto regular buyers (up to 180 days) which could be “one-off” (90 days to 7years)Both with and without recourse Is without recourseFor domestic and export receivables Usually for export receivablesNo minimum size Transaction should be minimum USD ,000
46DOCUMENTARY CREDITSAn arrangement at the request and on instructions of a customerTo make payment / authorise other bank to pay or negotiateAgainst stipulated documentsProvided terms and conditions are complied with46
49TYPES OF CREDIT Revocable / Irrevocable Confirmed Restricted / UnrestrictedTransferableBack-to-backRevolvingDeferredRed Clause / Green ClauseStandby49
50INTERNATIONAL TRADE – ICC’S PUBLICATIONS International Standard Banking Practice (ISBP) – for the examination of documents under Documentary Credits – Publication No.681International Standby Practices (ISP 98) – Publication No.59050
51INTERNATIONAL TRADE – ICC’S PUBLICATIONS Uniform Customs and Practice for Documentary Credits – UCP 600andSupplement to UCP 600 for electronic presentation (eUCP 1.1 version)Uniform Rules for Bank-to-Bank Reimbursement (URR 525/725)51
52INTERNATIONAL TRADE – ICC’S PUBLICATIONS Uniform Rules for Collection (URC 522)INCOTERMS 2000Uniform Rules for Demand Guarantees (URDG) – Publication No.45852
53THE STRUCTURE OF INCOTERMS 2000 4 Groups of termsGroup E : DepartureEXW EX Works (….named place)Group F : Main Carriage UnpaidFCA Free Carrier (…named place)FAS Free Alongside Ship (…named place)FOB Free On Board (…named port of shipment)Group C : Main Carriage PaidCFR 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
54UCPDC – UNIFORM CUSTOMS AND PRACTICE FOR DOCUMENTARY CREDITS Universally recognised set of guidelines governing Letters of CreditBrochure framed by ICC, HQ at Paris.ICC – World Business Organisation of non-govt. nature working towards Trade Liberalisation, Free & Fair competition1933 – revised in 1951, 1962, 1974, 1983,1993Latest Publication No.600, 2007 revision adopted w.e.f. 01/07/2007L/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
55The 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"; andRe-drafted transport articles aimed at resolving confusion over the identification of carriers and agents
56Some Highlights (continued): The UCP 600 RevisionSome 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.
57Summary of ChangesThe 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.